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INTRODUCTION TO 
 ECONOMICS 
 
 BY 
 
 JOHN ROSCOE TURNER, Ph.D. 
 
 FSOFESSOS OF ECONOMICS AND DEAN OF WASHINGTON SQUAKE COLLEGE 
 NEW VOKK CNIVEKSIiy 
 
 CHARLES SCRIBNER'S SONS 
 
 NEW YORK CHICAGO BOSTON 
 

 Copyright, 1919, by 
 CHARLES SCRIBNER'S SONS 
 
 
PREFACE 
 
 This book is an outgrowth of classroom discussions. It 
 contains in substance the talks on economics which have 
 been made, for the past eleven years, to my classes in 
 Cornell and New York Universities. 
 
 No apology is offered for the fact that this volume is 
 limited to a discussion of principles. Even the concluding 
 chapters on corporations are designed to exempKfy princi- 
 ples. The time has long since passed when a single volume 
 can treat exhaustively the whole field of economics. I 
 shall be more than content if this work justifies the scope 
 indicated for it in the title — Introduction to Economics. 
 
 Designed as an introduction, this book will serve as a 
 means to the end of a more intelligent study of economic 
 questions. It does not dispense with the necessity of read- 
 ing the many excellent treatises devoted to the different 
 phases of economics; rather it distinctly calls for such read- 
 ings. It merely prepares the mind of the student for the 
 thought contained in the more advanced and specialized 
 works on the subject and the practical applications they 
 reveal. 
 
 At the end of each chapter are appended exercises in 
 the form of questions, problems, and fallacies, the object 
 being to stimulate independent thinking as well as to de- 
 velop the power of applying what the student has learned. 
 In so far as may be, the problems are stated in the form in 
 which they appear in practical affairs. 
 
 The effort has been made to avoid obscure reasoning, 
 
iv Preface 
 
 loose generalities, and controversial entanglements. There 
 are text-books in economics which set forth the subject 
 soimdly but in a manner too obscure to be well adapted 
 for the beginner. The author of a book for beginners must 
 hold the needs of the student constantly in mind. Some 
 writers apparently are so obsessed by fear of the critic as 
 quite to forget the needs of the student. Other authors, 
 though they write fearlessly, load the evidence in favor of 
 this contention or that, thus failing to secure the balance 
 and proportion becoming to a science. StiU others skim 
 the principles in haste, wishing to introduce the beginner 
 forthwith to a discussion of the great practical problems. 
 These authors are unmindful of the fact that without a sub- 
 stantial grounding in fimdamentals the student's thought 
 must go astray when attacking the great social problems, 
 involving, as they do, burning issues replete with "isms." 
 These superficial writings are productive of harm and de- 
 serve to be frowned upon. There was never a greater need 
 for sound thinking in economics than in these unsettled 
 times following the war. But to sound thinking there is 
 only one true guide — the knowledge of fundamentals. How 
 far I have succeeded in the attempt to serve this end must 
 be left for others to decide. 
 
 I have made persistent effort to keep the dynamic dis- 
 tinct in thought from the static theory, but the separation 
 has been in thought rather than in space. The student 
 must proceed with both in mind if he would at once con- 
 ceive principles and appreciate their practical importance 
 in a world of change and progress. The laws of economics, 
 like the rules of arithmetic, are true, but you undertake the 
 impossible in attempting to hold the student's attention to 
 subject-matter so dry apart from the practical aid of illus- 
 
Preface v 
 
 tration. To put actual changes out of sight is to deaden the 
 student's interest in the subject. 
 
 I have avoided the introduction of terms for which there 
 is not sufficient precedent; have followed the tendency to 
 abandon the artificial classification of productive factors 
 into land, labor, and capital; have preferred to use the 
 term desirability rather than utility in the value problem. 
 Too much juggling with the term utility has left it with 
 no distinct meaning. And, moreover, the word desirabihty 
 (for the use of which there is sufficient precedent) ex- 
 cellently expresses the idea of the fitness or quality of an 
 object to excite a wish to possess. The word utility finds 
 use in the problem of social production. 
 
 I have been anxious to avoid the novel, but this has not 
 prevented some departures here and there from the cur- 
 rent statements of theories. 
 
 The first four chapters were written in the belief that 
 economic institutions can be adequately comprehended 
 only in the light of their historical development. The stu- 
 dent will have deeper regard for the institutions under 
 which he lives when he contemplates that they are the out- 
 growth of progressive changes through many centuries; 
 he will have only contempt for the constitution meddlers 
 who would remodel our economic life over a week's end. 
 He wiU know that these institutions form no barrier to 
 progress when they are subject to modification as needs 
 require. Following the study of essential institutions, the 
 problems of value and price are presented. The remainder 
 of the book is devoted to the following topics in the order 
 here given: Money and banking; production and rent; 
 labor and wages; capital and interest; corporations, mo- 
 nopoly, and trust legislation. 
 
vi Preface 
 
 I wish to acknowledge with gratitude the valuable sug- 
 gestions received during the preparation of this book from 
 my colleagues — Willard Fisher, Major B. Foster, David 
 Friday, Charles W. Gerstenberg, Joseph French Johnson, 
 and, particularly, Arthur L. Faubel who has read the 
 proof searchingly, constructively. Acknowledgment is also 
 made to my friend and former teacher, Frank A. Fetter, 
 of Princeton, for his careful reading and criticism of three 
 chapters. No formal acknowledgment is sufl5.cient to ex- 
 press my deep obligation to Herbert J. Davenport, of Cor- 
 nell, who went over the entire first draft of the work in a 
 rigorously critical and constructive manner. 
 
 J. R. T. 
 
 New York University, 
 May I, 1919. 
 
FAGS 
 
 CONTENTS 
 
 CHAPTER I 
 
 Introduction: The Beginning of Economic Institu- 
 tions 
 
 J. The science o£ economics. 2. Requirements of the economist. 
 3. Mistakes in early specialization. 4. Principles first, then speciali- 
 zation. 5. From objective to subjective control. 6. Knowledge is 
 power. 7. From physical to mental. 8. Three stages of progress, 
 g. The hunter stage. 10. The pastoral stage. 11. Domestication 
 and indirect production. 12. Conflicting interests. 13. Pressure and 
 progress. 14. Tribal property. 15. Variety and trade. 16. Self- 
 sufficiency. 17. The agricultural stage. 18. What the agriculturist 
 must know. ig. Three essentials of thrift. 20. A settled life. 21. 
 Production and civilization. 22. Slavery. 23. The conclusion. 24. 
 From primitive to manorial times. 25. Feudalism. 26. The manorial 
 system in England. 27. Ashley's picture of the eleventh-century 
 manor. 28. Tenants. 2g. Self-sufficiency on manors. 30. The re- 
 lation of property to government. 31. Exercises. 
 
 CHAPTER II 
 
 English Guilds and the Decline of Local Restric- 
 tions 22 
 
 I. Man a user of tools. 2. The interdependence of industries in a 
 civilized state. 3. The old and new in England's development. 4. 
 Development of great wealth. 5. Isolation and local unity. 6. The 
 alliance against lords of manors. 7. Guilds. 8. The guild as an eco- 
 nomic institution, g. Merchant guilds. 10. In France. 11. The 
 craft guild. 12. The Hundred Years' War between England and 
 France. 13. Changes during the war: Iri reUgion; in language; knight- 
 hood; the Black Death; the Peasants' Revolt of 1381; Enclosures. 
 14. Exercises. 
 
 vii 
 
FACE 
 
 viii Contents 
 
 CHAPTER III 
 
 National Control and the Industrial Revolution . 36 
 
 1. The national system. ^. Monopolies. 3. Mercantilism or Col- 
 bertism. 4. Restrictions. 5. National ideals. 6. The domestic sys- 
 tem. 7. The Industrial Revolution. 8. Commerce and need for 
 machinery. 9. The beginning of industrial classes. 10. Scientific 
 farming. 11. Control of natural forces. 12. The long delay. 13. 
 Changed point of view. 14. Social changes. 15. The Physiocrats. 
 16. The freedom of trade and agriculture. 17. Political effects. 18. 
 Beginning of social legislation. 19. A summary of changes which 
 affected wage-earners. 20. The formation of labor-unions. 21. Ex- 
 ercises. 
 
 CHAPTER rV 
 The Present Economic Order 54 
 
 1. Introduction. 2. Economic laws. 3. Theory. 4. The present 
 economic order. $. Private property. 6. Social expediency. 7. The 
 revival of enclosures. 8. Transportation. 9. The industrial develop- 
 ment of this country. 10. The growth of cities. 11. An example 
 from statistics. 12. The geographic division of labor. 13. The divi- 
 sion of labor and mutual dependence in the factory system. 14. Dif- 
 ferentiation. 15. Trading. 16. Competition. 17. The extent of 
 competition. 18. Self-interest. 19. Economic classes. 20. Contracts. 
 21. The automatic regulation of industry. 22. Exercises. 
 
 CHAPTER V 
 The Subject-Matter of Economics 75 
 
 I. The subject-matter of economics. 2. Productive capacity and 
 current supplies. 3. Destruction often a real gain. 4. The dissemi- 
 nation of education. 5. Social wealth. 6. Wealth formerly defined 
 as capacity. 7. Wealth not a comparative concept. 8. Private 
 wealth and public wealth. 9. Per capita wealth and national wealth. 
 
 10. Increasing aggregate wealth and diminishing per capita wealth. 
 
 11. View-points in autocratic and democratic countries. 12. Wealth 
 and property. 13. Capital and wealth. 14. The money expression 
 of wealth. 15. Economics. 16. Economic laws and social institu- 
 tions. 17. The goal of public policy. 18. Changes in economics. 
 19, Economics and political reforms. 20. Economics and business. 
 21. Exercises. 
 
Contents ix 
 
 CHAPTER VI 
 
 PAGE 
 
 Desire, Desirability 98 
 
 I. Desires as motives. 2. Desires are recurring. 3. Intelligence, 
 desire, effort. 4. Desires for near and remote possession, s- Stand- 
 ards of consumption. 6. Harmony in consumption. 7. Desires and 
 productive capacity. 8. "The cost of high living." g. Desires and 
 ultimate wealth. 10. Desires and association of ideas. 11. Altruistic 
 desires. 12. Desires and wants. 13. Necessities. 14. Repressibility 
 of desires. 15. The standard of life. 16. The notion of scarcity. 
 17. Desirability. 18. Utility. 19. Diminishing desirability. 20. The 
 equal desirabilities of units. 21. Total desirabiUty. 22. Graphic il- 
 lustration of equal desirabilities. 23. Graphic illustration of desira- 
 bilities at different times. 24. Marginal desirability. 25. The ten- 
 dency to equaUty of marginal desirabilities. 26. Graphic illustration 
 of this equality. 27. Examples of marginal desirability. 28. Exer- 
 cises. 
 
 CHAPTER VII 
 Market and Price 123 
 
 I. What is a market? 2. Examples of a market. 3. Transporta- 
 tion extends the market. 4. Wheat is sold in a broad market. 5. 
 Transporting costs taken into account. 6. The demand at Liverpool. 
 
 7. The communication of information. 8. Market ratios and price, 
 g. The market price at equating-point between market supply and 
 market demand. 10. The problem of price. 11. The price level. 
 12. Price-making. 13. Conditions of price-making: (I) One seller 
 without a marginal limit. (II) One seller with a marginal limit. (Ill) 
 A number of sellers with marginal limit. (IV) Two-sided competition. 
 14. Exercises. 
 
 CHAPTER VIII 
 
 Value and Demand 144 
 
 1. Price, a restatement. 2. Value. 3. Value is an individualistic 
 matter. 4. "The paradox of value." 5. Surplus and the limit to 
 exchanges. 6. Decision in directing expenditures. 7. Valuation. 
 
 8. Caution in the use of supply and demand. 9. Amount, supply. 
 10. Price-making illustrated. 11. Market demand and market sup- 
 ply. 12. Definitions illustrated. 13. Unrevealed price limits of buy- 
 ers and sellers. 14. Elasticity of market demand. 15. Complemen- 
 tary goods. 16. Prospective prices and present demand. 17. De- 
 mand curve. 18. Demand: Questions and answers, ig. Recapitula- 
 tion. 20. Exercises. 
 
Contents 
 
 CHAPTER IX 
 
 PAGE 
 
 Supply 172 
 
 1. Supplies; their variety, adjustment, and limitations, .i. Pur- 
 chasing power and supply. 3. Fixed supplies. 4. Senior's statement. 
 S. Cost defined. 6. Cost and limitation of factors. 7. Cost and the 
 price of product. 8. Cost a price expression of limitation of agents. 
 9. Supplies limit each other. 10. Competition of supplies. 11. In- 
 creasing cost. 12. Opportunity cost. 13. Kinds of opportunity cost. 
 14. Past cost and present supply; Present cost and future supply. 15. 
 Selling below cost. 16. Joint cost. 17. Movements in market sup- 
 ply. 18. Movements in supply curve. 19. Recapitulation. 20. Ex- 
 ercises. 
 
 CHAPTER X 
 Money and Its Purchasing Power 195 
 
 I. Money and price. 2. Money in exchange. 3. Barter and need 
 for money. 4. What is money? 5. The definition explained. 6. 
 Functions of money. 7. Credit, currency, cash. 8. Qualities of good 
 money. 9. Coinage. 10. Free, unlimited, gratuitous coinage. 11. 
 Money exchanged by weight and by count. 12. Seigniorage. 13. 
 Seigniorage and the purchasing power of money. 14. Other illustra- 
 tions. 15. Seigniorage in the monetary system of the United States. 
 16. Monetary system of the United States, 1915. 17. The mint price 
 and the market price of gold bullion. 18. Convertibility of money. 
 19. Exercises. 
 
 CHAPTER XI 
 
 Money and Its Purchasing Power (continued) . . . 220 
 
 I. Can the government make money? 2. A conservative view of 
 fiat money. 3. Greenbacks and prices. 4. Fiat money a monopoly. 
 5. Marginal desirability and value: A restatement. 6. The marginal 
 use of money. 7. It is the exchange function only that imparts de- 
 sirability to money. 8. The purchasing power of money. 9. Real 
 income and the price level. 10. Two meanings of the purchasing 
 power of money. 11. Effect of increasing gold production. 12. The 
 quantity theory of money. 13. Misimderstaudings answered. 14. 
 The number of goods: N. 15. Price movements not uniform. 16. 
 The price level determined by means of index numbers. 17. Simple 
 index numbers. 18. Weighted index numbers. 19. The purposes of 
 index numbers. 20. Exercises. 
 
Contents xi 
 
 CHAPTER XII 
 
 PAGE 
 
 Money Standards . . 251 
 
 I. Money movements automatic. 2. Selection of coins. 3. Gresh- 
 am's law. 4. When Gresham's law will not work. 5. Bimetallism. 
 6. The compensatory principle. 7. The meaning of terms. 8. When 
 bimetallism will not work. 9. When bimetallism will work. 10. Ar- 
 guments for bimetallism. 11. Argument against bimetallism consid- 
 ered. 12. Historical summary. 13. A summary review. 14. Free- 
 silver agitation of 1896. 15. The gold standard on trial. 16. 
 Different standards defined. 17. Exercises. 
 
 CHAPTER XIII 
 Credit and Banking 279 
 
 I. Credit as a substitute for money. 2. All classes use credit. 3. 
 Credit defined. 4. The basis of credit. S- Credit facilitates produc- 
 tion. 6. The danger of credit. 7. The general and limited accepta- 
 bility of credit instruments. 8. Bank credits. 9. Banks as reser- 
 voirs of capital. 10. Deposits. 11. Deposits lower the purchasing 
 power of money. 12. Time deposits. 13. Liabilities and assets. 
 14. The operations of a bank. 15. The value of a bank's liabilities. 
 16. Capital items. 17. Reserves. 18. Other assets. 19. The lead- 
 ing safeguard of a bank. 20. The agency of clearing-houses. 21. 
 Payments by checks between different communities. 22. Bank-notes. 
 23. Exercises. 
 
 CHAPTER XIV 
 
 Banking Legislation in the United States .... 305 
 
 I. Introductory. 2. Centralized banking. 3. The Bank of France. 
 4. Banking prior to National Banks. 5. The free banking system 
 of New York. 6. The National Bank act. 7. Provisions of the act. 
 8. Defects of the system. 9. Decentralization of banking. 10. 
 Inelasticity of credit. 11. Distribution of banking facilities. 12. 
 Banking and foreign trade. 13. New system demanded. 14. The 
 Federal Reserve act. 15. The Federal Reserve Board. 16. The re- 
 serve banks. 17. Federal Reserve notes. 18. Reserves of Federal 
 Reserve banks. 19. Reserves in member banks. 20. Noteworthy 
 features of the law. 21. Exercises. 
 
xii Contents 
 
 CHAPTER XV 
 
 PAGE 
 
 Thk Organization of Production 331 
 
 I. National forces co-operate in war. 2. The co-operant forces of 
 industry. 3. The automatic adjustment in industry. 4. Adjust- 
 tuents never complete. 5. Quantitative precision. 6. The services of 
 men standardized. 7. The test of production not on moral grounds. 
 8. The test of production not tangibility. 9. Social production refers 
 to amount. 10. Individualistic and social view-points. 11. The en- 
 trepreneur. 12. Functions of the entrepreneur. 13. The entrepre- 
 neur is a self-employed middleman. 14. The entrepreneur as ser- 
 vant of demand. 15. The uses of materials. 16. Direct and indirect 
 uses of goods. 17. The agencies. 18. Exercises. 
 
 CHAPTER XVI 
 The Law of Proportionality 352 
 
 I. Complementary agents. 2. The principle of resistance. 3. Phys- 
 ical intensive utilization. 4. Turgot's statement, s- These facts 
 expressed in money terms. 6. Intensive margin of utilization. 7. 
 Extensive margin of utilization. 8. What lands or land uses are culti- 
 vated? 9. Equality of intensive and extensive margins. 10. Sub- 
 stitution. II. The law of proportionality. 12. Bearing of propor- 
 tionality on the distribution of wealth. 13. How the price of agents 
 affects proportionality 14. The elastic limit of factors. 15. Ex- 
 tent of market. 16. Quantity and money returns. 17. Summary 
 conclusion. 18. Exercises. 
 
 CHAPTER XVII 
 The RENTmc Contract 374 
 
 I. Introduction. 2. Definition of rent. 3. Durable goods rented. 
 4. Buying or renting. S- Use-value derivative. 6. The renting con- 
 tract prospective. 7. The time element in rent. 8. Short factors 
 and high rent. 9. What is high rent? 10. Monopoly rents. 11. 
 Product returns vs. money returns. 12. The tendency toward di- 
 minishing money returns universal. 13. Large production and 
 monopoly. 14. Conditions for study of principle of increasing resist- 
 ance. 15. Rent a deduction from the principle of increasing resist- 
 ance. 16. Proportionality and rent. 17. Rent limited by income. 
 18. Rents limited by cost of reproduction. 19. Differential rent. 20. 
 Differentials a measure rather than a cause of rent. 21. Difference 
 in fertility. 22. Difference in costs. 23. Differences in location. 
 24. The owner's income. 25. Exercises. 
 
Contents xiii 
 
 PAGE 
 
 CHAPTER XVIII 
 
 Population and the Supply of Labor 399 
 
 I. The supply of labor: Location. 2. The supply of labor: Indus- 
 trial. 3. The supply of labon Non-competing groups. 4. J. E. 
 Caimes. 5. The supply of labor, peculiarities of. 6. Alfred Mar- 
 shall. 7. The order of treatment. 8. Population — a world problem. 
 9. Views of the seventeenth and eighteenth centuries favorable to the 
 increase of numbers. 10. The attitude in new countries. 11. The 
 limit to this progress. 12. Why some competitors favor a large popu- 
 lation. 13. The attitude in different forms of govenunent. 14. En- 
 vironment of Thomas Robert Malthus. 15. The Malthusian theory. 
 16. The persistence of the doctrine. 17. Rates of birth and death. 
 18. Malthus's emphasis on the positive check. 19. Progress from 
 pressure. 20. President Hadley's statement. 21. Doctrines logically 
 following Malthusianism. 22. The simplicity of Malthus's basic as- 
 sumption. 23. Private property and family development. 24. The 
 influence of freedom and public education. 25. Conclusion on the 
 limit of numbers. 26. Exercises. 
 
 CHAPTER XrX 
 
 Labor and Machinery 429 
 
 I. Labor defined. 2. Labor, direct and indirect. 3. The demand 
 for labor. 4. Variety of demand. 5. The "make-work" fallacy. 
 6. Broken-pane philosophy. 7. "Good for the trade." 8. The 
 "lump-of -labor" fallacy. 9. Questions raised by the introduction of 
 machinery. 10. The laborer's view-point. 11. These hardships on 
 the decline. 12. Machinery and market demands. 13. Machinery 
 improves the laborer. 14. Exercises. 
 
 CHAPTER XX 
 The Principles of Wages 449 
 
 i. Wages defined. 2. Problems suggested. 3. Wages differ from 
 profits. 4. Real and money wages. 5. The wage-fund doctrine. 
 6. The wage problem is forward-looking. 7. Effect of machinery 
 upon wages. 8. Similarity of wages and rent. 9. The same principles 
 for unlike agents. 10. How relative rents are determined. 11. How 
 relative wages are determined. 12. Thought and execution. 13. To 
 illustrate. 14. The wage system in proportionality. 15. The bar- 
 gam theory. 16. The wage system. 17. Equal wages for equal 
 tasks. 18. Wages equal the marginal product of labor. 19. The 
 time element. 20. Exercises. 
 
xiv Contents 
 
 CHAPTER XXI 
 
 Capital 467 
 
 I. Introduction. 2. Marginal desirability. 3. The labor-cost 
 theory of value. 4. Criticisms. S- Productive agents classified. 6. 
 Interest as wages of past labor. 7. Rent in the labor-cost theory. 
 8. Bases of criticism. 9. Only valuable land is cultivated. 10. A 
 productive agent as a composite of difiEerent single factors. 11. Any 
 factor which is an integral part of a productive agent is valuable. 
 12. Valueless land and valueless composite agent. 13. Marginal land. 
 14. Other arguments. 15. Land as capital. 16. Capital. 17. Cap- 
 ital contrasted with wealth. 18. Acquisitive powers which are not 
 wealth. 19. Extension of the capital concept. 20. Capital a right 
 to income. 21. Exercises. 
 
 CHAPTER XXII 
 Interest 489 
 
 i. The productivity theory. 2. The interest rate unaffected by 
 variation in production. 3. Unproductive loans. 4. The money 
 fallacy. 5. Variation of bank interest. 6. Gross interest and net 
 interest. 7. Time-discount. 8. Illustration, g. Time-discount in 
 capitalization. 10. CapitaUzation and interest. 11. Adjustment of 
 interest to capitaUzation. 12. The present worth of a bond. 13. 
 Money loans analogous to investments. 14. The interest rate reflects 
 time-discount. 15. Fallacy of inversion. 16. Interest involved in 
 simple exchanges. 17. Preference for present possession. 18. Ap- 
 parent exceptions. 19. The consumption idea. 20. Reasons for dif- 
 ferences in time-discount among persons. 
 
 CHAPTER XXIII 
 Interest, Further Considered 511 
 
 I. Determining a rate of interest. 2. Borrowers. 3. Adjust- 
 ments in the market. 4. The supply side of the money market. 5. 
 The order of thought: Production and discount. 6. Questions and 
 answers involving the foregoing principles. 7. Exercises. 
 
Contents xv 
 
 CHAPTER XXIV 
 
 PAGE 
 
 Forms of Industrial Ownership: The Corporation . 527 
 
 1. Introduction. 2. Individual ownership. 3. Limits to private 
 ownership. 4. Partnership. 5. Limited partnerships. 6. The dis- 
 advantages of a partnership are many. 7. Joint-stock association. 
 8. Corporations. 9. The advantages of corporations. 10. General 
 corporation acts. 11. Directors. 12. Election of directors: Dummy 
 directors. 13. Cumulative voting. 14. Inside information of stock- 
 holders. 15. Negotiability of stock-certificates. 16. Securing funds. 
 17. Funds from creditors. 18. Issuing notes. 19. Issuing bonds. 
 20. Issuing stocks and bonds. 21. Questionable practices. 22. 
 Remedies. 23. Foresight in business. 24. An educational transfor- 
 mation is now in process. 25. Exercises. 
 
 CHAPTER XXV 
 
 Large-Scale Production and Monopoly 556 
 
 I. Control by best talent. 2. Selection of men. 3. Distribution of 
 talent. 4. Standardization aids the purchaser. 5. Steady demand in 
 a broad market. 6. The quantity of demand. 7. Other advantages 
 of large production, with or without monopoly power. 8. The best 
 size of establishment. 9. Some advantages of monopoly. 10. Cut- 
 throat competition. 11. Two types of establishments. 12. Lower 
 costs from costlier tools. 13. The cost of tools limited by saving. 
 
 14. The competitor. 15. Factors should reproduce themselves. 16. 
 Monopoly control. 17. Advertising waste. 18. Salesmanship. 19. 
 Inequality of classes. 20. Elimination of independent businesses. 21. 
 Monopoly deadens initiative. 22. Summary and conclusion. 23. 
 Conclusion of chapter. 24. Exercises. 
 
 CHAPTER XXVI 
 
 Monopoly and Monopoly Price 582 
 
 I. Motive in competition and monopoly. 2. The test of monop- 
 oly. 3. Temporary monopoly. 4. Capitalistic monopolies. 5. Other 
 forms of monopoly. 6. Skilled labor. 7. Legal monopolies. 8. Nat- 
 ural monopolies. 9. Quasi-natural monopolies. 10. Voluntary and 
 enforced patronage. 11. Limitation of the market. 12. A summary 
 of market limitations. 13. Monopoly price. 14. Increasing costs. 
 
 15. Institutions of diminishing costs. 16. Monopoly prices vary. 
 17. Domestic and export prices. 18. Limitations on monopoly 
 price. 19. Exercises. 
 
xvi Contents 
 
 CHAPTER XXVn 
 
 PAGE 
 
 Control of Trusts 602 
 
 I. Trust defined. 2. Pools. 3. Statements in point by Taussig 
 and Jenks. 4. Railroads during the World War. s- The situation at 
 the dose of the wax. 6. The legal form of trusts. 7. From trusts to 
 holding companies. 8. From holding companies to mergers, g. The 
 purpose of trust legislation. 10. The hazard of the business man. 11. 
 Competition and attempt to monopolize. 12. Common law on re- 
 straint of trade. 13. Laissez-faire and control. 14. The Sherman 
 Anti-Trust law. 15. The prevention of trusts. 16. The Standard 
 Oil case. 17. Prevention or destruction. 18. Trust regulation. 19. 
 Need of further legislation. 20. Unfair methods of competition. 21. 
 The anti-trust legislation of 1914. 22. The Federal Trade Commis- 
 sion. 23. Holding companies and interlocking directorates. 24. The 
 Webb-Pomerene act. 25. Exercises. 
 
 Index 633 
 
INTRODUCTION TO ECONOMICS 
 
INTRODUCTION TO ECONOMICS 
 
 CHAPTER I 
 
 INTRODUCTION: THE BEGINNING OF 
 ECONOMIC INSTITUTIONS 
 
 I. The science of economics. 2. Requirements of the economist. 3. 
 Mistakes in early specialization. 4. Principles first, then specialization. 
 5. From objective to subjective control. 6. Knowledge is power. 7. 
 From physical to mental. 8. Three stages of progress, g. The hunter 
 stage. 10. The pastoral stage. 11. Domestication and indirect produc- 
 tion. 12. Conflicting interests. 13. Pressure and progress. 14. Tribal 
 property. 15. Variety and trade. 16. Self-sufficiency. 17. The agricul- 
 tural stage. 18. What the agriculturist must know. 19. Three essentials 
 of thrift. 20. A settled life. 21. Production and civilization. 22. Slav- 
 ery. 23. The conclusion. 24. From primitive to manoral times. 25. 
 Feudalism. 26. The manoral system in England. 27. Ashley's picture of 
 the eleventh-centtuy manor. 28. Tenants. 29. Self-sufficiency on man- 
 ors. 30. The relation of property to government. 31. Exercises. 
 
 I. The Science of Economics. — Science originates in 
 man's endeavor to answer the eternal question "why." 
 In answer to this question, thinkers are ever on the alert 
 to detect agreements and differences among things. The 
 untutored see a million phenomena, but these in chaotic 
 mass. The scholar sees the same phenomena, but subjects 
 these to law and order. He ties things with like quahties 
 into a bundle by themselves, and this bundle is the subject- 
 matter of a science. 
 
 Why are there panics in the business world? Why 
 does the cost of living continue to rise? Why does a 
 movie actor get more for a single performance than a 
 
 1 
 
2 Introduction to Economics 
 
 common laborer gets for a year's work? Why is there 
 mutual profit in trading? Why do we have monopolies? 
 and why are some monopoly prices high and others low ? 
 
 Problems of this sort are legion, but when exposed to 
 examination they are found to exist in causal reIa,tionship. 
 They may be tied into one bundle, and they form the 
 subject-matter of one science — the science of Economics. 
 
 2. Requirements of the Economist. — This group of 
 related thought is subject to scientific classification and 
 inquiry. But the ability to make such classification im- 
 plies a grasp of the principles which underlie the science. 
 New specimens of animals must remain stray individual 
 curiosities to him who is ignorant of the eight great sub- 
 kingdoms of animals. Likewise, no rigorous classification 
 of the varied business phenomena is possible apart from 
 the fundamental economic laws which these phenomena 
 obey. 
 
 The student incapable of comprehending beyond his 
 five senses is advised to let economics alone, for the char- 
 acteristic feature of this science is the interdependence of 
 its subject-matter. A sixth sense is required, that of the 
 detection of hidden relations. In addition to this sense, 
 the mental equipment of a first-rate economist comprises, 
 first of all, greatness of mind, then breadth of scholarship, 
 and finally the knowledge of application which converts 
 dead facts into quick thought. 
 
 3. Mistakes in Early Specialization. — The surest road to 
 failure as an economist is for the student to begin with a 
 special branch of the subject and pursue it to the exclu- 
 sion of other studies. Specialization there must be, but 
 this does not imply ignorance of all excepting one's chosen 
 field. Each separate field of inquiry furnishes its own par- 
 
The Beginning of Economic Institutions 3 
 
 ticular type of training, method of thought, and point of 
 view. The mere spedalist, who cannot bring to his aid 
 the assistance of liberal training, can grasp facts but not 
 situations, can solve isolated problems, but cannot deal 
 with them in the broad aspect of their relationships with 
 current economic activities. Like the perverted eye spe- 
 cialist who would prescribe for his patient with a sour 
 stomach a new pair of spectacles, there are narrow special- 
 ists in labor, or money, or trusts, who would treat all eco- 
 nomic ills from their one limited point of view. 
 
 4. Principles First, then Specialization. — ^An economic 
 fact is never an isolated datum; it is always the result of 
 a combination of forces. To thinb through an economic 
 problem requires mental power sufficient to marshal forces 
 to a common end, and sufficient mental balance to see 
 forces in their proper state of poise, for if any force is not 
 given its due weight, the conclusion will be either only 
 partially correct or wholly wrong. Two separate forces 
 guide the earth around the sun: overemphasis upon the 
 one leads to the conclusion that the earth must fly away 
 into empty space; the direful conclusion from overempha- 
 sizing the other must be that the earth will fall into the 
 sun and be consumed in fire. If one treats lightly the 
 power of vohtional control and overemphasizes procreation, 
 he must conclude that the growth of population will out- 
 strip the means of subsistence, resulting thus in actual 
 starvation and premature death from disease. If one 
 would approach his specialty in economics with a proper 
 mental poise, he must first put himself in command of the 
 general principles of the science. 
 
 5. From Objective to Subjective Control.— In his primi- 
 tive state man, like the animals about him, lived from the 
 
4 Introduction to Economics 
 
 gratuitous fruits of nature. He produced no article of 
 food, drink, or clothing, but hunted things and appropri- 
 ated them. Every step of his progress from savagism to 
 the highest-attained civilization has been marked by im- 
 proved instrumentalities. Back of all physical develop- 
 ments, however, were his developments in knowledge. In 
 power of body and swiftness of foot, in keenness of scent, 
 taste, hearing, and sight, man is an inferior in the animal 
 world. His power of supremacy is in his power of mind, 
 and as this power is weaker he is more nearly an animal, 
 and thus more dependent upon the free gifts of nature. 
 As this power is stronger, however, he more and more 
 controls the animals about him, and so directs the laws 
 of nature that they do his bidding. 
 
 6. Knowledge is Power. — For time out of mind men 
 have seriously debated as to which controls, nature or 
 man. The contenders, pro and con, would have ceased 
 their vain parleys long since, had they paused to define 
 the word "control," for, indeed, the whole contention has 
 been a play upon this one word. Whether man levels ob- 
 stacles or goes around them is of no consequence; it is 
 enough to know that he is not compelled to suffer them. 
 One argues that man deceives himself in the "magnanimous 
 claim that he conquers nature, for man's part is that of 
 adapting himself to natural forces which he can neither 
 create nor annihilate." The implication is that to con- 
 quer is to annihilate. These terms have little in common; 
 the pugiKst who lands the knock-out blow conquers, but 
 does not annihilate his adversary. Call it conquer, adap- 
 tation, or what not, the issue of importance in man's eco- 
 nomic development is this: His knowledge of natural forces 
 is cumulative, and this knowledge is the power which 
 
The B6ginning of Economic Institutions 5 
 
 enables him to levy tribute upon nature for the necessities, 
 comforts, and luxuries of life. The peculiarity of a natural 
 law is that it obeys only as it is obeyed. Learning this 
 peculiarity, man in obedience to nature's law, directs her 
 forces to the end of gratifying his desires. In the direction 
 of natural forces, truly "knowledge is power." 
 
 7. From Physical to Mental. — The knowledge of these 
 forces gives rise to inventions which harness and set them 
 to work. As the artist exhibits his thought on canvas or 
 chisels it in marble, so the scientist exhibits his thought in 
 the form of ingenious devices calculated to make easier 
 the labor of man, and to allot to natural forces a larger 
 share in production. In order of supremacy nature was 
 first, and then man — first the supremacy of objective laws 
 and finally that of subjective laws. 
 
 The development of sciences has, with few exceptions, 
 taken precisely the same order — ^first the objective or 
 physical sciences and then the moral or mental sciences. 
 
 During the seventeenth and eighteenth centuries the 
 laws of physical science engrossed the attention of scholars. 
 Thinkers followed a method and point of view which was 
 in strict keeping with the order of thought prevailing in 
 the physical sciences. At this time economics had its 
 beginning, and what could be more natural than that the 
 physical elements of this science should have been vital- 
 ized ? The mental aspects of the subject were neglected 
 almost as if they were beyond scientific statement, and so 
 vividly were the objective laws painted by the old masters 
 that they came to obsess the economists, and this holds 
 true for many devotees of the subject even in our own 
 time. 
 
 As we progress through the following pages, we shall see 
 
6 Introduction to Economics 
 
 how mental laws step by step take predominance over 
 physical force, how they motivate all economic activity 
 and direct the operations of all economic forces. 
 
 8. Three Stages of Progress. — ^The history of economic 
 progress bears witness to the truth of the above observa- 
 tions. Even prior to authentic history, conjectural study 
 permits this classification of economic progress: 
 
 The hunter stage. 
 The pastoral stage. 
 The agricultural stage. 
 
 9. The hunter stage sees man, devoid of industrial 
 equipment and ignorant of natural laws, living, as the 
 brute beasts about him, upon such wild fruits, nuts, and 
 animal flesh as he could find and appropriate. He was 
 subject to nature's lottery of weather, be it fair or foul, 
 and enjoyed abundance or suffered want as the seasons 
 varied. From hand to mouth, and from feast to famine, 
 he neither took forethought nor made provision for the 
 morrow. Having no fixed abode, such private property 
 as may have been his was of a movable type, and formed 
 an integral part of his own personality. He had brain for 
 thought but no ideas upon which to build. His single 
 handicap was his want of scientific knowledge, for, had he 
 this, he could have given shape to tools and form to new 
 industries that would have lifted him from the level of the 
 brute beast to the higher plane of human supremacy. 
 Wholly subservient to nature and without vision for the 
 future, he contributes no lesson to the modern science of 
 economics. 
 
 10. The Pastoral Stage. — Different conjectures have 
 been made as to how or why man came to domesticate 
 animals. The "pet theory" seems to prevail; namely. 
 
The Beginning of Economic Institutions 7 
 
 that some of the savages who caught young animals would 
 prefer to amuse themselves by playing with the captives 
 rather than destroying them for food. This contact be- 
 tween savage and pet enabled the former to learn the value 
 of the latter, enabled him to make selection among ani- 
 mals, retaining the more serviceable, and killing or driving 
 away the objectionable ones. Domestication has long 
 since, even long before the beginning of authentic history, 
 been accompUshed. "It is worthy of remark," says Pro- 
 fessor Carver, "that our branch of the human race has 
 not reduced a single new animal to domestication since 
 the beginning of recorded history." 
 
 11. Domestication and Indirect Production. — It little 
 matters how animals came to be domesticated — this much 
 is certain, a long step was made toward civilization when 
 man learned to secure indirectly the means of subsistence 
 through the agency of animals. The shepherd, although a 
 wanderer in search of pasture, had a more abundant and 
 certain food-supply than did the hunter in the previous 
 stage. We cannot overstate the importance to civiliza- 
 tion of the art of conserving and distributing products 
 through time. Were crops consumed and destroyed as 
 produced, we could not survive the winter or non-produc- 
 ing seasons; without saving there could be no cumulative 
 wealth, no durable agencies of production, no provision 
 for sickness or old age. Values would fluctuate panic-like 
 from one season to another, and no settled state of eco- 
 nomic life could exist. The utilization of animals made a 
 great contribution to the stability of economic life by way 
 of furnishing milk, eggs, and meat in recurring order. 
 
 12. Conflicting Interests. — But these, like most economic 
 blessings, gave rise to conflicts of interests. There are men 
 
8 Introduction to Economics 
 
 to-day who reason that, because land Is a free gift of nature, 
 each and all should have a free and equal license to the 
 use of it. And so the shepherds reasoned in the days of 
 old. Tribal property in herds, however, proved contrary 
 to the idea of equal rights for all tribes to the same land. 
 It seemed a monstrous idea, contrary to justice, that the 
 herd of one tribe should occupy a favored pasture to the 
 exclusion of other herds. As the population grew and 
 herds multipUed, contests, even tribal warfare, arose over 
 the occupancy of the better pastures. The plan of Abra- 
 ham and Lot proved best when they agreed that property 
 in herds made necessary also property in land. They 
 agreed to separate and each restrict his pasturing within 
 fixed bounds, for the land was hmited and the herds were 
 multiplying, thus giving rise to frequent quarrels. 
 
 13. Pressure and Progress. — The ancient herdsmen have 
 taught us yet another lesson, namely, that the pressure of 
 numbers is a cause of progress. The sequence of more 
 people, more herds, and less land for each herd, forced the 
 tribes to invent means for a more intensive use of land. 
 This led them to classify plants in order that they might 
 proceed to destroy the unfit and to multiply the more use- 
 ful. Thus economic pressure gave birth to agriculture. 
 
 14. Tribal Property. — Still another lesson we inherit 
 from the experience of the ancient shepherd. A tribe is a 
 group of related persons who claim descent from a com- 
 mon male ancestor. One was admitted to membership in 
 the tribe only when he stood the test of blood-relationship-j 
 the fact that he might live in the same geographic area 
 furnished no reason why he should be admitted to the 
 tribe, although it might furnish decisive reason why he 
 should be decapitated. Thus the tribe was a large family 
 
The Beginning of Economic Institutions 9 
 
 with one family religion, government, and a common own- 
 ership of property. What we call private property to-day 
 is, for the most part, the ownership of wealth by the family, 
 which wealth is directed by the head of the family. 
 
 15. Variety and Trade. — But the property of that day 
 was too similar in nature to give rise to extensive trading 
 among tribes. Extensive trade implies variety in produc- 
 tion, and the possession of unlike things by the several 
 traders. It is when production is subdivided into many 
 parts that there is need for considerable trading. The 
 reason for little trading among tribes is that all followed 
 the same occupation. 
 
 16. Self-Sufficiency. — Where there is no trading the con- 
 sumer must depend upon his own production for support. 
 Where a person, family, community, or tribe — without the 
 intervention of trade — supplies its own provisionings, it 
 lives in a "state of self-sufficiency." 
 
 We shall find that self-sufficiency also characterizes the 
 agricultural stage of economic progress. 
 
 17. The Agricultural Stage. — We have seen how a growth 
 of population led to economic pressure, and this, in turn, to 
 a higher stage of production — the agricultural stage. We 
 shall see that a further growth of population gave rise to 
 an extension of man's knowledge, that he was forced to 
 devise improved arts of husbandry, and to extend further 
 the principle of ownership or property. 
 
 A problem to be solved sets the mind to work in search 
 of a solution. This truth has many bearings: human ail- 
 ments gave rise to the science of medicine; injustice among 
 men called into being the science of law in order that jus- 
 tice might be had; maladjustments in nature made need 
 for the science of engineering; and the pressure of a grow- 
 
10 Introduction to Economics 
 
 ing population upon the earth for subsistence made de- 
 mand for the science of agriculture. 
 
 i8. What the Agriculturist Must Know. — Much knowl- 
 edge is required in order that man may make wise selec- 
 tion among plants as to the fittest tj^es for cultivation, in 
 order that he may adjust the different types of plants to 
 the proper qualities of soil, in order that he may know 
 when and how to plant, to cultivate, and to reap. The 
 further demand for necessities must needs increase this 
 fund of scientific knowledge in order that the land may 
 produce more. Soil must be utilized more intensively, 
 and the area of cultivation extended to include new lands. 
 Swamps must be drained and arid lands irrigated. Fer- 
 tilizers must be manufactured and these adopted in right 
 proportions to the different qualities of soil. 
 
 Himian history records no more worthy examples of the 
 growth in knowledge than these: development of systems 
 in the rotation of crops to prevent soil exhaustion; increas- 
 ing discoveries regarding the effect of different kinds of 
 crops upon the chemical quahties in soil; extension in the 
 art of grafting and in the selection of seeds. Additional to 
 these, and not less remarkable in development, comes the 
 breeding and improvement of animals. The knowledge 
 here indicated is of later date than in the stage of progress 
 under consideration; it is high credit to that remote age 
 that it began this development which we now so fully 
 enjoy. 
 
 19. Three Essentials of Thrift. — Such is the nature of 
 agriculture that, even in its first stages, it becomes socially 
 necessary for men to acquire these three essentials of thrift, 
 namely, foresight, abstinence, and a higher respect for pri- 
 vate property. Land must be cleared and improvements 
 
The Beginning of Economic Institutions 11 
 
 made for their future yield. Likewise, foresight is required 
 in making necessary improvements, in the preservation of 
 flocks, or in planting now in order to reap at a later date. 
 Foresight gives rise to abstinence. The former points out 
 foreseen opportunities or future difficulties, and calls upon 
 abstinence to be sparing now in order to save for the 
 future need. Abstinence in its turn requires a high respect 
 for property rights, for one can save only that which he 
 owns. One could not save his garden-vegetables, neither 
 would he labor to produce them, apart from the institution 
 of property, for then all who enjoy vegetables would be 
 permitted to help themselves. 
 
 20. A Settled Life. — Not least, probably greatest, among 
 the influences of agriculture upon civilization is the fact 
 that men were forced to cease wandering and settle down. 
 The old shepherds could drive their flocks from one grazing- 
 place to another, but the farmer's property, being immov- 
 able, required him to maintain a fixed abode. This gave 
 origin to home Hfe, to more durable social relations among 
 men, and to the beginning of social institutions. As for 
 building, it is safe to say that men on the march had no 
 need for durable structures, but among the first demands 
 made by a fixed abode is that of structures more or less 
 durable. Lands and houses, moreover, created a further 
 extension of private property in the form of household 
 goods and chattels. 
 
 21. Production and Civilization. — Civilization does not 
 im ply a static situation or fixed state of accomplishment; 
 it signifies a progressive interaction between the inner man 
 and his environment. There is no separatmg the history 
 of production from the history of civilization; the one may 
 almost be defined in terms of the other. The production 
 
12 Introduction to Economics 
 
 of the press gave wings to knowledge and enlightened man- 
 kind. The production of gunpowder, which made foot- 
 soldiers superior to armored knights, robbed the feudal 
 caste of its strength, and worked to the equalization of 
 man. The production of trade facilities introduced into 
 each community the different kinds of goods, the variety 
 in consumption, the different methods and ideas known to 
 every other section. The advanced civilization of ancient 
 times in the Mediterranean basin, in some respects un- 
 equalled even in our own time, took its origin and found 
 its development in the art of trade. 
 
 Whether it be the spread of religion, education, or lib- 
 erty; whether it be the power to bridge rivers, tunnel 
 mountains, or sail the seas; whether it be improvement in 
 the quality and variety of food, clothing, or shelter — what- 
 ever the blessing, even to life itself, it must go back for its 
 explanation to the one word: production. But rapid prog- 
 ress depends upon variety in production. Agriculture 
 made possible a large yield of food upon a Hmited area to 
 support a large and settled population. It enabled a por- 
 tion of the population to produce enough farm-produce for 
 all, thus hberating a portion of the people who turned 
 their efforts to new lines of industry. Manufacturing 
 and commercial cities came into being, and with them 
 the beginnings of a division of labor and varied produc- 
 tion. 
 
 In early times cities sprang up in the valleys, and by 
 overland routes were enabled to trade with distant places. 
 City-dwellers devoted their time to hand-work of all sorts. 
 In the Tigris, Nile, and Euphrates valleys, in particular, 
 there are records of flourishing trade between country and 
 city people. 
 
The Beginning of Economic Institutions 13 
 
 22. Slavery. — ^A noteworthy phase of the extension o'f 
 private property during this stage was the captivity and 
 enslavement of human beings. Is slavery to be justified ? 
 Yes and no. During the early stages in human develop- 
 ment the introduction of slavery is a step forward. Tribes 
 and races of people never enslave their own members; the 
 slaves of a tribe or race are the captives from another tribe 
 or race. Previous to the time when it became profitable 
 to enslave the captives, they were killed by their conquer- 
 ors. Slavery is justified when the issue becomes either 
 the loss of liberty or the loss of life. 
 
 In the second place, the primitive man preferred to 
 plunder rather than to work; it was with difficulty that he 
 could be induced to work at all. Prejudice aside, our bet- 
 ter judgment would welcome slave-labor as a vast im- 
 provement over the free idleness of savage plunderers. 
 
 But the economics of slavery goes deeper. The time 
 under review was prior to the introduction of improved 
 tools and labor-saving machinery. Labor was performed 
 by hand with the aid of a few crude instrumentalities. 
 Superior workmanship upon the land, requiring special- 
 ized knowledge, had not yet made its appearance. Only 
 muscular labor for heavy, coarse work was needed. Such 
 labor may be performed by slaves. But this must be 
 added: the slave has no more interest in the quality of the 
 good he produces or in the price for which it will sell than 
 the horse has in the load that it puUs. It follows that, 
 without incentive for improvement, the products of his 
 labor must remain of a crude and rough type. 
 
 While cultivation was in the beginning stages, land was 
 so plentiful and cheap that it figured but little in the ex- 
 penses of production, and tools were a negligible factor. 
 
14 Introdticiion to Economics 
 
 Under thdse conditions men thought of the cost of produc- 
 tion almost wholly in terms of muscular labor. Put dif- 
 ferently, labor was the limiting factor of production and, 
 therefore, the expensive factor. This fact, coupled with 
 the coarse type of production then required, made slave- 
 labor very profitable. 
 
 Slave-labor, however, is not a free good. Prior to cap- 
 tivity those destined to become slaves are valueless, but 
 so also are the fur-bearing animals of Siberia while still in 
 their native haunts. Subject these to human control, 
 however, and value and price are forthwith attached. 
 He who sells furs will not hesitate to attach a price because 
 the product was once a free good. Here we have learned 
 a first principle in the value problem; namely, the thing 
 valued must be subject to control. Moreover, if slaves 
 are reared from infancy, the process is both time-consum- 
 ing and expensive. The matter comes to this: slaves are 
 expensive to rear and maintain; they represent invested 
 capital; they are sold at prices corresponding with their 
 productive capacity. Whether one will hire free labor or 
 buy slaves is very like the problem whether it is better to 
 buy a home or rent. The two problems differ in this — 
 one can buy a superior house, but he cannot buy superior 
 slave-labor. 
 
 23. The conclusion to which we are brought is in strict 
 keeping with the history of the case. As industries de- 
 velop and are broken up into specialized parts, the pro- 
 ducers require skilled labor and labor that is readily ad- 
 justable to the varying demands of a changing market. 
 Machinery comes into use, thus making a demand for 
 mechanical skill. Then, too, the varying needs of the 
 market require the business man to have on hand a large 
 
The Beginning of Economic Institutions 15 
 
 labor force at one time, whereas in slack periods few work- 
 men are needed. Thus the free-wage system in an open 
 labor market fills the requirements of modern conditions 
 better, and in a manner far more economical, than could 
 slave-labor. 
 
 24. From Primitive to Manoral Times. — Between the 
 primitive economy we have so hastily reviewed and the 
 manoral economy now to be studied there was a long 
 lapse of time. Nor was this time without its interesting 
 lessons for the economist. During this period economic 
 changes brought about the decay of certain institutions 
 and gave rise to others of a new and higher form. I say 
 economic changes, not the plans of a great leader or group 
 of influential men, forced the remodelling of institutions 
 so that they conform in time and step with the march of 
 human progress. 
 
 25. Feudalism. — ^As stated by the Yale historian. Pro- 
 fessor B. G. Adams, "It is almost impossible even with 
 the most discriminating care to give a brief account of 
 completed feudalism and convey no wrong impression." 
 And he quotes De Quincey thus: "It is a natural resource 
 that whatsoever we find it difficult to investigate as a result, 
 we endeavor to follow as a growth. Failing analytically 
 to probe its nature, historically we seek relief to our per- 
 plexities by tracing its origin. . . . Thus, for instance, 
 when any feudal institution eludes our deciphering faculty 
 from the imperfect records of its use and operation, then 
 we endeavor conjecturally to amend our knowledge by 
 watching the circumstances in which that institution 
 arose."' 
 
 The circumstances under which feudalism arose were 
 > Ency. Brit., eleventh ed., vol. lo, p. 300. 
 
16 Introduction to Economics 
 
 two: (a) For centuries, particularly in Greece and Rome, 
 men had developed their industries and arts imtil civiliza- 
 tion had reached a high level. But in the fourth^ fifth, 
 and sixth centuries the migrations of barbarian hordes 
 from the north worked havoc with the political and eco- 
 nomic environment of the people and laid this splendid 
 civilization in ruins, (b) Existing social institutions had 
 to be transformed to meet new requirements. 
 
 The new situation is difficult of explanation because of 
 the confusion which prevailed. Nor was the situation 
 ever)rwhere the same. But this much was true then as it 
 is to-day: the object of organized tyranny takes the form 
 of murder, loot, pillage, and destruction. This brought 
 the peaceful arts into neglect, the superb Roman roads 
 into disuse, commerce into abandonment, and the power 
 of sovereign governments into a state of disintegration. 
 
 Everywhere a cry arose for protection — ^protection 
 against the sudden attacks of invading tribes, against op- 
 pressive neighbors, against exacting government officers, 
 and against unwarranted taxes of the governments them- 
 selves. In almost every relation of life and on every side 
 the weak freeman and small landholder were attacked, 
 yet the decaying empires were incapable of extending re- 
 lief. Protection, which normally it is the business of the 
 government to furnish, had to be sought elsewhere, and at 
 whatever price might be demanded for it. 
 
 The safest guarantee of the helpless against the formida- 
 ble invaders was, in many cases, to group in small com- 
 munities and put themselves under the protection of a 
 powerful leader or expert fighter. But the protection of 
 this chief personage was not free from charge; he held 
 the land an4 granted protection in return for payments 
 
The Beginning of Economic Institutions 17 
 
 and services. And this was the origin of the manoral 
 system. 
 
 26. The Manoral System in England. — It would not 
 serve our purpose to trace the peculiarities of the origin of 
 this system in England. It is enough to say that in their 
 conquest of 1066 the Normans found the'system in opera- 
 tion and took advantage of it as a convenient basis for 
 reorganizing the kingdom. To the victor belonged the, 
 spoils, and William the Conqueror, with generous hand, 
 granted the existing manors to his followers. Not content 
 with this, the Doomsday Survey, the most complete sur- 
 vey of agricultural resources ever made, was carried out, 
 and the entire kingdom was divided among favored land- 
 lords. 
 
 27. Ashley's Picture of the Eleventh-Century Manor.^ 
 
 "Let us picture to ourselves an eleventh-century manor 
 in Middle or Southern England. There was a village street, 
 and along each side of it the houses of the cultivators of 
 the soil, with little yards around them: as yet there were 
 no scattered farmhouses, such as were to appear later. 
 Stretching away from the village was the arable land, 
 divided usually into three fields, sown one with wheat or 
 rye, one with oats or barley, while one was left fallow. 
 The fields were again subdivided into what were usually 
 called 'furlongs'; and each furlong into acre or half-acre 
 strips, separated, not by hedges, but by 'balks' of un- 
 ploughed turf; and these strips were distributed among the 
 cultivators in such a way that each man's holding was 
 made up of strips scattered up and down the three fields, 
 and no man held two adjoining pieces. Each individual 
 holder was bound to cultivate his strips in accordance 
 with the rotation of crops observed by his neighbors. 
 Besides the arable fields, there were also meadows, enclosed ^ 
 for hay-harvest, and divided into portions by lot or rota- 
 
 lAshley's Introduction to English Economic History and Theory, book 
 I, pp. 6-7. 
 
18 Introduction to Economics 
 
 tion or custom, and after hay-harvest thrown open again 
 for the cattle to pasture upon. In most cases there was 
 also some permanent pasture or wood, into which the cat- 
 tle were turned, either 'without stint' or in numbers pro- 
 portioned to the extent of each man's holding." 
 
 28. Tenants. — Those who lived under the direction of 
 the manor were under compulsion to render some form of 
 assistance in the cultivation of the lord's land. The vil- 
 lagers may be classij&ed as free tenants, viUeins, handi- 
 craftsmen, and slaves. Free tenants made their payments 
 to the lord in money or in kind. When one pays in kind 
 he tenders a portion of what he produces; thus pajonent 
 in kind might consist of eggs, poultry, vegetables, or grain. 
 This class of tenants were socially superior to the next or 
 villein class, who rendered their pay in manual labor. 
 Handicraftsmen were little more than conamon slaves who 
 perform^ various fimctions upon the estates and in the 
 household. The Normans found that slaves constituted 
 about nine per cent of the population of England. Slavery 
 formed no integral part of manoral life. Absolute slavery 
 disappeared within a century after the conquest (1066.) 
 Slaves became customary holders of small plots, but under 
 onerous conditions. 
 
 29. Self-Sufficiency on Manors. — Each manor was a 
 community existing apart from others. Such would-be 
 roads as might connect these communities were too dan- 
 gerous for commerce because the traveller was subject to 
 outlawry. The records indicate that almost the whole of 
 what the manors purchased from the outside were these 
 essentials: millstones, salt, and iron for the making of 
 tools. Each manor developed its own customs, and pro- 
 vided its own court, church, and mill. It provided food, 
 
The Beginning of Economic Institutions 19 
 
 clothing, and the other necessities for its own needs. The 
 manor system furnishes an excellent example of the econ- 
 omy of self-sufl&ciency. 
 
 30. The Relation of Property to Government. — We have 
 seen how among primitive peoples the institution of prop- 
 erty took its beginning and extended its growth. We now 
 see the relationship of this institution to government. 
 Property implies power, the power to control. In a well- 
 established government the social power is organized in 
 the sovereignty of the state. The state may delegate to 
 persons or corporations, full, partial, or no property rights, 
 as it wills. Moreover, the power to delegate a property 
 right implies the power to take it away. If the expression 
 of the sovereign power, in the form of votes, should declare 
 against private property, that moment the institution 
 would die. When the old governments began to decay, 
 power passed from the states to the expert fighters, and 
 with this transfer went the transfer of the power that is 
 property. But the fighter has a self-interest which the 
 state has not, and he will not, therefore, be so generous 
 in his grants of property as would be the state. 
 
 Self-interest implies a personal greed that would make 
 levy upon the wealth, even upon the person, of others. 
 And the motive of self-interest predominates the rule of a 
 person, be he the lord of a manor or the ruler of a great 
 people. Should Cuba, for instance, come under the com- 
 plete domination of a single grea,t ruler, her people would 
 be levied upon for contribution, and their holdings be 
 modified to conform to the self-interest of that ruler. 
 
 The characteristics of a democratic government, on the 
 contrary, are imselfishness and the rule of common sense. 
 Guizot was right when he said: "Common sense is the 
 
20 Introduction to Economics 
 
 characteristic of humanity." A democratic government 
 is the organized form of the will of humanity. These facts 
 teach us in the United States not to take alarm because of 
 the great and growing accumulations of private wealth. 
 Nor need we fear the opposite extreme of unbridled social- 
 ism. Social institutions are always on trial, open to in- 
 spection, to inquiry, and under experiment. The common 
 sense of the people outweighs that of the would-be reformer, 
 and these people are free to vote institutions in or out. 
 They may move too slowly for the impatient, but in the 
 end the institutions which are good and fit will survive, 
 while the bad and unfit will be eliminated. 
 
 Under the lord of the manor there could be no individual 
 liberty, in the sense in which we understand it, and, in 
 consequence, no private property. Men were forbidden 
 to sell any product without the lord's permission; they 
 were bound to the soil as much as the trees upon it; their 
 services were at the disposal of the lord; their position was 
 little superior to that of slaves. 
 
 31. Exercises. — i. How does a science originate, and 
 what is the essential condition that any discipline may 
 become a science ? 
 
 2. Shall a piece of coal be studied in geology, botany, 
 physics, chemistry, or economics ? (Fetter.) 
 
 3. Write a description of one of the three stages of prog- 
 ' ress mentioned in paragraph 8. 
 
 4. Why was the domestication of animals of great eco- 
 nomic importance? "Invention and machinery is but fur- 
 thering the progress which had its beginning in the domes- 
 tication of animals." Justify this statement. 
 
 5. "Economicpressuregavebirth to agriculture" (para- 
 graph 13) and to property rights. Tell why this statement 
 is true. 
 
The Beginning of Economic Institutions 21 
 
 6. How did agriculture bring about foresight, abstinence, 
 a higher respect for private property, and a settled life? 
 
 7. Are there any conditions under which slavery is jus- 
 tifiable? If so, what are they? 
 
 8. Apart from political and moral considerations, could 
 slavery exist in an advanced stage of industrial develop- 
 ment? Defend your answer. 
 
 9. What were the circumstances under which feudalism 
 arose? 
 
 10. Write a description of the eleventh-century manor 
 in England. 
 
 11. What does the word property mean? How is it re- 
 lated to government? 
 
CHAPTER II 
 
 ENGLISH GUILDS AND THE DECLINE OF LOCAL 
 RESTRICTIONS 
 
 I. Man as user of tools, z. The interdependence of industries in a civil- 
 ized state. 3. The old and new in England's development. 4. Develop- 
 ment of great wealth, s- Isolation and local unity. 6. The alliance 
 against lords of manors. 7. Guilds. 8. The Guild is an economic institu- 
 tion. 9. Merchant guilds. 10. InFrance. 11. The craft guilds. 12. The 
 Hundred Years' War between England and France. 13. Changes during 
 the war: in religion; in language; knighthood; the Black Death; the Peas- 
 ants' Revolt of 1381; enclosures. 14. Exercises. 
 
 1. Man as User of Tools. — Man differs from the lower 
 animals in two respects: first, he is provided with reason 
 that enables him to make things, and, secondly, he is not 
 provided, as are the lower animals, with the means of pro- 
 tection, or with provision for bodily comfort, and such is 
 his digestion that he requires a superior quality of food. 
 His mental capacity gives him the power and his natural 
 shortcomings give him the motive, or furnish the neces- 
 sity, for him to invent things. The making, or, if a longer 
 word is preferred, the manufacturing, of things must have 
 been practised from the earhest times, otherwise the race 
 could not have survived. Even in the hunting stage there 
 must have been at least some crude instruments. 
 
 2. The Interdependence of Industries in a Civilized 
 State. — When man raised himself above the level of ani- 
 mals and began a civilized life he found that tools were not 
 less needed than the land itself. The resources of nature 
 and the tools of production are to each other as the mouth 
 
 22 
 
English Guilds and Local Restrictions 23 
 
 is to the stomach, for neither could support man in a 
 degree of comfort without the co-operation of the other. 
 
 We have said that agriculture requires a settled state 
 of living; it should be added that the tilling of the soil also 
 requires the population to be scattered. On the contrary, 
 manufacturing or the source of tools, particularly in a 
 civilized state, calls for congregated labor and for the ex- 
 change of goods. Manufacture and trade find most facili- 
 ties and must, for the most part, exist in towns or cities. 
 Whether cities attract manufactories or are built up around 
 them is not a question debatable; they each react upon the 
 other and grow together. 
 
 Within a well-organized society agriculture is supplied 
 with tools and finished products from the city, and the 
 city is supplied with raw materials from the farm. They 
 are interdependent; towns feed from the surplus of agri- 
 culture, and the tillers of the soil draw their finished prod- 
 ucts from the workshops of the town. This interdepen- 
 dence or mutual benefit is effected through the agency of 
 commerce. 
 
 If agriculture should decline, the towns will decay and 
 commerce must diminish. So mutually dependent are 
 these three parts of industry that the weakness of one 
 means the infirmity of all. How they develop together as 
 one large movement is well exemplified in the industrial 
 development of England. 
 
 3. The Old and New in England's Development.— Eng- 
 lish commerce now covers every sea, and there is not a 
 port the world over unfrequented by her ships of trade. 
 So commanding is her position in trade that all peoples of 
 the earth quote their international exchanges in terms of 
 her finance. Her giant institutions of finance are the 
 
24 Introduction to Economics 
 
 models of excellence for the rest of mankind. Her manu- 
 facturing cities and productive agriculture, her harbors 
 and rivers, her beds of iron and coal, are so bound together 
 by a network of railways as to make of the whole a veritable 
 workshop. The opportunities before her people are great, 
 but not as great as are the people who made them. Her 
 capitalists, enterprisers, and laborers are of the highest 
 order, and worthy of their great attainments. 
 
 The area of England, including Wales, is but a little 
 over one-fifth of the area of Texas. It is smaller than 
 Missouri by ii,o8o square miles, yet it supports in a high 
 state of comfort nearly 40,000,000 of souls. 
 
 Contrast the England of to-day with the England that 
 the Normans found in 1066. The total population re- 
 corded in the Doomsday numbered but 283,242. Certain 
 omissions were made in that great survey, and Ashley esti- 
 mates the total numbers at 1,500,000, although he says: 
 "This estimate is probably too high." It is safe to say 
 that in the eleventh century all England supported an 
 impoverished population which numbered fewer by a 
 quarter of a million than does the city of Philadelphia. 
 
 So striking a contrast in the industrial orders of the two 
 periods suggests an educational contrast, because indigence 
 and poverty keep the company of ignorance, while a high 
 state of well-being is inseparable from education. To 
 quote from Green's Short History: "Instead of long fronts 
 of venerable colleges, of stately walks beneath immemorial 
 elms, history plunges us into the mean and filthy lanes of 
 a mediaeval town. Thousands of boys, huddled in bare 
 lodging-houses, clustering around teachers as poor as them- 
 selves in church porch and 'house porch — drinking, quarrel- 
 ling, dicing, begging at the corners of the streets — take 
 
English Guilds and Local Restrictions 25 
 
 the place of the brightly-colored train of Doctors and 
 Heads — Mayor and Chancellor struggle in vain to enforce 
 order or peace on this seething mass of turbulent life." 
 
 4. Development of Great Wealth.— The land is not 
 more now than then, nor has nature added to its fertility. 
 Whence this change from a sparse population, barely able 
 to eke out a living, to a large population living in a state 
 of abundance? The Normans injected into England new 
 blood, new ideas, and money-lending which gave rise to 
 a new form of industrial evolution. This evolution was 
 the work of forces in society itself, operating upon their 
 material environment. In our own country not more than 
 500,000 American Indians could maintain a meagre ex- 
 istence where now dwell 60,000,000 or more of the most 
 prosperous people of which there is record. The powers 
 of knowledge are the seeds of development, and these, 
 united with a rich environment, are the cause of great 
 wealth wherever it is found. 
 
 But the development in knowledge and power of appli- 
 cation is, as we have said, coincident with variety in pro- 
 duction, and such variety is impossible apart from the 
 production of a surplus in agriculture. This surplus was 
 small on the English manors, and so the small towns, or 
 manufacturing villages, numbered not more than eighty 
 at the time of the Conquest. 
 
 5. Isolatioii and Local Unity. — ^The population dwelt 
 either upon manors or in towns, and was, therefore, divided 
 into small isolated groups. For want of good roads and 
 safe travel the different groups had little in common, but 
 there was close personal association within groups. Per- 
 sonal contact, together with a oneness of interest, produced 
 a strong sense of unity that enabled the group to act as a 
 
26 Introduction to Economics 
 
 corporate body. In the absence of a strong protecting 
 government self-preservation was imposed upon the group, 
 thus making more desirable the power to act as a corporate 
 body. 
 
 6. The Alliance Against Lords of Manors. — While the 
 towns and manors were similar in some respects, they dif- 
 fered in others. The citizens of the town were free; they 
 had many rights of self-government, among others the 
 right to levy taxes, regulate trade, and administer justice. 
 This freedom caused serfs to flee from the oppression of 
 the feudal lords, and go to the towns, where they were 
 accepted and made freemen. The lords of the manors 
 resented this, for it threatened their power, and rivalries 
 arose between the lords of the manors and the manufactur- 
 ing cities. 
 
 The govenmient did not hesitate to favor the cities, be- 
 cause the power of some lords, who were jealous of the 
 King himself, was so great as to threaten the safety of the 
 state. The self-interests of both the King and the towns- 
 people made an alliance for mutual benefit inevitable. 
 The dwellers in cities received from the King special privi- 
 leges in the form of royal charters, and they repaid the 
 King with contributions to the royal exchequer and a 
 promise of unswerving loyalty in time of emergency. 
 
 Being a centre of manufacture and trade, it is but natural 
 that the first request of a town would be for the special 
 privilege of monopoly in its line of trade. This brings us 
 to the formation of guilds — a new type of economic insti- 
 tution. 
 
 7. Guilds. — ^As the manor was limited to agriculture, so 
 the guild was limited to manufacture and trade. Some 
 historians reason thkt guilds have grown out of the spirit 
 of brotherhood in Christianity; others see them as a con- 
 
English Guilds and Local Restrictions 27 
 
 tinuation of the old Roman fraternities; others advance 
 the theory that guilds are derived from the early Scandi- 
 navian banquets. These unlike theories have this in com- 
 mon — guilds are the outgrowth of a pre-existing institution. 
 The economist could have little confidence in such 
 theories. The ancient and noisy revels of the Scandina- 
 vians had neither unity nor durability of association, and 
 these were prime characteristics of the guild. The Roman 
 fraternities had no continuity, as did the guild. Nor does 
 the guild suggest the spirit of Christianity and brotherly 
 love. It was designed, on the one hand, to form a monop- 
 oly of trade by keeping others out, and, on the other hand, 
 to cheat in trade. 
 
 8. The Guild Is an Economic Institution, and for the 
 explanation of such institutions we must look into the 
 facts of human nature. Economic changes modify man's 
 behavior and give new direction to his plans. An institu- 
 tion is no more than a device for the execution of a plan, 
 and must, therefore, change with the change of plan. It 
 is a part of man's nature to form associations, whether for 
 the support of the body or the salvation of the soul. Social 
 animals enjoy association, and where there is a motive in 
 common among men we have the explanation for an orga- 
 nized association or institution to carry out the motive. 
 
 As between the present form of corporation with monop- 
 oly power and the guild of mediaeval England and Europe 
 there are many points of difference, but back of the form 
 the motive for forming and the real essence of the institu- 
 tions is the same— that of securing advantage in trade 
 through the possession of monopoly power. 
 
 9. Merchant Guilds. — An organization which embodies 
 many interests is weaker and less durable than one with 
 a single interest and purpose. The merchant guild was 
 
28 Introduction to Economics 
 
 comprehensive in scope, covering all those who had occa- 
 sion to buy or sell anything beyond provisions for daily 
 use. Whether limited, as some, to trade within the town 
 of its location, or permitted, as others, to extend their 
 command of trade thtoughout the kingdom, they had 
 monopoly power over many lines of trade. 
 
 There was no free competition where the guild ruled. 
 It bought and paid for its rights in trade as truly as it did 
 the commodities in which it dealt. And these purchased 
 privileges took the form of oppressive regulations even to 
 the minutest details. When and where might goods be 
 sold ? in what quantities ? at what prices ? by whom and 
 to whom? These and other questions too numerous for 
 mention were subjects for definite regulation by the guilds, 
 and for .enforcement by the wardens of the guild. To 
 break one of these precious rules furnished an occasion 
 for public censure and fine, or else imprisonment and ex- 
 pulsion from the guild. 
 
 Note the spirit of oppressive regulation which character- 
 ized that backward age. Whether in the city guilds or the 
 country manors and whether in England or upon the con- 
 tinent, regulation was the rule. 
 
 10. In France. — Prior to 1798 in France the King sys- 
 tematically obtained the choice bits of scandal by opening 
 private letters which passed through the post; not fewer 
 than 168 censors passed upon publications; instead of a 
 single code of law, there was a legal variety of 300 different 
 laws, which were enforced by fines, tortures, and mutila- 
 tions. The King was wont to gamer riches through the 
 sale of monopoly rights. 
 
 Thus arose a grievous hindrance to trade. Internal 
 commerce was harassed by frequent tolls and customs 
 
English Guilds and Local Restrictions 29 
 
 duties on goods passing from province to province. A 
 vessel descending the Sa6ne and Rh6ne Rivers had to stop 
 and pay charges as many as thirty times, the whole amount- 
 ing to from 25 to 30 per cent of the value of the cargo. 
 Hardly a trade or industry escaped the oppressive regula- 
 tion of the guild. "Each week for a number of years," 
 said an inspector of manufactures, "I have seen burned 
 at Rouen 80 to 100 pieces of goods because some regulation 
 concerning the weaving or dyeing had not been observed 
 at every point."* 
 
 11. The Craft Guild. — The merchant guild, with its 
 many interests, gradually gave way to the craft guild, 
 which was stronger in organization because of its oneness 
 of interest. It was an organization of artisans engaged 
 in the same particular handicraft or trade. Its rules were 
 not less rigorous nor less strictly enforced than in the mer- 
 chant guild. Some of its regulations were commendable, 
 and similar rules are to-day insisted upon by governments 
 and trades-imions. They provided for honest work, fra- 
 ternal improvements, correct weights and measures, and 
 against night work in some cases, and against the adultera- 
 tion of products in all cases. 
 
 Within recent years in the United States we have wit- 
 nessed the gradual decay of the Knights of Labor, embrac- 
 ing all trades and classes of workers, and the rise of trades- 
 unions which include only men who work at the same trade 
 and who, therefore, have a unity of interest. Very like 
 this change from the general to the particular in unions 
 was the development in the guilds. And so with progress 
 in general; it is from the general to the particular. 
 
 12. The Hundred Years' War between England and 
 1 Harding's Essentials in Mediaeval and Modern History, p. 346. 
 
30 Introduction to Economics 
 
 France came to an inglorious end for England in 1453. 
 Its ultimate effect upon both nations was the overthrow of 
 the oppressive local institutions, among them guilds and 
 manors. The French were victorious and took England's 
 continental possessions, excepting Calais. A strong na- 
 tional sentiment was born, and the prestige of the French 
 King elevated him above his rivals and into the position 
 of an almost absolute monarch. But not so with the 
 Lancastrian Kings of England — in that country Parlia- 
 ment increased its powers, even to the control of the 
 purse. A national spirit arose, but it was organized in 
 Parliament rather than in the King. 
 
 13. Changes During the War. — Social and economic 
 movements during this war stimulated the people by 
 ushering in new lines of thought and by breaking down 
 industrial barriers. 
 
 (a) Religion: The church had a monopoly of religion, 
 and had accumulated vast estates which were free from 
 taxation. John Wyclif (1324-1384) accused the clergy of 
 irreligion due to the close connection between church and 
 state. Believing it Christ's will that the clergy remain poor, 
 he urged that the church be disestablished and its property 
 confiscated for state use. He denied the supremacy of 
 the Pope, and disavowed important dogmas of the Roman 
 Catholic Church. Translating the Bible into Engilish, he 
 openly revealed the teachings of the Scriptures to all read- 
 ers. Missionary priests were trained by him, who went all 
 over England teaching the people that they were losing 
 the true gospel instruction necessary to save their souls, 
 and that the great wealth of the church, so needed by the 
 poor, was wasted. His followers (Lollards) multiplied 
 rapidly, and twice it was seriously proposed in Parliament 
 
English Guilds and Local Restrictions 31 
 
 to confiscate the temporalities of the church. This proved 
 to be a most significajit educational movement. 
 
 (J) The Language : After 1066 the Norman-French tongue 
 enriched the Anglo-Saxon and gave rise to the modern 
 English language. Chaucer, in his Canterbury Tales, 
 established the Enghsh language — "the King's English" — 
 and portrayed, in matchless style, the state of English 
 society in the middle of the fourteenth century. 
 
 (c) Knighthood, originally concerned with landed pos- 
 sessions and military service on horseback, came to con- 
 cern itself with standards of honor, courtesy, and duty. 
 Its members were pledged to aid the oppressed, to honor 
 women, and to maintain the right. 
 
 {d) The Black Death is italicized for its significant eco- 
 nomic bearings. A sweeping transformation of social in- 
 stitutions was caused by this singular calamity known as 
 the Black Death. It first ravaged Europe and finally 
 reached England in 1348. It was a violent typhus fever, 
 accompanied by eruptions and black blotches on the skin. 
 Half of the rural popoilation died within a year, and the 
 death-rate among the clergy was particularly high because 
 their duties took them to the bedside of the sick. Twenty- 
 four thousand Franciscan friars died. London, then only 
 a small city, set aside a cemetery thirteen acres in extent, 
 and this was crowded witb the bodies of fifty thousand 
 victims of the malady. Business came to a standstill, so 
 much so that grass grew in the market-place of Bristol. 
 In short, the Black Death found England with a popula- 
 tion of four millions, and left that stricken land with but 
 two millions. 
 
 This was the laborer's opportunity, and he hastened to 
 take advantage of it. Despite its serious aspects, this 
 
32 Introduction to Economics 
 
 malady may be called a blessing in disguise; probably no 
 war has done more for the liberation of mankind. Labor 
 was suddenly cut short, with the result that employers in 
 England and on the Continent were set to bidding against 
 each other for such labor as was available. Wages ad- 
 vanced rapidly and villeins, disregarding the protests of 
 their masters, declared their independence of the manors. 
 They offered their services as freemen to the highest bidder 
 for a money wage. 
 
 Another significant lesson: The hard-pressed employers 
 persuaded Parliament to enact the "Statute of Laborers," 
 which forbade higher wages, and a later law provided severe 
 punishment for runaway villeins. Here we have economic 
 law and legal law in conflict: The former favors higher 
 wages due to the law of supply and demand; the latter 
 favors low wages and would arbitrarily enforce them. As 
 if once was not enough, the statute was re-enacted thir- 
 teen times, but all to no avail. Labor will sell for its 
 worth — not less and not more — in a competitive market. 
 Minimum wage advocates would do well to contemplate 
 more upon this fact. 
 
 (e) The Peasants' Revolt of 1381 is both an evidence of 
 the new independence felt by labor and an effective de- 
 mand for the betterment of labor. This Statute of Labor- 
 ers proved oppressive to the villeins and they, with the 
 townspeople, resented the tolls which added to their cost 
 of living. All were burdened with a heavy tax to support 
 "a useless foreign war." Their long brooding over these 
 troubles prepared the way for John Ball, whose speeches to 
 the lower classes might easily be mistaken for the language 
 of a modern single-taxer. In behalf of abolishing class 
 distinctions and private property in land, he said: "Are 
 
English Guilds and Local Restrictions 33 
 
 we not descended from the same parents, Adam and Eve? 
 And what can they [the upper classes] show, or what 
 reasons give, why they should be more the masters than 
 ourselves? . . . They are clothed in velvets and rich 
 stuffs ornamented with ermine and other furs, while we 
 are forced to wear poor cloth; they have wines, spices, and 
 fine bread, when we have only rye and the refuse of the 
 straw, and if we drink, it must be water; . . . but it is 
 from our labor they have wherewith to support their 
 pomp!" 
 
 Literally thousands were ready for revolt when, in 1381, 
 the poll-tax collector came along and insulted Wat Tyler's 
 daughter, only to be struck dead by her father. The fight 
 was on. Tyler's friends in misery arose to plunder and 
 murder the tax-collectors, and they did no discriminating, 
 in this particular, against other government officers. Much 
 property was destroyed in their search for the manor copy- 
 rolls, which they desired to bum. Congregating in Lon- 
 don, they demanded the abolition of villeinage. Soon 
 Tyler was killed, and the King outwitted the mob by 
 assuming the leadership of the insurgents and promising 
 redress of grievances. Thirty clerks were put to it to 
 draw up new charters, then the insurgents dispersed. 
 
 Consequences: The lords of the manors ceased to be dic- 
 tators, and had to bargain on equal terms with labor. 
 Wages were so high that the landlords, for the most part, 
 found more profit in leasing their estates and stock in 
 small lots to tenants. Thus arose the modern type of 
 small farmer who paid rent to the owner of the land, and 
 he paid wages to other laborers. 
 
 (/) Enclosures: The enclosing of land was the influence 
 to complete the downfall of the manorial system and to 
 
34 Introduction to Economics 
 
 usher in a money economy. High wages caused the old 
 form of agriculture, grain-raising, to decline; meanwhile 
 sheep-raising was becoming very profitable. England had 
 a good export market for her wool, and during the four- 
 teenth century a number of woollen-factories were intro- 
 duced into the country, thus adding to the demand and 
 increasing the price of the raw wool. 
 
 High wages were no obstacle to sheep-raising, because a 
 shepherd and his dog could care for a large drove of sheep. 
 The lords of the manors found it profitable to convert 
 their lands into sheep-ranches. Moreover, large boun- 
 daries of common land were fenced in for the same purpose. 
 Many persons owned as many as 24,000 sheep, conse- 
 quently the land had to be enclosed into very large pas- 
 ture-fields. This process of enclosing or fencing in land 
 is known as "enclosing," and upon certain conditions the 
 state gave the encloser property in the land. 
 
 The tenants, with few exceptions, were forced to surren- 
 der their holdings when the land was taken up in this 
 manner. Many of those who enclosed land were non- 
 residents, and due to the fact that but little labor was 
 needed to care for the sheep, the tenants received little 
 consideration and were forced to seek emplo)Tnent else- 
 where. 
 
 Wealthy merchants and professional men, desiring to 
 become landlords, bought and enclosed lands. Thus for 
 the first time lands became marketable, and with this 
 change rents rose ten and even twentyfold. This brought 
 the poor to the verge of starvation, and the whole realm 
 was overrun with beggars and thieves. Bishop Latimer, 
 a noted clergyman of that day, declared that if every 
 farmer should raise two acres of hemp there would not be 
 
English Guilds and Local Restrictions 35 
 
 enough to hang the thieves. He preached against the 
 change, but to no avail. "Let the preacher preach," he 
 said, "till his tongue is worn to the stumps; nothing is 
 amended." 
 
 Public resentment grew strong, riots broke out and the 
 government legislated against the change. Between the 
 years 1488 and 1624 act after act was passed against en- 
 closures, but all such legislation was ineffective. Despite 
 severe hardships and opposing legislation, industrial con- 
 ditions forced a change to private property in land. A 
 considerable portion of the tillable and pasture land of 
 England was enclosed at that time. 
 
 14. Exercises, i. What is meant by the interdepen- 
 dence of industries ? What is the connection between the 
 development of industries an(d the growth of cities ? 
 
 2. Contrast the numbers and prosperity of the English 
 people to-day with the numbers and prosperity in 1066. 
 Make a brief summary of the causes of this development. 
 
 3. Account for the rise of guilds. What was the differ- 
 ence between merchant guilds and craft guilds? What 
 was the chief characteristic of a guild? 
 
 4. Has economics anything to do with religion? With 
 the development of a language ? With knighthood ? 
 
 5. Following the Black Death, the Statutes of Laborers 
 were passed in 1351, and subsequent years. They had 
 very little practical effect. Account for their failure. 
 
 6. Summarize the chief economic changes which fol- 
 lowed the Peasants' Revolt of 1381. 
 
 7. Why did sheep-raising become so important and ex- 
 tensive in England during the fourteenth and fifteenth 
 centuries? 
 
 8. Write a report of one page (not over 300 words) 
 which will contrast the economic life of the English people 
 before the changes described in this chapter with the eco- 
 nomic life after the changes. 
 
CHAPTER III 
 
 NATIONAL CONTROL AND THE INDUSTRIE 
 REVOLUTION 
 
 t. The national system. 2. Monopolies. 3. Mercantilism or Cplbert- 
 ism. 4. Restrictions. 5. National ideals. 6. The domestic system. 7. 
 The industrial revolution. 8. Commerce and need for machinery. 9. 
 The beginning of industrial classes. 10. Scientific farming. 11. Control 
 of natural forces. 12. The long delay. 13. Changed point of view. 14. 
 Social changes. 15. The Physiocrats. 16. The freedom of trade and agn- 
 culture. 17. PoUtical effects. 18. Beginning of social legislation. 19. A 
 summary of changes which affected wage-earners. 20. The formation of 
 labor-unions. 21. Exercises. 
 
 I. The National System. — ^The religious, educational, 
 and industrial movements, which were outlined in the 
 last chapter, enabled the common people to sense their 
 power. The inevitable result was the breakdown of local 
 restriction and the rise of movements national in scope. 
 National sentiment became solidified under the rule of the 
 strong and popular line of Tudors. 
 
 It was in a period of internal dissension, when the public 
 mind was prepared to welcome a ruler with power to restore 
 unity and peace, that Henry VII took the throne. He 
 interpreted well the spirit of the time, and enlisted the 
 people's confidence by a selection of able advisers. This 
 was the beginning of a series of statesmen chosen from the 
 ranks of the people. He found England in dissension, but 
 transmitted it to his very capable son, Henry VIII, a 
 strong and well-organized government. After twenty-five 
 
 36 
 
National Control and Industrial Revolution 37 
 
 years of rule, "Henry, head of the state, became also head 
 of the church or, briefly, the English pope." Soon after- 
 ward came the "Virgin Queen," Elizabeth, who was a 
 curious compound of qualities masculine and feminine. 
 She was the most novel statesman known to history. The 
 ablest statesmen of England were chosen her ministers, 
 yet she was clearer-brained and farther-sighted than any 
 of them. Coquetry was her diplomatic weapon, and with 
 it the winsome queen had her own way. 
 
 2. Monopolies. — Queen Elizabeth (i 558-1603) appraised 
 the power of granting patents of monopoly to her favorites 
 as "the fairest flower of her garden." She granted exclu- 
 sive rights to private parties to deal in certain articles of 
 common use. Competition was thereby destroyed and 
 prices fixed by the privileged few. Such necessities as 
 salt, iron, calfskins, vinegar, lead, and paper were con- 
 trolled by patentees. Prices became exorbitant and the 
 abuses of the monopolists intolerable. 
 
 In 1601 the House of Commons brought pressure to bear 
 on the Queen and she promised reform. The memorable 
 Act of Parliament of 1624 made null and void all monopo- 
 lies which controlled the buying, selling, and making of 
 goods and manufactures. "This act effectually secured 
 the freedom of industry in England; and in the opinion of 
 excellent authorities has done more to excite the spirit of 
 invention and industry and to accelerate the progress of 
 riches in that country than any other in the statute-book." 
 The historian Gibbon says: "The spirit of monopolists is 
 narrow, lazy, and oppressive. Their work is more costly 
 and less productive than that of independent artists, and 
 the new improvements, so eagerly grasped by the competi- 
 tion of freedom, are admitted by them with slow and sullen 
 
38 Introduction to Economics 
 
 reluctance." Restrictions and special privileges extended 
 beyond internal affairs and applied to foreign trade as well. 
 These industrial changes were accompanied by changes in 
 economic thought. 
 
 3. Mercantilism or Colbertism. — Colbert, the famous 
 finance minister of Louis XIV of France, had an idea that 
 money is the greatest index of national wealth. To his 
 mind great wealth and an abundance of money were synon- 
 ymous terms. His anxiety to enrich France led him to 
 advocate tariff restrictions such as would cause that coun- 
 try to export more goods than she imported, and to collect 
 " the favorable balance of trade " in money. Many states- 
 men throughout Europe and England held similar views — ^^ 
 these statesmen, not economists, are called Mercantilists. 
 
 It was an age of nation-building and of international 
 jealousies. The argument that great sums of money were 
 required to maintain foreign fleets and armies was a force- 
 ful one. Moreover, money was considered the most im- 
 portant form of wealth, because of its durability and its 
 exchangeability. It was pointed out that if the merchant 
 does not convert his stock into money he fails, and from 
 this it was argued that the nation should sell its goods for 
 money. A result of such teachings was that Spain, Por- 
 tugal, Scotland, France, and England forbade the exporta- 
 tion of gold. We cannot emphasize too strongly that Mer- 
 cantiHsm was a national poUcy rather than a local policy. 
 Furthermore, the purpose of the policy was to create a 
 strong national state. It was broader than money-mak- 
 ing; it was state-making under severe restrictions and 
 regulations. These restrictions covered trade, manufactur- 
 ing, agriculture, and labor— in fact, they covered all of the 
 industrial relationships of society. The false doctrine was 
 
National ^Control and Industrial Revolution 39 
 
 then current that when a trade is made one party must 
 get cheated. Accordingly, it would be good statesman- 
 ship to devise a system that would cheat foreigners in 
 trade, and make collection of the favorable balance in 
 money. 
 
 4. Restrictions. To this point we have found that the 
 history of industrial England was characterized by restric- 
 tions — ^restrictions in manor life, then in guild life, then in 
 all trade between provinces; and, finally, the breakdown 
 of local restrictions and the rise of national restrictions. 
 
 5. National Ideals. — I have neglected mention of impor- 
 tant events which profoundly influenced the economic life 
 of England. Nothing has been said of the awakened enter- 
 prise following the discovery of the New World. No ref- 
 erence has been given to the religious wars of Europe, 
 which drove so many skilled artisans to England. Nor 
 has mention been made of international commercial trea- 
 ties, which made foreign trade safe, large, and profitable. 
 Not least of the omitted items was the formation of trad- 
 ing companies, such as the famous East India Company, 
 which carried English commerce into every port, and in- 
 troduced that nation's customs and flag to all the world. 
 
 Our purpose has been not to detail items, however inter- 
 esting, except as they might show how economic influ- 
 ences give form to new ideas, and how these react, giving 
 form to new lines of enterprise. The futility of attempt- 
 ing to study economic progress apart from national ideals 
 may be seen in these words from Professor Kimball :* "It 
 is to be especially noted that national ideals, popular 
 opinion, or some similar influence has always greatly influ- 
 enced industrial organization. Thus, in India the caste 
 « Principles of Industrial Organization, p. 4. 
 
40 Introduction to Economics 
 
 system for countless years prohibited all forms of factories 
 and all production was by simple handicraft, definite kinds 
 of work being assigned to particular classes of people. 
 Under the Roman system the armorers or fabri were a 
 class of artisans set apart for this sole purpose, and they 
 could not change their calling. It was a form of state- 
 supported and regulated slavery. History abounds with 
 similar instances of the effect of public opinion or national 
 necessity upon the method by which the nation was pro- 
 vided with the necessities of life. While, therefore, the 
 essential features of our modem system will probably 
 continue indefinitely, it need not be a matter of surprise or 
 alarm that many changes and regulations have been made 
 and will be made in deference to public opinion or national 
 necessity." 
 
 6. The Domestic System. — Between the decay of the 
 feudal system and the beginning of the industrial revolu- 
 tion stands the domestic system. Domestic is defined as 
 belonging to the house or home, and, in keeping with this, 
 the simple industries of that time were not housed in fac- 
 tory buildings, but were carried on around the family fire- 
 sides. This system began at a time when farming was 
 the primary interest of the householder. But he, with his 
 family, devoted his spare time to some simple handicraft — 
 particularly spinning and weaving. The spinning-wheel, 
 now a fit antique for exhibition in a museum, was found in 
 all well-to-do homes. In time these domestic arts took 
 on more importance. 
 
 A master workman, employing a few helpers who lived 
 with him, carried out in his own home all the processes of 
 spinning, weaving, and dyeing cloth. The food for the 
 workers would be produced upon their own land, that is, 
 
National Control and Indtistrial Revolution 41 
 
 they did farming as well as weaving. Perhaps a farmer's 
 wife and children would utilize spare time in weaving cloth 
 from the wool of their own sheep. What trade there was 
 moved in a very limited circle because of the poor roads. 
 Goods were produced for immediate consumption, the 
 worker knew his market and regulated his output accord- 
 ingly. There was a close personal relation between maker 
 and consumer, and between master and workman. 
 
 7. The Industrial Revolution. — There was virtue, intel- 
 ligence, and a certain charm in the simple life and dignity 
 of manners in primitive England. The customs of life 
 and the household appointments of that people were al- 
 most exactly duplicated in many sections of our South 
 prior to a generation ago. In many an isolated commimity 
 of the South to-day the manipulation of the hand-cards, 
 spinning-wheel, and the old-fashioned loom is far from 
 being a lost art. There is an economic independence and 
 rude comfort which these people get from direct contact 
 with the freshness and richness of the virgin soil. 
 
 The Industrial Revolution found the English people a 
 brave and hardy stock who loved independence. But their 
 primitive methods had lingered century after century, with 
 scarcely any evidence of private thrift. The resulting pov- 
 erty and stagnation of life are best described as a condition 
 of arrested social development. Then came the marvel- 
 lous industrial transformation. The change was like the 
 brightness and hope of day, following the darkness and 
 dread of night. 
 
 This change,— we call it the Industrial Revolution,— was 
 a change from the home to the factory, from hand-work 
 to machine-work, from rural to city hfe, from local to 
 world markets, from a simple to a complex division of 
 
4£ Introduction to Economics 
 
 labor. But greater than these changes and the cause of 
 them was a change in the point of view. 
 
 8. Commerce and Need for Machinery. — Prior to the 
 fall of Napoleon (1815) England had acquired naval su- 
 premacy and a monopoly of commerce on the sea. This 
 occasioned an extensive demand for the manufactured 
 products of England, especially for her textiles. Textiles 
 were produced by hand-cards, the spinning-wheel, and the 
 old-fashioned loom. The pieces of goods were collected 
 from the hamlets into the towns, from where they were 
 hauled over all but impassible roads to the port for ship- 
 ment. 
 
 The growing demand increased the pressure on old proc- 
 esses and called for new manufacturing processes. One 
 weaver could use the product of six spinners, but the in- 
 vention of Kay's drop-box (1783) enabled one weaver to 
 keep ahead of ten or twelve spinners. Spinning was thus 
 the greatest obstacle to progress, and the Royal Society 
 offered a prize for an invention to improve spinning. Im- 
 provements followed in quick succession, and large ma- 
 chinery succeeded the simple tools of the domestic sys- 
 tem. 
 
 9. The Beginning of Industrial Classes. — The operating 
 of large machinery called for separate buildings in which 
 power could be used. Furthermore, these new processes 
 involved too great an expense for the small master to incur, 
 so we find the capitalist buying machines and employing 
 labor. The consequence was an employing class, sepa- 
 rated from the workers and having no share in the actual 
 labor, but furnishing the means of production and paying 
 men to use these means. Naturally these new machines 
 were installed where power was available, and the popu- 
 
National Control and Industrial Revolution 43 
 
 lation concentrated in factory districts along the swiftly 
 running streams of northern England. 
 
 When James Watt perfected the steam-engine, the power 
 of steam was applied and factories multiplied still more 
 rapidly. Improved methods of smelting iron by the use 
 of coal were discovered and the mining industries grew. 
 Canals and roads were improved, then railroads were 
 built, so that within two generations England was trans- 
 formed into a region of thickly populated factory towns 
 closely connected by railroads. 
 
 10. Scientific Farming. — To hasten still more the changes 
 a revolution in agricultural methods occurred at the same 
 time. Scientific farming was introduced and farmers began 
 to employ new methods of tilling the soil and new means 
 of fertilizing. Such systems could be used only by the 
 prosperous and the small farmer was forced out. He either 
 drifted to the city to join the ranks of the factory-workers, 
 or sank to the level of an agricultural day-laborer. 
 
 11. Control of Natural Forces. — Prior to the use of large 
 machinery the output of industry was Limited by the fxmd 
 of himian muscle and nervous energy. Then came the 
 large tnachine — a device by means of which hiunan intelli- 
 gence takes control over natural forces. The limit to the 
 output of industry was no longer fixed by the fund of mus- 
 cular power; it was determined by the fund of knowledge. 
 Knowledge gives form to machinery which, in turn, ren- 
 ders natural forces subservient to human will. Expressed 
 differently: the limit to the output of an industry based 
 upon machinery is the available power of nature. 
 
 To labor-saving machinery two meanings are attached: 
 it substitutes for labor, and does the work formerly done 
 by hand; it does heavy work of which human muscle is 
 
44 Introduction to Economics 
 
 incapable. The substitution of machine-power for hand- 
 work had its beginning at the middle of the eighteenth 
 century. 
 
 The beginning of the great inventions is a date singled 
 out for distinct emphasis in the history of human progress, 
 but greater than these inventions was the change in the 
 course of ideas which called them into existence. We 
 must not confuse cause and effect: great inventions did not 
 cause the Industrial Revolution, but it was the Revolution 
 that caused the great inventions. 
 
 12. The Long Delay. — In our day long-distance conver- 
 sation by wire, the cabling of news back and forth across 
 the seas, the wireless telegraph, swiftly sailing steamers, 
 skyscrapers and subways, great manufactories covering 
 acres of ground and utilizing powerful machinery and em- 
 ploying thousands of men — these have become common- 
 place. This is a period of restless search for the novel and 
 new. The captain of industry, even though a miUionaire, 
 sleeps upon a most restless pillow; he is thinking, concoct- 
 ing, scheming, and devising how to add to his wherewithal. 
 Progress is contagious and comes to affect the whole peo- 
 ple. It is with nations as with individuals, the more they 
 progress the more restless they become. 
 
 From this progressive age we look back with amazement 
 and wonder upon the non-progressive and poor yet con- 
 tented peoples of the domestic system. How could man- 
 kind have dwelt upon the earth in a civilized state so long 
 and yet have made such a very small advance in industrial 
 methods? As H. C. Adams puts it: "Penelope, who 
 worked at her loom while awaiting the return of Ulysses, 
 would have found nothing very strange in the art of weav- 
 ing, could she have made a visit to the home of a textile 
 worker in the beginning of the reign of George III." Truh-, 
 
National Control and Industrial Revolution 45 
 
 the greatest wonder regarding the Industrial Revolution 
 was its long delay. 
 
 13. Changed Point of View.— The significant change in 
 ideas was simply this: The idea that machinery would 
 substitute for muscular strain and multiply the output of 
 industry did not appeal to the imagination of man before 
 the Revolution; then an economic new birth came about 
 because of the large European demand for EngUsh textiles. 
 Hand-methods could not exploit the new opportunities; 
 machinery must be had. England awoke; she offered 
 prizes of £50 and £25 (large prizes for that time), respec- 
 tively, for the first and next best improved method of 
 spinning. The incentive was great and following it were 
 the "Four Great Inventions" (Hargreaves's spinning-jenny, 
 1770; Ark Wright's water-frame, 1781; Cromp ton's mule, 
 1779; Cartwright's power-loom, 1785). By the end of the 
 first quarter of the last century the old idea had completely 
 given way to the new. There was full appreciation of in- 
 ventions and inventive genius was generously encouraged. 
 The industrial greatness of to-day owes its being to this 
 change in the idea regarding the use of machinery. 
 
 14. Social Changes. — One of the greatest effects of this 
 sudden Industrial Revolution was the degeneration of the 
 old skilled laborers and the emplojonent of a new class — 
 women and children. Manufacturers found that the new 
 machines performed the work of skilled labor, and that 
 in many cases a woman or a child could operate them effec- 
 tively. Women and children were ruthlessly exploited, 
 laboring fourteen and sixteen hours a day for a mere sub- 
 sistence. Factories and factory towns sprang up quickly 
 and were built with little regard for the health or morals 
 of laborers. 
 
 Previous to the Industrial Revolution the country as a 
 
46 Introduction to Economics 
 
 whole was poor; yet the wealth was fairly well distributed, 
 thus securing general comfort. The new forms of industry 
 were highly productive, but they brought about extreme 
 poverty in the midst of abundance. From 1760 to 1818 
 the population had increased 70 per cent, and the cost of 
 poor relief had increased 530 per cent. The degeneration 
 of labor, the alienation of classes, the increase of wealth 
 and the multiplication of paupers were characteristic of 
 this period. 
 
 Fierce competition in these new industries caused manu- 
 facturers to disregard the protection of morals, health, and 
 even the lives of workers. The goal was high profits, and 
 every effort on the part of public-spirited people for reform 
 was met with opposition. The prevaihng spirit of indi- 
 vidual Hberty which characterized that period made it 
 very difl&cult to enact much-needed legislation to remedy 
 the wretched conditions of workers. This new theory is 
 so different from the Mercantile doctrine previously men- 
 tioned that a brief explanation of it is necessary. 
 
 15. The Physiocrats. — It will be recalled that in the sev- 
 enteenth century the governments of Europe had imposed 
 severe restrictive systems upon trade and other industrial 
 activities. Such severity produced reaction, which was 
 first expressed in France in the early eighteenth century 
 by a school of economists known as the "Physiocrats." 
 They believed in a system of "natural liberty," i. e., that 
 the right to work is the property of every man, and that 
 he should be permitted to sell this property to the best 
 possible advantage, with no regulation from his govern- 
 ment except the necessary protection. The thought was 
 that individuals are by nature endowed with different ca- 
 pacities, and that each can produce the greatest abundance 
 
National Control and Industrial Revolution 47 
 
 if he follow the course for which his particular type of 
 natural strength capacitates him. Moreover, nature fur- 
 nishes him the inclination to follow his particular bent or 
 talent. The Physiocrats urged, therefore, the removal of 
 restriction in order that nature iriight take her course. 
 Each will employ his talent most effectively and thereby 
 produce most for himself. They concluded that because 
 society is composed of individuals the system which is 
 best for individuals must be best for all. When the pro- 
 duction of each is greatest, the total for all must be largest. 
 
 i6. The Freedom of Trade and Agriculture.— Naturally 
 the Physiocrats were advocates of the freedom of trade. 
 They fought against the restrictions upon imports and 
 exports that had been placed by the Mercantihsts. 
 
 They rendered another service to economic policy in dis- 
 couraging the overemphasis placed upon gold and silver 
 by the mercantilists. Agriculture was believed by them 
 to be the only real productive industry, and they wished to 
 foster it. To their way of thinking, the freedom of trade 
 would make for the greatest encouragement to agriculture. 
 Were trade free, different sections of country could be 
 given up to those products for which nature had most 
 highly capacitated them. While it is far from being true 
 that agriculture is the only real productive occupation, yet 
 this doctrine served an excellent purpose because it enabled 
 statesmen to see that a mere accumulation of money is 
 not the secret of national strength. 
 
 17, Political Effects. — Our chief interest in the Physio- 
 crats, however, is in the political effects of their teachings. 
 If governments followed their laissez-faire (let-us-alone) 
 policy, there would be no regulations upon conditions of 
 labor. Naturally the manufacturers wished to be left free 
 
48 Introduction to Economics 
 
 to reap all possible benefits from the new industrial condi- 
 tions, so they championed ardently this theory. The pub- 
 lication of Adam Smith's Wealth of Nations in 1776 ex- 
 pressed for Englishmen a modified version of some of these 
 physiocratic views. Public men became imbued with this 
 theory of natural liberty. So closely was this doctrine of 
 laissez-faire associated with the manufacturers of Eng- 
 land that the policy is sometimes termed the "Manchester 
 Doctrine," after the manufacturing city of that name. In 
 keeping with these theories, the moral and physical condi- 
 tions of mine and factory workers became intolerable. 
 Public sympathy was aroused and Parliament after a de- 
 plorable delay was forced to pass laws, if only to protect 
 human Ufe. Then it was that "social legislation" began. 
 Governments entered upon a new policy of regulation of 
 industry for the interest of the public — a policy that has 
 grown steadily since. 
 
 18. Begiiming of Social Legislation. — The workingmen 
 themselves were forced to combine for protection, and their 
 trades-unions began to be felt as a political factor. As a 
 result of the movement of the population from the coun- 
 try to the city, a reapportionment of the representatives 
 in Parliament had taken place, and this new laboring class 
 was given a voice in legislation. As they became stronger 
 they forced new measures through, until to-day England 
 has "Labor" members in the cabinet, laws regulating 
 workingmen's compensation for accidents, compulsory in- 
 surance measures, old-age pensions, restrictions upon the 
 work of women and children, and a whole mass of similar 
 ' ' social legislation. ' ' 
 
 19. A Summary of Changes Which Affected Wage- 
 Earners. — Prior to the introduction of machinery, we have 
 
National Control and Industrial Bevolution 49 
 
 seen that the hired man worked in the home of the em- 
 ployer. The simple and inexpensive tools were owned 
 oftentimes by the laborer himself. There was no sharp 
 distinction between capitalist and laborer. But the im- 
 mediate result of large machinery was the distinct separa- 
 tion of one class from the other. 
 
 Much capital was required to install the new machinery, 
 which was large and expensive. The ownership of the 
 means of production became concentrated in the hands 
 of capitalists. Separate buildings were required to house 
 the machinery — thus distinct factories arose. 
 
 To operate these factories many laborers were required 
 — thus arose congregated labor. Large machinery had 
 the effect of a wedge driven into the side of industrial 
 society. It separated capitalists from laborers, and this 
 cleavage brought about two groups with unlike inter- 
 ests. 
 
 Losing the sympathy that comes from personal contact 
 with hired men, employers bought labor as a mere ware. 
 The friendly relations and mutual understanding between 
 worker and employer came to an end. Stockholders in- 
 trusted the direction of their factories to a paid manager 
 whose sole interest was to make a good showing in divi- 
 dends for his employers. He forced the lowest wage that 
 was possible, believing that every penny subtracted from 
 wages was a penny added to dividends. Employers were 
 few in number and could easily form an understanding to 
 suppress competition on their side. This organized op- 
 pression of the capitalist class caused a reaction and the 
 formation of unions among the laborers. 
 
 20. The Formation of Labor-Unions.— The separation of 
 laborers from capitalists gave rise to misunderstandings, 
 
50 Introduction to Economics 
 
 and each class looked upon the other as an opportunity to 
 be exploited. Laborers had a common purpose in oppos- 
 ing capitalists and a common interest in the betterment 
 of their own conditions. This oneness of purpose and 
 interest made the formation of labor-unions inevitable. 
 The purpose of unions was to improve laborers, to improve 
 their wages, and to improve their environment. 
 
 Wages they would improve either by getting more per 
 day, or by getting the same for a shorter day. Wages are 
 raised when the pay for an eight-hour day is increased 
 from $2 to $3. So also are wages improved if the pay re- 
 mains $2 per day, while the working hours are shortened 
 from eight to six; the increase is from 25 to 33X cents an 
 hour. 
 
 So long as laborers were unorganized, however, there 
 was httle opportunity to improve wages. The individual 
 laborer whose daily bread was from his daily labor could 
 not bargain upon equal terms with the combined forces of 
 capital. Collective bargaining means that labor is banded 
 together in agreement to bargain for wages in a body. 
 Throughout the history of labor-unions, collective bargain- 
 ing has been the chief weapon to enforce their demands for 
 a higher wage. The extent to which unions may increase 
 wages will be a topic for special consideration later on. 
 
 An object of unions has been, and will continue to be, 
 to improve the environment of labor. Sanitary conditions, 
 pure drinking-water, proper light, heat, and ventilation, 
 rest-rooms, etc., are topics which unions discuss, bring to 
 public attention, and upon which they have enforced and 
 will continue to enforce action. Unions, moreover, pro- 
 vide different forms of insurance and pensions for their 
 members. The rise of labor-unions and their later devel- 
 
National Control and Industrial Revolution 51 
 
 opment into trades-unions form one of the most far-reach- 
 ing results of the Industrial Revolution. 
 
 21. Exercises. — i. What movement in England made it 
 possible for Queen Elizabeth to grant monopolies which 
 were national in scope? How did the method of obtaining 
 a monopoly in her time differ from the obtaining of one 
 to-day ? 
 
 2. What was the domestic system? 
 
 3. Was labor unionized during the domestic system? 
 Give the reason for your answer. 
 
 4. Why do the accounts of the beginning of the indus- 
 trial Revolution make so much mention of the textiles ? 
 
 5. J. D. Forrest says: "The industrial revolution was 
 not the result of the great mechanical inventions: rather 
 the inventions were the result of the revolution." C. J. 
 Bullock says: "Between 1760 and 1840 English industries 
 were revolutionized. The cause of this was a remarkable 
 series of inventions which affected the cotton and woollen 
 industries first." With which of these statements is the 
 present chapter in accord? Write a brief argument to 
 substantiate one of these statements and to disprove the 
 other. 
 
 6. What was the central idea in the teaching of the 
 Physiocrats ? 
 
 7. Define laissez-faire. What effect did the application 
 of this doctrine have upon the conditions of the laboring 
 population in England ? 
 
 8. Is the tendency toward a greater or less application 
 of the laissez-faire doctrine? In answer to this question 
 make mention of important laws which have been enacted 
 regarding the tariff, pure food and drugs, the working con- 
 ditions of women and cMldren, railroad rates, and safety- 
 apphance for machinery. 
 
 9. What conditions brought about the formation of 
 labor-unions? 
 
 10. Summarize the chief objects which unions would 
 accomplish. 
 
52 Introduction to Economics 
 
 II. Criticisms of Mercantilism. — These criticisms were 
 offered by writers contemporary with the Mercantilists. 
 It will be a helpful exercise if the student will give argu- 
 ments in defense of, or against them. 
 
 (a) If raw materials are wanting, the factory must stop; 
 if food is wanting the people must starve; if gold is want- 
 ing, there may be substituted barter or credit or paper 
 money, therefore money is secondary in importance. 
 
 {b) Money runs after goods, but goods do not always 
 run after money. Goods serve many purposes besides 
 buying money, but money serves no other purpose than 
 to buy goods. Other things may do the work of money, 
 but money does not do the work of other things. There- 
 fore, money is not real wealth. 
 
 (c) We exchange durable iron for wine in France. Why 
 not keep iron and thus multiply durable pots and pans? 
 Because we would soon have more than is needed. This, 
 it is evident, would be wasteful. (This is intended to 
 show that it is absurd for a nation to accumulate more 
 gold than necessary simply because it is durable.) 
 
 {d) Foreign armies may be maintained by sending man- 
 ufactured goods or raw materials, as well as by sending 
 money, so money is not necessary for foreign wars. 
 
 (e) The benefit of foreign trade consists, not in a money 
 balance, but in trading surplus products for needed goods. 
 
 (/) Every seller must be a purchaser and every purchaser 
 a seller, therefore England must accept goods in exchange 
 if she continues. to trade. 
 
 (g) When two parties trade, one does not necessarily get 
 cheated. Exchange profits both parties: the interest is 
 one of man with man, of state with state in the same realm, 
 of nation with nation. 
 
 {h) To nature and not to man belongs the police of the 
 economic order; therefore all restrictions on trade should 
 be removed. 
 
 {i) The nation which places a tariff against foreign 
 Powers will be retaUated against by those Powers. 
 
 {]) A merchant may grow rich by accumulating money 
 
National Control and Industrial Revolution 53 
 
 because he can exchange his money for the products of 
 others; the case is different with a nation, for in the long 
 run a nation must depend upon itself for its necessities of 
 Ufe. 
 
 {k) A nation cannot accumulate money at the expense 
 of others, because prices increase in the nation with a 
 large amount of money and decrease in the countries where 
 money is scarce. This causes a flow of money away from 
 the country which has a large store of gold, thus equalizing 
 the money supply as between nations. 
 
CHAPTER IV 
 THE PRESENT ECONOMIC ORDER 
 
 I. Introduction. 2. Economic laws. 3. Theory. 4. The present eco- 
 nomic order. 5. Private property. 6. Social expediency. 7. The revival 
 of enclosures. 8. Transportation. 9. The industrial development of this 
 country. 10. The growth of cities. 11. An example from statistics. 12. 
 The geographic division of labor. 13. The division of labor and mutual 
 dependence in the factory system. 14. Differentiation. 15. Trading. 
 16. Competition. 17. The extent of competition. 18. Self-interest, ig. 
 Economic classes. 20. Contracts. 21. The automatic regulation of indus- 
 try. 22. Exercises. 
 
 1. Introduction. — The preceding chapters offer a brief 
 survey of essential movements preceding the present eco- 
 nomic order. The purpose of this chapter is to review 
 some of the characteristic institutions under which eco- 
 nomic laws are now operating. 
 
 ■ In a narrow sense economics is the science of which 
 business is the art. Business as here used signifies any 
 occupation, employment, or investment for the sake of 
 income. A science teaches us to know, an art to do; a 
 science logically precedes the creation of a corresponding 
 useful art. The science of anatomy precedes the art of 
 surgery; the science of astronomy precedes the art of navi- 
 gation; the science of economics precedes the art of busi- 
 ness. Economic science is the only true guide of indus- 
 trial procedure; it contains the premises of reasoning on 
 business affairs. 
 
 2. Economic laws are statements of the order or rela- 
 tionship of business phenomena. They affirm that if cer- 
 tain causes exist, certain effects follow. The true order 
 
 54 
 
The Present Economic Order 55 
 
 or causal relationship of things exists long before it is ascer- 
 tained. Newton did not make the fact of gravitation; he 
 found it, and his formulation of this fact is a law. Little 
 more than a century ago the economists stumbled upon 
 the law of diminishing returns. From earliest times the 
 forces which limit production had been in operation, had 
 scattered people over the earth, and had limited their 
 supplies for the necessities of hfe, but only in recent times 
 have these forces been formulated into a law. As the 
 nugget is not converted into gold because we find it, so an 
 economic relationship is not transformed into a law be- 
 cause we discover it; we are not permitted to speak of a 
 statement as a law until patient testing proves it worthy 
 of that title. This science is constantly being enlarged 
 through the discovery of relationships and the formula- 
 tion of new laws and by increasing our knowledge of their 
 scope. 
 
 An economic law states that certain causes produce 
 certain effects only imder certain conditions. Reasoning 
 goes astray when counteracting influences are not consid- 
 ered along with positive influences. The law of gravita- 
 tion does not teach that a stone does fall toward the cen- 
 tre of the earth; it teaches that a stone would so fall were 
 counteracting influences removed. It is a law of popula- 
 tion that the number of people tend to increase more rap- 
 idly than does the supply of food. The authors of a cen- 
 tury ago were extremely pessimistic because, in their judg- 
 ment, starvation, disease, and death were the dismal 
 results deduced from this law. The error in their reason- 
 ing is that they too lightly regarded the counteracting 
 forces or checks to population. 
 
 Economic laws are either of coexistence or of sequence. 
 
56 Introduction to Economics 
 
 It is a law of coexistence that like goods in the same mar- 
 ket at the same time sell at the same price. It is a law of 
 sequence that by adding unit after unit to a supply of 
 like goods in a market, the price, other things equal, is 
 lowered. 
 
 3. Theory. — It is a commonplace though erroneous re- 
 mark that something is well enough in theory, but that it 
 will not work in practice. It is an error to contrast theory 
 and practice as the impractical versus the practical. A 
 theory is a provisional or tentative formulation of a law. 
 That which is true in theory must be true in practice. It 
 takes investigation and sound reasoning to formulate a 
 true theory because it must fit the facts. Theory and 
 science cannot be divorced, for theory explains phenomena. 
 Theory and practice hold the relationship of explanation 
 and execution. 
 
 4. The present economic order embraces the conditions 
 under which economic laws are formulated. Significant 
 institutions of this order now to be discussed are: Private 
 property, division of labor, exchange, competition, eco- 
 nomic classes, and contracts. 
 
 5. Private property is the fimdamental institution in 
 the present economic order. It has been defended upon 
 the following bases: 
 
 (a) Private property has been justified on the ground 
 of occupancy. It would be accurate to speak of occu- 
 pancy as the cause, in many cases, of private property. 
 But occupancy can never with accuracy be given as a jus- 
 tification of the institution. 
 
 (6) Private property has been justified by the so-called 
 natural-rights theory. It is argued that property is neces- 
 sary for the full self-realization of the individual. But, 
 
The Present Economic Order 57 
 
 in fact, is this not a condemnation of private property? 
 The iastitution of private property leaves the many all 
 but propertyless, whereas common ownership would dis- 
 tribute among all the means of self-development. Again, 
 what things redound to our fullest self-realization? Our 
 answer to this is not the same as it was a century ago; 
 ideas continually change as to what is right. Socrates 
 defended slavery on the basis of natural rights. We can- 
 not justify private property as a natural right or as a 
 means to the end of the most complete self-realization 
 until we know precisely what such means are. 
 
 (c) Private property has been justified by the labor 
 theory, namely that what a person creates by his muscle 
 or brain is his. A person has a right to himself, hence the 
 right to the use of his body and mind to acquire the means 
 of self-preservation. This implies the right to own and 
 enjoy the products of his labor. But this does not justify 
 the private ownership of land and other resources which 
 are not the products of labor. It cannot, therefore, be 
 given as a justification or basis for the institution of pri- 
 vate property. It is upon this ground largely that the 
 great single-tax advocate, Henry George, denied the right 
 of private property in land. 
 
 {d) Private property has been justified by the legal 
 theory. This, however, is a truism and not a theory. 
 Whatever the law recognizes as private property is such. 
 The law simply states that this or that may be privately 
 owned and there the matter ends. 
 
 6. Social Expediency. — The theories above mentioned 
 fail to justify private property. The acquisition of pri- 
 vate property in early times was by methods which would 
 not meet with public sanction in our day. The standards 
 
58 Introduction to Economics 
 
 of business ethics and the problems of ancient times dif- 
 fered from those we now know. Private property to-day 
 rests upon the one ground of social expediency. If it 
 works best, if it insures the greatest good to the greatest 
 number, it is justified. It is a human institution which is 
 always undergoing modification and change. Under it 
 some suffer misery while others enjoy the comforts of the 
 idle rich. Its workings are imperfect, as are those of all 
 human institutions. Despite inequaUties, however, it 
 seems to stand the test of the greatest good. Another ex- 
 ample from the industrial history of England will illumi- 
 nate this point. 
 
 7. The Revival of Enclosures. — ^During the years from 
 1760 to 1819 as many as 6,331,800 acres of land were en- 
 closed in England. England had formerly secured large 
 supplies of raw materials from Europe, but during the 
 Napoleonic Wars this market was cut off, so she had to 
 depend upon her own soil. This change was burdensome 
 because the tillable soil was limited and there was a dense 
 population. In the preceding chapter we mentioned a 
 large export demand for Enghsh products; add to this a 
 large home demand and it is at once evident that prices 
 for the products of the land must rise. The high prices of 
 products caused a rise in the price of land and its rent. 
 High land prices in turn excited a wish on the part of indi- 
 viduals to enclose and possess land. The goverrmient 
 looked with favor upon the move, because the cultivation 
 of the commons had been both wasteful and crude. It 
 was thought that the incentive of private property would 
 largely augment production, and that under private owner- 
 ship capital would be invested in agriculture and land 
 would be improved. 
 
The Present Economic Order 59 
 
 One keeps no grudging account of capital and exertion 
 which he spends upon his own soil. He is early in the 
 field; for each extra seed planted and every additional 
 waste avoided means more wealth which he and his family 
 may enjoy. One comes to personify and to love his own 
 land, shrubs, trees, and cattle. Arthur Young, a writer 
 on agricultural topics, now over a century ago, said: "Give 
 a man secure possession of a bleak rock and he will con- 
 vert it into a garden." To this statement the great Ameri- 
 can economist F. A. Walker added: "The vineyards of 
 the Rhine, built up in many cases of earth brought in 
 baskets up the sides of the mountains, are speaking wit- 
 nesses to the truth of this statement; while many of the 
 richest fields of Holland and Belgium, once drifting wastes, 
 illustrate the other saying of the eminent traveller: 'The 
 magic of property turns sand into gold.' " Private prop- 
 erty, so far as we know, is the greatest incentive to thrift. 
 
 No spirited activity had attended labor on the com- 
 mons; on the contrary, sloth and indolence, land-butchery 
 and smaU crops were always apparent. None the less, 
 enclosures were unpopular with the poor, who would pas- 
 ture their stock and husband a meagre subsistence upon 
 the commons. A popular piece of doggerel declared that: 
 
 "The law locks up the man or woman 
 Who steals the goose from off the common; 
 But leaves the greater villain loose 
 Who steals the common from the goose." 
 
 It is the testimony of Jeremiah Bentham (1748-1832), 
 an eminent thinker and writer of that time, that, after 
 the enclosures, "in passing through the lands which have 
 undergone that happy change, we are enchanted as by the 
 
60 Introduction to Economics 
 
 sight of a new colony. Harvests, flocks, smiling habita- 
 tions, have succeeded to the dull sterility of a desert. 
 Happy conquests of peaceful industry." The evidence 
 which one gains from the literature of that time goes to 
 show that, in spite of the apparent hardships worked by 
 converting pubhc lands into private property, the greater 
 social good was served because the land was made more 
 productive. It was upon the ground of social expediency 
 that enclosures were defended, and it is upon that ground 
 that we justify private property to-day. 
 
 The extent and limitations of private property will be 
 considered in a later chapter. Enough has been said to 
 indicate that this institution has been of slow growth, . 
 that it is subject to change with varying social needs, and 
 that it is the foundation-stone of the present economic 
 order. 
 
 8. Transportation. — The economic order of to-day is 
 new to the world. A chief factor in determining the in- 
 dustrial life of our time is that of transportation facilities. 
 
 Picture a family in a self-sufl&cing community. It must 
 practise a slow, wasteful, and chaotic means of getting a 
 living. Poverty, indigence, and ignorance invariably at- 
 tend such conditions. The cause of self-suflfidency is a 
 want of transportation facilities or of means of contact 
 with the outside world. 
 
 Given transportation, however, the products of different 
 communities may be exchanged for one another. Trans- 
 portation makes this exchange possible. When it becomes 
 easy for localities to trade with one another, it becomes 
 wise for the different communities to turn their productive 
 effort to the output of goods for which they have compara- 
 tive advantages in production. If nature favors com- 
 
The Present Economic Order 61 
 
 munity A for the growing of tobacco, and B for the manu- 
 facturing of shoes, and C for the growing of oysters, it 
 will follow that each locality can outcompete all the others 
 in a certain line, and those industries will localize with 
 respect to the maxinmm gain. 
 
 This localization of industries in turn leads to concen- 
 tration of capital. Capital in the different industries will 
 tend to combine and to concentrate at the point of maxi- 
 mum advantage. 
 
 9. The industrial development of this country has fol- 
 lowed the course indicated in the preceding paragraph. 
 Prior to the Civil War transportation was inefficient; 
 factories were small local concerns, being suited to the com- 
 munities where they existed. At the middle of the century 
 87.5 per cent of the population was rural. The aver- 
 age farm family lived a life of self-sufficiency. The farmer 
 produced his own fuel, grain, meat, leather, vegetables, 
 milk, butter, poultry, wool, flax, and cotton. In the home 
 were rather crude means of converting many of these raw 
 materials into finished products. 
 
 There was a limited amount of trading, of course, but 
 the nature of the commodities produced for trade differed 
 with respect to the distance from the market. In western 
 Pennsylvania grain was converted into spirits, and other 
 communities distant from the market produced light goods 
 of little bulk and large value. Many farmers, especially 
 west of the Alleghanies, turned to raising swine, cattle, and 
 horses, which could be driven to the market. 
 
 But the war taught the lesson of doing things on a large 
 scale. By the end of the century we had the enormous 
 total of 194,262 miles of railway. Add to this network of 
 railways the means of instantaneous connection by wire 
 
62 
 
 Introduction to Economics 
 
 and an excellent postal system, and we have the chief ex- 
 planation of the localization and concentration of indus- 
 tries. 
 
 10. The growth of cities has been in keeping with these 
 industrial changes. Large-scale production implies the 
 use of large mechanical equipment. Machine production 
 is more effective in manufacturing than in agriculture. 
 This fact gives the urban centres the advantage over rural 
 communities. Other reasons attract manufacturers to the 
 large centres of population. A large factory finds it nec- 
 essary to be in the midst of a large and varied supply of 
 labor. The advantages of marketing and of transportation 
 facihties are found in the city. An item of no little signifi- 
 cance is that of proximity to other manufacturers. Fac- 
 tories depend on each other for special parts and assist- 
 ance in many ways. Nearness to professional men who 
 can provide medical aid, or give legal advice, or render 
 expert opinions on divers questions, is very necessary. 
 
 11. An example from statistics will make clear the ten- 
 dency toward concentration. The statistics of the manu- 
 facturing of agricultural implements is given in the fol- 
 lowing table. These will be found characteristic of most 
 
 
 AGRICULTURAL IMPLEMENTS 
 
 
 Year 
 
 Product 
 (in millions) 
 
 Capital 
 (in millions) 
 
 Wage-earners 
 
 No. of 
 establishments 
 
 1850 
 
 $6.8 
 20.8 
 
 52-1 
 
 68.6 
 
 81.3 
 lOI .2 
 112. 
 
 $3-6 
 
 7,220 
 17,093 
 25,249 
 39,580 
 38,827 
 46,582 
 47,394 
 
 1,333 
 2,116 
 2,076 
 
 1,943 
 910 
 
 715 
 648 
 
 i860 
 
 13 
 34 
 
 62 
 
 145 
 157 
 196 
 
 9 
 
 8 
 
 I 
 3 
 7 
 7 
 
 1870 
 
 1880 
 
 1800 
 
 igoo 
 
 
The Present Economic Order 
 
 63 
 
 lines of industry. These figures show that in manufactur- 
 ing capital increases more rapidly than labor. While capi- 
 tal was increasing from $3,600,000 to $196,700,000, the 
 increase in the number of laborers was from 7,220 to 47,394. 
 It is especially noteworthy that while the product increased 
 from $6,800,000 to the enormous sum of $112,000,000 there 
 was a decrease in the number of plants from 1,333 to 648. 
 This tendency may be shown with respect to the ten- 
 dency of labor to congregate. The following table shows 
 what percentage of the total persons employed in Ger- 
 many at certain dates were engaged in manufacturing 
 establishments of different size. 
 
 1882 
 
 189s 
 
 Per cent of persons doing work alone 
 
 Per cent of persons in establishments employing 
 
 2 to 5 persons 
 
 Per cent of persons in establishments employing 
 
 6 to 10 persons 
 
 Per cent of persons in establishments employing 
 
 II to 50 persons 
 
 Per cent of persons in establishments employing 
 
 SI to 200 persons 
 
 Per cent of persons in establishments employing 
 
 201 to 1,000 persons 
 
 Per cent of persons in establishments employing 
 
 over 1,000 persons 
 
 25.2 
 
 16.4 
 
 10. 1 
 
 29.9 
 
 23s 
 
 19.4 
 
 6.0 
 
 7.2 
 
 6.6 
 
 12.6 
 
 16.6 
 
 18.4 
 
 II. 9 
 
 17.0 
 
 20.1 
 
 10.9 
 
 13-9 
 
 17-3 
 
 35 
 
 5-4 
 
 8,1 
 
 (Table taken from Taussig's Prindples of Economics, vol. I, p. 52-) 
 
 The reasons for the rapid growth of large-scale produc- 
 tion will be considered in a later chapter. Enough has 
 been said to show that in the present economic order the 
 vast size and complexity of modern industrial estab- 
 lishments present a striking contrast to conditions of a 
 century ago, and especially to conditions prior to the 
 Industrial Revolution. 
 
64 Introduction to Economics 
 
 12. The geographic division of labor refers to the local- 
 ization of industries, according to the principle of maximum 
 returns. With transportation facilities and markets well 
 developed, an industry tends to localize: (i) Where there 
 is a supply of skilled labor in that particular industry, or 
 in some cases where labor is cheap. Certain industries 
 make extensive use of woman and child labor, whUe others, 
 as the steel industry, use only the labor of men. In a 
 city where steel is the important industry the slight de- 
 mand for the services of women and children causes such 
 labor to be cheap. This situation is, other things equal, 
 an attractive centre for a cotton-mill. (2) Where soil and 
 climate are most suitable for the products of the industry, 
 e. g., we find orange-growing in Florida, apple-growing in 
 Washington, and tobacco-raising in Kentucky. (3) Where 
 fuel, raw materials or water-power necessary for the in- 
 dustry are at hand or easily obtainable. (4) Where large 
 markets for the output are of easy access. 
 
 One will rarely find a single district embodying all of 
 these advantages. Not infrequently localized industries 
 exist apart from any of these advantages. The reason for 
 this is that industries requiring large fixed capital are difiS- 
 cult to move with changing conditions. They start under 
 favorable conditions and become firmly rooted, their place 
 of business becomes known, their good-will and business 
 prestige are associated with their place of being. Such 
 reasons account for the persistence of extensive metal 
 works in New England, despite the fact that iron ore is no 
 longer smelted there. 
 
 An enterpriser is at liberty to invest where the returns 
 are most promising, and quite naturally he will invest his 
 energy and capital where nature promises most co-opera- 
 
The Present Economic Order 65 
 
 tion. Each enterpriser acts on the principle of maximum 
 returns for his own efforts. This, however, does not mean 
 the maximum returns per acre or per machine. Suppose 
 it takes the same labor and capital to cultivate five acres 
 of tobacco at a net profit of $500 per acre as it would to 
 cultivate forty acres of potatoes at a net profit of $100 per 
 acre, one will plant potatoes. The geographic division of 
 labor follows the principle of greatest net-profit return. 
 
 We have thus far studied a division of labor with respect 
 to the different localities where industries are located. We 
 may now turn to a study of the division of labor in the 
 same locality and within the same plant. 
 
 13. The Division of Labor and Mutual Dependence in 
 the Factory System. — The handicraft stage of production 
 was essentially individuaKstic, whereas the factory system 
 is characterized by large capital and congregated labor. 
 The tendency of large capital is to specialize. Not many 
 years ago the same shop produced many and varied lines 
 of goods. More recently competition has forced the shop 
 to concentrate on fewer lines of goods. Representative 
 shops have now abandoned the practice of making even 
 their own small tools and appliances. They buy such sup- 
 plies cheaper than they can manufacture them. In manu- 
 facturing the matter is reduced to this: a factory which 
 concentrates on a few products can reduce the cost per 
 imit of its output to a minimum. It can undersell its less 
 specialized competitor. The consequence is that factories 
 are no longer independent; they are mutually dependent. 
 They are dependent upon each other for their own tools 
 and appliances as they are upon the extractive industries 
 for raw materials. 
 
 The force of competition has so narrowed the produc- 
 
66 Introduction to Economics 
 
 t 
 
 tive process along certain lines that little flexibility is left. 
 Each tool and machine is designed to fit its specific func- 
 tion, and no other. The worker has his task narrowed 
 and limited by the same conditions. The jack of all trades 
 finds no place in the modern factory system. As man de- 
 velops, his desires call for a greater variety and a superior 
 quahty of goods, but in the field of production he tends 
 from a varied to a concentrated production. A report 
 of the United States Bureau of Labor states that there are 
 eighty-four distinct processes in the manufacture of a com- 
 mon pair of brogan shoes. One hundred pairs of these 
 are now turned out in ninety-eight minutes, whereas to 
 sew them by hand would take ninety-eight hours. More- 
 over, a workman may be skilled in one of these processes 
 and ignorant of the other eighty-three. 
 
 It is a complex division of labor when a process of pro- 
 duction is thus subdivided into many parts. A simple 
 division of labor is found when a workman carries through 
 the whole of one of the stages of production. There was 
 no division of labor in the self-sufficing community where 
 the same laborer would raise cattle, tan the hides, and 
 convert the leather into shoes for his family. It came to 
 be a simple division of labor when one raised cattle, another 
 tanned hides and yet another made shoes. And it devel- 
 oped into a complex division of labor when each of these 
 stages of production was subdivided into fractional parts. 
 
 14. Differentiation. — Development takes the form of 
 differentiation in social life as well as in animal life. 
 Through a process of evolution animals acquire more and 
 more specific organs for the performance of specific func- 
 tions. Instead of one organ to serve for the functions of 
 heart, lungs, stomach, etc., mutually dependent organs are 
 
The Present Economic Order 67 
 
 gradually developed. Similarly, in social life and in indus- 
 tries there is a gradual development of mutually dependent 
 agencies to perform various functions. At one time the 
 same person would convert the raw material into cloth, 
 finance his own efforts, bear his own risk, pack and carry 
 his products from place to place in search of a buyer. This 
 work has been differentiated into manufacturing, banking, 
 insurance, commission men, transportation, and merchan- 
 dising. 
 
 15. Trading or exchanging arises out of differentiation. 
 It is most obvious that when men are differentiated and 
 specialized with respect to specific Hues of emplo)Tnent 
 they must be mutually dependent. If one gives his entire 
 time and attention to the production of matches he will 
 soon have a surplus of matches and a want for other things. 
 Every form of specialization results in the production of a 
 surplus. Each producer depends upon the surplus of 
 others. Without the hatter the farmer would go bare- 
 headed, and without the farmer the hatter would starve. 
 Specialization and mutual dependence necessitate trade 
 and the surpluses are the things exchanged for each 
 other. Exchange is the grand medium through which 
 proportion and balance are maintained among the various 
 parts of the present economic order. 
 
 16. Competition is an institution in which men selfishly 
 and independently contest for the uses of wealth. Men 
 compete to outdo each other in the market. One mer- 
 chant would take trade from another, one railroad strives 
 to excel its competitor, and so on throughout all the lines 
 of business. There are different kinds of competition: 
 jockeys compete for the blue ribbon, wooers compete for 
 the prettiest girl, politicians for office, and actresses for 
 
68 Introduction to Economics 
 
 notoriety. But economic competition is a contest for the 
 uses of wealth. There is no competition for free goods. 
 Were all goods as abundant as air, competition would not 
 exist. Competition is for the ownership of scarce things. 
 Thus competition is tied up with the idea of scarcity and 
 private property. 
 
 We have seen that scarcity does not refer to the amount 
 of goods but to the strength of the desire for goods. There 
 may be an abundance of corn, yet if there are many con- 
 sumers and the desires intense, we may say that corn is 
 scarce. On the other hand, there may be few bumble- 
 bees and no one would speak of them as scarce. If re- 
 sources are Umited they may increase in scarcity and the 
 competition for them grow keen. Such is the case with a 
 growing density of population. When numbers multiply 
 with respect to resources competition sets in for the con- 
 trol of food and the services rendered by these resources. 
 
 Also competition may grow, irrespective of the increase 
 of population, because of increasing desires for goods. De- 
 sires increase as they are fed, thus extending the reach of 
 social ambition. To give one a million seems to whet his 
 appetite for more rather than to satisfy him. The increase 
 of population reinforced by the growth of desires causes 
 competition to become constantly keener. The two causes 
 mentioned — growing numbers and desires relative to re- 
 sources — are primary though not the only motives that 
 inspire economic competition. 
 
 17. The Extent of Competition. — Competition is found 
 in every stage of production, from the raw material to the 
 finished product in the hands of the consumer. "The 
 manufacturer of cotton goods chooses between competing 
 places for his factory; the makers of his machinery are 
 
The Present Economic Order 69 
 
 vying with each other to produce most economically the 
 engines, looms, etc., that are best adapted to his work; raw 
 products he buys from sellers competing in the open mar- 
 ket; labor he hires from among men who bid against each 
 other for his work; transportation companies compete with 
 one another in cheaply transferring his goods to market; 
 and in thte market, seller is struggling with seller for the 
 privilege of a sale with profit; buyer and seller bargain to- 
 gether, to agree on a price. The present century has seen 
 barrier after barrier swept away, till the whole world enters 
 more or less freely into the one struggle; family and social 
 distinctions are being obliterated in the industrial world; 
 customs and laws in restraint of trade have been set aside." ' 
 
 i8. Self-interest, in a narrow sense, would seek private 
 gain at the expense of others. The farmer may wish for 
 the grubworm and boU-weevil to take the cotton crop, spar- 
 ing his own, in order that prices for his product might be 
 high. The doctor of medicine may wish for his neighbors 
 to be sick and for his competitors to fail in order that his 
 practice may be increased. But if the neighbors are sick 
 their production is cut short and little is left' with which 
 to pay the doctor. Or if his competitors fail others will 
 spring up to take their places. Despite these counteract- 
 ing arguments it often happens that one is interested, and 
 with good reason, in the failure of other producers within 
 his own particular field of employment. 
 
 There is no exception to the principle that it is to one's 
 self-interest that his neighbors in other fields of employ- 
 ment succeed; The carpenter reasons that if his neighbor 
 is favored with a large crop, grain will be abundant and 
 cheap. His wages will go further when the production of 
 ' Fairbanks's Introduction to Sociology, New York, 1905, p. 270. 
 
70 Introduction to Economics 
 
 food, clothing, and necessities are so abundant as to cause 
 low prices. The real fact of exchange is obscured by the 
 use of money. Money is but a medium of exchange; the 
 real exchange consists of a transfer of goods or services for 
 other goods or services. We produce for the market and 
 largely buy what we consume from the market. Every 
 commodity produced is a demand for another commodity. 
 It is to one's self-interest to have large purchasing power. 
 Large purchasing power consists both in large production 
 for one's self, thereby augmenting one's command over 
 the products of others, and in a large production on the 
 part of others in order that the market prices which he 
 pays will be low. 
 
 10. Economic Classes. — In a highly organized competi- 
 tive society there are different classes to perform the differ- 
 ent economic functions of such a society. We ordinarily 
 distinguish three classes: laborers, capitalists, and entre- 
 preneurs. In a simpler state of society where man pro- 
 vided his own food, wore clothes woven and made at home, 
 built his own home and fashioned the tools he used, the 
 means of production were simple and owned, for the most 
 part, by the laborer. This condition prevailed prior to the 
 Industrial Revolution, and there was no sharp distinction 
 as between laborers and capitalists. But with the intro- 
 duction of large machinery too expensive to be owned by 
 workmen, separate classes arose. The one bought ma- 
 chines, constructed plants, and financed concerns, while 
 the other worked for a wage. Again, we find those who 
 own wealth who are in no position to use it themselves. A 
 child may inherit a fortune, a widow may acquire her hus- 
 band's estate, or a wealthy business man may retire from 
 active service — such are capitalists in the true sense of 
 
The Present Economic Order 71 
 
 the word. Now, if the owner of wealth (the capitalist) be 
 incapacitated to employ his means, and if the laborer, as 
 such, be empty-handed, what becomes of production? 
 Labor alone or wealth alone can produce nothing. A 
 third party, the entrepreneur, is necessary. And who is 
 the entrepreneur? He is the man who places labor and 
 wealth in productive combination. The function of the 
 entrepreneur is to plan a business, to borrow the wealth, 
 hire the labor, and co-ordinate these into a going concern. 
 The entrepreneur undergoes the responsibility, bears the 
 risk, and suffers the loss or takes the net gain, as the case 
 may be. 
 
 These three functions — ^performed by labor, capital, en- 
 terprise — are distinct, although the same man may per- 
 form two or all three of them. The same man may at the 
 same time hold the offices of trustee of a school, county 
 sheriff, and presidency of his secret order. These functions 
 are different, although cared for by the same man. Labor, 
 capital, and enterprise hold distinct functions and people 
 are roughly classified with respect to them. The next 
 institution within the present economic order to be dis- 
 cussed is the contract. 
 
 20. Contracts. — To-day business is complex and world- 
 wide in its scope. Our producers are constructing large 
 plants, investing enormous sums of wealth, employing large 
 forces of labor, and making agreeme^nts months or even 
 years ahead for the fulfilling of future contracts and for 
 supplies of raw materials. They are producing for distant 
 as well as for domestic markets. Our importers are con- 
 tracting with oriental countries long in advance for the 
 future delivery of laces, silks, and tapestries. Railroads 
 are contracting ahead with the steel corporation for the 
 
72 Introduction to Economics 
 
 future delivery of rails, which as yet are not in existence. 
 Industries are forced to depend upon each other. This is 
 an age of credit. The larger portion of business is done 
 on a credit basis. Credit is an implied or an expressed 
 contract to pay in the future. Were men not free to make 
 contracts or could these contracts be broken with im- 
 punity, our industrial structure could not exist for a fort- 
 night. 
 
 21. The Automatic Regulation of Industry. — ^The pri- 
 mary characteristic of our economic order is the inter- 
 dependence of men in society. We are, in reality, orga- 
 nized on the basis of co-operation. There is a grand ad- 
 justment of man to man, of industry to industry, which is 
 maintained automatically by means of exchanging in the 
 market. The complex of industries (mining, farming, 
 manufacturing, transportation, etc.) are adjusted to each 
 other, as are the tiny parts of delicate machinery, and this 
 adjustment is maintained by a price regime. If too many 
 mine coal and too few work in the textile trade, coal will 
 be abundant and cheap, textiles scarce and dear. Labor 
 and wealth will receive small returns in the one and large 
 returns in the other. A shift of productive energy will 
 slowly take place from the less to the more remunerative 
 employment. The result of this shift will be that less 
 coal is mined, its price will be higher, and the returns to 
 labor and capital increased. The reverse of these move- 
 ments will be felt in the textile trade. And the result of 
 these movements will be an equilibrium. The self-interest 
 of each and all to secure the largest returns so operates, 
 through exchanges on the market, as to tend always to 
 maintain an equiUbrium in the present competitive order. 
 The truth of this statement is evidenced throughout the 
 
The Present Economic Order 73 
 
 whole field of industry. It is the language of ignorance 
 which says that we are living in a chaotic and unregulated 
 economic order. 
 
 22. Exercises. — i. Does an economic law state a com- 
 mand or does it state merely an observed relation ? Can 
 it state both of these? Are economic laws subject to 
 exceptions. Is it correct to say that "the numerous ex- 
 ceptions to the law of wages make it impossible to predict 
 the outcome"? Can we "violate" a law of chemistry or 
 an economic law ? 
 
 2. Can one properly use the words theory and law inter- 
 changeably ? One frequently encounters these expressions, 
 "the theory of wages" and "the law of wages." Do they 
 have the same meaning ? 
 
 3. Define private property. Are all of the following ex- 
 amples of private property: one's hat, the Lincoln High- 
 way, the Chesapeake and Ohio Railroad, a jitney bus? 
 Name four things which may be either public or private 
 property. 
 
 4. What is the connection between paragraphs 6 and 7 
 in this chapter ? 
 
 5. State the causal sequence existing between the follow- 
 ing: industrial development, growth of cities, extension of 
 transportation, trade between locaUties, the geographic 
 division of labor. 
 
 6. Could there be large-scale production without exten- 
 sive transportation ? 
 
 7. What is a technical division of labor? and what 
 conditions make it possible ? 
 
 8. "All other organs, therefore, jointly and individually, 
 compete for blood with each organ, so that, though the 
 welfare of each is indirectly bound up with that of the rest, 
 yet, directly, each is antagonistic to the rest." "Evidently 
 this process (of enlargement of an industry or develop- 
 ment of a district whose products are in unusual demand) 
 in each social organ, as in each individual organ, results 
 
74 Introduction to Economics 
 
 from the tendency of the units to absorb all they can from 
 the common stodk of materials for sustentation; and evi- 
 dently the resulting competition, not between units simply, 
 but between organs, causes in a society, as in a living body, 
 high nutrition and growth of parts called into greatest 
 activity by the requirements of the rest." 
 
 Explain the doctrine of the first sentence and show how 
 it appUes to society. What hght is here thrown on com- 
 petition as a mode of growth, and on the general laws of 
 life of which competition is one phase ? (Quotation taken 
 from Spencer's Principles of Sociology, by Sumner.) 
 
 9. What is the relationship between the "doctrine of 
 self-interest" and competition? 
 
 10. Briefly summarize the chief institutions in the pres- 
 ent economic order. 
 
CHAPTER V 
 THE SUBJECT-MATTER OF ECONOMICS 
 
 I. The subject-matter of economics. 2. Productive capacity and current 
 supplies. 3. Destruction often a real gain. 4. The dissemination of educa- 
 tion, s. Social wealth. 6. Wealth formerly defined as capacity. 7. Wealth 
 not a comparative concept. 8. Private wealth and public wealth. 9. Per 
 capita wealth and national wealth. 10. Increasing aggregate wealth and 
 diminishing per cajiita wealth. 11. View-points in autocratic and demo- 
 cratic countries. 12. Wealth and property. 13. Capital and wealth. 
 14. The money expression of wealth. 15. Economics. 16. Economic laws 
 and social institutions. 17. The goal of public policy. 18. Changes in 
 economics. 19. Economics and political reforms. 20. Economics and 
 business. 21. Exercises. 
 
 I. The Subject-Matter of Economics. — ^The problems 
 which concern the economist have their origin in man's 
 struggle for the necessities, comforts, and conveniences of 
 life. To gratify these desires is the motive of all the eco- 
 nomic activities of man. Whether in the sweat-shop or 
 in the counting-house, himian endeavor is guided by the 
 one motive of gratif)dng desires. Necessities and con- 
 veniences, such as food, clothing, and luxuries which 
 directly gratify desires, are termed current supplies. Life 
 depends on current supplies, yet, without a constant source 
 of replenishment, the present amount of these would be 
 exhausted within a few months. This constant source of 
 replenishment — which we shall term productive capacity — 
 is the basis of the science of economics. Its paramount 
 significance demands for it thorough comprehension. 
 
 Productive capacity is conditioned by natural resources, 
 and the industrial arts, together with the enterprise and 
 
 75 
 
76 Introduction to Economics 
 
 knowledge which utilize them. Productive capacity, re- 
 sulting, as it does, from the co-operation of man with 
 nature, is the source from which necessities, comforts, and 
 conveniences flow to gratify desires. In our study of pro- 
 ductive capacity we must realize that any one factor by 
 itself is meagrely productive. Brick and mortar cannot 
 build a wall, nor can the plough turn a furrow without the 
 co-operation of labor. Productive capacity necessitates a 
 combination of agents, and the better the apportionment 
 of these agents, the more effective is the combination. 
 The functioning of this productive capacity and the dis- 
 tribution of its yield among consumers constitute the sub- 
 ject-matter of economics. 
 
 2. Productive Capacity and Current Supplies. — The dis- 
 tinction between productive capacity and current supplies 
 is frequently exemplified ia cases of recovery after loss. 
 The coromonest cases of loss or destruction are in connec- 
 tion with current supplies. Our productive capacity in 
 the form of climate, lands, harbors, and the fund of knowl- 
 edge accumulated and passed on to us from former gener- 
 ations, is little impaired by the devastating effects of fires, 
 floods, earthquakes, and wars. These agencies of destruc- 
 tion, however, may play havoc with such current supplies 
 as ships, homes, live stock, and crops, but full restoration 
 is soon accomplished. Soon after the earthquake and fire 
 San Francisco had advanced to a state of unprecedented 
 excellence. After the Chicago and Baltimore fires the 
 cities were not only quickly rebuilt but were noticeably 
 improved. Narrow, crooked streets and dilapidated biuld- 
 ings were supplanted by broad pavements and permanent 
 structures of brick and stone. Such experiences give us 
 the expression, "It takes a fire to make a city." Floods 
 
The Subject- Matter of Economics 77 
 
 may devastate the valleys of the Ohio and the Mississippi, 
 but after a brief interval the damages are fully repaired. 
 The direct losses of our Civil War were beyond comprehen- 
 sion, yet within a few years we were more prosperous than 
 ever. Merely temporary impoverishment is occasioned by 
 the destruction of current supplies, if only the source of 
 such supplies remains intact. When there is no dread of 
 recurring calamity to paralyze incentive, and when natural 
 resources, together with knowledge and scientific equip- 
 ment, remain imdiminished, there is a rapid reproduction 
 of current supplies. They differ from productive capacity 
 as the apple differs from the tree, or the crop from the 
 farm. The latter is the source; the former is the usufruct. 
 
 3. Destruction Often a Real Gain. — ^An enemy may lay 
 waste a country by fire and sword; he may carry off mova- 
 ble wealth, trample crops, burn factories and hom/;s, yet 
 there is no essential difference between these wastes and 
 the wastes in time of peace. It is no more wasteful 
 to bum a bridge, than not to utilize the agencies to 
 build it. 
 
 These periods of destruction, moreover, often teach valu- 
 able lessons of construction. The Civil War taught us to 
 concentrate the efforts of a multitude of men. Under tre- 
 mendous necessity we were forced to produce munitions, 
 food, and naval supplies on an unprecedented scale. In 
 peaceful times the hampering effect of customs, class spirit, 
 and industrial evils tends to deepen rather than to vanish. 
 The breakdown of these is a wholesome effect of war. The 
 weakening of special privilege and the hberation of new 
 ideas prepare the way for a new dynamic progress. For 
 instance, our Civil War gave impulse to the invention and 
 use of labor-saving machinery. "From 4,363 patents in 
 
78 Introduction to Economics 
 
 i860 — the high-water mark up to that time — the number 
 rapidly grew to 8,874 in 1866. In 1869 the number of 
 patents issued reached 12,957." 
 
 That which appears most destructive often embodies the 
 elements of greatest progression. The lessons of war are 
 the lessons of enforced saving, of austere living, of large 
 organization and operation, of large production where 
 greatest efficiency is enforced by military and financial 
 necessity. When applied to the industries of peace these 
 lessons had the effect of an economic new birth. In the 
 South a new growth took place after the war that would 
 have been impossible in a land of slaves, poor whites, and 
 contented plantation-owners. Thus it is seen that produc- 
 tive capacity may be increased fully as well by the more 
 effective utilization of old forces as by the harnessing of 
 new. 
 
 4. The dissemination of education increases productive 
 capacity. Ignorant tribes perish where natural resources 
 are richest. There is evidence that Indian tribes wasted 
 away in the fertile valleys of the Missouri and Mississippi 
 Rivers. The gains of civilization are measured not by 
 things produced but by the knowledge of how to produce 
 them. As our fund of knowledge increases, our control 
 over nature becomes more effective. Through education, 
 this knowledge and the means of applying it become com- 
 mon property. The productive capacity of the country is 
 increased by the dissemination of knowledge precisely as 
 though the soil were made more fertile or the mines richer. 
 Science, invention, education, industrial organization, de- 
 velopment in transportation, new banking facilities, stead- 
 ily enlarge this productive capacity. In this process of 
 enlargement our industrial equipment may be scrapped, to 
 
The Subject- Matter of Economics 79 
 
 be replaced by the newer and more efficient; but produc- 
 tive capacity is increased. 
 
 5. Social wealth includes productive capacity and cur- 
 rent supplies. It is the direct and indirect means of grat- 
 ifying our desires for the necessities, comforts, and luxuries 
 of hfe. We cannot define social wealth by an enumeration. 
 We no more define social wealth by enumerating the things 
 which compose it than we define the word house by mak- 
 ing a tabulation of brick, s};one, nails, and cement. We 
 may say, in truth, that wealth embodies usable natural 
 resources, such as land, harbors, and minerals; the knowl- 
 edge of science and organization; facilitating agencies, as 
 money and technological equipment, and all consumable 
 goods. But we cannot get a full concept of wealth by 
 enumerating the things which combine to make wealth. 
 A battahon is stronger in battle as a unit than as many 
 men acting as individuals, and a battalion under a good 
 commander is more effective than one under a poor com- 
 mander. A thousand men in a well-ordered factory, where 
 there is a minute division of labor, are far more productive 
 than the same thousand men acting as individual units. 
 There is no greater element in productive capacity than the 
 power of organization. You cannot determine the pro- 
 ductive capacity of a factory by an enumeration of engines, 
 tools, buildings, land, raw materials, and the like. The 
 physical equipment of two railroads may be precisely the 
 same — in rails, ties, rolling-stocks, stations, etc., yet they 
 may have vastly different capacities. This might be due 
 to unlikeness in management, or to unlike situations with 
 respect to other industries which railroads serve. There 
 is no definite measure of social wealth. And there is no 
 practical need of such measure. President Hadley is suf- 
 
80 
 
 Introduction to Economics 
 
 fidently correct: "The nation's wealth is to be found in the 
 enjoyments of its members." 
 
 Natural Resources 
 Basic Wealth Scientific Knowledge 
 
 Organization 
 
 f Tools 
 Social Wealth { Facilitating Wealth \ Money 
 
 \ Credit 
 
 [ Food 
 Consumable Wealth < Shelter 
 
 [ Conveniences 
 
 While this classification involves some overlapping, it 
 serves to make clear the concept of social wealth. 
 
 6. Many writers of a century ago limited wealth almost 
 wholly to capacity. Lord Lauderdale (an EngUsh econ- 
 omist of the last century) furnished us with the note- 
 worthy example of a privately owned supply of water. 
 Water was so scarce and so valuable that a good well was 
 a private fortune. Improvements were made which fur- 
 nished such a supply of good water as to make the pri- 
 vately owned well valueless. There the creation of social 
 wealth was the destruction of private wealth. The Amer- 
 ican economists — Daniel Raymond, A. H. Everett, Wil- 
 lard Phillips and less noteworthy writers of a century ago 
 — defined wealth as "national capacity." They would 
 not limit wealth to objects of private property which are 
 bought, sold, and exchanged. They taught that national 
 productive capacity (wealth) must include the free as well 
 as the slave, a salubrious atmosphere, and a navigable 
 river without tolls as well as a canal with tolls. They 
 agreed with the English economists, Lord Lauderdale and 
 David Ricardo, who reasoned that if water should become 
 scarce and high-priced, the individual owners of it would 
 
The Sulffect- Matter of Economics 81 
 
 be richer, but society as a whole would be poorer. They 
 would have argued that a deeper channel for the Mississippi 
 River would be as truly an object of wealth as is an arti- 
 ficial levee costing many millions of dollars. They would 
 have argued that had Providence constructed a broad- 
 flowing and navigable river from Colon to Panama it would 
 have been an object of wealth as truly as is a man-made 
 canal costing upwards of three hundred and fifty millions. 
 
 Economic writings fall largely into two groups: One 
 emphasizes social wealth in the broad sense of productive 
 capacity; the other emphasizes wealth in the restricted 
 sense of things owned. The early American economists 
 emphasized the former, while the majority of recent Ameri- 
 can economists emphasize the latter. The present work 
 recognizes the twofold aspect of wealth. Neither aspect 
 must be overlooked, nor must they be confused. 
 
 7. Wealth Not a Comparative Concept. — ^Another mis- 
 conception to be avoided is to consider wealth as a com- 
 parative term. The word wealth is derived from the word 
 weal (from the same root as well), which means a prosper- 
 ous state of being. Later usage caused wealth to be ap- 
 plied to the things which produce a prosperous state. In 
 this sense it was used comparatively to indicate "that 
 abundance of worldly estate which exceeds the estate of 
 the greater part of the community." We now use the ad- 
 jective rich in this sense. It is proper to use the word rich 
 in a comparative sense; it is proper to say that the rich 
 man has more wealth than others or that he has more pur- 
 chasing power than others. The word rich may refer either 
 to the possession of wealth or to the possession of value. 
 Wealth must not be used in this comparative sense. The 
 meagre equipment of the cobbler and the plant of the 
 
82 Introd/uction to Economics 
 
 Bethlehem Steel Company are alike wealth. It would be 
 a gross error to say that a thing is not wealth because it 
 does "not make any one rich in this comparative sense." 
 Public highways, parks, schools, and a salubrious climate 
 benefit all alike, but they are nevertheless wealth. 
 
 8. Private Wealth and Public Wealth. — For many pur- 
 poses we sacrifice strict accuracy and speak of wealth in 
 the terms of the things composing it. The practice of 
 bu3Tng and selling makes it necessary to think of wealth 
 in terms of specific things and units. Common usage 
 gives us the notion of private wealth, by which is meant 
 the things owned by individuals. Private wealth includes 
 such things as houses, land, live stock, necessities, and 
 comforts of all kinds. Further, private wealth includes 
 those things owned by a corporation (legal person), such as 
 railroads, water-works, factory-buildings, and machinery. 
 
 Public wealth, like private wealth, refers to the appro- 
 priated things. It is a broader term than private wealth, 
 including everything that is owned by private persons and 
 by governments. It includes public buildings, parks, high- 
 ways, pubUc schools, state universities. The term as com- 
 monly used does not include free goods, such as climate or 
 large bodies of water. 
 
 Social wealth embodies both public and private wealth. 
 This may be indicated as follows: 
 
 SoetdlweaWi 
 PrjOtliti wealth. 
 Private weaith 
 
 In the following pages the word wealth, when used with- 
 out a modifying term, will signify social wealth. 
 
The Sulked- Matter of Economics 83 
 
 9. Per Capita Wealth and National Wealth.— Per capita 
 wealth means the average wealth of the citizens of a na- 
 tion. National wealth is so used as to mean the aggregate 
 of the wealth in a nation. A nation may be comparatively 
 wealthy and its per capita wealth small. Conversely, a 
 nation may be poor and its per capita wealth large. In 
 the former case the aggregate wealth would be divided 
 among a large population, while in the latter case the 
 aggregate wealth would be divided among a small popula- 
 tion. Aggregate wealth remaining the same, per capita 
 wealth decreases as the population increases, or it increases 
 as the population decreases. 
 
 10. Increasing Aggregate Wealth and Diminishing per 
 Capita Wealth. — We have seen that it takes a combination 
 of different agents to produce a commodity; seed-corn, 
 land, labor, and tools must work together to produce a 
 bushel of corn. Productive capacity is increased by a 
 better apportionment of these factors. Prior to our Civil 
 War we had a small population in comparison with our 
 land and natural resources. Every increase in population 
 was a blessing collectively and individually, because it 
 made possible greater individual earnings. After a proper 
 adjustment between the population and resources is 
 reached, a further increase of population tends to in- 
 crease aggregate wealth and to diminish per capita 
 wealth. 
 
 11. View-Points in Autocratic and Democratic Countries. 
 — In a democracy, where the people control, individual 
 welfare and per capita wealth are emphasized. In an 
 autocracy, where a potentate controls, national strength 
 and national wealth are emphasized. In an autocracy 
 economic interest would centre in theories of prosperity 
 
84 Introduction to Economics 
 
 or in problems of production, while in a democracy the 
 prevailing emphasis falls on the problem of distribution. 
 The one would say: "We must produce before we distrib- 
 ute; there must be something to divide before we proceed 
 to a division; produce in abundance and distribution will 
 automatically take care of itself." The other would say: 
 "The greatest incentive to produce is found where there is 
 a proper distribution; great production without adequate 
 distribution would mean the wealth of a few and the misery 
 of a multitude; wisely distribute, and adequate production 
 will be properly fostered and directed." 
 
 The above statements show that for the sake of clear- 
 ness the word wealth should always be modified by one 
 of the following: Per capita, national, public, private, 
 social. 
 
 12. Wealth and Property. — It is necessary at this point 
 to distinguish between property and wealth. The neglect 
 of this distinction has caused great confusion, especially 
 in problems of taxation and in statistical tabulations of 
 our national wealth. Property is a legal concept; it is a 
 title to wealth. A house is an object of wealth; the title 
 to a house is property. A railroad is wealth; there may 
 be a thousand property rights to this one piece of wealth. 
 Wealth remains the same 'whether property rights are in- 
 creased, decreased, or destroyed. Should the state take 
 away the title of individuals to land, our land wealth 
 would remain the same. Property, and not wealth, was 
 created when Russian peasants were made subject to pur- 
 chase and sale. 
 
 We must not speak of legal instruments — deeds, fran- 
 chises, stock-certificates, mortgages, and other evidences 
 of ownership — as wealth. If we speak of a farm as wealth 
 
The Subject- Matter of Economics 85 
 
 and also speak of the title to it as wealth, we are counting 
 twice. If the city imposes a tax on a street-railway and 
 in addition imposes a tax on the stock or ownership of the 
 railway it is double taxation. 
 
 Inventions, discoveries, and new scientific methods have 
 made additions to wealth wholly out of proportion to the 
 gains of individuals in the form of property. The effect of 
 improvements is to enable a given amount of goods to be 
 produced at a lower cost, or to enable more goods to be 
 produced at a given cost. Should an improvement enable 
 a business to double its output without additional cost the 
 community would enjoy greater abundance and lower 
 prices. If an improvement should double the supply of 
 steel and cut the price in two, there would be no percepti- 
 ble increase in property of steel-owners, but a great addi- 
 tion to wealth. 
 
 Property enables individuals to live from the products 
 of others. Current supplies are perishable, therefore each 
 season must yield its crop if society be spared from want. 
 Society must continually produce these necessities. What 
 is true of society in this regard is not true of the individual. 
 The individual may have property in permanent assets, 
 and, as necessity arises, exchange these for current neces- 
 sities. Private ownership or property enables the indi- 
 vidual to depend on others. Thus private property 
 makes possible a leisure class (called "idle rich" and "par- 
 asites"). 
 
 13. Capital and Wealth. — Wealth consists, as we have 
 seen, of productive capacity and of the incomes which pro- 
 vide the necessities, comforts, and conveniences of life. 
 Capital, on the contrary, is acquisitive in nature. One's 
 capital expresses his purchasing power with respect to the 
 
86 Introduction to Economics 
 
 products of others. It is thus a privately owned valuable 
 right. There is much capital that is not wealth at all. 
 When Queen Elizabeth empowered one with the legal privi- 
 lege of monopolizing trade in cards, that right was not 
 wealth, although it became a great means of private acqui- 
 sition or capital. Capital may take the form of legal ad- 
 vantage, monopoly power, a franchise, or mere good-will. 
 
 Generally speaking, however, capital is the value of a 
 property right to an item of wealth. A horse is an item of 
 wealth. If horses are plentiful and cheap, the owner of 
 a horse has a small capital or value right. When the Euro- 
 pean war creates a large demand for horses, thus making 
 them scarce and high-priced, the owner finds that his capi- 
 tal is increased. Capital and scarcity are inseparably con- 
 nected. The capital of certain individuals may increase 
 while social and also per capita wealth decrease. Be- 
 tween 1900 and 191 5 there was but little increase in the 
 number of improved acres in farms, but the demand for 
 land products was greatly increased, due to the vast in- 
 crease of population. There was a decrease in the acreage 
 of land per capita, and at the same time an increase in the 
 capital in land. 
 
 14. The Money Expression of Wealth. — It is now evi- 
 dent that a sum of capital values may be misleading as an 
 index of well-being or as an expression of national or per 
 capita wealth. The estimate of our national wealth is 
 made in dollars. This is faulty for two reasons: first, 
 should we assume no change whatsoever in the amount of 
 national wealth, yet it would be expressed as larger or 
 smaller should the purchasing power of the dollar go down 
 or up; second, there is much wealth which is not expressed 
 in terms of money. The purchasing power of a dollar is 
 
The Sulyect- Matter of Economics 87 
 
 less to-day than it has been at any time in many years. 
 Should we assume that the per capita wealth remains con- 
 stant, yet a decHne in the exchange power of money will 
 show a great increase in the money worth of the per capita 
 wealth. 
 
 The money expression of our wealth gives no adequate 
 picture of well-being. It expresses nothing as to free 
 goods. Much of our public property has no money esti- 
 mate; our rivers and harbors are exemplary of this. 
 
 15. Economics is concerned with the utilization of 
 wealth and labor to the end of gratifying desires. This 
 makes of it a human science, and as such its subject-matter 
 is the basis of much controversy. It is closely related to 
 political, ethical, and historical considerations. Both for 
 the purposes of illustration and for the application of prin- 
 ciples the economist frequently takes excursions into these 
 kindred fields of thought. The more strictly, however, 
 kindred branches are separated, the better it will be for 
 each and all. "The easiest and surest way to increase 
 our knowledge of any subject is to isolate it, and investi- 
 gate it to the strict exclusion for the time of all other 
 subjects." 
 
 Some of the laws of economics are applicable to all forms 
 of social organization. They apply alike to the isolated 
 individual like Crusoe, to the cave-dweller, to the tribe of 
 savage huntsmen, to the self-suflSicing family, to the great 
 and prosperous nation. They apply in backward commu- 
 nities, where trade is by barter (barter bemg a trade of 
 goods or services for other goods or services, /. c, trading 
 without the use of money). They apply with equal force 
 in a capitalistic community with an intricate system of 
 currency. 
 
88 Introduction to Economics 
 
 In treating of the acquisition and utilization of wealth 
 economics must study nefarious practices, by which un- 
 scrupulous individuals acquire wealth. It must include a 
 consideration of such predatory agencies as the outfit of 
 the robber or the roulette-wheel of the gamester. Eco- 
 nomics also studies the most noble and edifying activities 
 of men so far as these are related to the production, main- 
 tenance, and utilization of wealth. This science inquires 
 into the cause and effect of different kinds of wealth and of 
 different lines of business. It serves to work into the un- 
 derstanding of men a body of sound principles from which 
 may be deduced practical rules and precepts for the safe 
 guidance of human conduct to the end of social and indi- 
 vidual well-being. 
 
 At the expense of repetition, let it be added that econom- 
 ics is a human science, and it is broad enough to include 
 all the wealth-getting and wealth-using activities of man 
 in whatever state of organization he may be found. The 
 student must be on his guard once for all against such defi- 
 nitions of this science as would artificially narrow the 
 thought to money price transactions. Buying and selling, 
 and legal or contractual obligations which are effected by 
 the use of money (price transactions) form an essential 
 part, but not the whole of economics. 
 
 i6. Economic Laws and Social Institutions. — We rilust 
 distinguish natural economic laws from man-made insti- 
 tutions. Scientific principles may determine legislation, 
 but legislation cannot determine scientific principles. In- 
 stitutions are man-made; they may be created, modified, or 
 destroyed by a majority vote. Institutions may be formed 
 in accord with economic principles that promote well- 
 being, and as such serve to the greatest social good. On 
 
The Subject- Matter of Economics 89 
 
 the other hand, they may be in accoijd with economic laws 
 and work positive harm. A law only states what will hap- 
 pen under certain conditions; it is not a part of the law to 
 state whether the consequence will be good or bad. The 
 competitive system, which embodies private property and 
 exchange, is an institution. The majority think that it is 
 based on such economic principles as will direct the work- 
 ings of this institution to the end of the greatest good; the 
 minority think differently. Who is right? To answer 
 this involves an economic problem which calls for a clear 
 conception of the nature and workings of economic laws. 
 The answer to this question requires investigation into 
 social history and an analysis of social experience in order 
 that we may learn the truth regarding the laws upon which 
 the competitive system is based. To define economic laws 
 in terms of the competitive system is to beg the question. 
 Or to define economics as the science of wealth, and then 
 define wealth in terms of the competitive system is in the 
 beginning to beg the question. Such a procedure prepares 
 the way not for a study of economic laws but for a mere 
 elaboration on the competitive system. 
 
 17. The goal of public policy is human welfare. The 
 word policy implies the recognition of some end to be 
 accomplished and the definite shaping of our course toward 
 that end. The old truism, "We can command laws only 
 by obeying them," teaches us that we must shape our 
 course in strict obedience to economic laws if we attain 
 the goal of our economic policy. We must comprehend 
 law before we can shape our course in obedience to law; 
 the shaping of a course takes the form of an institution, 
 therefore the study of economic law is antecedent to a 
 sound conclusion regarding the merits of institutions. 
 
90 Introduction to Economics 
 
 18. Changes in Economics. — Economics is to be sharply 
 distinguished from economy or economic life. Economic 
 life refers to the nature of the customs, institutions, and 
 activities of a people in getting a living. We say, for in- 
 stance, that the Civil War brought about a great change 
 in the economic life of the South. Formerly the plantation- 
 owner used slave-labor in the production of things largely 
 for his own use. Clothing, shoes, and farm-utensils were 
 produced in small shops on the plantation. To-day he 
 pays wages for labor, sells his products to large domestic 
 or foreign markets and acquires his clothing, shoes, and 
 farm-utensils indirectly from a giant corporation. This 
 describes a change in economic life. Economic life may 
 change while economic laws remain the same. As a gov- 
 ernment may change from one form to another, although 
 the principles of goverimient remain the same, so economics 
 may change while economic laws remain the same. Eco- 
 nomics is designed to explain economic life, and as eco- 
 nomic life changes, the science which explains it must 
 change in content and emphasis. 
 
 19. Economics and Political Reform. — ^Abundant natural 
 resources in the form of timber, iron, coal, and harbors, 
 together with a hardy people are no guarantee against 
 poverty. Science must unite with labor in order that re- 
 sources may yield their benefits. Poverty is found in the 
 midst of potential abundance as well as in the midst of 
 scanty resources. In either case poverty is due to mal- 
 adjustment — there are too many mouths to be fed in pro- 
 portion to the available supply of food, or there may be 
 enough food, but it may be owned by the few to the exclu- 
 sion of the many. In any such cases of maladjustment, 
 social conflict gives rise to problems for the lawmaker. 
 
The Subject- Matter of Economics 91 
 
 What law is depends largely upon existing economic con- 
 ditions. Social relations are constantly growing more 
 complex. Factories are selling their wares for delivery a 
 year hence even before they are produced; and in turn 
 these factories are contracting for the future delivery of 
 raw materials with which to make the same wares. Should 
 there be default of contract anywhere along the line, fu- 
 ture sales would be rendered impossible. The credit basis 
 upon which modern business is financed makes it impera- 
 tive that men meet their obligations. Instances might be 
 multiplied to demonstrate the need of legal enforcement 
 of contracts. 
 
 The growth of transportation facilities and the concen- 
 tration of industries tend to destroy community isolation 
 and to unite the interests of the people, hence there is need 
 of uniform legislation. Although this unity of interests 
 demands imity in legislation, our political organization is 
 such as to cause a diversity in law. As each State has been 
 added to the Union it has added a legislature and a court 
 of last resort to the oversupply of such [^bodies. States, 
 as weU as individuals, have conflicting interests, and they 
 vie with one another for advantages. Each State is 
 anxious to attract business, and so is reluctant to pass 
 compensation acts, child-labor laws or other remedial 
 legislation, lest capital seek the State with fewer restric- 
 tions. One State, for instance, by legalizing concentra- 
 tion and restraints of trade, has attracted large corpora- 
 tions. "That State profits to the extent of over $3,000,000 
 per annum because of its pioneer position in passing liberal 
 corporation laws." Other States, seeing these advantages, 
 are forced to similar measures and so interstate .^pmpeti- 
 tion only too frequently takes the form of lax legislation. 
 
92 Introduction to Economics 
 
 The statesman acquainted with the principles of eco- 
 nomics knows that one state does not succeed by impov- 
 erishing another. They are not economists who wish to 
 extend American trade by limiting or crippling the trade 
 of England. To-day every industry is producing for the 
 market. Every good so produced is from the moment of 
 its existence a demand for another product. Cripple a 
 nation or an industry and you limit the market for your 
 product. If only for selfish reasons, we should assist 
 other states or nations, and if our legislators were better 
 trained in economic principles, such unwise methods of 
 competing would not exist. 
 
 In addition, the moral level of competition is usually 
 set by the competitor of lowest standing. The manufac- 
 turer who pays low wages, maintains poor conditions and 
 exacts long hours, can force other employers to the same 
 level of conduct. His lower costs would enable him to 
 reduce his prices and take the market. Other manufac- 
 turers must conform to his low standard, or the state must 
 maintain a higher one. Statutes dealing with conditions 
 of factories, the employment of women and children, the 
 maintenance of safety-appliances are all instances of laws 
 attempting to overcome the evils of competition. In fact, 
 legislation, for the most part, is on strictly economic sub- 
 jects, such as the tariff, banking, labor troubles, and meth- 
 ods of competition.^ True statesmanship would seek to 
 
 ' An enumeration of the essential laws of the last pre-war administration 
 lend emphasis to this statement. The chief acts passed during that admin- 
 istration were: 
 
 (a) The Federal Reserve Law. 
 (6) The Eight-Hour Law. 
 (c) The Rural Credits Law. 
 ■ id) The Child Labor Law. 
 (e) The Workmen's Compensation Law. 
 
The Subject- Matter of Economics 93 
 
 preserve the benefits of competition and to destroy its 
 evils; it would raise the plane of competition without re- 
 stricting it. Therefore lawmakers are in duty bound to 
 have a grasp of economic principles. Voters cannot be 
 neutral on questions of economic conduct; to vote in the 
 negative is as positive in result as to vote affirmatively. 
 The college graduate who has neglected the principles upon 
 which legislation is based exercises the ballot no more in- 
 telligently than the illiterate. Since legislation is based 
 so largely upon these principles, it is clear that intelligent 
 voting requires some knowledge of economics.* 
 
 20. Economics and Business. — In a narrow sense eco- 
 nomics is the science of which business is the art. Eco- 
 nomics is therefore important for the business man to the 
 extent that a practitioner should understand the principles 
 of which he is making constant application. The study of 
 economics imparts, moreover, a habit of thought and a 
 familiarity with concepts invaluable to the man in big 
 business, who to be successful must have a deep compre- 
 hension of principles involving a network of mutually de- 
 pendent phenomena. The great generals of industry are 
 such, for the most part, because their deep insight into 
 mutually dependent phenomena gives them foresight and 
 
 (/) A Law Creating a Tariff Commission. 
 
 (g) Tlie Good Roads Law. 
 
 (A) The Income Tax Law and the Inheritance Tax Law. 
 
 (j) The Agricultural Extension Law. 
 
 (;■) The Alaskan Railway Law. 
 
 (k) The Federal Trade Commission Law. 
 
 (l) The Grain Anti-Gambling Law. 
 
 (w) The 'Safety-at-Sea Law. 
 
 {») The Cotton Futures Law. 
 
 (o) The Clayton Anti-Trust Law. 
 
 1 See H. C. Adams's Relation of States to Industrial Activity, pp. 39-47- 
 
94 Introduction to Economics 
 
 thereby enables them to grasp developing opportunities. 
 The greatest principle in economics is that of proportion- 
 ality — the principle of the adjustment and the interaction 
 of mutually dependent phenomena. As the market is ex- 
 tending and businesses are concentrating into large units, 
 complex and far-reaching problems cannot but develop. 
 The solution of these requires a profound knowledge of 
 economic principles. Some of the most notable advertis- 
 ing campaigns in recent years have been carried through 
 on strictly economic grounds. Some of the most careful 
 students of economics are men in the field of merchandising. 
 So-called middle-men must conform their conduct to the 
 principles of economics. Directors of large businesses and 
 small are constantly applying these principles and should 
 understand them. 
 
 But to say that economics is important for the business 
 man does not say that it teaches him how to become rich. 
 Some of the most ridiculous economic theories are adhered 
 to by prominent financiers. These men are masters of 
 detail within a limited field. There are successful men in 
 phases of banking who know nothing of the principles of 
 money and who have never read the Federal Reserve Act. 
 One might have years of training and successful experience 
 in particular phases of banking, and yet be as incapable as 
 a teamster of devising a monetary policy for the Philip- 
 pines. But as the economy of self-sufl&ciency is giving 
 way to the economy of interdependence, even the specialist 
 is compelled to view his task in its broader economic 
 aspects. A treatise on economics presents principles in 
 their relationship to each other. The problems of the 
 business man differ with respect to time and place; with 
 respect to changes in related businesses; with respect to 
 
The Suited- Matter of Economics 95 
 
 different proportions of ingredients in the different prob- 
 lems. The business man finds no prescriptions in eco- 
 nomics for each case, but from economics he learns how to 
 trace causes to their effects in the mutually dependent 
 phenomena of industry. 
 
 21. Exercises. — i. What is the difference between cur- 
 rent sjupplies and productive capacity ? 
 
 2. How may destruction be a real benefit to society? 
 Cite three examples of this. 
 
 3. Define: social wealth, private wealth, public wealth, 
 per capita wealth. 
 
 4. Are wealth and property co-extensive ? Give two 
 examples to illustrate your answer. 
 
 5. Wealth is any material good which satisfies a desire 
 of man, and which is not gratuitous. It is used as a col- 
 lective term, for the general conception of such goods, and, 
 when it describes the subject or aim of pohtical economy, 
 it carries with it the notion of abundance. Criticise and 
 correct this definition. Do you include in your definition 
 the following: Honesty, health, skill, "the moral, intellec- 
 tual, and physical natures" of the people, a patent right, 
 a copyright, a bill of exchange, the voice of a singer, a 
 good harbor, climate, and sunlight? (Sumner.) 
 
 6. If a census were taken of the wealth of the country, 
 ought the owners of land to return it at its market value ? 
 Is the land a part of the national wealth? Ought the 
 owners of govermnent bonds to include them in the return? 
 If they did so, and if the returns were added up, the na- 
 tional debt would be counted into the sum of the national 
 wealth. Would that be right? 
 
 If A sells to B a bale of cotton for $500 and B gives a 
 promissory note for it, ought B to return the cotton and 
 A the note? If A has a certificate of stock in a raihoad, 
 ought the railroad officers to return the railroad, and 
 ought A to return the stock? (Sumner.) 
 
 7. Are the following to be included in wealth: (i) the 
 
96 Introduction to Economics 
 
 original powers of the laborer; (2) his acquired powers; (3) 
 the original properties of the soil; (4) improvements on 
 land; (5) credit? 
 
 8. What is meant by the term "economic policy"? 
 What bearing may questions of economic policy have on 
 the institution of private property ? 
 
 9. Why is it necessary to distinguish between economic 
 laws and economic conduct ? In what way does economics 
 change ? 
 
 10. How does a knowledge of economics assist the legis- 
 lator ? the business man ? 
 
 11. Criticise: "A good climate is not wealth because all 
 , are equal in the enjoyment of it." Does this agree with 
 
 President's Hadley's statement, "The true basis for an 
 estimate of a nation's wealth is to be found in the 
 enjoyments of its members " ? (Economics, p. 4.) Does 
 this statement conform to private, public, or social 
 wealth ? 
 
 12. Criticise: F. A. Walker said: "The Proclamation of 
 Emancipation, in the United States and Russia, annihi- 
 lated a vast mass of wealth." 
 
 Do you agree with David Ricardo? He said: "It is 
 through confounding the ideas of value and wealth, or 
 riches, that it has been asserted, that by diminishing the 
 quantity of commodities, that is to say, of the necessities, 
 conveniences, and enjoyments of human life, riches may 
 be increased." 
 
 13. We associate efficiency with wealth and drunken- 
 ness with poverty. Should we classify whiskey, the means 
 of drunkenness, as wealth ? 
 
 14. Frost is not wealth but a destroyer of wealth, yet it 
 would be wealth if privately appropriated, because one 
 could add to the value of his own wealth by nipping his 
 neighbor's crop in the bud. Point out the error, if there 
 be any, in this statement. 
 
 15. The waters near our coasts are great sources of food. 
 They ^re not, for the most part, privately owned, yet they 
 
The SuJyect- Matter of Economics 97 
 
 are more important to the nation than a large part of the 
 land area. Are they wealth? If so, what kind? 
 
 1 6. Should you deny the concept of social wealth, could 
 you account for the economic power of ancient Egypt, or 
 of the United States? 
 
CHAPTER VI 
 DESIRE, DESIRABILITY 
 
 I. Desires as motives. 2. Desires are recurring. 3. Intelligence, desire, 
 effort. 4. Desires for near and remote possession. 5. Standards of con- 
 sumption. 6. Harmony in consumption. 7. Desires and productive capac- 
 ity. 8. "The cost of high hving." 9. Desires and ultimate wealth. 10. 
 Desires and association of ideas. 11. Altruistic desires. 12. Desires and 
 wants. 13. Necessities. 14. Repressibility of desires. 15. The standard of 
 life. 16. The notion of scarcity. 17. Desirability. 18. Utility. 19. Dimin- 
 ishing desirability. 20. The equal desirabilities of units. 21. Total desira- 
 bility. 22. Graphic illustration of equal desirabilities. 23. Graphic illus- 
 tration of desirabilities at different times. 24. Marginal desirability. 25. 
 The tendency to equality of marginal desirabilities. 26. Graphic illustra- 
 tion of this equality. 27. Examples of marginal desirability. 28. Exer- 
 cises. 
 
 I. Desires as Motives. — The movement of the blood in 
 the body, of the ocean tides, of the winds, and of the planets 
 sets the scientist the task of accounting for these move- 
 ments. Likewise the efforts of man in the shop, store, 
 market-place, on the farm, or in transportation, set the econ- 
 omist the task of accounting for these activities. Search 
 where he may, he will find but one motive for all economic 
 endeavor, and that is, human desires for the necessities, 
 comforts, luxuries, and conveniences of life. Desire, then, 
 is the starting-point in economic investigation. 
 
 The simplest form of desire, like that of the savage, 
 child, or animal, is for food and the other elemental require- 
 ments. The craving for food stirs men up to the effort 
 to secure it. That is the primary cause of productive 
 labor. As the individual's intelligence broadens, he comes 
 to attribute value not only to the immediate objects of 
 
Desire, Desirability 99 
 
 consumption, but also to the indirect means of producing 
 these. The individual's order of thought in attributing 
 value to things is from finished goods ready for consump- 
 tion back to the direct agencies of producing these and on 
 back to the more remote and indirect agencies. Because 
 we recognize the utility of the apple, reason teaches us to 
 prize the desirability of the tree which produced it, and 
 further to attribute value to the land, labor, and other 
 agencies back of the tree. 
 
 2. Desires Are Recurring. — Gratification at best is only 
 temporary. We do to-day's reading, eating, and exercis- 
 ing to-day. But to-day's eating will not gratify to-mor- 
 row's desire for food. In order that one may get the great- 
 est enjojonent through time, what is more, in order that 
 one may live, goods of present, direct use and services 
 must be meted out through time. These goods of direct 
 use and services are to be thought of, not as a fund or 
 accumulation, but as a flow. The dwelling-house is one 
 thing and the shelter (service) it affords through time is 
 another. The shelter of the house, the ride which the 
 automobile affords, the protection which clothing insures, 
 the thousand and one benefits from other productive 
 agents, constitute a flow. 
 
 3. Intelligence, Desire, Effort. — Desires show progress in 
 intelligence. Desires imply a knowledge of the thing de- 
 sired. If one says, "I desire," the question which nat- 
 urally follows is: "What? Do you desire a hat, a suit of 
 clothes, a pencil, a glass of orangeade?" You have no 
 desire for a glass of orangeade unless you know what 
 orangeade is. Benjamin Franklin was never imbued with 
 a desire for a Ford automobile. When there is no knowl- 
 edge there is no desire and desires increase as knowledge 
 
100 Introduction to Economics 
 
 widens. Knowledge gives birth to desire and desire points 
 out a path for will. Why will one risk his life further to 
 save a drowning child than to save a drowning dog, or 
 why will one work harder for a thousand dollars than for 
 ten dollars? Strong desires and great effort, and weak 
 desires and weak effort go together. 
 
 4. Desires for Near and Remote Possession. — It is a 
 general rule that the near occasions a stronger desire than 
 the remote. The child prefers one box of candy to-day to 
 two boxes a year hence. The normal person desires more 
 intensively the present possession of wealth or the present 
 direct uses of goods than the future possession or the 
 future uses of goods. The majority of the economists 
 place emphasis on the desire for present consumption over 
 future consumption. I wish to emphasize that the desire 
 for present possession of wealth over future possession of 
 wealth is far more significant. This point will occupy us 
 at length when we come to consider the theory of interest. 
 It is enough to say that the greater part of large credit 
 transactions, of durable investments and of permanent 
 improvements concern most deeply the direction of social 
 wealth. 
 
 But while desire is stronger for present consumption or 
 for present possession, it is common knowledge that as 
 intelligence broadens our present desire becomes stronger 
 for future goods. The ignorant man is not provident; he 
 does not save for the future. The intelligent person, how- 
 ever, cannot but realize the need of providing for the 
 future. This fact causes him to desire durative goods, 
 that is, durable agents which will yield the means of grati- 
 fying desires in the future. If there were no desire for 
 future incomes, man would not ascribe importance to 
 
Desire, Desirability 101 
 
 durable productive agents. While the desire for consiunp- 
 tion is back of the motive for possession, yet the determi- 
 nation to possess is the force which shapes industry. 
 
 5. Standards of Consumption. — Increasing intelligence 
 causes desires for goods and services that are superior in 
 quality, and the consumption of such goods and services 
 still further increases the standard of desire. A Tennessee 
 mountaineer told the writer that a summer's stay in New 
 York City had changed his desire for yarn socks, hoe-cake, 
 and moonshine. The wealthy who suffer a sudden reverse 
 of fortune find it hard to readjust their standards. In- 
 creasing intelligence, furthermore, develops a desire for a 
 great variety of goods. Thus increasing desires call for 
 improvement in the quality and variety of goods. They 
 call for better clothing in a greater variety, for better food 
 adapted to a wider range of taste, and for superior amuse- 
 ments in a more liberal assortment. 
 
 6. Harmony in Consumption. — Then, too, increasing in- 
 telligence gives rise to the desire for harmony in the means 
 of consmnption. Harmony in dress, in the different items 
 of the dinner, in house decoration, is demanded by the 
 more intelligent. A thoughtful husband will not purchase 
 his gifted wife an expensive hat unless he is prepared to 
 foot the bill for the other articles of apparel to harmonize 
 with it. The possession of one thing stimulates the desire 
 for other things, thereby extending the motive for further 
 effort. Man is by nature a social being; as such most of 
 his economic desires are the outgrowth of his social life. 
 In the language of W. E. Hearn, "Man is imitative, and 
 so seeks to have what his neighbor enjoys; he is vain, and 
 so desires to display himself and his possessions with 
 advantage before his fellows; he loves superiority, and so 
 
102 Introduction to Economics 
 
 seeks to show something that others have not; he dreads 
 inferiority, and so seeks to possess what others also possess." 
 
 7. Desires and Productive Capacity. — Desires as mo- 
 tives may be in accord with or out of accord with produc- 
 tive capacity. As above pointed out, the motive for pro- 
 duction is desire. We produce what we want; we expend 
 energy on the production of nothing else. If you wish the 
 clew to the economic production of the people, you have 
 but to determine what the people want. Industry is shaped 
 around and conformed to the desires of the people. De- 
 sires create demand for goods and that which the people 
 demand is what the factories, farms, and other industries 
 must produce. Do the people desire articles that are 
 rare, choice wines or scarce materials— things that nature 
 has little capacity for producing ? If so, little can be pro- 
 duced and nature can support but a small population. 
 Conversely, if a cheap and nutritive food, like rice or pota- 
 toes, is desired, abundance can be produced and a large 
 population can be supported with plenty. 
 
 The desire for a variety of goods and services causes a 
 varied production in society. What is more, a varied pro- 
 duction creates a larger abundance of goods. When few 
 goods are produced many productive agencies lie idle. If 
 we produce only cereals, garden-fruits, and vegetables, 
 the cranberry-swamps are not utilized. The same crop 
 will not grow on all kinds of land. Land good for wheat 
 may not be good for oranges. A variety of crops must be 
 grown if the great variety of soils be utilized. Further- 
 more, it is unwise to plant the same field to one crop year 
 after year. The scientific rotation of crops keeps the 
 land fertile. Thus we must have a variety of crops in 
 order to utilize the different qualities of land, and a rota- 
 
Desire, Desirability 103 
 
 tion of crops on the same field in order to secure the proper 
 utilization of the soil. 
 
 The different agencies of our productive capacity must 
 be utilized in order that we may employ a variety of labor 
 and managerial talent. When industry affords opportuni- 
 ties to the different varieties of productive labor and tal- 
 ent, the better it is for each and all. It is waste to have a 
 part of the productive energy idle. A varied production, 
 moreover, educates the people with respect to the co- 
 operative advantages of numerous industries working to- 
 gether. It shows the mutual benefits to be derived from 
 the interrelationship of industries, from a division of labor 
 and specialization. A varied production is conducive to 
 the development of inventive genius, thus furthering pro- 
 ductive capacity through new industrial processes and a 
 higher utilization of human skill and resources. Because 
 varied desires cause variety in production, we are furnished 
 with the secret of the complexity of modern productive 
 processes. 
 
 8. " The Cost of ffigh Living."— The cost of high liv- 
 ing is a coined phrase which expresses the theory that the 
 present high level of prices is due to the fact that we come 
 to desire those goods for which we have little productive 
 capacity. If desires are largely directed by the love of 
 ostentation; if our energies are turned from the cheap and 
 abundant to the rare and exclusive, fewer necessities are 
 produced and prices are raised. There is much truth in 
 this theory in a society where wealth rather than brains 
 set the style. The love of ostentation finds gratification 
 in the consumption of only those goods which are beyond 
 the means of the average person. It takes much wealth 
 to buy diamonds and other objects of exclusiveness. The 
 
104 Introduction to Economics 
 
 rich too often refuse to associate with those who are not 
 properly trade-marked with the required symbols. But 
 the possessors of wealth are highly regarded and the poor 
 desire their association. To enjoy this association the 
 poor must buy jewels when they should buy bread, and 
 automobiles when they should buy work-animals. To the 
 extent that production is given to luxuries it is denied 
 to necessities. This causes necessities to be scarce and 
 high-priced. 
 
 9. Desires and Ultimate Wealth. — ^The kind of goods 
 desired largely bespeaks the ultimate wealth of a society or 
 individual in yet another way. Is one's desire for beer or 
 music, for a big dinner or a good book, for tobacco or a 
 painting, for the temporary means of present gratification 
 or for the durable means of permanent gratification ? 
 The glass of beer can be enjoyed by only one and the 
 music by many; the big dinner is consumed once for all, 
 but the book can be read in turn by any nimiber; the to- 
 bacco goes up in smoke, while the painting remains a 
 source of gratification for the lovers of art. The same pro- 
 ductive energy back of the temporary means of gratifica- 
 tion would, in the end, yield far more enjoyment if turned 
 to the more durable means of gratification. 
 
 Again, do we desire to use the music, the book, and the 
 painting in private, or are we willing to share the use of 
 these with others ? The private use of these is denied to 
 the many, but a thousand may enjoy the same open-air 
 concert, or the same book in the public library, or the 
 same painting in the public art collection. This suggests 
 Certain difficulties not in the: present order of discussion. 
 However, under existing conditions we do share many of 
 these goods in common. Of course, art galleries, libraries, 
 
Desire, Desirability 105 
 
 and the like are examples of this; these are in the nature 
 of unearned increments for every one who utilizes them. 
 
 ID. Desires and Association of Ideas. — As a social being 
 man's desires are influenced by the association of ideas. 
 This is exemplified in the change of fashions. The classes 
 of society tend to go in groups and to follow the leaders. 
 Those things which the leaders wear, eat, or otherwise 
 enjoy, the followers strive to obtain. 
 
 When a style of dress becomes "common," and is worn 
 by the lower classes, it is discarded by the fashionable 
 people. Fashions that are absolutely repulsive at first 
 will often be adopted if they are introduced by popular or 
 noted persons. From his excesses Hemry VIII became a 
 bloated figure in the latter part of his life, and the aris- 
 tocracy stuffed their clothing to imitate his size. Queen 
 Elizabeth had auburn hair, and the ladies of fashion 
 sought for a dye that would turn their hair to the aris- 
 tocratic shade. 
 
 To use an example from Halleck's Psychology: When, 
 negligee hats first made their appearance, a shrewd hatter 
 sent for a very popular and well-dressed collegian and 
 offered him his choice of the best hats in the store, if he 
 would wear a negligee hat for three days. He objected to 
 making such an exhibition of himself, until he was flat- 
 tered by the hatter's wager that the hats could in this 
 way be made the fashion for the entire town. When the 
 collegian first put in his appearance on the campus with 
 the hat he was guyed for its oddity. Later in the after- 
 noon some of his friends concluded that the hat looked so 
 well that they would invest. On the following day large 
 numbers reached the same conclusion. For some time 
 after this the hatter found difiiculty in keeping a sufficient 
 
106 Introduction to Economics 
 
 supply in stock. Had an unpopular or poorly dressed 
 man appeared first on the campus with that hat, the result 
 would have been the reverse. The hat would have been 
 the same, but the association of ideas would have differed. 
 
 A knowledge of the power of the association of ideas is 
 of the utmost importance in business. One man has his 
 store so planned that all its associations are pleasing, from 
 the manners of the clerks to the fixtures and drapery. 
 Another store brings up unpleasant associations. A busi- 
 ness man was about to employ a young man for an impor- 
 tant position, when one day the elder chanced to catch 
 sight of him in questionable company. The law of con- 
 tiguity henceforth brought up this company whenever 
 the young man was thought of, and he failed to secure 
 the position. 
 
 II. Altruistic desires have a profound influence on the 
 economic conduct of men. This is especially true in an 
 advanced stage of civilization. There are broader traits 
 of character than a selfish desire for wealth. We strive 
 for personal economic advantage, but we are guided by a 
 feeling of duty, and if we disobey this feeling our own 
 conscience condemns us. We fear contempt and desire 
 personal honor, also we obey the inward command to be 
 right. We are social beings with imagination and sjon- 
 pathy. We think, remember, observe, and are troubled 
 by the distress of others. It is in our nature to have altru- 
 istic desires and to spend our substance and labor to 
 gratify them. Orphan asylums, one hundred and fifty 
 millions for the Red Cross, homes for the aged, societies 
 for the protection of children and of animals represent 
 economic activity of the altruistic type. Desire and striv- 
 ing to improve the economic order of the world are con- 
 
Desire, Desirability 107 
 
 stantly increasing in scope and depth. The teachings of 
 those who would limit economics to the selfish getting and 
 using of wealth are fruitless, because their concept is one 
 of unreal simplicity. 
 
 Economic desires are also altruistic with respect to suc- 
 ceeding generations. We follow an economic policy, in- 
 definite and crude, perhaps, toward sounder economic con- 
 duct and greater well-being for the future. We desire -to 
 transmit a richer world than the one we have inherited 
 from the past. Desires of this kind largely guide legisla- 
 tion of an economic nature, such as vast public expend- 
 itures for social and industrial improvement. Selfish desires 
 for private acquisition and desires for a fuller productive 
 capacity are both encompassed in the science of economics. 
 
 12. Desires and Wants. — "Two pounds of tea," says 
 Hearn, "were presented to Charles II as a present worthy 
 of a king. A century afterward the steady perseverance 
 of the Americans in abstaining from their unjustly taxed 
 tea was rightly regarded as the most remarkable case of 
 self-denial that history records." And Bastiat says: "It is 
 a phenomenon well worthy of remark, how quickly, by 
 continuous satisfaction, what was at first only a vague 
 desire quickly becomes a taste, and what was only a taste 
 is transformed into a want, and even a want of the most 
 imperious kind." A desire to see the World Series, how- 
 ever, cannot be termed a want. We want for things nec- 
 essary to our state of being. If the educated or the wealthy 
 are suddenly reduced by misfortune, they want for things 
 which the ignorant and the poor would regard as luxuries. 
 Habits of life determine wants; changing habits transform 
 mere desires into wants. Habits are confirmed and wants 
 are created by the continuous gratification of desires. 
 
108 Introduction to Economics 
 
 Painful desires or wants arise when the requirements of 
 habits are denied. We desire for both luxuries and neces- 
 sities but we never want, in the true sense of that word, 
 for luxuries. 
 
 13. Necessities. — Luxuries are economic goods or ser- 
 vices which are not necessities, whereas necessities are 
 those goods the lack of which would occasion wants or 
 painful desires. We may classify necessities as absolute, 
 acquired, and conventional. Absolute necessities include 
 warmth, shelter, and food, which are necessary to the 
 maintenance of life. Acquired necessities include items 
 like tobacco. In estimating the necessary outlays of the 
 laborer who uses tobacco, it would be an error not to take 
 account of his expenditures for tobacco, because he would 
 deny himself other and much needed goods rather than be 
 deprived of it. Conventional necessities include goods of 
 a quality and style which are in keeping with one's social 
 ranking. The minister is not expected to appear in the 
 coarse clothing of the day-laborer. The doctor or dentist 
 is socially ostracized whose instruments and office equip- 
 ment are below a certain grade of elegance. Those goods 
 are necessities which accord with one's station in life. Ac- 
 quired and conventional necessities must form a part of 
 the expenditures of the class concerned. The more one is 
 forced to spend for these the less he will have to spend for 
 other goods. Instructors are hard put to it at times be- 
 cause they are compelled to dress and maintain quarters 
 which would be in keeping with a larger income. 
 
 14. Repressibility of Desires. — Our most irrepressible 
 appetites are for the common necessities of life. These 
 we will have, whether our income be large or small. De- 
 sires for the primary necessities, however, are most quickly 
 
Desire, Desirability 109 
 
 satisfied. It is all but impossible to repress the craving: 
 for food, yet the desire for food is quickly gratified. On 
 the contrary, our most repressible desires are our most 
 insatiable desires. There is no end to our desires for com- 
 forts of the higher form, yet if forced to economize we cut 
 down on the consumption of these first. 
 
 15, The standard of life is but a level of consumption. 
 The habits and requirements which prevail in society call 
 for a rather definite standard of consumption. These hab- 
 its and requirements undergo gradual change, because they 
 result from natural and social influences which are slowly 
 modified through long periods of time. The quantity and 
 variety of food, clothing, and shelter, the standard of 
 public utilities required, the provision for sanitation, recre- 
 ation, education, and protection, roughly measure the eco- 
 nomic standard of Ufe. Man's consumption is limited by 
 his income, but his level of consumption is his standard of 
 life, therefore, his income determines his standard of life. 
 The forces operating on income, then, are the forces which 
 fix this standard. The forces operating on income are two; 
 man and his surroundings. These forces adjusted to each 
 other constitute productive capacity. Land may be fer- 
 tile and resources abundant, yet if the man element is 
 weak or poorly adjusted to its surroundings, a low income, 
 consequently a low standard of life, must prevail. Con- 
 versely the man element may be skilful, strong, and of 
 superb moral character, yet, if resources are wanting, a low 
 standard must prevail. Low production and a low stand- 
 ard, and high production and a high standard always 
 accompany each other. 
 
 We have seen that desire is the motivating force of pro- 
 duction, but another fact of primary importance is that 
 
110 Introduction to Economics 
 
 production or income is limited by productive capacity. 
 Furthermore, while desire stimulates production it invari- 
 ably outruns production; we always desire more than we 
 produce. Then, desire causes the standard to be as high 
 as it is and the limits of productive capacity cause it to 
 be as low as it is. In other words, the standard of life is 
 determined by two forces; desire and productive capacity. 
 This illustrates the interaction of economic phenomena. 
 A given state of being is the result of a tendency or pre- 
 vailing direction of motion of a number of forces which, 
 individually, would operate in different directions. 
 
 Do higher desires cause a large production of income, 
 or does the consumption of a larger income give rise to 
 higher desires? The answer, in keeping with the above 
 reasoning, is that these phenomena interact; both are re- 
 quired for economic advance. Although limited capacity 
 holds the income in check, it must not be overlooked that 
 desire is fundamental to production. 
 
 i6. The Notion of Scarcity. — In the economic sense 
 there is no such thing as scarcity apart from either a desire 
 or a need. Fewness and scarcity are not synonyms. 
 There are few mud-holes in dry weather, but they are not 
 scarce in the economic sense, there being neither desire 
 nor need of them. If there are few blacksnakes, they are 
 not scarce. Any economic good, on the contrary, is 
 scarce, for if it were not scarce it would be a free good and 
 not an economic good. Goods are said to be scarce so 
 long as our desires or needs are not fully gratified with 
 respect to them. Should we add loaf after loaf to the 
 supply of bread until bread became as common as leaves 
 on the ground, then there would be no scarcity of bread. 
 But bread is scarce so long as desires and needs are not 
 
IksirCj Desirability 111 
 
 fully gratified. Then we cannot detennine the scarcity of 
 a thing by the amount of it; rather scarcity is measured 
 in subjective terms. Regardless of the amount, if there 
 be a desire or need for a particular commodity it is scarce. 
 There are degrees of scarcity (scarce, scarcer, scarcest), 
 corresponding to the strength of the desire or need. 
 
 17. Desirability is the quality of goods or services which 
 is calculated or fitted to excite a wish to possess. Many 
 economists employ the word utility in the sense which I 
 have defined for the word desirability. Desirability is 
 preferred in this book for two reasons: it expresses ac- 
 curately the meaning intended, whereas utility is burdened 
 with so many definitions as to have no one distinct mean- 
 ing. Goods having desirability may be positively harmful, 
 may detract from the well-being of the user. Goods hav- 
 ing this quality may or may not serve our needs, but they 
 always serve our desires. Desirability changes with respect 
 to persons, occasions, times, and the condition of supply. 
 The painting has desirability for the lover of art, but it 
 can excite no wish to possess in the mind of the savage; 
 the desirability of formal attire is greater on formal occa- 
 sions; present goods have, with few exceptions, a higher 
 desirability than future goods; and bread has a higher 
 desirability when scarce than when abundant. In any 
 case the desirability of a good is determined by two things 
 — the strength of the desire to be met and the fitness of 
 the good to meet the desire. 
 
 18. Utility must not be confused with desirability. 
 These concepts may be used interchangeably at times 
 without harm, but under other conditions they are anto- 
 nyms. Utility is a social rather than an individualistic 
 concept; it is an objective quality of goods or services. 
 
112 Introduction to Economics 
 
 Utility is that quality or fitness of things to promote and 
 serve well-being. There are blessings in disguise; our 
 needs are administered to and our well-being promoted by 
 things which we neither desire nor understand, even by 
 things which we would avoid as distasteful to us. ^Esop 
 said: "We would often be sorry if our wishes were grati- 
 fied." It is not utility but desirability, the fitness to 
 excite a wish to possess, which directly introduces the 
 value problem. 
 
 19. Diminishing desirability expresses the elementary 
 principle that if the quantity of shoes, tea, or any other com- 
 modity increases, its total desirabiHty increases at a dimin- 
 ishing rate. An example will make this clear: Let us sup- 
 pose that a caravan travelling through a desert has one 
 pint of water. With great saving and extreme economy 
 the traveller can perhaps survive upon this limited amount. 
 What is its desirability for him? Being indispensable to 
 life, its desirability is immeasurable. Add a second pint 
 to the supply and it will have great desirabihty, although 
 it is not absolutely essential for the preservation of life. 
 If there be added a third, fourth, and on down to the 
 twentieth pint, he will have, let us assume, a sufficiency. 
 The undesirabiUty of carrying another pint would be near 
 the equivalent of its desirability. Thus we see that by 
 adding to the amount the total desirability increases at a 
 diminishing rate. 
 
 20. The Equal Desirabilities of Units. — Then, considered 
 as a whole, all desires are insatiable but any one desire, as 
 the desire for water, may be fully satisfied and cease to 
 exist. Another observation is that each like unit which is 
 added to a supply causes the desirability of each other 
 unit in the supply to be lowered. For instance, the trav- 
 
Desire J Desirability 113 
 
 eller through the desert may start with two pints of water, 
 and if to these he adds a third, fourth, and fifth pint he 
 will not appraise the two pints so highly as if the supply 
 had not been increased. Suppose that the five units in 
 his possession are alike in all respects, no one of them 
 could be more desirable than any other. Each of the 
 units in his supply has a desirability equal to that of any 
 other. Put as a general proposition: Like units in the 
 same supply at the same time are of the same desirability. 
 
 Crusoe had four guns, and assume that these were ex- 
 actly alike. Can we say that any one of these had more 
 desirability for him than any other? Certainly not. To 
 provide himself with animal food and to keep off the 
 beasts of prey, it was absolutely essential that he have a 
 gun, but it was not imperative that he have more than 
 one or two. It would have been fortunate for him could 
 he have exchanged a gun for food or clothing. This exam- 
 ple teaches us: (i) that the like units of a supply are of 
 equal desirability, (2) that the larger the number of units 
 in a supply, the less is the desirability of any one of the 
 units, (3) that we can measure the desirability of any one 
 unit, as when we wish to exchange it for another good. 
 But it must be dear that we cannot reason relative to the 
 total desirability of a supply in the same way that we rea- 
 son relative to one or more units in the total supply. 
 Crusoe might well have sold a gun for the price of one 
 bushel of grain, but it does not follow that it would be wise 
 for him to exchange the four guns for four bushels. In 
 the former case he would profit by the trade; in the latter 
 he would be without the means of protecting his life. 
 
 21. Total Desirability. — Suppose that our caravaner 
 would be willing to sell any one of his pints of water for 
 
114 
 
 Introduction to Economics 
 
 ten cents, does it follow that he would be willing to sell 
 the twenty pints for two dollars? On first thought one 
 would say that since the different pints are of the same 
 desirability it would follow that if one pint is worth ten 
 cents, twenty pints must be worth twenty times ten cents, 
 or two dollars. This is good arithmetic but poor eco- 
 nomics. Should the caravaner dispose of his total supply, 
 he would die for want of water. Needless to say, he would 
 not sell it at any price. This makes it clear that the de- 
 sirability of a unit of the supply multiplied by the number 
 of units in the supply does not give the total desirability 
 of the supply. Then, how may we calculate the total 
 desirability of a supply? It is evident that if the first 
 pint be subtracted from the supply the remaining nineteen 
 will each have a higher desirability, and, further, that the 
 desirability of the remaining pints would be increased by 
 the subtraction of the second, third, etc. In order to 
 attain the total desirability of a supply we may assume 
 that one unit at a time is subtracted in succession, and 
 that the desirabilities of each unit are added. 
 
 22. Graphic illustration of the equal desirabilities of dif- 
 ferent units at a given time in a total supply. 
 
 ^12348678 9 10 U i» 13 I'ti's 16 ir 18 19 M-^ 
 
 Figure i 
 
 The parallelogram A, B,C, D pictures the situation of 
 twenty units at a given time in a homogeneous supply. 
 The perpendicular lines are of equal length and each repre- 
 sents the desirability of a unit. 
 
 Since each unit in the supply has the same desirability 
 
Desire, Desirability 
 
 115 
 
 as any other unit, the length of the lines representing 
 these must be equal to one another. This figure, however, 
 does not picture the total desirability of the supply. 
 
 As above pointed out, the total desirability is obtained 
 by a succession of subtractions, each of which increases the 
 desirabilities of the remaining units. 
 
 23. Graphic illustration of the desirabilities of units at 
 different times, showing how they increase as the supply 
 is diminished. 
 
 FlGUKE 2 
 
 In the case above assumed (paragraph 21), it would be 
 found, as shown in Fig. 2, that by subtracting unit after 
 unit from D, C toward A, B, the desirabilities increase 
 until they become immeasurable. In this case the total 
 desirability would be immeasurable. Of course, we are 
 assuming an extreme case, but oftentimes a principle is 
 better grasped when presented in its extreme form. 
 
 24. Marginal desirability is the desirability of the last 
 added portion of a supply. But the last added portion 
 has the same desirability as any other like portion, there- 
 
116 Introduction to Economics 
 
 fore the marginal desirability is the desirability of a por- 
 tion or unit of the supply. In case of freely reproducible 
 goods, and these are most characteristic of the market, 
 marginal desirability is equal to the benefits which must 
 be foregone in acquiring them. Assume that a housewife 
 is making out an order to Sears, Roebuck & Co. for a supply 
 of soap which is priced at five cents a cake. How much will 
 she order? She would probably give a dollar for a cake 
 rather than be denied the use of soap. It goes without 
 saying that the desirability of a cake of soap is so much 
 stronger than the desirability of retaining the five cents 
 for buying something else that she decides to make the 
 purchase. A second, third, fourth, and on down to the 
 nineteenth cake, let us assume, have each a higher desira- 
 bility for her than has the alternative use of the five cents. 
 Whether to buy the twentieth cake gives her concern. 
 She will buy the twentieth cake if its desirability be but 
 a small fraction above that of five cents. The twentieth 
 cake reaches the marginal point where the cost or unde- 
 sirability comes to equal the desirability. 
 
 23. The Tendency to Equality of Marginal Desirabili- 
 ties. — Marginal desirability is an individual matter, vary- 
 ing from person to person, and the tendency of desirabili- 
 ties of different supplies for any one person is toward 
 equality. The housewife did not stop with a supply of 
 twenty cakes because she desired no more soap, for had 
 the price been four cents, she would probably have bought 
 twenty-five cakes. Nor did she so limit her supply be- 
 cause she wished to save the five cents. She ceased to 
 buy soap because she could gratify a more intense desire 
 by spending the five cents for something else. It is a part 
 of human nature so to spend means as to gratify the most 
 intense desire. Rather than buy more soap, a housewife 
 
Desire J Desirability 117 
 
 will buy fruit, buttons, sugar, or coffee. How much of 
 each of these goods will she buy? She cannot buy all the 
 things which have desirability for her; she must draw the 
 line somewhere. She will so distribute her expenditures 
 among the several goods as, in her judgment, to secure the 
 maximum desirability. The more she buys of some goods, 
 the less she can buy of others. Her expenditures in the 
 several lines are limited by a boundary-line^ drawn through 
 the different points of marginal desirability. Her expen- 
 diture for sugar limits the amount she can spend for coffee 
 or any other good. Her different desires are supplied by 
 a transfer of money from other lines of expenditure. She 
 ceases to spend money on any good the moment that she 
 can secure a higher desirability by transferring her pur- 
 chasing power to some other class of goods. Her transfer 
 of money from one class of goods to another, in her attempt 
 to secure the greatest total desirability, tends to equalize 
 the marginal desirabilities of different classes of goods. 
 
 26. Graphic Illustration. — ^Let A, B, C, D, and E, in 
 Figure 3, represent five classes of goods. Let the Arabic 
 figures represent the desirability of different units. Let S, T 
 
 represent the line of satiety, 
 and M, N the line drawn 
 through the different points 
 of marginal desirability. It is 
 seen that the housewife's de- 
 sire is to transfer her expendi- 
 ture so as to secure the 
 maximum desirability, and 
 that by so doing she has 
 iGUKE 3. brought about an equality 
 
 with respect to the marginal desirabilities of the several 
 lines of supply. The tendency is always to secure this 
 
 : A 
 
 B 
 
 C 
 
 D 
 
 E 
 
 - 
 
 . 
 
 
 
 
 11 
 
 : 10 
 
 
 
 10 
 
 10 
 
 
 : 9 
 
 
 9 
 
 9 
 
 9 
 
 
 : 8 
 
 8 
 
 8 
 
 8 
 
 8 
 
 
 : 7 
 
 7 
 
 7 
 
 7 
 
 7 
 
 
 : 6 
 
 6 
 
 6 
 
 6 
 
 6 
 
 
 M:. .5 
 
 5 
 
 5 
 
 6 
 
 5 
 
 
 s:.... 
 
 
 
 
 
 
 
 
 
 
118 Introduction to Economics 
 
 equality, although it is rarely attained, in fact never attained 
 among the poor. Now, should we assume that she desires 
 to buy some other goods, say F, G, and H, it is at once 
 evident that, other things equal, she will have less to spend 
 on ^, B, C, D, and E. Her supply of each of these will 
 be less, or, what is the same, their marginal desirabilities 
 will be raised. Thus we see that each line of goods limits 
 the supply and increases the marginal desirability of every 
 other class of goods. If we did not have to buy bread we 
 could buy more clothing, and if houses were free goods we 
 could spend more for automobiles; every line of goods is 
 competing, in a sense, with every other line of goods. We 
 shall see later on how a proportion and balance of all classes 
 of productive industries are worked out in keeping with 
 the relative market prices. 
 
 27. Examples of Marginal Desirability. — The purpose of 
 this paragraph is to answer some questions which, through- 
 out my teaching experience, I have found bothersome to 
 beginners. Goods have marginal desirabilities, to be sure, 
 whether they are for keep or for sale. But the comparison 
 of marginal desirabilities of goods which one has to offer 
 with that of the goods which he may purchase, is primary 
 to an exchange. Marginal desirability is truly a basic con- 
 cept in exchange. 
 
 (a) I have been asked a number of times how to dispose 
 of the marginal desirability of free goods in our exchange 
 economy. The answer is that a free good exists in such 
 abundance that its marginal desirability is zero. In fact, 
 it has no marginal desirability. Only scarce goods have 
 marginal desirability and only such goods enter into an 
 exchange economy. 
 
 (b) It was my privilege recently to converse with Mr. 
 
Desire, Desirability 119 
 
 N. G. Kidd, a pioneer of western Ohio, who was within 
 three months of the marvellous age of one hundred years. 
 His vivid memory of happenings in youth gave deep in- 
 terest to his reminiscences. He remarked that while on 
 his way from Virginia to his new abode he had travelled 
 some days with horse and drag-sled, when it became neces- 
 sary to use his axe. He was keenly disappointed to find 
 that it had been left behind. Leaving his young sister 
 with the horse and load, he journeyed back four days to 
 get the axe. The desirability of the axe to the frontiers- 
 man is all but immeasurable. Did this axe, the only unit 
 of the supply, have marginal desirability for him? The 
 student's answer is generally in the negative. But most 
 assuredly it did have marginal desirability, and that, too, 
 in the highest degree. It is only for the purpose of illus- 
 tration that economists speak of unit after unit being 
 added to a supply. The one unit of a supply has mar- 
 ginal desirability. This marginal desirability is equal to 
 the strength of the desire which would be defeated were 
 the article lost or otherwise removed. 
 
 (c) A student put this question in class: "In case one 
 has fifteen tons of coal in the cellar or a hundred bushels 
 of apples in storage, does any one unit hold a marginal 
 place in the supply?" He was answered in the negative. 
 "Then," he continued, "if there is no marginal item there 
 can be no marginal desirability." In reply one may say 
 that in a homogeneous supply any unit may be considered 
 marginal in the sense that the desire defeated by the loss 
 of it is precisely the same as that occasioned by the loss of 
 any other unit of the supply. 
 
 All scarce goods have marginal desirability; it makes no 
 difference whether we consider a succession of units added 
 
120 Introduction to Economics 
 
 one after another, or a stock of goods on hand, or a supply 
 consisting of a single unit. 
 
 {d) Another and difficult query: Does a dollar serve as 
 a common measure of marginal desirability? The answer 
 is most emphatically in the negative. Marginal desira- 
 bility is an individual matter. There may be as many 
 marginal desirabilities as there are buyers and sellers. A 
 dollar has a different significance to the rich and to the 
 poor, to the spendthrift and to the miser. Assume that 
 two men, one rich and the other poor, are in the market 
 for a horse. The circumstances of the poor man may be 
 such that a horse would have double the desirability for 
 him as for the rich man, yet the latter may be willing to 
 pay $200 whereas the former would pay not more than 
 $100. The pressing need for alternative goods may for- 
 bid the poor man offering more, whereas the wealthy pur- 
 chaser could expend $200 without denying himself any 
 felt necessity. To these men the marginal desirability of 
 a dollar is vastly different. To take a different supposi- 
 tion: The marginal desirability of a dollar may be ten 
 times as great for the poor boy as for the rich man's son, 
 yet both may be marginal buyers, that is, barely willing 
 to pay a dollar, say, for a ticket to a ball-game. How 
 account for the fact that these boys, one estimating a piece 
 of money ten times as high as the other, are both marginal 
 buyers of the same thing at the same price? Neither, in 
 this assumption, would pay a penny more than a doUar for 
 the ticket— both are strictly marginal buyers at the price 
 of a doUar. The explanation, and the only one, is found 
 in this: the marginal desirability of the game is ten times 
 as great for the poor as for the rich boy. If the dollar 
 and the game have each one unit of desirability for the 
 
Desire, Desirability 121 
 
 rich boy, they must each have ten units for the poor boy. 
 The equality of ratios between the alternative good to be 
 bought with the dollar and the game is the only sense in 
 which the marginal desirabiUties of these boys are com- 
 parable. Throughout the market the marginal desirabili- 
 ties of different classes of purchasers are comparable only 
 in the sense of the equality of ratios. It is in the sense of 
 the equality of ratios that different classes are brought 
 together as marginal buyers in the same market at the 
 same price. 
 
 28. Exercises. — i. What is the connection between intel- 
 ligence, desire, and effort? 
 
 2. What reasons can you give for the fact that, as a 
 rule, one's desire for the present possession of a good is 
 stronger than the desire for the future possession of it ? 
 
 3. What is meant by the principle of harmony in con- 
 sumption? Give an example of how the purchase of one 
 thing calls for the purchase of other things in each of the 
 following: buying a rug, a gun, a pen, an engine, a horse. 
 
 What other industries have benefited by the great de- 
 mand for automobiles within recent years? 
 
 4. Would the "simple hfe," causing a desire for only a 
 few simple goods, bring about a larger or a smaller pro- 
 duction of goods than we now enjoy? (Review para- 
 graphs 7 and 8 before answering this.) 
 
 5. Give two examples— the one to show how a business 
 house has been prospered, and the other to show how a 
 business house has been injured through the association of 
 ideas. 
 
 6. Give two examples of large expenditures during the 
 World War to gratify the altruistic desires of the people. 
 
 7. What is meant by the standard of life? By what 
 forces is it determined ? 
 
 8. "Fewness and scarcity are not synonyms." (Para- 
 graph 16.) Tell why. 
 
122 Introduction to Economics 
 
 g. Desirability and utility are not synonyms. (Para- 
 graphs 17 and 18.) Define each of these terms in your own 
 words. 
 
 10. By adding ton after ton to my supply of coal, the 
 total desirability increases at a diminishing rate. What 
 principle is involved in this statement ? Show the relation- 
 ship between this principle and that of the equal desirabil- 
 ity of units in a supply of like goods. 
 
 11. Define marginal desirability. 
 
 By means of the principle of marginal desirability, ex- 
 plain the following: 
 
 (a) The housewife, in the above example (paragraph 24) 
 stopped with the purchase of the twentieth cake of soap, 
 although she desired many more. If the price had been 
 reduced from five to four cents a cake, she would have 
 purchased twenty-five cakes. 
 
 (b) One enjoys the maximum desirability by maintain- 
 ing an equality, so far as he can, of the marginal desirabili- 
 ties of the different goods he buys. 
 
 (c) An essential, such as bread, is worth less than a 
 luxury, such as a diamond. 
 
 (d) One ordinarily attributes no value to air. 
 
 (e) A part may be worth more than the whole; for by 
 destroying a portion the remainder goes up in price. 
 
 (/) In a fair trade, both parties are benefited. 
 
CHAPTER VII 
 MARKET AND PRICE 
 
 I. What is a market? 2. Examples of a market. 3. Transportation 
 extends the market. 4. Wheat is sold in a broad market. 5. Transporting 
 costs taken into account. 6. The demand at Liverpool. 7. The com- 
 munication of information. 8. Market ratios and price. 9. The market 
 price at equating-point between market supply and market demand. 10. 
 The problem of price. 11. The price level. 12. Price-making. 13. Con- 
 ditions of price-making: (I) One seller without a marginal limit. (11) One 
 seller with a marginal limit. (Ill) A number of sellers with marginal 
 limit. (IV) Two-sided competition. 14. Exercises. 
 
 1. What Is a Market? — In common parlance we have 
 "the world market," "the American market," "the New 
 York market," " the New Orleans market," etc. These ex- 
 pressions signify place as essential to the definition of a 
 market. Again we have " the wheat market," "the money 
 market," "the cotton market." These expressions centre 
 around the idea of a particular commodity. We debate 
 the advisability of establishing a "central city market" to 
 which farmers may bring their various products and dis- 
 pose of them direct to the consumers. Here the word 
 market signifies the coming together of buyers and sellers 
 with respect to a number of different commodities. The 
 word market is abused by such a variety of uses that we 
 spare space to give it precise definition. 
 
 The word market does not signify any particular place 
 nor does it refer to a group of commodities indiscriminately. 
 It means an agreement within a group of exchangers as to 
 the price of a -particular species of commodity. It will be 
 seen that there is no such concept as a demand for or a 
 supply of a group of unlike commodities. Supply and de- 
 
 123 
 
124 Introduction to Economics 
 
 mand refer to one species of commodity, cotton, for 
 instance, at a uniform price. The adjustment of sup- 
 ply and demand takes place in a market, therefore one 
 market embodies one species of commodity and one group 
 of exchangers. In one market are found all of the influences 
 of supply and demand which converge toward a uniform 
 price. Due allowance in price must be made in all cases 
 for costs of transit which are occasioned by differences in 
 the physical location of the goods marketed. 
 
 It is a matter of no consequence whether the buyers and 
 sellers of a species of commodity live in the same village 
 or in different continents, they belong to the same market 
 by virtue of the fact that they buy from and sell to each 
 other. In the market goods may be sold by actual exhibit, 
 or by sample, or by mere description. The traders in a 
 market may meet face to face or be on opposite sides of 
 the water. They may make their offers and bids by word 
 of mouth, by symbol, by wire, or by any other means. It 
 has no bearing on the definition of a market whether a 
 commodity be controlled by an absolute monopoly or sub- 
 ject to unrestricted competition. Many writers deny that 
 there is a market where competition is restricted. But if 
 a monopoly product like anthracite coal is not sold on the 
 market, then where is it sold ? 
 
 2. Examples of a Market. — ^There are as many markets 
 as there are groups of exchangers. A manufacturer sells 
 one hundred dozen hats of the same grade to a wholesaler. 
 The wholesaler resells to twenty jobbers; the jobbers resell 
 to two hundred retailers; the retailers resell to a thousand 
 consumers. This is an example, not of one but of four 
 markets. 
 
 There are as many markets as there are differences of 
 
Market and Price 125 
 
 price after allowing for costs of transportation, freights, 
 deterioration, insurance, and the like. One market implies 
 imiformity in the grade ofifered for sale. It is obvious that 
 if a vender offers different portions of his supply at differ- 
 ent prices the purchasers wiU buy at the lower price. 
 There would be no demand at the higher asking price and 
 a keen demand at the lower, the effect of which would, of 
 course, result in a common uniform price. Suppose, now, 
 that the manufacturer sells fifty dozen hats to a whole- 
 saler in Winnipeg at one price, and that he makes a simi- 
 lar sale to a wholesaler in Memphis at a different price; 
 each of these sells to twenty jobbers (both sell to forty 
 jobbers), charging each jobber a different price from all 
 the others. Each jobber sells to ten retailers, charging no 
 two the same price (aU jobbers thus sell to four hundred 
 retailers). How many markets are here indicated? In 
 this example we have two prices as between the manufac- 
 turer and the wholesalers, which means two groups of 
 exchangers and two markets; as between the wholesalers 
 and jobbers there are forty markets, and four hundred 
 markets between the jobbers and the retailers. This 
 totals four hundred and forty-two markets. 
 
 Another example is needed: The manufacturer of "Mrs. 
 Blank's Face-Cream" maintains a restricted price policy. 
 He widely advertises the retail price of his article at 50 
 cents. He sells without discrimination, large lots and 
 small, to fifty wholesalers at 30 cents; he requires the 
 wholesalers to seU to retailers at a fixed price of 40 cents 
 and a thousand sales are made to retailers; the retailers 
 seU at a maintained price of 50 cents to ten thousand con- 
 sumers. Here we have three and only three markets. 
 
 Briefly stated: A market means an agreement between 
 
126 Introduction to Economics 
 
 buyers and sellers with reference to the exchange of a 
 species of commodities at a uniform price, with allowance 
 for costs of transit. Like goods in a given market at the 
 same time sell at the same price. 
 
 3. Transportation Extends the Market. — If there were 
 no transportation facilities each producer would be com- 
 pelled to dispose of his wares in the immediate vicinity of 
 their production. Transportation extends the boundaries 
 of a market, without respect to political boundaries. Ex- 
 tended markets permit the individuals of each community 
 to enjoy a variety of goods coming from the different cli- 
 mates, soils, and deposits of resources. Trade is a means 
 of adjusting our goods to our desires, and the broader the 
 market the more perfect becomes the adjustment of our 
 means to the meeting of our desires. 
 
 4. Wheat is Sold in a Broad Market. — ^The wheat-crop 
 of 1914-15 was the largest crop in the history of this coun- 
 try. One would reason that the price of wheat would be 
 correspondingly low. But, in fact, the price became so 
 high as to alarm the public and make a demand to stop 
 its exportation. How explain this fact? 
 
 Wheat is subject to definite classification according to 
 grade or quality. All traders know exactly what is meant 
 when any particular grade is mentioned, therefore they 
 may intelligently buy and sell wheat, which may be located 
 in any part of the world, or which, in fact, may not be 
 harvested at the time a trade is made. Moreover, wheat 
 is durable, thus making it capable of being transported to 
 any part of the world. Some countries produce a surplus 
 and export wheat, while other countries cannot supply 
 their needs, thus becoming importers. The following 
 tables show these facts: 
 
Market and Price 127 
 
 AVERAGE ANNUAL EXPORTS (1909-1913) OF WHEAT OF SIX 
 PRINCIPAL EXPORTING COUNTRIES 
 
 Country Bushds Country Buskds 
 
 Russia 148,262,700 United States 53,024,700 
 
 Argentina 96,858,600 India 40,711,100 
 
 Canada 65,064,500 Australia 36,670,700 
 
 AVERAGE ANNUAL IMPORTS (1909-1913) OF WHEAT OF SIX 
 PRINCIPAL IMPORTING COUNTRIES 
 
 Country Bushels Country Bushels 
 
 Great Britain and Ireland 191,693,300 Netherlands 63,355,100 
 
 Germany 87,357,000 Italy; 56,302,900 
 
 Belgium 73,422,800 France 34,169,500 
 
 (These tables and the remarks on the wheat market are based on chapter 
 XII of Professor L. H. D. Weld's excellent book, The Marketing of Farm 
 Products.) 
 
 These figures show that the large importers are confined 
 to a small place in western Europe. Liverpool is the trade 
 centre of this consumption area. The exporting countries 
 are in both the northern and southern hemispheres; their 
 crops mature in different seasons. The following table 
 shows the sources of the Liverpool market wheat receipts 
 throughout the year: 
 
 To Liverpool 
 
 in 
 
 January 
 
 from Australia. 
 
 <i It 
 
 tt 
 
 February 
 
 
 Australia, Argentina. 
 
 U 11 
 
 tt 
 
 March 
 
 
 Australia, Argentina. 
 
 U (t 
 
 tt 
 
 April 
 
 
 Argentina. 
 
 11 It 
 
 tt 
 
 May 
 
 tt 
 
 . 
 
 cc tc 
 
 tt 
 
 June 
 
 
 India. 
 
 tt (( 
 
 ti 
 
 July 
 
 
 India. 
 
 ti (I 
 
 11 
 
 August 
 
 
 India, United States. 
 
 it n 
 
 (C 
 
 September 
 
 
 United States, Russia. 
 
 ti tc 
 
 tt 
 
 October 
 
 
 United States, Russia, Canada. 
 
 tt tt 
 
 tt 
 
 November 
 
 
 Russia, Canada. 
 
 tt tt 
 
 tl 
 
 December 
 
 
 Canada. 
 
128 Introduction to Economics 
 
 Wheat may be bought and sold prior to its production, 
 may be transported any distance, may be stored through 
 time, matures at different times throughout the year, and 
 from exporting countries it diverges toward a common 
 centre at Liverpool. What is more natural than that a 
 highly organized wheat market should grow out of these 
 conditions? The Liverpool market may better be termed 
 a world market because in it the influences of supply and 
 demand are international in scope and operate toward a 
 uniform price. 
 
 5. Transporting Costs Taken into Account. — ^The Chi- 
 cago or Minneapolis price of wheat is approximately that 
 of the Liverpool price, minus, of course, the cost of insur- 
 ance, freight, handling, etc. Were the Chicago price ap- 
 proximately as high as the Liverpool price no American 
 would export his wheat. But we produce a surplus be- 
 yond our needs and the competition of sellers pushes down 
 the price, making it profitable to export to Liverpool. We 
 are each year on an "export basis"; that is to say, we find 
 it profitable to export, because we have a surplus. 
 
 6. The Demand at Liverpool. — ^The Liverpool demand is 
 an aggregate of the offers of consumers who buy directly 
 or indirectly through that market. One's demand is in- 
 tense in proportion to his desire, coupled with his ability 
 and willingness to pay. The market demand for wheat is 
 somewhat elastic, for if the price is too high, rye, barley, 
 and other substitutes would be used; smaU variations in 
 price would occasion large variations in the volimie of 
 sales. The demand for foreign wheat would diminish if 
 the importing countries were blessed with a large crop. 
 Or in case these nations are impoverished by war, the de- 
 mand will diminish, because the people will have but lit- 
 
Market and Price 129 
 
 tie purchasing power. A shortage of crop in Russia and 
 Canada will operate to increase the price of wheat from 
 other parts of the world, because prices must be forced 
 high enough to induce a larger shipment from other coun- 
 tries. Liverpool can get wheat in any case only by out- 
 competing the potential buyers in the exporting countries. 
 In 1914-15 the United States and Argentina had a large 
 surplus of wheat. Russia's surplus could not get through 
 the Dardanelles; Canada and India had small crops, and 
 Australia's crop was a failure. There was an international 
 play of forces which brought high prices to the American 
 farmer. 
 
 The suppliers and demanders throughout the countries 
 above mentioned compose a single group of exchangers 
 within which agreements are reached as to the price of a 
 particular commodity. This fulfils all the requirements of 
 a market. The expression, a world market for wheat, is 
 Justified. 
 
 7. The Communication of Information. — We have men- 
 tioned transportation or the movement of commodities as 
 essential to a broad market. But it must be kept in mind 
 that a market implies intimate business relations, a meet- 
 ing of the minds of buyers and sellers with respect to the 
 price of commodities dealt in. The submarine cable brings 
 Liverpool and the Chicago wheat-pit together, and it 
 unites Liverpool and New Orleans with respect to cotton. 
 Conditions of transportation and the communication of 
 infortnation are essential to the idea of a market. These 
 conditions are essential to the converging of influences 
 toward a market price. Without these conditions each 
 community would have its own independent market, but 
 with the perfection and extension of the agencies of com- 
 
130 Introdtiction to Economics 
 
 munication the market broadens. Local markets lose their 
 independence with the broadening and uniting of the com- 
 munity of interests. 
 
 Frequent publications of statistical and other informa- 
 tion bearing upon both the present supply and the prob- 
 able future supply are of great aid to a group of exchang- 
 ers. To the extent that such information is complete, 
 man may reason rather than guess on turns in price. The 
 tendency toward gambling is repressed, and we have the 
 wholesome effect of an approximation toward uniform 
 prices through time. 
 
 8. Market Ratios and Price. — The market ratios of ex- 
 change taken as a whole can, of course, neither rise nor 
 fall. If to-day one ox will exchange for twenty sheep, 
 whereas yesterday one ox exchanged for twenty-five sheep, 
 we must say that relative to the sheep the ox has gone 
 down, or relative to the ox the sheep have gone up. Thus 
 we know, both cannot rise or fall at the same time in 
 relation to each other; and what is true of the ox and 
 sheep holds for all commodities. All commodities cannot 
 simultaneously rise or fall in relation to each other, yet 
 they may rise or fall in relation to any one among the 
 number. If cattle be the species of commodity selected, 
 commodities in general may rise or fall in relation to cat- 
 tle. The exchange ratios of other commodities to one 
 selected commodity are their prices. Prices are generally 
 expressed in terms of money, "yet," says F. A. Walker, 
 "it is equally correct to say that the price of a horse is 
 seventy-five bushels of wheat, as to say that it is $ioo." 
 And we may add that while seventy-five bushels of wheat 
 is the price of the horse, the horse is the price of seventy- 
 five bushels of wheat. In every exchange there are two 
 
Market and Price 131 
 
 prices; if one exchanges his dog for a fighting-cock, the 
 price of the fighting-cock is the dog, and the price of the 
 dog is the fighting-cock. 
 
 Despite the fact that price is the amount of one com- 
 modity given in exchange for another, we usually think of 
 price in terms of money. The money price of a thing is 
 nothing more or less than the amount of money given in 
 exchange for that thing. From childhood we are accus- 
 tomed to the use of money, we think in terms of it, adjust 
 our dealings to it, evaluate commodities in terms of it. 
 We all speak a common language, or know precisely what 
 is meant when talking in terms of money. Money is the 
 one form of wealth generally acceptable in exchange. Its 
 common use and general exchangeability as between all 
 classes in the community make it practical and necessary 
 to speak of prices in terms of money. 
 
 9. The market price, is the equating-point between mar- 
 ket supply and market demand in a market. This mar- 
 ket price tends to bring all individual prices in conformity 
 with itself. If one could market his corn at $1 a bushel 
 he would not seU to his neighbor at 90 cents, and his 
 neighbor would refuse to pay $1.10 could he buy in the 
 market at $1. 
 
 10. The problem of price is to explain the price move- 
 ments which cause goods to be cheap or dear. Business 
 men become expert in forecasting the prices of certain 
 commodities. The cotton-speculator has an office equipped 
 with every device for obtaining information which may 
 affect the price of cotton. As a specialist on cotton his 
 judgment regarding movements in the price of steel may 
 be worth little or nothing. But he has at his finger's end 
 a knowledge of the influences behind the supply of and the 
 
132 Introduction to Economics 
 
 demand for cotton. He knows, for instance, of the prob- 
 able need of cotton for explosives, of changes in fashions, 
 of the use of substitutes for cotton; if there has been a 
 storm in India, or a flood in Brazil, or a boll-weevil pest 
 in Texas, or a shortage of cars, or an attempt to comer the 
 market, or a strike at the cotton-mills, or a blockade around 
 the Liverpool market, he knows both the fact and its 
 probable influence on the price. The business man is 
 interested primarily in one or two commodities and can 
 forecast the prices with surprising accuracy. 
 
 The economist's task goes deeper; he must explain the 
 ultimate forces back of price movements in general. The 
 task of the business man is easier because he searches into 
 the narrow range of facts bearing directly upon his special 
 field of interest. Moreover, he assumes in the beginning 
 fundamental propositions which the economist must prove. 
 The economist approaches this problem through an analy- 
 sis of the ultimate forces behind supply and demand. 
 Also he is compelled to explain movements in the purchas- 
 ing power of money because the prices of goods are ex- 
 pressed in money, and must therefore vary with the pur- 
 chasing power of money. 
 
 II. The price level, or general average of the prices of 
 commodities, if accurately kept through a period of years, 
 is a basis for determining the movements in the general 
 purchasing power of a doUar. But the formulation of 
 price levels through a series of years is in no sense a study 
 of price movements. The prices averaged to obtain a 
 price level simply register the results of former price move- 
 ments. What caused these prices to be as they are? 
 This question puts the problem; it sets the task of a search 
 into the nature and causes of the movements back of 
 
Market and Price 133 
 
 price. There are many careful students who diligently 
 collect price statistics over a period of years and by means 
 of index numbers formulate these data into price levels. 
 This is excellent and needed work. But they delude them- 
 selves by terming it an account or study of price move- 
 ments when, in fact, it is but an accumulation of the 
 effects of price movements. 
 
 12. Price-Making. — In the market demands are made 
 and goods are offered for sale. One observes that trade 
 takes place at prices agreed on in the process. He ob- 
 serves further that higher prices attract more sellers and 
 that lower prices attract more buyers. He sees that when 
 prices are high keen competition among the sellers pushes 
 the price down, and that when prices are low keen com- 
 petition among buyers pushes the price up. What he does 
 not see are the subtle and real but unexpressed marginal 
 desirabilities limiting or fixing the lowest figure below 
 which the sellers will not part with their goods, and the 
 upper limit to the bids of the buyers. Whatever the hid- 
 den facts may be, however, the bald fact stands out that 
 the expressed supply and demand, the actual and disclosed 
 figures of the buyer and seller fix the market price. The 
 market price, as above noted, is the point at which mar- 
 ket supply and market demand are equated. 
 
 13. Conditions of Price-Making. — ^We may briefly out- 
 line the usual conditions under which prices are made.^ 
 
 I. One seller without a limit below which he will not sell: 
 (i) One seller, one non-reproducible good, one buyer. 
 (2) One seller, one non-reproducible good, several buyers 
 (one-sided competition). 
 
 ' Monopoly prices will be discussed in another connection. 
 
134 Introduction to Economics 
 
 (3) One seller, a number of non-reproducible goods, several 
 buyers (one-sided competition). 
 
 II. One seller with a limit below which he will not sell: 
 
 (i) One seller, one non-reproducible good, one buyer. 
 
 (2) One seller, one non-reproducible good, several buyers 
 
 (one-sided competition). 
 
 (3) One seller, a number of non-reproducible goods, several 
 
 buyers (one-sided competition). 
 
 (4) One seller, a number of reproducible goods, a number 
 
 of buyers (one-sided competition). 
 
 III. A number of sellers with a limit below which they will not 
 
 seU: 
 
 (1) A number of sellers, a number of reproducible goods, 
 one buyer (one-sided competition). 
 
 IV. Two-sided competition: 
 
 (i) A number of sellers, a number of reproducible goods, a 
 number of buyers. 
 
 I. One seller without a limit below which he will not sell. 
 (i) If in a forced sale there be one non-reproducible good, 
 such as a rare antique, it is evident that if but one buyer 
 presents himself the price may be made at a very low fig- 
 ure. Something must be allowed for bluff, for a pretense 
 of hidden facts on the part of the seller, and for skill at 
 bargaining. 
 
 (2) But the case will be very different with respect to 
 price if a number of buyers present themselves in compe- 
 tition for the rare antique. Figure i is designed to repre- 
 sent the buyers by the symbols B^, B^, B^. Their maximum 
 subjective offers of $4, $3, $2 are given for the corres- 
 ponding symbols.. The seller has no limit below which 
 he will not sell, but, of course, he is anxious to obtain the 
 largest figure he can. The three bidders may start with 
 
Market and Price 
 
 135 
 
 o 
 
 B' B' B' 
 
 ■Bidders 
 
 FiGUKE I 
 
 IB 
 
 low offers, each bidding above 
 the others until the $2 is reached. 
 Beyond this point B' refuses to 
 go, leaving the competition to 
 B^ and B^. These continue the 
 contest, neither knowing the oth- 
 er's maximum subject offer, un- 
 til B'^'s maximum limit of $3 is 
 reached. The price will fall at 
 
 the point of B^'s last bid, which will be somewhere be- 
 tween $3 and $4. 
 
 (3) In case one seller is forced to sell, for anything they 
 will bring, a collection of antiques (which are approximately 
 the same in all respects) to a number of buyers, a very dif- 
 ferent situation arises. The seller may adopt either of 
 two policies: he may conceal his supply, offering for sale 
 but one unit at a time, or he may offer the total supply at 
 one time. In the former case each transaction will be 
 carried through as indicated in Figure i. But suppose 
 there are five units, five meteoric stones approximately 
 
 equal in all respects, of- 
 fered at one time to six 
 competitors. If we con- 
 struct a figure (Figure 
 2) on a similar plan to 
 that of Figure i, B^ will 
 be first to drop out in the 
 bidding. Now, if we as- 
 sume that one buyer will 
 , , , take one vuiit there will 
 
 B'B^StB'i'B'^ 
 
 SMiderB. be left five buyers for the 
 
 FiGDEE 2 five units. Since all are 
 
 c 
 
 
 
 
 
 
 
 
 $8 
 $7 
 S6 
 »5 
 tl 
 (3 
 
 B 
 
 
 
 
 
 
 
 
 _. 
 
 1 — 
 
 -— ' 
 
 — 
 
 j_ 
 
 A 
 
 
 
 
 
 
 
136 Introdiiction to Economics 
 
 to be sold the price cannot go above $4, because B* would 
 drop out, leaving only four purchasers. The price will be 
 fixed at $4, or between $3 and $4. All of the units would 
 sell at the same price, because at any one time similar 
 units are not treated differently in the market. Like por- 
 tions of a supply in the same market at the same time sell 
 at the same price, regardless of the degree of desirability 
 which may accompany each such portion. If one unit is 
 held for a lower price the competition of bidders will raise 
 its price; if one unit is held for a higher price the want of 
 competition among bidders will lower its price. Free com- 
 petition means uniformity of price under uniform condi- 
 tions. 
 
 //. One seller with a limit below which he will not sell. 
 (i) If the seller of a non-reproducible good, for instance 
 the original production of an old artist, refuses to part 
 with his good for less than $2,000, a sale is conditioned on 
 the payment of that sum or more. Should one buyer with 
 a maximum subjective offer of $3,000 present himself a 
 sale will be made. The price will be fixed at $2,000 or 
 $3,000, or more than likely between these limits. SkiU at 
 bargaining will have much to do with the fixing of the 
 price. 
 
 Figure 3 is designed to represent the buyer by the sym- 
 bol B' and the seller by the symbol S. The limit below 
 which S will not sell and the maximum offer of B' are 
 given for the corresponding symbols. The figure, I take 
 it, is self-explanatory, indicating as it does that if skill at 
 bargaining be approximately equal as between S and B, 
 the price will fall at or near $2,500. 
 
 (2) Suppose, however, that S has widely advertised his 
 rare production and that a number of buyers present 
 
Market and Price 
 
 137 
 
 themselves in competition for 
 it. We are now presented with 
 a situation of common occur- 
 rence, where a seller with a re- 
 serve price parts with his good 
 under the condition of one- 
 sided competition. Again we 
 may resort to the aid of a fig- 
 ure which will visualize the 
 transaction. Figure 4 is con- 
 structed according to the plan of Figure 3. We have 
 here represented one seller with a reservation price of 
 $2,000, and six buyers whose maximum offers range from 
 $1,000 to $6,000. A sale wUl be made because there are 
 buyers willing to pay more than S holds as a reserve price. 
 But where will the price be fixed ? Competition between 
 buyers must answer this question. Competitive bidding 
 will first eliminate B^, and as it progresses B^, B*, B^ will 
 successively drop out. B^ and B^, neither knowing what 
 the other may have "up his sleeve," remain in the contest. 
 B^, however, drops out the moment that the maximum 
 
 which he would pay 
 ($5,000) is passed. This 
 leaves the price to be 
 fixed at any bid which 
 B^ may make above 
 $5,000. 
 
 (3) A seller may have 
 a number of non-repro- 
 ducible goods, alike in 
 all respects, which he 
 would not sell below a 
 
138 
 
 Introduction to Economics 
 
 Seller' & supply 
 
 certain figure. Assume that he has a reserve price of 
 $2,000 on each of five such goods, and that six bidders 
 enter into competition for them. As in paragraph 3, 
 under the heading, "One seller without a limit below which 
 he will not sell," this seller may have either of two selling 
 policies; he may conceal the supply and offer for sale but 
 one unit at a time, or he may offer the whole supply at 
 one and the same time. Assuming that each buyer will 
 
 take but a single unit in any 
 case, we may proceed to ex- 
 plain by aid of the accom- 
 panying Figure 5. If we as- 
 sume a policy of selling one 
 unit at a time the above 
 description accompanying 
 Figure 4 will show that the 
 price of the first unit sold will 
 be above $5,000, with $6,000 
 as a maximum. The second 
 unit will be above $4,000, with $5,000 as a maximum; the 
 third $3,000 to $4,000; the fourth $2,000 to $3,000, and the 
 fifth will be exactly $2,000. 
 
 If all are thrown on the market at one time they must 
 sell, as we have seen, at one uniform price. (See para- 
 graph accompanjang Figure 2 above.) This price could 
 not be below the seller's reserve price of $2,000, nor could 
 it be higher than $2,000, because there would be only four 
 buyers willing to pay more than $2,000. 
 
 (4) The case of one seller of a number of reproducible 
 goods to a number of buyers presents the case of a 
 selling monopoly. Monopoly price holds such a con- 
 spicuous place in economics that it is thought best to re- 
 
 r 
 
 B' B' 
 
 B* B' B* B*- 
 FlGUHE S 
 
 teooo 
 (sooo 
 
 -- J4000 
 
 — 13000 
 
 — £2000 
 
 — tlOOO 
 
 B 
 
Market and Price 
 
 139 
 
 serve space for more detailed discussion in the following 
 chapters. 
 
 III. A number of sellers with a limit below which they 
 will not sell, (i) A number of sellers may actively com- 
 pete in the selling of a number of commodities similar in 
 all respects. They may or may not have a limit below 
 which they will not sell. It is termed a buying monopoly 
 when they have to sell to a single purchaser. This point 
 must await its turn for consideration. It is called two- 
 sided competition when they compete in selling to a num- 
 ber of competing buyers. 
 
 IV. Two-sided competition, (i) The selling of a number 
 of like commodities by a group of competing sellers to a 
 group of competing buyers is, as above stated, two-sided 
 competition. This represents the usual manner of buy- 
 ing and selling on the market. We have seen that as the 
 price is lowered the number of sales is increased in two 
 ways: (a) More buyers come into the market, (b) each 
 buyer may take a larger number of goods. The reverse of 
 this is true in case the price is raised. The sellers, in turn, 
 will throw a larger supply on the market with a rise in 
 price, and vice versa. This may be indicated as follows: 
 
 Demand scale for bushels of wheat 
 Bushels 
 At $0.80 buyers will purchase 20,000 
 
 .81 
 .82 
 
 •83 
 .84 
 
 •8S 
 .86 
 .87 
 .88 
 .89 
 .90 
 
 19,000 
 
 17.S00 
 16,000 
 14,000 
 12,500 
 11,000 
 9,000 
 
 7.500 
 S.ooo 
 2,000 
 
 Supply scale of bushels of wheat 
 Bushels 
 At $0.80 sellers will supply 2,000 
 
 .81 
 
 
 
 
 S.ooo 
 
 .82 
 
 
 
 
 7,500 
 
 .83 
 
 
 
 
 9,000 
 
 .84 
 
 
 
 
 11,000 
 
 ■8s 
 
 
 
 
 12,500 
 
 .86 
 
 
 
 
 14,000 
 
 .87 
 
 
 
 
 16,000 
 
 .88 
 
 
 
 
 17,500 
 
 .89 
 
 
 
 
 19,000 
 
 .90 
 
 
 
 
 20,000 
 
140 
 
 Introduction to Economics 
 
 (2) The above supply and demand scales may be graphi- 
 cally represented by superimposing one curve upon the 
 other (Figure 6). The distance from the point of inter- 
 section of the supply and demand curves, X, to the base 
 
 line PO is equal to 
 tie price, 85 cents, 
 which free compe- 
 tition establishes; 
 the length of the 
 price line repre- 
 sents the number 
 of bushels sold at 
 the competitive 
 price. The inter- 
 section of these 
 curves marks the 
 equating-point of 
 market supply and 
 demand. The mar- 
 ket tends to be per- 
 manent; the market price of uniform goods at any one time 
 is the same price (like goods in the same market at the same 
 time sell at the same price), but there is no continuous 
 price. Each trade represents a distinct and separate price. 
 Price curves are drawn to show movements of the prices 
 of particular articles through time. Such curves, however, 
 must not be interpreted as picturing continuous prices; 
 they show but a succession of individual prices. 
 
 90 
 
 
 
 
 
 
 
 
 
 
 
 
 
 \ 
 
 N-^ 
 
 
 
 
 
 
 
 I 
 
 
 88 
 ^ 87 
 1 86 
 fe85 
 
 a 
 
 S 84 
 
 <*! 83 
 
 82 
 
 81 
 
 80 
 
 
 
 n; 
 
 W 
 
 
 
 
 
 / 
 
 / 
 
 
 
 
 
 \ 
 
 \ 
 
 
 
 
 / 
 
 
 
 
 
 
 
 \ 
 
 \ 
 
 
 / 
 
 
 
 
 
 
 PrU 
 
 e lii 
 
 e 
 
 \ 
 
 jr 
 
 
 
 
 
 
 
 
 
 
 y 
 
 N 
 
 
 
 
 
 
 
 
 
 y 
 
 / 
 
 
 \ 
 
 
 
 
 
 
 
 J\ 
 
 Y 
 
 
 
 
 \ 
 
 
 
 
 
 f\ 
 
 w 
 
 
 
 
 
 
 \ 
 
 
 
 ^ 
 
 y' 
 
 
 
 
 
 
 
 \ 
 
 
 
 
 
 
 
 
 
 
 
 
 
 8 10 12 14 
 
 UXiO fusAeb 
 Figure 6 
 
 IS IS 20 
 
 Market price refers to one species of commodity. Mar- 
 ket demand equals the amount of one species of commod- 
 ity that will be purchased at the market price, and market 
 
Market and Price 141 
 
 supply equals the amount that will be sold at that price. 
 That is to say, market supply and market demand are 
 equal (the amount sold is equal to the amount bought) 
 and that market price is the equating-point between them. 
 Should the price be arbitrarily marked up to 86 cents (see 
 Figure 6) there will be fewer who are anxious to buy and 
 more who are anxious to sell, or if marked down to 84 
 cents then more would be anxious to buy and fewer anxious 
 to sell. Such would destroy the equilibrium between sup- 
 ply and demand. 
 
 Under free competition the price would automatically 
 revert to the point of equality between market supply and 
 market demand. The market price is, under active com- 
 petition, precisely at a point or margin of both market 
 supply and market demand. The same point (market 
 price) marks the margin for both sides of the market equa- 
 tion. At this point of 85 cents in a nicely adjusted mar- 
 ket there are indifferent buyers and sellers; sellers who will 
 withdraw if the price drops a fraction, buyers who will 
 withdraw if the price rises a fraction. These least eager 
 buyers and sellers are strictly marginal buyers and sellers. 
 These have been inaptly termed the marginal pair (the 
 least eager buyer and seller), as if there could be but one 
 such person on either side of the market. There may be 
 any number on either side of the market barely willing to 
 exchange at this point. 
 
 A buyer and seller in the market trade at one market 
 price. This allows a margin of advantage for the sellers 
 who would take less and for buyers who would pay more.. 
 At a market price of 85 cents there is a margin of advan- 
 tage of 5 cents for those buyers who would pay 90 cents, 
 also there is a margin of advantage of 5 cents for those 
 
142 Introduction to Economics 
 
 sellers whose reservation price is 80 cents. The buyer's 
 margin of advantage is equal to the difference between 
 what he does pay and the maximum which he would pay 
 rather than forego the good, whereas the seller's margin 
 of advantage is the difference between the market price 
 of the good and his reservation price. The surplus desir- 
 ability thus acquired is the gain or product of trading. 
 
 14. Exercises. — i. Does a large congregation of people 
 among whom goods are exchanged by barter constitute a 
 market? 
 
 2. Assume that a local merchant contracts with a farmer 
 to take his total supply of cotton at the end of the season, 
 paying for it the market price prevailing at the time the 
 cotton is marketed, and that he allows the farmer to take 
 goods from his store prior to the maturity of the crop, and 
 that he agrees to pay the farmer the residue in money 
 after the crop is gathered. Is this purchase made in a 
 market? If so, is the market any particular place? If 
 not, what is the market ? 
 
 3. Assume that the cotton mentioned in the above 
 question is sold by the local merchant to a New Orleans 
 merchant, and resold by the latter in a cotton exchange. 
 Do these different exchanges take place in the same mar- 
 ket? 
 
 4. Is Montgomery Ward & Co. a market or many mar- 
 kets ? If a market, or markets, what is the location ? Is 
 the wheat market located at Minneapolis, or Chicago, or 
 Liverpool, or does it have a location? What is meant by 
 a "world market for wheat?" 
 
 5. Tell what is meant by the italicised phrases in the 
 follcfwing: All produce for the market; he has gone to the 
 market; government control spoiled the market for this 
 product; advertising created a market for Pears' soap; the 
 money market is dull; a central city market tends to lower 
 prices. 
 
Market and Price 
 
 143 
 
 6. Define the word market, and show its function, as 
 you have defined it, in the industrial world. 
 
 7. What is a market price? Are all prices market 
 prices ? 
 
 8. Is the problem of price the same as finding the price 
 level? 
 
 9. Summarize the conditions, as mentioned in the lat- 
 ter part of this chapter, under which prices are made. 
 
 10. What would be the market price of wheat under the 
 following conditions of supply and demand: 
 
 Demand scale for hushds of wheat 
 
 Bushels 
 At $0.40 buyers will purchase 10,000 
 
 .41 
 
 (( u 
 
 .42 
 
 it tt 
 
 43 
 
 It It 
 
 .44 
 
 " " 
 
 •45 
 
 It It 
 
 .46 
 
 tt tt 
 
 .47 
 
 tt tt 
 
 .48 
 
 tt tt 
 
 •49 
 
 tt tt 
 
 •SO 
 
 tt tt 
 
 Supply scale of bushels of wheat 
 
 Bushels 
 At $0.40 sellers will supply 1,000 
 
 9,500 
 
 " ^41 
 
 
 2,500 
 
 8,750 
 
 " .42 
 
 
 " 3,750 
 
 8,000 
 
 " .43 
 
 
 " 4,500 
 
 7,000 
 
 " .44 
 
 
 5,500 
 
 6,250 
 
 " ^45 
 
 
 " 6,250 
 
 5,500 
 
 " .46 
 
 
 7,000 
 
 4,500 
 
 " -47 
 
 
 " 8,000 
 
 3,750 
 
 " .48 
 
 
 " 8,750 
 
 2,500 
 
 " .49 
 
 tt tt 
 
 " 9,500 
 
 1,000 
 
 " .50 
 
 tt tt 
 
 " 10,000 
 
CHAPTER VIII 
 VALUE AND DEMAND 
 
 I. Price, a restatement. 2. Value. 3. Value is an individualistic mat- 
 ter. 4. "The paradox of value." 5. Surplus and the limit to exchanges. 
 6. Decision in directing expenditures. 7. Valuation. 8. Caution in the 
 use of supply and demand. 9. Amount, supply. 10. Price-making illus- 
 trated. II. Market demand and market supply. 12. Definitions illus- 
 trated. 13. Unrevealed price limits of buyers and sellers. 14. Elasticity 
 of market demand. 15. Complementary goods. 16. Prospective prices 
 and present demand. 17. Demand curve. 18. Demand: questions and 
 answers. 19. Recapitulation. 20. Exercises. 
 
 I. Price, a Restatement. — ^The preceding chapter had 
 to do with the making of exchanges in a market, and 
 showed that in every exchange a price emerges. It should 
 now be clear that there is no such thing as price, apart 
 from an exchange of one thing for another. Shoes are 
 exhibited for sale and marked $8, $10, and $15 a pair. 
 Are these figures prices? They are not, although we so 
 speak of them in common parlance; they are no more than 
 the exhibited offers of the merchant. In the column of 
 stock quotations one sees a certain stock offered at 115, 
 and sees that the maximum bid for it is perhaps only 100. 
 Does a sale take place? There is no meeting of minds as 
 between buyers and sellers; there can be no exchange, and, 
 in consequence, no price. 
 
 What is price? The definitions of price from the year 
 
 1771 to the present have, with great diligence, been 
 
 brought together and classified by Professor F. A. Fetter.* 
 
 1 The " Definitions of Price," American Economic Review, vol. XI, no. 4, 
 pp. 783-813- 
 
 144 
 
Value and Demand 145 
 
 The conclusion of this very able contribution, together 
 with the weight of authority upon the subject, gives us 
 this definition: "Price is the quantity of goods given or 
 received in exchange for another good." F. A. Walker 
 gives a clear expression of this idea: "Price is purchasing 
 power expressed in terms of some one article; power-in- 
 exchange-for-that-article, be the same wheat, or beef, or 
 wool, or gold, or silver. In common speech the word price 
 brings up the idea of money-value, the purchasing power 
 of an article expressed in terms of money. Yet it is equally 
 correct to say that the price is 75 bushels of wheat, as to 
 say it is $100." 
 
 Price implies a quantitative exchange, so many units of 
 one thing given in trade for another. If you trade $1 for 
 a cap, you give 23.22 grains of fine gold, or its equivalent, 
 for the cap. You may give a unit of gold, or wheat, or 
 iron for the cap, but in any case trade implies an exchange 
 of quantities, and price is the quantity of one thing given 
 in exchange for another. 
 
 In most cases price, as stated in the preceding chapter, 
 signifies the quantity of money paid for a good or service, 
 but there are numerous exceptions to this. Country stores 
 usually ask two prices for their goods — the money-price 
 and the produce-price. Coffee may be quoted at 25 cents 
 in money, or at a slightly higher price in butter and eggs. 
 In aU barter transactions prices emerge, although no 
 money is handled. International trade is, for the most 
 part, barter, for comparatively little gold is involved in 
 these transactions. 
 
 Price is not what would be given if circumstances were 
 different, nor is it what should be given. There are no 
 "ifs" or "shoulds" about it; it is the amount (quantity) 
 
146 Introduction to Economics 
 
 of one thing which, in the process of exchange, is given for 
 another thing. 
 
 The preceding chapter showed a price to be at the point 
 of equilibrium between market supply and market de- 
 mand. Price can no more be attributed to supply than 
 to demand, or vice versa. Demand stationary, price 
 changes with variations in supply. Or with supply fixed, 
 price changes with variations in demand. A fuU account 
 of price, therefore, can be reached only through a study of 
 supply and demand. Demand, now to be considered, is 
 based directly upon value and valuations. But what is 
 value ? 
 
 2. Value. The word value is burdened with a variety of 
 meanings. It is used in the household and market-place, 
 in senses technical and non-technical, in works on natural 
 science and social science and in the writings of popular 
 fiction. We hear these expressions: the value of heat 
 units, the value of a word or phrase, valuable man, valu- 
 able idea or suggestion. In economic writings one finds 
 a variety of different uses for the word, such as value in 
 use, value in exchange, social value, objective value, sub- 
 jective value, and so on. Many writers define the word 
 as we have defined price, but price implies an exchange 
 whereas value does not. 
 
 This term is not limited to objects which are for sale. 
 The following are valuable things, although not for sale: 
 Government reservations of natural resources; public 
 buildings, as the capitol, jail, or schoolhouse; parks and 
 highways; libraries, museums, zoological or botanical col- 
 lections. Within this class, also, are many private pos- 
 sessions, as the picture of a deceased friend, grandfather's 
 old pipe, one's clothing, and keepsakes of many kinds. 
 
Value and Demand 147 
 
 These things are not market facts, are not for sale, yet a 
 definition that denies value to them would not, and should 
 not, be taken seriously. 
 
 We shall define value as the importance which one 
 attributes to an objective good or service. As such it is a 
 very real subjective fact, but it is difficult to define it 
 with exact quantitative or arithmetic exactness. An ap- 
 praisal of things in their quantitative aspects is necessary 
 as a foundation for exchanges where a definite amount of 
 one thing is given in trade for a specified quantity of 
 another. The idea of valuation serves this purpose; we 
 will explain it shortly. 
 
 3. Value Is an Individualistic Matter. — Being the impor- 
 tance which the mind attributes to a good or service, value 
 is in no sense to be considered a part of the good. It is an 
 error to speak of intrinsic value, as though value were a 
 quality of a good. 
 
 The same good varies in one's esteem with the change 
 of desire; "witness the frumpy horror that was last year a 
 coveted bonnet." We discover new qualities in goods, 
 new services to which they may be put, and these lead us 
 to attribute importance to them. 
 
 Around her flower-bed a lady had placed some odd- 
 shaped rocks, which she had found at a river's side. A 
 visitor was attracted to one of these, examined it, and 
 made her an offer of $100 for its possession. This excited 
 her imagination, and what to her had been but a worthless 
 ornament became a rare and precious object. She refused 
 the offer, and refused each successive offer, except the final 
 bid, which was $5,000. A new quality was discovered in 
 the rock — ^it contained diamonds. But this she did not 
 know, for the visitor never revealed the secret of his find- 
 
148 Introduction to Economics 
 
 ing. Her thought was that if it were worth thousands to 
 the visitor, it must be of great importance for her. Thus 
 value may be attributed either because we find a new 
 quality or because we suspect such a quality to exist. In 
 any case value is subjective; it is a quality imputed to an 
 object. 
 
 Again, we may highly esteem a good under one set of 
 circumstances, and a change of conditions, such as new 
 inventions or styles, may largely diminish or destroy this 
 value. 
 
 Moreover, we may highly prize an object when we be- 
 lieve it to have desirability, even if such quality is absent. 
 At an auction sale a box was offered for what it would 
 bring. The auctioneer declined to say whether anything 
 was in it. He asked for bids and the highest offer was 
 $3- 75- Oil examination the purchaser found that the box 
 was empty. That value was attributed to the box, how- 
 ever, cannot be denied. This but illustrates the fact that 
 value is an attributed quality. It is natural for each and 
 all to attribute less value to things which are plentiful. 
 Were diamonds as plentiful as glass, one would then 
 attribute no more value to the former than to the lat- 
 ter. 
 
 4. "The Paradox of Value." — If by magic the supply 
 of necessities, comforts, and conveniences were increased 
 until they became as abundant as air, they would cease to 
 have value attributed to them and could command no 
 price. When the total amount of any good is increased 
 beyond a certain point, there is a decrease in its total 
 price. This fact is termed the "paradox of value." Great 
 abundance means great wealth whereas extreme scarcity 
 may mean high price. If corn is scarce and sells at a dol- 
 
Value and Demand 149 
 
 lar a bushel, the total crop will be worth more than if it 
 were twice as large and sold at forty cents a bushel, or four 
 times as large and sold at eighteen cents a bushel. 
 
 When an individual (or corporation) controls a large 
 portion of the amount of corn, wheat, or other commodity, 
 it is to his interest to increase his output up to a certain 
 point, and beyond that point his self-interest lies in de- 
 stroying or otherwise limiting the supply in order to in- 
 crease its price. The interest of the individual coincides 
 with social welfare so long as it is to his interest to increase 
 his output, but he comes into conflict with social welfare 
 the moment that his interest lies in curtailing the supply. 
 The paradox of value is a significant practical problem 
 with which economists and lawmakers must deal in the 
 regulation of monopoly power. 
 
 But in competitive industries the case is otherwise. If 
 all crops are large the total amount of produce may have 
 a less total price than if the crops were small. The indi- 
 vidual farmer, none the less, finds it to his interest to make 
 his output as large as is within his power. It would be 
 unwise for him to produce no crop or a small crop, because 
 that would avail him nothing. He would thus increase 
 the price for his competitors at his own expense. 
 
 As for society, it is now clear that the per unit price of a 
 good diminishes as the supply of it is enlarged; this makes 
 it possible for a large to have a less total price than a 
 small supply. As for the individual, we have seen that 
 the marginal desirability of a good diminishes as one 
 comes to possess more and more of it. It is in order to 
 apply this principle in the study of exchange transactions. 
 We shall now see that it limits and directs such transac- 
 tions. 
 
150 Introduction to Economics 
 
 5. Surplus and the Limit to Exchanges. — Modern indus- 
 try, as we have seen, is characterized by a division of 
 labor, specialization, and exchange. One can specialize 
 and devote his every effort to the making of hats because 
 he can exchange these for the various goods he may choose 
 to acquire. If there were no exchange it is clear that the 
 manufacturer could not turn out five thousand hats a 
 month. The division of labor and specialization are made 
 possible by exchange. When one specializes in the mak- 
 ing of hats it must follow that he will have a surplus of 
 hats and a want for other things. But while he is anxious 
 to exchange his surplus for other things, there is a limit at 
 which he wiU cease trading. This is thB limit of equal 
 marginal desirabilities. 
 
 To illustrate: A has a bag of salt, and B has a bag of 
 rice. They meet in trade. Each demands what the other 
 has, and each supplies what the other has not. A hands 
 over a pint of salt and B hands over a pint of rice; this is 
 repeated time after time. As his supply of salt diminishes 
 A finds that the remaining units have an increasing desir- 
 ability; he attributes a higher value to them. And as he 
 acquires additional units of rice, their marginal desirabili- 
 ties diminish; he attributes less value to each unit of 
 rice. Ultimately he reaches the point where the desirabil- 
 ities of a unit of rice and a unit of salt are equal. When 
 A reaches the point of equality of marginal desirabilities 
 he stops trading on the old basis. B can push the trad- 
 ing further only by offering more than a pint of rice for a 
 pint of salt. 
 
 This example illustrates that each buyer must also be a 
 seller, and that each seller must also be a buyer. There 
 are two suppliers and two demanders in everv trade. It 
 
Value and Demand 151 
 
 illustrates further that the limit to one's trading is reached 
 at the point of equality between two marginal desirabili- 
 ties. 
 
 6. Decision in Directing Expenditures. — Every purchase 
 implies a decision to buy on the part of the purchaser. 
 This decision may be the result of a whim, fancy, or im- 
 pulse; it may be ill considered or well considered, none 
 the less it is a decision. The psychologist may bother 
 himself, if he wishes, as to the manner of its origin, but the 
 economist takes the decision as a fact and proceeds. 
 
 Take, for example, the ladies at a bargain-counter. 
 Some weigh light matters seriously, complaining that they 
 cannot make up their minds. Others are all but incapable 
 of decision, "like the ass between two stacks . . . simply 
 stand and dodder." Still others have a penetration of 
 mind, making them quick of perception and decision. 
 Their decisions are of nice discrimination, are not ill con- 
 sidered because they are quick. One admires the quick, 
 yet accurate decisions of noteworthy business men. Such 
 ready decisions are usually the result of previous thought 
 and experience applied to specific cases. Then, too, there 
 are those in the market who jump at a decision, who de- 
 cide like a flash without deliberation past or present. 
 
 Professor Hoffding tells how Jeppe, a character in a 
 comedy, is addicted to drink. His wife has just given him 
 money and ordered him to buy soap. He knows that if 
 he squanders the money his wife will beat him. He delib- 
 erates over the longing in his stomach and the fear for his 
 back. "My stomach says you shall, my back you shall 
 not." Desire plays its part by minimizing the one and 
 magnif}dng the other. Jeppe asks himself: "Is not my 
 stomach more to me than my back"? I say, "Yes." 
 
152 Introduction to Economics 
 
 "Yes" forms the decision. It is of little consequence 
 whether strong appetite, habit, hunger, cold, fancy, or 
 caprice forms the decision; the fact of economic conse- 
 quences is that decision determines man's economic be- 
 havior, determines the direction of his expenditure, deter- 
 mines his every purchase in the market. 
 
 Every good and service in the market is competing for 
 the purchaser's dollar. And, unfortunately for him, he 
 can spend his dollar but once. He deliberates between 
 the marginal desirabilities of goods. The marginal desir- 
 ability of a free good is zero, that is to say, it has no mar- 
 ginal desirability. Deliberation and choice as between 
 marginal desirabilities of goods must be limited to scarce 
 goods. Only goods that are valued, and not all of these, 
 enter into an exchange economy. 
 
 The purchaser has a desire for goods; the different goods 
 which he may purchase are the alternatives for the course 
 of his action; he deliberates between these alternatives and 
 the result of his deliberation (decision) is to acquire one 
 good in preference to another. Briefly put, expenditures 
 are directed by a comparison between the marginal de- 
 sirabilities of different goods; such comparison leads pur- 
 chasers to attribute different degrees of importance to 
 goods, and to reach a resulting decision to buy one rather 
 than another. 
 
 7. Valuation. — The last paragraph showed us the man- 
 ner in which expenditures are directed. It is now in order 
 that we inquire more particularly into the manner in which 
 one comes to offer his own good or service for that of 
 another. Of all the goods competing for the purchaser's 
 dollar, let us assume that his preference is for a pair of 
 gloves. How did he reach the decision to part with what 
 
Value and Demand 153 
 
 he has for what he has not, to give his dollar for the gloves ? 
 Subjectively he weighed the marginal desirability of the 
 alternative use for the dpllar against that of the gloves. 
 If in his own mind the marginal desirability of some one 
 of the goods which the dollar would buy had outweighed 
 that of the gloves, he would have attributed higher value 
 to it and would have decided to retain his dollar for the 
 alternative good and to do without the gloves. On the 
 contrary, should the importance of the gloves be upper- 
 most in his mind, he at once comes to the decision to offer 
 his dollar in exchange for the gloves. This subjective 
 weighing of the importance of one thing against another is 
 called evaluation, and the decision to offer what one has 
 for that which he has not is the outgrowth of the evalua- 
 tion. 
 
 A valuation, then, is a subjective weighing of the impor- 
 tance which one attributes to different things. It may 
 take the form of a mere price appraisal. For instance, 
 one has a violin with which he will not part for less than 
 loo bushels of wheat or $ioo in money, either of these 
 sums will be his price appraisal, despite the fact that there 
 may be no purchaser for the violin. Or the poor man 
 might be willing to pay $100,000, if he had it, for a string 
 of matched pearls. In this case the valuation would be 
 no more than a hypothetical price. Valuation, or price 
 appraisal, then, is but the price one would be willing to 
 pay under certain conditions, the maximum one would 
 pay for a good, or the minimum which he would take in 
 case he owned the good. From this it is clear that all 
 valuations do not lead to a demand or offer to buy. One 
 may evaluate goods whether he has or has not the means 
 to buy them. Again, if I evaluate a good in my posses- 
 
154 Introduction to Economics 
 
 sion more highly than a good which another owns, I would 
 certainly not offer to trade with him. But while all valu- 
 ations do not lead to offers, all offers arise from valuations. 
 
 When A and B met in trade with the salt and the rice, 
 each compared the marginal desirabilities of a unit of that 
 which he had with a unit of that which the other pos- 
 sessed. Each of the two parties to the exchange of rice 
 for salt first made a subjective valuation preparatory to 
 making an offer. Thus, each trade implies two valuations, 
 one on the part of each trader. The decision to make a 
 demand or offer for a good is, let it be remembered, always 
 the result of a valuation. 
 
 8. Caution in the Use of Supply and Demand. — "Mar- 
 ket prices are determined by supply and demand"; this 
 statement is so frequently encountered in the language of 
 the business world that we must spare space to ascertain 
 exactly what these terms mean. Demand must not be 
 confused with desire. The humblest peasant may desire 
 a luxurious home with as much intensity as if he were a 
 millionaire, but he could make no demand for it. Desire 
 must be coupled with purchasing power before it can be- 
 come a demand. A hungry group of impoverished people 
 may besiege a shop for bread, and yet be unable to demand 
 a single loaf. One must have purchasing power before 
 he can demand a meal, or a ride on a train, or a suit of 
 clothes, or any other salable thing on the market. 
 
 To whom does a demand refer ? This term is used with 
 reference to the buyer, or would-be buyer, who makes a 
 reasonable offer for a good. One never demands his own 
 wares; the thing demanded must always belong to another. 
 Demand must not be confused with the idea of the owner's 
 withholding a commodity from the market for his own 
 
Value and Demand 155 
 
 use, or for a higher price. Demand may be used with 
 respect to an individual or to a group of buyers. 
 
 To what does demand refer ? It refers to a certain arti- 
 cle, be it potatoes, or cotton cloth, or iron, or any other 
 particular good; there is no such thing as demand indis- 
 criminately for shoes, steel rails, pianos, peanuts, and all 
 other salable things in the market. Nor does this term 
 refer to a good which is not for sale. It is said that there 
 is an abundance of coal near the south pole. For this 
 there is need, but no demand. The government is with- 
 holding coal from the market. There is a desire but no 
 demand for this, for the single reason that it is not for sale. 
 
 On the other hand, supply refers to the person, or group 
 of persons, who offer a commodity for sale at a reasonable 
 price. It also refers to a particular good, and not to goods 
 indiscriminately. 
 
 It would not be a demand should one offer 50 cents for a 
 piano, nor would your corn be a portion of the supply, 
 should you hold it for $10 a bushel. Such absurd figures 
 are wholly without the reckonings of the market, they are 
 not at all market facts to which the market terms of sup- 
 ply and demand refer. It must be remembered that sup- 
 ply and demand refer to a salable good which is offered at 
 a figure neither too high nor too low for buyers and sellers 
 to consider. 
 
 9. Amount, Supply. — ^Assume an isolated community in 
 which ten farmers devote their wealth and labor to the 
 growing of potatoes. Each of the ten produces 1,000 
 bushels, thus making a total of 10,000 bushels of potatoes. 
 Without further ado, we may speak of the 10,000 bushels 
 at the end of the season as the amount or stock of pota- 
 toes on hand. 
 
156 
 
 Introduction to Economics 
 
 Each of the producers will wish to retain, to withhold 
 from sale, a portion of his stock for food and for seed. 
 Assume that each withholds loo bushels for his own use. 
 Each will thus have 900 bushels for sale, and the ten will 
 have 9,000 bushels for sale. Assuming that these 9,000 
 bushels are for sale (some at a reasonably high, and others 
 at a reasonably low price), we may speak of them as the 
 supply. Supply is that portion of the amount which is 
 for sale at asking prices, such as will fall within the con- 
 templation of buyers and sellers. 
 
 10. Price-Making Illustrated. — Will the whole supply 
 of 9,000 bushels be marketed forthwith ? This is very im- 
 probable. The market demand may be weak, and so, were 
 the whole supply at once thrown upon the market, it could 
 be sold only at a very trifling figure. It is more probable 
 that those producers who have some money ahead will 
 prefer to sell none of their stock until the market improves; 
 others who are in need of money will sell only a portion of 
 their supply. A weak market demand calls forth a small 
 volume of sales. 
 
 It is evident that at a high price many would be willing 
 to sell, but only a few would care to buy. Buyers are 
 attracted by low prices, but these discourage sellers. The 
 self-interests of buyers and sellers pull in opposite direc- 
 tions. The following table will serve to show these facts: 
 
 At $2.00 purchasers would buy i,ooo bu. and producers would sell g.ooo bu. 
 
 1.80 
 1.60 
 1.40 
 
 2,000 
 3,000 
 4,000 
 
 8,000 " 
 7,000 " 
 6,000 " 
 
 1.20 
 
 5,000 
 
 S.ooo 
 
 1. 00 
 .80 
 .60 
 .40 
 
 6,000 
 7,000 
 8,000 
 9,000 
 
 4,000 " 
 
 3.000 " 
 
 2|O0O " 
 
 1,000 " 
 
Value and Demand 157 
 
 The table shows that the number of bushels that would 
 be bought and the number that would be sold come to 
 equality at the price of $1.20. Could the selling price be 
 fixed at any other figure? Could it be at a higher price, 
 say $1.40? No, for the number of bushels that would be 
 sold exceeds the number that would be bought by 2,000. 
 Sellers could not dispose of these 2,000 bushels except at a 
 lower figure, and they would compete, thus driving the 
 price down. Could the price be lower than $1.20, let us 
 say, $1.00? No, for at this figure the number of bushels 
 that would be bought exceeds the number that would be 
 sold by 2,000. The purchasers for this extra amount could 
 not get it except at a higher price, and they would com- 
 pete, thus driving the price up. 
 
 We now see that, with supply and demand as they are 
 presented in the above table, the price could not be other 
 than $1.20. Should either the supply or the demand vary, 
 the price would also vary. But in every case price is fixed 
 at the equating-point of these two opposing volumes. 
 Although this appears a very simple fact, many writers 
 fall into the error of speaking as if it were price that deter- 
 mines supply and demand, rather than the reverse. 
 
 Is it not frequently stated that "a. high price causes a 
 large supply," or that, "a low price brings forth a large 
 demand?" It must be emphasized that all prices, even 
 the prices of an absolute monopoly, are determined by 
 supply and demand. 
 
 A monopoly first reckons upon the demand for its prod- 
 uct, and then seeks to control the price by manipulating 
 the market supply. Suppose that one has a monopoly 
 on automobiles. He knows that at a low price many cars 
 will be sold, that at a medium price fewer will be sold, and 
 
158 
 
 Introduction to Economics 
 
 at a high price only a small number will be sold. Suppose 
 he would wish to fix the price at $500 a car. He could 
 not maintain this price should he throw more cars upon 
 the market than buyers would take at this figure, for the 
 extra amount would drive the price down. On the other 
 hand, were he to market only a few cars, competition 
 among buyers would raise the price. 
 
 11. Market Demand and Market Supply. — ^The volume 
 sold must equal the volume bought; it is impossible for 
 the purchases to exceed the sales. There is only one point 
 at which purchases and sales reach an equilibrium; the 
 price fixed at this point is called the market price. This 
 volume which is exchanged (or equally the sum of these 
 market prices which would be paid) is, from the standpoint 
 of the buyers, the market demand and, from the standpoint 
 of the sellers, the market supply. 
 
 12. Definitions Illustrated. — ^The following figure will 
 serve to make clear the above definitions. 
 
 CfVom Btandpoinf of buyers)^ 
 Market demand. 
 X>€mand 
 
 (From itandpolnttifieBtn) 
 
 Amount or atooi in 
 jpossetston 
 
 ■Supply or that portion 
 oftheamountheldfor 
 reasonable prioe 
 
 Marlce% ttipply 
 
 Figure : 
 
 Eggs upon your table or those stored for your personal 
 use are wholly out of the market, are no part of supply or 
 demand; they belong within the area C above. Just now 
 (1919) the price of eggs in New York City is unprecedent- 
 edly high, yet the storage-houses are reported to contain 
 millions of dozens held for a still higher price. Assuredly 
 
Falue and Demand 139 
 
 these are a part of the total supply, but they are no part 
 of the market supply; they belong within the area B in 
 the figure. The millions of dozens within the stores are 
 subject to purchase and sale at the market price; they are 
 at once the market supply and the market demand, and 
 belong within the area A above. 
 
 13. Unrevealed Price Limits of Buyers and Sellers. — In 
 the competitive market a seller may have an "asking 
 price" and, in his mind, he may have a much lower price 
 limit (valuation) which he would take rather than forego 
 a sale. This valuation is in reality the limit and he will 
 retain possession of the good rather than take a lower 
 figure. He will welcome any offer which the buyer makes 
 above this valuation. He will welcome an offer of $100 
 for his cow should he be willing to take $60 rather than 
 forego a sale. A buyer likewise may make an offer mean- 
 while holding in mind an unrevealed maximum beyond 
 which he will not go. He will welcome anything lower 
 than his maximum. Were his upper limit $80 for a cow 
 he would consider it a good fortune should he have to pay 
 only $40. It is to be noted that buyers and sellers may 
 not have such limits definitely in mind (psychologists say 
 they generally have not), yet the fact remains that there 
 are such limits. This fact of rational limitation to buying 
 and selling is the only essential and significant fact for our 
 purpose. The effect of unrevealed price limits (valua- 
 tions) upon exchanges may be illustrated. 
 
 Four push-car venders, each with a bushel of potatoes, 
 arrive at the street corner, where they are met by five 
 anxious housewives. A harangue of bids and haggling 
 ensues, but back Of all the noise are some significant facts. 
 The venders will not give the potatoes away; each has his 
 
160 
 
 Introduction to Economics 
 
 personal valuation below which he will not sell, and each 
 housewife her maximum bid. Will there be trading ? No, 
 if all of the valuations of the venders exceed all of the 
 maximum offers of the would-be buyers. And yes, if the 
 maximum bid of any buyer exceeds the lower limit of any 
 seller. All the potatoes will be sold only when all of the 
 maximum bids will be greater than the valuations of all 
 sellers. 
 
 We may put the matter differently; there are four bushels 
 of potatpes and nine contending parties for their posses- 
 sion (four venders and five housewives). After all the 
 bargaining the wind-up of the matter will be that the four 
 persons holding the highest valuations (whether they be 
 the venders or housewives) will own the potatoes. 
 
 Let B indicate buyer and S seller. 
 
 I B's valuation is $1.40 for 
 
 1 S's " " 1.35 
 
 2 S's " " 1.30 
 
 2 B's " " 1. 25 
 
 3 S's " " 1.20 
 
 3 B's " " LIS 
 
 4 B's " " i.io 
 SB's " " 1.0S 
 4 S's " " i.oo 
 
 bushel.' 
 
 According to this figure, two bushels are sold and two 
 remain in the possession of the venders. They were the 
 four highest valuations which determined the ownership. 
 These unrevealed or hidden valuations are uncovered by 
 movements in price, as may be seen in a study of the elas- 
 ticity of market demand. 
 
 ' When the valuation of a good is expressed by a sum of money, it must 
 be imderstood that the good in question is, in reality, held in comparison 
 with any alternative good which that sum of money would buy. 
 
Value and Demand 161 
 
 14. Elasticity of Market Demand. — It is the experience 
 of merchants that when the prices of certain commodities 
 are lowered, even slightly, there is a marked increase in 
 the number of sales, and that when the prices of these 
 commodities go up there is a marked decrease in the mar- 
 ket demand. In the case of other goods, salt for example, 
 the number of sales or the amount sold is little affected by 
 a movement in price. If one has a monopoly of salt, 
 knowing full well that he will sell approximately as much 
 at a high as at a low price, would his asking price be high 
 or low? We can answer with certainty that it would be 
 high. 
 
 Should this monopolist control the supply of a good for 
 which there were adequate substitutes, should he control 
 the supply of brick in the neighborhood of a stone-quarry, 
 the case would be different. If his price were exorbitant, 
 builders would buy stone. The elasticity of market de- 
 mand refers to the extent to which the number of pur- 
 chases varies with movements in price. Salt is an excellent 
 example of a good for which there is an inelastic market 
 demand; goods for which there are adequate substitutes 
 (cotton for woollen, linen for silk, wood for cement, horses 
 for mules or motor-trucks for either, one breakfast food 
 for another, tea for coffee, etc.) are examples for which 
 there are elastic market demands. 
 
 The market demand for tobacco or for other goods the 
 use of which constitutes a habit is comparatively inelastic. 
 The market demands of the wealthy are more inelastic 
 than are those of the poor. When eggs sell at 60 cents 
 a dozen the wealthy will diminish their volume of purchases 
 but little, whereas the housewife of meagre circumstances 
 will economize, substitute A-go-la, or go without eggs. 
 
162 
 
 Introduction to Economics 
 
 Production is constantly growing more varied, and this 
 signifies a greater variety of goods or means of substitu- 
 tion. Because of substitutes the prices of different goods 
 move sympathetically. The price of any good for which 
 there is an adequate substitute cannot go disproportion- 
 ately high. A consequence of varied production is that 
 market demands are more elastic and monopolies have less 
 power to fix high prices. Substitutes compete with one 
 another, thus lowering the price and making it uniform. 
 
 Again, the larger the number of buyers at different price 
 levels, the greater is the elasticity of market demand. 
 Assume two cases: 
 
 X" 9 " 
 
 ' " " two buyers. 
 
 X " 8 " 
 
 ' " " three buyers. 
 
 Y " lo " 
 
 ' " " five buyers. 
 
 Y " 9 " 
 
 " " fifteen buyers 
 
 Y " 8 " 
 
 ' " " thirty buyers. 
 
 First, for X at lo cents there would be one buyer. 
 
 Second, 
 
 It is obvious that if the price drops a penny on these 
 two goods, X and Y, the number of sales, or market de- 
 mand, of Y will be larger than in case of X, i. e., the elas- 
 ticity of market demand is greater for Y than for X. 
 
 15. Complementary goods are those which work to- 
 gether in serving the same purpose. The following are 
 examples: boilers and engines, sand and cement, the right 
 and the left shoe, pen and ink, fiddle and bow, tobacco 
 and pipe, horse and carriage. Do not confuse substitutes 
 with complementary goods, for they obey different princi- 
 ples: goods in the one class correspond in price and goods 
 in the other class correspond in quantity, as we shall now 
 see. Cornflakes and oatmeal are substitutes, consequently 
 their prices correspond. 
 
Value and Demand 163 
 
 Complementary goods, on the contrary, do not corre- 
 spond in relation to price; they tend to maintain a con- 
 stant ratio in relation to quantity. If one loses a left glove 
 of a two-dollar pair of gloves, he would give the worth of 
 the pair to get it back. Should we assume that there is a 
 monopoly on automobile-wheels, and that the owner of a 
 $2,000 car has a wheel smashed, it is evident that the 
 owner of the car could be made to pay almost if not the 
 whole price of the car for a wheel. WeU-matched horses 
 are worth more in a pair than separately, just as a matched 
 string of pearls is far more valuable than would be the 
 same pearls singly. 
 
 In the construction of a house there are many comple- 
 mentary goods, such as nails, cement, brick, lumber, hard- 
 ware, and the like. A demand for a house is a, joint de- 
 mand for all the complementary goods entering into its 
 construction. If it is a favorable time to build, if building 
 materials and labor are cheap, it is evident that nails 
 (being absolutely essential and but a small fraction of the 
 total expense of building) must reach an extraordinary 
 price in order to discourage building. It is not the prices 
 but the quantities of complementary goods which tend to 
 maintain a constant ratio to one another. Substitutes 
 compete with one another; complementary goods employ 
 one another. 
 
 16. Prospective Prices and Present Demand. — The de- 
 mands of the people are primarily for consumable goods. 
 But the demand for these places a demand upon labor 
 and the industries producing consumable goods. In fact, 
 a demand for the products of labor is an indirect demand 
 for labor and for other productive agencies. It frequently 
 occurs, as in December, 1916, or in the spring of that year, 
 
164 Introduction to Economics 
 
 that the pressure for finished goods becomes intense, with 
 the consequence that production is crowded to the limit. 
 Such periods, when there is not enough to go around, 
 produce apprehension that supplies will be so limited as 
 not to be had at a reasonable figure, and that still higher 
 prices will prevail in the future. Buyers rush into the 
 market, hoping to lay in a stock of goods before prices go 
 up. The result is, of course, that market demand is quick- 
 ened, thus causing prices to advance rapidly and out of 
 proportion to a normal time. 
 
 At such times the newspapers are fiUed with resolutions 
 of denunciations and urgent requests for investigations. 
 Somebody must be blamed; storage-houses are denounced, 
 niiddlemen condemned, coal operators and railroad offi- 
 cials are threatened with public ownership. Everything is 
 censured, excepting the right thing — an excess of demand 
 at the old price. In time the true remedy is accomplished 
 through the great body of consumers themselves. If a 
 drought shortens a crop, or grubworms take the corn, or 
 boll-weevils ruin the cotton, they may vote one adminis- 
 tration out and another in, yet despite this unwitting con- 
 fidence in an administration they come in time to find the 
 cure. They begin a substitution of cheaper products for 
 dearer; they are actuated by an added stimulus to produc- 
 tion and enlarge the acreage sown to wheat, oats, barley, 
 and planted to potatoes, corn, and cotton. They produce 
 more cars, spray the orchards better, and in many other 
 ways augment production. This increased production 
 allays the apprehension, brings about a new and less pres- 
 ent demand, and thus lowers the price. 
 
 17. Demand Curve. — A demand curve is a graphic rep- 
 resentation of the individual demands; it reports the num- 
 
Value and Demand 
 
 165 
 
 Successive buyeri and utUt» of tea 
 Figure 2 ' 
 
 ber of units of a supply that would be bought at different 
 prices. Note the different circumstances of the individual 
 demanders for some common necessity, tea, for example. 
 Some buyers are of the "cheap rich" type given to extrava- 
 gant expenditures; others who are wealthy calculate their 
 
 expenditures with dis- 
 
 ... •^ 
 
 crimmation; some are t^v? 
 
 spendthrifts; others 
 have the temperament 
 to save; still others are 
 poor and can spend but 
 little; some are in the 
 habit of using tea, while 
 others care little for it. 
 Thus there are many 
 conditions causing as 
 many subjective valua- 
 tions. The marginal desirability of the dollar (i. e., alter- 
 native goods which the dollar would buy) differs among 
 the several buyers, as does that of a unit of tea. 
 
 According to Figure 2, A would be a marginal buyer at 
 60 cents, i. e., he would go without tea rather than pay 
 more. At a lower price it is probable that he would buy 
 a larger quantity. Assume that the market price is, as a 
 rule, about 55 cents, what would be the effect on the num- 
 ber of sales should the price drop to 35 cents? It is cer- 
 tain that the market demand (the demand would not be 
 affected) would be increased in two ways: (a) There would 
 be a larger number of buyers, and (b) each buyer on the 
 average woiild take more tea. There would be more buy- 
 ers: first, because buyer F would come into the market, 
 and, of course, since the buyers A, B, C, D, and E are will- 
 
166 Introdtiction to Economics 
 
 ing to pay more than 35 cents they would welcome the 
 opportunity to buy at that price; second, the users of 
 cofifee, cocoa, and the like would take to the use of tea in 
 many cases. The lowering of the price, furthermore, would 
 form an inducement for each consumer to buy tea in larger 
 amounts. This reasoning is based upon the supposition 
 that the marginal desirabilities of the buyers with respect 
 to both the alternative use for money and the tea remain 
 unchanged. Such a supposition is fairly accurate for short 
 periods of time. 
 
 18. Demand: Questions and Answers. — Some of the 
 more important questions suggested by the previous dis- 
 cussion will now be stated and answered. 
 
 (a) Can one logically ascribe marginal desirability to 
 money ? 
 
 I answer in the negative. Money is but a half-way 
 house in a trade. If I give you my cap for your pen the 
 transaction is complete, but if I trade the cap for a dollar 
 and hand it over for the pen, it is obvious that the trans- 
 action is only half complete when it reaches the half-way 
 house — the dollar. Money is only a mediimi of trade, 
 only a means or agency in the exchange of the cap for the 
 pen. Perchance one expends his money for a ride on the 
 train. Why this? Why did he not buy a ticket to the 
 ball-game, or buy a painting, or some other good? Be- 
 cause in weighing the marginal desirabilities of the differ- 
 ent things his money would buy he attached greatest im- 
 portance to the ride. As the check for your coat enables 
 you to take the coat from the cloak-room, so your money 
 enables you to take whatever good you prefer from the 
 market. The check and the money have no marginal de- 
 sirability in themselves; they merely reflect the marginal 
 
Value and Demand 167 
 
 desirability in something else. To define money as a 
 "medium of exchange" is to foreclose the ascribing of mar- 
 ginal desirability to it. 
 
 (J) How may the demand for a good be increased ? 
 
 There are two, and only two, ways in which the demand 
 for a good may be increased. These are: first, when there 
 is the same number of demanders as formerly, but each 
 is willing to pay a higher price, i. e., when no more goods 
 would be bought, although the different bidders would be 
 willing to offer a higher price for them; second, when there 
 are more bidders than formerly at the different offers, i. e., 
 more goods would be bought than formerly at the different 
 price levels. 
 
 The first: Assimie five bidders for a certain kind of auto- 
 mobile who would be willing to pay: 
 
 Bidder i would not pay over |i,ooo for one automobile. 
 " 2 " " " " 800 " " " 
 
 ([ (I <( K [1 g 11 U (( 
 
 " 4 " " " " 400 " " " 
 
 " r " " " " 200 " " " 
 
 These figures represent the maximum which each of the 
 several bidders would pay. Each one would welcome any 
 less price than this maximum. At $1,000 there could be 
 only one purchase, for no other bidder would give so much 
 for a machine; at $800 there would be two purchases, at 
 $600 three purchases, at $400 four purchases and at $200 
 there would be five purchases. The following curve (Fig- 
 ure 3) shows the number of machines that would be taken 
 at the different prices. 
 
 Assume now that -the sellers undergo an expensive ad- 
 vertising campaign, that they cover the market with skil- 
 ful salesmen, and provide excellent service for customers. 
 
168 
 
 Introduction to Economics 
 
 The advertising, the work of salesmen and demonstrators, 
 the exhibits, etc., educate the buyers relative to the quali- 
 ties of the machine and to the new uses which it may 
 serve. Through this extension of good-will for the auto- 
 mobile, the buyers come to impute a higher value to it, 
 and are willing forthwith to pay a higher price. Suppose 
 
 e^xvlajied next 
 
 12 3 4 6 
 Number of automoKlea 
 
 
 
 
 
 
 
 lOOO 
 SOD 
 
 
 
 Kr- 
 
 
 
 
 4 
 
 f 
 
 
 
 % 
 
 
 > 
 
 
 " 400 
 
 
 . y't 
 
 
 
 
 
 
 
 
 
 
 
 
 1 
 
 
 FiGUBE 3 
 
 1 2 S 1 B 
 Svanbtr of avLiomiW.et 
 
 FlGUBE 4 
 
 that each bidder places an additional valuation represented 
 by $2oo upon a car. This means a new and higher de- 
 mand for the car; there are no more sales, but the price 
 offers are higher. This situation may be represented by 
 Figure 4. 
 
 The second way in which demand is increased: Assume 
 that the effect of the advertising campaign will be not to 
 cause higher offers, but to cause four times as many bid- 
 ders at the several figures above given. 
 
 Instead of one there are four whose valuation would be $1,000. 
 
 it li li ii it a ti a it it Qf^n 
 
 it it it (c tt ti it (i (£ tt /;«« 
 
 a (( a (t (( tc ct It tt tt 
 
 400. 
 . tt it (( t( tt li II (( (( it 
 
 200. 
 
Value and Demand 
 
 169 
 
 This means an increase in demand by an increase in the 
 number of demanders at the different price levels. The 
 following figure (Number s) shows both the old and the 
 new or increased demand. 
 
 I 2 
 
 4 6 6 7 8 9 10 11 12 13 U 15 16 
 Number of automobiles 
 
 Figures 
 
 Again, a demand may increase in both ways because of 
 an increase in the wealth or average purchasing power in 
 the community. Farmers, for example, are always more 
 liberal in their expenditures just after a remunerative crop 
 season. Enlarged purchasing power increases one's de- 
 mands both in size and variety. 
 
 (c) Assume that no change has been made in the valua- 
 tions of bidders, would the demand for automobiles be in- 
 creased should the price be dropped from $600 to $200? 
 
 We may say that the number of purchases would in- 
 crease from three to five, but there being no change in the 
 valuations of purchasers, the demand could not be in- 
 creased. For should the price be again fixed at $600 the 
 sales would be as before — only three. It would be correct 
 to say that a fall in price increases the market demand, for 
 it always expresses the number of purchases at the market 
 price. Demand must not be confused with market de- 
 mand: the former refers to the quantity of a good that 
 
170 Introduction to Economics 
 
 would be bought at a series of different prices; the latter 
 refers to the quantity of a good that would be bought at 
 the market price. 
 
 19. Recapitulation. — We have seen that desirability is 
 individualistic: There is no such thing as social desirability. 
 Demand arises out of the comparisons of marginal desira- 
 bilities. If one has, say, a dollar, and there are three 
 goods, A, B, and C, any one of which sells for a dollar, he 
 makes comparison of the marginal desirabilities of the 
 different things the dollar will buy. He will retain the 
 dollar if the marginal desirability of some alternative use 
 outweighs that of each of the three goods mentioned, or 
 he will spend it in case the marginal desirability of any 
 good outweighs that of the alternative use for the dollar, 
 for as the marginal desirability of a good is high one 
 attaches high value to it. The explanation of the demand 
 and the forces back of it are found only in the analysis of 
 marginal desirability. Somewhat elliptically speaking, the 
 order of thought is: desire as a motive of acquiring the 
 means of gratification »-»■ scarcity of the means of gratifica- 
 tion »-»■ desirability of these means »-^ relative marginal 
 desirabilities ■»-*■ value •»-* valuation »-*■ demand. 
 
 20. Exercises. — i. Define price. Does the process of 
 reasoning that would lead to the exchange of a cow for a 
 horse differ from that which would result in the exchange 
 of $100 for a horse? 
 
 2. Define value. Why has the term "intrinsic value" 
 come into disrepute? Is the value which one attributes 
 to a good varied because of the following: Change in fash- 
 ion? New discovery? Increased amount? 
 
 3. What is meant by the paradox of value ? What bear- 
 ing does it have upon the fact that the self-interest of a 
 monopolist may be contrary to the welfare of society ? 
 
Value and Demand 171 
 
 4. In the above example, why was A unwilling to trade 
 all of his salt for rice? What determined the limit of his 
 trading for rice ? 
 
 5. The idea of valuation must precede that of demand. 
 Explain this fact. 
 
 6. Distinguish between desire and demand. To whom 
 and to what does demand refer? To whom and to what 
 does supply refer ? 
 
 7. Construct a supply and a demand curve to represent 
 the figures on page 156, and explain why the price could 
 be neither above nor below $1.20. 
 
 8. What is the difference between amount, supply, mar- 
 ket supply? Between demand and market demand? 
 
 9. What is meant by the elasticity of market demand? 
 With respect to what kind of goods is this elasticity most 
 pronounced? Is this elasticity different as between the 
 poor and the rich? How does the number of potential 
 buyers at different price levels have a bearing upon the 
 elasticity of the market demand ? 
 
 10. Is the elasticity of market demand for substitutes 
 governed by the same principle as that which operates in 
 case of complementary goods? Explain why or why not. 
 
 11. The Dutch East India Company used to destroy 
 part of the spice-crop in order to enhance its profits. Was 
 there a fallacy in the proceedings ? (Sumner.) 
 
 12. Criticise the following: 
 
 (a) "The marginal desirability of money varies as people 
 have more of it." Does marginal desirability refer to a 
 unit or to the whole amount of a good? to all persons or 
 to an individual ? does it refer to money at all ? 
 
 (&) "The demand will be larger when prices are low, and 
 vice versa." Do you agree with this? If not, reword the 
 sentence to agree with your thought. 
 
 (c) "A low price causes a large demand, but a small 
 supply." If this is true, would it also be true that "sup- 
 ply and demand are always equal to each other"? Does 
 price determine supply and demand, or is just the opposite 
 true? 
 
CHAPTER IX 
 SUPPLY 
 
 1. Supplies; their variety, adjustment, and limitations. 2. Purchasing 
 power and supply. 3. Fixed supplies. 4. Senior's statement. 5. Cost 
 defined. 6. Cost and limitation of factors. 7. Cost and the price of 
 product. 8. Cost a price expression of limitation of agents, g. Supplies 
 limit each other. 10. Competition of supplies. 11. Increasing cost. 12. 
 Opportunity cost. 13. Kinds of opportunity cost. 14. Past cost and pres- 
 ent supply: present cost and future supply. 15. Selling below cost. 16. 
 Joint-cost. 17. Movements in market supply. 18. Movements in supply 
 curve. 19. Recapitulation. 20. Exercises. 
 
 I. Supplies; Their Variety, Adjustment, and Limita- 
 tions. — ^He who visits a great city for the first time beholds 
 a variety of supplies quite beyond his powers of compre- 
 hension. He sees goods of innumerable kinds, shapes, 
 contents, and sizes. He sees a supply provided for the 
 gratification of every want, desire, whim, and fancy that 
 the imagination can invent. What impression must the 
 backwoodsman carry away who is privileged to witness 
 the variety of products within a large centre of trade, or 
 who beholds the maze of sample commodities which at a 
 world's fair are assembled from all trades and nations for 
 exhibition? Well might he believe that the golden age 
 of which men have always dreamed is at hand. 
 
 This variety of supplies could not exist apart from dif- 
 ferences in productive capacity. Coal, gold, iron, silk, 
 apples, salt, or any other product, is the output of a par- 
 ticular type of productive power. As with natural re- 
 
 172 
 
Supply 173 
 
 sources and artificial agents, so with labor — it exists in 
 great variety. 
 
 Mining is hard work, so why should any dig coal when 
 there are such agreeable occupations as that of pitching a 
 few games of baseball each summer at a salary of $10,000? 
 Why do the majority of laborers go into the positions that 
 pay low wages, while so few enter the more remunerative 
 employments? The laborer's choice is limited by his 
 aptitude for the tasks. According to their different ca- 
 pacities, producers are divided into many classes, and are 
 adjusted accordingly to the unlike tasks within the divi- 
 sion of labor. 
 
 But the variety of supplies is not alone due to different 
 forms of productive capacity, for differences among de- 
 mands furnish the motives for the production of all sup- 
 plies. Should all turn vegetarian, those who grow swine 
 would have to find another occupation. Should none want 
 pork, no one would demand it, and so none would be pro- 
 duced. In every case there is a demand back of supply. 
 
 Supply Adjustments: Not only do supplies exist in great 
 variety, but also they tend to hold, to the degree of a 
 mathematical nicety, a proper economic apportionment to 
 one another at innumerable different prices. Strangely 
 enough, there are many persons (none of them economists) 
 who would have the government take charge of produc- 
 tion and manage it. They would have it dictated that 
 so much of this, that, and the other shall be produced. 
 Fortunately this industrial imperialism is uncalled for, 
 because, in obedience to natural economic laws, there is a 
 tendency for the various supplies to maintain a perfect 
 economic adjustment. There is no boss and no need for 
 any to dictate this adjustment; it is the outgrowth of 
 
174 Introduction to Economics 
 
 natural forces which, under free competition, operate 
 through the agency of market price. 
 
 Why are there not irmumerable mistakes in the relative 
 outputs of the different lines of supply? Why do we not 
 have twice or three times as much productive power turned 
 to the growing of wheat, and but a half or third as much 
 given to the manufacture of shoes? Why is the total 
 productive capacity apportioned as it is among different 
 fields of endeavor, why not some other apportionment? 
 • Were there a relative overabundance of wheat, its cost 
 of production would exceed its market price, and many 
 would abandon its production. Were there an insuflS- 
 ciency of shoes, their market price would so exceed their 
 cost as to attract many new producers. As water seeks a 
 common level, so through market prices competition tends 
 toward a uniformity of profits (selling prices less costs), 
 and hence toward a proper economic apportionment among 
 the different supplies. 
 
 Supply Limitations: What determines the limitation to 
 the volume of the different supplies ? Productive capacity 
 is limited, i. e., it is incapable of furnishing us all that we 
 wish. If our desires did not extend beyond a few simple 
 lines of consumption, they could be fully satisfied. But 
 when we demand a thousand things, rather than five or 
 six, productive capacity is incapable of meeting in full the 
 numerous drafts made upon it. Each person so directs 
 his limited energies that there is a tendency, but only a 
 tendency, to keep his numerous desires equally gratified. 
 As a result no desire can be fully satisfied, and each supply 
 limits every other supply. In our impatience we complain 
 of the "niggardliness of nature," for it does not furnish 
 all that we want; we might equally condemn our unbridled 
 
Supply 175 
 
 desires, for they are such that we cannot have all we want. 
 These thoughts on supply will be more fuUy presented in 
 the following discussion. 
 
 2. Purchasing Power and Supply. — Supply and demand 
 are closely related ideas. Referring again to the example 
 of A and B with the salt and rice; A's salt, together with 
 his desire for rice made a demand, and B's rice together 
 with his desire for salt made a demand. It is always the 
 demand which fosters the production of supply. 
 
 Every good finds a sale because some one desires it and 
 has another good or service to exchange for it. Great pro- 
 duction means abundant purchasing power that opens a 
 demand for other products. The greatest vent for one's 
 wares is found in those places where the most wealth is 
 produced. A salable product is no sooner created than it, 
 from that instant, affords a market for other products to 
 the full extent of its own price. A good harvest is a bless- 
 ing, not only to the agriculturist, but likewise to the dealers 
 in all commodities. Industries are so interdependent that 
 the success of one has a wholesome effect upon all the 
 others. To-day we regard Voltaire's dictum as sheer non- 
 sense, that "such is the lot of humanity, that the patriotic 
 desire for one's country's grandeur is but a wish for the 
 humiliation of one's neighbors; . . . that it is clearly im- 
 possible for one's country to gain, except by the loss of 
 another." We are interested in the prosperity of others 
 because their success causes a demand for our own goods. 
 
 In the progressive state talent is turned to account; in 
 the retrograde state it goes unrewarded. Compare the 
 merchant's opportunities in a rich town with those of the 
 merchant in the district of indolence and apathy. There 
 is no gain from dealing with a people that have nothing to 
 
176 Introduction to Economics 
 
 pay. Large purchasing power brings forth large demands, 
 and in response to demands supplies are produced. An 
 exception to this must be made for fixed supplies. 
 
 3. Fixed Supplies. — There is no cunning or device by 
 which we may multiply the paintings of a dead artist. 
 Antiques, rare jewels, meteoric stones, and select building 
 sites are fixed in volume of supply. The present valuation 
 of such supplies is affected in no way by their original cost. 
 One would as readily pay $100 for the autograph of a 
 famous seventeenth century author as for an antique, the 
 production of which cost days of toil. The meteoric stone, 
 the nugget picked up by chance at a river's bank, stand in 
 one's valuation upon precisely the same basis as does the 
 old sculptor's product costing months of sacrifice and labor. 
 It is not the labor or expense of their original production, 
 but it is the relative marginal desirability of such goods 
 that determines one's price appraisal (valuation) of them. 
 
 4. Senior's Statement. — It is not to be implied, how- 
 ever, that cost has no bearing upon the valuation of a 
 good, for most emphatically it does have such a bearing 
 in the case of most goods. I shall say in the case of all 
 reproducible goods on the market. Whatever influence, 
 cost or other, that limits supply must affect the valuation 
 and ultimately the price of a commodity. Bear it in mind 
 that one's valuation and consequent demand for a good 
 are derived from its marginal desirability in comparison 
 with the marginal desirability of that which he would pay 
 in exchange. But the relative marginal desirability of a 
 good is high or low, as the supply is small or large. So we 
 say that unfavorable labor conditions, ill-adapted ma- 
 chinery, a poor crop year, a shortage of cars, a panic, a 
 heavy cost of production, or a limitation in the necessary 
 
Supply 177 
 
 agencies of production — any form of influence which short- 
 ens a supply does increase its marginal desirability and in 
 consequence increases the price. 
 
 Professor Davenport makes this most illuminating quo- 
 tation* from the writings of N. W. Senior: "Any other cause 
 limiting supply is just as efl&cient a cause of value in an 
 article as the necessity of labor in its production. And, in 
 fact, if all the commodities used by man were supplied by 
 nature without any intervention whatever of human labor, 
 but were supplied in precisely the same quantities that 
 they now are, there is no reason to suppose either that 
 they would cease to be valuable, or would exchange in any 
 other than the present proportions." 
 
 Cost, then, bears on the price of a good only as it influ- 
 ences the supply, but so important and far-reachjng is the 
 influence of cost upon supplies that we must not spare a 
 thorough analysis of it. 
 
 5. Cost Defined. — Cost is the antithesis of income; it is 
 outgo — the outgo made to get an income. If I enjoy the 
 income of a man's labor, it is at the cost of paying him a 
 wage; if I enjoy the income of your house it is at the cost 
 of pajdng you a rent; if I enjoy the income of a farm it is 
 at the cost of paying for the uses of that farm. 
 
 Should I own the farm, the house, and do my own work, 
 I would pay neither a rent nor a wage to another. Can it 
 be said that I enjoy income free from cost? The cost of 
 my income is not less real because I own the agencies of 
 its production. I could have let the house and farm for a 
 rent, also I could have received a wage by working for 
 some one else. If this farm and house could be let to 
 another for $1,500, I simply give up the receipt of $1,500, 
 1 " Value and Distribution," p. 44. 
 
178 Introduction to Economics 
 
 by retaining them for my own use. And so with the wage 
 relinquished; it is a cost. 
 
 The ideas of cost and sacrifice are closely related. We 
 hear it remarked: his victory cost him his life; that paint- 
 ing cost tireless effort; he drained the swamp at the cost 
 of his health. Strict accuracy would require the use of 
 the word sacrifice rather than cost in these remarks. 
 
 Cost is an outgo and is expressed in terms of money. 
 It may be regarded either as a sum paid to another or as 
 income foregone. It is a mere word quibble, worthy of 
 no serious attention, not to use the word outgo in the case 
 of a relinquished income. I no longer have it if I pay out 
 $1,500, nor do I have that sum if I refrain from accepting it. 
 
 The cost or price outgo necessary to get twenty bushels 
 of potatoes may be divided into several parts. You may 
 rent some land, hire some tools, hire a horse, hire a laborer, 
 and buy some seed. With these the twenty bushels of 
 potatoes are produced. The aggregate of all these prices 
 is the cost. In case you own these different agents of pro- 
 duction and do your own work, you are out of pocket, i. e., 
 your cost is the aggregate of all the prices you might have 
 received by letting them to other people. Or suppose you 
 could sell these for $1,000. It costs you, if the rate is 5 
 per cent, the interest on this sum or $50 to hold it for your 
 own use. 
 
 6. Cost and Limitation of Factors. — There is much dif- 
 ference between the cost which one must undergo if he 
 get a good, and the cost which he is willing to undergo in 
 order to get it. What determines the cost which the busi- 
 ness man must pay to produce a good? As a bushel of 
 corn is the product of land, seed, labor, and tools, so any 
 other product is the output of a number of agencies. 
 
Supply 179 
 
 Should the productive capacity of these several agencies 
 exist in such abundance as does air or sunshine, their ser- 
 vices would be free and could command no price. But un- 
 fortunately the productive agents are limited, some of 
 them very narrowly limited, and so their services are 
 scarce and command prices. Demand fixed, the cost which 
 the business man must undergo to produce a good depends 
 upon the limitation of the productive factors back of that 
 good. If there be a large demand for the product of a 
 narrowly limited factor, the cost outlay for the services of 
 that factor must be high. If there be a small demand for 
 the product of a factor, the cost outlay for the services of 
 that factor will be low. Demand remaining the same, the 
 cost or price paid for the services of an agent varies with 
 variations in the supply of the agent. Let us now turn 
 to an answer of this question; what determines the cost 
 which the business man is willing to undergo to produce a 
 good ? 
 
 7. Cost and the Price of Product. — ^The amount of costs 
 which the business man is willing to undergo is determined 
 by the price which he expects the product to bring. One 
 will not pay a cost of $3 to produce a bushel of corn which 
 he would expect to sell for $2. One makes the outlay to 
 grow com on the poor hillside, or to construct a shaft far 
 into the ground for a ton of coal, or he pays a wage suffi- 
 ciently high to induce the laborer to risk his life in dan- 
 gerous enterprises, because the price of his product will be 
 high enough to justify the cost. Pearls are not high-priced 
 because men dive for them, but men dive for them because 
 they are high-priced. Cost does not determine the price 
 of commodities, but the price of commodities determines 
 the cost one will undergo to get them. The cost of pro- 
 
180 Introduction to Economics 
 
 ducing any good is the total price of everything entering 
 into its production, and the reason for paying these prices 
 is that the good will sell for a price higher than its cost. 
 
 8. Cost a Price Expression of Limitation of Agents. — 
 Productive factors are priced in keeping with the price of 
 their anticipated yields. A security will bring a high price 
 if it promises to pay a high return. Land, mines, steam- 
 ships, and other productive agents are high-priced or low 
 as their anticipated incomes are large or small. With certain 
 omissions, the order of thought may be indicated as follows: 
 Demand fixed; any productive agent, say land ■►->■ amount 
 of yield or product •►-^- price of yield or product «»-► price 
 of land. This schematic showing of the causal sequence 
 makes it obvious that it is the scarcity of the agent (demand 
 taken for granted) which explains the limited supply of the 
 product. They are the limitations of agents relative to the 
 drafts made upon them which cause the costs that must be 
 made by an entrepreneur to produce a good. If factors A 
 and B are essential to the production of a commodity, and 
 if A may be had in great abundance while B is scarce, evi- 
 dently the business man will have to pay high for the use 
 of B and little for the use of A. Cost becomes simply the 
 price expression of the scarcity and productivity of agents. 
 
 9. Supplies Limit Each Other. — Because of limited pro- 
 ductive capacity there is a limit to the total supply of all 
 goods. But in the market there are various demands call- 
 ing for the production of a variety of goods. The relative 
 strength of the different demands causes a larger cost out- 
 lay in the production of some goods than of others. If the 
 market price for corn is considerably higher than for wheat, 
 farmers will use more land for corn and less for wheat. 
 An increase of the one may mean a decrease of the other. 
 
Supply 
 
 181 
 
 If demands so multiply that ten classes of commodities 
 must be supplied whereas formerly five were supplied, 
 other things remaining equal, the supply of each class of 
 commodities must be less than formerly. 
 
 In Figure i, let the total length of the five fines a a' toe e' 
 be equal to the total length of the ten fines //' to o o' . Now, 
 
 A a 
 
 b e 
 
 d 
 
 
 B B 
 
 f 
 
 
 9 
 
 
 h 
 
 
 i 
 
 
 / 
 
 
 k 
 
 
 I 
 
 
 m 
 
 n 
 
 
 
 
 C 
 
 < 
 
 »' 
 
 V 
 
 o' 
 
 a 
 
 ' < 
 
 5' 
 
 
 t 
 
 • 
 
 a 
 
 / 
 
 I 
 
 ' 
 
 i 
 
 ' 
 
 i 
 
 
 h 
 
 • 
 
 I 
 
 '- 
 
 m! 
 
 n 
 
 • 
 
 
 
 • 
 
 E 
 Figure i 
 
 Jf 
 
 if the length of one of these lines represent the total vol- 
 ume of any one class of supply, it will be obvious that, 
 other things equal, in the latter stage a supply is but one- 
 half as large as in a former stage. When the production 
 of ten uruts rather than five is undertaken, it follows that 
 but a half of the former labor and other productive capac- 
 ity, on the average, can be given to any one supply. 
 
 10. Competition of SuppUes. — Another way of putting 
 this thought is to say that suppfies compete for the same 
 productive agents. The same field may be used for graz- 
 ing, for the growing of hay, corn, or for the most valuable 
 fruits. Lands for the growing of such fruit are rare and 
 expensive, and so the growers of the cheaper commodities 
 mentioned could not compete with the fruit-growers for 
 
182 Introduction to Economics 
 
 such land because the price of their product would not 
 justify it. With the discovery or improvement of more 
 such land, however, the price of frmts would be lowered 
 and the growers of the cheaper commodities may come 
 into effective competition with the fruit-growers. Thus it 
 is apparent that the cost which one producer must undergo 
 for an agent is influenced by other competing uses for the 
 same agent. The cost outlay of the corn-grower is influ- 
 enced by the other competing uses for the land. The land 
 will go to the highest competitor; to the extent that land 
 is used for other products corn will be scarce and high- 
 priced, but the more this corn is worth the higher is the 
 cost which the corn-grower can pay in competition with 
 others for the land. 
 
 II. Increasing cost per unit of output has been errone- 
 ously used by able thinkers, who ought to know better, as 
 a synonym for the law of diminishing returns. This latter 
 concept will be given discussion under the caption, " Pro- 
 portionality." Increasing cost is a blanket term covering 
 a number of ideas. We shaU make brief mention of (a) ex- 
 haustion of basic wealth, (6) monopolization of a factor, (c) 
 malapportionment of factors. Although America is a new 
 land, yet, due to improper rotation of crops and to want of 
 adequate fertilization, the productivity of the soil in many 
 places is being exhausted, with the consequence that, other 
 things equal, it requires a greater cost to secure a unit of 
 supply. And this greater cost will be met only in case 
 demand is such as to justify it. The choicest timber has 
 been cut away in places and in other places exhaustion is 
 threatened, so it must result that supplies are secured at 
 an increasing cost. As coal is removed train-load after 
 train-load, year in and year out, we must go farther and 
 
Supply 183 
 
 farther from the mouth of the mine. In many other ways 
 the constantly increasing cost of production is due to 
 reduced supplies of basic wealth. 
 
 Again, the business man finds certain factors essential 
 to the output of his product. What if a monopoly or 
 other restriction controls the supply of a factor ? He must 
 pay the monopoly price or quit business. Thus a pro- 
 ducer may suffer increasing costs through the artificial 
 monopolization or restriction of others. 
 
 The malapportionment of factors must wait its turn for 
 fuller treatment. We may say here that we have increas- 
 ing costs or decreasing costs as the malapportionment of 
 factors is becoming worse or better. It is this phase of 
 increasing cost, and this only, which will find discussion 
 under the heading of diminishing returns. A manufac- 
 turer finds that he must work out an adjustment of factors 
 to factors within his plant and, furthermore, that the size 
 of the whole plant must be adjusted to the extent of his 
 market. To the degree that he reaches an ideal adjust- 
 ment his costs of production decrease, and vice versa. We 
 shall see that, although a factor may be kept in a perfect 
 state of repair, yet, because of diminishing returns, the 
 costs per unit of output will increase. 
 
 12. Opportunity Cost.*— If one goes to a theatre in the 
 evening he cannot spend that evening at home with his 
 family. If he has a dollar and wants a cap costing a dollar 
 as well as a pair of gloves, it follows that if he buys the 
 gloves he must forego the cap. The real choice determin- 
 ing the direction of his effort is not between the dollar 
 and the gloves, but between the gloves and the cap, there- 
 
 ' For best discussion of this topic see Davenport's Economics of Enter- 
 prise. 
 
184 Introduction to Economics 
 
 fore the gloves cost him the cap. One may use his field to 
 grow either corn or cotton; to grow cotton costs him the 
 opportunity to grow corn. If one has a coal-mine, it can 
 be used only for the output of coal, yet its owner must 
 give up recreation if he works it and sacrifice the alterna- 
 tive income on the capital which he must put into the 
 mine. In the choice of an occupation the young man has 
 an open field. He hesitates in his selection, knowing full 
 well that his choice closes the gates between him and other 
 promising alternatives. Getting into a profession or occu- 
 pation is like getting into the rapids — it's difficult to turn 
 back. Were there no alternatives there could be no choos- 
 ing, and a choice made implies other opportunities relin- 
 quished. Opportunity cost is truly significant in the ex- 
 planation of supply, because business men do weigh oppor- 
 tunities against each other in deciding to produce any one 
 variety of supply. 
 
 13. Kinds of Opportunity Cost. — One may be capacitated 
 for large earnings in the business world and yet choose to 
 devote himself to research or to a learned profession with 
 a small monetary return. Personal pride or public opinion 
 may operate to direct one from the field where the mone- 
 tary income is to be found. In numerous cases such as 
 these, choice is not dictated solely by a price consideration; 
 nevertheless, these choices directly affect supplies. 
 
 The choice between recreation and the sacrificing of wages 
 presents some curious examples. It is a rule that the higher 
 the price for a commodity the larger will be the production 
 of that commodity. But a higher wage per hour does 
 not necessarily mean that laborers will work longer hours. 
 High wages, generally speaking, lead workmen to agitate 
 for an eight-hour day, rather than for a twelve-hour day. 
 
 The end-of-the-day margin expresses the fact that fatigue 
 
Supply 
 
 185 
 
 increases as one works longer until finally a point is reached 
 when the worker prefers recreation to the extra income. 
 If the worker is getting 40 cents an hour, his income will 
 be considerably larger than his sacrifice for the first hours 
 of the working-day, but the margin of difference will dimin- 
 ish as the day advances, until finally his sacrifice will equal 
 his income and there he will wish to end the day's work. 
 Each added 40 cents diminishes the desirability of money, 
 and each added hour's labor increases his sacrifice. 
 
 8 9 10 U 12 
 
 Figure 2 
 
 As we have presented Figure 2, the sacrifice curve is 
 steeper than the desirability curve. If the laborer's stand- 
 ard of living is low, his desires will be easily gratified, con- 
 sequently if the wages per hour are high the curve AB 
 would be much steeper than CD. If his standard be high, 
 his desires of a high order and varied, CD would be much 
 steeper than AB. In any case the end-of-the-day margin 
 will be reached; this is a significant fact in the limitation 
 of the supply of labor, and consequently of the supplies 
 which labor produces. 
 
 14. Past Cost and Present Supply; Present Cost and 
 Future Supply.— Consumption goods and present supplies 
 are not as a rule the products of current industry. Apples 
 
186 Introduction to Economics 
 
 are gathered from trees planted twenty-five years ago. 
 Trace a pair of shoes back to the leather, the leather to 
 hides, the hides to cattle, the cattle to land and its prod- 
 ucts, the land back to its preparation, the preparation to 
 the tools and these on back — the origin of current supplies 
 could, in large part, be traced far back. It is estimated 
 that not one-tenth of current supplies is wholly the prod- 
 uct of current industries. Current supplies, then, are lim- 
 ited by the estimates which business men in the past have 
 made of the prices which we should be willing to pay 
 to-day. 
 
 At any one time men are planting orchards, preparing 
 land, building new factories, and extending old ones in 
 anticipation of future prices. Merchants buy ahead, 
 builders make future contracts, farmers allot certain 
 amounts of land to cotton and sugar-beets, depending en- 
 tirely upon their estimate of future prices. Thus, it is 
 seen that current supplies are largely determined by the 
 estimates which business men in the past made of present 
 prices, and, further, that present estimates of future prices 
 are now shaping industry so as to determine future sup- 
 plies. Bearing directly on the present volume of different 
 supplies is the fact that we limit current supplies by shap- 
 ing our efforts to the end of production for the future. 
 Should we convert the labor and capital now employed in 
 the construction and extension of factories, railways, and 
 other productive agencies into the making of consumable 
 goods, we should have a present feast at the expense of 
 future hunger. All costs are forward-looking; the provi- 
 sion of supply looks to the future. This fact makes oppor- 
 tunity costs singularly significant in the supply problem. 
 
 It should be clear that it is supply, not the cost, which 
 
Supply 187 
 
 determines present price. If at great cost a railroad is 
 constructed in a region of few resources it will be of little 
 worth. There are idle factories stocked with the best 
 equipment known to man, valueless because they are idle 
 and idle because of the miscalculation of their builders. 
 
 In a West Virginia oil-field a Mr. Clay sank a well within 
 ten feet of the boundary-line of his land. He struck a 
 gusher worth several thousands of dollars. His neighbor, 
 anxious to tap the same pocket or pool of oil, sank a well 
 but six feet on the other side of the boundary-line. His 
 cost was $3,200, and that for a dry hole. It is not the 
 cost but the price of the yield which determines the price 
 of a productive agent. The cost of producing a good is 
 the total of all the prices paid for the services of the agents 
 that produce it. But how do these factors — the labor, 
 raw materials, land, tools, etc. — get their prices? This we 
 have answered previously: from the expected income or 
 prices of their yield. The business enterpriser is a middle- 
 man who buys to sell again. He buys all the services of 
 the factors and converts these into a product which is sold 
 at such a price as it will bring. Does he make a profit? 
 Only when his costs aire less than his selling price. Assur- 
 edly it is not his costs which fix his selling price; rather it 
 is the selling price which justifies and determines the 
 amount of cost which the business man will make to get 
 a good. 
 
 15. Selling below cost is sometimes advisable. When 
 Congress was considering the measure to appropriate 
 $11,000,000 for a manufactory of armor-plate, the Beth- 
 lehem Steel Company fought the measure chiefly because 
 it would render their equipment for the same purpose 
 worthless, or practically so. It seems that stockholders 
 
188 Introduction to Economics 
 
 had invested some $7,000,000 in the plant for the output 
 of armor-plate. This company, in my judgment, over- 
 came every reasonable contention of the Government by 
 offering to produce armor-plate at any price which the 
 Government itself might set. Why such an offer ? Simply 
 because it is better to get something than nothing out of 
 the huge investment made in good faith by the stockhold- 
 ers, and made, too, at the behest of the Government. It 
 is good sense to sell below cost rather than to suffer a total 
 loss. Many obstinate or otherwise foolish merchants have 
 been marked with ruin because rather than do this they 
 prefer to hold goods until out of season. 
 
 Although prices are not determined by cost, yet cost 
 may affect prices by affecting supply. When the producer 
 anticipates a high future price for hats he will undergo a 
 large cost in the construction of equipment to produce hats 
 for sale at the high prices. The result of this large equip- 
 ment will be a larger supply of hats. Cost of present con- 
 struction, though determined by anticipated prices, caimot 
 but bear on future price. The anticipated price determines 
 cost, which in turn has an effect on supply and price. 
 
 16. Joint cost* is found in the numerous examples where 
 the same operation which turns out one commodity turns 
 out others also. One cannot produce mutton without 
 growing wool, nor produce cotton fibre without cotton- 
 seed. If one grows beef, he cannot but add to the supply 
 of hides, horns, bones, fat, etc. 
 
 If there be no material change in the demand for cotton- 
 seed, how would a growing demand for the fibre affect the 
 price of the seed ? A growing demand for the fibre would 
 push its price up, would cause an increase in its produc- 
 ' F. W. Taussig, " Principles of Economics," I, ch. 16. 
 
Supply 189 
 
 tion, with the consequence that the increased supply of 
 seed relative to the demand would lower the price of the 
 seed. 
 
 The effect of the same cost outlay is both fibre and seed. 
 The combined price of both products detehnines the 
 amount of cost one will make to produce them. On the 
 average there is a dollar's worth of seed to ten dollars' 
 worth of fibre, so by utilizing the seed one gets eleven 
 dollars every time he would get ten dollars were the seed 
 wasted. The planter can afford a larger outlay to get the 
 eleven dollars. In other words, the saving of the seed 
 causes a larger output and consequently a lower price of 
 fibre. Every chemical discovery or mechanical device 
 which increases the joint products or the by-products of 
 a plant tends to lower the price and to increase the supply 
 of any one of the joint products. 
 
 17. Movements in Market Supply. — It is now clear that 
 a rise in price causes an increase in market supply in two 
 
 - , !■■! T otal Stock ofoom- 
 
 ^^Karket tupply or number of tdlet 
 
 at the market prioe. 
 
 F1GOEE3 
 
 ways: more sellers are brought into the market, and each 
 seller will convert a larger portion of his supply into mar- 
 ket supply. 
 
 In the last chapter we saw that the market demand 
 
190 Introduction to Economics 
 
 may be increased in two ways: skilful salesmanship may 
 extend the market demand and thus without lowering the 
 price increase the volume of sales, or the market demand 
 may be increased, due to an increase in price offers; these 
 offers being higher, not more in number. Market supply 
 may be enlarged in other ways than by an increase in 
 price. If the owners of grain should anticipate a fall in 
 price, they would convert a larger portion of their supply 
 into market supply at the prevaiUng prices. Again, im- 
 proved methods of production or a want of storage facili- 
 ties would encourage them to extend the market supply. 
 More frequently, however, the market supply is increased 
 because of a rise in price. 
 
 18. Movements in Supply Curve. — ^A graphic represen- 
 tation of an increase in the number of sales which suppliers 
 will be willing to make at the different levels of price will 
 be seen in a shifting to the right of the supply curve (as in 
 Figure 4). 
 
 Figure 5 shows a change in which suppliers will diminish 
 the number of sales they would be willing to make at the 
 different levels of prices. 
 
 Generalizing, as Davenport puts it, the language of plot- 
 ting: With stationary supply, the demand curve moving 
 up or to the right must mean higher prices; moving to the 
 left or down, lower prices. 
 
 With stationary demand, the supply curve moving up 
 or to the left means higher prices; moving to the right or 
 down, lower prices. 
 
 With both curves moving, the possible combinations and 
 the different price adjustments are indefinitely numerous. 
 
 19. Recapitulation. — Productive capacity or the source 
 of supply consists of the co-ordinating of natural resources. 
 
Supply 
 
 191 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 Bushels stipplied 
 
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 Sushets supplied 
 
192 Introduction to Economics 
 
 technological equipment, labor, and scientific knowledge. 
 A large productive capacity brings forth abundant supply, 
 and vice versa. Demands are the directing forces as to 
 what classes of supply we shall produce, and productive 
 capacity fixes an elastic limit to these supplies. If graz- 
 ing-land is scarce there will be few cattle, few hides, and 
 scarce leather. The different demands for leather affect 
 one another. A large demand by the harness-makers 
 means a smaller supply of leather for shoes. The various 
 demands operating under a competitive price regime main- 
 tain through an automatic adjustment a grand proportion 
 and balance among all classes of supply. 
 
 During the next moment our demands may change, but 
 at the present moment they may be considered as fixed. 
 To meet these is a large number of different limited sup- 
 plies. These are physically limited by the physically lim- 
 ited productive powers in agents. Because of the physical 
 limitation of these supplies, the goods of which they are 
 composed command prices. It is the task of the entre- 
 preneur to get together the essential factors to secure 
 these marketable products. He can get together and con- 
 trol these factors only by paying such prices as their ser- 
 vices will bring for the time he uses them. What he pays 
 for them, expressed in terms of money, is the cost of pro- 
 ducing the goods. If he sells below the cost of produc- 
 tion, he fails in business; if he sells above, he makes a 
 profit. Then, what determines the cost he can afford to 
 pay? There is but one answer; it is the selling price of 
 the product. 
 
 20. Exercises. — i. What effect upon the supply' of auto- 
 mobiles would be caused by a large production of agricul- 
 
Supply 193 
 
 tural and manufactured products ? Were you a cabinet- 
 maker, what would you care, so far as your personal inter- 
 ests are concerned, if the wheat-crop should fail? 
 
 2. What is meant by a fixed supply? Suppose that 
 there are 2,500 pieces of a particular kind of seventeenth- 
 century furniture, and that of these 1,000 are for sale. Is 
 the fixed supply 2,500 or 1,000? 
 
 3. What theory of price is controverted by the above 
 statement (paragraph 4) of Senior ? 
 
 4. Does the cost of producing a thing determine its 
 price, or is it the price of a thing which determines the 
 cost that will be made to produce it ? 
 
 5. Explain this statement: "Cost is the price expression 
 of the limitation of productive agents." State the funda- 
 mental cause why champagne or copper is dear. In an- 
 swering this, consider {a) the demand for these, (6) their 
 cost of production, (c) the limited productive capacity. 
 
 6. How does the production of ships and munitions to 
 meet war demands affect other supplies, such as cotton 
 cloth, mutton, automobiles, and shoes? 
 
 7. Define opportunity cost; state different kinds of such 
 cost; explain its effect upon the limitation of any supply; 
 give its bearing upon the proper economic adjustment of 
 supplies to one another. 
 
 8. How are present supplies related to costs in time 
 past? Does it ever pay to sell below cost? 
 
 9. Define joint cost. The demand for hides remaining 
 the same, what would be the ultimate effect on the price 
 of hides should there be a vast increase in the demand for 
 beef? 
 
 10. What is the relationship between limited pasture- 
 lands and the price of beef? How might a sufficient rise 
 in the price of beef affect the amount of land used for pas- 
 ture? Is this a change in the supply of land? in the 
 supply of pastureland ? 
 
 11. A false bottom was put into an elevator-bin so that 
 it held 50 bushels, when it was supposed to hold 10,000. 
 
194 Introduction to Economics 
 
 What was the effect on the market price of wheat? (Sum- 
 ner.) 
 
 12. Suppose a considerable rise in the price of wool to 
 be foreseen, how would farmers expect the prices of mut- 
 ton, beef, and hides, respectively, to be affected, and why? 
 (Sumner.) 
 
 13. A manufacturer is prepared to produce a large 
 amount of paper, but he decides to defer production even 
 though his plant will be idle for a time, and his future cost 
 will be larger. He reasons that the market is not yet 
 ready for the paper, that the effect of his having a large 
 amount in store will be that buyers will defer their pur- 
 chases and maintain a low price. Buyers will try to our- 
 wait him, knowiag that he cannot afford to hold the idle 
 stock indefinitely. 
 
 (a) Do you agree with his reasoning? 
 
 {b) What counter arguments might be made ? 
 
 (c) What economic principle is involved ? 
 
CHAPTER X 
 MONEY AND ITS PURCHASING POWER 
 
 I. Money and price. 2. Money in exchange. 3. Barter and need for 
 money. 4. What is money? s- The definition explained. 6. Functions 
 of money. 7. Credit, currency, cash. 8. Qualities of good money. 9. 
 Coinage. 10. Free, unlimited, gratuitous coinage. 11. Money exchanged 
 by weight and by count. 12. Seigniorage. 13. Seigniorage and the pur- 
 chasing power of money. 14. Other illustrations. 15. Seigniorage in the 
 monetary system of the United States. 16. Monetary system of the 
 United States, 1915. i7- The mint price and the market price of gold 
 bullion. 18. Convertibility of money. 19. Exercises. 
 
 I. Money and Price. — Price, we have seen, is the amount 
 of a thing, money or other, given in exchange for another 
 thing. But prices are generally thought of and expressed 
 in money. Reasoning on prices, then, must include an ex- 
 amination of the influencfes which determine the exchange 
 powers of money. It is at once evident that if money is 
 extremely scarce while corn exists in great abundance, very 
 little money would be given for a bushel; that is to say, the 
 price of corn would be low. On the contrary, were money 
 abundant while corn is scarce, it would require much more 
 money to buy a bushel; the price would be high. This 
 does not differ in principle from exchanges in which no 
 money is involved. If at the same time we have a scarcity 
 of grain and the yards are congested with cars full of coal 
 for which there is no market, a bushel of corn would com- 
 mand a large supply of coal in exchange. 
 
 In order to account for the money price of goods, account 
 must be taken of the supply of money, as well as of the 
 
 '95 
 
196 Introduction to Economics 
 
 supply of goods. It will be the purpose of this chapter 
 to point out some determining influences on the purchasing 
 powers of money. The purchasing power of money is of 
 such significance that we shall devote the following chap- 
 ter also largely to this subject. The chapters immediately 
 preceding this have had to do with influences which deter- 
 mine the supply of and the demand for goods. The money 
 price of a good depends upon two things; the supply of 
 and demand for the good and the purchasing power of 
 money. 
 
 2. Money in Exchange. — In an economy of self-suffi- 
 ciency the choice as to what one produces is determined 
 by his personal wants. In an economy of interdependence 
 and trade, such as we know, the choice as to what one pro- 
 duces is determined by abilities and aptitudes. The self- 
 sufficing family produces its own clothing, food, and drink. 
 The laborer in an exchange economy throws his product 
 upon the market, let who will consume it. He, in turn, 
 looks to the products of others for the means of gratifying 
 his own desires. 
 
 The producers offer their several products for sale upon 
 the market, these same producers become consumers, buy- 
 ing in the market such necessities, comforts, and luxuries 
 as their desires, fancies, or caprices may dictate. In the 
 market exchanges take place and the consequence of these 
 exchanges is the division of labor. The virtue of exchange 
 is that it brings about a division of labor, and the virtue 
 of a division of labor is that it enlarges production. Ex- 
 change facilitates or, to speak more accurately, makes pos- 
 sible a minute division of labor with its consequences. 
 Exchange in its turn is facilitated or, better yet, made 
 possible by the great agent of exchange — money. 
 
Money and Its Purchasing Power 197 
 
 3. Barter and Need for Money.— Could a community in 
 which no exchanging takes place enjoy a division of labor? 
 Yes, but under an entirely different economic order from 
 that in which we now live. It would be possible for the 
 different members of a communistic society to follow tasks 
 to which their talents are adapted, should they distribute 
 the products of the community, giving to each according 
 to his need. They would share the income of the com- 
 munity in the same way that the family to-day distributes 
 its income without money and without price. The divi- 
 sion of labor under existing circumstances requires per- 
 sons to get together in exchange, or else go without needed 
 supplies. 
 
 Exchanges there must be, but exchanges would in all 
 instances be hampered and in many cases would be im- 
 possible without the use of money. Even in cases of bar- 
 ter, goods traded for goods, each of the goods traded is 
 evaluated in terms of the money unit, in order to deter- 
 mine the ratio of exchange between these goods. For in- 
 stance, suppose that the manufacturer of pianos could 
 not resort to the use of money to effect his exchanges, he 
 would find difficulty in trading his product for the inexpen- 
 sive commodities of every-day use — salt, coffee, bread, 
 and the small articles of merchandise. There would be 
 many persons who would desire a piano, but who would 
 not have the articles needed by the piano-maker. Or if 
 one is found who possesses all or any of these articles it 
 would be difficult, if not impossible, to work out an exact 
 price equivalent as between the piano and the goods to be 
 given in exchange for it. 
 
 Some goods are more barterable than others. Could 
 the piano-maker first exchange his product for a very bar- 
 
198 Introduction to Economics 
 
 terable commodity, one for which all would be willing to 
 exchange whatever goods they might have for sale, he 
 would experience little difficulty in obtaining the several 
 commodities of his desire. 
 
 4. What Is Money? — ^We may first note how money 
 may not be defined. It caimot be defined by telling what 
 it is made of. It is no definition to say that the money 
 unit — the dollar — contains 23.22 grains of pure gold. Dif- 
 ferent commodities have been used as money: Knives were 
 formerly used as money in China; tobacco served the same 
 function in Virginia; some other commodities that have 
 served this function are wheat, bark, cattle, iron, and shells. 
 
 These examples show also that there is no particular 
 shape, size, or weight which money must have. 
 
 Money, furthermore, cannot be made by law. Tobacco 
 in Virginia was money before it was so legally defined. A 
 loaf of bread would not become a dollar should we affix a 
 government stamp bearing these words: "This is a dollar 
 — in God we trust." The law may declare a thing "legal 
 tender" which will not be accepted as money. If the law 
 declares some commodity to be money which debtors may 
 tender in the full discharge of debts and which creditors 
 are compelled to accept, the contracts between debtors 
 and creditors may specify that payment shall be made in 
 something else. 
 
 To declare a thing legal tender may not render it valu- 
 able. Continental notes were legal tender, yet they were 
 so worthless as to give us the expression, "not worth a 
 continental." There may be money which does not have 
 the quality of legal tender. A slight error crept into the 
 monetary bill for the Philippine Islands which failed to 
 define small change as legal tender. The people were 
 
Money and Its Purchasing Power 199 
 
 probably unaware of the oversight; or if they were it was 
 a matter of no consequence. Small change was used at 
 the post-offices, banks, and in general circulation. What 
 is more, a commodity may be money in the full sense of 
 that word, and at the same time be counterfeit, and every- 
 one may know that it is counterfeit. The Philippines fur- 
 nish another instance. Copper is found in an almost pure 
 state in one place — for all I know, in several places — in the 
 hills, and the natives, at the time of the American occu- 
 pancy, had long been accustomed to mine, pound into 
 shape, and use this copper as money. Centavas (a copper 
 piece worth the half of an American penny) possessed the 
 highest degree of acceptability, and was common currency, 
 despite the fact that all knew it to be counterfeit. 
 
 Anything — counterfeit or of legal sanction, legal tender 
 or not — which is generally acceptable carries with it a 
 function beyond and in addition to its ordinary natural 
 function. If copper becomes generally acceptable, it takes 
 on a function in addition to the uses made of it in the in- 
 dustrial arts. And this additional function is the money 
 function. Whatever acquires this function becomes a 
 medium of exchange. 
 
 The word "mediimi" deserves particular emphasis here. 
 The copper ceases to be an end in itself and becomes a 
 means to an end, "an intermediate thing in the commerce 
 between the producers and consumers of any and of every 
 article." The seller accepts the copper with no other 
 end in view than that of passing it on in payment to 
 another seller. 
 
 The function described is the money function: money is 
 the medium of exchange. How define it? Money is that 
 which passes freely from hand to hand throughout the com- 
 
200 Introduction to Economics 
 
 tnunity, in payment for goods and in full discharge of debts, 
 being accepted without reference to the character or credit of 
 the person offering it, and without the intention of the person 
 who receives it to consume it otherwise than in tendering it to 
 others. 
 
 5. The Definition Explained. — ^The long definition just 
 given embodies a number of points which deserve special 
 mention. The money function is the kernel of this defi- 
 nition. That very able and gifted writer, F. A. Walker, 
 had this in mind when he said: "Whatever performs this 
 function, does this work, is money, no matter what it is 
 made of, and no matter how it comes to be a medium at 
 first, or why it continues to be such. So long as, in any 
 community, there is an article which all producers take 
 freely and as a matter of course, in exchange for whatever 
 they have to sell, instead of looking about, at the time, for 
 the particular things they themselves wish to consume, 
 that article is money, be it white, yeUow, or black, hard 
 or soft, animal, vegetable, or mineral. There is no other 
 test of money than this. That which does the money- 
 work is the money- thing. It may do this well; it may do 
 this ill. It may be good money; it may be bad money — 
 but it is money all the same." ' 
 
 Some writers say that money must be of fuU commodity 
 value, but the above definition pays no regard to what 
 money is made of, says nothing of the exchange power of 
 the commodity used to make money. It defines money in 
 terms of what money does — it would know the doer by 
 what it does. It would include all media of exchange 
 whether paper or coin — it is enough that it be generally 
 acceptable. It would not include checks, because they 
 'Political Economy, Advanced Course, p. 123. 
 
Money and Its Purchasing Power 201 
 
 are not generally acceptable, do not pass freely from hand 
 to hand, are not accepted without reference to the char- 
 acter or credit of the person offering them. The definition 
 is not burdened with overrefinement, it corresponds to 
 popular usage, and is workable. 
 
 6. Functions of Money. — ^What does money do? To 
 answer this question is to give the functions of money. To 
 serve as a common medium of exchange is its primary func- 
 tion, other functions are derivative from this. A pen or a 
 watch performs a specific service and is wanted for no 
 other purpose. Money likewise is a simple tool desired 
 for the one purpose of making exchanges and none other. 
 Money is no mysterious thing, no mystic principles veil 
 or obscure it; it is a tool for making exchanges, just as a 
 hammer is a tool for driving nails. 
 
 Money is a standard or common denominator of value 
 or, more accurately, a standard of the relative prices of 
 goods. This is a derived function, although many writers 
 class it with the first-mentioned, and speak of these as the 
 two primary functions. This error is easily disposed of, 
 for a thing could not serve as a standard of value unless it 
 be a medium of exchange. Strictly speaking, money is 
 not a standard of value as between persons. It would be 
 a curiously poor yardstick, which is two feet long in one 
 man's hands and ten feet long in the hands of another. 
 But something comparable to th"s is true in the case of 
 the dollar, for it reflects large marginal desirability for the 
 poor and little for the rich. Considered from the stand- 
 point of one person, the dollar does serve as a measure of 
 the comparative worth of different commodities. The in- 
 dividual measures the relative valuations of corn and 
 wheat by bringing these in comparison with the value he 
 
202 Introduction to Economics 
 
 attributes to a unit of money. If for him the marginal 
 desirability of a bushel of corn and the alternative use of 
 a doUar are equivalent, while the marginal desirability of 
 a bushel of wheat would be the equivalent of two dollars, 
 he would here have measured the values attributed to 
 two commodities, finding the one to be double that of the 
 other. As between persons, however, money serves sim- 
 ply as a measure of price. 
 
 The third function of money, likewise derived from the 
 first mentioned, is that of a storehouse of general purchas- 
 ing power. When we speak of value being stored in money 
 we do not imply that value is something intrinsic in money; 
 we mean that money is a durable thing and that it is 
 always salable. 
 
 The fourth function of money is very similar to the 
 third: it is a standard of deferred payments. The pur- 
 chaser defers payment when he buys goods on credit; the 
 borrower defers payment when he borrows from a bank; 
 in any case payment is deferred when a debt is made. If 
 one borrows $i,ooo for one year's time, he agrees simply 
 to return the $i,ooo plus the interest; he dofes not, except 
 in rare instances, agree to pay back as much purchasing 
 power as he borrowed. As a little reflection will show, 
 this introduces a point of great significance. Let us sup- 
 pose that one had borrowed in the year 1915 $1,000, which 
 he agreed to repay in 1920. Assume further that in this 
 five years prices double, that in 1920 it will take $2 to 
 buy the same goods which $1 would have bought in 1915, 
 What would be the consequences ? As much money would 
 be returned as was borrowed; the debt would be paid in 
 legal tender and, therefore, legally cancelled. The obliga- 
 tion would be cancelled, dollar for dollar returned, while 
 
Money and Its Purchasing Power 203 
 
 but one-half of the purchasing power would be repaid. 
 But this is not all, for the creditor has been affected with 
 a serious injustice, and the debtor has enjoyed an unearned 
 benefit. 
 
 Money (and this is the last function to be mentioned, 
 although it certainly is not a distinct function) is used as 
 the reserves of banks. Notes and checks are based on 
 bank deposits or reserves. Bank reserves form the basis 
 of the credit structure. 
 
 7. Credit, Currency, Cash. — Popular usage makes money, 
 credit instruments, currency, and cash synonjonous, but 
 there are differences in the meanings of these terms. 
 
 Credit: There could be no credit apart from confidence. 
 When a buyer of goods or services makes a promise to pay 
 at a later date, he is trusted or given credit. This credit 
 is evidenced by written promises or contracts to pay, these 
 written contracts being called credit instruments. Credit 
 instruments are unconditional promises to pay money on 
 demand or at a specified future time. Certain credit in- 
 struments, bank-notes for example, become generally ac- 
 ceptable throughout the community; and since they come 
 to do the money-work, they are therefore the money-thing. 
 This type of money is called "representative money" by 
 some and "fiduciary money" by others. 
 
 Currency: Certain goods acquire through custom a high 
 degree of marketability; these are money or closely ap- 
 proximate it. Goods or instruments with a high degree 
 of marketability serve as circulating media or currency. 
 Currency includes primary money (gold in the United 
 States, which is back of all other forms of money), fiduciary 
 money (which is backed by primary money), and bank 
 deposits. 
 
204 Introduction to Economics 
 
 Cash: Some forms of currency such as checks drawn 
 against bank deposits are of limited acceptability. Cash 
 always means "ready money." Generally speaking, cash 
 is a synonym for currency. 
 
 8. Qualities of Good Money. — ^An essential quality of 
 good money is stability, because movements in the purchas- 
 ing power of money are always troublesome. If a com- 
 modity maintain the same exchange power through time, 
 its money price will vary with every variation in the pur- 
 chasing power of money. If wheat is priced at one dollar 
 the farmer borrows the equivalent of i,ooo bushels of his 
 product when he borrows $i,ooo. Assume the exchange 
 power of wheat relative to other goods to be stable for the 
 period of a loan, yet it is possible for the price to drop 
 from a doUar to fifty cents, because of an increase in the 
 purchasing power of money. In this case the farmer 
 would have borrowed the equivalent of i,ooo bushels of 
 his product and would be compelled to return in payment 
 the equivalent of 2,000 bushels of his product. Or assume 
 that two bushels represent a day's labor; he would have 
 borrowed the product of 500 days' labor, paying for it the 
 product of 1,000 days' labor. On the contrary, should the 
 purchasing power of the money unit be diminished by one- 
 half, the wheat would double in price, and the farmer 
 would return the product of only 250 days' labor. 
 
 Money should also be uniform in purchasing power. If 
 there were no fixed relationship in purchasing power of 
 coins, or should there be a lack of uniformity in the pur- 
 chasing power and appearance of notes coming from banks 
 in different sections of the country, there would be no end 
 of confusion, both in current transactions and in deferred 
 payments. 
 
Money and Its Purchasing Power 205 
 
 Money should be elastic in order that it may be adjusted 
 to the varjdng needs of trade. Inelasticity has been the 
 most serious defect in our monetary system. Hard money 
 cannot be coined, thrown into circulation, and withdrawn 
 with the changing demands of trade. Elasticity is to be 
 looked for through the expansion and contraction of notes. 
 
 Money should be in convenient denominations in order 
 that it may be adaptable to all transactions, to large busi- 
 ness deals and petty purchases. Many have argued in 
 favor of a half-cent piece in order to still further adapt 
 money to current needs. 
 
 Money should be convenient to handle. If the dollar 
 were made of iron it would be too bulky. We no longer 
 coin the single gold dollar, because it is too small for gen- 
 eral convenience. 
 
 Money should be beautiful, easy to recognize, difficult to 
 counterfeit. It should be made of substance which is iw- 
 pressable, or capable of taking and holding the impression 
 or die. It should be of such shape and hardness as to 
 make it difficult or impossible to remove a portion of the 
 metal without defacing the coin. Coins are made harder 
 by the addition of alloy. Small coins should contain a 
 large per cent of alloy, because they get more wear than 
 large coins. In a dollar's worth of small coins there is 
 much more surface exposed to friction and wear than in a 
 single dollar-coin. 
 
 Money should be durable. No perishable commodity 
 could serve as a standard of deferred payments or as a store- 
 house for saving. 
 
 9. Coinage is the process of converting bullion into 
 coin. When a government stamps a piece of metal, cer- 
 tifying its weight and fineness, the process is known as 
 
206 Introdtiction to Economics 
 
 coinage. Coinage is a matter of convenience; no questions 
 are asked when one tenders a gold coin in payment. The 
 people accept a coin by tale or count when the government 
 by means of its stamp has certified as to its weight and 
 fineness. One would appreciate the necessity for coinage 
 were he compelled to carry around the necessary acids, 
 retort, and scales to test and weigh the proper amounts of 
 the precious metals used in his current purchases. The 
 fact that coins are accepted at face value furnishes tempta- 
 tion to the counterfeiter, because he knows that a similar 
 stamp on a baser metal would pass current. The clipper, 
 likewise the sweater, is also tempted, for if he can abstract 
 part of the metal in such a way as not to disfigure the coin, 
 it will continue to pass at full face value. Improvements 
 in the art of coinage have been stimulated by the presence 
 of potential counterfeiters. At first coins were stamped on 
 but one side, later both sides were stamped, so that the 
 stamp would be defaced in a process of removing a portion 
 of the metal. The edges were miUed to defeat the work 
 of the clipper. The sweater's task is made hard by a pro- 
 vision for the recoinage of pieces showing natural wear, so 
 that a worn coin is an object of public distrust. 
 
 The medium of exchange must have universal accepta- 
 bility, and this it cannot have unless' it maintains the full 
 confidence of the people. A country's monetary system 
 pervades the whole life of the community. So significant 
 is coinage that governments everywhere single out coinage 
 as a particular process to be monopolized by the sovereign 
 power of the State, and counterfeiting is made an act of 
 treason. 
 
 ID. Free, Unlimited, Gratuitous Coinage. — Many people 
 have the idea that free coinage means simply that a person 
 
Money and Its Purchasing Power 207 
 
 may have his bullion converted into coin free of charge. 
 This would be true in case of gratuitous coinage, but not 
 in case of free coinage. We are said to have free coinage 
 when any owner of bullion is at Uberty to have it coined 
 on the same terms as the government, or as any other 
 citizen. There may or may not be a charge for the opera- 
 tion. We have the free coinage of gold in the United 
 States. 
 
 Unlimited coinage has, of course, just the opposite 
 meaning of limited coinage. If we had limited coinage of 
 gold the government would specify a limit to the amount 
 of coin which one might have struck. We have the un- 
 limited coinage of gold in the United States. 
 
 Gratmtous coinage, as above implied, means that the 
 government makes no charge for converting bullion into 
 coin. We have the gratuitous coinage of gold. 
 
 II. Money Exchanged by Weight and by Count. — In 
 ancient times the precious metals were not always coined. 
 They were used as money in bulk. Exchanges involving 
 money must have been difficult to make and only approxi- 
 mately accurate, for the metal had to be weighed and 
 tested. Even in antiquity there was some coinage; "pieces 
 of silver" are spoken of in Genesis (20 : 16, 37 : 28). Also 
 in Genesis reference is made to "money in full weight" 
 (32 : 21); another reference is to "land worth four hundred 
 shekels (224 grains troy) of silver . . . and Abraham 
 weighed to Ephram the silver" (Genesis 23 : 15, 16). "And 
 I . . . weighed him the money in the balances" (Jeremiah 
 32 : 10). Reference is made in the Bible also to the use of 
 gold (Genesis 44 : 8) and brass (Matthew 10 : 9) as money. 
 The probability is that a number of metals were used as 
 money and that they passed for the most part by weight. 
 
208 Introduction to Economics 
 
 In our day gold bars are used to settle international bal- 
 ances. 
 
 The exchange of coins (exchange by count) is in reality 
 an exchange by weight, for coins are but pieces of metal 
 stamped to indicate their weight and fineness. The Amer- 
 ican dollar is 23.22 grains of fine gold stamped. In 18 16 
 the English ParHament defined the pound sterling as being 
 113 grains of pure gold, and that definition still holds. 
 The American gold coin is nine-tenths fine and the English 
 sovereign, the "pound," is eleven-twelfths fine. The par 
 of exchange (the ratio of fine gold in them) is 4.866; that 
 is, that number of dollars contains the same amount of 
 fine gold (113 grains) as an English pound. 
 
 12. Seigniorage is the charge which the government 
 makes for converting bullion into coin. This charge may 
 be barely sufiicient to cover the actual cost of coinage, or 
 it may be large enough to leave a surplus above the cost 
 of coinage. That part of seigniorage covering the actual 
 cost of coinage has been termed brassage. 
 
 Should the purchasing power of a coin be computed 
 according to the amount of the bullion contained in it, or 
 should the cost of mintage be added? That is to say, if 
 it costs 5 cents to coin a $5 gold-piece, should it contain 
 500 cents' worth of gold, or should it contain only 495 
 cents' worth of bullion, and should the cost of coinage 
 (5 cents) be added in to make up the $5? Those who 
 answer that it should contain only 495 cents' worth of 
 bullion argue as follows: The distinct need for money 
 gives an additional purchasing power to gold which has 
 taken the form of coin. As a piece of furniture is worth 
 more than the crude lumber of which it is made, so a coin 
 is worth more than the bullion contained in it. If a pair 
 
Money and Its Purchasing Power 209 
 
 of shoes is worth more than so much leather, why is not 
 a coin worth more than so much bullion ? 
 
 What is more, if a gold coin, say $5, has five dollars' 
 worth of bullion in it, what is to prevent its being melted 
 down when occasion arises? The metal would be alter- 
 nately coined and melted down, recoined and again melted 
 as necessities dictate. 
 
 It is evident that if the bullion-owner were asked to 
 give 500 cents' worth of bullion and to pay in addition 5 
 cents (making 505 cents' worth of bullion), he would either 
 have no coining done, or else a $5 coin would be worth 
 more than 500 cents. 
 
 In connection with foreign trade another question would 
 arise, for a coin containing 495 cents' worth of bullion 
 might be kept in circulation at its face value (five hundred 
 cents) in the country of its issue, but it would buy only 
 495 cents' worth of goods from another country. 
 
 13. Seigniorage and the Purchasing Power of Money. — 
 This topic suggests a significant monetary principle, and 
 in order that this principle may stand out more boldly I 
 shall avoid confusing it with a multitude of considerations 
 by limiting the discussion to a single assumed country. 
 Assume that in a certain country the monetary transac- 
 tions remain about constant, and that 1,000,000 coins, 
 each containing 100 grains of fine gold, are required. This 
 would involve the use of 100,000,000 grains of gold as 
 money. If the government decides to charge a seigniorage 
 of I per cent, it may take one grain out of each coin, thus 
 leaving 1,000,000 coins in circulation, each of which con- 
 tains 99 grains of fine gold. Would a coin now pur- 
 chase as much as when each contained 100 grains? It 
 would, for there would be no increase in the number of 
 
210 Introduction to Economics 
 
 coins, and no decrease in the demand for purposes of ex- 
 change. 
 
 "But suppose the sovereign proceeds further, and takes, 
 not I grain but lo from every hundred, issuing 1,000,000 
 pieces of only go grains each. Will the purchasing power 
 of each piece be affected? Not in the least. There is 
 the same demand for pieces, the same supply. People still 
 want pieces of money; can only get them by giving com- 
 modities for them; have as many commodities and no fewer 
 to give; and there are just as many pieces and no more to 
 be obtained in this way." * 
 
 Now, assume that the government goes to the full limit 
 of seigniorage and takes out 100 per cent of the bullion 
 in a piece of money. Will a piece of money now purchase 
 as much as before? Yes, on one condition, and one only, 
 namely, that there be no alteration in the supply relative 
 to the demand for money. 
 
 The reasoning found in this paragraph was clearly 
 stated by the great thinker, David Ricardo, over a century 
 ago, and through all these years not a single first-rate 
 writer on the subject has deviated from his thought. To 
 present the whole matter in a word: the purchasing power 
 of money is determined by the demand for relative to the 
 supply of money. 
 
 14. Other Illustrations. — ^Assume that this government 
 charge a seigniorage of 25 per cent, and that it provides 
 that the bullion content of coins should not be diminished. 
 What would be the immediate effect on prices ? Inasmuch 
 as there would be the same amount of money and the same 
 amount of money-work to be done, there would be no 
 immediate change in prices. Would the bullion-owner be 
 
 ' Walker's Political Economy, Advanced Course, p. 147. 
 
Money and Its Purchasing Power 211 
 
 encouraged to take his bullion to the mint? No, because 
 he could get in exchange for his bullion only 75 per cent 
 as many coins as before the enactment of the law. What 
 would be the effect on the purchasing power of a coin 
 should the monetary demand increase, due to the normal 
 business growth of the community? I answer, it would 
 increase. The purchasing power of a coin would continue 
 to grow beyond and above its bullion content with the 
 growth in the monetary demand. When the purchasing 
 power of a coin becomes 25 per cent larger than its bullion 
 content, would men be induced to have their bullion coined ? 
 They would be under precisely the same inducement as if 
 no seigniorage existed; they would receive from the mint 
 coins whose purchasing power would be the full equivalent 
 of the bullion they brought to the mint. 
 
 Let us change the assumption: The government decides 
 to debase the coins 25 per cent {i. e., have them contain 
 25 per cent less gold), and to hoard the 25 per cent seignior- 
 age. This would, of course, cause no increase in the rate 
 of coinage. A light-weight coin would now cost the same 
 that a full-weight coin had cost before the seigniorage 
 charge, and since the charge would not cause an increase 
 in the number of coins, there could, under this assumption, 
 be no rise in prices. 
 
 Would prices fall? This would happen only in case the 
 light-weight became more valuable than the full-weight 
 coins, and they could become more valuable only by a 
 diminution in the number of coins struck. And since men 
 would give no more bulUon for a light-weight coin, and 
 since it would buy as much as a full-weight coin (for we 
 have seen that prices could not rise), the rate of coinage 
 would not be diminished. 
 
212 Introduction to Economics 
 
 Let us suppose that after accumulating a large fund of 
 seigniorage the government adopts the policy of coining 
 its fund of seigniorage, and thus adding largely to the 
 supply of money in circulation. How will this affect the 
 purchasing power of money? So long as this 25 per cent 
 seigniorage was hoarded it had no more effect on prices or 
 (what is the same) on the purchasing power of money 
 than if it were non-existent. But the very moment this 
 large additional sum of money enters into circulation, the 
 supply of money relative to the demand for it is increased, 
 so the purchasing power of coins will diminish; in other 
 words, prices will rise. Demand remaining the same, so 
 long as the quantity of money is limited, a debased coin 
 will circulate not according to the amount of the metal 
 actually contained, but at the purchasing power it should 
 bear, were it of full weight and fineness. Depreciation of 
 money (rise in prices) can result only from an excess of it. 
 
 It has been said that prices would rise (the purchasing 
 power of money would decline) at the time when this large 
 additional volume of money enters the market. Let us 
 now consider the permanency of this decline. We have 
 assumed that men have been bringing 100 grains of gold 
 to the mint in exchange for coins which (though they con- 
 tain 75 grains) are worth the full 100 grains. If coins are 
 now worth less than 100 grains of gold, it will be evident 
 that bullion-owners will no longer give 100 grains for coins 
 worth less than 100 grains. After this extra supply of 
 coins has been absorbed in the market, there will be little 
 or no gold offered to the mint for coinage. As the mone- 
 tary demand of the community grows, prices will decline 
 (the purchasing power of money will rise). This will con- 
 tinue until the money unit reaches a purchasing power 
 
Money and Its Purchasing Power 213 
 
 equivalent to that of loo grains of gold, when the bullion- 
 owners will again offer their gold to the mint. 
 
 15. Seigniorage in the Monetary System of the United 
 System. — The following table will show the main features 
 of our monetary system. Gold is the only kind of money 
 which is not artificially limited in amount; it is the only 
 metal subject to free, unlimited, and gratuitous coinage. 
 Minor coins are issued only in exchange for other money; 
 men get change from the bank, and the bank obtains it 
 from the government mints. Small coins are redeemed 
 on demand at the treasury and at the banks. Their con- 
 vertibility maintains their parity. As the following table 
 will show, the bullion content of these coins is small. 
 
 The variety of uses for money necessitates a number of 
 different denominations, there being an elastic limit to the 
 amount needed in the different denominations. If there 
 be a shortage of dimes, traders would be glad of the privi- 
 lege of exchanging other money for dimes; if too many 
 dimes, traders will be anxious to exchange dimes for the 
 more needed denominations. Relative to all forms of 
 money, there is a point of greatest convenience for any 
 one denomination, and this point is called the saturation- 
 point. This point marks the upper limit to the supply of 
 any denomination. The dime, for example, is convertible 
 into other forms of money, and when too many dimes get 
 into circulation they will be offered for redemption. But 
 while the bullion content of the dime (silver subsidiary: 
 gold :: 14.958 : i) is small, the government issues it at face 
 value, thus making a profit. It is therefore to the interest 
 of the government that these coins remain in circulation. 
 The government maintains their circulation by using its 
 monopoly power over coinage to limit their output. 
 
214 
 
 Introduction to Economics 
 
 16. Monetary System of the United States, 
 
 1915- 
 
 Metals 
 
 Weight, grains 
 
 Fineness 
 
 Ratio to gold 
 
 I. Gold coins 
 
 25.8 
 
 .90 
 
 100 
 
 2. Silver dollar 
 
 412.5 
 
 .90 
 
 15.988 to I 
 
 3. Silver, subsidiary 
 
 385.8 
 
 .90 
 
 14.953 to I 
 
 4. Nickel (5 cents) 
 
 5. Copper (i cent) 
 
 77.0 
 48.0 
 
 -25 
 • 95 
 
 
 
 
 MeUl 
 
 Limit of issue 
 
 Legal tender for private 
 debts 
 
 Receivable for 
 public dues 
 
 I. Gold coins 
 
 Unlimited 
 
 Unlimited 
 
 For all 
 
 2. Silver dollar 
 
 Ceased in 1905 
 
 Unlimited 
 
 For all 
 
 3. Silver, subsidiary 
 
 Needs of the people 
 
 $IO 
 
 $10 
 
 4. Nickel (5 cents) 
 
 Needs of the people 
 
 25 cents 
 
 2S cents 
 
 5. Copper (i cent) 
 
 Paper 
 
 6. Gold certificates 
 
 Needs of the people 
 
 25 cents 
 
 25 cents 
 
 Unlimited in exch. 
 
 No 
 
 ForaU 
 
 
 for gold coin 
 
 
 
 7. Silver certificates 
 
 In exchange for 
 silver dollars 
 
 No 
 
 ForaU 
 
 8. U. S. notes 
 
 No new issues 
 
 Unlimited 
 
 Except customs 
 
 Q. Treas.notesofi8()o 
 
 No new issues 
 
 Unlimited 
 
 ForaU 
 
 10. National b'k notes 
 
 Capital of banks 
 
 No 
 
 Except customs 
 
 II. Fed. Reserve notes 
 
 Per cent of gold re- 
 serve 
 
 At banks of res. system 
 
 ForaU 
 
 Metal 
 
 Exchangeable at 
 
 Redeemable at Treasury 
 
 In circulation 
 
 Treasury for 
 
 in 
 
 Oct. I, 1915 
 
 X. Gold coins 
 
 Gold cert. U.S.,Tr. 
 or Fed. Res. notes 
 
 
 616,000,000 
 
 2. Silver dollar 
 
 Silver certificates 
 
 
 65,000,000 
 
 3. Silver, subsidiary 
 
 Minor coins 
 
 Lawful money (a), in 
 sums or multiples of $20 
 
 162,000,000 
 
 4. Nickel 
 
 
 Lawful money (a) in, 
 
 
 
 
 sums or multiples of $20 
 
 62,000,000 {d) 
 
 S. Copper 
 
 
 Lawful money (a), in 
 
 
 
 sums or multiples of $20 
 
 J 
 
 Paper 
 
 
 
 
 6. Gold certificates 
 
 Subsidiary and 
 minor coins 
 
 Gold coin 
 
 1,172,000,000 (e) 
 
 7. Silver certificates 
 
 Silver and minor 
 coins 
 
 Silver dollars 
 
 482,000,000 if) 
 
 8. U. S. notes 
 
 Subsidiary and 
 minor coins 
 
 Gold 
 
 337,000,000 
 
 9. Treasury notes of 
 
 Silver and minor 
 
 Gold 
 
 2,200,000 
 
 i8go 
 
 coins 
 
 
 
 xo. National bank 
 
 Subsidiary silver 
 
 Lawful money (6) 
 
 761,000,000 
 
 notes 
 
 and minor coins 
 
 
 
 II. Fed. Reserve notes 
 
 Gold {€) 
 
 Gold (c) 
 
 133,000,000 
 
 Total C^) 
 
 
 
 3,792,200,000 
 
 fa) "Lawful money" includes gold coin, silver dollars, U. S. notes, and Treasury notes. 
 (6) Redeemable also in lawful money at bank of issue. 
 (c) Redeemable also at Federal Reserve banks in gold. 
 id)" 
 
 a) Not usually included in the estimates of total money in circulation. 
 
 U) Represented dollar for doUar by gold kept in the U. S. Treasury. 
 
 if) Represented dollar for doUar by silver kept in the U. S. Treasury. 
 
 (g) Besides, there were about $312,000,000 in the U. S. Treasury not offset by outstand- 
 ing paper. The total money stock fin circulation and in the Treasury, eliminating certifi- 
 cates representing gold and silver) was about $4,233,000,000, of which 70 per cent was metal 
 flargely represented in circulation by paper certificates) and 30 per cent "was paper. Of the 
 70 per cent 50 was gold, 18 was silver, and 2 was copper and nickel. 
 
 The foregoing table is taken from Fetter's Modem Economic Problems, vol. 11, page 57. 
 
Money and Its Purchasing Power 215 
 
 17. The Mint Price and the Market Price of Gold Bul- 
 lion. — ^The weight of a gold eagle must not vary more than 
 half a grain from the standard weight prescribed by law. 
 Smaller gold coins must vary not over one-fourth of a 
 grain. This allowable variation is called the "tolerance 
 of the mint." The American gold dollar contains, allow- 
 ing for the tolerance of the mint, 23.22 grains of fine gold. 
 In the United States 23.22 grains of fine gold is worth as 
 much in the form of bullion as in the form of a coin. Why 
 is this so? The answer is that we have free, unlimited, 
 and gratuitous coinage of gold. The owner enjoys the 
 privilege of offering his gold bullion to the mint in exchange 
 for gold coin. There is no limit to the amount that he may 
 so offer, and no seigniorage is charged him; he gets as 
 much metal in the form of coin as he offers in the form of 
 bullion. A dollar could be worth neither more nor less 
 than 23.22 grains of gold, because the mint stands ready 
 at all times to give gold coins for the amount of bullion 
 they contain. 
 
 Furthermore, the market price (the price of gold bullion 
 in the open market) cannot vary from the mint price (the 
 amount of money which a given weight of gold will pro- 
 duce when coined) of gold bulHon. Before the bullion- 
 owner are two competing markets, the arts market and 
 the money market. On the one side stand the manufac- 
 turers of Jewelry and other articles made of gold, these 
 manufacturers being the middlemen through whom are 
 expressed the demands of all purchasers of gold products. 
 On the other hand stands the mint, likewise an interme- 
 diary institution through which are expressed the demands 
 of the whole people who are offering their goods in exchange 
 for money. To which market will the owner sell his bul- 
 
216 Introduction to Economics 
 
 lion? The answer is a simple one; to the one offering the 
 higher price. Let us assume for the sake of illustration 
 that the arts market offers a slightly higher price. Gold 
 bullion would drift from the money market to the arts 
 market. This would limit the output of money, thus 
 causing its purchasing power to rise; relatively speaking, 
 it would enlarge the gold supply in the arts market, thus 
 causing its money price to decline. The change of de- 
 mands in the two markets would now cause gold to drift 
 in the opposite direction — from the arts to the money 
 market. The precious metals are very sensitive, very 
 responsive to even slight variations in demand — so much 
 so, indeed, that virtually no difference exists in the price 
 of gold as between the two markets. 
 
 Now that gold coined and gold uncoined are worth the 
 same, we may say that there can be no change in the 
 money price of gold. A dollar, regardless of changes in 
 the prices of all other commodities, will always exchange 
 for 23.22 grains of fine gold, no more and no less. Gold 
 is the primary money of the United States; aU other forms 
 of our money are automatically regulated by the purchas- 
 ing power of gold. 
 
 18. Convertibility of Money. — ^Any one kind of money 
 is convertible when it is capable of being exchanged for or 
 redeemed in another kind of money. In a broader sense 
 we may speak of the convertibility of any good into money; 
 land is convertible into money and money into land. Con- 
 vertibility is used generally to exchange other forms of 
 money for primary money. Convertibility may be either 
 implied, as in case of our silver, or it may be and usually 
 is expressed. It is expressed, for example, on a $10 gold 
 certificate in these words: "This certifies that there have 
 
Money and Its Purchasing Power %Vll 
 
 been deposited in the Treasury of the United States of 
 America ten dollars in gold coin, payable to the bearer on 
 demand." 
 
 The purchasing power of fiduciary money will be main- 
 tained by the primary money, even though it should have 
 little or no bullion content when a large amount of it is in 
 circulation. It is conceivable that loo pennies might be 
 made worth more than a one-dollar piece. They perform a 
 very necessary function in our petty transactions and were 
 their supply narrowly limited, they would surely rise in 
 purchasing power. After 1893 British. India restricted the 
 coinage of their rupee, and the monetary demand of the 
 community grew until the money worth of the rupee sur- 
 passed its bullion worth. When the rupee reached i6d., 
 for instance, it would have produced no effect for the gov- 
 ernment to offer to redeem it at isd. in gold. This reason- 
 ing leads to this conclusion: Convertibility determines a 
 limit below which the purchasing power of fiduciary money 
 cannot fall, but it can go above that limit. 
 
 This conclusion suggests another important considera- 
 tion: If under our system the purchasing power of a 
 fiduciary dollar cannot go below (under certain conditions 
 might even go above) the gold dollar, does it follow that a 
 large issue of fiduciary money would have no bearing on 
 the purchasing power of a dollar? This does not follow. 
 Every additional dollar thrown into circulation has the 
 effect of lowering the purchasing power of every other dol- 
 lar. If for every dollar of fiduciary money we add to our 
 circulating media we should withdraw a gold dollar from 
 circulation, placing it in the treasury to redeem the fidu- 
 ciary, there could be no change in prices (the purchasing 
 power of the dollar would remain the same). Prices, the 
 
218 Introduction to Economics 
 
 demand for money remaining the same, could not change, 
 because there would be no alteration in the supply of 
 money. But we do not deposit gold, dollar for dollar, back 
 of all the circulating media. Long experience has demon- 
 strated that there is need for a gold redemption fund which 
 is small in comparison with the total circulating media. 
 It is rare that some forms of fiduciary money are ofifered 
 for redemption. This fact leads to the conclusion that a 
 large issue of fiduciary money adds to the supply of money, 
 and, therefore, the demand for money remaining the same, 
 the purchasing power of a dollar will decline (prices will 
 rise). 
 
 19. Exercises. — i. If there were no exchanges would 
 there be any money ? If there were no money would there 
 be any exchanges ? State the causal sequence between the 
 following: large production, money, minute division of 
 labor, exchange, price. 
 
 2. Tobacco is not money. Why? Tobacco would be 
 money under certain conditions. What are the condi- 
 tions? What is meant by "that which does the money- 
 work is the money- thing"? 
 
 3. What is meant by "legal tender"? Could a commod- 
 ity serve as money which is not legal tender? Give an 
 example to prove your answer. 
 
 4. What is the primary function of money? Mention 
 five other functions which are derivative from this? 
 
 5. Are the following sjoionyms: money, currency, cash? 
 
 6. What are the qualities of good money? Would the 
 qualities of money which is good for a poor society accus- 
 tomed to petty transactions, be the same as those of good 
 money for a wealthy society in which there are large 
 monetary transactions? 
 
 7. In many markets the laws require that the exact 
 quaUty and weight of goods be stamped upon the con- 
 tainer; coinage laws require that metal be stamped, thus 
 
Money and Its Purchasing Power 219 
 
 certifying its weight and fineness. The objects of the law 
 in the two cases are not precisely the same. Explain. 
 
 8. In the United States we have the free, . . ., and . . . 
 coinage of gold. Fill in the blank spaces and define the 
 terms used. 
 
 9. This chapter states that money would not depreciate 
 in purchasing power under certain conditions, even though 
 IOC per cent seigniorage were taken out. Is this true, and 
 if so, under what conditions ? 
 
 10. The mint price and the market price of gold tend 
 to remain the same in the United States. Tell why. 
 
 11. Nations as men are wealthy in proportion to the 
 amount of money possessed. Criticise. 
 
 12. Assume that a gold-mine in California is owned by 
 citizens in the same community. Would there be any dif- 
 ference in the increased wealth of that community whether 
 $10,000 worth of gold were mined or $10,000 worth of 
 wheat were produced? Would there be any difference in 
 the total wealth of society as a whole ? 
 
CHAPTER XI 
 
 MONEY AND ITS PURCHASING POWER 
 
 (continued) 
 
 I. Can the government make money? 2. A conservative view of fiat 
 money. 3. Greenbacks and prices. 4. Fiat money a monopoly. 5. Mar- 
 ginal desirability and value: a restatement. 6. The marginal use of money. 
 
 7. It is the exchange function only that imparts desirability to money. 
 
 8. The purchasing power of money. 9. Real income and the price level. 
 10. Two meanings of the purchasing power of money. 11. EfiEect of in- 
 creasing gold production. 12. The quantity theory of money. 13. Mis- 
 understandings answered. 14. The number of goods: N. 15. Price move- 
 ments not uniform. 16. The price level determined by means of index 
 numbers. 17. Simple index numbers. 18. Weighted index numbers. 19. 
 The purposes of index numbers. 20. Exercises. 
 
 I. Can the Government Make Money? — The beginner 
 in economics believes, and will state without fear of con- 
 tradiction, that not only can the government make money 
 by law, but also that it does actually do so. He beheves 
 that it is in the prerogative of the all-powerful sovereignty 
 of the state to declare what is and what is not money. That 
 the government makes money seems to be a truism; no 
 statement is more likely to command universal assent 
 among the uninformed, for they see about them different 
 kinds of money, some pieces made of gold but many more 
 made of paper, and all possessing the same purchasing 
 power. And the uninformed think this is because all bear 
 alike the govermnent stamp. 
 
 But after a study of the question the student will realize 
 that it is in a very limited sense that the government 
 makes money; that in a broader sense the government can 
 
Money and Its Purchasing Power 221 
 
 no more make money by law than it can make grape- juice 
 by law. The government prescribes the conditions under 
 which money may be issued, and here its powers end. 
 The government can make money only in the sense of 
 making itself a servant of the laws of money. Public offi- 
 cials must understand the principles of money and define, 
 subject to these principles, the conditions which regulate 
 the issue of money. 
 
 Suppose that the government could arbitrarily make 
 money by law, that it could place its stamp upon bits of 
 paper, and that these bits of paper, inscribed "This is a 
 dollar," would pass current in exchange for the products 
 of the world. There would be no reason why Montenegro 
 might not establish a government press and print enough 
 paper money over a week's end to buy such an abundance 
 of goods as would make it as wealthy as the United States. 
 A political speaker said, with reference to the American 
 silver dollar: "If the government can make a dollar with 
 48 cents' worth of silver and 52 cents' worth of law, why 
 should a poor man be compelled to pay $10 in hard-earned 
 money as taxes? Put 100 cents' worth of law in a dollar, 
 print a note and give the tax-payer a rest." 
 
 The above are the ideas of extreme fiat theorists who 
 preach the doctrine of the unlimited power of the state to 
 make money and maintain its purchasing power. Fiat 
 means "let there be made," and extreme fiat theorists believe 
 that the government in its magic power has but to say 
 "let there be made money" in order to convert stones, bark, 
 paper, or anything else into money. The chief example 
 of fiat theorists in the United States were the "Green- 
 backers" who wished to retain and to increase the green- 
 backs issued during the Civil War. Many of them saw 
 
222 Introduction to Economics 
 
 in greenbacks an exhaustless source of national income, a 
 ready means of pa3dng the national debt, a liberation from 
 the burdens of taxation, and better yet, a source from 
 which citizens might borrow at wUl money without inter- 
 est. Irredeemable goverrmient paper and luxury for all 
 was their dream. 
 
 2. A Conservative View of Fiat Money. — Fiat money 
 has no promissory relationship to other money. The gov- 
 ernment definitely promises to redeem certain forms of 
 money in gold coin, and because of this promissory rela- 
 tionship this money cannot be depreciated below the pur- 
 chasing power of gold coin. Fiat money need suffer no 
 depreciation; on the contrary, it may be made to appre- 
 ciate, but from an entirely different reason from that of a 
 promissory relationship. Its purchasing power, whatever 
 that may be — low, medium, or high — depends upon the 
 degree to which it is artificially limited and the demand 
 made for its use. If its output is wisely restricted, if con- 
 fidence be maintained in the integrity of the government 
 issuing it, it will serve all the functions of money; through 
 its use as a mediimi of exchange it becomes the standard 
 of price, the basis of credit, and the standard of deferred 
 payments. 
 
 Those writers are in error who claim that money always 
 derives its purchasing power from the metal constituting 
 it. Any cause limiting the supply of money relative to 
 the demand for it is as efficient a cause of its purchasing 
 power as is the metal constituting it. Gold coin may be 
 fiat money, and is fiat when the money worth of the coin 
 exceeds its bullion worth, due to the artificial limitation of 
 its supply. Then, why squander the precious metals in 
 making money ? 
 
Money and Its Purchasing Power 223 
 
 There is a sound reason why every civilized nation 
 makes use of the precious metals in its monetary system. 
 The precious metals have been produced from antiquity to 
 the present; they are so precious and durable that they 
 have been saved, and they exist in great abundance. Cur- 
 rent losses from them or additions to them from the mines 
 make relatively little difference in their total supply; they, 
 therefore, maintain a relatively stable, definite purchasing 
 power. Note that the word was stable, not fixed purchas- 
 ing power. Stable implies relativity; that which is stable 
 is so by comparison with that which is of less duration. 
 Money made of the precious metals cannot have a lower 
 purchasing power than that of the bullion content. The 
 supply of such money under free, gratuitous, and unlimited 
 coinage is automatically regulated by the market price of 
 the bullion constituting it, whereas money containing no 
 bullion is left to law, to the miscalculations and changing 
 opinions of lawmakers. There can be no business stability 
 when there is a lack of public confidence in the money 
 system. 
 
 3. Greenbacks and Prices. — In 1861 gold was the money 
 in common use throughout the country. In that year the 
 secretary of the treasury negotiated with the banks of 
 New York City a loan of $150,000,000. The brilliant suc- 
 cesses of the South on the field of battle, together with 
 financial incapacity at Washington, weakened Northern 
 credit and rendered these bonds all but unsalable. De- 
 positors, becoming alarmed, withdrew gold from the New 
 York banks, and forced them to suspend specie payments. 
 Other banks throughout the country (excepting banks in 
 California) followed the New York banks in the suspension 
 of specie payments. Bank-notes became the money of the 
 country. 
 
224 Introduction to Economics 
 
 The government could not get gold, and this gave the 
 fiat theorists their opportunity, of which they did not fail 
 to take advantage. In February, 1862, the first green- 
 back law was passed, and in less than a year's time $400,- 
 000,000 of United States notes (called greenbacks because 
 of their color) were issued. The government promised to 
 redeem these notes some time in the future, but set no 
 date for their redemption. They were legal tender and 
 served as the standard money of the North. PubUc con- 
 fidence in their worth was shaken by the large and fre- 
 quent issue of these notes, and they declined in purchasing 
 power until $1 in gold would exchange for $2.50 in green- 
 backs. It follows, of course, that there was a correspond- 
 ing rise in prices. 
 
 But this increase in price was not due wholly to the 
 great supply of greenbacks. Only one-half of the country 
 demanded greenbacks, whereas formerly the whole nation 
 used gold; this meant that there was probably a decline in 
 the demand for money. The lessened demand for money 
 caused a decline in its purchasing power, and, the com- 
 modity prices of goods remaining the same, money prices 
 increased. The Confederacy issued $500,000,000 in notes, 
 which may be considered, in their bearing on prices, a part 
 of the money supply of the whole country. Lastly, the 
 government issued treasury notes to the extent of $400,- 
 000,000. These were largely used as bank reserves and 
 thus became a basis of credit. Since credit does exactly 
 the same work as money, whatever serves to increase credit 
 would have the same bearing on prices as an increase in 
 the supply of money. 
 
 When greenbacks were issued, they were from the be- 
 ginning worth less than gold. In this way debtors profited, 
 
Money and Its Purchasing Power 225 
 
 because they could pay their debts in cheap money, could 
 pay to creditors less purchasing power than they had 
 received. The largest single class of debtors were the 
 bankers, who were forced to take these legal-tender notes 
 in payment of loans, and so were forced to pay them out 
 to depositors; thus greenbacks quickly reached every 
 channel of commerce. The greenback displaced at once 
 the old standard and became itself the new standard of 
 prices. Upon becoming the standard of prices it must 
 be the basis of credit, because promissory notes, checks, 
 book credit, and other obligations were cancelled by the 
 payment of greenbacks. The greenbacks became the ob- 
 ject of the country's monetary demand; they came to have 
 a purchasing power independent of the old standard; as 
 this purchasing power was less than that of the former 
 standard money, prices (the amount of money in green- 
 backs) would rise. When $i gold exchanged for $2.50 
 greenbacks, the farmer cared not at all whether he sold a 
 bushel of potatoes for a price of $1 in gold or for a price 
 of $2.50 in greenbacks; depreciated money and high prices 
 are convertible terms. 
 
 4. Fiat Money a Monopoly. — The whole charge for fiat 
 money may be considered as seigniorage, seigniorage being 
 the monopoly price which the government charges for the 
 issue of fiat money. In the case of a fiat issue, the govern- 
 ment has complete monopoly power, but the government, 
 as in the case of any other monopoUst, can control the 
 supply only; no monopoly has power to dictate what the 
 demand shall be. The expression of the needs of the peo- 
 ple for money is the demand for money; it is the amount 
 of money-work to be done in the community. He who 
 fails to give as full weight to the demand for money as to 
 
226 Introdiiction to Economics 
 
 the supply of it is ignorant of the purchasing power of 
 money and wholly unfit to discuss the subject. The pur- 
 chasing power of money will not be altered, will move 
 neither up nor down, unless the government alters the 
 quantity of money, so long as the demand remains un- 
 changed. It makes not a feather's weight of difference 
 whether the government takes out i per cent of seigniorage 
 or ID per cent or loo per cent. 
 
 "But," objects one, "former issues of such paper have 
 depreciated; history repeats itself." This objection is be- 
 side the point; this argument is not in behalf of a fiat sys- 
 tem, its purpose is to point out the principles according 
 to which the purchasing power of money is regulated. 
 Nowhere is a better exemplification of these principles 
 found than in the history of fiat issues. Valuable lessons 
 are gained from the history of monetary systems, even 
 when the results are wholly negative. History may reveal 
 the nature of monetary principles by showing the condi- 
 tions under which they will not work. Some conspicuous 
 depreciations of fiat money are recorded in history, and 
 insight into the causes at work in these cases acquaints us 
 with monetary principles and the best utilization of them. 
 We learn how to do by learning how not to do. 
 
 As early as the twelfth century China had a pure fiat 
 money cut from the inner bark of the mulberry-tree. It 
 was issued by the sovereign power of the people with as 
 much solemnity as if it were of pure gold; it was strictly 
 limited in accord with the principle of monopoly control; 
 it maintained the full confidence of the people; it performed 
 aU the functions of money and was, therefore, money in 
 the full meaning of that word. In the thirteenth century 
 Persia imitated this Chinese money, but attempted to 
 
Money and Its Purchasing Power 227 
 
 enforce artificially its circulation. After a trial of three 
 days business closed down, the officials were massacred, 
 and the money disappeared. The Persian money had been 
 made in imitation of the Chinese piece; why was one a 
 conspicuous success and the other a conspicuous failure? 
 China adhered to the principles of money by restricting 
 its issue to the amount of money-work to be done; Persia 
 attempted to prosper by law and to enforce artificially the 
 circulation of their issue. 
 
 During the French Revolution, the authorities issued 
 "assignats," fiat paper money, which at first performed 
 well the functions of money. Seeing these favorable re- 
 sults the authorities were encouraged and continued the 
 operation of the printing-press until forty-five thousand 
 millions of franks were issued. Failure, due to overissue, 
 was the result. Continental currency in the United States 
 was issued in such volume that even the treasury ceased 
 to keep a record of the issue. Failure, due to overissue, 
 was the result. 
 
 5. Marginal Desirability and Value: a Restatement. — 
 We are coming now to a statement of the marginal de- 
 sirability of the alternative uses of money, and prepara- 
 tory to that statement a brief review of the general princi- 
 ple is called for. For a fuller discussion of the principle see 
 the chapter on " Desire, Desirability." 
 
 Desirability is a quaUty of goods or services which is 
 calculated or fitted to excite a wish to possess. It varies 
 with persons, goods, places, and times. 
 
 Diminishing desirability expresses the principle that as 
 supply increases the total desirability increases at a dimin- 
 ishing rate. As one adds unit after unit to his supply of 
 a good, the total desirabihty of the supply will increase, 
 
228 Introduction to Economics 
 
 but as the supply is enlarged, as unit after unit is added, 
 each portion of the supply will have less and less gratifying 
 power. 
 
 Each additional unit of a supply causes the owner to be 
 less dependent upon each and every preceding unit. And 
 every unit maintains an equal desirability with every other 
 unit of a supply. Should one add orange after orange until 
 he had a supply of twelve, any one would have a desirability 
 equal to that of any other. 
 
 If the desirability of one unit is equal to that of any 
 other in the supply, can the total desirability of the supply 
 be obtained by multiplying the desirabiHty of one unit by 
 the number of units ? Not at all. If a Crusoe had twelve 
 guns he could not utilize so many and would be wilUng to 
 throw one away; its desirability would be zero, but it does 
 not follow that (0X12=0) zero would be the desirability 
 of the whole supply. How, then, can we measure the total 
 desirabiUty? We can do it by subtracting unit after unit 
 and adding the desirabilities of the different units, in this 
 way obtaining the sum of all the desirabilities — the differ- 
 ence between the total desirabilities of twelve guns and 
 no guns. 
 
 The tendency is for supplies of different commodities to 
 maintain equal marginal desirabilities. One ceases to buy 
 bread, not necessarily because he would have no more of 
 it, but because the money he would spend for additional 
 bread will gratify a more intense desire if spent for some 
 more highly desired commodity. 
 
 The dollar cannot be a common measure of marginal 
 desirability as between persons, because it does not itself 
 reflect the same desirability for all persons. 
 
 Valuation is the price appraisal of a good or service; it 
 
Money and Its Purchasing Power 229 
 
 may be expressed as the amount of a thing one would be 
 willing to give for a good or service. Valuation is, there- 
 fore, a direct outgrowth of the comparison of the marginal 
 desirabilities of different things. 
 
 6. The marginal use of money differs from that of other 
 goods in this way; the services of other goods are more 
 narrowly limited, whereas money is universally exchange- 
 able and thus capable of serving all desires. The marginal 
 use (it of itself has no marginal desirability) thus comes to 
 express the general level of the marginal desirabilities of 
 goods. Any particular good, bread for example, diminishes 
 rapidly in per-unit desirability to each owner with addi- 
 tional increments; the desire for money diminishes slowly 
 with additional increments, for the purchasing power of 
 money spreads out over the broad area of goods in general. 
 When water is poured into a hollow pipe, the level will rise 
 rapidly; but it will rise slowly when poured upon a broad 
 surface. Just so rapidly will desirability decline when in- 
 crements, say bread, are applied to the gratification of a 
 particular desire, and as slowly in the case of money, which 
 spreads itseK out to gratify all desires. When a good is 
 offered for a dollar, it is offered in competition with all 
 other goods, because a dollar is readily exchangeable for 
 all other goods. 
 
 7. It is the Exchange Function Only that Imparts Desir- 
 ability to Money. — ^The rich may be enslaved by their 
 wealth, they may have more than they can advantageously 
 expend, but the poor must calculate their expenditures with 
 care, must weigh this necessity against that in order to 
 get the greatest total desirkbility. It is simply untrue 
 that the dollar is a common measure of desirability as 
 between the rich and the poor. One will say that the poor 
 
230 Introduction to Economics 
 
 and the rich pay exactly the same prices in the market; 
 bread is not lo cents a loaf to the man worth $io,ckx) and 
 5 cents to the man worth $5,000. Both may be marginal 
 buyers of bread at the same market-price, and this, it is 
 argued, proves that a piece of money has the same desir- 
 ability for the two classes. In fact, no such thing is proved. 
 The desirability reflected by a piece of money may be 
 ten, or twenty, or one hundred times greater to the poor 
 than to the rich, yet both are willing to pay the same price 
 for a loaf. But, suppose that both are marginal buyers 
 of the same thing at the same price {i. e., neither willing 
 to pay a penny more), how account for the fact that the 
 desirability reflected by money is higher to the one than 
 to the other? The simple truth and complete reply to 
 this question may be stated as follows: If the marginal 
 desirability of a unit of money is ten times greater for the 
 poor, and if the marginal desirability of the loaf is like- 
 wise ten times greater for the poor than for the rich man, 
 both must be marginal buyers at precisely the same price.^ 
 
 How much of any one commodity will the buyer, rich 
 or poor, take? Each and every individual wiU continue 
 to buy until the point is reached where the marginal de- 
 sirabihty of that commodity comes to equal the marginal 
 desirability of its money price. If oranges are 5 cents 
 each, a buyer wiU continue to buy oranges until an equality 
 is reached between the marginal desirabilities of something 
 else the 5 cents will buy and one orange. This point of 
 equaUty of marginal desirabilities is the stopping-point of 
 the purchaser. 
 
 Let us answer this question: What determines the mar- 
 
 ' See last paragraph in chapter on "Desire, Desirability." Cf. Daven- 
 port's Economics of Enterprise, ch. VII. 
 
Money and Its Purchasing Power 231 
 
 ginal desirability of the alternative use of a unit of money? 
 Through a simple exchange the purchasing power in the 
 form of a coin may be given the form of an orange, of a 
 loaf of bread, or of any other thing on the market. Money 
 serves no end in itself, it is a means to an end, and its 
 desirability is to be thought of in terms of the goods for 
 which it will exchange. Its desirability is not an indepen- 
 dent thing, because it is derived from that for which it 
 will exchange. For what quantity of other commodities 
 will a dollar exchange ? The amount of anything for which 
 a dollar will exchange depends upon the price of that 
 thing; and the concept of the general purchasing power 
 of a dollar depends wholly upon the general level of prices. 
 
 To state the argument briefly: The importance attrib- 
 uted to a dollar differs among persons; the purpose of the 
 dollar is to buy things, therefore its desirability for a per- 
 son is the desirability of a dollar's worth of goods to that 
 person. The dollar's worth of goods depends upon the 
 general or average level of prices, and the level of prices 
 is at the point of equality of ratio between money and 
 goods. Marginal buyers, rich and poor, pay the same 
 level of prices in the market, not because they have the 
 same marginal desirabilities, but because they have an 
 equality of ratio as between the money and the goods 
 bought. 
 
 8. The Purchasing Power of Money. — ^A dollar will 
 buy lo pounds of sugar at lo cents a pound, 20 pounds at 
 5 cents, and 50 pounds at 2 cents a pound. It is but a 
 common truism that the purchasing power of money is 
 large when prices are low, and small when prices are high. 
 The average or general purchasing power of money de- 
 pends upon the general average or level of prices. The 
 
232 Introduction to Economics 
 
 words, "depends upon," in the last sentence do not ex- 
 press the exact idea; it is strictly accurate to say that 
 "the purchasing power of money" and "the general level 
 of prices" are convertible terms. Neither depends upon 
 the other, both mean one and the same thing. 
 
 The average weight of a baseball nine is the total weight 
 of the members divided by nine. No member may weigh 
 exactly the same as this average. The weights of the dif- 
 ferent individuals will be distributed about this general 
 average — some below and some above. Likewise, if we 
 compare the prices of particular goods with the general 
 level of prices, we will find them distributed about this 
 general average — some above and some below, some high 
 and some low. Professor Irving Fisher aptly compares 
 the level of prices to the level of a lake. The surface of 
 the lake is not smooth, there are waves and for every wave 
 a trough. Below the general level are the troughs, and 
 above are the crests of the waves. The individual waves 
 and troughs will not vary far from the general level of 
 prices. If prices are low the purchasing power of money 
 is high. This would cause each person to be anxious for 
 money and would make him willing to sell his product for 
 a low money price. On t"he contrary, if the purchasing 
 power of money is low, the seller will require more money, 
 a higher price for his product. The prices of particular 
 commodities are influenced by and tend to vary with the 
 general level of prices. 
 
 9. Real Income and the Price Level. — We have defined 
 valuation as a price appraisal, or as the amount of one 
 thing which an individual would be willing to give for 
 another thing. From this definition it is clear that one's 
 valuation of a piece of money is the amount of something 
 
Money and Its Purchasing Power 233 
 
 else which he would be willing to give for it. Thus the 
 valuation of money comes to be expressed in terms of com- 
 modities in general, and so we can express one's valuation 
 of money in terms of the general level of prices. 
 
 The level of prices (the purchasing power of money) de- 
 termines for the individual what he can get in exchange 
 for a unit of money. The various classes of people, such 
 as farmers, laboring men, and professional men, buy those 
 goods which are suited to their needs. Engineers do not 
 buy plows and farmers do not buy dentists' chairs. The 
 real income of the individual depends upon his money 
 income and upon the prices of the things he buys. But 
 the prices of the things he buys depend upon the gen- 
 eral level of prices. To illustrate: Will the housewife pay 
 90 cents for a dozen eggs? Yes, if she desires the eggs 
 more than something else the 90 cents would buy. She 
 weighs in her mind the eggs against the alternative use of 
 the money. If the level of prices is low the purchasing 
 power of her money will be high; she will highly regard 
 her 90 cents and so will pay but a small price for eggs. 
 The seljer of eggs will be more eager for the money be- 
 cause of its high purchasing power, and, in consequence, 
 he wiU part with the eggs for a low price. Hence, if the 
 price level is low, the price of eggs or the price of any other 
 particular good, will be low. Because individual prices 
 conform, more or less roughly, to the general price level, 
 one's real income — ^whatever class of goods he buys — de- 
 pends upon his money income and the level of prices. 
 Some modifications of this statement will be noted under 
 the topic "Price Movements Not Uniform." 
 
 10. Two Meanings of the Purchasing Power of Money. 
 —Two meanings may attach to the expression, "the pur- 
 
234 Introduction to Economics 
 
 chasing power of money." We may have in mind either 
 a unit of money or the total supply of money when speak- 
 ing of the purchasing power of money. In this discussion 
 we have reference to the purchasing power of each integral 
 part of the circulating media, for to speak of the total pur- 
 chasing power of money would serve no practical purpose. 
 Moreover, the total purchasing power of money is neither 
 increased nor diminished by adding to or subtracting from 
 the amount of money. The total money-work to be done 
 determines the purchasing power of the amount of money 
 used to do that work, be that amount large or small. 
 
 If an isolated society requires $100,000 to carry on con- 
 veniently its money-work, this sum would perform all the 
 functions of money, would transact all the exchanges re- 
 quiring money; it would, in short, supply the total demand 
 for money. Were this amount doubled no additional 
 money -work could be done and no additional demand sup- 
 plied. Two dollars would be used to do the work formerly 
 done by one, and two doUars would take on the same pur- 
 chasing power which was formerly held by one. This 
 reasoning holds with equal force for the entire world. 
 
 We have seen that the total price of a large crop may be 
 smaller than that of a small one, but, as above pointed 
 out, the same reasoning does not apply to the total pur- 
 chasing power of the quantity of money. The total pur- 
 chasing power of money, be it remembered, is determined 
 by the money-work to be done, and this work, other things 
 being equal, is not altered by a change in the quantity of 
 money. Again, every bushel of wheat added, even though 
 it decrease the total price of wheat, is an increase of wealth, 
 but the same cannot be said in case of the added dollar. 
 On the one hand, money exchanges against all commodi- 
 
Money and Its Purchasing Power 235 
 
 ties; on the other, wheat is but one of a number of com- 
 modities to exchange against money. If a large supply 
 causes wheat to decline in price as compared with other 
 commodities, it will represent a less portion of the total 
 demand for money, and its price will fall per bushel and 
 in sum. But the total supply of money, on its side, stands 
 alone in the demand for goods and, other things remaining 
 the same, can neither rise nor fall in purchasing power. 
 
 II. Effect of Increasing Gold Production. — Due both to 
 the discovery of new fields and to improved methods, there 
 has been an enormous increase in the output of gold in the 
 last few years. There are two world markets for gold; the 
 arts market and the money market. It has large value 
 in httle bulk, is durable, and is universally acceptable. 
 These qualities, together with a world demand, give it a 
 world market at a virtually uniform world price, so what- 
 ever effect there may be from an increase of its output, it 
 wiU be world-wide. If it affects prices, not one nation but 
 all nations share the consequences. 
 
 If there be no material change in the volimie of business 
 or in the methods of trade, an enlarged output of gold 
 will enlarge the supply of this commodity relative to 
 other forms of wealth, thus lowering the valuation of a 
 unit of it in terms of other goods. What use will be made 
 of this increased output? It will be used in the industrial 
 arts, or for the coinage of money, or for both of these pur- 
 poses. If at first the arts market bids higher for its use, 
 the supply of money will not be increased, while many 
 additional articles, made partly or wholly of gold, will be 
 thrown upon the market. The money price of these goods 
 will decline, and this will cause a part of the increase to be 
 diverted to monetary uses. For the reasons stated in the 
 
236 Introduction to Economics 
 
 discussion of free, unlimited, and gratuitous coinage, the 
 bullion value of gold will be the same in the two markets. 
 A portion of the additional output of gold will go into the 
 arts and a portion will be converted into coin. The de- 
 mand for money remaining the same, there will be a tran- 
 sition from lower to higher prices. We are now prepared 
 to summarize our discussion with a statement and explana- 
 tion of the economic theory accounting for these price 
 phenomena. 
 
 12. The Quantity Theory of Money. — Logically the 
 quantity theory should have been discussed near the be- 
 ginning of the preceding chapter, because it embodies the 
 foundation principle of all reasoning on the purchasing 
 power of money. But I have tried to follow a more peda- 
 gogical order of topics in order to prepare the way for a 
 clearer insight into this theory. By placing it here it will 
 serve as a review in part of principles already given and 
 these in turn will make clear the quantity principle. 
 
 The quantity theory of money may be formulated as 
 follows: Other things remaining equal, the purchasing 
 power of a unit of money falls as the quantity of money 
 increases, and idee versa. To express this differently: 
 Prices will rise and fall in direct proportion to changes in 
 the quantity of money, providing other things do not 
 change. What do we mean by other things? They are 
 two: the rate of turnover of the money itself, i. e., the aver- 
 age number of times a year a doUar is exchanged for goods, 
 and the number of goods per year exchanged for money. 
 
 The supply of money and the quantity of money are 
 different concepts. The supply of money includes the 
 quantity of it and, what is equally important, the velocity 
 of its circulation. "The nimble sixpence does the work of 
 
Money and Its Purchasing Power 237 
 
 the slow shilling." A dollar that turns over or is exchanged 
 for goods five times a day does as much money-work, no 
 less and no more, as the five-dollar coin or paper which 
 turns over once a day. Let M symbolize the amount of 
 money and R its rate of turnover, then M (money) multi- 
 plied by R (rate of turnover) gives us the supply of money. 
 
 Let N symbolize the goods exchanged for money and P 
 the price at which these goods are exchanged. Then N 
 multiplied by P gives us the demand for money. The 
 equation of exchange algebraically expressed: MR = NP or 
 
 MR 
 N 
 In order that P may be increased there must be an in- 
 crease in M, or in R, or a decrease in N. On the other 
 hand, P is decreased by a decrease in M, or in R, or by an 
 increase in N.^ 
 
 13. Mistmderstandings Answered. — ^Does the quantity 
 theory teach that if the amount of money is increased 
 prices will increase? It teaches nothing of the kind. 
 Writers who ought to know better have erred at this point. 
 Suppose that M (quantity of money) is doubled and that 
 its rate of turnover (R) is reduced from twlenty to ten times 
 a year; there would be no movement inKprice, for, in the 
 light of our reasoning above, the supply of money (the 
 product of M and R) is unaltered. Suppose, again, thd,t 
 M is doubled, that R is unchanged, and that N doubles; 
 here again there would be no price movement. 
 
 If India has $3 per capita and the United States $45, 
 does it follow that prices will be fifteen times as high in the 
 latter country? This would have to be answered in the 
 affirmative, if money in both countries circulated at the 
 
 'See Money and Prices, by E. W. Kemmerer (2d ed., 1909), pp. 15/. 
 
238 Introduction to Economics 
 
 same rate and if the amount of goods exchanged for money 
 were the same per capita. But in India money circulates 
 less rapidly and the number of goods per capita exchanged 
 for money is less than in the United States. 
 
 What effect does barter have upon money prices? To 
 the extent that people trade by barter they lessen the 
 demand for money. If N is diminished, MR remaining 
 the same, P must increase. 
 
 What effect does the use of checks have upon prices? 
 They substitute directly for money and thereby lessen the 
 demand for it. The purchasing power of money declines 
 and prices rise. As in the above case N (the number of 
 goods exchanged for money) declines, and, MR remaining 
 the same, P rises. 
 
 What effect does hoarding have upon money prices? 
 Hoarding is a matter of degree, for exchanging is a series of 
 hoarding. Money is hoarded except at the instant it is 
 doing money-work. Its circulation cannot be compared 
 with the flowing of a stream through the channels of com- 
 merce, it could more aptly be compared, as some one has 
 put it, with the jumping of a rabbit. It jumps and rests a 
 while, then jumps again, and so on. But to the extent 
 that money is hoarded it diminishes the supply of money 
 which is doing the money-work. R in the equation of ex- 
 change is diminished, that is to say, the supply of money 
 is diminished; M. and N remaining the same, P must di- 
 minish. 
 
 Does an increase in the quantity of money decrease its 
 rate of turnover ? History shows that there is no percepti- 
 ble change in the velocity of circulation when the quantity 
 of money is increased. In case of the discovery of a gold- 
 mine the miners at first convert their product into money. 
 
Money and Its Purchasing Power 239 
 
 and in this way obtain bags of surplus money above their 
 needs. They will either spend it for goods or put it in 
 the bank. If large amounts of surplus money suddenly 
 come into the market, there will be a rush upon the stores. 
 The demand for goods relative to the supply will push the 
 price up. If this surplus finds its way into the bank it 
 will not be held idle; the banks will find a means of forc- 
 ing it into circulation. Its rate of circulation will not be 
 diminished and the goods exchanged for it will take on a 
 higher money price. 
 
 What is the effect of book credit upon the rate of turnover 
 and therefore upon prices? If we have goods "charged" 
 we need keep Kttle money on hand. If we pay at. the 
 time of purchase we must have the money in advance of 
 the purchase. In the first case we may have no money 
 until pay-day, and then turn it over to our creditors aU 
 at once. In the second case we pocket our wages on pay- 
 day, and pay it out gradually. The first throws the wages 
 into circulation immediately; the second has the effect of 
 hoarding (holding out of circulation) on the average at 
 least half the wages. We have seen that hoarding dimin- 
 ishes the supply of money and, other things equal, lowers 
 prices. Again: when one pays as he goes, he usually pays 
 in money and when he pays at the end of the week or 
 month he pays by check. When the use of checks substi- 
 tutes for that of money, the demand for money is lessened 
 and prices rise.* 
 
 14. The Number of Goods. — ^We have spoken as if a 
 good exchanges but one time in the market and, there- 
 fore, makes but one demand upon the money supply. In 
 one sense this is literally true. But the student may 
 
 1 See Fisher's Economics, pp. 242-247, 
 
240 Introduction to Economics 
 
 take an example, say, of a hat worth about $5, to show 
 that our assumption is not well founded. He may show 
 that it is sold by the manufacturer to the Jobber for $4, 
 by the jobber to wholesaler for $4.50, by wholesaler to 
 retailer for $5, by retailer to consumer for $6. ($4 plus 
 $4.50 plus $5 plus $6 equals $19.50.) This would show 
 that the hat makes a demand of $19.50 rather than a de- 
 mand of $5 upon the supply of money. 
 
 If we have grasped the fuU meaning of production, how- 
 ever, it is clear that the hat as such is not fuUy produced 
 until it is in the consumer's hands. At each productive 
 stage it holds a new and different economic relationship 
 and may be considered as a different economic good with 
 respect to the demand it makes for money. In any one 
 stage it exchanges but once and at a different price from 
 that of any other stage. How, then, is the number of 
 goods counted? The number of goods exchanging against 
 money is counted by the number of exchanges just as the 
 number of passengers on a railroad is counted by the niun- 
 ber of fares collected. The Subway in New York City 
 carries about 1,500,000 passengers a day, or approximately 
 547,500,000 a year. The number of different persons car- 
 ried would be but a small fraction of the number of pas- 
 sengers. 
 
 15. Price Movements Not Uniform. — ^At any one time 
 the prices of certain commodities will be rising and the 
 prices of others will be declining. But when speaking in 
 general terms of price movements reference is made to the 
 general average or level of all prices. Some objectors to 
 the quantity principle argue that if an increase of money 
 is a cause of rising prices, it will have the same influence 
 on the price of all goods; if the cause is general its effect 
 
Money and Its PurcJmsing Power 241 
 
 will be general. But any right-thinking person should 
 know that if the worth of certain goods declines more 
 rapidly than does the purchasing power of money {i. e., a 
 rise in general price level) these goods must fall in price. 
 
 Certain goods maintain the same price, even with large 
 movements in the purchasing power of money. Prices 
 that are fixed in advance by contracts cannot change. 
 Interest or the price paid according to a contract for the 
 present over the future use of capital will not change. The 
 price of gold bullion will change not at all, and the price 
 of goods made of gold will vary Httle, if any, when there 
 is a change in the value of money. Goods sold imder the 
 principle of price maintenance will not vary. Charges 
 such as rates and fares on public utilities, and other prices 
 subject to legal restrictions will remain the same, whether 
 the purchasing power of money varies up or down. 
 
 Monopoly prices, for example, steel rails, tend to main- 
 tain a uniform price, irrespective of the general price 
 movement. Articles will vary little in price which fully 
 substitute for other goods which maintain a fixed price. If 
 two articles directly substitute for one another they can 
 differ but little in price, for if one becomes cheaper buyers 
 make little market demand for the dearer, thus causing 
 its price to decline; they make a large market demand for 
 the cheaper, thus causing its price to rise. This principle 
 causes substitutes to sell at about the same price. 
 
 Certain goods decline in price at the same time that the 
 price level is rising. Perishable food products decline in 
 price at those times of the year when the market is full, or 
 approaching a glut, and this despite a decline in the pur- 
 chasing power of money. The same is true of goods pass- 
 ing out of style. New processes and inventions are all the 
 
242 Introduction to Economics 
 
 while sending machinery to the scrap-heap in some cases, 
 and forcing down the prices of machinery in other cases. 
 
 The level of prices could not rise unless the total increase 
 of prices outweighed the total decrease. And the prices 
 which rise do not go up uniformly. For Instance, the 
 wages of labor move very slowly. Employers fear to raise 
 wages because it is difficult to lower them in case of neces- 
 sity, and when wages are high laborers fight every move 
 to lower their income. Real estate, advertised goods, and 
 others move very slowly. But a decline in the purchasing 
 power of money means that average prices rise; to the ex- 
 tent that some prices decline, others remain stationary, and 
 others rise slowly, the prices of some commodities must 
 rise rapidly. 
 
 i6. The Price Level Determined by Means of Index 
 Numbers. — As above pointed out, the purchasing power 
 of money is expressed by the quantity of other things which 
 a unit of money will buy. It varies inversely as the gen- 
 eral level of prices. If the level of prices is high a given 
 amount of goods or services will cost a large amount of 
 money; the money cost of these would be low if the price 
 level be low. It would be an easy task to determine the 
 price level if all prices moved uniformly, but individual 
 prices, like the different bees in a swarm, move with seem- 
 ing independence in divers directions, though the general 
 movement be upward or downward when taken as a whole. 
 The different movements of individual prices make the 
 determination of general prices extremely difficult. Gen- 
 eral prices are determined by index numbers. 
 
 17. Simple Index Numbers. — The prices of a large nimi- 
 ber of commodities are determined in some year, and these 
 prices are called 100 as a basis of comparison. If in the 
 
Money and Its Purchasing Power 243 
 
 year chosen, say 1900, the price of salt is 10 cents a pound, 
 that price will be 100 per cent of itself. Now, in order to 
 get a broad range of prices, take the prices of, say, one 
 hundred different commodities so selected from the sev- 
 eral fields of industry as to represent the general average 
 of the purchasing power of money. As in the case of salt, 
 each of these prices will be 100 per cent of itself. The 
 index number for all these commodities will be 10,000. 
 This, divided by the number of commodities, will give 100 
 as an average. Suppose at the end of the following year 
 the prices of the same commodities be again determined, 
 with the following results: ten have risen 50 per cent, ten 
 have risen 40 per cent, ten have risen 20 per cent, twenty 
 have risen 10 per cent, forty have remained the same, ten 
 have diminished 20 per cent. By adding these prices we 
 get 11,200 as the index number for the whole group for the 
 second year. This, divided by the number of commodi- 
 ties (100), will give 112, representing a rise of 12 per cent 
 in the general level of prices. This method of simple 
 index mumbers is obviously deficient in one particular. 
 Our next method will take account of this shortcoming. 
 
 18. Weighted Index Numbers. — Some commodities make 
 far heavier demands upon money than others. The amount 
 of indigo sold is insignificant in comparison with the vol- 
 ume of wheat sold. If the price of indigo drops 50 per 
 cent, and that of wheat increases 10 per cent, would it be 
 fair to state that the cost of living has declined 20 per 
 cent? Weighted index numbers are used to avoid this 
 difficulty. They give to each article an importance pro- 
 portionate to the quantity marketed, as recorded in trade 
 statistics. Or commodities may be weighted according to 
 the amount produced, as determined by the statistics of 
 
244 Introduction to Economics 
 
 production. Let us take the price (loo) in the year 1900 
 as a base, and assume that the price of wheat has gone up 
 25 per cent by 1905. The index number for it would then 
 be 125. We may assume that in the meantime indigo has 
 diminished in price 25 per cent, or that its index number 
 is 75. Assume that the production of wheat has been 
 10,000 times that of indigo. How shall we weight these 
 prices? Multiply the index number for indigo by i and 
 that for wheat by 10,000, because relatively it is 10,000 
 times as important (75X1 = 75 and 125X10,000 = 1,250, 
 000), and divide the sum of these products by 10,001. 
 
 When Professor R. P. Falkner, of New York University, 
 was constructing index numbers for the United States 
 Senate Committee on Wages and Prices, he followed a 
 method slightly different from that here indicated. He 
 assigned commodities their relative importance not on 
 amounts sold or produced, but on the basis of amounts 
 used by the typical working man's family. Although this 
 method does not reveal changes in the general level of 
 prices, it is of great sociological importance. While the 
 Falkner Index Numbers are easily the best means yet de- 
 vised for determining real wages, they are open to the 
 criticism of taking wholesale rather than retail prices. 
 
 Simple index numbers are easier to construct than the 
 weighted and, despite appearances to the contrary, there 
 is ordinarily very little difference in the results obtained. 
 
 19, The purposes of index numbers are numerous. New 
 uses are arising all the time to which this instrument or 
 indicator of price movements may be applied. Private 
 businesses as well as governments use index numbers. We 
 shall point out only a few of the more important uses. 
 They are used by governments to aid in public arbitration 
 
Money and Its Purchasing Power 245 
 
 or otherwise settling labor disputes. If unions demand a 
 20 per cent advance in wages at the time when general 
 prices are remaining constant or diminishing, their position 
 is weak. But when prices are increasing, if the employer 
 is receiving a high and increasing price for his product and 
 paying a low price for labor, the laborer's real income is 
 diminishing and the employer is making a net gain at the 
 laborer's expense. If labor asks an increase sufficient to 
 take up this slack, it has a strong position. Then, too, the 
 government cannot establish an equitable system of taxa- 
 tion without respect to real incomes. These are deter- 
 mined by means of index numbers which make possible 
 accurate comparisons between the expenses of doing busi- 
 ness and the money incomes from businesses. To levy a 
 tax without considering expenses works injustice, for if 
 some assessments are too low, other taxpayers are unduly 
 burdened. In many instances such taxes prove prohibi- 
 tive. Furthermore, the government must have a basis of 
 judging price movements over long periods of time when 
 introducing remedial measures to improve the standard of 
 living. We read of low prices in times past and of high 
 prices in the present. Any conclusion from the statistics 
 of past and present prices is hasty and unwarranted unless 
 carefully interpreted through the agency of index numbers. 
 Index numbers may be used by individuals: If one is 
 considering a change in the location of his business, say 
 from Boston to Galveston, he would want to compare the 
 purchasing power of money in these two places. Business 
 men are continually comparing their expenses of doing 
 business (raw materials, labor, rent, advertising, salesmen, 
 and so on) with the selling prices of their output. Their 
 price movements and selling policies rest in large part 
 
246 Introduction to Economics 
 
 upon the price movements of the items making up the 
 expenses. Railway officials resort to index numbers to 
 establish the necessity of raising rates. If the Standard 
 Oil Company is accused of fixing its prices too high, it 
 might prove that, although its money prices are rising, its 
 real prices are dechning. Index numbers are used in mak- 
 ing such comparisons, and in cases at law, which turn upon 
 questions of fact, index numbers play an important part. 
 
 Of course, index numbers, as other figures, may be jug- 
 gled. Some say, "Figures won't lie," but the statisticians 
 know better. Courts may be effectively deceived by a 
 skilful manipulator of index numbers. In order that 
 index numbers may properly show the facts, they should 
 be so selected as to compare things under like conditions. 
 
 This may be shown by the considerations involved in 
 the answer to this simple question: Has the price of coal 
 advanced during the past year ? In the first place, there is 
 a seasonal demand for coal; it is more in demand during 
 cold weather. It would be an error to compare the July 
 price of 1918 with the November price of 1919. The situ- 
 ations are not comparable. Like periods of the year should 
 be selected for comparison. Secondly, due regard must 
 be given to place. Coal on the Pacific coast is much higher 
 than in the East. If one finds that in November, 1918, 
 coal is $10 a ton in Scranton, and that at the same date 
 in 1919 it sells for $15 in San Francisco, he has no basis 
 for the conclusion that coal has advanced in price. The 
 Scranton price should be compared at the two dates. 
 Again, local conditions such as fires, floods, and strikes 
 may so affect prices at particular places that no general 
 conclusion can be drawn. Also the same kind and quality 
 of coal must be compared at the two dates. No safe con- 
 
Money and Its Purchasing Power 247 
 
 elusion can follow a comparison of the price of a good 
 grade at one date with that of a poor grade at another 
 date. 
 
 General index numbers should be given such a balance 
 as to represent fairly all prices. If, for instance, forty 
 commodities are selected and intended to be representa- 
 tive of general prices, they would fail of their purpose 
 were several commodities chosen from one group of prod- 
 ucts. The prices of commodities of one group tend to 
 move sympathetically. If ten out of the forty commodi- 
 ties were different kinds of fish, a movement in the price 
 of fish would have disproportionate weight in making up 
 the average. 
 
 Lastly, the interpretation of the figures representing 
 price levels would be aided, and comparisons in different 
 years simplified, if the unit for measuring any commodity 
 be taken as a "dollar's worth." Let every price in the 
 base year be a dollar, then the average of all prices would 
 be a dollar. If in the base year a dollar's worth of bread 
 be ten loaves, and if during the following year ten loaves 
 sell for $1.50, we have a ready comparison of prices at the 
 two dates. In the same way take a dollar's worth of coal, 
 shoes, wool, and so on, throughout the selected list, and 
 make an average of the movements of the several prices 
 to determine variations in the purchasing power of money. 
 
 20. Exercises. — i. Is the value of gold due to the action 
 of government? Was tobacco in early Virginia money be- 
 cause the government declared it so? Had a law been 
 passed against the decline of continental currency, would 
 this have arrested its decline ? 
 
 2. The law which regulates the purchasing power of 
 money is not made by Congress. Is this true? Legisla- 
 
248 Introduction to Economics 
 
 tion on the money question is good or poor to the degree 
 
 that it conforms with 
 
 Finish the sentence, and tell why you so finish it. 
 
 3. What is fiat money? Could its purchasing power be 
 made to appreciate? How? If all the different denomi- 
 nations of media of exchange were doubled in number, 
 would all money be fiat? 
 
 4. What were the reasons pointed out in paragraph 3 
 of this chapter for the increase in prices following the issue 
 of greenbacks ? 
 
 5. Does a dollar possess the same purchasing power for 
 the poor man and the rich man ? Does it reflect the same 
 marginal desirabilities ? 
 
 6. The "general level of prices" and the "purchasing 
 power of money" are two ways of expressing the same 
 idea. Explain. In what way is the price of shoes related 
 to the general level of prices ? 
 
 7. Professor Fetter puts the question, "Why does nearly 
 all the gold produced in California leave the State ? What 
 keeps any of it there ? " Answer it. 
 
 8. If at the same time wheat is selling at $2 a bushel in 
 San Francisco and Philadelphia, would any be shipped 
 from one of these places to the other ? An ounce of gold, 
 900 fine, is alike at San Francisco and Philadelphia, $18,604. 
 Why is gold ever shipped from Cahfornia to New York? 
 
 9. A dollar contains 25.8 grains of standard gold — that 
 is, gold nine-tenths fine. An ounce contains 480 grains. 
 How many dollars will an ounce make? 100 ounces? A 
 goverimient officer says that the value of gold is constant 
 because it is fixed in price. Is this true ? 
 
 10. Does the price which a dentist pays for his gold 
 remain the same because gold is stable in value ? 
 
 "Gold is stable in terms of itself and in terms of itself 
 only." Explain. Would this be true of corn were we to 
 make it the standard? 
 
 If the money price of gold can neither increase nor de- 
 crease, shall we regard gold as an exception to the law that 
 prices are fixed by supply and demand ? 
 
Money and Its Purchasing Power 249 
 
 11. Dr. Scott Nearing says: "Theoretically, if the 
 amount of the circulating medium is in any large sense a 
 cause of the increase in prices, the prices of all commodities 
 should have risen in approximately the same ratio." 
 Criticise. 
 
 12. Why might an increased resort to barter have the 
 same effect upon money prices as an increase in money? 
 
 13. A country using gold money as its sole medium of 
 exchange, under free and gratuitous coinage, makes the 
 following changes: it imposes a seigniorage charge of 10 
 per cent, but without giving up free coinage or reducing 
 the amount of fine gold in the coin. To what extent and 
 in what direction will the value of money change, if at all — 
 
 (o) If the number of goods exchanged gradually in- 
 creases 5 per cent ? 
 
 (6) If the number of goods exchanged gradually in- 
 creases 25 per cent? 
 
 Give your reasons clearly. (Fetter.) 
 
 14. How may long-time contracts retard the adjust- 
 ment of prices ? 
 
 15. "The nations in this great war can never pay their 
 debts for the very simple reason that they owe more than 
 the total of all money on earth." Criticise. 
 
 16. Assume that there is twenty dollars' worth of wealth 
 in the United States for every dollar in money, should we 
 increase the money twentyfold would the discrepancy be- 
 tween money and wealth disappear? or decrease? or in- 
 crease? or remain the same? 
 
 17. Criticise these statements: "There is not enough 
 money in the world to do the money-work." "The money 
 is not coming out of the ground fast enough to meet the 
 new conditions of life." "The railways of this country 
 could never have been built in the early fifties had it not 
 been for the lucky discovery of gold in California in 1849, 
 which provided the means by which we could pay for the 
 construction of the railways." 
 
 18. What is the difference between simple and weighted 
 
250 Introduction to Economics 
 
 index numbers? Mention different purposes which index 
 numbers serve. 
 
 19. If you were to make a set of index numbers for the 
 purpose of determining the real wages of labor, would it 
 make any difference as to the kind of commodities you 
 might select as a basis for your index numbers? Why or 
 why not? 
 
 Suppose you select 50 commodities for this purpose, 
 would it be fair should 10 of these commodities be different 
 varieties of breakfast foods ? 
 
 20. At a given time the following commodity prices 
 prevailed: Cotton (raw), $0.10 per lb.; wheat, $i.cx5 per 
 bu.; sugar, $0.07 per lb.; potatoes, $1.00 per bu.; beef (for 
 roasting), $0.25 per lb.; shoes, $5.00 per pair; cotton cloth 
 of a standard grade, $0.12 per yd.; woollen cloth of a 
 standard grade, $1.25 per yd.; men's hats, $4, and coal, 
 $7 per ton. 
 
 At a later date the prices of the same commodities were 
 respectively as follows: $0.13, $1.05, $0.06, $1.10, $0.30, 
 $5.75, $0.15, $1.20, $4.50, and $6.50. 
 
 Tabulate these facts and compute index numbers, which 
 will show: 
 
 1. Changes in the price level of all ten commodities. 
 
 2. Changes in the price level of the articles of food. 
 
 3. Changes in the price level of the articles of clothing. 
 (Fetter.) 
 
CHAPTER XII 
 MONEY STANDARDS 
 
 I. Money movements automatic. 2. Selection of coins. 3. Gresham's 
 law. 4. When Gresham's law will not work. 5. Bimetallism. 6. The com- 
 pensatory principle. 7. The meaning of terms. 8. When bimetallism will 
 not work. g. When bimetallism will work. 10. Arguments for bimetal- 
 lism. II. Argument against bimetallism considered, iz. Historical sum- 
 mary. 13. A summary review. 14. Free-silver agitation of 1896. 15. The 
 gold standard on trial. 16. Different standards defined. 17. Exercises. 
 
 I. Money Movements Automatic. — The money of a 
 country circulates in the land of its issue, not according to 
 weight but according to the stamp it bears. The grocery- 
 man does not weigh a piece of money offered him in pay- 
 ment for goods, he looks at the inscription upon the coin 
 offered and accepts it at face value without further ado. 
 But if a gold coin, marked ten dollars, is offered to a foreign 
 creditor, it is accepted, not according to its face value, 
 but according to its bullion content. Were American gold 
 coins so worn as to be diminished five per cent in weight, 
 it would take ten dollars and fifty cents in these coins to 
 pay a ten-dollar obligation to an English creditor. 
 
 So much for the basis of international money payments; 
 let us now inquire as to the movement of money between 
 countries. Should Canada enjoy a bumper crop and, as 
 well, a large output from her forests, mines, and fisheries, 
 she would doubtless enjoy an abundance of goods at low 
 prices. If at the same time unfavorable weather, pests, 
 and labor disputes work against the production of supplies 
 in the United States, her people must pay high prices, and 
 can enjoy a large consumption of goods only by securing 
 
 251 
 
252 Introduction to Economics 
 
 commodities from Canada or elsewhere. But two sets of 
 prices, the one high and the other low, cannot under nor- 
 mal trading conditions long remain side by side. The situ- 
 ation resembles that of two reservoirs side by side, the one 
 full and the other half full of water. So long as they are 
 independent of each other the water in the two will remain 
 at these unequal levels; but once a coimecting pipe is intro- 
 duced between the two, automatically the water's flow 
 will leave but one level. 
 
 The wise old saying holds true here: "A good market to 
 sell in is a poor one to buy in, and a good market to buy 
 in is a poor one to sell in." Canada will find the United 
 States a good market to sell in, and the United States will 
 find Canada a good market to buy in. The buyer in the 
 United States, finding that his money has a higher purchas- 
 ing power across the line, will send his money thither for 
 goods. Good will continue to flow one way and money 
 the other until prices are equalized in the two coimtries. 
 No investigator will make the discovery that Canada has 
 proportionately less money, and no formal negotiations 
 will be inaugurated to equalize the money suppUes in the 
 two countries. Individual traders, prompted by the prin- 
 ciple of self-interest, and knowing little and caring less 
 about relative money supplies, wiU so trade as to level 
 automatically prices between these countries. The work- 
 ings of this automatic regulation were formerly slow and 
 obstructed, as traders depended upon weekly letters and 
 price-currents. To-day the principle works with a free- 
 dom and fulness of movement, trade news being flashed 
 far and wide, daily and even hourly. 
 
 2. Selection of Coins. — ^While a local overstock of gold 
 coin is flowing into foreign markets, it will also be flow- 
 
Money Standards 253 
 
 ing into the arts market — both local and foreign. Slack 
 business and a shortage in the production of wheat, beef, 
 and coal will cause a relative oversupply of money, so 
 money will go to the melting-pot as well as to the other 
 markets of the world. The two sources of outlet for a 
 local oversupply of money are foreign markets and the 
 melting-pot. 
 
 Will coins be exported and melted indiscriminately? 
 The answer is in the negative, and it involves one of the 
 most significant laws in Economics. Coins are not selected 
 by chance, not sent out because they are closest to the place 
 of export, not melted because they are nearest the manu- 
 facturer of jewelry. We shall now inquire as to the prin- 
 ciple of selection. They are not the fittest coins but the 
 unfittest which shall remain in circulation. 
 
 3. Gresham's law teaches that the bad money drives 
 the good out of circulation. Let the student commit this: 
 "Bad money always drives out good money, when issued 
 in abundance." Despite her vanity and many administra- 
 tive blunders. Queen Elizabeth, as above remarked, was an 
 able ruler, the one element of strength that distinguished 
 her being her keen Judgment of men, that enabled her to 
 officer the administration with the ablest thinkers and ad- 
 visers in England. Sir Thomas Gresham, founder of the 
 Royal Exchange of London, was the chief financial agent 
 under Elizabeth. He investigated for his government the 
 condition of coins in Amsterdam, and found that the old 
 and worn coins drove out of circulation the new coins of 
 full weight, which were issued in abundance. This prin- 
 ciple, that the bad money tends to drive out the good, was 
 noted by so ancient an observer as Aristophanes (B.C. 444- 
 380), but it was discovered anew and brought 'prominently 
 
254 Introduction to Economics 
 
 before the EngKsh-speaking world by the noted adviser of 
 Elizabeth. 
 
 The original formulation of this law made no reference 
 to the exportation of gold coin as caused by an issue of fiat 
 money. More than a few writers have erred at this point. 
 Gresham referred to coins of the same metal but of different 
 weights on account of wear, clipping, and abrasion. If in 
 a gold-using country exportation or conversion of money 
 into the arts takes place, the heavier coins will be selected 
 for these purposes. As money, heavy coins are worth no 
 more than abraded coins, but when sold by weight, as they 
 are in the arts and export markets, they are worth more. 
 While this law was originally formulated with reference 
 to coins made of the same metal, the principle involved is 
 easily applied in any case where bad and dear money cir- 
 culate in the same market. 
 
 4. When Gresham's Law Will Not Work. — A Virginia 
 fruit-grower permits his family to use only the sortings— 
 the green, knotty, inferior apples, and his neighbors call 
 him penurious. He answers the charge: "We can't afford 
 to use good apples when there are plenty of poor ones." 
 And this is the way the nations act with respect to their 
 money. Poor money serves the functions of the home 
 market as well, and good money serves tlie other functions 
 better; there is great economy in Gresham's law. But this 
 law will not always work, for were it a bald truth, without 
 exceptions, that the bad money drives out the good, then 
 a deficient penny would deplete a treasury. 
 
 No one would melt a new ten-dollar gold coin into bul- 
 lion, if that bullion were worth less than the ten dollars, 
 as no one will intentionally convert metal from a more 
 valuable to a less valuable form. Gresham's law will 
 
Money Standards 255 
 
 never work, in the sense that the best coins will find the 
 melting-pot, when the Supply of money is so small relative 
 to the demand for it that the metal will be worth more in 
 the form of a coin than in the form of buUion. It will not 
 work when money is worth more than its bullion content. 
 
 We now know that metal will not be transformed from 
 coins to bullion when the purchasing power of such coins 
 is superior to that of their bullion content. But would 
 this prevent the operation of Gresham's law in the sense 
 that the lighter coins cause an exportation of the heavier 
 ones? No, the heavier coins may be exported when they 
 are in no danger of the melting-pot. 
 
 To return to the supposition regarding Canada's abun- 
 dance and our shortage of goods, her need for money was 
 in excess of the supply. Canadians might have cheap 
 money and dear circulating side by side, the bad money 
 driving the dear money neither to the melting-pot nor to 
 the United States or any other country. The good money 
 would not be driven to the melting-pot, because it would 
 be worth more in the form of money, and it would not 
 be driven out of the country because its purchasing power 
 in Canada would be higher than if it were sent out of the 
 country. 
 
 A knowledge of Gresham's law introduces a discussion 
 of bimetallism, for the operation of this law will maintain 
 a fixed ratio between the purchasing powers of gold and 
 silver. Should either metal become cheaper debtors will 
 be eager to pay with it. This will at once increase the 
 demand for the cheaper and lower the demand for the 
 dearer metal, thereby making them equal. 
 
 5. Bimetallism means the free coinage of two metals at 
 a fixed ratio, the coins of either being legal tender as the 
 
256 Introduction to Economics 
 
 debtor may elect. Monometallism is a monetary system 
 where one metal is given the right of free coinage. Bi- 
 metallism as well as monometallism may be thought of as 
 a single standard. Two metals maintained at a parity 
 perform precisely the same functions; they lose their inde- 
 pendence in a monetary sense and become one and the 
 same. A country may have the bimetallic standard based 
 on gold and silver, and coin other metals, as copper and 
 nickel. Coins of other metals, however, are token and 
 not primary money. 
 
 The common man of this generation thinks of bimetal- 
 lism as a mere theory — something nice to talk about but 
 dangerous and unworkable if established. He is not in- 
 formed that mankind has had far more experience and, 
 may I add, more satisfactory experience with bimetallism 
 than with monometallism and that prior to the nineteenth 
 century no nation definitely adopted monometallism. Eng- 
 land broke the rule in 1816, but neither the United States 
 nor European nations followed her example until after 
 1870. Bimetallism is workable and it is not involved in 
 mystery as many are led to believe. It rests upon a sin- 
 gle definite and simple principle which explains the ex- 
 traordinary permanence of the ratio of exchange of gold 
 and silver under bimetallism. 
 
 6. The compensatory principle is the fundamental fact 
 in bimetaUism. This principle recognizes two great de- 
 mands for both gold and silver; their use in the arts and 
 in the coinage of money. The monetary demand is large 
 and any change in it reacts quickly upon the purchasing 
 power of these metals. This very fact — the quick and 
 sensitive response of the purchasing power of these metals 
 to changes in demand — makes it impossible for either gold 
 
Money Standards %51 
 
 or silver, under bimetallism, to fall much below the other, 
 and impossible for them to remain separate in price. After 
 the gold discoveries in California and Australia, John E. 
 Cairnes, the eminent English economist, wrote (and I give 
 this illuminating quotation, because it shows the nature of 
 the compensatory principle): "The crop of gold has been 
 unusually large; the increase in the supply has caused a 
 fall in its value; the fall in its value has led to its being 
 substituted for silver; a mass of silver has thus been dis- 
 engaged from purposes which it was formerly employed to 
 serve; and the result has been that the two metals have 
 fallen in value together." If, according to Gresham's law, 
 gold tends to drive silver out, less silver and more gold will 
 be used in coinage. This decrease in the demand for silver 
 will lower its purchasing power; this increase in the de- 
 mand for gold will increase its purchasing power; the result 
 will be a coming together of the two. This interaction of 
 the forces of supply and demand which maintains a fixed- 
 ness of the ratios between gold and silver is known as the 
 compensatory principle. 
 
 7. The Meaning of Terms. — ^When a coin is adopted the 
 government determines how much gold or silver to put into 
 it. The gold dollar contains 23.22 grains of fine gold, and 
 2.58 grains of alloy to harden the coin so that it will stand 
 wear; the total or standard weight is fixed by law at 25.8 
 (23.22 + 2.58) grains. The silver dollar contains 412.5 
 grains, which is 90 per cent fine (371.25 grains of fine silver 
 plus ^1% alloy). The ratio of silver to gold in our coins 
 is 371.25 : 23.22 :: 15.98 : i. This is so near 16 : i that we 
 speak of it as such. 16 : i means simply that there is six- 
 teen times as much fine silver in a silver dollar as there is 
 fine gold in a gold dollar. But it must not be concluded 
 
258 Introduction to Economics 
 
 that we are on a bimetallic standard because we coin these 
 metals at the ratio of i6 : i. When is a nation on a bime- 
 tallic standard ? When it declares for the free and unlim- 
 ited coinage of both metals and gives to both equal debt- 
 paying power. 
 
 Let us next inquire the meaning of the terms, "market 
 ratio" and "mint ratio." When gold and silver bullion 
 change in price with respect to one another and to other 
 commodities, independent of their exchange power in the 
 form of money, their "market ratios" have changed inde- 
 pendently of their "mint ratios." If one grain of gold in 
 the form of coin is made by law to exchange for sixteen 
 grains of silver in the form of coin, their "mint ratio" is 
 I : i6. But if a rich silver-mine is opened, silver bullion 
 will fall in exchange power, and if it falls until one ounce 
 of gold bullion will exchange in the open market for thirty- 
 two ounces of silver, the "market ratio" has fallen to i : 32. 
 
 8. When Bimetallism Will Not Work.* — ^Assume that a 
 country has a bimetallic standard at a ratio of 16: i, and 
 that meanwhile the market ratio is 32:1. How would 
 Smith, a gold-bullion owner, pay Jones an obligation of 
 $10? He can pay this debt in either of two ways: He can 
 take 232.2 grains of gold (the bullion content of $10) to the 
 mint, exchange it for $10, take this $10 and pay the debt. 
 Or he can take but one-half of this gold (11 6.1 grains) to 
 the bullion market and trade it for enough silver bullion 
 to exchange at the mint for $10 in silver, and with this 
 pay Jones in fuU. AU debtors would pay their obligations 
 with silver; gold would go out of circulation; business trans- 
 actions would be adjusted to the money in circulation; there 
 would be bimetallism legally and monometallism in fact. 
 
 ' An excellent discussion of bimetallism is found in F. A. Walker's Po- 
 litical Economy (advanced course, 3d cd.) pp. 463-475. 
 
Money Standards 259 
 
 It must be observed, however, that as gold in this ex- 
 ample loses its monetary demand, it tends to decline in 
 purchasing power; also, the demand for silver and conse- 
 quently its purchasing power is increased, because it must 
 fill the place made vacant by the withdrawal of gold. The 
 establishment of bimetallism in a few unimportant money- 
 using countries will have the effect of making the pur- 
 chasing power of these metals more nearly equal. But bi- 
 metallism will not work so long as the monetary demand 
 for gold and silver is not large enough to bring the purchas- 
 ing power of these metals to the ratio established by law. 
 In all such cases Gresham's law operates to the defeat of 
 bimetallism. 
 
 9. When Bimetallism Will Work. — Bimetallism will suc- 
 ceed when Gresham's law ceases to operate or to expel the 
 dearer metal from circulation. This, of course, will be 
 when there is no longer a cheaper and dearer metal, but 
 when gold and silver are equal to one another in purchas- 
 ing power at the legal ratio. The compensatory principle 
 will hold them at this equality in purchasing power when 
 the mint ratio is fixed reasonably near the market ratio, 
 and when there is a reasonable monetary demand for the 
 metal. 
 
 Assimie the nations of the world to be divided into three 
 approximately equal groups of four countries each, and 
 that one group is composed of silver-using countries, an- 
 other is composed of bimetallic countries holding the ratio 
 16: 1, and that the remaining group consists of gold-using 
 countries. They may be represented thus: 
 
 Silver-using 
 countries. 
 
 Bimetallic 
 
 countries. 
 
 Gold-using 
 countries. 
 
260 Introduction to Economics 
 
 What will be the effects of a large increase in the output 
 of silver? This will cheapen silver relatively to gold. 
 The owners of silver bullion will hasten to take advantage 
 of the situation in the bimetaUic group, where they can 
 exchange their silver for gold at the rate of i6: i. The 
 gold thus displaced by the new silver will pass into its 
 best market, the gold-using countries. Gold will decline in 
 purchasing power because of the diminished need for it in 
 bimetaUic countries, and because of the largely increased 
 supply in gold-using countries. Forces are in operation 
 meanwhile to increase the purchasing power of silver. It 
 has to supply the place made vacant by the departure of 
 gold from the bimetallic group; then, too, it will be de- 
 manded in the silver-using countries. A sudden increase 
 in the supply of silver will cause the price of the bullion 
 content of coins to be less than their purchasing power in 
 the form of money, thus making it profitable for silver- 
 owners to have their bullion coined in the silver group as 
 well as in the bimetallic group. 
 
 Should the cheapening effect on silver be large at a time 
 when commercial forces are advancing the purchasing 
 power of gold, there will be a rapid substitution of silver 
 for gold in the bimetallic group. If there be an unusual 
 need for additional gold in the gold-using countries, they 
 can draw for their additional needs only from the bimetallic 
 states. Will the gold become exhausted in these coun- 
 tries? Such is possible but not likely. The increased 
 supply of silver will find a market covering two-thirds of 
 the money-using world — the silver-using and bimetallic 
 countries. This extensive demand will not permit a rapid 
 decline in its purchasing power. The displaced gold will 
 find a market in but one-third of the money-using coun- 
 
Money Standards 261 
 
 tries, and these countries already have a normal gold sup- 
 ply. It is all but certain that the compensatory principle 
 will make these metals equal to each other in purchasing 
 power at the legal ratio long before the bimetallic group 
 finds its more valuable metal exhausted. 
 
 Assume that states from each of the monometallic 
 groups change to the bimetaUic standard, leaving two 
 coimtries in each of the monometallic groups and giving 
 eight countries to the bimetallic group. It may be rep- 
 resented thus: 
 
 2 Silver- 
 using 
 countries. 
 
 8 Bimetallic countries 
 
 2 Gold- 
 using 
 countries. 
 
 Beyond question, the bimetallic standard is now safe. 
 The base of the system is broadened to cover two-thirds 
 of the money-using world; if the cheaper threaten to drive 
 the dearer metal from this extensive area, it can go to only 
 two states already normally supplied; these two states 
 would be surfeited with the metal long before the great 
 bimetallic area is drained. The extensive area demanding 
 the metal tending to decline will retard or arrest its de- 
 cline; the limited area demanding the dearer metal is soon 
 fully supplied, thus causing that metal to decline. 
 
 The reasoning under the last two headings leads to the 
 conclusion that national bimetallism cannot succeed, but 
 that international bimetallism, if sufficiently broad, will 
 succeed. 
 
 10. Arguments for Bimetallism. — National bimetallism is 
 unworkable and there is no defense for it. International 
 bimetallism would be workable. Two primary arguments, 
 to say nothing of minor arguments, have been advanced 
 
262 Introduction to Economics 
 
 for it. These are: Bimetallism would give to the world a 
 more stable standard; it would facilitate exchange between 
 gold standard and silver standard countries. 
 
 The needs for a stable standard are apparent. If the 
 purchasing power of money rises, debtors are injured be- 
 cause they must pay back more purchasing power than 
 they have received, or if the purchasing power of money 
 declines creditors must take in payment less purchasing 
 power than they have given. Rising prices disturb indus- 
 try because price movements are not uniform; declining 
 prices throw a blanket over industry. One hesitates to 
 invest his money in business when prices are declining, for 
 he buys at a higher and sells at a lower price. Rising 
 prices stimulate most branches of industry, because capi- 
 talists hasten to invest their means at the lower to sell out 
 later at the higher price. 
 
 How would international himetallism stabilize the purchas- 
 ing power of money ? The two metals will be tied together 
 in one system; the volume of gold and sUver when com- 
 bined would be so large that temporary movements in 
 the supply of either would have little effect on the pur- 
 chasing power of money. The probabilities are (and the 
 history of the metals bears out the point) that gold and 
 silver will not together advance or decline in purchasing 
 power in the same degree. If gold tends to rise rapidly, 
 while the tendency is for silver to move as rapidly in the 
 opposite directioiji, since they are tied together, the pur- 
 chasing power of money cannot vary. If silver tends rap- 
 idly downward while gold tends downward but slowly, the 
 gold will retard the decline in money. The purchasing 
 power of money varies with the average variation in the 
 Volume!: of the two metals. The production of gold and 
 
Money Standards 263 
 
 silver are not related, and there is no reason why their out- 
 put should vary equally in the same direction; in fact, they 
 have in the main tended to vary in opposite directions. 
 
 Professor J. F. Johnson closes his discussion of this 
 topic with these words: "Since stability of the standard is 
 the most important quality it can possess, the argument is 
 in favor of bimetallism." ' 
 
 How would international bimetallism facilitate exchanges 
 between silver-using and gold-using countries? It would 
 simplify trading and all kinds of contracts between these 
 countries. At present exchange relations of gold and 
 silver fluctuate constantly. If a New York merchant is 
 quoted the price of silk in China (a silver-standard coun- 
 try) he is puzzled to know how much gold he must give. 
 If he sells to a merchant in Shanghai he is paid in silver, 
 the gold price of which may vary considerably before the 
 transaction is completed. He may lose or he may gain, 
 depending upon the turn in the relative purchasing powers 
 of the metals. 
 
 Dealers in foreign exchange speculate in these variations 
 of money; they assume the risks. Because dealers in for- 
 eign exchange assume the risk, the New York exporter may 
 know exactly how much American money he will receive 
 for his draft on the silver country. The risk, none the 
 less, exists regardless of who assumes it; it makes trade 
 inconvenient and expensive. Moreover, long-time con- 
 tracts can be little more than a gamble between gold and 
 silver using countries. 
 
 The fluctuations between the metals discourage a nor- 
 mal flow of investment funds between nations of different 
 monetary standards. Tariff walls and unstable monetary 
 ' Money and Currency, revised ed., p. 222. 
 
264 Introduction to Economics 
 
 systems removed, capital would seek the best profits the 
 world over. The American financier fears to invest in a 
 country of another standard lest his investments return to 
 him in depreciated money. 
 
 Silver-standard countries fear to contract obligations in 
 gold-standard countries. England formerly made loans of 
 enormous sums in poimds sterling to British India (a silver- 
 using country prior to 1893). The interest alone on these 
 loans amounted to about £16,000,000 in gold which they 
 were compelled to pay annually in London. The Indian 
 government noted two significant facts: (i) The purchasing 
 power of their money in the home country varied but little 
 through time. (2) Silver continued to decline in terms of 
 gold. It took just twice as many rupees (the Indian coin) 
 in 1893 to buy a pound sterling in London as it took in 
 1873. Their foreign debt grew more and more burden- 
 some because it took more and more of their money to 
 pay London; and this despite the fact that, in terms of 
 gold, her annual dues to London were not increasing and 
 her money retained about the same purchasing power at 
 home. 
 
 A similar situation arose after the Boxer troubles in 
 China, when that country was required to pay considerable 
 indemnities to gold-standard countries. 
 
 II. Argument Against Bimetallism Considered. — ^There 
 are eminent authorities on the money question who object 
 to bimetallism. One such authority states: "Whenever two 
 kinds of money are legal tender, the cheaper will be used, 
 and the other wiU disappear." This question begging 
 assertion assumes what is to be proved, namely, that a 
 cheaper metal exists under bimetalhsm. This assertion, 
 moreover, embodies the very principle which would pre- 
 
Money Standards 265 
 
 vent the metals from separating in purchasing power at 
 the legal ratio. W. S. Jevons, who justly ranks as one of 
 the two or three most brilliant economists England has 
 produced, understood well the compensatory principle, yet 
 he was a monometalhst. His objection to bimetallism is 
 based upon the belief that there is a strong prejudice 
 against silver. In his well-known work, Money and Bank- 
 ing, Horace White expresses the same opinion. If silver 
 were as desirable, he thinks, it would be put on an equal 
 footing with gold. "Even the most elaborate system of 
 exchanges through banks and clearing-houses leaves a 
 residuum of payments to be made by the transfer of metal, 
 and here the question of weight becomes decisive. A bank 
 which has to receive $1,000,000 of metal will always pre- 
 fer, say, 4,000 pounds of gold rather than 140,000 pounds 
 of silver. It can afford to pay a premium for gold equal 
 to the difference in the cost of handling and storing the 
 two masses. The earliest sign of a premium on gold, 
 after a bimetallic agreement had been made, would render 
 the agreement itself inoperative." ^ 
 
 No one has ever proposed such a ratio as that here 
 assimied, and nothing is proved by an argument based 
 upon a single and minor function of money. Gold will 
 serve better in some functions and silver in others. Both 
 will serve alike for bank deposits; certificates backed by 
 silver would be no less desirable than those backed by 
 gold. If gold be more desirable to settle trade balances 
 with gold-standard countries, silver will be more desirable 
 to settle these balances with silver-standard countries. If 
 a silver dollar is inconvenient because it is too large, a gold 
 dollar is inconvenient because it is too small. 
 ' Money and Banking, third ed., pp. 76-77- 
 
266 Introduction to Economics 
 
 There is no natural "preference of mankind for gold." 
 A large portion of the world is on the silver standard, a 
 number of countries since 1893 having changed from the 
 silver to the gold standard. They changed, not because 
 of a natural preference for gold, but because of their com- 
 mercial relations with the gold-using countries of the 
 United States and Europe. The prejudice, if such it be, 
 in most of these countries is against gold, for, although 
 virtually forced to the gold standard, silver is the only 
 money used in circulation. It is found difficult "to edu- 
 cate these peoples to the use of gold." 
 
 12. Historical Summary. — Space will permit no more 
 than the briefest outline of American monetary history. 
 The great financier, Alexander Hamilton, was the first 
 secretary of the treasury. He found the people thinking 
 in terms of EngUsh money, but really using a medley of 
 coins — Spanish, Mexican, and others. He weighed the 
 situation as best he could in this and other countries in 
 order to strike the proper ratio between gold and silver. 
 Upon finding the ratio to be about 15 : i, he recommended 
 the bimetallic standard at this ratio to Congress. Con- 
 gress trusted the judgment of Hamilton and gave his 
 report the form of law in 1792. Thus America began with 
 a bimetalUc standard of 15:1, the gold dollar containing 
 24^ grains and the silver dollar containing 371 J^ grains. 
 
 Difficulty arose; the new silver dollar slightly out- 
 weighed the worn Mexican and Spanish dollars which were 
 in circulation. Money-brokers assumed the profitable task 
 of exchanging the worn Spanish and Mexican coins for the 
 new dollar, which they exported to the Spanish colonies in 
 exchange, and at i per cent profit, for old coins. The lat- 
 ter were brought back and offered at our mint for new 
 
Money Standards 267 
 
 dollars, and again the rounds of exchange would be made, 
 thus ' ' forming an endless chain. ' ' President Jefferson put a 
 stop to this in 1806, when he ordered the mint to strike no 
 more silver dollars, and this act remained in force thirty- 
 years. The presence of underweight Spanish coins, to- 
 gether with the small monetary demand, brought our first 
 experience to failure. This cheaper metal drove gold from 
 circulation. 
 
 The next important date is 1834, for in that year a new 
 coinage act was passed, and a new ratio of 16:1 between 
 the metals was chosen. This is sometimes called the 
 "Gold Bill"; it did not disturb the bullion content of the 
 silver dollar, but reduced the bullion content in gold coins 
 some 7 per cent. This made gold coin slightly inferior to 
 silver and Gresham's law played its part expelhng the sil- 
 ver. This law operated slowly at first, but later its opera- 
 tion was hastened by the production of Russian gold-mines 
 about 1840 and by the extraordinary discoveries of gold 
 in California and Australia in 1849. ^"^ increase in the 
 supply of gold, never before equalled in the history of the 
 precious metals, lowered the purchasing power of that 
 metal and hastened the expulsion of silver from the market. 
 
 Creditors declared the law unjust, for it lowered the 
 bullion content of coins which they were compelled to 
 accept in payment of debts previously contracted. These 
 objections were easily disposed of, because gold had not 
 been in circulation and, therefore, no debts had been con- 
 tracted in terms of it. Moreover, prices were declining 
 and the purchasing power of money remained about the 
 same. 
 
 The next significant date was 1853. This act gave us for 
 the first time a settled money of our own. We had in cir- 
 
268 Introduction to Economics 
 
 culation no silver dollars of our minting since President 
 Jefferson's order of 1806 to stop their coinage. Smaller sil- 
 ver coins were of full weight and were driven out by light- 
 weight foreign coins. The Act of 1853 reduced the bullion 
 content of minor coins which ever since have remained in 
 circulation. The coinage of silver "change" was limited, 
 otherwise we should have gone to a silver basis, and our 
 hard money would have consisted entirely of small 
 "change." This law was followed by an Act (1857) deny- 
 ing legal tender to foreign coins. 
 
 The Act of 1873 S^ve the sanction of law to the single 
 gold standard, and stopped the free coinage of the stand- 
 ard silver dollar, making it legal tender to only five dollars. 
 Little did the people care about this restriction on the silver 
 dollar, for "to Americans it was an unknown coin." Nor 
 were the people enthusiastic concerning the gold standard, 
 for, excepting in Oregon and California, the money in cir^ 
 culation consisted of greenbacks, bank-notes, and silver 
 "change." Conditions soon changed, however; silver 
 dropped in purchasing power; had we kept bimetallism, 
 silver would have become the money of the country. The 
 silver interests branded the act "the crime of 1873." Con- 
 tentions arose which led to the next important measure. 
 
 The Bland- Allison Act of iBj"] was a compromise mea- 
 sure, providing for the purchase and coinage of not less 
 than $2,000,000 worth nor more than $4,000,000 worth of 
 silver each month. The bill passed over the veto of Presi- 
 dent Hayes and became law in 1878. In 1890 it was re- 
 pealed when the Sherman Act took its place. 
 
 The Sherman Act was passed in 1890 and repealed three 
 years later. It provided for an indefinite amount of legal- 
 tender notes for the purchase of silver bullion. It was a 
 
Money Standards 269 
 
 party measure; not a Democrat voted for it nor a Repub- 
 lican against it in either House of Congress. 
 
 The only restriction on the rate of this note issue was 
 that a sum should be issued necessary to buy 4,500,000 
 ounces of silver each month at its market ratio. About 
 $156,000,000 notes were issued. Being legal tender, they 
 were, although redeemable, in effect a fresh and unlimited 
 issue of greenbacks. Inflation followed, the gold standard 
 was seriously threatened, and the panic of 1893 followed. 
 
 13. A summary review of the events following the 
 passage of the Sherman Act in 1890 will be found instruc- 
 tive. The act led to the issue of $156,000,000 new trea- 
 sury notes within three years, and to the exportation of 
 $160,000,000 worth of gold in the same period. In 1893, 
 therefore, the country held at least $150,000,000 less gold 
 than it would have had if the Sherman Act had not been 
 passed; the gold reserve, while the act was in force, de- 
 clined from $184,000,000 to $84,000,000 (October, 1893). 
 The depression following the panic of 1893 '^^^ accompa- 
 nied by a shrinkage in the need for currency, while at the 
 same time continuous inflation was resulting from the 
 treasury deficit, the excess of expenditures from July i, 
 1893, to December i, 1895, amounting to $130,000,000. 
 Continuous inflation gave rise to a continuous demand for 
 gold for export. The treasury, having lost most of its 
 gold during the preceding three years, was obliged within 
 three years to add $262,000,000 to the funded debt, receiv- 
 ing in cash thereby $293,000,000."^ During the seven 
 years 1890 to 1896, inclusive, the total exports of gold ex- 
 ceeded the total imports by $273,160,658. 
 
 The "limping standard" is a name applied to a situation 
 
 'Johnson's Money and Currency, revised ed., pp. 358-359. 
 
270 Introduction to Economics 
 
 which arose in France, Germany, and the United States 
 when these nations surrendered the free and unlimited 
 coinage of silver. The mints were closed to silver, and 
 thereby the demand for silver was lowered; but the silver 
 coins were neither recalled from circulation nor made 
 redeemable in gold. Although the bullion in a silver dol- 
 lar was worth much less than the bullion content of a 
 gold dollar, yet, being limited in issue, it hobbled along at 
 the same purchasing power of its stronger associate. 
 
 Since there is no free coinage, new silver supplies cannot 
 become money and thus increase the supply of money, or, 
 what is the same, lower its purchasing power. The coin- 
 age of incoming gold supplies is not so restricted, and the 
 demand for money remaining the same, additional sup- 
 pKes of gold coins tend to lower the purchasing power of 
 money. Should the face value of silver coins drop below 
 their bullion content, such coins will readily find their way 
 to the melting-pot. Bullion is not free to become coin, 
 but coin is free to become bullion. 
 
 Were there a sufficiency of money in the form of silver, 
 paper, nickel, or copper to do the money-work, it would 
 oust gold money. But the limitation of such moneys 
 enables gold money to circulate. Silver, of course, did 
 not maintain its parity with gold on any other ground 
 than that of a limitation in its supply. It is fiat and its 
 purchasing power was maintained, as in the case of the 
 birch-bark money of China, upon the principle set forth 
 in discussing the "quantity theory." 
 
 The limping standard, despite the opinion of competent 
 writers to the contrary, passed out of existence in this 
 country with the incoming of the Sherman Law of 1890. 
 According to the letter of this law, silver dollars are not 
 
Money Standards 271 
 
 redeemable in gold on demand. "However, in ordinary 
 times, the holder has no difficulty in exchanging them for 
 gold; and in extraordinary times, if non-redemption should 
 threaten depreciation, the secretary of the treasury would 
 be obliged to redeem them." * This statement, summariz- 
 ing the facts of the subject, shows that they are truly re- 
 deemable. 
 
 The primary money of the United States is gold; ours is 
 a gold standard, the value attributed to all money other 
 than gold rests upon the confidence of the holder, that he 
 can exchange it upon demand for gold. 
 
 14. Free-Silver Agitation of 1896.— There should now be 
 no doubt that a well-established system of international 
 bimetallism would work; this is confirmed by the reason- 
 ing on the subject, and it has been proved in fact in every 
 case when it has been given a fair trial. It would steady 
 prices and facilitate international commerce and the nor- 
 mal distribution of capital. The fluctuations in the pro- 
 duction of the single metal — gold — make it a very imper- 
 fect standard. 
 
 Serious objection was urged against the single gold 
 standard in the United States and in European countries, 
 prior to 1896, Isst the supply of gold would prove inade- 
 quate to satisfy the needs of all gold standard countries. 
 Gold prices fell with alarming persistency, and with ill 
 effects upon the business temper of the people. When 
 conditions were at the worst (1896) W. J. Bryan came forth 
 with a radical proposal for national bimetallism at 16:1; 
 he was nominated for the presidency and, with "free sil- 
 ver" as a paramount issue, was given nearly one-half of 
 the popular vote of the country. The bullion in a silver 
 ' Johnson's Money and Currency, revised ed., p. 364. 
 
272 Introduction to Economics 
 
 dollar, at the time, was worth about fifty cents, and, had 
 the United States alone adopted bimetallism, the effect 
 would have been a shift from the gold to a silver standard. 
 The Republicans met the issue with a vague indorsement 
 of international bimetallism; but this indorsement was for 
 political effect only, because all informed persons knew 
 that the European nations would not agree to it. Both 
 parties favored international bimetallism, and both knew 
 it to be impossible of accomplishment, but the Democrats, 
 rather than suffer the effects of the limited money supply 
 under the gold standard, were willing to assume the risk 
 of national bimetallism. 
 
 But after 1897 an enlarged supply of gold caused an up- 
 ward movement in gold prices which has continued to the 
 present time. It was not long before Mr. Bryan was able 
 to remark that the RepubUcans wanted the gold standard 
 and got it, and the Democrats wanted more money and got 
 it. Both got what they wanted and both should be happy. 
 
 The problem has changed from one of scarcity to one of 
 an increasing oversupply of money. As previously noted, 
 there is no problem in uniformly low or in uniformly high 
 prices, nor would uniformly rising or declining prices pre- 
 sent difficulties; the problems difficult of solution arise out 
 of the maladjustments occasioned by the inequality of 
 price movements. Problems we now have a plenty, but 
 how to increase the money supply is not one of them, con- 
 sequently bimetallism is for the time a dead issue. His- 
 tory is being made rapidly, however, and the dead issue 
 of to-day may be the burning and paramount issue of 
 to-morrow. 
 
 15. The Gold Standard on Trial. — Stability stands out 
 as the single most mportant feature money can have. If 
 
Money Standards 273 
 
 the gold standard fails it will fail upon the ground of insta- 
 bility. Gold combines, as does no other metal, all the 
 features necessary for the making of money. What of 
 the prospects of its stability in purchasing power? De- 
 clining prices prior to 1897 threatened the continuance of 
 the gold standard, as have rising prices since that date. 
 The history of the subject does not make us sanguine, yet 
 important influences are becoming active which may steady 
 gold prices. 
 
 It is argued that transition to the gold standard bids 
 fair to cover the whole commercial world in the near future, 
 and this extensive demand will arrest, it is thought, the 
 rapidly declining purchasing power of gold. But this 
 argument is less convincing when we remember that a 
 large portion of the earth, including important money- 
 using countries, have within the last few years substituted 
 the gold for the silver standard. At the very time when 
 the gold standard was becoming securely established in 
 these countries, gold prices have made the most rapid 
 advances. This extensive demand has been more than 
 offset by increased gold production. The growth of the 
 business of the world, bringing about an expansion of ex- 
 change transactions, must mean that growing demands 
 will be made for money. Supply being aside, the greater 
 the demand for money the lower will be general prices. 
 
 Let us inquire into the prospects on the side of supply. 
 From present indications the supply will be sufficiently 
 large. The production of gold, like that of any other 
 manufacturing industry, has a precision made possible by 
 the inventions and processes now used. Costs can be 
 accurately estimated and output normally regulated to 
 demand. Costs promise to be the chief limiting agency 
 
274 Introduction to Economics 
 
 of the supply. And these costs of production will tend to 
 be automatically regulated by the purchasing power of 
 gold. The various items of cost, such as wages, tools, 
 and machinery, will go up as the purchasing power of gold 
 goes down. The decline in the purchasing power of gold 
 will arrest its production at the point where the cost of 
 production equals the worth of the gold produced. New 
 gold discoveries aside, we may expect a more stable gold 
 output throughout the next decade than we have had dur- 
 ing the half-century now ending. 
 
 i6. Different Standards Defined.— All writers on money 
 agree, if in little else, upon the one fact that the money 
 standard should be stable. Their reasoning teaches them, 
 in the first place, and the history of previous experiences 
 confirms their reasoning, that no one commodity, gold or 
 other, can maintain perfect stability in the purchasing 
 power of money. 
 
 The multiple or tabular standard was the first suggestion 
 made to remedy the instability of the value of money. 
 This suggestion attempts to answer the question: How 
 maintain a uniform purchasing power over goods? If 
 Smith lends Jones $500, the loan in reality amounts to the 
 command over a certain quantity of goods which that sum 
 of money would buy at the time of the loan. The tabular 
 (multiple) standard provides that Jones shall return to 
 Smith the same purchasing power borrowed, be that $500 
 more or less. But how are debtors and creditors to de- 
 termine the equivalence of the purchasing power borrowed 
 and returned? This suggests the necessity of a govern- 
 ment commission which shall make frequent estimates of 
 price changes, and with such estimates in hand it will be 
 easy to calculate the amount of money necessary to can- 
 
Money Standards 275 
 
 eel a loan. If, during the life of the loan index numbers 
 should rise from loo to no, Jones would return to Smith 
 not $500 but $550. Or if the index of prices drop to 90, 
 Jones would return the same purchasing power he bor- 
 rowed by handing back $450 instead of $500. 
 
 Other writers say there can be no stability with respect 
 to goods. Changes in styles, methods, and inventions 
 make the expression "command over a certain quantity 
 of goods" difficult of interpretation. Formerly the arti- 
 cles of common necessity — and such articles must enter 
 into an interpretation of the purchasing power of money- 
 would include goods now obsolete. Tallow candles, spin- 
 ning-wheels, and flint-lock rifles were once common neces- 
 sities; where they now exist they hold a different economic 
 relationship. Goods have but the one purpose of gratify- 
 ing desires; justice, therefore, requires not an equivalence 
 in command over a certain quantity of goods, but an 
 equivalence in, to use an awkward expression, desire-grati- 
 fying power. This has been called, but erroneously so, 
 a utility standard. It is worthy of no further considera- 
 tion, in that it is impossible of attainment. 
 
 Others say: "Let us have the labor standard." This is 
 based upon a hodgepodge of theories now discarded. Pay 
 back a sum of money which will buy the same amount of 
 labor as the money borrowed would have bought at the 
 time of the loan. 
 
 The commodity standard is the name given to the stand- 
 ard now in use throughout the civilized world. The 
 world's money is made of gold and silver; long-time con- 
 tracts are made in terms of gold or silver money, depend- 
 ing upon the standard under which they are made. If 
 one borrows $1,000 when prices are low and pays when 
 
276 Introduction to Economics 
 
 prices are high, he pays back $i,ooo. This is not the most 
 just, but the most practical standard, and is universally 
 accepted. 
 
 The compensated dollar has, within the last few years, 
 been the subject of numerous articles in different lan- 
 guages. The thoughtful consideration of the subject and 
 its wide acceptance by statesmen, business men, and 
 economists are due to the very able and attractive manner 
 in which it has been presented by Professor Irving Fisher. 
 
 This plan does not claim to be ideal. This fact alone 
 entitles it to discussion. He who comes forth with an 
 "ideal standard" is unworthy of being heard, for in the 
 very nature of things such a standard is impossible. Under 
 this plan the gold standard would be constantly main- 
 tained in conformity with a multiple or tabular standard. 
 A tabular standard, as pointed out a moment ago, is far 
 from ideal. If prices go up we cannot say whether the 
 worth of goods has gone up, or the purchasing power of 
 money down, or whether both of these phenomena are 
 causal. Those who defend the idea of the compensated 
 dollar do not allow themselves to be drawn into a harangue 
 over the tabular standard, accepting this standard for bet- 
 ter or for worse; they say, simply, the plan is to vary the 
 weight of the gold dollar or other unit from time to time 
 in such a way as to maintain always substantially the 
 same purchasing power. 
 
 There would be no recoinage of gold money from time 
 to time. It is suggested that aU circulating gold be called 
 in and paper certificates issued therefor, and that a vary- 
 ing quantum of gold bullion be held in reserve for the 
 redemption of these certificates. It is thought that such 
 a change could be easily made because we now use paper, 
 
Money Standards %11l 
 
 fo' the most part, rather than gold coin. Regardless of 
 its changing worth, we now hold 22.23 grains of gold per 
 dollar, back of a certificate; the new plan would not define 
 how many grains of gold must back the dollar; it would 
 require that a varying amount of bullion back the certifi- 
 cate, this amount to be so varied as to keep the purchas- 
 ing power of a dollar the same through time. The dollar 
 now has an unvarying bullion content and a varying pur- 
 chasing power; it would then have an unvarying purchas- 
 ing power and a varying bullion content. If during the 
 year the exchange power of a unit of gold diminish one- 
 half, a gold certificate could be redeemed for twice the 
 amount of gold at the end as at the beginning of the year. 
 All the plans given for improving the standard have 
 their defenders, but the gold standard is here to stay, so 
 far as we can now see, indefinitely. , 
 
 17. Exercises. — i. In a poor community there is little 
 money. Is the community poor because there is little 
 money in it, or is there little money because the community 
 is poor ? 
 
 2. A good market to sell in is a poor market to buy in, 
 and a good market to buy in is a poor market to sell in. 
 How is this fact related to the movement of money from 
 one nation to another? What limits the extent of the 
 movement of money from one place to another ? 
 
 3. What is Gresham's law? When will it not work? 
 
 4. Define bimetallism. Explain the compensatory prin- 
 ciple. Would you vote for national bimetallism ? For in- 
 ternational bimetallism? 
 
 5. Assume that in 1896 the market ratio of gold to silver 
 was exactly 32:1, and that the United States had adopted 
 bimetallism at a ratio of 16 : i. Wouldboth gold and sil- 
 ver coins have come into and remained in circulation ? If 
 not, in what money would debts have been paid? Which 
 
278 Introduction to Economics 
 
 money would have become the standard? What would 
 have become of the other? ; 
 
 6. Summarize the arguments for and against inter- 
 national bimetallism. 
 
 7. Define these terms; mint ratio, market ratio, gold 
 points, "bad money," "good money," inconvertible paper 
 money. 
 
 8. "Should all prices rise uniformly or dechne uniformly, 
 no one would be either benefited or injured." Is tlus 
 true? 
 
 9. Because prices do not increase uniformly some classes 
 are benefited and others are injured. Is this true ? If so, 
 what classes are injured? And what classes are benefited? 
 
 10. Tell what occurred at each of the following dates in 
 the monetary history of the United States: 1792, 1806, 
 1834, 1853, 1857, 1873, 1877, 1890. 
 
 11. Make an argument either for or against the idea of 
 the compensated dollar. Would it work with respect to 
 foreign exchange? Why or why not? 
 
CHAPTER XIII 
 CREDIT AND BANKING 
 
 1. Credit as a substitute for money. 2. All classes use credit. 3. Credit 
 defined. 4. The basis of credit. 5. Credit facilitates production. 6. The 
 danger of credit. 7. The general and limited acceptability of credit in- 
 struments. 8. Bank credits, g. Banks as reservoirs of capital. 10. De- 
 posits. II. Deposits lower the purchasing power of money. 12. Time 
 deposits. 13. Liabilities and assets. 14. The operations of a bank. 15. 
 The value of a bank's liabilities. 16. Capital items. 17. Reserves. 18. 
 Other assets, ig. The leading safeguard of a bank. 20. The agency of 
 clearing-houses. 21. Payments by checks between different communities. 
 ,22. Bank-notes. 23. Exercises. 
 
 1. Credit as a Substitute for Money. — In our reasoning 
 upon the law of substitution, it was made clear that when 
 commodities will readily substitute for each other, the 
 prices of these commodities will tend to be uniform. If 
 two kinds of building material will supply the same demand 
 or readily substitute for each other, their prices will vary 
 but little. If a large increase in supply tends to diminish 
 the price of pork at the same time that a shortage in pro- 
 duction is tending to increase the price of beef, an in- 
 creased demand for the former will arrest its decline, while 
 a decreased demand for the latter will arrest its advance. 
 The two are competing to fill the same demand and this 
 competition tends to level their prices. 
 
 Credit substitutes directly for money; in performing the 
 same function both supply the same demand, and an in- 
 crease of credit affects the purchasing power of a dollar no 
 less than an increase in the supply of money itself. So 
 close is the relationship between money and credit that in 
 
 279 
 
280 Introduction to Economics 
 
 many instances they come to perform precisely the same 
 functions; here their identities fuse and the two become 
 one. Bank-notes; are they credit instruments ? Yes, they 
 bear the promise to pay to the bearer on demand. Are 
 they money? That which does the money-work is the 
 money-thing, and this work they do in full. 
 
 Credit liberates wealth when it substitutes for primary 
 money. An isolated community worth $100,000 can enjoy 
 but $80,000 worth of necessities and conveniences should 
 it be compelled to set aside $20,000 in gold coin to facili- 
 tate its exchanges. Could it substitute credit for gold 
 coin, and convert its gold into necessities, its well-being 
 would be increased to the extent of $20,000. 
 
 2. All Classes Use Credit. — Formerly the debtor class 
 consisted almost entirely of the poor, who were forced in 
 times of stress to borrow from their more favored brethren. 
 To-day the debtor class consists, for the most part, of the 
 wealthy who borrow for investments. But the distinc- 
 tion must not be drawn too sharply, for all classes use 
 credit. 
 
 Improvident working men spend their wages before they 
 are earned. Always dependent upon credit stores, they 
 pay extortionate prices to be carried on the books. The 
 rule of these stores is low prices for cash and high prices 
 for credit, the credit prices being made high enough to 
 counterbalance bad debts. Those honest enough to pay, 
 pay enough to square the account of the dishonest custo- 
 mer. Improvidence, as a cause of credit, makes the com- 
 mercial system uncertain. 
 
 A very poor community must have the necessities of 
 life; the pressure for goods causes idle money in the drawer 
 to be regarded as an unnecessary luxury. So their cash 
 
Credit and Banking 281 
 
 reserves are reduced to a minimum; they resort to credit 
 and trust to luck that they will get more money somehow 
 when it is needed. 
 
 Provident persons starting into business or desiring to 
 enlarge operations will have little money in reserve. The 
 need of funds to construct large productive establishments 
 may require more money than is in circulation. This 
 necessity, whether for purposes of consumption or of pro- 
 duction, will lead to the establishment of a credit system 
 which shall serve the place of money. 
 
 3. Credit Defined. — ^What has been said indicates that 
 credit is a readily acceptable thing, which performs the es- 
 sential function of money, but it has a broader application. 
 If we speak of the public credit of Mexico, we have in mind 
 the ability and readiness of that government to fulfil its 
 pecimiary obligations. Credit is trust given or received; 
 expectation of future payment for property transferred or 
 promises given; it applies to individuals, corporations, and 
 nations. 
 
 Credit is used at times to signify a person's ability to 
 contract a debt. "A good pay is master of another man's 
 purse." "A good way to make debts is to pay them." 
 William Roscher, a German economist, said: "Credit is 
 the power of disposition over the goods of another, volun- 
 tarily granted in consideration of the mere promise of the 
 counter-value." 
 
 A more accurate statement is that credit refers to the 
 obligation which exists between a debtor and a creditor 
 during the interval of time between the two parts of a 
 complete act of exchange. The economist, for the most 
 part, thinks of credit simply as a substitute for money. 
 
 This credit obligation may or may not be legally enforci- 
 
282 Introduction to Economics 
 
 ble. If Smith makes a note to Jones for $i,ocx> for value 
 received, it could be enforced at law; but if Smith and 
 Jones gamble, the obligation or credit given is non-enforci- 
 ble. 
 
 Credit is to be distinguished from a credit instrument, 
 the latter being a promise to pay money which is written 
 or printed or in tangible form. 
 
 Credit is not a commodity; it creates only indirectly; it 
 is merely an agency of transfer. 
 
 4. The basis of credit is confidence. There must be 
 confidence in the honor and probity of the debtor, but his 
 personal honor is not enough; there must also be confidence 
 in his ability to pay. Confidence as a basis of credit refers 
 both to the disposition and the ability to pay. 
 
 If an irresponsible tramp tender his note the maker of 
 the note has neither the will nor the ability to pay, and his 
 note, properly speaking, is not a credit instrument. Credit 
 must have reference to the ability of the persons contract- 
 ing debts. This fact is recognized by the law, for the con- 
 tracts of idiots and, in many cases of minors, are non- 
 enforcible. The merchant who would sell "on time" to 
 the irresponsible tramp would be incapable of giving 
 credit; or if mentally sound he would be merely "taking 
 a chance." 
 
 There are cases where credit is given without reference 
 to the honor of the debtor. In real-estate transactions, 
 for instance, the record in the county clerk's ofiice is the 
 only worth-while witness. If Smith executes a land con- 
 tract to sell to Jones mortgaged property, Jones must 
 receive it according to contract and at the agreed price, 
 even if Smith declared it to be free from obligation. Here 
 credit is involved and Jones must pay even if against his 
 
Credit and Banking 283 
 
 will, and must receive the real estate, even though Smith 
 falsified. 
 
 5. Credit Facilitates Production. — It is common knowl- 
 edge that people who borrow money on credit really bor- 
 row the use of the wealth which that money will buy. No 
 one pays interest on borrowed money for the sake of keep- 
 ing it; on the contrary, it is at once exchanged for ripe 
 goods or for productive wealth. 
 
 There are active capitalists who productively employ 
 such means as they may have or may borrow; there are 
 also passive capitalists — women, children, retired business 
 men — who, having no productive use for their means, loan 
 at interest to active capitalists. Credit facilitates the 
 transmission of capital, the control over agencies of pro- 
 duction, from passive to active . capitalists. Thus credit 
 serves to place the productive agencies of the community 
 at the proper place and in the most enterprising hands. 
 By the transfer of productive power to the vigorous and 
 energetic class of people, public welfare is promoted. This 
 makes active agencies more active and gives motion to 
 idle agencies. It concentrates industries and makes pos- 
 sible the advantages of large-scale production. 
 
 Credit, then, is a means to the end of larger production 
 and is, therefore, itself productive. All the numerous 
 agencies, facilitating and other, which co-operate in their 
 organized capacity to create utilities, are productive. No 
 one agent alone is productive. Land, or labor, or machin- 
 ery, or credit, or any other one agent, considered separate 
 and apart from others, is non-productive. A productive 
 agent is a composite unit, and every essential element nec- 
 essary to compose it is productive. Credit is such an ele- 
 ment and it is idle to deny, as many do, its productivity. 
 
284 Introduction to Economics 
 
 6. The Danger of Credit. — Credit ties firm to firm and 
 business to business throughout the industrial life of the 
 people. No misfortune can attend one branch of industry 
 which is not of vital concern to every other. For instance: 
 A large corporation is forced into bankruptcy; its out- 
 standing obKgations are large and numerous; its creditors 
 have reckoned these obligations among their assets and 
 have contracted with other concerns upon the strength of 
 these assets; but, this basis of credit failing, they in turn 
 cannot pay their debts and so the effects of the one big 
 failure are passed on. The failure of one firm gives effect 
 to a succession of failures throughout industry. Its effect 
 has been compared to that produced when a stone is cast 
 into a pond; one circular wave leads to another until the 
 farthest edges of the pond are reached. 
 
 Credit is most sensitive; being based upon confidence, it 
 is as changeable as human thought. It unites with money 
 to facilitate exchanges and every extension of it is an 
 added possibility of disaster, for if any considerable por- 
 tion of the intricate mechanism of trade should fail, con- 
 fidence is shaken. An impairment of confidence results in 
 the withdrawal of credit, and this in turn causes stringency 
 in the money market. This condition, accompanied by a 
 nervous and unreasonable rush on the part of each to save 
 himself, ruins many and may injure all. 
 
 Production is roundabout and is becoming more so with 
 the development of civilization. If the primitive man 
 wanted a drink of water, he lay down by the brook and 
 drank directly from it. Later on he made use of a crude 
 receptacle which we may call an economic good with an 
 indirect use. The water was no longer attained directly, 
 but indirectly through " the agency of the receptacle. 
 
Credit and Banking 285 
 
 Should the average city-dweller trace the whole roundabout 
 process step by step of his getting a drink of water, he 
 would be amazed at the complexity. The water is ob- 
 tained only at the end of a long succession of technical 
 steps — ^mining, smelting, shaping, transporting, merchan- 
 dising, and other. This indirect or roundabout process is 
 the most effective way of getting what we desire, but it 
 requires time to obtain thus the objects of desire. The 
 more roundabout the process, generally speaking, the 
 longer is the lapse of time between the beginning and the 
 end of the productive process. Credit faciUtates this com- 
 plicated process; it enables probable future goods to ex- 
 change against those actually present; it provides the 
 basis of a continuous working policy, thus giving temporal 
 solidarity to business. At the same time, however, it 
 lengthens the forecast which producers must make of the 
 market, and thereby increases the uncertainties of time. 
 Credit further increases the uncertainties of time, because 
 through it the number of interests involved are increased. 
 In his Economic Crises, a book deserving careful 
 study, E. D. Jones writes: "The abuses of credit may 
 manifest themselves in many forms. At one place they 
 may centre in the banking policy, at another in joint-stock 
 companies; at one time the fault may lie in bankruptcy 
 laws, at another in a reckless issue of paper money. The 
 use of credit is particularly dangerous when the tone of 
 business is unusually optimistic. It is also dangerous in 
 lines of trade in which estimates are unusually speculative 
 and results are uncertain. The history of mining, inven- 
 tion, and foreign trade is replete with failures due to easy 
 credit. And the modern growth of credit has for the first 
 time made speculation socially dangerous." And further: 
 
286 Introduction to Economics 
 
 "The convulsions of modern business would seem to 
 indicate that the credit structures which have been raised 
 in the business world are too lofty for the basis of integ- 
 rity we have at present to offer. The remedy lies at 
 every man's door. Civilization cannot merely migrate 
 from country to country as it has done in the past; we 
 must learn how to intensify the economic and social bonds 
 without self-destruction and without the increase of those 
 economic wastes of which crises form a part." 
 
 7. The General and Limited Acceptability of Credit In- 
 struments. — ^A credit instrument has general acceptability 
 when all persons in a country accept it without question 
 in payment for goods and services. Such an instnmient 
 must be negotiable; there must be general confidence in 
 its maker; it must be difficult to counterfeit, easy to recog- 
 nize, and in convenient denominations. Notes of this 
 character are issued by banks and governments; if non- 
 interest bearing, they serve as money, whether legal ten- 
 der or not. 
 
 A credit instrument is said to have limited acceptability 
 when it will serve as a means of payment only within a 
 restricted field. A non-negotiable promissory note is most 
 limited as to acceptability. If made payable to order or 
 bearer, it is negotiable and its acceptabihty is broadened. 
 Other instruments of limited acceptability are book ac- 
 counts, bills of exchange, various forms of bank credit, 
 and emergency currency such as "pay checks." 
 
 All such instruments are based on confidence in the in- 
 dividual or firm which makes them, and since the maker 
 is not generally known, confidence in his promise to pay is 
 limited. 
 
 During the panic of 1893 confidence was at a minimum 
 
Credit and Banking 287 
 
 and Kttle personal credit was accepted, and the need for 
 money to take the place of credit exceeded the available 
 supply. People lost confidence in one another, but large 
 corporations were able to maintain the people's faith in 
 certain localities. The corporations issued "pay checks" 
 as a sort of emergency currency. They have been called 
 "community credit money," but one should not speak of 
 a credit instrument of only a community reputation as 
 money. 
 
 8. Bank credits form by far the most important form of 
 credit and have, therefore, a most significant influence on 
 prices. Banks are institutions which deal in credit; they 
 make their income by selling their credit to customers. 
 This credit is more convenient than primary money, and 
 is so universally acceptable as to become the common 
 medium of exchange in the business world. A bank sells 
 its credit by simply giving its promise to pay. The writ- 
 ten evidence of an individual's promise to pay is a promis- 
 sory note; the written evidence of a bank's promise to pay 
 takes the form of a bank-note or an entry in what is known 
 as a "pass-book." But why such confidence in a bank 
 that its mere promise comes to serve as the common 
 medium of exchange throughout the business world? This 
 confidence rests upon so many pillars of support that a 
 mere- enumeration of them becomes tedious. They are: 
 the bank's paid-up capital; its surplus and undivided 
 profits; its reputation and good-will; the character of its 
 loans and securities held; the liability of stockholders; the 
 prestige of its officers, directors, and stockholders; and, 
 finally, the people's confidence is strongly supported by 
 faith in the control and inspection by expert official ex- 
 aminers. 
 
288 Introduction to Economics 
 
 Banks perform various functions useful to their custom- 
 ers; some of these are performed by institutions other than 
 banks. They maintain deposit vaults, change money, sell 
 securities, and serve as trustees. But the one essential 
 and true banking function is that of dealing in credit. 
 
 9. Banks as Reservoirs of Capital. — A bank may be 
 likened to a reservoir from which capital (purchasing 
 power) flows in the form of credit. Surplus funds flow 
 into the bank and become the basis of credit issues, which 
 flow out to the places where capital is needed. Thus 
 banks become equahzing agencies of finance throughout 
 the community. Small driblets of idle capital are col- 
 lected by the banks and consolidated into huge funds capa- 
 ble of meeting the demands for large capital on the part of 
 great industrial establishments. In this way the banks 
 put idle capital to work and they arrange capital in such 
 volumes that it can work most effectively. 
 
 10. Deposits. — ^Individuals might retain their own funds, 
 might disappoint the burglars by hiding them in unsus- 
 pected places, or at enormous expense keep burglar-proof 
 vaults, but a division of labor is better which allows one 
 man to make it his business to provide a place of safe- 
 keeping and so do this work for all. Those who intrust 
 their funds to a bank are called depositors and the funds 
 so intrusted are deposits. The bank holds itself ready to 
 pay the depositor at any moment, or "on demand." In- 
 dividuals would rather leave their means "on deposit" 
 than to bear the risk and inconvenience of carrying them 
 about. Consequently, even the most wealthy carry httle 
 money with them; they carry instead the right to draw 
 money. Thus risks and inconvenience are reduced to a 
 minimum, 
 
Credit and Banking 289 
 
 But the money deposited is small in comparison with 
 the deposits made through discounting. A simple illus- 
 tration will show how deposits are thus made. A mer- 
 chant who sells on time furnishes a farmer with tools, fer- 
 tilizer, and seed, taking in exchange his note for $500, 
 which will mature four months hence, when he sells the 
 crop. The merchant caimot exchange this note to dis- 
 tant commercial houses for goods, as such houses would 
 not take the note of a man, though of high moral honor 
 and financial ability, who is unknown except in his home 
 community. But such houses make it a practice to accept 
 the credit of banks. The merchant wishing to use in his 
 business the $500 called for in the note will wish to trade 
 this promissory note to the bank for its generally accepted 
 credit. He indorses this note and presents it to the local 
 banker, who (knowing both the maker and indorser to be 
 honest and able to pay, and knowing further the power of 
 the law to compel payment) is willing to trade the credit 
 of his bank for it. Inasmuch as the note will not mature 
 for four months he will not give in exchange the credit of 
 the bank to the full face value of the note, but accepts the 
 instrument at its present worth ($500 less interest for four 
 months). The merchant is now at liberty to take his pay 
 for the note, for instance, $490, in either of two ways — he 
 may take the cash, or he may leave it with the bank as a 
 deposit and take away a pass-book which evidences the 
 deposit, and a check-book which enables him to draw in 
 such amounts and at such times as he finds convenient. 
 The latter is the usual method followed in this country, 
 therefore in discounting a customer's note the bank in- 
 creases its own deposits. What does this illustration show 
 a deposit to be? From the standpoint of the bank, a 
 
290 Introduction to Economics 
 
 deposit is the bank's promise to pay money to a person or 
 corporation. From the standpoint of the depositor, a 
 deposit is the right to draw upon the bank. 
 
 In this illustration the discounted note becomes the 
 property of the bank. The merchant, though called a 
 borrower, has sold to the bank his right to secure money in 
 the future, just as he sold agricultural equipment to the 
 farmer. He indorsed the note, thus promising to make it 
 good just as he guaranteed the plows and other equipment 
 sold to the farmer. What did the bank give in exchange? 
 This transaction simply involved an exchange of rights; 
 the bank sold the merchant a right to draw at will for his 
 right to a future income. 
 
 No new principle would be involved in case the mer- 
 chant has a note, made by himself, discounted at the 
 bank. His note evidencing the right to collect a certain 
 sum of money in the future is sold to the bank in exchange 
 for the right to draw on demand. 
 
 II. Deposits Lower the Purchasing Power of Money. — 
 Business men meet their obligations for the most part by 
 drawing on their bank accounts. Professional men and 
 the wealthier classes avail themselves most generally of 
 this means of payment. On the other hand, the poorer 
 classes and, for the most part, those who live in the country 
 districts use money. Again, bank credit is used in case of 
 large payments and money is used by all classes in so- 
 called "petty transactions." It is both convenient and 
 customary to use money and bank credit in transacting 
 the people's business. The demands for each are fairly 
 established in practice, and the amounts of each in com- 
 mon use hold a more or less constant ratio to each other. 
 In other words, there is a rather constant ratio of money 
 
Credit and Banking 291 
 
 in circulation to money in the form of deposits. This 
 means simply that an increase in the supply of money 
 causes a proportionate increase in bank deposits. Com- 
 pared with these deposits the bank credits (substitutes for 
 money) issued upon them are many times larger. Conse- 
 quently deposits have the effect of lowering the purchasing 
 power of money or of raising prices. 
 
 12. Time Deposits are carried by savings-banks, as well 
 as by separate departments of commercial banks. These 
 deposits are not drawn (as are deposits in commercial 
 banks) on demand. Upon making a time deposit the cus- 
 tomer agrees not to draw for some specified minimum time, 
 or until a certain number of days after he shall have noti- 
 fied the bank of his intention to withdraw funds. Be- 
 cause the banker knows in advance when withdrawals will 
 be made he can prudently invest a large portion of the 
 funds intrusted to his safe-keeping. There is no danger of 
 a "run" upon the bank in times of panic. He has to 
 maintain but a small fraction of the deposits to meet the 
 demands of his customers for cash. The Federal Reserve 
 Act of 1913 requires that only 5 per cent shall be kept as 
 a reserve against time deposits. The depositor receives 
 interest on time deposits and regards them as investments 
 and not as demand credit available for current cash trans- 
 actions. 
 
 Demand deposits are spoken of as checking accounts; 
 they are payable at any time and the demand for payment 
 is made by the personal check of the depositor. 
 
 13. Liabilities and Assets. — -Thus far we have se^n that 
 bank discount amounts to this: the bank buys the right to 
 collect a specified sum of money at a certain future time, 
 and gives in exchange its promise to pay on demand a sum 
 
292 Introduction to Economics 
 
 of money equal to the present worth of the money it ac- 
 quires the right to collect. A liability (debt) is that which 
 one is under obligation to pay. The bank has a right to 
 receive, at its maturity, the face value of a note which it 
 discounts; there is a corresponding duty to pay on the 
 part of the debtor or maker of the note. That which is a 
 right of the bank is a debt or liability of the debtor. On 
 the other hand, the depositor has a right to receive on 
 demand the funds deposited at the bank; this right on the 
 part of the depositor is a debt or liability on the part of 
 the bank. The Habihties of a bank embrace its total in- 
 debtedness to stockholders, note-holders, and depositors. 
 But in return for every liability assumed the bank gets 
 something, and this which the bank receives is called its 
 assets. The bank gets as much as it owes and owes as 
 much as it gets; its assets and liabilities weigh the same — 
 they balance. A bank is a corporation, a legal person; it 
 is unlike a natural person in this : it can own no more than 
 it owes. 
 
 14. The Operations of a Bank. — We have said that a 
 bank is a legal person, a corporation, and that it can own 
 neither more nor less than it owes. This may be seen 
 when the liabilities and assets of a bank are arranged side 
 by side. A bank, as any other corporation, must have 
 capital with which to begin business. Let us assume that 
 five persons agree to establish a bank, that they secure a 
 charter, and subscribe $50,000. The bank will be capital- 
 ized at this sum, and the ownership of it will be divided 
 into 500 parts, called "shares," each of which will be 
 worth $100. If each of the five men subscribed $10,000, 
 each would come to own 100 shares of stock. When this 
 money is turned over to the bank, it owes or is liable to 
 
Credit and Banking 
 
 293 
 
 the stockholders for it. The paid-in capital is a liability 
 of the bank, and the bank holds the $50,000 cash as an 
 asset against its liability. The statement stands thus: 
 
 Assets 
 
 Liabflitics 
 
 Cash. . . . 
 
 
 . . $50,000 
 
 Capital. . 
 
 
 ..$50,000 
 
 The bank cannot do business without real estate, furni- 
 ture, and fixtures, which it buys at a cost of, say, $5,000. 
 This sum will be deducted from cash, leaving the state- 
 ment thus: 
 
 Assets 
 
 Liabilities 
 
 Cash 
 
 Real estate, furniture. 
 
 . .$45,000 
 5,000 
 
 Capital.. 
 
 
 . . $50,000 
 $50,000 
 
 $50,000 
 
 Both the purpose of the bank and its obligation to the 
 stockholders require it to earn profits; and, since it is an 
 institution which deals in credit, it will seek to convert its 
 idle cash into interest-bearing securities. There will be 
 in the community a number of merchants and other busi- 
 ness men who desire bank credit. Their customers in 
 payment for goods have made over to these business men 
 notes varying in amounts and dates of maturity. Suppose 
 that the bank is offered an aggregate of $20,000 worth of 
 these promissory notes (securities). The bank will dis- 
 count these in the manner above described. Should the 
 average time for their maturity be 90 days, the bank will 
 deduct the discount of, say, $300 and give deposits of 
 
294 
 
 Introduction to Economics 
 
 $19,700 for the notes. The value of the notes at maturity 
 would be $20,000, but the depositors are willing to forego 
 $300 for the present right to draw $19,700. The $300 dis- 
 count becomes a hability, under the item "undivided 
 profits," to the stockholders. The $20,000 worth of securi- 
 ties are the property of the bank and are entered among 
 the assets under the item of "loans." In this transaction 
 there appear some new items changing the statement to 
 read thus: 
 
 Assets 
 
 Liabilities 
 
 Cash 
 
 Loans (securities) 
 
 Real estate, furniture. 
 
 .$4S,ooo 
 . . 20,000 
 • S>o°° 
 
 Capital 
 
 Undivided profits 
 
 Deposits 
 
 . . $50,000 
 
 300 
 
 19,700 
 
 $70,000 
 
 $70,000 
 
 15. The value of a bank's liabilities must rest upon the 
 value of its assets. The major part of the assets consists 
 of the liabilities which the bank holds against its customers. 
 These liabilities are backed in part by the houses, land, 
 and other wealth of these customers, and they may also 
 be backed in part by the liabilities which these customers 
 hold against other persons. But these in turn are backed 
 by tangible wealth. So we may say the ultimate basis 
 of a bank's assets is the real wealth of the community. 
 The hank is merely an agency for giving the quality of 
 liquid currency to unsalable forms of wealth. One may be 
 wealthy yet have no purchasing power, such is the condi- 
 tion of an owner of unsalable land. He turns to the bank 
 for aid, offers it a note backed by his land, and this is con- 
 verted into the form of readily acceptable bank credit. 
 
Credit and Banking 295 
 
 i6. Capital Items. — ^A bank as a corporation or legal 
 person is distinct from the shareholders who own it, and 
 intrust their funds to it. To the shareholders it owes the 
 original capital received from them, as well as all the earn- 
 ings of the capital. It is understood, however, that any 
 claims held against the bank by shareholders cannot be 
 enforced until after all other creditors are paid in full. 
 The "capital" item represents the bank's liability to its 
 stockholders; therefore the capital is what is left after all 
 other liabilities are subtracted from the total assets of the 
 bank. It is evident that the value represented by the 
 "capital" item is constantly changing. Bookkeepers, how- 
 ever, keep the "capital" item unchanged; they charac- 
 terize any increase not as "capital," but as "surplus" or 
 "undivided profits." Why? Because bookkeeping is sim- 
 plified by keeping the capital at the same figure; because 
 the history of a bank's net capital accumulations is shown 
 at a glance when the original capital is kept separate from 
 the later accumulations; because, finally, the certificates 
 which represent the stock have an engraved face value 
 which caimot be changed conveniently to keep pace with 
 the fluctuating money worth of the stock. 
 
 The items of "surplus" and "undivided profits" are 
 simply bookkeeping devices for recording the variations of 
 capital. As the "capital" is maintained at the same fig- 
 ure, so bookkeepers also hold the item of "surplus" at the 
 same figure for considerable periods of time. The main 
 reason for this is simplicity. How can this be done, it will 
 be asked, since the additions to the original capital must 
 fluctuate with the normal operations of the bank's business ? 
 This is made possible by the creation of a third item, also 
 a part of capital, called "undivided profits." This item con- 
 
296 Introduction to Economics 
 
 sists of a varying amount in addition to surplus. " Capi- 
 tal" (the original sum put in), "surplus" (an accumulation 
 of earnings maintained in round numbers for considerable 
 periods of time) and "undivided profits" (an irregular and 
 varying sum in addition to surplus), are but three parts of 
 one and the same liability of the bank to its stockholders. 
 17. Reserves.— He is a poor banker who holds large sur- 
 pluses of idle cash. Funds must be loaned at interest, 
 and deposits created through the discount of notes far in 
 excess of the cash which a bank keeps on hand. If it fails 
 in this, a bank neither serves its function nor makes a 
 reasonable profit. What would happen if all these deposits 
 were immediately called for in cash? If the governor did 
 not declare a legal holiday (as goveirnors have done when 
 banks were threatened with a "run"), the bank would 
 become insolvent. Then, is it not dangerous for a bank 
 to contract obligations beyond its cash reserves? This is 
 to be answered in the negative. Would the notes which 
 the bank has discounted maintain its solvency? Legal 
 insolvency exists when a bank's cash assets are insufficient 
 to meet its liabilities as they faU due. The demands upon 
 a bank are for cash and cannot be met by an offer of even 
 the best securities. The moment a bank is unable to 
 meet the demands of the depositors in cash, that moment 
 it has failed; and the moment a depositor has to accept 
 securities in satisfaction of his claim, that moment begins 
 a division of the property of the bank among its creditors. 
 The real banking reserve consists of those assets of the 
 bank which are cash (ready purchasing power) or immedi- 
 ately convertible into cash. Such assets are specie, cash 
 items (demands on others immediately collectible in cash), 
 and legal-tender notes. 
 
Credit and Banking 297 
 
 To return to the above question, bankers are in no dan- 
 ger who increase the deposits subject to call far beyond 
 the amount of the reserves. Skilful bankers so order their 
 discounting of notes as to have a more or less regular inflow 
 of money with the maturity of these notes. Suppose that 
 a banker discounts 300 notes a month, or an average of 10 
 each day. Should all these mature on one day, the banker 
 would be embarrassed with surplus and idle cash for a 
 day or two; he would have to carry a large reserve to tide 
 him over until his next income period, thirty days hence. 
 But should the discounting of securities be so ordered 
 that there will be an approximately equal number of ma- 
 turities each day, fewer idle reserves will have to be held, 
 because the inflow of funds to the bank would approxi- 
 mately equal that of the outflow from the bank. The de- 
 mands on reserves run more or less steadily from day to 
 day and observing banks soon learn what ratio of reserves 
 to deposits to maintain. 
 
 The proportion of reserves to demand liabilities is weak- 
 ened in two ways — by an increase of liabilities, or by a 
 decrease of cash. In a conservative bank there is a care- 
 ful watch kept over the demand liabilities and the cash, 
 so that they are maintained at a ratio well above the dan- 
 ger-hne. In an unsafe bank, too much stress is laid upon 
 the point that "idle cash is a loss," the possibility of finan- 
 cial storms is disregarded, all possible sail is spread, the 
 reserves are imprudently reduced below the danger-line. 
 In behalf of depositors, laws have been made to define 
 minimum reserves requirements. 
 
 Under the national banking laws of the United States 
 this minimum was fixed at 25 per cent for city banks and 
 15 per cent for country banks. It is left to the banker to 
 
298 Introduction to Economics 
 
 determine how much, if any, may be required in addition 
 to this minimum. The size of the necessary reserve varies 
 from place to place; generally speaking, it is larger in the 
 city than in the country districts. 
 
 Payment by checks do not necessarily make demands on 
 the reserves of banks. Smith, Jones, and the other busi- 
 ness men of the community are customers of the same 
 bank, and when they make their payments to one another 
 through checks upon the bank, these credits are turned 
 back to the bank for deposit. Smith hands to Jones his 
 check for $ioo in payment of a debt; Jones takes this to 
 the bank for deposit, and the bookkeeper deducts $ioo 
 from Smith's account, adding the same to the account of 
 Jones. No cash is required, there is merely bookkeeping. 
 If Smith decides to pay Jones $ioo cash, he will withdraw 
 this amount from the bank, but as soon as it is received by 
 Jones he will return it to the bank. These examples are 
 typical of the ordinary transactions carried on through 
 banks; they are of such a nature that banks are enabled to 
 keep reserves that are small in comparison with their lia- 
 bilities. 
 
 i8. Other Assets.— Banks are coming more and more to 
 loan on collateral; that is, borrowers pledge some form of 
 salable property to the bank, which may be readily con- 
 verted into cash by the bank in case the loan is not promptly 
 paid. Stocks and bonds are the most desirable form of 
 collateral, because if the bank is embarrassed for funds, 
 these securities may be sold quickly on the stock exchanges. 
 Banks, especially those in the vicinity of stock exchanges, 
 carry a considerable proportion of their assets in the form 
 of stock-exchange collateral. Loans made on this basis are 
 usually payable at "call"; that is, no definite time is set 
 
Credit and Banking 299 
 
 at which they mature, but they are payable at any time 
 the bank demands payment. 
 
 Other quick assets, of growing importance in American 
 banking, are such securities as government, state, and 
 municipal bonds. English banking-houses will go so far 
 as to treat consols as if they were cash. 
 
 "Outside paper" is a technical name given by a bank to 
 the promissory notes of business firms which are not among 
 its own customers and depositors. When a bank has sur- 
 plus funds over and above the requirements of its clientele 
 it may find an outlet for them in the purchase of outside 
 paper. A group of middlemen called note-brokers make 
 it a business to search out and sell to banks desiring such 
 paper. This practice is commendable on condition that 
 the bank knows the financial standing of the firms backing 
 this paper, because it has the effect of distributing the 
 risks of the bank over a broader business circle. It is not 
 well for the bank to restrict its loans to a few customers or 
 firms, for, these failing, the bank fails. It is better not to 
 carry all the eggs in one basket. 
 
 19. The Leading Safeguard of a Bank. — Real insolvency 
 means that an institution owes more than it is worth. 
 Lxgal insolvency is reached when an institution is not able 
 to pay on demand, although its assets are equal to its lia- 
 bilities. When a bank receives a commercial deposit it 
 agrees to pay on demand; when it fails in this, the bank 
 has failed despite the sufficiency of its assets in forms other 
 than cash. While a bank's failure does not necessarily 
 imply that it is really insolvent, yet it must make safe its 
 depositors. The leading safeguard of a bank against real 
 insolvency lies in the strength of its capital, surplus, and 
 undivided profits. These represent the stockholders' in- 
 
300 Introduction to Economics 
 
 terests and the claims of all other creditors of a bank are 
 prior to those of the stockholders. The greater the ratio 
 of their interests to those of the other creditors, the less is 
 the danger of real insolvency. 
 
 But the standing danger which threatens the safety of 
 a bank is the right of depositors and the holders of its 
 notes to demand funds at any instant. Bankers may in- 
 crease reserves relative to liabilities by (i) care in the selec- 
 tion of securities to be discounted; (2) so raising the rate of 
 discount as to discourage borrowers; (3) refusing to renew 
 loans or to make new loans; and (4) collecting loans sub- 
 ject to call. 
 
 20. The Agency of Clearing-Houses. — Should Smith pat- 
 ronize the First National while Jones deposits with the 
 Second National Bank of the same city, they could still 
 pay each other by means of checks as effectively as though 
 both deposited in the same bank. If both carried deposits 
 in the same bank, a check paid by one to the other would 
 mean that the bookkeeper would simply deduct the amount 
 of the check from the deposit of the payer and add the 
 same to the deposit of the payee. In the case now assumed 
 the transfer of the check would be effected through the 
 agency of a clearing-house. Smith, for example, hands 
 Jones a check or order on the First National, to pay Jones 
 $100; Jones indorses the same, making it payable to his 
 bank (the Second National), which in payment adds $100 
 to his deposit. He surrenders his title to the check; it be- 
 comes the property of his bank, which gives Jones in ex- 
 change a right to draw $100. Now the First National 
 Bank owes the Second National $100. Throughout the 
 day each of these banks has collected from the numerous 
 business men of the city a large number of checks against 
 
Credit and Banking 301 
 
 the other. Were there a large number of banks in the 
 city, they would accumulate numerous checks against one 
 another. These checks or credits are sent to the clearing- 
 house, which settles the accounts between banks just as a 
 bank settles accounts between customers. Suppose that 
 the First and Second National Banks hold equal amounts 
 against each other. The obligations would cancel out. 
 But if the orders were in favor of the First National to the 
 extent of $i,ooo, it would be credited with the surplus and 
 the bank or banks owing this would be debited with the 
 deficiency. The aggregate of these differences over a con- 
 siderable period of time will be small. By paying these 
 small differences to the clearing-house, there will be but 
 little cash used in transactions which would otherwise ag- 
 gregate large sums. 
 
 21. Payments by Checks between Different Communi- 
 ties. — Should Smith live in Hoboken and Jones in St. 
 Joseph, Louisiana, they could still pay each other by 
 means of bank credit. Smith may draw a check on his 
 bank in Hoboken and send it to Jones. The Hoboken 
 bank now owes Jones $ioo. Jones indorses the check, 
 takes it to his bank in St. Joseph in exchange for a corre- 
 sponding sum to the credit of his deposit account. Now 
 the bank in Hoboken owes the bank in St. Joseph $ioo. 
 The St. Joseph bank indorses it and sends it for collection 
 to a New Orleans bank with which it maintains a deposit. 
 The New Orleans bank now owns the check against the 
 Hoboken bank, and it has paid for it by simply adding a 
 corresponding sum to the credit of the deposit account 
 which the St. Joseph bank carries with it. The New Or- 
 leans bank carries a deposit with a New York bank, so it 
 indorses the check to the New York bank- The New 
 
302 Introduction to Economics 
 
 York bank buys the check by adding a corresponding sum 
 to the deposit account of the New Orleans bank. The 
 New York bank now owns the check, and sends it to the 
 clearing-house in New York for collection from some other 
 New York bank, with which the Hoboken bank has a 
 deposit account. In the clearing-house $ioo, the amount 
 called for in the check, is added to the account of the bank 
 presenting the check, and the same amount is deducted 
 from the deposit account of the correspondent' of the 
 Hoboken bank. This correspondent bank deducts $ioo 
 from the deposit account of the Hoboken bank, and sends 
 the check to the Hoboken bank, which deducts $ioo 
 from the deposit account of the customer, Smith, who 
 originally signed it. 
 
 22. Bank-notes are credit instruments so exchangeable 
 that they do the work of money and are, therefore, to be 
 classed among the forms of money. They are so conve- 
 nient that they take the place of metallic money in many 
 cases, and thus lessen the amount of it used in effecting 
 exchanges. A bank-note is simply a promissory note 
 issued by the bank. The holder of a note has a right at 
 any time to demand payment by the bank, and the bank's 
 obligation to a note-holder is not unlike its obligations to 
 a depositor. 
 
 23. Exercises. — i. "The basis of credit is found in the 
 tangible wealth of the world." Explain. "The basis of 
 credit is confidence." Are these statements contradictory? 
 
 2. What effect will an increase in the supply of cotton 
 have upon the demand for woollens? What effect would 
 an expansion of credit have upon the purchasing power of 
 
 'When one bank carries a deposit account in another they are called 
 " correspondent " banks. 
 
Credit arid Banking 303 
 
 money? What economic principle is suggested by these 
 two questions ? 
 
 3. Point out the dangers connected with credit in the 
 modern business world. 
 
 4. Why will bank credit substitute for money more 
 readily than will the credit of a good citizen? 
 
 5. How may deposits be made in a bank? Describe in 
 detail how deposits are made through discounting. 
 
 6. What effect do deposits have upon the purchasing 
 power of money? 
 
 7. "A bank statement is a simimary of the bank's assets 
 and liabilities. 
 
 "(a) The assets and liabilities are always exactly equal. 
 How do you account for this ? 
 
 "(6) If the assets and Habilities are always equal, how 
 can the statement indicate the strength of the bank ? 
 
 "(c) If you deposit $100 in gold, does this affect the 
 bank's assets? Its liabilities? Explain. Answer similar 
 questions assuming the deposit to be in the form of a $100 
 check on this bank; assume it to arise from your giving 
 your note for $100 to the bank?" (Hayes.) 
 
 8. "(o) Why is it that for 'every asset there is a lia- 
 biHty?' , 
 
 "(6) If men in organizing a bank put in $20,000 in gold, 
 the statement will then stand: Assets, cash, $20,000; lia- 
 bihties, capital stock $20,000. Why is capital a liability? 
 
 "(c) How will the statement be affected if $10,000 is 
 spent for a site and building ? 
 
 "{d) If Mr. X deposits $200 in gold? 
 
 "(e) If Y cashes a $50 check drawn by X? 
 
 "(0 If Z opens an account by depositing a $100 check 
 written by X? 
 
 "(g) If Z, wishing to borrow, gives his note for $300 to 
 the bank and has this amount, less $2.45 interest, deposited 
 to his account? 
 
 "{h) If the bank spends $1,000 for bonds? 
 
 "(i) If the bonds are later sold for $1,100? 
 
 "{j) If Z pays his note at maturity? " (Hayes.) 
 
304 Introduction to Economics 
 
 g. After the following operations, how would you ar- 
 range the several items under liabilities and assets? The 
 bank begins with a paid-up capital of $150,000 and has a 
 surplus of $30,000. It discounts for customers $300,000 of 
 four months' notes, and bills receivable at 6 per cent, the 
 borrowers take one-third of the proceeds in cash and leave 
 two-thirds on deposit. Customers deposit $50,000 in cash, 
 $25,000 in checks drawn on this bank, and $25,000 in checks 
 drawn on other banks. 
 
CHAPTER XIV 
 
 BANKING LEGISLATION IN THE 
 UNITED STATES 
 
 I. Introductory. 2. Centralized banking. 3. The Bank of France. 
 4. Banking prior to National Banks. 5. The free banking system of 
 New York. 6. The National Bank act. 7. Provisions of the act. 8. De- 
 fects of the system. 9. DecentraUzation of banking. 10. Inelasticity of 
 credit. 11. Distribution of banking facilities. 12. Banking and foreign 
 trade. 13. New system demanded. 14. The Federal Reserve act. 
 15. The Federal Reserve Board. 16. The reserve banks. 17. Federal Re- 
 serve notes. 18. Reserves of Federal Reserve banks. 19. Reserves in 
 member banks. 20. Noteworthy features of the law. 21. Exercises. 
 
 I. Introductoiy. The function of banks, as well as their 
 operations, have been pointed out in the chapter on "Credit 
 and Banking." In a great commercial community these 
 functions reach beyond the welfare of individual customers; 
 they are national and international in scope. Banks are 
 the agencies through which currency systems operate. In 
 proportion to their ability to distribute properly, to expand 
 and contract the currency as need arises, to make their ser- 
 vices readily available to all classes, agricultural and other, 
 they do their work well or Ul. Coins cannot be struck and 
 recalled to meet the varying contractions and expansions of 
 business, but some kind of elasticity of currency is neces- 
 sary to meet the ups and downs in the money demand. 
 This elasticity is to be found in bank credit, through the 
 expansion and contraction of either bank-notes or deposits. 
 Notes may be issued by numerous and competing banks, 
 or they may be issued by one bank or under one central 
 supervision. 
 
 305 
 
306 Introduction to Economics 
 
 2. Centralized Banking. — Prior to the Civil War there 
 were different kinds of banks which issued notes. These 
 notes were easily put into circulation; they passed as 
 money, though not always at par; their redemption at the 
 banks was postponed, for certain banks evaded their re- 
 demption when called upon, and they continued to pass 
 from hand to hand; reckless issues led many banks to 
 collapse. This sad experience led to the advocacy of a uni- 
 fied control of note issues, but as a "let alone" pohcy pre- 
 vailed, a decentralized note issue accompanied it. Decen- 
 tralized note issues in Scotland, England, and the United 
 States led to recurrent bank failures during the first half of 
 the nineteenth century. 
 
 On the European Continent a different and more praise- 
 worthy experience is recorded. There the issue of notes 
 has been regarded as a public function, and generally has 
 been permitted only by institutions connected with or 
 supervised by the governments. 
 
 Two policies have taken root: (i) Decentralization, mani- 
 fold note issue, goverrmient supervision, and (2) centraliza- 
 tion and quasi-public note issues. 
 
 Typical of the latter policy are the three noteworthy 
 central banks: the Bank of France, the Bank of England, 
 the Reichsbank of Germany. These insritutions are not 
 alike in all respects, but they have one lesson in common. 
 Attention will be given here only to the Bank of France: 
 It is simple in operation, and will show the functions of a 
 central bank. 
 
 3. The Bank of France. — ^Although the Bank of France 
 is privately owned, and pays dividends to private stock- 
 holders, its manager is appointed by the French Govern- 
 ment, and it is under the virtual control of the state. 
 
Banking Legislation in the United States 307 
 
 Nevertheless, it is little hampered in its operations, since 
 there is no special regulation of its banking functions, no 
 separate provision for the safety of its notes, since it has 
 a monopoly of the note issue. 
 
 Public Duty: The Bank of France is the fiscal agent of 
 the government, keeps the public funds, administers and 
 records the public debt, and lends funds to the govern- 
 ment. \ Always, in time of need, the treasury of France 
 turns to this bank for advances. Since 1914 as well as 
 after 1870, the services of the bank in financing the govern- 
 ment cannot be overestimated. It issues notes and lends 
 to the government. So large was the issue during and 
 after the war of 1870-1, that it was decided to suspend 
 specie payments, but so great was the confidence in the 
 bank's power and willingness to meet its obligations that 
 no depreciation occurred prior to the date of redemption, 
 1878. That was a period of enormous note issue, yet con- 
 servative in comparison with the great demand for cur- 
 rency, and this conservatism sustained public confidence. 
 
 Specie Reserve: In normal times this bank, relative to 
 its demand obligations, carries the largest reserve of any 
 bank in the world. The large and growing specie reserve 
 is composed of both gold and silver — mostly gold, and so 
 the bank is able to maintain a low rate of bank interest. 
 Moreover, this large reserve is never in danger of exhaus- 
 tion, and enables the bank to maintain a policy of low and 
 uniform discount rates. It changes the discount rate on 
 the average about once a year — from 1875 to 1908 there 
 were only thirty-six changes. American bankers would 
 object to holding a large reserve of idle specie, but the 
 Bank of France is not primarily a money-maker for its 
 stockholders. Its mam purpose is to render the best pub- 
 
308 Introduction to Economics 
 
 lie service, to hold the government's jSnances to impreg- 
 nable strength. Because of this it has even been accused 
 of collecting a huge war reserve in this form. 
 
 Deposits: There is little deposit checking in France; the 
 people use specie and bank-notes almost altogether. The 
 tendency for notes to remain in circulation for long periods 
 of time, together with the fact that they are more conve- 
 nient than hard money, causes gold to flow into the bank 
 in exchange for notes and to remain there. Notes are not 
 issued in small denominations, however — not less than 50 
 francs, few less than 100 francs — and this compels the use 
 of hard money for petty transactions. The money system 
 and habit of the people are such that the average per capita 
 use of money is very large. 
 
 Branch Banking: Provision has been made for the estab- 
 lishment of 337 branches of the central bank. By the 
 decree of 1808 branches were estabhshed plainly with the 
 design of centralizing the banking interests of the empire 
 under the lead of the great bank in Paris, but the Bourbon 
 ruler in 1817 and 1818 closed these branches. In 1882 
 branches were again estabhshed. There are some objec- 
 tions to these branch banks; their capital is allotted by the 
 central bank; they are supervised by the parent bank in 
 Paris; they must secure special permission to do business 
 with other banks; their rates of discount are determined, 
 not by the local needs where they are, but by a policy fixed 
 in Paris; their directors are selected by the governor of the 
 bank; the real authority is in the hands of a manager 
 appointed by the government, frequently a stranger, and 
 assisted by subordinates sent from the capital. The ob- 
 jections to branch banking in the United States are that 
 small banks fear they will be swallowed up by the large 
 
Banking Legislation in the United States 309 
 
 banks in New York City, and that local interests will be 
 served best by independent local banks. Our system has 
 advantages over the rigid uniformity required for the whole 
 of France. That system lacks adaptability to local needs. 
 On the other hand, branch banking has many advan- 
 tages. Branch banks facilitate the collection and distri- 
 bution of loanable capital from and to different parts of 
 the country. Such a system keeps its fingers on the busi- 
 ness pulse of the whole country and makes easy the circu- 
 lation of money from places of surplus to places of need. 
 Such an acquaintance with the needs of the whole country 
 cannot but add to the solidarity of business. While it is 
 true that a small branch may afford adequate banking 
 facilities for isolated places, one system effects a compara- 
 tively uniform rate of interest. This is an appealing argu- 
 ment to the American business man who has suffered the 
 needless burden of wide differences in the interest rates 
 between different sections of the country. A bank with 
 branches reaching every section of the country does not 
 face ruin by local business depressions. Many towns are 
 built around a single industry, and the banks serving these 
 towns go down with the failure of the industry. Branch 
 banking also secures superior executive ability at the head. 
 Inasmuch as a central policy guides the whole system, the 
 necessity of spreading rare ability over the individual 
 branches is spared. But when such ability is revealed in 
 any branch it is, through a system of selection and promo- 
 tion, advanced to a higher ranking. Branch banking lends 
 efficiency to capital. The small nation with facilities for 
 marshalling and transporting its troops from front to front 
 may withstand a foe far superior in all but these facilities. 
 Likewise a nation with an adequate baiJdng system that 
 
310 Introduction to Economics 
 
 penetrates all sections may give to a small volume of capi- 
 tal adequate powers to do the nation's work. 
 
 Elasticity : There is a maximum legal limit to the notes 
 the Bank of France may issue. But this limit is virtually 
 a dead letter as it is far in excess of the usual issue, and is 
 modified in times of need. We may say that it issues 
 notes as far as it sees fit; they fluctuate from week to week, 
 depending upon the market needs; when they come back 
 to the bank they are not reissued. It discounts ordinary 
 commercial paper for its customers. Its accommodations 
 are for the poor as well as for the rich; it will discount 
 paper worth five francs (one dollar). It does a large redis- 
 count business for other banks. Seventy per cent of its 
 paper bears the signature of some other bank as an in- 
 dorser. This privilege of banks to have their commercial 
 paper rediscounted enables a bank with limited means to 
 make loans. 
 
 This bank gives to France a strong centralized financial 
 system, so organized as to reach all sections of the country, 
 and to apportion the nation's capital to the local needs. 
 It furnishes an elastic system; through rediscounts it 
 enables other banks to supply the credit and monetary 
 needs of those who hold good commercial paper; it does 
 not discriminate between rich and poor in extending its 
 accommodations. It does business for the people, for 
 other banks, and for the government. In marked contrast 
 with this centralized system is the decentralized national 
 banking system of the United States. 
 
 4. Banking Prior to National Banks. — It is beyond the 
 scope of this book to trace through the several types of 
 banks and banking which preceded the national banking 
 system. At some periods in the history of ante-bellum 
 
jBanking Legislation in the United States 311 
 
 banking inconvertible notes existed in weltering chaos; the 
 secretary of the treasury could not, within several millions, 
 estimate their amount; they were termed "heterogeneous 
 rags" as they poured forth m great volume from "wild- 
 cat" or "coon-box banks"; they took, at times, the form 
 of unchartered scrip in denominations from six cents up- 
 ward; redemption, if at all, was at times enforced by 
 "lynch law"; Secretary McCuUoch spoke, in disgust, of 
 the system, at one time, "as a compound of quackery and 
 imposture." During these "good old days" the pick- 
 pockets and unscrupulous rogues had a free license. When 
 Congress refused to recharter the second bank of the United 
 States (a worthy institution), a large number of state banks 
 sprang up, of the "joint-stock" and limited liability type. 
 In not a single state were they subject either to effective 
 regulation or supervision. It was the system, not the 
 banks — the government, not the bankers — that are to be 
 censured. But there were praiseworthy characters among 
 bankers, and some illuminating examples of banking. 
 
 5. The free banking system of New York deserves spe- 
 cial mention as a forerunner and model for the national 
 banks. "The wildly extravagant issues of really incon- 
 vertible paper money," says F. A. Walker, "supplied the 
 motive and the means for every species of extravagant, 
 wanton, and irresponsible speculation. Words could 
 scarcely exaggerate the extent to which the distortion of 
 production and the misapplication of capital were carried. 
 The whole head was sick and whole heart faint. The retri- 
 bution came in the panic of 1837, and in the second and 
 heavier shock of 1839, and in the long and dreary prostra- 
 tion of industry which followed." ^ These experiences led 
 'Political Economy, pp. 441-442. 
 
312 Introduction to Economics 
 
 to legislation designed to place banking on a sound basis. 
 Before 1838 in New York banks had special charters, 
 with the consequence that a bank was a privileged mo- 
 nopoly. Special charter institutions, banking or industrial, 
 have always been a cause of political corruption and bri- 
 bery of legislatures. The Act of 1838 was an enabhng act. 
 It enabled any person or group of persons to engage in 
 banking on certain prescribed conditions. One condition 
 was that no bank-notes could be issued until security for 
 their redemption was placed in the hands of the comp- 
 troller of the state. This security had to consist of United 
 States or New York stocks or bonds, and of mortgages on 
 improved real estate. This scheme of secured circulation 
 is known as the New York system. The system was not 
 perfect in two respects: (i) It provided certain but not 
 immediate convertibility of notes; (2) the nature of the 
 securities to back notes did not prove a most fortunate 
 selection. 
 
 Different states undertook to follow New York's exam- 
 ple, but these attempts ended in failure, due to the char- 
 acter of securities with which they backed their notes. 
 Improvements which pointed to success, however, were 
 under headway when the Civil War began, and they were 
 superseded by the National Bank Act. 
 
 6. The National Bank Act was advocated in the report 
 of Secretary Chase in 186 1, but it did not take the form of 
 law until February 25, 1863. In its behalf the following 
 arguments were urged. 
 
 Market for bonds: A prohibitive tax was placed upon 
 the note issue of banks other than national banks; thus 
 the new banks were to issue all bank-notes. They were 
 required to buy government bonds and deposit them at 
 
Banking Legislation in the United States 313 
 
 the Treasury Department in Washington as a guarantee 
 of the notes issued. The treasury was in great distress, 
 and the demands upon it for war purposes put the depart- 
 ment in search for new sources of revenue. It was thought 
 some hundreds of millions in bonds could be sold to the 
 banks to back their note issue. Moreover, each bank, 
 whether it issued circulating notes or not, was required 
 to deposit in the treasury a certain amount of registered 
 bonds of the United States. To sell bonds to meet the 
 exigency of war was the first and primary object of the 
 National Banking Act; it was truly a war measure. But 
 as a fiscal resource it failed. Not until after the war and 
 when the government was on its feet — able to borrow at 
 home and abroad — did the national banks begin to call for 
 bonds in large amounts. 
 
 Uniformity in Currency: We now come to the most re- 
 deeming feature of the act. Notes, uniform in appear- 
 ance, in value, and in acceptability, came in the place of a 
 great variety of notes— worthless, altered, forged, and 
 other. Every holder of a national bank-note is backed 
 by the credit of the government. A note from a bank in 
 Maine wUl pass as readily in Cah'fornia as in its home 
 state, and that, too, without regard to the standing of 
 the bank which issues it. No longer is the holder of a 
 note annoyed from the refusal to receive bank-notes by 
 those unacquainted with the bank of issue. 
 
 Curb Inflation: State banks, during the Civil War period, 
 were redeeming their notes in greenbacks. These went 
 down in purchasing power with the greenbacks and added 
 largely to the circulating media. Could national bank- 
 notes supersede state bank issues and be limited in amount 
 to the capital stock of the national bank, the public credit 
 
314 Introduction to Economics 
 
 would be strengthened. This would clear the market of 
 state bank-notes, leaving only greenbacks and national 
 bank-notes. The latter being restricted, the purchasing 
 power of greenbacks would be strengthened. 
 
 Public Deposits: The banks would provide a place of 
 safe-keeping for the government's funds. A number of 
 banks have been designated by the secretary of the trea- 
 sury as depositaries of public money. These are especially 
 convenient for making local disbursements.. The deposits 
 of the government are running accounts like those of pri- 
 vate customers. If the government wishes to restore 
 funds to the money market, it makes what is known as 
 special deposits. To withdraw these advance notice is 
 given, and upon them interest is to be paid at a rate 
 prescribed by the secretary of the treasury. 
 
 Tie People to Government: It was argued that a large dis- 
 tribution of bonds would tie up the people's interest with 
 that of the government. When the national banks come 
 to own millions of bonds they will use their agency in be- 
 half of the credit of the government. Likewise the peo- 
 ple who hold bank-notes supported by government bonds 
 will make effort to safeguard the public credit. 
 
 7. Provisions of the Act. — The original act and its later 
 amendments provided that every national bank should 
 deposit registered United States bonds in the treasury, 
 whether it issued circulating notes or not. Every bank 
 may receive notes equal to the par value of the bonds de- 
 posited by it, but not exceeding their market value. Bank- 
 notes thus rest on the credit of the government; this 
 security remains if the issuing bank fails. Banks are re- 
 quired to redeem their notes at their own counter. And 
 in addition to the bonds deposited, each bank must keep 
 
Banking Legislation in the United States 315 
 
 on deposit in the United States Treasury, in lawful money, 
 a sum equal to 5 per cent of its circulation. This is to 
 redeem notes when presented in sums of $1,000 or multi- 
 ple thereof. What if a bank fails? The comptroller pays 
 the note-holder in lawful money, and declares the bonds 
 which the defaulting bank has deposited to be forfeited to 
 the government. He may cancel or, at his pleasure, sell 
 bonds equivalent to the notes he redeems. Suppose the 
 bonds do not fully reimburse the government for the notes 
 it redeems for the failed bank? It has first Hen on the 
 assets of the bank, and- a right against stockholders who 
 are held to double liability. When the notes are paid they 
 are cancelled. 
 
 In order that country districts may have banking facili- 
 ties, provision is made that a town having less than 3,000 
 population may have a bank with a capital stock of 
 $25,000. The amount of capital required to establish a 
 bank ranges upward as follows: When the population is 
 from 3,000 to 6,000, at least $50,000 capital is required; 
 when the population is from 6,000 to 50,000 at least 
 $100,000 capital is required; when the population is over 
 50,000 at least $200,000 capital is required. Bank shares 
 must be $100 each, at least 50 per cent of the capital must 
 be paid in before the bank begins business, and the remain- 
 der must be paid in monthly instalments of not less than 
 10 per cent each. 
 
 The legal reserve is not the same for all banks. Banks 
 are divided into three classes: Central reserve city banks, 
 reserve city banks, and all others, commonly called coun- 
 try banks. Prior to the Federal Reserve Act the country 
 banks (banks outside of certain large cities) were required 
 to have as a reserve a sum of lawful money equal to 15 
 
316 Introduction to Economics 
 
 per cent of their deposits, but three-fifths of this 15 per 
 cent (or 9 per cent) might be deposited in a reserve city- 
 bank. Then, a country bank was not required to keep in 
 its own vaults a reserve of over 6 per cent. Reserve city 
 banks were required to keep a reserve of 25 per cent. 
 One-half of this (121^ per cent) might be kept on deposit 
 in a central reserve city bank, where it was counted as 
 part of the depositing banks' legal reserve. There are 
 three central reserve cities — New York, Chicago, St. Louis 
 — and the banks in them were required to hold in their 
 vaults a reserve of lawful money equal to 25 per cent of 
 their deposits. 
 
 8. Defects of the System. — The national banking sys- 
 tem accomplished much good for the country, but it had 
 certain defects which were largely responsible for the panics 
 and financial strains which business has recurrently suf- 
 fered. The banks were not equal to the situation during 
 the panics of 1893, 1903, and 1907. There was demand 
 for reform; why should the wealthiest nation have the 
 poorest banking system in the world? Yet, what was 
 there to do? The subject was intensively studied after 
 1903, and in the year following the severe panic of 1907 
 Congress appointed a National Monetary Commission. 
 This large commission, with its corps of eminent scholars 
 and experts in finance, submitted a comprehensive report 
 in 191 2. A summary of that report (Report National 
 Monetary Commission, 62d Congress, 2d Session; Senate 
 Documents 243, 6-16) should be carefully read by all stu- 
 dents of economics. The chief faults of the system were: 
 (i) Decentralization; (2) inelasticity of credit; (3) poor dis- 
 tribution of banking facilities over the country; (4) no 
 American banking institutions in foreign countries, and (5) 
 no rediscount system. 
 
Banking Legislation in the United States 317 
 
 9. Decentralization of Banking. — A national bank could 
 have no branches, as does the Bank of France. Conse- 
 quently, there was no really national banking institution. 
 Each national bank was a local institution, doing a local 
 business, and depending upon its own resources. Each 
 depended upon its own reserves to meet its demand liabili- 
 ties. In dull times country banks deposited a portion of 
 their reserves in reserve cities. Reserve city banks in turn 
 sent their idle cash to New York City banks, which paid a 
 small interest for it. Thus the idle funds of the country 
 drifted to New York, the commercial and financial centre 
 of the country. But New York banks were not paying 
 interest on cash to hold it idle; they loaned it out at call 
 for use on the stock and produce exchanges, carrying the 
 required reserve of 25 per cent. During a revival of 
 business — generally at crop planting or harvesting time — 
 the banks in the South and West were called upon by 
 depositors for cash, these banks called upon the reserve 
 city banks, and these upon New York banks. The New 
 York banks having loaned down to the required reserve 
 were forced to call in loans, but the borrowers had this 
 invested and found difficulty in Uquidating immediately. 
 Just this order of circumstances is largely responsible for 
 the recurring panics in this country, and explains why they 
 have been more acute than in other countries. The year 
 1913 was fairly normal as respecting banking conditions, 
 and in that year the banks owed depositors $20,000,000,- 
 000, when the total currency of the country was about $3,- 
 600,000,000. Less than one-half of this was in the banks, 
 and that centred, as above described, largely in New York. 
 Should fright seize a fair portion of depositors and they 
 make sudden demands on banks, the banks affected must 
 close their doors. 
 
318 Introduction to Economics 
 
 A partial remedy is suggested in Mr. Paul M. Warburg's 
 illuminating remark that we must treat our money reserves 
 as a city does its water-supply — accumulate it in one or 
 more large reservoirs and be able to send it at once to the 
 spot where it is needed. France has long since learned 
 this lesson and practises it in the manner above indicated. 
 A banker in Lyons does not fear his depositors, for the 
 Bank of France will furnish him gold or notes in exchange 
 for his assets. "Depositors do not want money when they 
 know they can get it"; they make a run on the bank be- 
 cause they fear they cannot get money. 
 
 Not only were the national banks local in organization, 
 but also their assets were of a local and non-liquid charac- 
 ter. A bank's discounts are for the most part in the form 
 of the promissory notes of its customers, and the bank 
 officials are local men, on confidential terms with their 
 customers. Borrowing is a matter of private business, a 
 promissory note a personal matter, and the borrower would 
 regard it a personal offense should the banker attempt to 
 raise money on his note. This is called rediscounting — 
 the bank discounts a note for a customer, and has this 
 same note discounted again by another bank. That is, 
 the bank buys the note from its customer, and sells the 
 same to another bank, taking its pay in cash or in the form 
 of an increased deposit at the other bank. Rediscounting 
 is a common practice in Europe, and a very helpful one in 
 distributing among the people the total loaning capacity 
 of the banks. In this country it has been regarded as a 
 confession of weakness on the part of the bank. 
 
 In Europe the seller of wares draws a biU of exchange 
 or draft upon the buyer which the buyer "accepts" or 
 attaches his signature to. The creditor also indorses this 
 
Banking Legislation in the United States 319 
 
 and has it discounted at the bank. These are freely bought 
 and sold by banks, thus enabling a bank to increase its 
 liquid assets at will. This furnishes a discount market for 
 the obhgations of business men which works as freely as 
 do our own markets for stocks and bonds. Want of a 
 discount market has made more pronounced the local char- 
 acter of our banks. 
 
 10. Inelasticity of Credit. — The rigid requirements for 
 bank reserves (15 or 25 per cent), together with the ten- 
 dency of banks to keep their funds loaned to the limit, has 
 already been commented upon. At crop-planting or crop- 
 moving seasons banks whose reserve percentages are at 
 the minimum, are not permitted to extend their accommo- 
 dations. " A fixed reserve is to credit what a stone wall is 
 to a prisoner: thus far, but no farther." 
 
 But the bond-secured note issue is the chief difficulty. 
 A national bank can issue notes to the market value or to 
 the par value, whichever is the smaller, of the goverimient 
 bonds which it buys and deposits in the treasury. As the 
 price of bonds goes up the profits of the bank must go down, 
 and vice versa. If the par value of a bond is $100 and its 
 market value $110, the bank must pay $110 for the privi- 
 lege of issuing $100 in notes. When will banks issue a 
 large amount of notes ? Assuredly, when the price of bonds 
 is low. When is the price of bonds low? Always when the 
 market rate of interest is high. The income on a bond is 
 a fixed amount. A 5 per cent bond whose par value is 
 $100 yields the owner $5 a year, no more and no less; it 
 yields this fixed sum whether the market rate of interest 
 be I per cent or 10 per cent. What would a permanent 
 annuity of $5 a year be worth when the market rate of 
 interest is 10 per cent? Fifty dollars, because $5 is 10 per 
 
320 Introduction to Economics 
 
 cent of that sum. What if interest changes to 2 per cent ? 
 It will be worth $250 because $5 is 2 per cent of that sum. 
 As the rate of interest goes up a bond (a fixed income in- 
 strument) goes down in price, and vice versa. When will 
 the interest rate be high? On two occasions: (a) With 
 few exceptions, when prosperity abounds and prices are 
 rising; and (b) always during the sudden fright of a panic. 
 Thus, in times of great prosperity, at the very time when 
 the market is not in need of more money, bond prices are 
 low and notes are thrown in large volume upon the mar- 
 ket. But the panic period is short, and banks, in self- 
 preservation, are collecting cash rather than bujdng bonds. 
 Yet many notes are issued during the flurry of panic. 
 When the interest rate is low bonds are high and note 
 issues few. When will this be? During depressions and 
 periods of dull business, when additional notes are most 
 needed. The expansion of notes is not always at the 
 wrong time; fortunately, it sometimes occurs in time of 
 need. But note the direction of such elasticity afforded 
 by the national banks; it is always out, not in. We can 
 get notes out, but in slack seasons they do not return. 
 
 II. Distribution of Banking Facilities. — Banking facili- 
 ties have developed with respect to the urban centres, 
 while agricultural districts have had their prosperity re- 
 tarded for want of banking accommodations. No adequate 
 agency has been provided for supplying them with fimds 
 for their busy seasons; they have had to pay higher inter- 
 est rates than prevail in the industrial centres. National 
 banks, before 1913, were forbidden to make loans on real 
 estate. The banking machinery was devised for money 
 to drift from small banks to the large banks — from coun- 
 try districts to financial and urban districts. Deposits 
 
Banking Legislation in the United States 321 
 
 did not travel in the opposite direction, and when city 
 banks were called upon to return borrowed funds to coun- 
 try banks it was calculated to cost a panic. What is more: 
 "We have no effective agency," reports the National Mone- 
 tary Commission, "covering the entire country, which 
 affords necessary facilities for making domestic exchanges 
 between different localities and sections, or which can 
 prevent disastrous disruption of all such exchanges in 
 times of serious trouble." 
 
 12. Banking and Foreign Trade. — To quote further from 
 the commission's report: "We have no American banking 
 institutions in foreign countries. The organization of such 
 banks is necessary for the development of our foreign 
 trade." European countries maintain such banks, much 
 to their advantage. These banks extend accommodations 
 to the financial and business interests where located, enlist 
 good- will, and attract attention to home products; they 
 study local demands, inform their countrymen of prospec- 
 tive sales, report on the credit of importers, negotiate 
 trade, arrange and make it easy to effect foreign payments. 
 Foreign banks handling American trade in South America 
 and the Orient naturally favor their own countrymen. 
 
 Competitive or decentralized banking cannot protect or 
 regulate a nation's gold supply. There are times when a 
 country has an oversupply of gold and to export it is 
 profitable, and at other times when the supply is short it 
 is necessary to attract gold from abroad. A central insti- 
 tution to dominate the control of foreign exchange is needed 
 to raise its rate to hold gold in the country or attract it 
 from abroad, and to lower its rate to dispose of a surplus. 
 A central bank controls the expansion of credit which is 
 an essential factor in depleting a nation's gold supply. 
 
322 Introduction to Economics 
 
 When credit expands prices accordingly rise, and it be- 
 comes profitable to buy in other countries where prices 
 range lower. Exports fall and imports increase, thus leav- 
 ing an unfavorable balance which must be paid in gold. 
 
 13. New System Demanded. — When you add to these 
 difficulties the constant meddling, to the displeasure of 
 many, of the national treasury, there is Uttle wonder that 
 a complete overhauling of the whole system was called for. 
 The Aldrich plan, committed to the principle of a central 
 bank, was brought forth and intensively debated. At this 
 time the Democratic party came into power, pledged 
 against the plan bearing the name of the champion of 
 high tariS. None the less, the new administration adopted 
 the essence of the plan, but provided, as we shall now see, 
 twelve central banks instead of one. 
 
 14. The Federal Reserve Act became law December 23, 
 1913. It created twelve regional banks, each of which is 
 to keep the reserves of the district in which it is located. 
 In each of the districts, designed as ist, 2d, 3d, and so on 
 to the 12th, the regional banks are located as follows: No. i, 
 Boston; No. 2, New York City; No. 3, Philadelphia; No. 
 4, Cleveland; No. 5, Richmond; No. 6, Atlanta; No. 7, Chi- 
 cago; No. 8, St. Louis; No. 9, Minneapolis; No. 10, Kansas 
 City; No. 11, Dallas; No. 12, San Francisco. The districts 
 have undergone sUght modification as to boundary and 
 may be further modified. Missouri is the only State hav- 
 ing two regional banks. 
 
 15. The Federal Reserve Board. — The whole system is 
 under the supervision of a governing board, called the 
 Federal Reserve Board, with headquarters in Washington. 
 There are seven members of the board, two of whom are 
 ex-ojfficio, the secretary of the treasury and the comptroller 
 
Banking Legislation in tlie United States 323 
 
 of the currency. Five members are appointed by the 
 President of the United States, for a period of ten years, 
 and at a salary of $12,000 a year. As head of the whole 
 system this board is charged with heavy responsibihties. 
 
 Committed to its direction are the following powers: To 
 protect the national gold supply; to provide an elastic cur- 
 rency through the contraction and expansion of notes; to 
 provide a systematic pooling of reserves of existing banks, 
 thus securing economy in and an effective utilization of 
 the money supply; to provide a free and general discount 
 market for commercial paper. The law provides that this 
 central board may (i) compel one regional bank to redis- 
 count commercial paper held by other regional banks, and 
 may determine the rate at which such rediscounts are 
 made. Thus the privilege of one bank to rely upon others 
 so organizes banking facilities that their resources are 
 denied to no section, and are at the disposal of all who 
 can offer paper measuring up to a certain standard. A 
 marked contrast is this to the old decentralized system 
 where each bank must deny credit, and in self-defense call 
 in reserves when expansion is most needed. The board 
 may (2) suspend reserve requirements, thus effecting an 
 economy in gold, and adding to the lending power of banks. 
 It may (3) suspend for cause any officer or director of a 
 regional bank in its exercise of general supervision over 
 the whole system. It may (4) regulate the issue and 
 retirement of Federal Reserve notes. Regarding this 
 means of providing an elastic currency more will be said 
 a moment later. 
 
 16. The reserve banks are banks for bankers in their 
 respective districts. Every national bank in the district 
 is required, and State banks and trust companies are 
 
324 Introduction to Economics 
 
 privileged, to subscribe for stock to an amount equal to 
 6 per cent of the subscribing bank's capital and surplus. 
 Thus, reserve banks are owned by other banks, which are 
 known as member hanks. Their dealings as a rule are 
 limited to member banks, but these stockholders or mem- 
 ber banks do not get all the earnings in dividends. Part 
 of these earm'ngs go to the United States as a franchise 
 tax. 
 
 What They Do: A regional or federal reserve bank may 
 accept deposits from the government (and from non-mem- 
 ber banks for exchange purposes); discount notes, drafts, 
 and bills of exchange indorsed by a member bank and 
 drawn for agricultural, industrial, and commercial pur- 
 poses; discount acceptances based upon the importation 
 and exportation of goods; deal in bills of exchange; deal in 
 gold coin or bullion; deal in government obligations and 
 short- time obligations of States and municipalities; carry 
 balances with other regional banks for exchange purposes; 
 establish branches in its own district and in foreign coim- 
 tries; and, subject to the approval and determination of 
 the Reserve Board, fix its rate of discount. 
 
 Directors: Over each regional bank are nine directors 
 who are divided into three classes of three men each. 
 Class A are chosen by the member banks and are presum- 
 ably bankers, class B are chosen by the member banks 
 but must not be bankers, class C are chosen by the Federal 
 Reserve Board to represent the general pubUc, but two of 
 these must be bankers. 
 
 17. Federal Reserve Notes. — Provision is made in the 
 act for the gradual withdrawal of national bank-notes. 
 But these notes may, if national banks so desire, continue 
 in circulation. 
 
 The notes issued by the regional banks may be in de- 
 
Banking Legislation in the United States 325 
 
 nominations of $5, $10, $20, $50, $100, $500, and $1,000. 
 They are receivable by all member banks and regional 
 banks, and for taxes, customs, and other public dues. 
 
 These notes are not secured by government bonds, but 
 by a deposit either of gold or commercial paper; further- 
 more, they are obligations of the United States, and they 
 are also secured by the assets of the issuing bank. They 
 are redeemable in gold at the treasury and in gold or law- 
 ful money at the regional banks. 
 
 A regional bank must send to the treasury or return to 
 the issuing bank, and not reissue any notes of other regional 
 banks which it may receive. This brings notes back to 
 the issuing bank, limits their circulation in other reserve 
 districts, and shortens the time during which they remain 
 in circulation. 
 
 i8. Reserves of Federal Reserve Banks. — A regional 
 bank must carry a reserve in gold of not less than 40 per 
 cent against its notes, and 35 per cent in gold or lawful 
 money against its deposits. Any deficiency is subject to 
 a graduated tax. 
 
 A tax of I per cent per annum is charged upon each such 
 deficiency until the reserve is lowered to 32>^ per cent, 
 thereafter iJE^ per cent tax is added for each 2^ per cent 
 deficiency or fraction thereof. The following table will 
 show this: 
 
 When the reserves against notes The tax rate upon the total de- 
 are: ficiency shall be: 
 Below 40.0 to 32.5 per cent. i-o per cent. 
 Below 32.5 to 30.0 per cent. 2.5 per cent. 
 Below 30.0 to 27.5 per cent. 4-o per cent. 
 Below 27.5 to 25.0 per cent. S-S per cent. 
 Below 25.0 to 22.5 per cent. 7-° Per cent. 
 Below 22.5 to 20.0 per cent. 8.5 per cent. 
 Below 20.0 to 17. s per cent. lo-o per cent. 
 
326 Introduction to Economics 
 
 The bank paying this tax must add an equivalent amount 
 to the interest and discount charged member banks. This 
 enables a necessary expansion of the note issue in times of 
 emergency. The heavy tax paid upon a deficiency below 
 the required reserve will encourage banks to withdraw 
 their notes from circulation when the emergency calling 
 them out is over. Professor Fetter illustrates these facts 
 thus: "Suppose for example that the circulating notes 
 were in normal times $1,000,000,000, and the reserves, 
 therefore, were $400,000,000 and the rate of discount 5 
 per cent. Then the circulation might be doubled with the 
 same reserves, the proportion thus falling to 20 per cent 
 of outstanding notes, and the rate of discount to customers 
 rising to 13.5 per cent (5 plus 8.5)." ' 
 
 The Federal Reserve Board may, in times of emergency, 
 reduce reserves against both notes and deposits, and in 
 both regional and member banks, down to the last dollar. 
 This affords an opportunity to provide sufficient credit for 
 any emergency. 
 
 19. Reserves in Member Banks. — The act makes a wise 
 distinction between the reserve requirements for time de- 
 posits and demand deposits, in case of all member banks. 
 They are required to keep no more than a 3 per cent 
 reserve against time deposits. The purpose of this require- 
 ment is to encourage banks to establish savings depart- 
 ments. 
 
 The reserve required for banks in the central reserve 
 cities is reduced from 25 to 13 per cent, in reserve cities 
 from 25 to 10 per cent, and in other banks from 15 to 7 per 
 cent. We have seen that the depositaries of funds that 
 might be counted a part of a bank's reserve were in the 
 'Modem Economic Problems, p. 124. 
 
Banking Legislation in the United States 327 
 
 reserve and central reserve cities. The regional banks are 
 now such: depositaries, and all legal reserves of member 
 banks must be on deposit with them, no reserve in vault 
 being required of member banks. 
 
 20. Noteworthy Features of the Law. — The law would 
 break down a monopoly control of the money supply by 
 large banking syndicates, and give the advantage of credit 
 to all worthy investors. It would insure the pooling or 
 co-operant use of reserves, thus putting adequate lending 
 power at the disposal of banks in all sections of the coun- 
 try and at all seasons of the year. To this end regional 
 banks are empowered to maintain branches, and inter- 
 dependence among all banks has been established. Banks 
 are not now compelled to withdraw currency from the 
 market and hoard it as a means of fortifying themselves 
 against danger. Centralized reserves will also secure an 
 economy in gold. Adequate provision for acceptances and 
 rediscounts is provided, a judicious use of which will make 
 slow-moving securities liquid, give the widest employment 
 to local resources, and facilitate the movement of goods 
 into and out of the country. This will create new and 
 convenient types of paper, giving them stability and cer- 
 tainty in the market. But more important, an adequate 
 distribution of funds in time and place will equalize the 
 interest rate over the whole country. The most note- 
 worthy features of the law are those which add to the elas- 
 ticity of deposits and notes. We have seen how the ex- 
 pansion and contraction of notes, as well as Kberality in 
 reserve requirements, work to effect this elasticity. 
 
 The Transmission of Funds : American commerce has suf- 
 fered because of the excessive charges made upon business 
 men for the collection and transmission of their funds. 
 
328 Introduction to Economics 
 
 Prior to the Federal Reserve Act country banks carried 
 this type of extortion to the point where some of them 
 made fully one-half of their earnings from such charges. 
 Provision is now made for clearing checks through the 
 regional banks and for collecting drafts. Member banks 
 may charge clients a fee sufficient to cover the actual cost 
 of collecting fimds, but these charges are under federal 
 control. 
 
 Foreign Branches: Americans heretofore, who have en- 
 gaged in foreign trade or operated branch houses abroad 
 either have financed themselves or depended upon foreign 
 banks. South America is a developing field for our busi- 
 ness. Until branches of American banks were estabKshed 
 there, our business men depended largely upon branches 
 of European banks. The charge has been made that such 
 banks, working as they did in close harmony with mer- 
 chants of their own nationality, were often unfaithful to 
 their American clientele, allowing competitors to know 
 their business operations, and, when disposed to do so, 
 cutting off their credit in favor of such rivals.^ Banks may 
 now establish branches abroad, with the permission of the 
 Reserve Board, which wiU be operated subject to very lib- 
 eral terms. This wiU provide the needed foreign banking 
 accommodations to place American business men upon a 
 footing of equality with foreign competitors. 
 
 21. Exercises. — i. If in France prices are rising owing to 
 an inflation of currency, there will be a tendency for im- 
 ports to increase and for gold to be exported. What could 
 the Bank of France do to remedy the situation ? 
 
 2. A central hank with branches in different sections of 
 
 ' American Economic Review, IV, p. 22. 
 
Banking Legislation in the United States 329 
 
 the country is more desirable than a decentralized system 
 such as have been the national banks in the United States. 
 
 Define the terms italicized. 
 
 Make an argument for, and an argument against this 
 statement. 
 
 3. What is meant by the elasticity of currency? What 
 are its advantages? 
 
 ' 4. Compare the free banking system of New York with 
 the national banking system. 
 
 5. What arguments were made for the National Bank- 
 ing Act prior to its adoption? Were these arguments cor- 
 rect? 
 
 6. How was the financial situation affected by the cus- 
 tom of banks to deposit a part of their reserves in New 
 York banks? (Foster.) 
 
 7. What was the chief problem that grew out of the 
 seasonal demands for currency? 
 
 8. Tell why note issues under the national banking sys- 
 tem run coimter to the requirements of business? 
 
 9. An item in the financial page: 
 
 The rediscounting of commercial paper at the Federal Reserve 
 Bank of New York by some of the city's largest banks on Wednes- 
 day had the effect yesterday of improving general money market 
 conditions. Call loans which were made at 15 per cent on Mon- 
 day, and as high as 10 per cent on Tuesday, and touched 7 per cent 
 Wednesday, were placed yesterday at from 3 to 5 per cent. Most 
 of the loans were made at 4^ per cent, the renewal rate, and the 
 closing quotation was 3 per cent. Time money rates were easier. 
 
 Explain the process of rediscounting here referred to. 
 In just what^way did the rediscounting operations relieve 
 the call money market ? Do you consider that this use of 
 the rediscounting facilities provided by the Federal Reserve 
 System was in accord with sound banking principles ? Was 
 it the best possible use of the rediscounting mechanism? 
 
 10. A financial stringency is felt in the ninth and tenth 
 Federal Reserve Districts owing to the fall-crop movement. 
 
330 Introduction to Economics 
 
 Cash is scarce. What action may the Federal Reserve 
 Board take to remedy the situation? (Foster.) 
 
 11. The Federal Reserve Board desires to force up the 
 market rate of interest as a means of checking overspecu- 
 lation and inflation. The banks have large reserves on 
 hand. The rediscount rate is raised. In your opinion, 
 will this achieve the desired result ? Explain. 
 
 If your answer to the preceding question is in the nega- 
 tive, outline in detail what plan may be followed. (Fos- 
 ter.) 
 
 12. Explain carefully why Federal Reserve notes cause 
 a greater elasticity of currency than was secured by means 
 of national bank-notes. 
 
 13. In times of emergency the Reserve Board may fur- 
 nish relief through its power to regulate the reserve of a 
 member bank. Explain how this may be done. 
 
CHAPTER XV 
 THE ORGANIZATION OF PRODUCTION 
 
 I. National forces co-operate in war. 2. The co-operant forces of indus- 
 try. 3. The automatic adjustment in industry. 4. Adjustments never 
 complete. 5. Quantitative precision. 6. The services of men standard- 
 ized. 7. The test of production not on moral grounds. 8. The test of 
 production not tangibility, g. Social production refers to amount. 10. In- 
 dividualistic and social view-points. II. The entrepreneur. 12. Functions 
 of the entrepreneur. 13. The entrepreneur is a self-employed middleman. 
 14. The entrepreneur as servant of demand. 15. The uses of materials. 
 16. Direct and indirect uses of goods. 17. The agencies. 18. Exercises. 
 
 I. National Forces Co-operate in War. — During a great 
 war nations are organized into vast fighting machines. 
 One purpose guides and shapes these organizations — to 
 overpower the enemy. Into one complex whole the powers 
 of the nation are integrated so that they operate succes- 
 sively and simultaneously. That is to say, the forces of 
 the nation under one supreme command are knit together, 
 so as to form a compact harmonious whole of all the re- 
 lated branches and necessary processes of the belligerent 
 powers of the nation. These forces operate successively, 
 so that step by step raw materials in the ground are ex- 
 tracted, transported, and through many processes shaped 
 into finished forms. 
 
 These forces operate simultaneously, so that aU the nec- 
 essary divisions of labor are at one time joint or co-operant 
 forces to a common end. The organization embodies divi- 
 sions of infantry, cavalry, artillery, ammunition columns, 
 engineers, and transporting facilities to furnish supplies at 
 
 331 
 
332 Introduction to Economics 
 
 the front. But the war would be of short duration were 
 this all. Whence these supplies? From the shops, mills, 
 and factories that shape raw materials into ripe goods. 
 Whence the raw materials ? From the mines, forests, fish- 
 eries, and farms. This vast system embraces: All laborers, 
 from the miner in the shaft to the soldier in the trench; all 
 materials, from the minerals embedded in the crevices of 
 rocks to the shell exploding over the batteries of the 
 enemy; all the comforts from their elemental forms, through 
 the many processes, till they come to clothe, feed, amuse, 
 instruct, and otherwise provide the personnel of the 
 nation. 
 
 These forces, so integrated into a vast fighting machine, 
 are but the elements of one composite unit that is subject 
 to orderly regulation. The seat of authoritative regulation 
 is in the all-powerful sovereignty of the state. From this 
 source power is delegated to a commander (though chief 
 servant he is) with general supervision over all the forces 
 in the field. This power is further redelegated to com- 
 manders of divisions and so on down to the squad corporals. 
 
 The roar of musketry and the strategy of officers may 
 obscure the vision as to those who are extracting, trans- 
 porting, and shaping materials. But in fact these silent 
 workers co-operate in the common plan to serve the com- 
 mon purpose of the state. AU the forces of men and mate- 
 rials are not separate units, but under a structural organi- 
 zation they fuse into one productive system. 
 
 What the people want they produce, and they produce 
 nothing else. Desire is the motivating force which shapes 
 a system and sets it in operation. If you would know 
 what a people produce ask, first, as to the nature of their 
 desires. It took mastership to bring productive power to 
 
The Organization of Production 333 
 
 its present height, and it could not be maintained at that 
 height one year without it. 
 
 2. The Co-operant Forces of Industry. — As in time of 
 war so in time of peace, industries are shaped in obedience 
 to the demands of the people. What the people want they 
 produce, and changes in desires affect the shape of industries 
 and bend the direction of human endeavor into new lines. 
 
 Productive capacity embodies all the agencies which 
 supply the means of gratifying desires. It consists of 
 natural resources, of the scientific knowledge of the ways 
 and means of utilizing these resources, of the technological 
 equipment through which this knowledge operates. 
 
 But there may be capacity which lies dormant. The 
 most effective utilization of this capacity is the most fun- 
 damental industrial problem. A solution of this problem 
 is to be found in the method of analysis and co-operation. 
 The productive process is analyzed into its constituent ele- 
 ments; tasks are divided into difficult and easy, mechani- 
 cal and intellectual, skilled and crude. Men are, accord- 
 ing to their fitness, set to the numerous tasks which make 
 up the industrial process. There are tasks for each and 
 all; the miner, the transporter, the manufacturer, the mid- 
 dleman, the lawyer, the artist, the comedian, and the rest. 
 
 The scope of the industrial process is larger than the 
 worker, or the resources, or the organization^t is a co' 
 operation of all these in one composite whole. No one 
 division of industry is independent of other divisions car- 
 ried on elsewhere. Any one division of the productive 
 process presupposes the proper working of many others; it 
 follows some, precedes others, and operates simultaneously 
 with others. Each fits into and becomes a part of the 
 industrial order. The line of work followed by each is 
 
334 Introduction to Economics 
 
 adapted to and determined by the other divisions of the 
 whole process. There is no severalty of processes; they 
 are interlocked. 
 
 3. The Automatic Adjustment in Industry.— The pro- 
 ducer invests his labor and means according to the princi- 
 ple of comparative value. Why, for example, do not 
 fanners sow their lands wholly to wheat? They produce 
 for the market, and their self-interest causes them to plant 
 such crops as will yield the largest net money return. 
 Should all turn to the production of wheat, that product 
 would be cheap and others dear. The demands of the 
 people operating through the self-interest of the farmers 
 thus cause a variety of crops. Apply this principle to the 
 whole industrial order, and we have the explanation of 
 variety in the processes of production. 
 
 The principle of comparative value, where competition 
 is imobstructed, explains why there is a tendency for profits 
 to be uniform throughout the industrial process. As the 
 farmer would shift from wheat production to the growing 
 of swine in order to increase his net income, so would pro- 
 ductive energy in any line be shifted to another and more 
 remunerative field. But all producers are actuated by 
 the motive of largest gain, and this causes productive 
 power to shift from places where it exists in largest abun- 
 dance (where money returns are small) to places where it 
 is scarce (where money returns are large). In this way 
 the shifting of the means of production tends to equalize 
 returns throughout the industrial system. 
 
 4. Adjustments Never Complete. — Immobihty of pro- 
 ductive agencies retards and, I may say, defeats a perfect 
 equilibrium of returns throughout all industry. Assume 
 that a community has a most intelligent population, that 
 in alertness, prosperity, and inventiveness it ranks second 
 
The Organization of Production 335 
 
 to none — even such a people are slow to adjust themselves 
 to new needs. If such a people are suddenly called upon 
 to construct new ships to counterbalance the destruction 
 by a fleet of submarines, it takes many months to make 
 the necessary readjustments of the productive power which 
 is ordinarily devoted to the arts of peaceful industry. 
 
 Capitalists invest their means in forms that are more or 
 less fixed and can convert their wealth into new forms 
 only after much delay. If one has invested in or con- 
 structed a mill which utilized power from a waterfall, he 
 could change the place of his mill or reconstruct it to take 
 advantage of steam-power, only against great resistance 
 and at heavy cost in time and money. 
 
 The risk involved in a change of investment lends to 
 the immobility of productive agencies. The differentia- 
 tion, specialization, and localization of trades vastly in- 
 crease productive power, but the risk of loss from a mis- 
 adventure is large in proportion to the chances of gain. 
 To enlarge productive equipment is to enhance the risk of 
 loss. If Smith has specialized in the shoe trade— knows 
 that trade and none other — his risk is large if he attempts 
 to transfer his means to the hat trade, of which he is 
 ignorant. Or through no fault of his own a new invention 
 may reduce him to penury over a week's end. This is an 
 era of specialists; specialists are ignorant of advantages in 
 other fields and helpless if the opportunities for working in 
 their own field are taken away. And this may be done by' 
 a monopoly entering the field, or by an invention, or by a 
 change in demand. So many are the risks of loss that the 
 less adventurous are willing to "go slow and let well enough 
 
 alone." 
 
 Backward peoples follow in the footsteps of their fathers 
 century in and century out; advanced peoples not infre- 
 
336 Introduction to Economics 
 
 quently find that readjustments are not fully accomplished 
 in the generation that first feels the necessity of them. 
 The mobility of productive power is a matter of degree, 
 less pronounced among backward peoples and more tardy 
 where investments are of a fixed nature. There is always 
 a tendency to bring about a well-ordered proportion and 
 balance among all branches of industry; but such is never 
 fully accomplished. 
 
 5. Quantitative precision is another characteristic of 
 the industrial process. This is an age of machinery, 
 whereas prior to the industrial revolution, except for a 
 few simple tools belonging to workmen themselves, work 
 was done by hand. With the introduction of steam-power 
 large and expensive machinery made competition by hand 
 processes impossible, and the cost of such machines made 
 it possible for only capitalists to own them. Thus the in- 
 troduction of steam-power brought about a distinct class 
 of owners, a distinct class of workers or hired men, and 
 congregated labor. The use of machinery is found in aU 
 industry; it has so subdivided work as to break up labor 
 into simple movements, and it has made of all industry 
 one balanced mechanical process. 
 
 As the unerring time-piece requires exact functioning on 
 the part of each cog, wheel, and spring, so the machine 
 process requires quantitative precision and accurate func- 
 tioning in point of time and sequence. Mechanical accu- 
 racy requires uniformity of processes, standardization of 
 tools, and staple grades of output. Mechanical standard- 
 ization has taken the place of the craftsman's skO that 
 adapted the output to any style, cut, and trim which the 
 fancy of the user might dictate. 
 
 It would be difficult, costly, time-consuming, and I shall 
 say impossible to equip an army with rifles were each made 
 
The Organization of Production 337 
 
 after an individual pattern to suit the fancy of the soldier 
 who might use it. But if standardized to one pattern and 
 the several parts made of a definite size, shape, and gauge, 
 then high-power machinery will be constructed for the 
 specific purpose of making rifles and, without undue delay, 
 will produce them in the needed abundance. Consumers 
 object at times to standardization on the ground that one's 
 individuality cannot show itself, since all must buy goods 
 made according to a common pattern. Standardization 
 appUes to the agencies which transport us, which transport 
 our goods, and which transport our messages. The tools 
 and machinery of production are made according to a 
 definite grading in size, shape, and gauge. The articles of 
 consumption — clothing, food products, home-furnishings, 
 and the like — are standardized and stamped as to grade, 
 weight, and content. This has led to uniform systems of 
 weights and measures. 
 
 6. The services of men are standardized. A standard- 
 ized machine process works with automatic precision. 
 Maladjustment in one department affects the smooth work- 
 ing of the process as would the disorder of a spring defeat 
 the accurate time-keeping of a clock. Any part can per- 
 form its function in full only when the other parts are 
 rightly adjusted and properly working. The nature of the 
 workman's job is determined for him by the machine 
 which he is to operate, and a pace or rapidity of work is 
 set for him by the rapidity of the movements which work 
 in sequence throughout a plant, and the quality of his 
 work is set by the standard or grade of excellence which 
 the output is required to reach. The worth of a laborer is 
 measured in units of output. 
 
 7, The Test of Production Not on Moral Grounds.— 
 To this point reference has been made only to the external 
 
338 Introduction to Economics 
 
 form of the productive system. We have seen that pro- 
 ductive forces interlock and work co-operantly. This, it 
 has been pointed out, requires that a proportion and bal- 
 ance must exist among the several parts to guarantee their 
 smooth and harmonious joint operation. The introduction 
 of machinery results in the congregation of labor, and 
 brings about the rather distinct classes of capitalists and 
 workers, as well as another class to be considered a moment 
 later — the entrepreneur. We have also seen that the most 
 marked characteristic of the productive order is standard- 
 ization, which is a consequence of the comprehensive use 
 of machinery. 
 
 It is now time to inquire what this is all about: What is 
 production, and what the thing produced? It has been 
 stated that people produce that which they desire, that 
 they intentionally produce nothing else, that desire is the 
 motivating force of production. All productive energy is 
 directed toward the gratification of desires, and production 
 is itself the creation of the means of gratifying desires and 
 needs. Production is the creation of desirabilities and 
 utilities. 
 
 Competitive production consists in so changing things 
 that they command a price. Production, for the most 
 part, redounds to human well-being, but it may also work 
 to the injury of man. Acts are not judged as productive 
 or unproductive on moral grounds. The outfit for the 
 gambler, the equipment for the highwa3Tnan, liquor for 
 the drunkard, and opium for the drug fiend are economic 
 products, and that which produces them is productive. 
 
 8. The Test of Production Not Tangibility.— Acts are 
 not judged as productive or unproductive with regard to 
 tangibility. The preaching of a sermon, the dancing act, 
 the work of the menial servant or of the musician do not 
 
The Organization of Production 339 
 
 result in tangible products as does the work of farmers, 
 carpenters, and cabinetmakers. But they gratify desires 
 directly; the cabinetmaker gratifies desires indirectly, his 
 labor taking the form of a cabinet which in turn gratifies 
 the user. 
 
 Production and destruction are antonyms, yet all pro- 
 duction involves destruction. Fire destroys fuel in firing 
 an engine, chemicals are used up in making medicines, 
 building materials are consumed in the erection of a house, 
 and so on through all production. Labor, time, materials 
 are requisites of and are used up in production. But skill 
 in production minimizes the necessary wastes. Should the 
 untrained hand attempt to draw a cartoon the result would 
 be an awkward grouping of marks — a waste of time, paper, 
 and ink. But give the same equipment to an expert. Bud 
 Fisher, for instance, and the pen marks are converted into 
 the amusing characters of Mutt and Jeff. Will his act be 
 productive? Apply the test: society, through the news- 
 papers as middlemen, is paying this cartoonist a high 
 salary, his product gratifies desires, and that is the end of 
 production. In a cartoon the author had Jeff claim ex- 
 emption from service in the European War. The officer 
 questioned, and Jeff answered, as follows: "Does a wife 
 depend on you?" "No." "Children?" "No." "Rel- 
 atives?" "No." "Then upon what grounds do you 
 claim exemption; who does depend on you?" "Bud 
 Fisher." The idea here expressed is Hterally true. The 
 cartoonist produces and markets his product for a Uving. 
 He is productive in the same sense that the farmer is pro- 
 ductive. To produce is to provide the means for supply- 
 ing the demands of the people, regardless of the character 
 of these demands. Production may take tangible form or 
 it may not. The thing produced is desirabiUty whether it 
 
340 Introduction to Economics 
 
 be in the form of a skirt-dance or of a loaf of bread. But 
 it should be emphasized that the large portion of pro- 
 ductive enterprise has to do with tangible commodities. 
 Science has demonstrated the inability of man to add or 
 detract a single atom of matter; production must, there- 
 fore, concern itseK with such changes in matter as will 
 create desirabihties and utilities in things. Such changes 
 consist in giving a proper composition to things, of putting 
 them in such form, time, and place that they may serve 
 the 'desires and real needs of the people. 
 
 9. Social production refers to amount rather than to 
 price. It has been pointed out that social production is 
 not the creation of price gain. It is not true that produc- 
 tion is always the response to price-paying disposition. 
 Value and price are high in proportion to the scarcity of 
 goods, that is, in proportion to the niggardliness of produc- 
 tive capacity. The high price of goods and limited pro- 
 duction of them are almost convertible terms. Social pro- 
 duction is great to the extent that the output approaches 
 the stage of free goods. 
 
 10. Individualistic and Social View-Points. — Individual- 
 istic or competitive production must not be confused with 
 social production. The individual may grow wealthy at 
 the expense of society. He may (if a monopolist) with- 
 hold or destroy a portion of his supply in order to raise the 
 price of the remaining portion. In any case, his one in- 
 terest is to get the highest price. His interest oftentimes 
 runs counter to the interest of society; the competitor in 
 the refining of sugar would like to see the failure of every 
 refinery excepting his own. 
 
 The interest of society hes in the production of general 
 abundance. Since the economic welfare of all is the pri- 
 
The Organization of Production 341 
 
 mary problem, the economist must concern himself pri- 
 marily with social production. But although the view- 
 points of social and private production differ, it does not 
 follow that a system of private or competitive production 
 works, on the whole, contrary to the public interest. On 
 the contrary, experience demonstrates the reverse of this, 
 and throughout the civilized world competitive production 
 has been adapted as the means, or rather as the form of 
 productive organization, to secure the largest social pro- 
 duction. 
 
 In other words, society as a whole, through the agency 
 of governments, is master and manager of its productive 
 machinery. There are different ways in which this ma- 
 chinery may be organized and society will adopt the man- 
 ner which the majority believes will yield the largest social 
 production. And at the present it has chosen the private 
 or competitive form of organization. Competitive produc- 
 tion is to be regarded as a means to that which is first, 
 foremost, and primary in consideration — social production. 
 The economist who rests his case with a discussion of com- 
 petitive production does not grasp the problem, mistakes 
 the means for the end, cannot see the town for the houses. 
 
 Private production is, in nature, acquisitive; its com- 
 mand is to acquire possession of that which will buy or 
 otherwise obtain from others the objects of individual de- 
 sire. To get possession is the individual producer's idea in 
 competitive production. Social production asks not who 
 owns, but what new desirabilities and utilities are created ? 
 It consists in so changing materials by compounding, shap- 
 ing, or placing them in time and location as to create in 
 society new utilities and desirabilities. It consists further 
 in rendering services which do not take material form. 
 
342 Introduction to Economics 
 
 The productive system, above described, operates under 
 the guidance of the entrepreneur. 
 
 11. The Entrepreneur. — The French term, entrepreneur, 
 has a meaning very similar to that of the English words 
 undertaker or enterpriser. Many authors prefer to use 
 one or the other of the English terms, but these are in 
 common use in the street and market-place, and are there- 
 fore encumbered with different shades of meaning — ^we 
 think of the undertaker as a funeral director, and of the 
 enterpriser as some type of adventurer. The entrepreneur 
 may be one man or many, may make an income or may 
 not, may own capital or may not, may perform the several 
 tasks in his business or may hire others to do them. The 
 word entrepreneur is a title (as is sheriff, minister, or presi- 
 dent), which is given to the person or persons who perform 
 a particular set of functions. What are the functions of 
 the entrepreneur? 
 
 12. Functions of the Entrepreneur. — Upon his own ini- 
 tiative and at his own risk the entrepreneur assumes the 
 ownership and mastery of a business. This may be a newly 
 promoted business or an old and established business. A 
 business is an opportunity harnessed or so correlated with 
 industrial agents as to be productive. The entrepreneur is 
 the central figure in production who correlates the agen- 
 cies of production and acquisition; labor comes to him for 
 employment, and all forms of wealth come to him for di- 
 rection and utilization. Entrepreneurs determine what and 
 how much shall be produced, hire workmen, and determine 
 what they shall do, borrow money and invest it. 
 
 The entrepreneur's relations with others are contractual 
 in nature; he pays wages and salaries according to con- 
 tract, the interest paid for capital, the rent or hire paid 
 
The Organization of Production 343 
 
 for other productive agents, the price paid for raw mate- 
 rials, and all of his other costs which go to other people 
 are paid according to contract. He has other costs which 
 are not contractual, such as the rendering of his own ser- 
 vices (wages rehnquished) and the interest which must be 
 allowed for his own capital invested in the business. When 
 he sells the product and subtracts all the contractual costs 
 the net residue is termed profits. 
 
 13. The Entrepreneur is a Self-Employed Middleman. 
 — ^He buys to sell at a profit. The jobber in the line of 
 food products is an entrepreneur who buys commodities 
 in bulk; he sorts, packs the products according to grade, 
 prepares the goods for the market, receives orders, and 
 sells if fortunate at a price sufficient to cover all costs and 
 leave a fair profit. 
 
 It has been a much-debated question as to whether the 
 directors of boarding-houses, hotels, restaurants, and cafes 
 are middlemen. These directors, together with wholesale 
 houses, have taken the affirmative, have insisted that 
 these institutions are intermediary agencies in the same 
 sense as are retail grocerymen, and, therefore, should have 
 the benefit of wholesale prices. Retail grocerymen have 
 taken the negative, insisting that eating-places must be 
 regarded as final consumers, that wholesalers must not 
 supply them, that this profitable field must be left for the 
 retailer. But, in fact, there is no room for argument, for 
 just as the retailer buys meats and cuts, prepares, and dis- 
 tributes them to the trade, or as he buys coffee, grinds, pre- 
 pares, and distributes it, so the hotel proprietor buys goods, 
 prepares, and distributes them to the trade. Both must 
 undergo the costs of maintaining a place of business, of 
 paying for food products, of hiring help, of preparing and 
 
344 Introduction to Economics 
 
 selling. Both as self-employed middlemen for a profit are 
 entrepreneurs. 
 
 The factory-owner as entrepreneur is a self-employed 
 middleman who buys raw materials and undergoes the 
 costs of preparing and selling them, in the form of finished 
 goods, to the trade for a net gain. He may buy iron ore 
 and, through several processes, convert it into steel prod- 
 ucts of different forms and shapes to suit his purpose; may 
 buy logs and convert them into handles, spokes, axles, and 
 so on to suit his need; may buy paint ingredients and com- 
 pound them into durable form and bright color — when all 
 is done and the different parts assembled, these crude ma- 
 terials will have taken the finished form of wagon, mow- 
 ing-machine, or what-not that he cared to produce. 
 
 As middleman, or in the capacity of entrepreneur, he is 
 owner of the materials he handles. If as entrepreneur this 
 man uses his own money, we may say that in a sense he 
 borrows it from himself in his other capacity as a capital- 
 ist. And he must count this interest relinquished as a 
 cost equal to that which he would secure in the capacity of 
 a capitalist, should he loan this money to another. With 
 this capital (owned or borrowed) he constructs a plant, 
 rents land and other needed agencies, buys equipment, 
 hires labor, and lays in raw materials. All these outlays 
 are money prices paid for the services of men, for the use 
 of capital and other agents, and for the raw materials 
 bought outright. These things and services are his own 
 private property to do with as he will for such time as he 
 has contracted and paid for them. 
 
 14. The Entrepreneur as Servant of Demand. — This in- 
 troduces another point: though independent owner, with 
 the liberty to dispose of his possessions at will, is not his 
 
The Organization of Production 345 
 
 course of action, after all, determined for him rather than 
 by him ? I answer, it is. His business is a privately owned 
 public intermediary through which the forces of supply 
 and demand operate. If a change in season lowers the 
 demand for straw hats, the cheapening effect is passed 
 back to the entrepreneur, who, in turn, passes it back, in 
 the form of lower prices, to the earlier producers who 
 furnish raw materials. These will diminish their output, 
 and finally cease producing if the prices they receive be- 
 come less than their costs. This will be true of every 
 commodity which becomes unfavorably affected by changes 
 in styles, seasons, or by the substitution of other goods. 
 If on the supply side favorable weather, new inventions, 
 improved methods, or new discoveries of raw materials, 
 should lower the costs of output, this cheapening effect 
 is passed to the entrepreneur and, through him, trans- 
 mitted to consumers in the form of lower prices. 
 
 The entrepreneur is servant, not master, of these natural 
 forces of demand and supply. His ability. to forecast 
 changes and ma!ke contracts to take advantage of them 
 is his source of profits. Changing demands affect, through 
 the medium of entrepreneurs, corresponding changes in 
 the organization of productive agencies. But the output 
 of these agencies is restricted because the agencies are 
 themselves limited. The equating-point between supply 
 and demand is price. Thus the entrepreneur fixes prices 
 and determines what shall and what shall not be produced 
 only in the sense that he is a self-employed agent to direct 
 the operations of the limited productive agents to meet 
 the demands of consumers. 
 
 15. The Uses of Materials.— We have seen that produc- 
 tion is used in two senses— competitive or acquisitive, and 
 
346 Introduction to Economics 
 
 social. To get purchasing power, by creating it or other- 
 wise, is the competitor's aim. His selfish aim, however, 
 generally redounds to the pubhc welfare. Social produc- 
 tion works to the end of greater abundance. The indi- 
 vidual with purchasing power may remain idle and buy 
 what others produce. But society, taken as a whole, must 
 produce or starve. 
 
 Material production creates, as above stated, not an 
 atom of matter, but new uses in things. A few examples 
 will make this clear. The pen is one thing, and the uses 
 which flow from it is another. Apples are one thing, the 
 tree or agency giving them another. In the economic 
 sense the difference between a draft-horse and a dead horse 
 is that one can and the other cannot give off uses. All 
 that one wants with a house is the uses it will bear. No 
 one would pay for a house located in a desert or polar 
 region beyond the reach of man. A sunken ship at the 
 bottom of the sea may be as physically perfect as the 
 swift French liner, Rochambeau, yet it could command 
 not a penny in exchange. The only difference between 
 gold in the moon and gold in a national bank is that one 
 is worth zero and the other one hundred cents on the dol- 
 lar — and this solely because the one is at the proper place 
 to render uses, whereas the other is not. It is wholly be- 
 cause of the uses of things that they have desirabilities 
 and utilities. 
 
 1 6. Direct and Indirect Uses of Money. — ^The coal-mine, 
 the well of water, the storage plant full of goods, and the 
 money-bag contain uses in the form of goods which they 
 yield up at the will of man. Likewise the tree, the horse, 
 the farm, and the engine contain uses in the form of apples, 
 services, crops, and power which they yield up at the will 
 
The Organization of Production 347 
 
 of man. All economic goods or agents contain uses either 
 actually or potentially, and it is for this reason, and this 
 only, that we value them, work to produce them, and deny 
 ourselves to save them. Be it remembered, the only 
 reason why we care for goods, why we undergo hardship 
 for them, why we value and price them, is the uses which 
 they actually or potentially contain and will surrender to 
 our needs. 
 
 As the years come and pass out during the life of man, 
 so with his desires. And he must make provision to meet 
 the desires that will be, as well as those that are. The 
 uses of durable agents ripen through time. No ingenuity 
 can get aU the uses of the field in any one year, but its 
 potential uses become actual as time passes and needs 
 arise. As we sever the maturing coupon from the bond at 
 the interest-paying date, so we must await the proper sea- 
 son to sever grass from the field and fruit from the tree. 
 Productive agents mature their yields in recurring order: 
 The fleece of the sheep and the crop of the field recur annu- 
 ally, milk from the cow, and eggs from the nest recur daily. 
 What the bond is to the coupons attached, productive 
 agents are to their recurring )delds. And as the bond is 
 priced according to the number, size, and maturing date 
 of its attached coupons, so durable agents, the parent 
 stems of future yields, are priced according to the number, 
 size, and maturing date of their recurring uses. In capital- 
 izing durable agents, we are, so to speak, pricing the ser- 
 vices locked up in them. 
 
 We capitalize these services whether direct or indirect. 
 Clothing is valuable for the warmth it yields, wool for the 
 clothing it makes, sheep for the wool they produce, and 
 pastures for the feed they supply. The steaming cup of 
 
348 Introduction to Economics 
 
 coffee has direct uses in the hands of the final consumer, 
 but a moment previous to that they belonged to the res- 
 taurant-keeper, and were to him what a hoe is to a farmer 
 — simply a means of obtaining a liveUhood. As such they 
 were an agency or means of getting something else; that 
 is to say, indirect. 
 
 Note further: it took heat, pot, water, and coffee-grain 
 to make that cup of coffee. The uses of these several 
 agents were compounded into one final use. And these 
 several uses were themselves the joint product of different 
 agents; as such they were compound uses. The agents 
 producing them worked successively as land, coffee-tree, 
 coffee-grain, transportation facilities, grinding-mill, middle- 
 man, and so on. In this case the land uses are most in- 
 direct. Thus the productive process proceeds from sim- 
 ple uses to compound, and from most indirect to direct. 
 The productive agents work successively and simultane- 
 ously in transforming indirect into direct uses. 
 
 With the development of civilization production takes a 
 more circuitous, roundabout, or indirect method. In at- 
 tempting to analyze this process the older economists 
 attempted to classify concrete material agents as direct 
 and indirect. Their labors were in vain; they might as 
 well have reasoned regarding a perpetual motion. All the 
 uses of a hoe are indirect and it may be, therefore, an in- 
 direct good. The uses of bread at the time of final con- 
 sumption are direct and, at that time, bread is a direct 
 good. But other goods render both direct and indirect 
 uses at the same time. 
 
 As an ornament pleasing to the eye. Velvet Joe's big 
 pipe bears direct uses, but as a means to the pleasure de- 
 rived from the "glowing weed" it is an indirect good. 
 
Tlie Organization of Production 349 
 
 The train carrying both freight and passengers is render- 
 ing both kinds of uses. 
 
 The purpose of the owner makes goods both direct and 
 indirect. The farm wife has two buckets of milk, alike in 
 all respects; she will use the one directly and fatten the pig 
 with the other. 
 
 The same good may be direct at one time and indirect 
 at another. If you ride the horse his services are, for the 
 time, direct, but if you hitch him to the plow, his ser- 
 vices are indirect — an agent to get a crop. The uses of 
 goods may be classified as direct and indirect, but goods 
 themselves cannot be so classified. We think, deal in, and 
 appraise goods according to their uses, therefore there is no 
 significance in a classification of goods were this possible. 
 
 17. The agencies which the entrepreneur uses for pro- 
 ducing these desirable changes in materials are of many 
 kinds and used for many purposes. 
 
 (a) Composition: All are familiar with certain agencies 
 for compounding materials so as to add to their uses. 
 Among these agencies are the materials used in making 
 medicines, explosives, liquors, in cooking foods, in con- 
 verting iron into steel or hides into leather. All chemical 
 and biological agencies are of this class, which alter the 
 chemical content and material composition of things. 
 
 (i) Form: A change in form, such as converting a briar- 
 root into a pipe or a log into a piano-case, does not involve 
 a chemical or organic change in matter. The lace-knitting 
 machine that arranges gossamer into fantastic shapes, ma- 
 chines for spinning, weaving, tools that extract coal from 
 the mine, stone from the quarry, and water from the well, 
 form implements to gather grain, dig ditches, and split 
 rails— these are agencies for changing the form of things. 
 
350 Introduction to Economics 
 
 (c) Place: Every transporting agent — cart, horse, train, 
 hod-carrier, or other — that removes a thing from a place 
 where it has Uttle use to where it is mote needed, is a 
 productive agent adding to the desirabilities of materials. 
 
 {d) Time: There are agencies which add to the uses of 
 things by preserving them to such time as they are most 
 needed. Granaries, cellars, cold-storage plants, jars for 
 canning, and other preservative agencies are exemplary. 
 Also, there are agencies for producing things before their 
 normal season, for instance, greenhouses, ice-factories, and 
 incubators. 
 
 All these agencies may play a part in furnishing the 
 same good. There is a change in composition when ice 
 is frozen, a change in form when it is cut into cakes, a 
 change in place when it is put into the ice-house, a change 
 in time when kept until the warm simimer months. 
 
 18. Exercises. — i. Operations of nations which are at 
 war are carried on successively and simultaneously, and the 
 same may be said with respect to the operations of indus- 
 tries in times of peace. Explain fully the meaning of this 
 statement. 
 
 2. What is meant by the statement that industries are 
 established in obedience to the demands of the people ? 
 
 3. What is meant by the automatic adjustment of in- 
 dustries to one another throughout society? 
 
 Is such adjustment made upon a physical basis or upon 
 a basis of profits ? 
 
 4. Would it be correct to say that there is always a ten- 
 dency toward a complete adjustment of industries to one 
 another, but that such adjustment is never fully attained ? 
 
 If the statement is correct explain why such adjustment 
 is never reached. 
 
 5. Why does the extensive introduction of machinery 
 into industry bring about quantitative precision ? 
 
The Organization of Production 351 
 
 6. What forces are now operative in industry that cause 
 the services of men to be standardized ? 
 
 7. Define production. Is the test of production material- 
 ity of result ? Commendability of result ? Useful service ? 
 
 8. Is a franchise productive? The lawyer who gets 
 guilty men acquitted? A counterfeiter? A whiskey- 
 maker ? A painter of obscene pictures ? A roulette- table ? 
 A burglar's jimmy? A burglar? Explain. (Davenport.) 
 
 g. What are the functions of the entrepreneur ? 
 Is the entrepreneur in a large factory the manager? 
 The board of directors ? The stockholders ? 
 
 10. Can the entrepreneur tell how much he can afford 
 to pay for the use of a factor ? Is this the same as telling 
 what its separate service is? How may a thing in its 
 actual use cost the entrepreneur more than he pays to get 
 it ? (Davenport.) 
 
 11. If entrepreneurs generally get more skilful, what 
 is the effect on their profits ? On the wages of laborers ? 
 (Davenport.) 
 
 12. An economic good, such as a pen, a horse, a car, or 
 a food-product, cannot be classified for all purposes, either 
 as a direct or as an indirect good. Why is this so ? 
 
 13. They are only the economic uses of goods which 
 may be classified as direct or indirect. Explain this 
 statement. 
 
CHAPTER XVI 
 
 THE LAW OF PROPORTIONALITY 
 
 I. Complementary agents. 2. The principle of resistance. 3. Physical 
 intensive utilization. 4. Turgot's statement, s- These facts expressed in 
 money terms. 6. Intensive margin of utilization. 7. Extensive margin of 
 utilization. 8. What lands or land uses are cultivated? g. Equality of 
 intensive and extensive margins. 10. Substitution. 11. The law of pro- 
 portionahty. 12. Bearing of proportionality on the distribution of wealth. 
 13. How the price of agents affects proportionahty. 14. The elastic limit 
 of factors. 15. Extent of market. 16. Quantity and money returns. 17. 
 Summary conclusion. 18. Exercises. 
 
 I. Complementary Agents. — When agents unite or work 
 together in performing a function, they complement or fill 
 out each other and are called complementary agents. For 
 instance, the boiler is worthless without the engine, and 
 the locomotive is valueless without the track. The wheel 
 and belt complement each other, and so with saw and 
 carriage, soap and water, knife and fork, lock and key. A 
 group of complementary goods is valued as a whole; if the 
 hook is missing the eye is worthless, and the hook will be 
 worth the same as both hook and eye. 
 
 In a study of the technical productive process, we are 
 studying the best quantitative relationship of complemen- 
 tary agents. All such agents employ or make necessary 
 the use of others. As each member of a baseball nine com- 
 plements every other member in the co-operant group of a 
 well-balanced team, so the building, land, raw materials, 
 labor, and varied parts of technological equipment comple- 
 ment each other and become one large composite produc- 
 tive agent. 
 
 35« 
 
The Law of Proportionality 353 
 
 Any product — whether it be shoes, loaf, cloth, hat — is 
 the product, not of one, but of a number of agents work- 
 ing together. Pens alone cannot write;. they must com- 
 bine with ink, paper, operator. Land alone cannot pro- 
 duce wheat; it must combine with water, seed, labor, and 
 tools. There could be no ride in the automobile were a 
 wheel missing, or the engine out of repair, or the gasolene 
 wanting, or the chauffeur absent — each complementary 
 agent must contribute its bit in the production of a good 
 or service. 
 
 2. The Principle of Resistance. — Productive agents will 
 not render their services gratuitously; they resist our 
 efforts to compel them to supply our needs. And the 
 more effort we exert upon an agent the greater this resist- 
 ance becomes. In order to grasp the significance of this 
 principle it is necessary to hold two things in mind: a lim- 
 ited agent and static conditions. 
 
 A given area of land wiU yield more and more as more 
 and more labor, tools, and seed are applied to it. But 
 while the total yield from this land is increasing, the re- 
 turns per unit of expenditure upon it will diminish. The 
 resistance of the land will increase with the increased 
 pressure upon it for more products. This may be illus- 
 trated as follows: 
 
 LIMITED AREA WORKED 
 
 By I man yields 15 bushels, or 15 bushels per man 
 
 " 2 men 
 
 
 40 
 
 
 " 20 
 
 " 3 " 
 
 
 54 
 
 
 " 18 
 
 " 4 « 
 
 
 56 
 
 
 " 14 
 
 " 5 " 
 
 
 60 
 
 
 " 12 
 
 " 6 " 
 
 
 66 
 
 
 " II 
 
 " 7 " 
 
 
 66^ 
 
 
 " 9'A 
 
354 Introduction to Economics 
 
 This illustration shows that two men are the most appro- 
 priate number to work this specific tract of land in order 
 to get the highest commodity return per man. At this 
 point begins increasing resistance on the part of the land 
 to the further application of labor. The commodity re- 
 turns to each successive laborer grow less and less. 
 
 What is true of land is true of other productive agents. 
 If a manufacturer installs too much machinery, a part of 
 it will be habitually idle. The other portions of his plant 
 are too small to employ fully the machinery; too much 
 machinery is applied to the other portions of the plant, or, 
 what is the same, too little of other things is applied to the 
 machinery. Machinery is the long factor, other factors are 
 short. Because of the increasing resistance on the part of 
 the short factors, the physical or commodity returns to 
 each additional machine grow less and less. If the build- 
 ing is the long factor each foot of idle space is physically 
 an excess and is, when translated into price terms, carried 
 as an unnecessary cost. Again, an excessive office force 
 makes this the long factor, and the resistance to further 
 production on the part of the short factors causes a dimin- 
 ishing return of the physical product for each addition to 
 the office force. 
 
 If there were no physical resistance on the part of 
 agencies to produce, one hammer would drive all the nails 
 in the community; one farm would feed the world; one 
 laborer could do all the work; one productive agent along 
 any line would be a national supply. 
 
 Resistance limits the supply of products coming from 
 any one agent. Thus resistance is the cause of the scarcity 
 and consequently the price of commodities. The greater 
 the resistance of a productive agent, the greater, of course, 
 is the cost of getting additional uses. 
 
The Law of Proportionality 355 
 
 3. Physical Intensive Utilization. — If we take a limited 
 agent, as a planing-mill, it will become the short factor as 
 we add more and more to the labor force, to building, to 
 other machinery, and to raw materials. This short factor 
 becomes unable to back up the longer factors, and they 
 produce a diminishing commodity return. It may be pos- 
 sible to get stiU further uses from the planing-mill by 
 working it more intensively, but, to speak in terms of price, 
 the resistance may be such that the cost of harnessing 
 further uses from the machine will outweigh the price of 
 such uses. 
 
 Getting more and more commodity returns from any 
 agent — farm, engine, horse, laborer, house, or other — by 
 applying more of other things to it is called physical inten- 
 sive utilization. 
 
 4. Turgot's Statement. — The early resistance of an 
 agent is comparatively difl&cult to overcome. Productive 
 agents are "like a spring which is forced to bend by being 
 loaded with a number of equal weights in succession. If 
 the weight is light and the spring is not very flexible, the 
 effect of the first load might be almost nil. When the 
 weight becomes sufl&cient to overcome the first resistance, 
 the spring will be seen to yield perceptibly and to bend; 
 but, when it has bent to a certain point, it will offer greater 
 resistance to the force brought to bear on it, and a weight 
 which would have made it bend an inch will no longer 
 bend it more than half a hne."^ And the same noted 
 author goes on to remark on the cultivation of the soil as 
 
 ' This was, I believe, the first illustration of the principle by an economist. 
 It was written about 1768 by A. R. F. Turgot, on a prize essay submitted 
 to him. See Cannan's Theories of Production and Distribution, pp. 147- 
 148. 
 
350 Introduction to Economics 
 
 follows: "If it were once tilled the produce will be greater; 
 tilling it a second, a third time, might not merely double and 
 triple, but quadruple or decuple the produce, which will 
 thus augment in a much larger proportion than the ad- 
 vances increase, and that up to a certain point, at which 
 the produce will be as great as possible compared with the 
 advances. Past this point, if the advances be still in- 
 creased, the produce will still increase, but less, and always 
 less and less until the fecundity of the earth being ex- 
 hausted, and art unable to add anything further, an ad- 
 dition to the advances will add nothing whatever to the 
 produce." 
 
 This illustration shows that the initial resistance of 
 agents is strong, that after the initial advances are made 
 resistance grows less and less up to a point (maximum 
 commodity returns) where it again grows stronger and 
 stronger as further advances are made. 
 
 5. These Facts Expressed in Money Terms. — The facts 
 brought out by this study of the physical adjustment of 
 factors relative to commodity returns may be expressed 
 in terms of money cost and price returns. Put differently, 
 an agent gives ofif few uses for the first expenditures upon 
 it, after which it gives off more uses per unit of expenditure 
 up to a point where it begins to give less and less money 
 returns for each additional expenditure. The entrepre- 
 neur will not make further expenditures upon an agent 
 when the point is reached where the use given off by the 
 agent is no larger than the expenditure made to get it. 
 This point, where the price of the income from an agent is 
 no larger than the outgo to get it, is called the intensive 
 margin of utilization. It marks the edge, point, or mar- 
 gin at which the utilization of the agent will cease. 
 
The Law of Proportionality 357 
 
 6. Intensive Margin of Utilization. — Land is intensively 
 cultivated by erecting higher buildings upon it, or by dig- 
 ging further down into it, or by any other means which 
 tends to get more and more returns from it. But there is 
 a definite economic limit to the height of building, or to 
 the depth of digging, or to the care of cultivation. We 
 stop at the point where loss would be incurred by going 
 further, where the increasing cost comes to equalize the 
 diminishing price return, or, in other words, at the margin 
 of intensive cultivation. A use is valueless which would 
 be worth no more than the cost of harnessing it. Then, 
 the marginal uses of an agent are valueless, but man will 
 undergo no effort for a valueless use, therefore marginal 
 uses are not cultivated. Theoretically, cultivation ex- 
 tends down to, but does not attempt to harness the uses 
 on or below the intensive margin. 
 
 7. Extensive Margin of Utilization. — It was the princi- 
 ple of resistance in the cultivation of land which caused 
 Abraham to depart from Lot. "The land was not able 
 to bear them, that they might dwell together." Were 
 there no principle of resistance in land, a small area would 
 provide for all. There would be no land rents, no trans- 
 portation costs, and every economy of localized industry 
 would be enjoyed. Why migrations, and why are all in- 
 habitable parts of the globe occupied? The one answer 
 is the principle of the increasing resistance of land. 
 
 If a colony settles in a new country, it will (fertility, 
 location, and all things considered) occupy the best grades 
 of land first. As the population increases, or as foreign 
 markets develop, or as increasing standards of the people 
 call forth higher prices for goods, this land will be more 
 intensively cultivated. Increasing resistance will make it 
 
358 Introduction to Economics 
 
 more and more difficult to supply their needs from this 
 land. Rather than cultivate this one tract at too large 
 an expense it will be more profitable to occupy the next 
 best tract. And with further demands for land products 
 poorer and poorer tracts will be cultivated. Extending 
 cultivation out to cover additional tracts of land is called 
 extensive cultivation. The outer edge or margin to which 
 cultivation extends is the extensive margin of cultivation. 
 
 8. What Lands or Land Uses are Cultivated? — All land 
 under cultivation is valuable. Men do not labor to har- 
 ness a valueless use, and this they would do should they 
 cultivate valueless land. The heaviest expenditures are 
 justified only upon the most valuable land. One is marked 
 as a poor business man who makes lavish expenditures 
 upon cheap land. The least valuable land of all can com- 
 mand the least application of labor and capital upon it. 
 Worthless land, like the scrap-heap machine, is abandoned, 
 not because there are no possible uses in it, but because 
 the cost of harnessing these uses would be more than they 
 are worth. 
 
 Those who object to this view make this well-sounding 
 fallacy: "Yes, men wiU cultivate worthless land, so long 
 as they get a fair return from the capital applied to it." 
 This, I may say, is the only point of any significance favor- 
 ing the contention that valueless land is cultivated. And 
 it is easily set aside. We have seen in the reasoning on 
 complementary agents that land, tools, seed, and labor 
 jointly produce. Any one of these agents alone is non- 
 productive. And a return from their joint action is to be 
 attributed, not to one or two but to all the causal factors. 
 Why attribute the whole return to capital when land is 
 an absolute essential in production? These complemen- 
 
The Law of Proportionality 359 
 
 tary agents unite into one composite productive unit, as 
 do the parts of a clock into one timepiece, but no one 
 would be so foolish as to attribute the time-keeping quahty 
 to the dial, and value it to the exclusion of the other parts. 
 Now, the tools, seed, and labor applied to this land are 
 valuable solely because of what they produce, and for pre- 
 cisely the same reason the land is valuable, for indeed it is 
 joint partner with the other factors in producing exactly 
 the same thing. 
 
 The point at which cultivation ceases or the line, so to 
 speak, which marks off the valuable from the valueless land, 
 is called the extensive margin of {cultivation) utilization. 
 
 There is an extensive utilization of all forms of produc- 
 tive agents. The intensive utilization of a planing-mill 
 grows more and more inconvenient and costly. As its 
 resistance increases the other (long factors) show diminish- 
 ing returns. This wiU Justify the installation of another 
 planing-mill. And so for all productive agents. 
 
 9. Equality of Intensive and Extensive Margins. — If a 
 farmer has an extra hundred dollars, will he bring more 
 land imder cultivation or more intensively utilize land now 
 \mder tillage ? His desire to receive the largest net return 
 will cause him so to distribute his expenditures as to keep 
 the two margins at an equality. Should the field inten- 
 sively cultivated offer the larger returns, it will pay to 
 continue investing upon it until its margin is lowered to 
 the point where its money return equals that of the exten- 
 sive margin. 
 
 Again, one attempts to withdraw his capital from the 
 less paying occupation in order to invest it in the more 
 remunerative occupation. By withdrawing capital from 
 where relatively too much is employed he raises the mar- 
 
360 Introduction to Economics 
 
 gin and thus increases the returns from each unit of capi- 
 tal remaining there. And by applying this capital to the 
 more remunerative field the margin will there be lowered 
 and the returns to capital diminished. In any case, the 
 attempt to employ capital in its most remunerative em- 
 ployment tends to equalize the returns to capital in aU 
 employments. 
 
 ID. Substitution. — During the course of production 
 entrepreneurs find it necessary to substitute one thing for 
 another, one type of labor for another, new inventions for 
 old, a larger machine for a smaller, or vice versa, and so on. 
 The purpose of substitution is to bring about a better ap- 
 portionment or adjustment of the factors of production. 
 This is also concerned with such problems as lengthening 
 short factors, or of ehminating waste by shortening factors 
 which are unnecessarily long. 
 
 A certain factor is found to hold a monopoly position, at 
 times, and all the other factors must be adjusted to it. 
 The flow from a mineral spring is limited and the other 
 factors employed to utilize this water must be adjusted 
 to the size of the flow, for it carmot be so enlarged as to 
 accommodate itself to the size of the other agents. The 
 same idea holds with respect to a building site in a crowded 
 city, or with respect to a factor which relatively is very 
 costly, or with respect to a factor Umited by franchise, or 
 monopoly right. 
 
 To work out proper substitutions in order to maintain a 
 proper proportion and balance in the business is the pri- 
 mary problem in business management. When such an 
 adjustment is reached there is no reason for further sub- 
 stitution, and it would be sheer waste to enlarge or further 
 improve any of the productive factors without improving 
 
The Law of Proportionality 361 
 
 all. But, unfortunately, such an ideal adjustment is at 
 best only temporary. 
 
 II. The Law of Proportionality.— We have now come to 
 the most important topic in economics. This law simply 
 states facts regarding quantitative relationship from which 
 most facts concerning price relationships are derived. 
 There is a best adjustment of parts to make a bridge, 
 automobile, or machine, and, any part lacking, the mech- 
 anism works poorly or not at all. There must be a proper 
 mixture of ingredients to produce a paint, and a proper 
 mixture of paints to give us a painting. These are physi- 
 cal facts illustrative of physical adjustments. 
 
 Industry consists of mental processes and the movement 
 of physical things. Back of the existing structure are the 
 movements of materials which gave it form, and back of 
 these movements were the thoughts and plans of where 
 and how to move these materials. The principle guiding 
 these thoughts and shaping these materials into finished 
 structures is the law of proportionality. This law teaches 
 how to add to the serviceability of things by giving them 
 proper combination. The work of farmers, merchants, 
 cooks, chemists, engineers, transporters, and miners is to 
 move or combine things so that natural forces may operate 
 to give desired results.* 
 
 There is an old saying that "too much of a good thing 
 is bad." Water is so good as to be an absolute essential 
 to life, but too much of it fills the cellar, floods the valley, 
 and makes swamps. No crop could be produced without 
 it, but too much of it destroys the crop. If a dry plain 
 
 ' The reasoning and some of the illustrations used in this paragraph are 
 most admirably expressed in, and are taken from, Professor Carver's Essays 
 in Social Justice. See particularly his chapter XI. 
 
362 Introduction to Economics 
 
 fails to produce for want of water, a swamp refuses to pro- 
 duce for the opposite reason — too much water. The owner 
 of the dry plain would like to buy water, whereas the swamp- 
 owner would regard it a privilege to give it away. Its 
 price or want of price depends upon the physical fact of 
 proportionality. The swamp-owner reasons: "More water 
 less crop; less water more crop." The remedy for both of 
 these cases is to move water; move it from places of abun- 
 dance to places of scarcity. The entrepreneur constantly 
 deals with substitutions to bring about the proper adjust- 
 ment. The proportions with which he deals are variable, 
 and a chief duty of his is to redistribute his resources from 
 time to time so as to cut down long factors and add to the 
 short ones. If he is a manufacturer of gunpowder, he 
 knows that his product results from the mixture of char- 
 coal, saltpetre, and sulphur, and further, that the short factor 
 will be the limiting factor. 
 
 He may have enough charcoal and saltpetre to make 
 20,000 kegs of powder, but if he has only enough sulphur 
 to make 500 kegs, the short factor — sulphur — will limit 
 his total product to 500 kegs. He might double or quad- 
 ruple the long factors, but to no effect on the final output. 
 Should he double the short factor, however, the forthcom- 
 ing product would be doubled. In this case the increased 
 product would be attributed to the short factor. This 
 manager could well afford to pay a high price for sulphur, 
 but he would not be justified in a large outlay for the 
 other two factors. It is thus shown again that the market 
 conditions respecting productive agents are based upon 
 the physical fact of proportionality. Davenport's state- 
 ment, "The ultimate determinant of the high price of any 
 product is to be found in the scarcity of the productive 
 
The Law of Proportionality 363 
 
 factors upon which the forthcoming of the product is con- 
 ditioned." ^ But this lacks strict accuracy in that it is the 
 relatively short factor which limits supply and thus ac- 
 counts for high price. 
 
 12, Bearing of Proportionality on the Distribution of 
 Wealth. — ^When we speak of the distribution of wealth we 
 mean, strictly speaking, a distribution of income. And a 
 study of economic distribution is an attempt to account 
 for the comparative size of the shares of income which go 
 to the different agents (or their owners) which produce 
 the income. It attempts to answer the question. Why do 
 some agents get so much of the income while others get so 
 little ? All shares of distribution are not governed by the 
 same economic principles. With respect to the principles 
 governing them the shares are divided into four classes — 
 Rent, Interest, Profits, and Wages. They may be indi- 
 cated with respect to the agents producing them as follows: 
 
 Rent -«-<• Wealth 1 m,- „ „ j ■»«■ /Entrepreneurs ■►^Profits 
 
 I T-t.- J Ti/r /Entrepreneurs' 
 
 ) Things and Men {Laborers -^V 
 
 Interest -*-« Capital] ° \Laborers »-> Wages 
 
 For the sake of clearness let us repeat a statement pre- 
 viously made: The order of thought is from the price 
 of the product to the price of the productive factor. If 
 the product is scarce and high-priced, then a high price 
 wiU be paid for the use of the productive factor. The 
 causal sequence runs from product to agent; it never runs 
 
 'Economics of Enterprise, p. 435. This is quoted from Davenport's 
 chapter VIII, which is recommended to the readers of this book as, in my 
 judgment, the most clear-cut analysis in print of the relation of cost to 
 value. To use his own words to express his line of thought: "The causal 
 sequence on the supply side of the problem runs from the relative scarcity of 
 the product, thence to the relatively high price of the product, thence to 
 the relatively high remuneration of the factor" (p. in). Note his appli- 
 cation of this to wages (p. 115). 
 
364 Introduction to Economics 
 
 in the opposite direction. If a productive agent is very 
 scarce, it would be vicious reasoning to hop directly to the 
 conclusion that it is, therefore, very high-priced. The 
 order of thought is: Supply of productive agent »-»- supply 
 of product »->- price of product "-^ and, lastly, to price of 
 productive agent. 
 
 Because the scarce factor limits the product, the high 
 price of the product will, in turn, cause a high price to be 
 paid for the use of the short factor. Again, to increase the 
 short factor has the effect of increasing the product; xmit 
 for unit the short factor is most productive and the long 
 factor less productive. The greatest productive need is 
 met by adding to the supply of the shortest factor, and he 
 who adds most to the short factors adds most to produc- 
 tion. The high price for scarce products reflects a high 
 price back to the short factor; thus he who produces most 
 gets most. If sulphur is the short factor in the output of 
 gimpowder, he who adds most to sulphur adds most to 
 the gunpowder, and the high price of gunpowder will 
 reflect the highest reward back to the producer of sulphur. 
 And in all cases where desirabilities and utilities coincide, 
 he who gets most is worth most to society. 
 
 If a capital instrument is the short factor and labor the 
 long, the capital instrument will secure more of the product 
 as its share. Similarly, different grades of labor are needed 
 in production. If skilled labor be the short factor and un- 
 skilled labor the long, then the larger share will go to the 
 skilled labor. Or if unskilled labor were the short factor, 
 its share would be larger than that of skilled labor. 
 
 Land was the long factor, whereas labor was short in this 
 country prior to the Civil War, so the result was a smaU 
 share for landowners and high wages for labor. At the 
 
The Law of Proportionality 365 
 
 same time in England land was the short factor and the 
 labor supply was disproportionately large. The result was 
 the reverse of conditions in America — labor was cheap and 
 land rents dear. The same is true throughout distribu- 
 tion — long factors and low returns, short factors and high 
 returns. 
 
 13. How the Price of Agents Affects Proportionality. — 
 We have so far, for the most part, studied proportionality 
 as a physical fact. It takes a best quantitative technical 
 combination to produce the largest commodity returns. 
 But nature has not distributed her bounties equally; some, 
 like air, she has oversupplied, and others she has supplied 
 sparingly. We may be very saving of short factors, may 
 make every possible substitution for them, yet they are 
 limiting agents, and the high price of their products gives 
 them a large share in distribution. The scarcity and cost 
 of these agents makes it unprofitable at times to carry out 
 the best technical proportionality of factors. " The patent- 
 ofl&ce at Washington," says Professor Fetter, "is a veritable 
 graveyard of ingenious inventions that are not commer- 
 cially profitable. The inventor, in order to gain material 
 rewards and at the same time to benefit mankind, must 
 study not only the technical side of his problem, but the 
 question of value as well."^ 
 
 Mention was made above that a certain factor may hold 
 a monopoly position and others must be adjusted to it. 
 This factor may be so limited and high-priced for somei 
 purposes as to defeat a best technical apportionment of 
 factors for other purposes. When there are a number of 
 uses for a limited agent, it will be put to the most remunera- 
 tive use, and thus denied to the others. Hay is not grown 
 » Economic Principles, Vol, I, p. 109. 
 
366 Introduction to Economics 
 
 on the rare wine-lands of France. In working out an 
 apportionment of factors, regard must be paid to the sell- 
 ing price of the product and the extent of the market for 
 it, and to the relative cost of factors as well as to the price 
 which is offered for these factors because of their use in 
 other fields of employment. 
 
 Suppose that X is a limited factor and, further, that the 
 production of articles A and B is conditioned upon the use 
 of X. If A is very high-priced, and is in such general de- 
 mand that it requires all of X in its production, it must 
 follow that if B is a low-priced good it cannot be produced. 
 Thus the high price of product A and the physical limita- 
 tion of productive factor X defeat the production of B. 
 The large demand for one commodity oftentimes pre- 
 cludes the existence of other commodities, and this is true 
 solely because of the limitation and high cost of certain 
 factors of production. Apportionments wiU be made that 
 will produce the output which commands the highest 
 income. 
 
 Many writers say that the price of a product is high 
 because the cost (money outlay) of the factors to produce 
 it are high. This type of shallow instruction does not get 
 below the surface. It simply accounts for one price by 
 another price. What we want to know is how to explain 
 the price thing. To explain price two things are to be 
 kept in mind: the one is demand, and the other is the 
 limitation of the short factors of production which makes 
 necessary a large cost outlay to secure the use of them. 
 
 14. The Elastic Limit of Factors. — When we speak of 
 the physical limitation of certain factors, we do not mean 
 that the services which we can get from them exist in a 
 mathematically fixed quantum under all conditions. A 
 
The Law of Proportionality 367 
 
 few words of explanation are called for. The quantity 
 theorists, for instance, tell us that a dollar which turns 
 over ten times a week does as much money-work, has the 
 same effect on the price level, and is as large a part of the 
 supply of money as is a ten-dollar piece which turns over 
 once a week. By like reasoning, the employer would as 
 willingly pay a skilled workman $4 a day who can turn 
 out four pieces a day as to pay $4 to two inferior workmen 
 who combined could produce four pieces a day. The one 
 man who turns out four pieces is as large a part of the 
 labor supply as are two men who combined could do no 
 more. One will pay as much rent for an acre that pro- 
 duces 100 bushels as for two acres which combined could 
 produce 100. Put differently, the supply of productive 
 factors is not measured, in the economic sense, by bulk, 
 size, or area; it is measured in terms of yield. 
 
 Consider land for the purpose of illustration. A group 
 of English writers, known as the Maltho-Ricardian School, 
 taught that land is fixed in supply, while population tends 
 to double every twenty-five years. The conclusion from 
 these teachings was most pessimistic; population must 
 pass subsistence and be cut off by starvation. But the 
 lapse of a century since this teaching began shows the 
 error of this doctrine. The growth of population is regu- 
 lated by other causes than those supposed, and the land 
 supply (in the economic sense of a productive agent) has 
 been vastly increased. 
 
 If a non-productive thing is made productive, the econ- 
 omist calls it a truism that the supply or productive capac- 
 ity has increased. In keeping with this truism, if swamp 
 lands are drained and set to growing crops, the land sup- 
 ply is increased. If dry plains are made productive 
 
368 Introduction to Economics 
 
 through irrigation, the land supply is increased. If new 
 inventions, discoveries, or methods cause an increase in 
 the yield of land, land is more productive — the land sup- 
 ply is increased. Any means of getting more from land — 
 building, tillage, and rotation of crops — is from the stand- 
 point of production and, therefore, from the economist's 
 view, to add to the land supply. Despite the simplicity 
 of this truism some economists have joined company with 
 the single-taxers in denying it. 
 
 At a given time or at a given stage of improvements in 
 the industrial arts there is more or less fixity in the supply 
 of productive agents. The law of substitution at any 
 given stage of industrial development is operative to 
 secure the best apportionment of forces at that time. The 
 better the apportionment the greater is the supply of pro- 
 ductive capacity. The problem of proportionality has to 
 do with variable factors. It would add to simplicity could 
 we definitely tie down certain factors and regard them as 
 fixed, but such would be an unreal simphcity. 
 
 15. Extent of Market. — To this point we have considered 
 proportionality with respect to the proper adjustment of 
 factors to one another. The other phase of the problem, 
 in its broader sense, is to adjust the size of the plant to 
 the extent of the market for its output. The best technical 
 adjustment of factors may leave the plant too large or too 
 small for the demand made for its products. 
 
 In an exchange economy, such as we know, where aU 
 produce for the market every commodity produced is in 
 reality a demand for another commodity. If there is too 
 large an output of one class of goods relative to others, its 
 price wiU be low in terms of other goods. This is what is 
 meant by overproduction. There can be no overproduc- 
 
The Law of Proportionality 369 
 
 tion along all lines, for all of our desires are never fully 
 gratified. There is a tendency for man to spend his means 
 so as to keep his desires equally gratified, and if there be 
 a disproportionate supply of goods along one line, it can 
 be sold only at such prices as shall tap a lower level of 
 "price-paying disposition." 
 
 In a well-balanced industrial community there is a ten- 
 dency for the size of plants to be apportioned to each other 
 as are the productive factors in a single plant. If one 
 line of industry is relatively short its products will sell at 
 a high price. This will induce investments from other 
 fields where the plants are relatively large. Thus there 
 is always operative an automatic adjustment of the lines 
 of industry to one another. Then, proportionality is a 
 broader concept than the adjustment of parts to one 
 another in a single plant; it embodies the idea of the bal- 
 ancing and adjustment of industries to one another through- 
 out industrial society. 
 
 i6. Quantity and Money Returns. — What has been said 
 but emphasizes a point made in an earlier chapter, namely, 
 that there is a limit to large-scale production. An entre- 
 preneur may reason that by maintaining a good technical 
 apportionment of factors it will pay constantly to enlarge 
 his plant. By so doing he will enjoy decreasing costs per 
 unit of output. But such a policy would, if continued too 
 far, bring him to ruin. 
 
 To the extent that he buys up productive capacity in 
 the enlargement of his own plant, he somewhat reduces the 
 available productive capacity in other lines of industry. 
 Thus, while disproportionately enlarging his own output 
 he causes a diminution in its price. Consequently his out- 
 put will bring a lower price in terms of other goods, because 
 
370 Introduction to Economics 
 
 it will be disproportionately large, and others will have 
 relatively fewer goods to give in exchange for his product. 
 So if one directs a large business or has a monopoly he 
 may at the same time enjoy increasing returns with respect 
 to the quantity of his output and suffer diminishing returns 
 with respect to the money income from his output. This 
 recalls the kindred point, namely, that a producer's success 
 depends largely upon the wealth, prosperity, and purchas- 
 ing power of his neighbors. One never grows rich by sell- 
 ing to those who have nothing to pay. 
 
 But those rare cases, where an increasing physical return 
 causes a decreasing money return, simply reflect a mal- 
 adjustment in industry as a whole. It means merely that 
 some branches of industry are proportionately too large. 
 Should the output from all lines of industry increase uni- 
 formly, elasticity of market demand aside, the ratio of 
 exchange among products would not change, therefore the 
 increased quantity return would mean also an increased 
 purchasing power or money return. Where a right adjust- 
 ment is kept a curve describing the money incomes will 
 represent uniform profits. We have seen that in competi- 
 tive industry there is a tendency to uniformity of the ex- 
 tensive and intensive margins, and to uniformity in the rate 
 of profits. We now see that the whole tendency of com- 
 petitive industry is to maintain automatically a uniformity 
 of commodity and money returns or exchange power. 
 
 For the average competitor, but not for the monopolist 
 or large producer, the total money product always varies 
 in proportion to the quantity of his output. The amount 
 which he can produce is too small to affect perceptibly the 
 general market price of the product. For him the market 
 price is a fixed thing. 
 
The Law of Proportionality 371 
 
 17. Summary Conclusion. — On the demand side: Man's 
 desires are numerous; he attempts so to expend his means 
 as to gratify the most intense desire; as he adds unit after 
 unit to the gratification of a desire the desirability of the 
 added units diminishes; when the desirability of a class of 
 goods diminishes to the point where other classes of goods 
 hold for the purchaser higher desirabilities, he will transfer 
 his expenditures. The effect of this order of expenditure 
 is the tendency (though far from realization among the 
 poor) to maintain an equality of the desirabiUties of differ- 
 ent classes of goods. 
 
 On the supply side: Products come from a combination 
 of complementary agents, which agents are limited in 
 amount and resist our efforts to compel them to supply 
 our needs. Some of these agents are scarcer than others, 
 and some show increasing resistance more readily than 
 others. 
 
 These facts call into play the principle of substitution 
 which is of first importance to business managers. It is 
 based directly upon the principle of resistance, and so it 
 has to do with the amount of agents that should be com- 
 bined with this factor or that; it is concerned with the 
 diminution of long factors and the extension of short ones. 
 In brief, the substitution of factors is a means to the end 
 of the best proportionality of factors. 
 
 The proportionality of factors is their physical combina- 
 tion and adjustment (in certain proportions) which ren- 
 der them jointly productive. Thus proportionality is a 
 consequence of substitution. The law of proportionality 
 covers all productive factors in their various combinations; 
 it determines the physical fact of productivity. It is the 
 organization of productive capacity. 
 
372 Introduction to Economics 
 
 While proportionality is a physical fact, it is worked out 
 according to the price of products and the cost of factors. 
 Men will form productive estabhshments only when the 
 selUng price of the products is large enough to leave a 
 reasonable return over all costs. The high cost of certain 
 factors often makes impossible the best physical appor- 
 tioiunent of them. 
 
 Each of the factors which go to make up a plant is sub- 
 ject to the principle of resistance, consequently the whole 
 plant obeys the same principle. This causes the product 
 to be scarce and valuable. The price of the product makes 
 the producer willing to pay a price for the services of the 
 productive agents, both severally and in combination. 
 But the price paid for the services of a productive agent 
 is rent, hence the relationship between the principle of 
 resistance and rent. 
 
 18. Exercises. — i. If one man should own New York har- 
 bor, could he obtain rent for it ? If so, what now becomes 
 of the rent he could get for it? Is that harbor now 
 wealth? Would it be wealth were it owned by some 
 man? 
 
 2. If there were no principle of resistance, would there 
 be any difference in the amount of land needed? In the 
 number of laborers needed? In the number of houses 
 needed ? 
 
 What has this principle to do with the scarcity of grain 
 grown in a field? With the size of a load hauled on a 
 wagon? With the number of chairs needed by a family? 
 
 3. Is there any relationship between the facts noted in 
 Turgot's statement (paragraph 4, this chapter) and the 
 price of corn? 
 
 4. What lands or land uses are cultivated? (Para- 
 graph 8.) 
 
 "Under certain conditions it would pay to carry on 
 
The Law of Proportionality - 373 
 
 cultivation beyond the intensive or the extensive margin of 
 utilization." Why does this statement contradict itself? 
 
 5. "The law of proportionality is based directly upon 
 the principle of resistance which causes an elastic limit to 
 the output of each individual factor." Explain carefully. 
 
 6. Land may be physically productive in the sense that 
 it has the physical properties for growing a crop, mean- 
 while it may be economically unproductive. Explain. 
 
 If economically unproductive, would any farmer work 
 land? 
 
 Would it add to the wealth of society if a crop should be 
 grown upon such land ? 
 
 7. Explain how land economically unproductive might be 
 made economically productive by a decrease in the wages 
 of labor. By superior management. By new inventions 
 or improvements in farm implements. By an increase in 
 the price of farm produce. 
 
 8. The physical fact of productivity is determined by 
 the great law of proportionality which states a physical 
 relation. The physical apportionment of factors to one 
 another is conditioned upon the cost or price of the differ- 
 ent factors. Explain why the two statements are con- 
 sistent with each other. 
 
 9. An analysis of the distribution of wealth must be 
 based directly upon the law of proportionality. (Para- 
 graph 12.) Explain. 
 
 10. What economic principle explains why buildings are 
 so high in Wall Street? Why are they not much higher? 
 
CHAPTER XVII 
 
 THE RENTING CONTRACT 
 
 I. Introduction. 2. Definition of rent. 3. Durable goods rented. 4. 
 Buying or renting. 5. Use-value derivative. 6. The renting contract 
 prospective. 7. The time element in rent. 8. Short factors and high rent. 
 9. What is high rent? 10. Monopoly rents. 11. Product returns vs. 
 money returns. 12. The tendency toward diminishing money returns 
 universal. 13. Large production and monopoly. 14. Conditions for study 
 of principle of increasing resistance. 15. Rent a deduction from the prin- 
 ciple of increasing resistance. 16. Proportionality and rent. 17. Rent 
 limited by income. 18. Rents limited by cost of reproduction. 19. Dif- 
 ferential rent. 20. Differentials a measure rather than a cause of rent. 
 21. Difference in fertility. 22. Difference in costs. 23. Differences in lo- 
 cation. 24. The owner's income. 25. Exercises. 
 
 I. Introduction. — Chief among the politico-economic 
 problems of the nineteenth century were these: the tariff, 
 the pressure of population upon the means of subsistence, 
 the advantage of landowners in the distribution of wealth, 
 and the single tax. The arguments, pro and con, upon 
 these problems were based directly upon the theory of 
 differential land rent. It has been said that a tariff would 
 force a population to feed from its own soil. This would 
 bring inferior lands under cultivation and increase rents, 
 thereby enriching landlords and impoverishing tenants. It 
 has been said that whereas the supply of land is fixed by 
 nature, there is a natural tendency for the population to 
 multiply rapidly. Thus the increasing numbers of people 
 must cause pressure upon the earth for food, must in- 
 crease the landlord's rent and impoverish the tenant. It 
 has been said that the land is the source of all supplies and 
 
 374 
 
The Renting Contract 375 
 
 the field of all labor, that the puniest infant who comes 
 wailing into the world in the squalidest room of the most 
 miserable tenement-house becomes at that moment seized 
 of an equal right with the millionaires. And it is robbed 
 if it is denied equal access to the land. Place a tax, a single 
 tax, upon the land so large as to absorb all land rents. 
 This would have the effect of making public property of 
 what is now the private ownership of land. 
 
 Until recent years the literature upon the subject taught 
 that rent forms no part of the cost of production. The 
 business man who paid rent knew full well that this was a 
 part of his outgo or cost of doing business. Yet he read in 
 the books that rents were not costs. The economists now, 
 though not without exceptions, teach that rent is a cost. 
 
 Within recent years another change has been made in 
 the thought on the rent problem. Rent was formerly de- 
 fined as a payment for the use of land and for the use of 
 land only. To-day rent is defined as a payment for the 
 temporary use of a house, horse, automobile, plough, land, 
 or any other durable productive agent other than man. 
 Rent is now studied as one of the primary shares in distri- 
 bution, as a leading cost in the production of wealth, as 
 the greatest obstacle to clear thinking on taxation, and as 
 the source of numerous social problems. 
 
 2. Definition of Rent. — If a farmer tills his own soil, he 
 gets an income but cannot be said to receive a rent. When 
 one occupies his own dwelling, or drives his own team, or 
 uses his own tools, he gets services (usances), but receives 
 no rent. Rent is the price paid by one person to another 
 for the temporary use of productive agents. Rent is but 
 a special appUcation of the general problem of price — it is 
 the price of the temporary services of agents. 
 
376 Introduction to Economics 
 
 Rent impKes private property. Where there is no pri- 
 vate property there can be no rent. There could be no 
 buying or selling, consequently no rent, apart from own- 
 ership; the only reason why you cannot rent or lease to 
 another a pubHc park is because you do not own it. Rent 
 also implies legal contracts. You cannot discharge the 
 tenant at will, because you are bound in contract to fulfil 
 your agreement with him throughout the renting period. 
 To rent is to contract with an owner for the use of an 
 agent. 
 
 3. Durable Goods Rented. — One does not rent a pound 
 of beef, a loaf of bread, or a ton of coal, because these ob- 
 jects are destroyed by the uses made of them. Rented 
 agents are returned intact to their owners after the renting 
 period. If one pays $1,000 a year for the lease of a house, 
 he is said, in popular usage, to pay that sum as rent. But 
 in strict usage, the cost of such repairs as will leave the 
 house in as good condition as when leased, must be de- 
 ducted from the $1,000 in order to find the net or true rent. 
 Rent is a net sum over and above all repairs; only those 
 things may be rented which remain practically intact 
 through the renting period. 
 
 Goods which serve their purpose only by entering into 
 permanent combination with other goods are not rented. 
 One would not rent steel beams, or nails, or bricks to be 
 used in the construction of his house. One does not rent 
 the thread with which to sew a garment, because it could 
 not be returned intact to the owner. Such goods lose their 
 identity by becoming a part of other goods. Only durable 
 goods which maintain their identity are well suited to the 
 renting contract. 
 
 The tenant who rents a farm does not rent separately 
 
The Renting Contract 377 
 
 the land, hedges, fences, ditches, and durable improve- 
 ments on the land. These combined make the farm, and 
 the farm thus composed of land and durable improve- 
 ments is well suited to the renting contract. The different 
 factors cannot be separated for rent or for purposes of 
 taxation. 
 
 4. Buying or Renting. — It has been pointed out that the 
 only reason why one desires a good or is willing to pay a 
 price for it is because of the services which it is capable 
 of rendering. You will pay no price for a house which 
 you are forbidden to enter, rent, sell, or otherwise use. 
 The price you will pay depends upon the price of the ser- 
 vices you expect to get from the house. You buy the 
 house when you pay for its services in toto; you rent the 
 house when you buy the services for a limited period of 
 time. 
 
 It is not always wise to buy a dwelling or building for 
 one's business, even though it is offered at a reasonable 
 figure. One may have difficulty in disposing of his dwelling 
 to advantage if he is called elsewhere to a more remunera- 
 tive position; or one may use his capital funds to better 
 advantage by investing them in something else. If one 
 does not know the neighbors and surroundings in a com- 
 munity, it is better to rent for a time in order to determine 
 whether permanent residence is desirable. 
 
 The entrepreneur of a new enterprise cannot be sure that 
 his business will succeed. The beginner, by renting for a 
 time, can test his possibihties for success in the building of 
 another, so that in case of failure his burden is less, because 
 less fixed capital is involved. On the other hand, if he is 
 successful his business will grow. With the expansion of 
 business, larger quarters will be needed, and possibly a 
 
378 Introduction to Economics 
 
 move to a better neighborhood or trade centre would be 
 advisable. Such changes can be more easily made by the 
 renter. When a business has become firmly established, 
 especially if it requires a large amount of room, it may be 
 desirable to own the building in which it is housed. 
 
 If one's business requires only an office, it may not be 
 wise to buy or build. It is more economical to rent office 
 space in a building constructed for the purpose. Such 
 buildings furnish every convenience, are easily accessible, 
 and are well-known. An office in the Woolworth Build- 
 ing may be had for a reasonable rent, but to buy land in 
 an equally advantageous location and build an office as 
 fully equipped would call for a large investment. 
 
 One will rent rather than buy in order to gratify a tem- 
 porary need. One will rent a taxicab rather than buy it, 
 to get home on a rainy day. If the farmer's mowing- 
 machine is in the repair-shop temporarily, he will prefer 
 to rent for the short period of time. 
 
 5. Use-Value Derivative. — There is a difference between 
 the use and the product of an agent, a difference between 
 the uses of a farm and the corn, wheat, or potatoes which 
 that farm produces. The use is the origin of the product. 
 One cannot buy the uses of potatoes unless he buys the 
 potatoes, because the potatoes are destroyed in the proc- 
 ess of rendering their uses.- But one may buy the uses of 
 the farm for a given time without buying the farm, because 
 the farm is not destroyed in the process of yielding a crop. 
 The farm remains intact after a period of cultivation; it is, 
 therefore, as above stated, subject to the renting contract. 
 
 To rent a farm is to buy the uses of it for a given period 
 of time. The rent is the price paid for these uses. The 
 purpose of renting or of buying the uses of the farm is to 
 
The Renting Contract 379 
 
 secure the products or yield of the farm. How much rent 
 will you pay for the uses of the farm ? As you are willing 
 to pay the merchant a high price for a valuable good, so 
 you are willing to pay the landlord a high price (rent) for 
 the opportunity of a valuable crop. In a sense the rent 
 is the advance purchase price of the crop. The price of 
 the farm, or of its total uses, is derived from the anticipated 
 valuation of what it will produce through time. 
 
 The products of uses vary in nature. Some uses give 
 off a tangible return, e. g., the corn from the field. Some 
 uses give off intangible returns, e. g., the sound of a musi- 
 cal instrument. The product of a corner lot is location, or 
 relativity to the market. The product of an accountant's 
 outfit is to facilitate the workings of other agents. In the 
 rent problem the nature of the product is of no consequence. 
 To explain rent is to explain the price of the uses of rent- 
 bearing agents. 
 
 The uses to which agents are put determine the relative 
 supplies of goods. If the price of corn increases while 
 that of wheat declines, more land will be turned to corn 
 and less to wheat, with the result — more corn, less wheat. 
 But productive agents, all things considered, will be turned 
 to their most remunerative employment. The rich to- 
 bacco-farm in Kentucky will not be used for grazing pur- 
 poses any more than would the luxurious mansion on 
 Fifth Avenue be used for a tobacco-barn. 
 
 6. The Renting Contract Prospective. — ^The renting con- 
 tract is made before the renter takes possession. This fact 
 subjects the renter to risk. Smith leases a dwelling, expect- 
 ing to live in it, and so he must pay the rent, even though 
 he cannot occupy it as when a turn in business calls him 
 to another town. Corporations rent coal, oil, or timber 
 
380 Introduction to Economics 
 
 lands at times, years in advance of operations. The ten- 
 ant contracts to pay a high rent because he expects a 
 valuable crop, but pests or a drought or a flood may ruin 
 his crop. He may secure a large yield in bushels, but the 
 market price may be low. 
 
 The rent paid is fixed by contract at the beginning of 
 the renting period. If the merchant agrees to pay $5cx> 
 
 Qain „ 
 
 ^^ — j^ Earnings varv, 
 
 ^ ' ' V x^ * Contract rent is uniform^ 
 
 JjOss Jjoas 
 
 a month for a building over a period of five years, his rent 
 outlay remains the same irrespective of his earnings. Rent 
 depends not upon past earnings but upon anticipatory 
 earnings. 
 
 Because anticipatory earnings are not definitely known, 
 the renter may either suffer a loss or enjoy a net gain. 
 Whereas rent is the purchase price of the temporary uses 
 of an agent, the purchase price of the agent is the sum 
 paid for all the future uses of the agent. Then, if risk is 
 involved in the purchase (rent) of the uses of the agent for 
 the immediate future, certainly a greater risk is involved 
 in the purchase of all the future uses. 
 
 We see now that present contract rents are based upon 
 the prospective or future yields of agents. No one will 
 contract to pay rent for an abandoned mine because of its 
 former yield. Rent emerges only in case of a gain-promis- 
 ing opportunity. 
 
 7. The Time Element in Rent. — If one rents an agent 
 which will yield an income immediately, he will be willing 
 to pay a rental approximately equal to the price of the , 
 
The Renting Contract 381 
 
 yield. But if the income will not be secured before the 
 lapse of one, two, or five years, the case is different. Men 
 prefer the present over the future possession of goods. 
 You would rather have $i,ooo to-day, than twenty years 
 from now. The average man holding a note of $io6 due a 
 year hence would be willing to sell it at the present for 
 $ioo. Assume that the income from a rent-bearer will 
 mature a year hence; its present worth (future price dis- 
 counted to the present) will be less than its price at ma- 
 turity. The further the income is removed in time, the 
 less is the rent of the producing agent. Present rent is 
 derived from the present worth of income. 
 
 8. Short Factors and High Rent. — In working out the 
 best proportionality it was found, in the preceding chap- 
 ter, that certain factors may hold a monopoly position. 
 For instance, the available land space may be limited. A 
 corner lot, a franchise, or natural conditions may fix the 
 area at the disposal of the entrepreneur. A monopoly 
 right by another may definitely limit the supply of certain 
 factors essential to his business. Wherever, for any such 
 reason, a factor is limited, the entrepreneur must work 
 out his adjustment of factors with respect to this factor. 
 Or if the price of one factor is far in excess of that of the 
 other factors, the adjustment will usually be made with 
 respect to this one. 
 
 This is but another way of saying that short factors 
 determine the capacity (ability to produce incomes) of 
 productive establishments. These factors are high in 
 price by virtue of the fact that they are short factors. 
 As short factors they limit the output of goods; they 
 are most productive and, therefore, command the largest 
 rent. 
 
382 Introduction to Economics 
 
 9. What Is High Rent?— If a lot on Wall Street rents 
 for $50,000 a year, while a potato-patch of the same area 
 in Kansas rents for $5, shall we say that the one rent is 
 high and the other low ? Not in strict accuracy. One dol- 
 lar for 20 cakes of soap is no higher price than 5 cents for 
 I cake. Likewise $50,000 for 10,000 units of productive 
 power is no higher rent than is $5 for one such unit. Be- 
 fore we say a rent is high we should inquire the produc- 
 tivity of the agent rented. Where competition is active 
 and free the rents or prices of productive services are re- 
 duced to equality. 
 
 If one rents a farm and pests or drought spoil the crop, 
 he has paid for non-remunerative services — the rent is 
 high. If he rents a business house or a factory and an 
 unforeseen panic injures the business, he has paid for non- 
 remunerative services — the rent is high. 
 
 Superior management increases the productivity of land 
 as does increased fertilizer. But competition is such that 
 the inferior manager must pay the same rent as the most 
 skilled manager. Under inferior direction the yield of the 
 land may be small as compared with rent, and a high yield 
 relative to rent may reward the efforts of the wise man- 
 ager. For the inferior the rent would be high and for the 
 superior it would be low. Rent is high or low always in 
 comparison with the price of the yield. 
 
 10. Monopoly Rents. — Monopoly rents obey the same 
 principle as do monopoly prices which have already found 
 discussion. Monopoly rents are one kind of monopoly 
 prices, for the monopolist will rent his wealth at that figure 
 which will yield him the largest net return. Monopoly 
 rents are not without limit. 
 
 One limit to monopoly rent is the selling price of thfc 
 
The Renting Contract 383 
 
 product; in no case will a tenant pay a rent that is higher 
 than the anticipated price of his crop. Another limit to 
 the rent of an agent is the rent of other agents which will 
 readily substitute for the monopolized agent. Automobile 
 trucks and draft-horses may be substituted for each other 
 in most cases. Should there be a monopoly on draft-horses 
 the rent could not be made excessive because of the avail- 
 able substitute for them. Again, the monopoUst must 
 endeavor to preserve the renter's prosperity. Should the 
 owner of a waterfall demand a ruthlessly exorbitant rent, 
 he would kill the business of the renter. The renter can 
 go into some other business and would do so if a monopo- 
 list exact his profits in the form of rent. 
 
 II. Product Returns vs. Money Returns. — It is now 
 clear that one rents wealth in order to get returns from 
 that wealth. But of what do returns consist? It is evi- 
 dent that the tenant of a farm may speak of his return 
 as so many bushels or as so many dollars' worth. For 
 some purposes it is best to think of returns in weight and 
 tale; for other purposes it is best to calculate returns in 
 terms of money. For purposes of trade and distribution 
 we are forced to think of returns in their price aspect. If 
 one is calculating his profits or losses on the year's opera- 
 tions, he can compare his income and costs only by reduc- 
 ing them to their money equivalents. But if one is reason- 
 ing on the problem of social well-being, if he is estimating 
 the current supplies to meet the needs of the people, he 
 must think in terms of product rather than in terms of 
 money. The supply of a good — as sugar, salt, or other — 
 may be least when its price is greatest. 
 
 Let us consider, for example, all competitors who are 
 growing corn. As each one endeavors to grow such an 
 
384 Introduction to Economics 
 
 amount as will render him the greatest net gain, the total 
 number of bushels produced will be greatly augmented; 
 but the larger the product return, the less the price of each 
 bushel produced. After a certain point is reached, the 
 total price of the corn-crop will diminish as the number of 
 bushels increases. The producing competitor will suffer 
 because of the decline in the price of his corn, but the same 
 facts — abundant corn at a low price — will add to social 
 well-being. 
 
 Assume now that a monopoly controls the available 
 salt factories. It may well be that by a better physical 
 adjustment of factors the volume of output is augmented 
 at a diminishing cost, that is to say, the cost per unit (per 
 bag) of output is diminished as the volume of output in- 
 creases. But the demand for salt is inelastic. The price 
 must be very low if more than a normal supply is sold. 
 Then, despite the fact of increasing volume returns, there 
 will be decreasing money returns. It will be to the pro- 
 ducer's interest to curtail physical output; his interest will 
 conflict with the interest of society. 
 
 The view-point of each competitor is now to be consid- 
 ered. Any one grower of corn will find his crop so small 
 in comparison with all the corn produced that his output 
 will have an insignificant effect on the market price. Con- 
 sequently, the larger the amount of his product the greater 
 will be his money return. It is then to the interest of 
 each competitor to make his commodity return large. 
 This being to the interest of all competitors, causes the 
 maximum total output in society. The competitor's in- 
 terest in this case is in keeping with the interest of 
 society. 
 
 From the above reasoning it is clear that the rent paid 
 
The Renting Contract 385 
 
 for the use of an agent may be diminished in certain cases 
 by virtue of the fact that improvements in the agent may 
 increase the volume of its physical output. 
 
 12. The Tendency Toward Diminishing Money Returns 
 Universal. — ^When more and more productive factors are 
 expended upon a limited agent that agent will show in- 
 creasing resistance to further output. This was made clear 
 in the preceding chapter with respect to a limited area of 
 land. Additional expenditures upon the Umited agent 
 show a decUne in both the commodity return and the 
 money return. 
 
 Let us now consider a factory or a railroad. Here we 
 find a tendency for the cost, per unit of output, to diminish 
 until a certain point is reached, as the volume of output 
 increases. If the railroad moves 100,000 passengers a 
 month, its costs per passenger will be less than if it moved 
 only 1,000 passengers. It will cost the sugar-refinery less 
 per himdredweight of output when it produces a large 
 volume, until a certain point is reached, than when it pro- 
 duces a small volume of sugar. But such institutions 
 (sometimes erroneously called institutions of increasing 
 returns) will see the total price of their output decline 
 when the voliune of output has grown beyond the normal 
 needs of the market. Ultimately receipts will fall below 
 costs despite the fact that the per-unit costs themselves 
 are diminishing. 
 
 Thus we find diminishing money returns generally appli- 
 cable, but there are two unlike causes for this general ten- 
 dency, (a) Money returns diminish in one case because 
 of a decrease in product returns relative to costs, (i) 
 Money returns diminish in the other case because of an 
 increase in product returns. 
 
386 Introduction to Economics 
 
 13. Large Production and Monopoly. — ^Agriculture fur- 
 nishes a good example of the tendency of money returns 
 to a competitive producer to diminish with a decrease in 
 commodity returns. There is a definite paying limit to 
 the amoimt of expenditure justified upon a field. This 
 fact renders large-scale production upon a limited area im- 
 possible and maintains competition by keeping productive 
 units small and scattered. 
 
 But, as explained previously, the institution which dimin- 
 ishes the costs per unit of output by enlarging its scale of 
 production has a tendency to monopoly. In case of a 
 number of competitors in the manufacture of sugar, each 
 will desire to reduce his productive costs below those of 
 his competitors. In order to do this he must have the 
 largest output, and this is made possible by lowering the 
 price to drive competition from the market. 
 
 14. Conditions for Study of Principle of Increasing Re- 
 sistance. — If the student is following this reasoning care- 
 fully, he finds two unlike view-points in what has just been 
 said. The one has to do with a given situation, with a 
 limited agent (in the above case a limited area of land). 
 One can see the principle of increasing resistance, can iso- 
 late it from a heterogeneous mass of details, only when he 
 limits the study of it to a given agent at any one time. 
 The words "at any one time" are important. Should I 
 study the comparative returns from a given field in 18 15 
 and 1915, 1 should observe a large increase in returns, but 
 I should be reckoning with unlike situations. During the 
 century marked improvements have been made in labor, 
 inventions, and in the arts of husbandry generally. There 
 would be a change of situation which would becloud the 
 reasoning with respect to the increasing resistance of a factor. 
 
The Renting Contract 387 
 
 But if I take, for the reckoning on returns, a given time 
 in which no perceptible changes take place in the arts of 
 husbandry, if I further confine my study to a limited area, 
 I can then and then only observe the true working and sig- 
 nificance of the principle of resistance. The like condi- 
 tions are termed static conditions. The principle of resist- 
 ance is always and everywhere operative in industry, but 
 the point here made is that under static conditions only 
 can this principle be isolated, seen, and scientifically 
 studied. 
 
 In case of growing large-scale production, we find that 
 there is rapid change from old to new, from small to large, 
 from antiquated methods and machinery to the newest 
 and best. With these changes the cost per unit of output 
 diminishes. But it is clear that such changes are but 
 transitions from one set of conditions to another. The 
 factors are changeable and the mind cannot clearly grasp 
 the true workings of the resistance of any factor. 
 
 There can be no compromise; it is absolutely essential 
 for clear thinking on rent that the student grasp this fact 
 — at any given time the yield of a productive agent cannot 
 be indefinitely increased without increasing costs. In a 
 given time there is an elastic limit to the returns from any 
 productive agent — be it horse, engine, house, field, or other. 
 
 15. Rent a Deduction from the Principle of Increasing 
 Resistance. — ^All economy begins with scarcity. Apart 
 from scarcity, there would be nothing to work for, no in- 
 crease of material blessmgs to inspire further activity; life 
 would not be worth living. To acquire valuable things is 
 the incentive to effort and the value one attributes to 
 things (demand assumed) is determined by their scarcity. 
 The resistance of agents to further production causes the 
 
388 Introduction to Economics 
 
 scarcity of goods. We are, therefore, willing to pay a price 
 or rent for the services of agents to produce these scarce 
 and desirable goods. We attach value to the field because 
 of the valuable crops it yields, and to the horse because 
 of the valuable services it performs, and to the boat be- 
 cause of the valuable transporting it does. Products are 
 valuable because they are scarce, and they are scarce be- 
 cause of the resistance of agents to the further production 
 of them. Thus the scarcity of goods is traceable to this 
 basic economic thought — the increasing resistance of 
 agents. The rent we are willing to pay for the temporary 
 services of productive factors is determined by the so-called 
 "scarcity value" of these products. 
 
 i6. Proportionality and Rent. — Proportionality or the 
 adjustment of productive factors to one another, as we 
 have seen, is based upon the law of resistance common to 
 each and every factor of production. It does not pay to 
 apply too many or too few factors to any one factor — there 
 is a best adjustment or proportionality. All of the agents — 
 mill, belts, fuel, building, and so on — which unite to con- 
 vert a log into lumber must be reckoned as one composite 
 productive unit. As you attribute value to a horse as a 
 whole, so you attribute value to a composite productive 
 unit as a whole. As you would not attribute value to the 
 legs, eyes, and stomach of the horse separately, so you 
 would not attribute value to the engine, belts, fuel, and 
 building of a sawmill separately. Where factors must 
 co-operate to produce a good, it is impossible to assign 
 to any one agent a product based upon the supposition 
 of separate productivity. No separate product can be 
 ascribed to any single factor. 
 
 Well does this writer remember the first question put to 
 
The Renting Contract 389 
 
 him on his oral examination for the degree of Doctor of 
 Philosophy. It was: "In a large wagon-factory, what part 
 of the value of a spoke should be attributed to managerial 
 ability?" His guess was most fortunate: "It can't be 
 done. All the factors back of that spoke are united into 
 one composite unit and must be valued as such." 
 
 The supply side of the price of a good is found in the 
 comparative advantage of various combinations of factors 
 of production. If the price of structural steel rises, the 
 entrepreneur will undertake to increase the supply. His 
 problem is: "What changed proportion of the several fac- 
 tors will most easily turn out the increased supply?" 
 Should more labor be applied to the same plant, or should 
 the plant be enlarged relatively to the existing labor force, 
 or what should be the conjunction of additional factors? 
 The best technical or physical adjustment of factors to one 
 another is always conditioned upon the cost of the different 
 factors. If land is cheap and abundant, while labor and 
 tools are scarce and high-priced, farmers will not be spar- 
 ing of land — it will pay to "skin" the land in order to 
 conserve and more intensively utilize tools and labor. 
 Were land, tools, and labor of the same degree of scarcity 
 and price, their intensity of utilization would tend to be 
 the same. 
 
 The yield of any factor depends largely upon the other 
 factors applied to it. Land can reach its maximum yield 
 only when the agents — tools, fertilizer, seed, labor — are 
 most advantageously applied to it. Therefore, the usance 
 of an agent will be largest and its rent highest when there 
 is a best adjustment of other factors to it. 
 
 17. Rent Limited by Income. — ^The rent which the 
 entrepreneur does pay for agents is vastly different from 
 
390 Introduction to Economics 
 
 what he would pay if he had to. One pays two cents for 
 the morning paper, but he would pay, say, ten cents rather 
 than go without it; so the owner of the sawmill may be 
 willing to pay an annual rent of $5,500 for an engine rather 
 than do without it, but he does pay for it only the normal 
 competitive rent. It is a matter of much concern to him 
 whether certain essential factors are owned by a monop- 
 oly. The limit to the rent which he could permanently 
 pay for a monopolized factor would be determined by all 
 of his other costs and the selling price of his product. He 
 would lose if he paid more rent for one factor than the dif- 
 ference between his income and other costs. 
 
 Concerns are sometimes forced to run their business at 
 a loss for short periods of time. It is better to get some- 
 thing out of the plant than nothing. Rather than disband 
 an organized laboring force during a dull period in the 
 market and pay interest and depreciation upon an idle 
 plant it may well pay to rent an essential factor, although 
 such a rent exceed the difference between income and 
 other costs. But it is impossible for costs — rent and other 
 — to exceed incomes over a long period of time. Should 
 income remain smaU, the plant would be capitalized at a 
 lower figure. Or if costs could not be reduced the factory 
 would either quit business or transfer to a new line of 
 production. In the long run, maximiun rents cannot go 
 above income. 
 
 18. Rents Limited by Cost of Reproduction. — Should 
 one control the only thrashing-machine in an agricultural 
 community, he could temporarily command a high rent 
 for the use of it. But the neighbors, seeing this large rent, 
 will begin the purchase of thrashers. This will push down 
 the rents until they pay only a competitive return on the 
 
TJie Renting Contract 891 
 
 cost of a thrasher. ' Where goods are freely reproducible, 
 rents will tend to a fair return on cost of reproduction. 
 
 19. Differential Rent. — One group of thinkers have 
 taught that there would be no rent were all lands equally - 
 accessible and uniform in fertility. Let us examine this 
 idea. No one claims that oxen are valuable because they 
 differ in weight; in the same way, it would be in the high- 
 est degree absurd to claim that houses are valuable because 
 some are better than others. Is land valuable because 
 some is better than other? Certainly not. The price of 
 land is derived from the price or price equivalent of its 
 yield. Whether land is the same or different in quality is 
 of no consequence in explaining why land yields rent. 
 Differences in quality explain why some land yields more 
 rent than other, just as differences in diamonds explain 
 why some are worth more than others. 
 
 If the net yield of one field is 50 bushels, while that of 
 another is 100 bushels, the tenant would pay twice the rent 
 for the one that he pays for the other. Differences in land 
 may serve as a measure of rent, may explain why one field 
 rents higher than another. Differences in land do not ex- 
 plain the cause of rent. The "differential theory of rent" 
 is a misnomer. A theory is the explanation of a fact. To 
 explain why some rents are higher than others is vastly 
 different from an explanation of the fact or existence of 
 rent. It may well be that inferior lands are unused and 
 valueless, while superior lands command a high rental; 
 but this is nothing peculiar to land. The best apples may 
 command a fancy price, while the knotty green ones are 
 left to rot on the ground. But the best apples are not 
 valuable because there are inferior ones, nor is superior 
 land valuable because there are swamps and bleak sum- 
 
392 Introduction to Economics 
 
 mits beyond the margin of cultivation. Men rent land 
 and the land is valuable, not because inferior land exists, 
 but because of the scarcity and desirability of the services 
 it renders. 
 
 20. Differentials which measvire rent must be distin- 
 guished from the cause of rent. If the net yield of acre 
 Number i is loo bushels, while that of Number 2 is 50 
 bushels, the differential or difference in yield between 
 these two acres of land is 50 bushels. Acre Number i 
 will command a rental larger by the price equivalent of 
 50 bushels than will Number 2. This difference measures 
 the difference in rent. But it is no theory or explanation 
 of rent, because a theory of rent must explain why rent 
 exists. It must answer the question why a rent or price 
 is paid for the temporary productive services of a house, 
 horse, machine, acre of land, or other productive agent. 
 The differential idea is important, however, in the expla- 
 nation of why some land or houses or horses rent higher 
 than others. 
 
 Business Sites: A corner lot usually holds a differential 
 advantage and commands a higher rent than an inside 
 lot. The store on the corner is more accessible to cus- 
 tomers because twice as many people pass by it. The 
 accommodation of customers is a primary consideration 
 in the location of a retail shop. This idea explains why 
 country stores are located at the cross-roads, and why 
 small shops go to the residential districts of cities. 
 
 In wholesaling the differential advantages depend mostly 
 upon nearness of shipping facilities. Nearness to wharfs, 
 side-tracks, and stations will command a high rent from 
 the wholesaler. 
 
 Residence: Who are the neighbors? is the primary ques- 
 
The Renting Contract 393 
 
 tion in selecting a residence site. A few years ago in a 
 particular section of a Southern city the houses were of 
 excellent construction and commanded a high rental. 
 Some undesirable families settled in that section, with 
 the consequence that some of the residences are vacant, 
 while others rent for a nominal sum. In another case a 
 noteworthy citizen of this country secured control of the 
 real estate in one section of a small city, and later on 
 moved there. This attracted men of means to that neigh- 
 borhood, and thereby largely increased his land rents. 
 Other factors making for differential rents on residences 
 are improvements such as water, gas, electricity, street- 
 railway facilities, schools, and churches. 
 
 21. Differences in Fertility. — ^A colony settling in an 
 uninhabited country finds more land than is needed. Be- 
 cause of its great supply land is a free good, no one has to 
 pay a price for the use of it. The land being of various 
 grades of fertihty, the more productive grades will be 
 occupied first, and with the increase of population the 
 growing demand for food wiU bring less useful lands or less 
 useful qualities of land under cultivation. Suppose that 
 there are four grades of land. The best quality (Number i) 
 will be first cultivated, and the second grade (Nimiber 2) 
 will be used when the growing demand for food can no 
 longer, except at a high cost, be supplied from the first. 
 And the further growth of population will necessitate the 
 cultivation of grades 3 and 4. 
 
 Assume, now, that the yield per acre of these four grades 
 of land is 100, 90, 80, 70 bushels respectively, and, further- 
 more, that the cost per acre of cultivating the different 
 grades of land and of getting their yield to the market is 
 the same. With these assumptions in mind, the amount 
 
394 Introductmi to Economics 
 
 of rent can be accurately indicated. At first no rent would 
 be paid because land is a free good. But when grade 2 
 comes under cultivation, the first grade will command a 
 rent of the price equivalent of 10 bushels per acre. It will 
 be immaterial to the farmer whether he cultivates grade i 
 and pays a rent equivalent to 10 bushels per acre, or culti- 
 vates grade 2 free from rent. When grades 3 and 4 are 
 cultivated, the rent per acre of grade i will be 30 bushels, 
 of the second grade 20 bushels, and of the third grade 10 
 bushels. 
 
 22. Differences in Costs. — ^Let us now assume that the 
 gross yield per acre of these four grades of land is the 
 same, say 100 bushels. Number i may be well kept and 
 ready for the plough; Number 2 requires a considerable 
 outlay for fertilizer; Number 3 must be fertilized and 
 cleared of rocks; Number 4 must be drained, hedged, fenced 
 as well as fertilized and cleared of rocks. The gross yield 
 is 100 bushels in every case, but should you be willing to 
 pay as high a rent for Number 4 as for Number i ? Cer- 
 tainly not. Let us put the case in the form of figures. 
 
 Number i yields 100 bushels, less 70 for costs — ^rental, 
 
 30 bushels. 
 Number 2 yields 100 bushels, less 80 for costs — ^rental, 
 
 20 bushels. 
 Number 3 yields 100 bushels, less 90 for costs — rental, 
 
 10 bushels. 
 Number 4 yields 100 bushels, less 100 for costs — rental, 
 
 o bushels. (See figure 2, page 395.) 
 
 23. Differences in Location. — We shall now assume that 
 the four tracts of land each produces 100 to the acre, and 
 that there are uniform costs of 50 bushels an acre for the 
 cultivation of the different tracts. Let us further assume 
 
Tlie Renting Contract 
 
 395 
 
 
 No. 1 
 
 
 No. 2 
 
 
 No. 3 
 
 
 No. 4 
 
 
 Bent 
 SO 
 
 -90 
 
 ■eo 
 
 Sent 
 
 SO 
 
 -90 
 ■ 80 
 
 Rent 
 
 10 
 
 
 
 
 
 
 
 
 
 -sn 
 
 
 
 
 
 
 
 
 
 
 ■70 
 
 
 •TO 
 •60 
 
 50 § 
 
 
 
 
 
 
 
 
 
 
 
 
 '60 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 50 ^ 
 
 
 •50 ° 
 
 
 
 p 
 
 
 
 
 
 
 
 
 
 
 to 
 
 
 10 
 .30 
 • 20 
 
 
 iO ^ 
 
 
 .in S 
 
 
 pV 
 
 
 
 
 
 ■ 
 
 
 
 
 
 
 
 
 
 
 .30 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 ■20 
 -in 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 .in 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 100 
 •90 
 -80 
 •70 
 
 50 
 40 
 30 
 20 
 10 
 
 Sent eaiuHt yUld leit coet 
 FlGUKE No. 2 
 
 that all the products are marketed in Liverpool, that Num- 
 ber I is in the United States, Number 2 in Canada, Num- 
 ber 3 in Argentine, and Number 4 in Russia. 
 
 The Russian tract could pay no rent, because the cost 
 of cultivation plus the cost of transportation (50 bushels) 
 leaves no surplus. The Argentine tract could pay a rent 
 of ID, the Canada tract 20, the United States tract 30. 
 
 -J>^- 
 
 100 to acre l_ _ ..Tjita— 
 
 aw to acre J J^ 
 no rent^ '/ 
 
 / 
 
 / 
 
 Argentine 
 
 100 toaore 
 
 10 rent 
 
 Figure No. 3 
 
396 Introduction to Economics 
 
 As world markets develop, lands everywhere compete. 
 Differences in location have the same effect on rents as 
 have differences in the quality of land. 
 
 We may conclude from the above illustrations that the 
 rent of a productive agent tends to equal the present 
 worth of the net yield for the renting period of that agent 
 (the net yield being the gross yield less all costs). 
 
 24. The Owner's Income. — ^We have seen that rent is 
 contractual in nature, that the rent problem is a part of 
 the general price problem, that rent is always a price paid 
 by one person to another for the temporary uses of a rent- 
 bearer. The owner of a rent-bearing agent has before 
 him two alternatives: he may use the agent himseM; he 
 may let it to another for a rent. In either case he enjoys 
 an income. The prices or price equivalents of all the 
 anticipated incomes — contractual or other — discounted to 
 their present worth give the present capital value of the 
 agent. The term "usance- value" has been used to sig- 
 nify the return which the owner gets from operating his 
 own agent. The term "economic rent" has been used in 
 this same sense. It is well to have a definite term for this 
 non-contractual return as well as to have the term rent for 
 the contractual return. I have preferred at times to em- 
 ploy the more common terms — yield and income — to sig- 
 nify the non-contractual return. 
 
 25. Exercises. — i. Jones lets his house to Smith for 
 $1,200 a year. Jones pays for up-keep $20, for taxes 
 $200, puts in a new furnace costing $500, makes a planta- 
 tion of shrubs on the lot costing $100, bores a well costing 
 $300, grades the lawn, costing $80. 
 
 Does Jones get any rent? If so, show what outlays 
 should be deducted from the $1,200 received in order to 
 determine the rent. 
 
The Renting Contract 397 
 
 2. Which of the following are rent-bearing agents: 
 Loaf of bread, ham, plough, farm, dollar, lubricating-oil, 
 house? Tell why in each case. 
 
 3. Generally speaking, would it be expedient to buy a 
 house or to rent during a period of great building activity ? 
 Defend your answer. 
 
 4. During the World War there was little building in 
 New York, but it was thought that there would be much 
 building immediately following the war. Would it, gen- 
 erally speaking, have been better during the war to have 
 signed a long lease or to have rented for a year at a time ? 
 
 What other facts than those given must you have before 
 answering the question just given ? 
 
 5. "When the franchise was granted for a surface line 
 the rent on dwellings along this street declined, but the 
 rent for business houses increased." Why might this be 
 true? 
 
 6. "The big stores on Fifth Avenue must sell at a high 
 price because of their enormous rents. We are not so 
 conveniently located, yet due to low rents we can sell at 
 much lower prices." Criticise. 
 
 7. Does rent as a price paid by one person to another 
 add anything to the wealth of society as a whole? 
 
 Does the income (usance or economic rent) which one 
 gets from working his own land add anything to the wealth 
 of the community ? 
 
 Is it the owner who tills his own soil, or the owner who 
 rents his soil, who suffers in case of floods, drought, pests, 
 or low prices for the product? 
 
 Why can we not call both the contractual and the non- 
 contractual incomes rents ? 
 
 8. Short factors command large rents. Why ? 
 
 9. What effect did the opening up of Western lands have 
 upon the land rents in New England States? _Why? 
 
 10. Suppose a new and inexpensive chemical should 
 double the yield of any land upon which it might be used. 
 What influence would this have upon land rents in gen- 
 eral? Would any less land be used than at present? 
 
398 Introduction to Economics 
 
 11. Should American farmers cultivate their soil as in- 
 tensively as do the Belgian farmers? 
 
 12. Why is the tendency toward diminishing money 
 returns universal? 
 
 13. Rent is a deduction from the principle of resistance. 
 Explain. 
 
 14. "Were a new process discovered that would double 
 the products of all cultivated lands, rents would double." 
 Why or why not? 
 
 15. Trace the sequence from rare land to high land rent. 
 
 16. Under perfect competition the total costs to the 
 tenant of producing a bushel of corn is exactly the same 
 whether he rehts good land or poor land. Why? 
 
 17. Place the following in proper sequential order: Lim- 
 ited land area, increased demand for cdrn, larger produc- 
 tion of corn, lower marginal land, higher price of corn, in- 
 creased cost of production, increased land rent, increased 
 price of corn land. 
 
 18. Should the landlords forego all land rents the price 
 of corn would not be diminished. Is this true? 
 
 19. Why is the cost of production the same for any one 
 tenant at the extensive margin as at the intensive margin ? 
 
 20. Why is the average farm getting larger in the United 
 States ? 
 
CHAPTER XVIII 
 POPULATION AND THE SUPPLY OF LABOR 
 
 I. The supply o£ labor: Location. 2. The supply of labor: Industrial. 
 3. The supply of labor: Non-competing groups. 4. J. E. Caimes. S- The 
 supply of labor, peculiarities of. 6. Alfred Marshall. 7. The order of 
 treatment. 8. Population — a world problem. 9. Views of the seven- 
 teenth and eighteenth centuries favorable to the increase of numbers. 10. 
 The attitude in new countries. 11. The limit to this progress. 12. Why 
 some competitors favor a large population. 13. The attitude in different 
 forms of government. 14. Environment of Thomas Robert Malthus. 15. 
 The Malthusian theory. 16. The persistence of the doctrine. 17. Rates 
 of birth and death. 18. Malthus's emphasis on the positive check. 19. 
 Progress from pressure. 20. President Hadley's statement. 21. Doctrines 
 logically following Malthusianism. 22. The simplicity of Malthus' basic 
 assumption. 23. Private property and family development. 24. The in- 
 fluence of freedom and public education. 25. Conclusion on the limit of 
 numbers. 26. Exercises. 
 
 I. The Supply of Labor: Location. — ^The problem of the 
 supply of labor may be local, or national, or international 
 in scope. Let us consider the local problem. We fre- 
 quently speak of our cities as being overcrowded at the 
 very time when crops in the Central West are going to 
 waste for want of harvest hands. If wages are at a sub- 
 sistence basis in New Orleans and at a premium in St. 
 Louis, we may conclude that workmen are few in the one 
 place and too numerous in the other. Where jobs hunt 
 labor, workmen are scarce; where working men hunt jobs, 
 labor is in oversupply. The problems suggested by these 
 examples are local in scope. 
 
 National: For the purpose of our present illustration, 
 Canada and Australia are considered different nations; in 
 
 399 
 
400 Introduction to Economics 
 
 these nations and in America high wages prevail, for the 
 population is scarce relative to the abounding resources. 
 Contrast these with Sicily, where numbers are so dense 
 that only a marvel of patient toil enables the people to 
 live. In that country there is little machinery, for so low 
 are wages that human toil is cheaper. 
 
 Imagine a Texas ranchman being compelled, as are 
 the Swiss, to allow the cattle to stand in a stable while he 
 cuts their food and brings it to them, lest they may trample 
 down the precious grass. Translate a dense population 
 into terms of human labor and again the Swiss are exem- 
 plary. "In the haying season," says Professor Fetter, 
 "the harvester cUngs with one hand to the steep mountain- 
 side, cutting the grass by the handful and piling it in little 
 bunches loaded down with stones to keep it from blowing 
 away, until it can be carried down into the valley on the 
 backs of men and women." 
 
 Differences in the density of populations in the several 
 countries suggest many problems, among others: differ- 
 ences in per capita wealth and wages; unlike social condi- 
 tions; migrations from overcrowded to less crowded coun- 
 tries. These are studies in the national supply of labor. 
 
 International: Prior to the occupation of the Americas 
 and Australia the growth of population in England and 
 Europe had, considering the stage of industrial arts at the 
 time, begun to press upon the means of subsistence. Many 
 observe the rapid multiphcation of numbers in our time 
 and predict an overpopulation for the whole world. The 
 theory of population is a systematic study of the forces, 
 positive and negative, which account for the number of 
 people. As such it is primarily concerned with all men; it 
 is international in scope, 
 
Population and the Supply of Labor 401 
 
 2. The Supply of Labor: Industrial. — The supply of 
 labor may also be studied from the standpoint of different 
 industries. Because of the division of labor and specializa- 
 tion, the skilled artisan is limited to a single line of manual 
 dexterity. This skill being the result of many years of 
 appHcation, the artisans of to-day are those who began 
 their preparation years back, and the artisans of the not 
 distant future will consist of those now in training. At 
 any one time the supply of skilled labor depends, not upon 
 the current demands, but upon previous hues of training. 
 
 This makes the choosing of a career a hazardous under- 
 taking. The young man may see that plumbers and fit- 
 ters are scarce and highly paid, whereas jewellers are plen- 
 tiful and work for low wages. Influenced by this observa- 
 tion, he becomes a plumber rather than a jeweller; perhaps 
 thousands of other young men have made the same obser- 
 vation and followed the same course. After the lapse of 
 years, however, when these men have attained proficiency 
 in plumbing, the demands in these two employments may 
 have changed about. There may be a large demand and 
 high reward for jewellers, for the reason that skilled men 
 are few in the trade. The opposite of this condition may 
 prevail in the plumbing business. The wisdom of a pres- 
 ent choice depends upon future demand rather than upon 
 relative present incomes. 
 
 The introduction of new inventions, the substitution of 
 one thing for the use of another, and changes in demand, 
 make it impossible to foresee the future and adjust labor. 
 Where supplies are slow to meet a rapidly changing de- 
 mand, there is always maladjustment. Labor is unlike 
 other goods in the length of time required to provide it, 
 consequently its adjustment to other things is most imper- 
 
402 Introdttction to Economics 
 
 feet. One industry is blessed with an abundance of labor, 
 another has little help and must limit the output, still 
 another is forced to substitute inventions for labor in order 
 to continue business, and so on throughout the industrial 
 world. 
 
 3. The Supply of Labor: Non-competing Groups. — 
 There is no line sharply distinguishing skilled from im- 
 skilled labor. But for the most part skilled labor is foxmd 
 in the more remunerative positions, and these are the posi- 
 tions where ability and long training count for most. 
 Many bricklayers have neither ability nor skill and some 
 hod-carriers have both, but the assumption is that men 
 are adjusted to tasks proportionate to their aptitudes, and 
 are classified accordingly. 
 
 It is well known that the wages of the skilled exceed 
 those of the unskilled. But since common labor for the 
 production of our every-day supplies is indispensable, why 
 this difference in wages? As scarcity makes diamonds 
 more precious than bread, so the relative shortage of sup- 
 ply explains the higher wage for the skilled. Reverse the 
 case, and the higher reward would go to the unskilled. 
 Could labor move freely from one grade to the other, 
 wages would come to equality, as water, when unobstructed, 
 attains a common level. 
 
 4. J. E. Caimes^ further divides the labor supply: "What 
 we find, in effect, is not a whole population competing in- 
 
 ' Some Leading Principles of Political Economy, chap. Ill, pp. 66-67. 
 Although the exact wording of Cairnes is here given, we use the quotation 
 to serve a vastly different theory from the one Cairnes had in mind. He 
 regarded the idea of non-competing groups as a rare exception to the "labor- 
 theory of value"; we regard it as a particular case of the theory to be devel- 
 oped shortly, namely, the wages of labor are determined by the discounted 
 marginal product of labor. 
 
Population and the Supply of Labor 403 
 
 discriminately for all occupations, but a series of indus- 
 trial layers, superposed on one another, within each of 
 which the various candidates for employment possess a 
 real and effeotive power of selection, while those occupy- 
 ing the several strata are, for all purposes of effective com- 
 petition, practically isolated from each other. We may 
 perhaps venture to arrange them in some such order as this: 
 
 "First, at the bottom of the scale there would be the 
 large group of unskilled or nearly unskilled laborers, com- 
 prising agricultural laborers, laborers engaged in miscel- 
 laneous occupations in towns, or acting in attendance on 
 skilled labor. 
 
 "Secondly, there would be the artisan group, comprising 
 skilled laborers of the secondary order — carpenters, Joiners, 
 smiths, masons, shoemakers, tailors, hatters, etc., with 
 whom might be included the very large class of small retail 
 dealers, whose means and position place them within the 
 reach of the same industrial opportunities as the class of 
 artisans. 
 
 "The third layer would contain producers and dealers of 
 a higher order, whose work would demand qualifications 
 only obtainable by persons of substantial means and fair 
 educational opportunities — for example, civil and mechan- 
 ical engineers, chemists, opticians, watchmakers, and 
 others of the same industrial grade, in which might also 
 find a place the superior class of retail tradesmen; while 
 above these there would be a fourth, comprising persons 
 still more favorably circumstanced, whose ampler means 
 would give them a still wider choice. This last group 
 would contain members of the learned professions, as well 
 as persons engaged in the various careers of science and 
 art, and in the higher branches of mercantile business." 
 
404 Introduction to Economics 
 
 It goes without saying that no hard and fast line divides 
 one class from another, and that there is much seepage 
 constantly going on among them. 
 
 5. The Supply of Labor, Peculiarities of. — Large families 
 are expensive rather than remunerative for parents. Sal- 
 able Uve-stock is bred for the market, but there is no 
 commercial motive in rearing children. There is some evi- 
 dence of an exception to this statement on the early Ameri- 
 can frontier. There the cost of rearing a family was at a 
 minimum; meanwhile wages were prohibitively high. The 
 economist, F. Bowen, says that a motive in rearing chil- 
 dren was to secure their labor. 
 
 High Pay and Short Hours: The supply of labor is not 
 wholly a question of the number of workmen. The skill 
 and dexterity of labor, together with its application, are 
 important in reckoning the labor supply. One man that 
 turns out two units of product a day supplies as much 
 labor as do two men who each turn out one unit. 
 
 Especially among those whose standard of Hfe is low, a 
 higher wage causes less application. Irving Fisher's exam- 
 ple of the basket-makers is at point: "In South America, 
 for instance, traders from Europe were once buying native- 
 made baskets of a pecuUar kind. In order to increase the 
 supply of baskets, which was far less than they could 
 market in Europe, the traders decided to raise the price 
 that they would offer to the makers, thinking to stimulate 
 the production of baskets by inducing the men to work 
 more hours. Exactly the opposite result followed. As 
 soon as these workmen were offered high prices for the 
 baskets, they worked fewer hours and made fewer baskets 
 than before; they could now get more money even for 
 doing less work, and they did not need or want more 
 
Population and the Supply of Labor 405 
 
 money. Their wants were so few and simple that the 
 marginal desirability of money to them decreased very 
 rapidly with an increased amount of it; and their disin- 
 clination to work was so great that, combined with the 
 feeble desirability of its rewards to them, they would 
 supply less of it when the rewards were great than when 
 they were small. Similar instances have been cited among 
 the Filipinos and among the negroes in the South. Recent 
 experiments in coal-mines show that a slight increase in 
 wages stimulates the men to work longer, but that a large 
 increase (60 per cent beyond the ordinary wage) results in 
 irregularity of work and the desire to reduce the number 
 of hours." 1 
 
 It is an accepted principle that a rise in price stimulates 
 production and augments the supply of goods. If you 
 would have an abimdant crop of wheat, guarantee the 
 owner a high price. In peculiar contrast to this general 
 rule is the supply of common labor which decreases for 
 the very reason that other supplies increase. 
 
 6. Alfred Marshall, the distinguished English economist, 
 points out these peculiarities of the supply of labor: (i) 
 The worker sells his work, but retains property in. himself. 
 (2) The seller of labor must deliver it himself. (3) Labor 
 is perishable, and often sold under special disadvantages. 
 
 To comment on the third peculiarity first: The work- 
 man's labor is his source of income, and when he is unem- 
 ployed the income lost cannot be recovered. Perishable in 
 this sense does not conform to strictly accurate usage, for 
 perishable implies liability to decay; a thing must have 
 existence before it can decay, and labor does not exist 
 where the worker is idle. If men lose time when idle, so 
 • Elementary Principles of Economics, chap. XVII, pp. 313-314. 
 
406 Introduction to Economics 
 
 does a machine, factory, or mine. Marshall did not do 
 well in his choice of the term perishable. On the whole, 
 the peculiarity is this: the seller of labor is commonly 
 poor, cannot afford to dispense wholly with the wage- 
 income, even temporarily. This puts him at a disadvan- 
 tage in bargaining with his more wealthy employer. This 
 very peculiarity has become a primary cause for the estab- 
 lishment of labor-unions with funds to support those who 
 may be temporarily unemployed, and to give each member 
 the distinct advantage of collective bargaining. 
 
 The second peculiarity is important, even though not 
 always true. If you sell shoes your product may go far 
 and near, but you do not present yourself where it is de- 
 livered. Your product may go to decorate the tiny foot 
 of a winsome performer at the Winter Garden, or may 
 serve in the sewer to protect the feet of the common laborer. 
 
 But the laborer must go with his labor. Whatever may 
 be the temper of the employer and the character of the 
 associates; whatever the nature of the pursuit, whether as 
 a miner in the deepest shaft or as a painter upon the top- 
 most pinnacle, whether as a flyer in the air or diver in the 
 sea, whether the work is filthy or clean, unhealthful or 
 healthful, whether dangerous as a TNT plant or safe as 
 a pulpit — wheresoever labor goes, the worker must go. 
 
 The fact that the worker must go with his job is at the 
 base of much legislation looking to safety appliances, sani- 
 tation, and moral improvement. The first peculiarity is 
 significant, for he who rears and educates the laborer does 
 not receive the price paid for his services. Producers of 
 material goods may pocket the price paid for them. He 
 who rears beasts of burden and builds factories or ma- 
 chines reaps the reward, whether these are retained for 
 
Population and the Supply of Labor 407 
 
 his own use or sold to another. The investor in private 
 property takes the yield; the rearing of laborers is costly, 
 but the yield goes to the one invested in rather than to 
 the investor. 
 
 Through differences in the wealth and foresight of 
 parents labor tends to be divided into two classes — the 
 few who are well trained and the many who are without 
 adequate preparation. The evil of this tendency is cumu- 
 lative. Too often the poor are without vision for the fu- 
 ture; their families are large and ill kept. These in turn 
 beget large families, thus continuing a process which mul- 
 tiplies still further the number who are poor and inade- 
 quately trained. As a rule wealth belongs to those who 
 appreciate more fully the importance of educating chil- 
 dren. The few who inherit wealth and are educated by 
 their parents in turn have few children. In this manner 
 there is a tendency to maintain a comparatively small 
 class of well-to-do and educated persons. 
 
 7. The Order of Treatment. — Certain peculiarities of 
 the labor supply, together with its maldistribution among 
 places and industries, have been pointed out. Because 
 this subject matter sets forth in the begirming some of the 
 more practical questions involved, it has been considered 
 before the more theoretical aspects. The beginner should 
 have an idea of what it is all about in order to appreciate 
 the bearings of a theoretical discussion. 
 
 The student is well advanced toward a grasp of the pop- 
 ulation problem when he appreciates that it is a study in 
 the proportionality of the number of people to the avail- 
 able productive resources. An ideal proportionality would 
 have: (a) An adjustment of labor and resources proportion- 
 ate to the requirements of the several lines of employment; 
 
408 Introduction to Economics 
 
 {h) a best adjustment of the population as a whole to the 
 total social wealth. Any discussion of the density of 
 numbers or of the labor supply is meaningless unless the 
 number of people is considered in its relationship to the 
 resources. 
 
 The fact that there are differences in the labor supply 
 relative to resources throws much light upon the reason 
 why there is such variance in rates of wages in different 
 localities and in different industries. It explains the rea- 
 son for intensive cultivation in old countries and extensive 
 cultivation in the new. It furnishes the reason for the 
 differences in per capita wealth in different countries. It 
 accounts for the large tenant class in old countries where 
 land is high. It is the chief cause of the migrations of 
 people from one land to another. The proportionality of 
 population to resources gives rise to many social problems. 
 Birth-rates and death-rates, wars, pestilences, famines, 
 etc., find their chief explanation in the numbers of people 
 relative to the available resources. 
 
 We shall now turn from the distribution of numbers 
 among trades and territories to the different views regard- 
 ing the increase in the numbers of mankind. 
 
 8. Population — a World Problem. — When the tribes of 
 old dwelt in isolated places it was possible for local famines 
 to thin or destroy some tribes, while others, more fortu- 
 nately located, enjoyed abimdance. Then men were fed 
 from the land upon which they dwelt; the want of trans- 
 portation and trade imposed isolation and made of each 
 community a self-sufficing world. 
 
 Transportation and trade, together with the dissemina- 
 tion of knowledge put an end to self-sufficiency. Want is 
 not localized when, as Henry George would put it, "sheep 
 
Population and the Supply of Labor 400 
 
 killed in Australia are eaten fresh in England, and the 
 order given by the London banker in the afternoon is 
 executed in San Francisco in the morning of the same day." 
 Were people forced to feed from the soil they occupy, a 
 city, as London, would forthwith perish. But as individ- 
 uals employed in their several tasks provide each the need 
 of others, so, through the art of trade, locaHties and na- 
 tions depend upon and serve one another. With money 
 "I can even lay the fertility of both Indies and of the 
 farthest corners of the earth under contribution to supply 
 my personal wants." (F. Bowen.) 
 
 Transporting facilities will distribute not only products 
 but also population; they carry people to the food as well 
 as carry food to the people. If marked inequality arises 
 between places, the localities in need will either import 
 necessities from the lands having a surplus, or a portion of 
 the people will emigrate. This tendency to equalize the 
 conditions of men is world-wide, and it makes the popula- 
 tion problem a world problem. 
 
 9. Views of the Seventeenth and Eighteenth Centuries 
 Favorable to the Increase of Numbers. — Prior to the 
 famous contribution of Malthus at the beginning of the 
 last century, public opinion approved every increase of 
 population. The Englishman, Joshua Gee, writing in 1729, 
 said: "Niunbers of people have always been esteemed the 
 riches of a state." The first sentence in Goldsmith's 
 Vicar of Wakefield reads: "I was ever of opinion that 
 the honest man who married and brought up a large family 
 did more service than he who continued single and only 
 talked of population." In his justly famous essays of 
 1752 David Hume, after discoursing upon the unproduc- 
 tiveness of lawyers and physicians, declared the doctrine 
 
410 Introduction to Economics 
 
 that happiness and populousness are necessary attendants. 
 William Pitt's speech of 1796 declared that those who 
 rear children enrich their country; Samuel Whitebread 
 replied to Pitt proposing a liberal premium for the encour- 
 agement of large families.' 
 
 10. The Attitude in New Countries. — In new and par- 
 tially settled countries public opinion will give sanction to 
 a rapid multipUcation of numbers, for the vast potential 
 power of idle resources only awaits the human hand. A 
 golden situation without labor to exploit it makes a de- 
 mand for population. As between the number of people 
 and the supply of natural resources, maladjustments take 
 two forms: in an old and overpopulated country, as Italy, 
 labor is the long factor, while nature's bounty is the short 
 factor; in a new country, as Canada, labor is the short 
 factor and resources the long. 
 
 The first of these conditions gives rise to a pessimistic 
 view which regards additional numbers as a cause of lower 
 wages and a multiplication of mouths to be fed. The 
 second type of maladjustment gives rise to an optimistic 
 view which sees in additional numbers a cause of higher 
 wages and a multipUcation of hands to do work. 
 
 11. The Limit to this Progress. — A pioneer colony dis- 
 embarking in America may be faced with the alternatives 
 of starving to death or of making their return to the over- 
 populated land from which they came. Nature yields her 
 bounties under resistance and where the human element is 
 too feeble few provisions may be had. Let the numbers 
 of people multiply into the thousands, and labor will ac- 
 quire sufficient power partially to overcome this resistance. 
 
 • See Edwin Cannan's, Theories of Production and Distribution (second 
 edition), 1903, pp. 124-125. 
 
Population and the Supply of Labor 411 
 
 Let these numbers increase to a hundred million, and na- 
 ture's resistance succumbs to the power of man. The feat 
 of controlling the vast resources of America by the human 
 will has made this the richest of all nations. The march 
 of human progress is from the control of nature over man 
 to the control of man over nature. 
 
 But this progress is not without limitation; its final limit 
 is the point of best adjustment between the numbers of 
 people and the amount of resources. Every increase in 
 numbers up to this point means an increase of the average 
 per capita income, and every increase of population beyond 
 this point will decrease the average per capita income. 
 Up to this point there is a demand for more people. 
 
 12. Why Some Competitors Favor a Large Population. 
 — Competition is based upon self-interest, and it is to the 
 interest of our entrepreneurs to produce goods at the least 
 expense. If we would compete under favorable condi- 
 tions with Europeans in the open markets we must pro- 
 duce equally as cheap. If the manufacturers of Great 
 Britain produce cotton cloth at a lower cost than the 
 American factories, we could not expect to undersell and 
 capture their South American market for this product. 
 
 A primary cost in producing is the wages paid for labor, 
 and it is to the employer's interest that this cost be low- 
 ered. Cheap labor is the entrepreneur's plea; his self- 
 interest adapts him to the false view that a mass of half- 
 paid workers would result in industrial advance and in 
 national prosperity. 
 
 As is well known, this view of the entrepreneur has been 
 most efl&cacious in maintaining the open-door policy of 
 immigration in the United States. By precisely the same 
 view they would welcome large families to augment the 
 
412 Introduction to Economics 
 
 supply of cheap labor. It has been well said that, "foxes 
 approve large families among rabbits." 
 
 13. The Attitude in Different Forms of Government.— 
 
 Monarchies put first the augmentation of the power of 
 rulers. "It is I who am the state," is the theory of an 
 autocrat, and in obedience to that theory the land and its 
 people are made subservient. In democracies the power 
 resides in individuals who see to it that the welfare of per- 
 sons comes to the fore. Self-interest is at liberty to exert 
 itself in behalf of a better distribution of wealth. And the 
 interest of first magnitude is per capita income rather than 
 aggregate national wealth. Where the welfare of individ- 
 uals is of first importance, self-interest operates against the 
 pressure of over-numbers long before the senses revolt in 
 disgust or pinch in hunger. In monarchies the self-interest 
 of persons is subordinated to the power of the state. The 
 ruling class is content to stand upon a substratum of 
 general poverty if only a vast aggregate wealth is at its 
 disposal. Rulers seek aggrandizement in the multiplica- 
 tion of the people, for their policy is imperialistic and their 
 autocratic power seeks extension by the force of arms. 
 Whence large armies but from the people ? Hence the de- 
 sire for a large population. The aggrandizement of a po- 
 tentate is found in the multitudinous misery of his subjects, 
 but the aggrandizement of the people is found in happy 
 fewness where prevails the highest average in the ordering 
 and furnishing of individual lives. The first scientific 
 study of population was made by Thomas R. Malthus. 
 
 14. Environment of Thomas Robert Malthus. — Malthus 
 was an unmarried English clergyman in a small country 
 parish when, at the age of thirty-two, he published his first 
 study (1798) on the population problem. At that time 
 
Population, and the Supply of Labor 413 
 
 the people had begun to react against the extravagant 
 desire for a large population. Reaction in France was in- 
 tensified by the cynical selfishness with which the court 
 and its adherents sacrificed the well-being of the people for 
 the sake of their own luxury and military glory. The feel- 
 ing became general that, whether an inordinate increase 
 in numbers strengthened the state or not, it occasioned 
 untold misery. It was insisted that the rulers of the state 
 had no right to subordinate individual happiness to the 
 aggrandizement of the state. 
 
 While Malthus was furthering his studies the social con- 
 ditions of England, already gloomy, were becoming more 
 unendurable. At that stage of industrial improvement, 
 the population became so large as to strain seriously the 
 productive facilities for support. An astonishing series of 
 bad crops came at the very time when England was cut off 
 from the markets of Europe from which she was accus- 
 tomed to import quantities of grain. Meanwhile an ex- 
 hausting war, a series of ruinous poor laws, the introduc- 
 tion of new inventions that threw artisans out of employ- 
 ment, were but aiding the evil forces of the time. The 
 masses of England were reduced to the greatest misery 
 recorded in the social history of that country. 
 
 While the seasons were such as to stunt the crops, the 
 principle of resistance was in full force, still further limiting 
 the yield of the intensively cultivated land. As if to add 
 to the misery, the birth-rate seemed, without limit, to add 
 to the overpeopled land. The price of wheat jumped from 
 37s. id. in 1790 to 83J. iTci. in 1810. 
 
 These were the conditions when Malthus, by nature a 
 well-meaning pessimist, presented his theory of popula- 
 tion, and that, too, with a darkness of prospect ending in 
 evil, starvation, and death. 
 
414 Introduction to Economics 
 
 15. The Malthusian theory is, in brief, that population 
 has a tendency to multiply faster than subsistence. The 
 former perpetually outstrips the latter, with the conse- 
 quence that everywhere arises the disease of overpopula- 
 tion, with its accompaniments — poverty, starvation, and 
 death. The author mentioned two checks to this tendency 
 — "the preventive and the positive." The positive check 
 kills after birth; the preventive check prevents birth. 
 
 Malthus, wishing to put a sharp edge on this argument, 
 reduces it to a mathematical nicety. People understand 
 figures better than abstract statements, and the notion 
 that "figures won't lie" gives to the unreal an appearance 
 of truth. His memorable formula shows the frightful 
 rapidity with which population grows when allowed to 
 progress unhindered, and the relative slowness in the 
 growth of the means of subsistence. Population is shown 
 to follow a geometrical series, doubling every twenty-five 
 years, whereas the means of subsistence increase in arith- 
 metical progression, each term also corresponding to a 
 period of twenty-five years. Thus the increase: 
 
 Population i 2 4 8 16 32 64 128 256 512 
 
 Necessities 1234 5 6 7 8 9 10 
 
 In the table given the lapse of only 225 years is long 
 enough for the population figure to grow to over 51 times 
 the means of subsistence. Henry George has been patient 
 enough to follow this geometrical series for 2,150 years. 
 He goes to China for the solitary example of a family that 
 has survived a great lapse of time. The descendants of 
 Confucius still exist there, forming, in fact, the only 
 hereditary aristocracy. According to the calculation the 
 members of that family, 2,150 years after Confucius, 
 
Population and the Supply of Labor 415 
 
 should number 859,559,193,106,709,670,198,710,528 souls. 
 Though the maxims of "the Most Holy Ancient Teacher" 
 inculcate anything but the prudential check, yet there is 
 a discrepancy between a Malthusian tendency and the 
 actual figures for that family of only 22,000. 
 
 16, The Persistence of the Doctrine. — ^How brief is the 
 history of America in point of time, yet its population has 
 passed the 100,000,000 mark. The frontier is no more; 
 the occupation of land free from charge has long since 
 become history; already the superior resources are har- 
 nessed, and the ill effects of over-numbers is taking the 
 form of diminishing real wages. Note the facts: In 1800 
 the population of this country was 5,000,000. Doubling 
 four times (4 periods of 25 years each = 100) gives us 
 a population of 80,000,000, which is actually the figure for 
 1905, only five years after the end of the century. Go to 
 the lower East Side of New York, or to the impoverished 
 sections of the great cities, and you see the buildings and 
 streets teeming with pallid children who bear the marks of 
 poverty. Contemplate an overcrowded land, as is Sicily, 
 where "For days or months the peasants live on almost 
 any sort of green thing they find in the fields, frequently 
 eating it raw. Just like cattle." 
 
 Do not these examples seem to support the dismal 
 theory, to give some basis of fact for the tendency of popu- 
 lation to outstrip the means of subsistence, and to show 
 that the equilibriimi of numbers with resources is brought 
 about by misery, plague, and famine, which raise the death- 
 rate to equality with the birth-rate? I simply put the 
 question, deferring its answer, for the one purpose of this 
 paragraph is to account for the persistency of this much- 
 hackneyed doetrine. 
 
416 Introduction to Economics 
 
 I venture the belief, furthermore, that many put faith 
 in Malthusianism for no other reason than the volume of 
 criticism hurled against it, now for over a century. Is 
 not the much-continued smoke an evidence of fire? The 
 stinging sarcasm and unbridled abuse of half-baked scholars 
 must disgust the thoughtful, for what argument is there in 
 abuse ? Derision has served to advertise the doctrine, and 
 to make it famous rather than obscure. 
 
 Malthus, moreover, made his argument adaptable to a 
 variety of views. All know that restraint there must be 
 in some form, and if the misery-vice-death type of restraint 
 is distasteful, you may be an equally devoted Malthusian 
 by adhering to the moral or preventive type. Like Colonel 
 Bryan's example of the stone fence in Nebraska, it is as 
 tall as it is broad, and must therefore be as high after it is 
 overthrown as before. 
 
 Many theories of population have contested for place 
 and attention, but these have proved no more than flash- 
 lights which for a time dazzle and blind us to the old doc- 
 trine to which sooner or later we are forced to return. 
 But this we must bear in mind, that many modifying con- 
 ditions have arisen which Malthus could not foresee. No 
 one accepts the doctrine in unmodified form. Thoughtful 
 students now confine their attention almost wholly to the 
 preventive check as among advanced societies. Among 
 backward peoples the positive check works in full force. 
 
 17. Rates of Birth and Death. — By the birth-rate we 
 mean the number of births per 1,000 inhabitants per year. 
 If the population of Blank City is 100,000 and the number 
 of births there is 3,600 a year, the birth rate is 36 per 1,000. 
 Statisticians sometimes speak of the refined birth-rate, 
 meaning thereby the number of births a year per 1,009 
 
Population and the Supply of Labor 417 
 
 women of child-bearing age, from fifteen to fifty. The 
 greater the per cent of the population which are of child- 
 bearing age, the greater, other things the same, will be 
 the birth-rate. This explains why in some communities 
 the birth-rate is so large among immigrants as compared 
 with the native population. A large portion of the natives 
 are either children or elderly persons, while the immigrants, 
 especially the newly arrived, are wage-earners at a pro- 
 creative period of life. 
 
 By the death-rate we mean the number of deaths per 
 one thousand inhabitants per year. It is computed and 
 expressed in the same manner as the birth-rate. 
 
 The difference between the birth-rate and the death-rate 
 for any one year represents the rate of increase, or of de- 
 crease, of population for that year. If the birth-rate is 
 36 per thousand, and the death-rate 16 per thousand, the 
 increase of population is 20 per thousand, or 2 per cent. 
 
 The tendency of numbers to increase depends upon two 
 things — ^propagation, preservation. Where the tendency to 
 propagate is greatest, there may be, however, no increase 
 in numbers. In backward societies record has been made 
 of tribes in which it is normal that women forty years of 
 age have given birth to twenty children. So low is the 
 preservation of numbers, however, that the population is 
 stationary in these tribes. 
 
 To preserve a child to manhood the parent must feel 
 sufl&cient love for it to provide care and the necessities of 
 life. Races have different tendencies to cherish and pro- 
 vide for their offspring. Premature death from disease, 
 or want of parental care, or the niggardliness of nature to 
 provide sufficient means, may tend as strongly to diminish 
 population as does procreation to increase it. Inquiry into 
 
418 Introduction to Economics 
 
 the nature and causes of increase must give equal regard 
 to the forces preservative of population as to propagation. 
 
 i8. Malthus's Emphasis on the Positive Check. — Since 
 the writings of Darwin, who was influenced somewhat by 
 Malthus, the thought of scholars has turned to the theory 
 of development by natural selection or survival of the fit- 
 test. In consequence much has been read into Malthus 
 that was not a part of his own thought. 
 
 At the time he received his education the laws of physi- 
 cal science and the methods of thought common to the 
 exact sciences dominated thought and set the way of 
 thinking for the social sciences. 
 
 His thought was on a material basis; the earth is limited 
 in its power to supply physical means of subsistence, popu- 
 lation can progress to the extent of this limit and there it 
 must stop. By nature man's procreation is controlled, by 
 nature the food supply is controlled, nature's consequence 
 is through misery and vice to place a definite physical 
 limitation which man cannot control and beyond which 
 he cannot go. Consider Malthus's later work on political 
 economy and this leaves no room for doubt; it shows be- 
 yond question that his thought was tuned to and ruled 
 by the laws of exact science dealing with material things. 
 Rent due to physical differences ia soil and the natural 
 law of diminishing returns; wages due to the procreative 
 instincts and to the niggardliness of nature; interest fixed 
 by the natural workings of self-interest — these were chief 
 tenets of his. Malthus brought in enough of volitional 
 control to save his doctrine from being characterized as 
 predestination in its boldest form. The positive check was 
 his main interest and the theory of his treatise was built 
 around it. 
 
Population and the Supply of Labor 419 
 
 IQ. Progress from Pressure. — Closely related to these 
 checks is the dynamic influence which pressure seems to 
 bring about. The poverty engendered by pressure acts 
 as a powerful stimulus in the development of industry, 
 science, and invention. It took the pressure of war to 
 bring out numerous devices previously unknown, to per- 
 fect forms of organization and strategic moves with power 
 to overcome the force of the enemy. Man must also in- 
 vent, reorganize, and marshal anew his forces in his time- 
 enduring contest with the niggardliness of nature. 
 
 Malthus, imwilUng to give more credit than that of an 
 arithmetical progression to human ingenuity, looked upon 
 increasing numbers as deadening to progress. Were Mal- 
 thus now alive he would doubtless admit that the experi- 
 ence of a century shows supplies to have outgrown the 
 number of people. But, he would admonish us, experience 
 is often a deceptive teacher; the past century must be 
 regarded as a period of readjustment and of the occupa- 
 tion of new lands. The end of this period of prosperity 
 is rapidly approaching. 
 
 20. President Hadley's Statement.^— "This pressure of 
 population upon subsistence serves in no slight degree as a 
 stimulus to improvement in the arts. It was this which 
 forced hunting tribes to practise the domestication of ani- 
 mals. It was this which forced wandering pastoral tribes 
 to settle down and apply themselves to the less exciting 
 and agreeable arts of agriculture. It is this which has 
 done much to accelerate the change from the military 
 organization of society to the modern system of free labor. 
 The attempt to provide for all children that might be born 
 would, in the opinion of the Malthusian, not only prove 
 • Economics, pp. 45-46. 
 
420 Introduction to Economics 
 
 futile from the difficulty of finding food enough to go 
 around, but it would also, first, take away the stimulus 
 under which progress had been made; second, put a stop 
 to the natural selection of the stronger individuals and 
 families and reduce the race to a dead level; third, impair 
 the capital of the community through increased consump- 
 tion and diminished production so much that it could not 
 maintain the stage of civilization which it had reached, 
 and that its progress must give place to retrogression. 
 The Malthusian therefore argues that society cannot un- 
 dertake to relieve its members from the pressure and from 
 the evils of poverty unless they will consent to adopt pre- 
 ventive checks to population." 
 
 21. Doctrines Logically Following Malthusianism. — To- 
 day there is no fear of universal misery, although our sys- 
 tem of property may threaten the very existence of numer- 
 ous famihes. But is it not the business of society to pro- 
 vide for its members? On the whole poverty is decreas- 
 ing, and many who suffer want have but themselves to 
 blame. None the less, the present system is criticised for 
 falling short of its duty; when any man is willing to work, 
 it is said, he should not be denied the privilege. Malthus 
 made sharp criticism of this idea on the ground that society 
 could not undertake to furnish employment, and that 
 poverty grew out of the pressure of population upon the 
 means of subsistence. He thought it no indictment against 
 society that the struggle for existence should reduce some 
 to poverty. 
 
 Would Malthus sanction the distribution of alms among 
 the poor ? The question of charity has always been a per- 
 plexing one; there are many who can produce large for- 
 tunes, but surprisingly few who can give wisely to charity. 
 
Population and the Supply of Labor 421 
 
 Right or wrong, Malthus could have but one conclusion — 
 to give charity adds to the evil of overpopulation. In 
 criticism of an English poor law, he said: "Canute, when 
 he commanded the waves not to wet his princely foot, did 
 not in reality assume a greater power over the laws of 
 nature." He thought that public charity, with particular 
 reference to England's system of poorhouses, would en- 
 courage child-bearing. "The poor are themselves the 
 cause of their own poverty," but if the state assumes the 
 burden of this poverty there can be no limit to overpopu- 
 lation short of reducing the whole people to the minimum 
 of subsistence. 
 
 The population theory made a protectionist of Malthus. 
 A system of international trade bringing into England an 
 abundance of necessities only augments the ill effects of 
 ovemumbers. Let England limit her population in ac- 
 cordance with the provisioning of her own soil, he argues, 
 and her difficulties will be less when international wars 
 cut her off from the markets of the world. 
 
 This theory has stood in the way of social relief, has 
 defended the capitalist, and shifted the responsibihty for 
 the maldistribution of wealth from human institutions to 
 natural laws. To feed the hungry and clothe the naked 
 is to run counter to the decree of Providence, for let the 
 capitalist divide profits with the poor and no relief is given. 
 Numbers multiply in proportion to charity given, only to 
 press again upon the means of subsistence. Charity can 
 only impoverish the giver, and it cannot aid the pauper; 
 if it tends to equality, it is an equality of common mis- 
 ery. 
 
 22. The Simplicity of Malthus's Basic Assumption. — In 
 many respects there is close similarity between the writings 
 
422 Introduction to Economics 
 
 of Malthus and Darwin. The struggle for existence is, 
 said Darwin himself, Malthusianism applied to the whole 
 animal and vegetable world. Despite the similarity of sub- 
 ject matter and lines of treatment, there was a vast differ- 
 ence in method between these famous scholars. Malthus 
 reduced his problem to an unreal simplicity; he reasoned 
 concerning man as he would concerning an AustraKan 
 rabbit. He thought of either as having a few defi- 
 nitely fixed attributes unalterable by circumstances. 
 Darwin's was a doctrine of adaptability. It was his 
 thought that animals change characteristics in conformity 
 with their environment, and that "reasoning man excels 
 in adaptability." Briefly put, the view of Malthus was 
 static, that of Darwin dynamic. 
 
 How did Malthus apply his simple notion of human 
 nature to the question of marriage? He was willing for 
 the rich to marry young, for in aU respects his was a rich 
 man's doctrine that made a public benefaction of the greed 
 and self-interest of the upper class. But he admonished 
 the poor to delay marriage, for he regarded early marriage 
 and large families as convertible terms. His purpose was 
 to shorten the procreative period of married life. 
 
 His characteristic error lay in the assumption that the 
 procreative instincts of animals and men are essentially 
 the same. He treated too lightly the moral and intellec- 
 tual differences, but, most important, he virtually ignored 
 the distinction between sexual and reproductive instincts. 
 The two are in no wise similar and are governed by dif- 
 ferent motives. Gide well says: "Only to the first can 
 be attributed that character of irresponsibihty which he 
 wrongly attributes to the second." They differ, indeed, 
 as animal instincts differ from the social and rehgious. 
 
Population and the Supply of Labor 423 
 
 23. Private Property and Family Development. — Private 
 ownership tends to divide society into classes. This ten- 
 dency calls for a restatement of certain outgrowths from 
 private property. When a system of property arose to 
 make men secure in their possession, the result was most 
 beneficial yet an apparent violation of justice. It led to 
 domination rather than extinction among successful fight- 
 ers in an early age. If there were no right to hold in pos- 
 session, conquerors would kill the conquered, whereas pri- 
 vate property would preserve them as slaves. Security of 
 tenure also stimulates the saving as well as the creation of 
 wealth. 
 
 Private property divides families from one another as if 
 they were in separate compartments. It places the house 
 of have beside that of want, and enables Jones to rear his 
 family in luxury while Smith, who lives within a stone's 
 throw, must for want of means rear his family in indigence. 
 There is no "keeping up with the Joneses" on the part of 
 Smith, for the former has been more prudent than the lat- 
 ter. This individualizes the problem of overpopulation 
 by bringing it within the discretion of each householder. 
 It enables a progressive advance of the members of a 
 family from generation to generation, and again it permits 
 the poverty of a family to deepen from generation to gen- 
 eration. 
 
 But what of family progress were the burdens of poverty 
 equally shared? In a social state the burdens of the im- 
 provident would drag all down to a common state of pov- 
 erty. Private property then gives free play to the process 
 of natural selection of the types most fit to survive. 
 
 "At this point, it is interesting to note one of the great 
 economic paradoxes. They who call themselves socialists, 
 
424 Introduction to Economics 
 
 and who might therefore be supposed to look at things 
 from the standpoint of the group or the state, are the very 
 people 'who are least inclined to do anything of the kind. 
 To them the group or the state is only an agency through 
 which individual rights and advantages are to be obtained. 
 The kind of reasoning which necessarily follows from the 
 conception of the group as an entity having interests more 
 permanent and greater than those of individuals is pecu- 
 liarly abhorrent to them. Such an idea as that the ad- 
 vantage should be given to the strong rather than the 
 weak, in order that the herd, group, or state may become 
 eventually a hetd, group, or state of strong members, is 
 diametrically opposed to all their ideals and ways of 
 thinking." i 
 
 24. The Influence of Freedom and Public Education. — 
 Common property implies a common burden, and what- 
 ever may be one's endeavor to act with prudence, he can- 
 not emancipate himself from the burden of poverty caused 
 by the imprudence of others. Private property tends 
 rather to happy fewness; Jones is responsible both for the 
 size of his family and for its provisioning. This gives mo- 
 tives, on the one hand, to have the family smaller, and, 
 on the other, to produce wealth for its subsistence and to 
 save wealth for its maintenance. 
 
 But men are imitative, and the craving to enjoy the 
 status of the well-to-do affects the masses. In a state of 
 private property and freedom, such as ours, this craving 
 for the luxuries of the rich shows itself in an economy of off- 
 spring. As Professor E. A. Ross says:^ "The little stranger 
 
 ' Thomas N. Carver, Essays in Social Justice, p. 321. 
 ^ Western Civilization and the Birth-Rate. Publications of the Ameri- 
 can Economic Association (3d series, vol. VIII, No. i) Feb, 1907, pp. 80-81. 
 
Population and the Supply of Labor 425 
 
 trenches on raiment, bric-a-brac, upholstery, travel, enter- 
 tainment. Here the decencies, there the comforts, yonder 
 the refinements and vanities of life compete with the pos- 
 sible child and bar it from existence." Our state knows 
 no durable system of caste; "wide stairways are opened 
 between the social levels, and men are exhorted to climb 
 if they can." If children impede the climbers, prudence 
 will take care that children are not born. From this I 
 conclude that our free educational system is now a factor, 
 and is destined to become a most powerful factor, in the 
 prevention of families burdensomely large among the poor. 
 
 25. Conclusion on the Limit of Numbers. — ^The preven- 
 tive and positive checks both operate, the latter among 
 backward people and the former among the more cultured. 
 In an advanced country, as France, where the population 
 has been almost stationary for years, volitional control 
 regulates numbers, whereas among the Eskimos, where 
 " the girl is married in her teens and carries a baby on her 
 back each summer," the population is stationary wholly 
 because of the positive check. 
 
 We have found that in a state of free labor and private 
 property the responsibilities of rearing children are indi- 
 vidualized; they fall directly upon the parent and only 
 indirectly upon society. We have found that with the 
 spread of knowledge the reproductive instinct tends to 
 divorce itself from the sexual instinct. These facts reduce 
 the problem to its simplest form. Each parent, realizing 
 the personal responsibility involved, and apart from sexual 
 instinct, answers this question— how many children do I 
 want? 
 
 Three considerations enter into his answer — his plane of 
 living, his standard of living, and the devotion he would 
 
426 Introduction to Economics 
 
 feel for the offspring. These influences vary from person 
 to person. 
 
 The plane of living is his actual possession and enjoy- 
 ment of goods — his actual level of subsistence and comfort. 
 It is an objective fact. The standard of living is a subjec- 
 tive fact — a fact of thought, desire, and purpose. 
 
 If one's plane of living is above his standard of living, 
 children are more likely to be welcomed. Children, too, 
 are welcome if one is optimistic regarding the future of his 
 plane of Hving. An intense love for children serves to 
 cause a willingness to lower the plane below the standard 
 of living. 
 
 In a larger sense the apportionment between the num- 
 bers of people and the productive resources must affect 
 the individual planes and standards of living. If the 
 average standard of living is low, the adjustment of num- 
 bers to resources will be fixed at a point where the plane of 
 living will be low. The growth of numbers will be arrested 
 where the proportionality between the numbers of people 
 and the resources come into conformity with the standard 
 of living. Numbers will increase as the standard of living 
 is lowered, and vice versa. 
 
 I am aware that a full discussion of the supply of 
 labor would carry us beyond a mere study of the increase 
 of numbers; the strength, knowledge, inventiveness, and 
 character of people bear upon the productive capacity of 
 labor. Further than the slight consideration already given 
 these important matters, however, the scope of this book 
 will not permit us to go. 
 
 26. Exercises. — i. Real wages are higher in Europe than 
 in China, and higher in the United States than in Europe. 
 
Population and the Supply of Labor 427 
 
 Assume that you were asked to make an investigation to 
 explain the differences between the real wages in these 
 countries. What questions would you ask relative to the 
 environment of labor in the different countries? What 
 questions would you ask relative to the laborers themselves 
 in the different countries ? What questions would you ask 
 relative to the political and economic institutions in the 
 different countries? 
 
 2. During the World War doctors of medicine were so 
 scarce that their services commanded a very high price, 
 yet the supply of doctors could not be readily increased. 
 Might there have been a similar situation with respect to 
 painters? plumbers? ditch-diggers? 
 
 3. At a given time are artisans of equal skill paid the 
 same wages in the different industries ? Why or why not ? 
 Is the tendency in the long run for the wages of equally 
 skilled artisans in different industries to be the same? 
 Why or why not ? 
 
 4. Point out some peculiarities relative to the supply of 
 labor. (Paragraphs 5-6.) 
 
 5. How does the attitude in old countries relative to the 
 increase in the population differ from that held in new 
 countries? Explain the cause of this difference. 
 
 6. Write a brief account of the life of T. R. Malthus. 
 
 7. What was the Malthusian theory of population? 
 Make an argument either for or against this theory. 
 
 8. What bearing does the institution of private property 
 have upon the number of births? 
 
 9. With the spread of knowledge the reproductive in- 
 stinct tends to divorce itself from the sexual instinct. One 
 writer says that the effect of this truth is "a tendency 
 toward the survival of the unfittest." What does he 
 mean? Is he correct? 
 
 10. What is the limit to the number of rabbits in Aus- 
 tralia ? Do the same influences limit the number of people ? 
 
 11. If the maximum human birth-rate were constantly 
 maintained, what would be the effect on the average dura- 
 tion of life? (Fetter.) 
 
428 
 
 Introduction to Economics 
 
 12. The population of Blank City is 
 
 The num- 
 , thus the 
 
 ber of births in that city each week is 
 
 number of births a year is So we say the birth- 
 rate is . The number of deaths each week is , 
 
 So we say 
 less 
 
 thus the number of deaths a year is 
 
 the death-rate is . The birth-rate is 
 
 than 
 
 the death-rate by per cent. 
 
 the population of that city is 
 
 larger 
 decrease 
 
 The annual Y'^^^^"''^ of 
 mcrease 
 
 . Fill in the blank 
 
 spaces and cancel such words as may not be necessary. 
 
 13. "From the following and similar figures a German 
 statistician formulated what is called 'Engel's law,' as to 
 the proportion of the expenditures going for food." 
 
 PER CENT SPENT BY FAMILIES IN SAXONY 
 
 Laboring 
 
 Middle Class 
 
 Well-to-do 
 
 Food 
 
 Clothing 
 
 Shelter 
 
 Fire and light 
 
 Education 
 
 Public safety. 
 
 Health 
 
 Labor 
 
 62 
 16 I 
 12 
 
 s] 
 
 2 
 
 I 
 
 I I 
 I 
 
 95 
 
 IIow would you formulate the "law"? 
 
CHAPTER XIX' 
 LABOR AND MACHINERY 
 
 I. Labor defined. 2. Labor, direct and indirect. 3. The demand for 
 labor. 4. Variety of demand. 5. The "make-work" fallacy. 6. Broken- 
 pane philosophy. 7. "Good for the trade." 8. The "lump-of -labor" fal- 
 lacy. 9. Question raised by the introduction of machinery. 10. The la- 
 borer's view-point. 11. These hardships on the decline. 12. Machinery 
 and market demands. 13. Machinery improves the laborer. 14. Exercises. 
 
 I. Labor Defined. — It seems waste space to define labor, 
 for who does not know the meaning of this common term ? 
 Common terms are deceptive, however, and lead to diffi- 
 culty when exposed to examination. "Much philosophy 
 is wanted for the correct observation of things which are 
 before our eyes." The actor, the musician, and the ball- 
 player — do these labor or play? They both play and 
 labor; enjoyable labor is play and remunerative play is 
 labor. 
 
 Again, one may labor for another receiving a contract 
 wage, or he may drive his own team, till his own soil, keep 
 his own shop, thus laboring for himself for such income 
 as he may acquire. 
 
 Furthermore, labor may take tangible form when the 
 builder constructs a house, or the product may be intangi- 
 ble as the service of the physician or the lawyer. 
 
 What is more, disagreeable toil does not define labor. 
 To pile stones, then to no purpose repile them, would be 
 toil, to be sure, but we should classify the toiler in another 
 category than that of laborer. Nor is pleasure the central 
 
 429 
 
430 Introduction to Economics 
 
 idea in the definition of labor. Because idleness is a dis- 
 agreeable prick to the conscience, it is but natural to find 
 pleasure in fruitful labor. There is pleasure without labor, 
 however, in amusement and entertainment. 
 
 If neither pleasure nor pain can serve, may purpose 
 serve as the central idea in labor? The fanner's purpose 
 is good and the rogue's purpose is bad, and the fool's pur- 
 pose is misdirected; no one finds fault with the dreamer's 
 purpose, but is he laboring who squanders time and relent- 
 less toil in the hopeless task of securing a perpetual mo- 
 tion ? Not as we believe. 
 
 I Is reward a safe criterion by which to judge what is and 
 what is not labor? The tourist climbs the mountain for 
 pleasure and the guide for pay. The two perform the 
 same act, but for different rewards; it is newly found joy 
 for the one and monotonous toil for the other. Certainly 
 the guide labors, but the tourist is a consumer spending 
 money for enjoyment. Should one toil diligently for a 
 dishonest pa)miaster there would be labor, but no reward. 
 A turn in business may wipe out the fruits of long labor. 
 On the contrary, fortune may favor the idle with unearned 
 rewards. The nature of reward helps little in the defini- 
 tion of labor. These remarks suggest difi&culty. 
 
 Labor is productive and is classified among productive 
 agencies. Production we have found to be the creation 
 of desirabilities and utilities. I shall define labor as human 
 effort, mental or physical, directed toward the creation of de- 
 sirabilities and utilities. This definition avoids the errors 
 above criticised, and places labor in the category of pro- 
 ductive agencies. 
 
 2. Labor, Direct and Indirect. — In the principles of cost- 
 keeping the labor element of cost is divided into two classes. 
 
Labor and Machinery 431 
 
 All work done directly upon the product and recognizable 
 as pertaining only to the operations upon it is called direct 
 labor. But there is much facilitating work not directly 
 applied to any particular product. Thus in factories the 
 fireman, the engineer, the oiler, the crane men, errand 
 boys, office help, etc., are employed in activities that are 
 general and not specific, or the time that they are em- 
 ployed on any one job is so short that intelligent distri- 
 bution of their labor is uncertain. Such is called indirect 
 labor. 
 
 3. The Demand for Labor. — The total demand for labor, 
 in a broad sense, consists of the available resources which 
 would lie idle apart from human aid. It little matters 
 how rich the mine, how fertile the soil, how luxurious the 
 grass, how invigorating the climate, how abundant the 
 coal, or plentiful the iron, or how manifold the resources 
 of nature, human labor must co-operate before wealth is 
 produced. If resources are more limited in Nevada than 
 in Pennsylvania, the population will be smaller in the 
 former because the demand for labor is larger in the latter. 
 Labor is one of the necessary agents of production and 
 where other such agents abound there labor is in demand. 
 
 Men hire labor for what it produces, as they borrow 
 money for what it buys; the motive of the employer is in 
 the product of the labor. If you demand a good, you in- 
 directly employ labor, for the good is the product of labor. 
 
 Labor begets labor, because the product of one's labor 
 is the means of employing more labor. When all produce 
 for the market, each buys goods produced by another and 
 pays for them, directly or indirectly, with his own prod- 
 ucts. A product for sale is a demand for another product, 
 and hence a demand for labor. Every producer finds the 
 
432 Introduction to Economics 
 
 most extensive vent for his wares in those places where 
 most wealth is produced. 
 
 Could the laborer see that each additional product is 
 equally as efifective as is the employer's pocketbook in 
 creating a demand for labor, he would once for all aban- 
 don the crude philosophy which teaches that a "limited 
 output increases the demand for labor." The laborer is a 
 merchant bargaining for the sale of his own service. Com- 
 pare a merchant's opportunities in a rich town with those 
 of the merchant in a community of indolence and apathy. 
 Sales are few and at a small price when the customers have 
 nothing to pay. 
 
 4. Variety of Demand. — ^The demand for labor is co- 
 extensive with the demand for goods and services. When 
 the market demand for goods is elastic, so also is the market 
 demand for labor. For the labor that produces staples, 
 whose volume of sale varies little with price movements, 
 the condition of employment is comparatively steady. 
 Labor is uncertain in tenure and wages fluctuate more 
 when the sale of the product depends upon a varying de- 
 mand. Labor is called upon to readjust itseK when 
 fashions change, when bicycles give way to automobiles, 
 when temperance closes the distilleries and breweries, when 
 war gives rise to munition-plants, when men go to fight 
 and women go to work. 
 
 Fitting workmen into the industrial system and fitting 
 the industrial system to workmen and these to a changing 
 demand is a grave problem. Crises of unemployment 
 arise, and with these agitators become the mouthpiece of 
 the discontented; industrial strategy fails, thus putting the 
 conservative to their wits' end, while revolutionary social- 
 ists take the stump in behalf of "justice and a decent wage." 
 
Labor and Machinery 433 
 
 When in war the enemy makes a surprise attack at one 
 point, the need for additional troops is immediate, but it 
 takes time to supply these from a distant field; the battle 
 is lost because the supply is tardy and the need is quick. 
 So also an abrupt industrial change makes a hasty de- 
 mand for labor, but much time is required to marshal 
 workers from accustomed employments and school them 
 for the untried task. Some suffer privation and others 
 reap gain; however, the misfortunes of the oppressed 
 would rarely be, were labor adjustments concurrent with 
 demand. The uneven pace of labor and demand gives 
 rise to many problems, and not least among these is the 
 uneven pace of wages and prices. Statistics bear out this 
 reasoning; the tendency of wages is to foUow prices, but 
 a curve representing the rise of prices mounts more rapidly 
 and declines more rapidly than does the curve representing 
 the wages of labor. 
 
 5. The " Make- Work " Fallacy. — Idleness brings dis- 
 content to labor, for to deprive the workman of wages is 
 to deny him the necessities of life, to bring humiliation 
 upon himself and his family, to deaden his self-respect and 
 prepare his mind for acts of crime, rapine, and violence. 
 Rather than idle workmen with the consequent discontent, 
 revolutionary socialism, and crime, the state should pro- 
 vide work at the public expense, even if this work creates 
 no useful thing or renders no valuable service. It would 
 be better artificially to screen the skies to "make work" 
 for the candle-makers than to have these men walking the 
 streets in idleness. 
 
 This is not an argument for a make-work policy; the 
 point here is that of the two evils the make-work idea is 
 less than that of idleness. The real fallacy in the "make- 
 
434 Introduction to Economics 
 
 work" idea has never been so well expressed as by Frederic 
 Bastiat. He brings out the point in his so-called — 
 
 6. Broken-Pane Philosophy. i — "Have you ever had 
 occasion to witness the fury of the honest burgess, Jacques 
 Bonhomme, when his scapegrace son has broken a pane of 
 glass ? If you have, you cannot fail to have observed that 
 all the bystanders, were there thirty of them, lay their 
 heads together to offer the unfortunate proprietor this 
 never-failing consolation, that there is good in every mis- 
 fortune, and that such accidents give a fillip to trade. 
 Everybody must live. If no windows were broken, what 
 would become of the glaziers ? Now, this formula of con- 
 dolence contains a theory which it is proper to lay hold of 
 in this very simple case, because it is exactly the same 
 theory which unfortunately governs the greater part of 
 our economic institutions. 
 
 "Assuming that it becomes necessary to expend six 
 francs in repairing the damage, if you mean to say that the 
 accident brings in six francs to the glazier, and to that 
 extent encourages his trade, I grant it fairly and frankly, 
 and admit that you reason justly. 
 
 "The glazier arrives, does his work, pockets his money, 
 rubs his hands, and blesses the scapegrace son. That is 
 what we see. 
 
 "But if, by way of deduction, you come to conclude, as 
 is too often done, that it is a good thing to break win- 
 dows — that it makes money circulate — and that encourage- 
 ment to trade in general is the result, I am obliged to cry, 
 'Halt!' Your theory stops at what we see, and takes no 
 account of what we don't see. 
 
 " We don't see that since our burgess has been obliged 
 ' Quoted by F. A. Walker. Political Economy, pp. 321-322. 
 
Labor and Machinery 435 
 
 to spend his six francs on one thing, he can no longer spend 
 them on another. 
 
 " We don't see that if he had not this pane to replace he 
 would have replaced, for example, his shoes, which are 
 down at the heels, or have placed a new book on his shelf. 
 In short, he would have employed his six francs in a way 
 in which he cannot now employ them. Let us see, then, 
 how the account stands with trade in general. The pane 
 being broken, the glazier's trade is benefited to the extent 
 of six francs. That is what we see. 
 
 "If the pane had not been broken, the shoemaker's or 
 some other trade would have been encouraged to the 
 extent of six francs. That is what we don't see. And if we 
 take into account what we don't see, which is a negative 
 fact, as well as what we do see, which is a positive fact, we 
 shall discover that trade in general, or the aggregate of 
 national industry, has no interest, one way or other, whether 
 windows are broken or not. 
 
 "Let us see, again, how the account stands with Jacques 
 Bonhomme. On the last hypothesis, that of the pane 
 being broken, he spends six francs, and gets neither more 
 nor less than he had before, namely, the use and enjoy- 
 ment of a pane of glass. On the other hypothesis, namely, 
 that the accident had not happened, he would have 
 expended six francs on shoes, and would have had the 
 enjoyment both of the shoes and of the pane of 
 glass. 
 
 "Now as the good burgess, Jacques Bonhomme, con- 
 stitutes a fraction of society at large, we are forced to con- 
 clude that society, taken in the aggregate, and after all 
 accounts of labor and enjoyment have been squared, has 
 lost the value of the pane which has been broken." 
 
436 Introduction to Economics 
 
 7. " Good for the Trade." — The make-work idea ap- 
 pears in many forms: "Blessed is that country where the 
 rich are extravagant and the poor are economical. A 
 rich spendthrift is a blessing and a rich miser is a curse; 
 extravagance is a splendid form of charity. Let the rich 
 spend; let them build; let them give work to their fellow- 
 men." (R. G. IngersoU.) 
 
 Miss Giulia Morosini, daughter of the Italian banker, is 
 reported to have spent $250,000 a year on dress. "One 
 thousand dollars," she said, "is a modest price to pay for 
 a gown, and I have many that cost almost five thousand." 
 She was "economical" in shoes, using only forty pairs a 
 year at an average cost of $50 each, and so with gloves 
 and handkerchiefs, which cost only $1,000 each a year. 
 "For lingerie my bill last year amounted to $15,000. 
 Stockings at $10 a pair and corsets at $50 I do not con- 
 sider extravagant." Upon New York's far-famed speed- 
 way she drove her "spiked" team of three horses, which 
 were valued at $30,000, while the superbly appointed 
 "turnout" cost $5,000. How justify this rank extrava- 
 gance? "It is all good for the trade," said she.^ Miss 
 Morosini, like Empress Eugenie, wore no pair of gloves 
 more than once, and helped other industries by purchas- 
 ing many silks and laces. 
 
 These extravagances are good for the trades in question. 
 They make not a greater but a less demand for labor as a 
 whole. The labor and capital used to meet these extrava- 
 gant demands are withdrawn from the production of neces- 
 sities. When necessities must compete with extravagances 
 for labor and capital there will be fewer improved farms, 
 fewer herds of cattle, fewer railroads, machine-shops, and 
 ' McCall's Magazine, April, 1909. 
 
Labor and Machinery 437 
 
 factories. When a people turns its means from the build- 
 ing up of the state's productive capacity and to the arts 
 of extravagant consumption, there will be fewer resources 
 and a diminishing demand for labor. 
 
 8. The " Lump-of-Labor " Fallacy.— The lump-of-labor 
 theory is based upon the assumption that there is a given 
 amount of work to be done; if one group of laborers does 
 this work other groups are unemployed, and if machinery 
 does the work labor goes idle. Consider the girl at the 
 typewriter. She, as the rest of us, desires limited compe- 
 tition and unlimited consumption, but her reasoning leads 
 to gross errors. She argues: a limited number of girls are 
 needed to do the t}^ewriting; if wealthy girls do this work 
 the injury is twofold— the poor are unemployed, and in- 
 come is turned from those in need only to further add to 
 the coffers of the rich. Thus the idleness of the rich is 
 regarded as a benefit conferred upon the poor. 
 
 A professor, who should know better, argued against 
 fellowships for graduate students on the ground that, "we 
 are educating too many for the profession and thereby 
 lowering our own salaries." 
 
 We are here taking the social-welfare point of view. It 
 is not overlooked that the employment of additional 
 laborers works individual hardships in numerous cases. 
 
 Even the economists of a century ago reasoned upon 
 the assiunption that "man's desires are limited by the nar- 
 row capacity of the himian stomach." They must have 
 been "lump-of-labor" theorists, for we produce only what 
 we desire and if the desire is definitely fixed so also must 
 be the work. 
 
 We now know that desires are dynamic, not fixed, that 
 the more we feed them the more rapidly they multiply 
 
438 Introduction to Economics 
 
 and grow. The greatest welfare exists where there is 
 most to gratify our desires; then, on the whole, it is to the 
 interest of laboring poor that the rich be productively 
 employed. 
 
 Were all idle, production would cease and starvation 
 would result. Were half of our laborers to become idle, 
 the result would be depopulation, misery, and returning 
 barbarism. Every idle person, rich or poor, is a contribu- 
 tion to this miserable end. The poor girl should not con- 
 demn her rich competitor for her labor, because she in 
 reahty creates the means for paying herself. "She adds 
 before she divides, deducts only as she adds, and competes 
 only as she co-operates." The consumer only detracts, 
 while the producer adds to the sum of goods divisible. 
 There cannot be too much produced and our dread is of 
 underproduction rather than overproduction. 
 
 If we desire more wealth we are forced to desire the 
 employment of more productive effort. If we object to 
 more labor coming into the field, we are forced to object 
 to a further use of machinery. The poor girl who objects 
 to the competition of the rich girl in typewriting is forced 
 to object to the use of the typewriting-machine she em- 
 ploys. 
 
 9. Questions Raised by the Introduction of Machinery. — 
 Patent laws are such that the machinery invented in one 
 country may be used throughout the civilized world; 
 Americans, therefore, do not use most machinery because 
 our people are most inventive. Germany makes the most 
 extensive use of many American inventions. Then why 
 is machinery so extensively used in some countries and 
 so little used in others ? Differences in the wages of labor 
 is the answer. It is cheaper to use machinery in America, 
 
Labor and Machinery 430 
 
 where wages are high, and cheaper to employ labor in 
 China where wages are low. 
 
 If labor-saving machinery is used as a substitute for 
 costly labor, does it not follow that machinery directly 
 competes with and lowers the wages of labor? This has 
 been a standing question since the beginning of the Indus- 
 trial Revolution; it is a most important and fair question, 
 deserving thoughtful reply. At one time the wage-earners 
 answered this in the negative, and smashed machinery 
 because they thought it robbed them of a living wage. 
 
 If we take the consumer's point of view, we at once 
 favor machinery because it augments production, lowers 
 prices, and enables our money to purchase more goods. 
 But we are here taking the laborer's point of view who is 
 interested to know the effect of machinery upon the de- 
 mand for labor. 
 
 Temporary efect : The entrepreneur introduces machin- 
 ery for two reasons — to increase and hasten his volume of 
 output, to lower his cost of production. Within a short 
 period of time the demand for any particular class of goods, 
 say wire nails, will vary little. But a sudden introduction 
 of machinery would enable the number of laborers who 
 have been regularly employed in that business to over- 
 supply the market. The first effect of this machinery will 
 be the displacement of a portion of the labor. 
 
 Bearing witness to this fact are the uprisings in Asiatic 
 Turkey since American machinery invaded those ancient 
 lands in 1902. The Bible and ancient history make record 
 of vast supplies of grain from those fertile lands in ages 
 now remote. Through all these centuries grain had been 
 reaped by hand and threshed by oxen driven around in a 
 circle. The first reaper created a sensation, the greatest 
 
440 Introduction to Economics 
 
 since Mohammed preached his new religion, and all but 
 produced a state of riot among the Arabs, who declared 
 that it left nothing for them to glean. 
 
 Will the entrepreneur turn off all but a sufficient number 
 of working men to maintain the volume of output as it 
 was prior to the installation of machinery? The answer 
 must depend in part upon the nature of the product. 
 
 The nature of the product : If the product is one for v/hich 
 the demand is inelastic, the chances are that a consider- 
 able portion of the labor will not be retained. Should the 
 commodity be one for which the demand is very elastic, 
 the employer will retain the larger portion of his labor. 
 By lowering the price he could dispose of a larger volume 
 of output, and that at a handsome profit until other com- 
 petitors entered the field. 
 
 If the entrepreneur enjoys a monopoly he will continue 
 the employment of such a supply of labor as will fix the 
 volume of output at the point of greatest net return. This, 
 again, will depend upon the elasticity of demand. In com- 
 petitive industries, where the cost per unit of output 
 diminishes with the increasing size of the business, cut- 
 throat competition is such as, in many cases, to actually 
 increase the demand for labor. Within a century machin- 
 ery increased the productive power of labor approximately 
 one-hundredfold in the textile trade, yet the number of 
 laborers increased in that industry because of the elasticity 
 of the demand. In this case, as in the case of the monopo- 
 list, the volume of production is enlarged and labor retained 
 in anticipation of an increased demand. Generally speak- 
 ing, the temporary effect of machinery in a particular 
 industry is to displace labor unless the product fills a very 
 elastic demand. 
 
Labor and Machinery 441 
 
 A misconception oj the labor-saving machine : Some critics 
 attempt to prove that the introduction of machinery does 
 not even temporarily lower the total demand for labor. 
 Consider the manufacture of shoes; they say that while 
 the new machine displaces a number of hand laborers it 
 also takes a number of laborers to build the machine. As 
 labor is reduced in making shoes, it is correspondingly in- 
 creased in the production of machinery. But, let us ask 
 these critics, in what sense may we speak of labor-saving 
 machinery if machinery saves us no labor? There would 
 certainly be no advantage in producing agricultural imple- 
 ments if the labor required to produce these were the equiv- 
 alent of the labor they save the farmer. 
 
 Long-time efects : If we study particular industries 
 rather than the whole field of labor, we find results vary- 
 ing with the nature of the product. It is but natural that 
 over long periods of time the demand will increase for all 
 the different kinds of goods. Even those staples which 
 satisfy the primary needs will meet an increasing demand. 
 Salt fills a most inelastic demand, yet, should the popula- 
 tion double, the need for salt would be multiplied by two. 
 Can we say, however, that, despite the development in 
 the use of labor-saving machinery, the demand for labor 
 will keep pace with the growing demand for products? 
 Certainly not; it would be a contradiction in thought to 
 answer this question affirmatively. In no sense, where 
 labor-saving machinery is employed, will the demand for 
 labor increase as rapidly as the increase in the production 
 of and demand for goods. 
 
 How machinery enlarges the demand for labor: It is in a 
 broader sense that the introduction of labor-saving ma- 
 chinery calls for an increase in the supply of labor. Im- 
 
442 Introduction to Economics 
 
 proved means of production has a double effect: to illus- 
 trate, it makes shoes cheaper, thereby enabling the pur- 
 chaser to increase his demand for other things, say gloves; 
 it frees a certain amount of labor from the shoe business 
 to go into other lines of business, say the glove business. 
 
 If the demand for a good is very elastic, the first effect 
 of labor-saving machinery will be to cheapen the product; 
 this will be followed by an increased demand. If the 
 growth in demand is sufficient, it will actually increase the 
 demand for labor, but never in proportion to the increasing 
 volume of product. The railway-train has supplanted the 
 stage-coach and has set many men to work where the old 
 coach employed one, but the amount of traffic has increased 
 more rapidly than has the number of railway employees. 
 Thus, where the demand is elastic, the amount of labor in 
 a single industry may be increased because of labor-saving 
 improvements in that industry. 
 
 The usual effect of cheapening the products of one in- 
 dustry is to create a demand for the products of another 
 industry. If a smaller portion of my wage goes to pur- 
 chase the common necessities, I have more with which to 
 demand the higher comforts and even the luxuries of life. 
 This new demand gives rise to other industries, thereby 
 making a new demand for labor. 
 
 10. The Laborer's View-Point. — ^The owner of large ma- 
 chinery must be a man of means, and when it was intro- 
 duced into industry a sharp division was made between 
 the capitalists and laborers. This division put an end to 
 the companionship of the employer and his hired man. 
 They no longer worked side by side at the same task, the 
 worker quit living in his employer's home, quit eating at 
 the same table and sharing the same fireside. They be- 
 
Labor and Machinery 443 
 
 came estranged. Their interests, in a narrow sense, grew 
 antagonistic; the employer bought labor with the same 
 merciless interest as he would buy raw materials, and the 
 laborer's interest in his employer's welfare was nil. The 
 one wanted to perform the least labor for the most pay; 
 the other wanted to give the least pay for the most labor. 
 
 Readjustments cancel personal skill: The entrepreneur 
 would reduce cost by introducing machinery, and consum- 
 ers welcome machinery because its effect is to lower prices. 
 It is easy enough for these to admonish the worker to be 
 patient, to preach the ultimate good of machinery as a 
 "long-run" benefit to labor and society in general. We 
 must not be too hasty, however, to pronounce the worker 
 an imbecile who objects to machinery. He lives in a state 
 of merciless competition; he is forced to specialize in a 
 trade; life is too short for the average man to master more 
 than one trade; he lives from hand to mouth and his daily 
 labor means his daily bread. His personal ruin and the 
 poverty of his family result if machinery removes him 
 from work. 
 
 Society sees labor as a whole and in the long run it re- 
 gards the individual's misfortune as a mere incident of prog- 
 ress. The masses of men, among them the laborers, do not 
 act upon the long-run motive. Moreover, what promise 
 has the long run for one who is forced to starve now ? If 
 progress takes his job, the same progress should provide 
 his support. The facts are that machinery has displaced 
 many thrifty laborers and reduced them, with their families, 
 to misery. When the burden falls solely upon those who 
 are least prepared to bear it, there is little wonder that 
 they remonstrate. If through patient toil they acquire 
 skill in a trade, machinery cancels this skill; the burden is 
 
444 Introduction to Economics 
 
 not less than if the state should cancel their rights of pri- 
 vate property in the fruits of their labor. 
 
 11. These Hardships on the Decline. — ^At first thought 
 one reasons that if the introduction of labor-saving ma- 
 chinery works hardship, this evil must grow with the 
 expansion of the machine process. But this reasoning is 
 in error. There is a vast difference between going from a 
 hand process to a machine process, and that of going from 
 one kind of machine to another. It was the old-time cob- 
 bler who was in serious difficulty when, for the first time, 
 he raised his spectacles from the accustomed awl, peg, and 
 last to behold the new innovation — a revolutionized indus- 
 trial world replete with competing machinery. Students 
 of the problem go back to the Industrial Revolution for 
 their examples of the extreme hardships which machinery 
 imposes. Certainly we find here and there such hardships 
 in our time, but fortunately they are on the decline. 
 
 The majority of laborers now use machinery of some 
 kind, and, since there are only a few principles of machin- 
 ery, it follows that a thorough acquaintance with one 
 machine makes it easy for the laborer to transfer to another 
 and new type of machine. Consider, for instance, how 
 general has become the use of the gas-engine, how varied 
 the types of machines now nm by it: the workman who 
 learns to operate one such engine can with ease adapt 
 himself to any one of a large number of positions. The 
 same is true of the steam-engine, and it is likewise true of 
 electric power. 
 
 12. Machinery and Market Demands. — The large pro- 
 ductive plants of to-day require enormous quantities of 
 fixed capital. The heavy machinery which is installed is 
 built for a specialized type of production. The entre- 
 preneur is anxious to keep this machinery fully employed, 
 
Labor and Machinery 445 
 
 and it is to his interest to keep intact a large force of trained 
 workmen. Then the first effect of large machinery is to 
 secure the tenure and stabilize the conditions of workmen. 
 
 As new transporting facilities develop, the niarket is 
 extended. Industrial plants expand apace in size with the 
 extension of the market; they come to produce no longer 
 for a local market but for a world market, and no longer 
 for the demand of the immediate future, but for the de- 
 mand of the distant future. Thus in adjusting productive 
 capacity to demand, large capital is sunk in more or less 
 fixed forms. 
 
 Now contemplate the effect of a far-reaching change in 
 demand. This fixed machinery must come to a standstill 
 when the demand turns from its product, and, as for labor, 
 it must either shift to produce for the newly created de- 
 mand or go idle. A vast change in the market, therefore, 
 finds fixed capital more helpless in making a shift than is 
 the case with labor. 
 
 There is another thought which claims serious, if only 
 brief, attention. No principle of demand is better estab- 
 lished than this: the demand for comforts and luxuries 
 fluctuates more than the demand for prime necessities. 
 Considering the working population as a whole, investi- 
 gators find that an effect of machinery is a relative decline 
 in the number of workmen producing necessities, and that 
 the relative proportion of those who produce comforts and 
 luxuries is on the increase. The cumulative effect of 
 machinery, therefore, is to subjugate labor more and more 
 to the vicissitudes of demand. 
 
 13. Machinery Improves the Laborer .^ — The handling of 
 the old jack-plane used to cause heart-disease, and made 
 
 ' Read Alfred Marshall's Prindples of Economics, sixth edition, Book IV, 
 chap. IX. 
 
446 Introduction to Economics 
 
 carpenters, as a rule, old men by the time they were forty. 
 When Adam Smith wrote (1776), men overworked them- 
 selves, ruining their health and constitution in a few years. 
 "A carpenter," said that famous author, "in London, and 
 in some other places, is not supposed to last in his utmost 
 vigor above eight years. Almost every class of artificers 
 is subject to some particular infirmity occasioned by exces- 
 sive application to their peculiar species of work.''^ Only 
 a few years ago excessive muscular strain was the common 
 lot of the majority of working men in England and else- 
 where. 
 
 The effect of machinery is to relieve muscular strain and 
 to perform tasks which are beyond human strength. In 
 the making and handling of armor-plates, heavy munitions, 
 and structural steel, man's muscles count for nothing. 
 Machinery makes fighter the work of housekeepers, makes 
 easier all types of manufacturing, and it displaces muscular 
 strain in all the extractive industries. 
 
 Machinery also reUeves the monotony of life. Mention 
 has been made of the way in which the technical division 
 of labor in modern industry narrows the scope of each 
 person's work. In those trades where there is the most 
 subdivision of work, the individual's task is most narrow; 
 he exercises the same faculties and, without variance of 
 motion, repeats the monotonous routine year in and year 
 out. At first while he learns the simple movements he is 
 required to use judgment in performing them, then he 
 practises these until they become habitual. Thereafter is 
 only the monotony of constant repetition. Such work 
 depletes men both mentally and physically, for develop- 
 ment is arrested apart from variety in thought and mus- 
 cular activity. 
 
 ' Quoted by Marshall, Idem, p. 262. 
 
Labor and Machinery 447 
 
 Fortunately, however, these monotonous and routine 
 tasks are most sure to be taken over by inventions. As 
 soon as the motion becomes constant and unvarying, the 
 task of the inventor is simplified. Thus machinery both 
 reheves the strain on human muscles and prevents the 
 monotony of work from involving monotony of life. 
 
 14. Exercises. — i. A tourist and his guide climb a moun- 
 tain — the one for pleasure, the other for pay. Is either or 
 are both laboring? The workers on the tower of Babel, 
 which was designed to reach into heaven, got pay. Did 
 they labor ? If so, was it productive labor ? 
 
 2. In a building concern does a bricklayer perform 
 direct or indirect labor? What of the bookkeeper? 
 
 3. "The more limited the output of each laborer, the 
 greater will be the dem9,nd for additional laborers." Dis- 
 cuss. 
 
 4. How may individual and industrial hardships arise 
 from the fact that labor adjustments are slow, whereas 
 changes in the demands for the products of labor may be 
 rapidly made ? 
 
 5. Define and illustrate the "make-work fallacy." 
 Assume that the 2,000,000 soldiers who return from France 
 will either remain idle for twelve months or will be employed 
 at a good wage in unproductive effort. Which would be 
 better ? 
 
 6. Would machinery increase or decrease the real wages 
 of labor in a new country, say Australia ? in an overcrowded 
 country, say Sicily ? 
 
 7. Prove this statement: It is to the interest of the 
 laboring poor that the rich be productively employed. 
 Prove this: It is to the interest of the poor that the rich 
 spend their means in productive enterprises rather than 
 for luxurious entertainments. 
 
 8. Criticise this: "My automobile is a necessary luxury." 
 
 9. What, generally speaking, is the difference between 
 the temporary effects and the long-time effects of the intro- 
 duction of machinery upon the demand for labor? 
 
448 Introduction to Economics 
 
 10. Would the conditions of labor in a single industry 
 be affected more or less if the demand is very elastic for 
 the products of that industry ? 
 
 11. How did the introduction of large machinery change 
 the relationship between the laborer and the employer? 
 
 12. The hardship which the introduction of machinery 
 imposed upon labor was that of unemployment, but this 
 hardship is on the decUne even though more and more 
 machinery is coming into use. Why is this so ? 
 
CHAPTER XX 
 THE PRINCIPLES OF WAGES 
 
 I. Wages defined. 2. Problems suggested. 3. Wages differ from profits. 
 4. Real and money wages. 5. The wage-fund doctrine. 6. The wage 
 problem is forward-looking. 7. Effect of machinery upon wages. 8. Simi- 
 larity of wages and rent. g. The same principles for unlike agents. 10. 
 How relative rents are determiaed. 11. How relative wages are deter- 
 mined. 12. Thought and execution., 13. To illustrate. 14. The wage 
 system in proportionality. 15. The bargain theory. 16. The wage sys- 
 tem. 17. Equal wages for equal tasks. 18. Wages equal the marginal 
 product of labor, ig. The time element. 20. Exercises. 
 
 1. Wages Defined. — ^A wage is a price; it is the price 
 paid by one person to another on account of labor per- 
 formed. The employer agrees to pay the workman so 
 much per piece or unit of output, or agrees to pay him a 
 sum certain per hour, day, week, or month. The one pay- 
 ment is called a piece wage; it is payment for the amount 
 of work performed irrespective of the time expended. If 
 the laborer is making bolts at a piece rate of 20 cents he 
 would receive $1 for an output of five, $6 for an output of 
 thirty, and so on. The other method of payment is called 
 a time wage. If the employee is paid $3 per day, his pay 
 would be neither more nor less, whether his output be five 
 or thirty bolts per diem. All other wage systems, such as 
 profit-sharing or gain-sharing, are combinations of time 
 and piece wages. 
 
 2. Problems Suggested. — Where large numbers of work- 
 men are employed and the personal relations between the 
 employer and workmen vanish, all laborers in a group 
 receive the same wage. The most superior, even should 
 
 449 
 
450 Introduction to Economics 
 
 he exert himself to the utmost, receives the same time 
 wage as the most inferior workman. The first effect is to 
 kill the incentive of the superior workman. Another effect 
 is that the better men, xmwilling to accept a wage fixed by 
 the ineificiency of the poorest, organize unions to force 
 from the employer a compensation in keeping with their 
 work. 
 
 The records of day work as a guide in setting piece rates: 
 The piece wage, when first introduced, must be roughly 
 adjusted to the time wage. For instance, the average 
 worker is paid $3 a day and turns out, say, fifteen bolts in 
 a normal day's work. The day wage would be the equiva- 
 lent of a piece wage of 20 cents. Upon this basis the piece 
 wage is fixed at 20 cents. Now in contrast with the day 
 wage, which tends to deaden incentive, the piece wage 
 stimulates workmen to the highest pitch. Instead of fif- 
 teen bolts the better men produce thirty or even forty, and 
 raise their income from $3 to $6 or $8. 
 
 Tendency to cut rates: Our first thought turns in praise 
 to the piece wage as better for all; better for the workmen, 
 because it raises their wages and pays them according to 
 their deserts; and better for the employer because it in- 
 creases his volume of output in a given time, and that, 
 too, with little addition to his overhead expenses. Nu- 
 merous examples from experience, however, make us less 
 cheerful. The employer sees, with imwilling eye, that his 
 labor is paid an amount excessive as compared with the 
 daily wage of the average workman. Either through 
 cupidity, or because he really believes the worker receives 
 more than his fair share of the product, the employer has 
 "cut" and "recut" the piece wage to lower the earnings 
 of labor. To take an example from the willowing of ostrich 
 
The Principles of Wages 451 
 
 feathers: "When the trade started few knew how to willow, 
 and 15 cents was paid for tying one set of knots (one 
 inch). The following season more workers were in the 
 field, and the price went down to 13 cents an inch. Then 
 it dropped to 1 1 cents, 9 cents, 7 cents, 5 cents, and finally 
 the workers received but 3 cents an inch." 
 
 If at the "cut" rate the workman attempts to increase 
 his output to retain his income, the covetous desire of the 
 employer sees a double advantage — less wages paid out, 
 and more work turned in. Is all this to the encourage- 
 ment of labor? Certainly not, for penalized effort is 
 grudgingly given. 
 
 The reaction of the laborer: The first reaction of the 
 laborer is to work less strenuously, for if wages are lowered 
 with the increase of output, why not diminish the output 
 and receive a larger wage per piece ? His next reaction is 
 to turn to organization as a means of securing by might 
 what should be his by right. There are still other objec- 
 tions to the piece wage. 
 
 Risk: There is no risk in time wages as to the amount 
 the laborer shall receive; let conditions vary as they will, 
 his income is fixed by contract. The same is not true for 
 those employed at a piece wage. Whatever the conditions, 
 they receive in proportion to product. Unforeseen contin- 
 gencies arise, machines break down, or raw materials fail 
 to appear; in all such cases the loss falls upon the laborer. 
 
 The disfavor of unions: The piece wage puts each worker 
 upon his own mettle, appeals to his seK-interest or personal 
 ambition, and breaks down the co-operative spirit upon 
 which unions depend. The spirit aroused is that of com- 
 petition, discord, and suspicion among workmen rather 
 than the fraternal spirit of brotherly benevolence and 
 
452 Introduction to Economics 
 
 good-will. It thus breaks the union's grip of the labor- 
 supply and is, in consequence, condemned by the union. 
 
 A cause of overexertion: "Chips fly faster by Job work 
 than by day work." The "driving" or "speeding-up" 
 process seems to characterize the system. Those who are 
 in need, or who are ambitious to get ahead in the world, 
 are anxious to produce to their maximum capacity. They 
 sometimes overdo thus enfeebling their health and 
 strength. 
 
 Despite these objections, the piece wage is the only 
 feasible plan in many kinds of factory work. As the de- 
 fects of the system become better known they are corrected; 
 managers seek to obtain accurate knowledge before adjust- 
 ing rates of pay and, if right-minded, aim to fix and main- 
 tain the pay at a fair and just rate. 
 
 3. Wages Differ from Profits. — ^Two men, the one a 
 renter and the other employed, may do precisely the same 
 thing, may hoe side by side in the same potato-patch, may 
 perchance receive incomes exactly equivalent for their ser- 
 vices, and yet the one's income is profits and that of the 
 other is wages. Does it follow that wages and profits are 
 essentially the same? They essentially differ. 
 
 The first undergoes all the risk; he pays rent for the 
 land and wages for his help, and buys his seed, tools, fer- 
 tilizer, and gives his own time. Between the plow and the 
 potato-digger there is chance of frost, or devouring bugs, 
 or drought, or excessive rain, and then there are market 
 conditions after the crops to cause apprehension. He 
 takes his chances with the trinity of weather, pests, and 
 prices for such income as he may receive. The second 
 runs no risk, but works for a definitely fixed contractual 
 wage. There are other differences: unlike motives actuate 
 
The Principles of Wages 453 
 
 these two men; the one shoulders the responsibility and 
 the other is care-free; the actions of the one are self-willed, 
 and the actions of the other are directed. To call one's 
 own product a wage does not conform to business ter- 
 minology. 
 
 The wage problem, encompassing, as it does, a multi- 
 tude of troublesome questions, arises from the relationship 
 between the hired man and his employer. He who works 
 for himself never strikes, or boycotts, or pickets the busi- 
 ness. He does not go to law for a higher wage or for 
 shorter hours or for improved living conditions. For pur- 
 poses of sound reasoning we must distinguish between 
 these two types of income. Term them profit and wages, 
 and you have a distinction conforming to business usage 
 and to the theory of the case; you have cleared the ground 
 for a discussion of the practical problems which are, in 
 fact, contract-wage problems. 
 
 4. Real and -Money Wages. — Money wages refer to the 
 content of the pay-envelope, to the number of dollars the 
 wage-earner receives. By real wages is meant not the 
 nimiber of dollars, but the amount of purchasing power 
 received. Money wages may remain the same, while real 
 wages vary because of price movements. Suppose one has 
 received an annual salary of $2,000 for a period of five 
 years, and that meanwhile prices have doubled. His 
 money wage or salary has not changed, but his real wages 
 have been reduced by half. In discussing the wage prob- 
 lem real wages are far more important than are money 
 wages. 
 
 5. The Wage-Fund Doctrine. — ^Having defined v/ages, 
 let us now turn to an examination of the influences which 
 determine the amount of wages. The older British econ- 
 
454 Introduction to Economics 
 
 omists, as well as some American writers, have championed 
 the crude and now abandoned Wage-Fund Doctrine. The 
 doctrine is simple and lends itself to brief statement: At 
 any one time there is a certain amount of funds, no more 
 and no less, set aside with which to pay the wages of labor. 
 J. S. Mill says: "This sum is not regarded as unalterable, 
 for it is augmented by saving, and increases with the 
 progress of wealth; but it is reasoned upon as, at any given 
 moment, a predetermined amount." The Englishman, 
 H. Fawcett, says: "The circulating capital of a country is 
 its wage-fund. Hence, if we desire to calculate the aver- 
 age money wages received by each laborer, we have simply 
 to divide the amount of this capital by the number of the 
 laboring population." 
 
 Then, at any one time, there is a predetermined amount 
 of funds that is going to be paid to labor. It is impossible 
 for the laborers to receive one penny more or less. This 
 fund is the dividend, and the number of laborers the 
 divisor, and the quotient is the average wage. If the fund 
 be 100,000 and the number of laborers 1,000, the average 
 wage will be 100,000 -j- 1,000 = 100. 
 
 Thus the learned economists of England left the prob- 
 lem. The scholars looked upon this as a simple arithmetical 
 truism, not subject to criticism. It would be diflScult to 
 select a simple theory which has done so much to retard 
 thought as this. My reasons for this statement are four: 
 First, it is not a theory at all, for a theory is an explanation 
 of a fact. It is a mere assertion that wages are paid out 
 of accumulated funds, but so is interest, and rent, and thp 
 price of bread, cigars, and every other thing for which we 
 pay. The reason we pay for a thing is not because we 
 have money, but because of the services it will render. 
 
The Principles of Wages 455 
 
 Second, this superficial notion took the form of a truism; 
 it glossed over and hid from view the real wage p^roblem, 
 thus removing it from discussion. Third, its effect was to 
 favor capital and do gross injustice to labor. In case a 
 group of laborers wished to strike or otherwise act to 
 improve their income the capitalist, with the address of 
 a moralist, and with the sanction of the economists, would 
 object on the ground that the fund is fixed; therefore, if 
 some get more others must get less. This doctrine made 
 laborers dependent upon capitalists, and made capitalists 
 the benefactors of the race. If laborers asked more, they 
 were met with the admonition to sacrifice instead, for in 
 this way only could the fund be maintained and their wages 
 assured. Fourth, it made the rate of wages depend upon 
 a fund accumulated from the past rather than upon that 
 which labor produces. 
 
 6. The Wage Problem is Forward-Looking. — Men pay 
 present wages out of accumulated capital, to be sure, but 
 the willingness to hire labor and the amount paid for it 
 depend upon the anticipated product of labor. The plow- 
 man's labor will later mature into a crop, the builder's 
 labor into a house, and the manufacturer's labor into a 
 finished good. The present wage is an advance price out 
 of the expected future product. 
 
 We shall now see that machinery affects wages as it 
 affects the product of labor. 
 
 7. Effect of Machinery upon Wages. — The effect of 
 machinery as the effect of legislation, say the minimum 
 wage, upon wages may be approached from two points of 
 view; from the view-point of labor as a whole, or from the 
 view-point of particular classes of labor. Roughly speak- 
 ing, labor may be divided into two classes — those who are 
 
456 Introduction to Economics 
 
 skilled, who use their brain in their work, and those who 
 are unskilled, who use principally brawn in their work. 
 
 It goes without saying that the man of brawn cannot 
 eflFectively compete with the "man of iron"; the machine 
 wins in the contest of strength and speed. But only the 
 unskilled go down, they only are outworked and underbid 
 by the machine. The skilled and thoughtful workman, on 
 the contrary, rises above the machine, takes advantage of 
 its superior strength, and converts its productive capacity 
 into an enlarged wage. 
 
 On the whole, whatever increases the productive power 
 of labor will also increase the wages of labor. Wages, I 
 mean real wages, will be increased in the form of a larger 
 money income, as well as in the lowering of prices. 
 
 Assume two farms, one fertile and the other poor. The 
 most expert labor can exact no more than a small yield 
 from the latter. This small yield would certainly not 
 justify the proprietor in a large wage expenditure for 
 labor. Poor farm, poor help, and poor wage is the rule. 
 Contrast with this the fertile farm which will respond to 
 skilled labor with a bumper crop. Upon such land the 
 cheapest help is the dearest, for the enhanced yield occa- 
 sioned by superior labor will leave for the proprietor a 
 larger surplus despite the higher wage. Whether skilled 
 or unskilled, the proprietor of the rich soil can pay more 
 for labor for no other reason than that it yields more. 
 
 As soil fertility adds to the productivity and, therefore, 
 to the wages of labor, so also will machinery add to the 
 productivity of labor, and in consequence to wages. Other 
 things equal, wages are high in a rich country where natural 
 resources abound; add machinery to this favorable en- 
 vironment and the labor of man becomes at once both 
 lighter and more remunerative. 
 
The Principles of Wages 457 
 
 8. Similarity of Wages and Rent. — The distinguishing 
 difference between rent and wages is this: rent pays for 
 the temporary uses of wealth; wages pay for the temporary 
 services of men. The agencies differ, but the prices (wages 
 and rent) paid for the services of these agencies are deter- 
 mined in virtually the same way. The business man is 
 actuated by precisely the same motive when he buys the 
 services of wealth and the services of labor. These ser- 
 vices are alike offered in the market for sale; they are alike 
 priced according to the values attributed to them, and 
 they are valued alike according to their yield. In discus- 
 sing the rent problem we found rent to be a deduction 
 from 1 the principle of resistance. Because of resistance 
 the output of the rent bearer is limited; this limitation or 
 scarcity gives rise to the value and price of the product. 
 The value attributed to the product makes us wilKng to 
 pay a rent for the use of it. This reasoning, without 
 modification, applies to the wages paid for the scarce and 
 valuable services of men. 
 
 p. The Same Principles for Unlike Agents. — All know 
 that human beings differ from rent bearers, but this is not 
 to say that their services differ in the economic sense. 
 Muscular power differs from machine power or from the 
 power of a waterfall only in degree, but the man thinks 
 and the machine does not; men differ from other produc- 
 tive agents in a thousand ways. But differences among 
 productive agencies do not imply that their products are 
 governed by different economic laws. 
 
 Many economists have blundered at this point, and 
 so serious was their blunder as to render their system of 
 thought erroneous from one end to the other. For in- 
 stance, land is unlike the agents produced by labor in a 
 number of respects. Many economists, seeing this differ- 
 
458 Introduction to Economics 
 
 ence, jumped to the conclusion that the products of these un- 
 like agents must therefore obey different economic laws, so 
 they went to work to patch up a rent theory for the land 
 agent, and an interest theory for artificial agents. Do 
 different economic laws apply to cotton and wool? Cer- 
 tainly not, yet there is little resemblance between a sheep 
 and land. Similar, also, and obeying precisely the same 
 economic laws are the products of the ditch-digger and the 
 steam-shovel, yet the one is a man and the other a machine. 
 Wages and rent obey the same economic laws despite the 
 di^fferences in the agents producing them. 
 
 10. How Relative Rents Are Determined. — While study- 
 ing rent we found it to be a physical law that the short 
 factor limited the output, and that if long factors are 
 increased the product will not proportionately increase. 
 The entrepreneur seeks to add to his short factor because 
 it is most productive. The important conclusion follows 
 that because of the higher productivity of the short factor 
 a higher rent is paid for the use of it. In other words: 
 Short factors and high rent, long factors and low rent. 
 
 11. How Relative Wages Are Determined. — ^This rea- 
 soning applies with equal force in determining the wages 
 of labor. A sledge-hammer cannot pound stone, neither 
 can a man; it takes the two combined in order that each 
 may liberate the productive powers in the other. A 
 mighty man with a tack-hammer would make a pimy 
 showing at crushing stone. There should be a best physi- 
 cal adjustment between labor and other agents. The 
 earnings of labor vary with the adjustment of factors, 
 wages being high or low as the adjustment is good or poor. 
 
 Of the different groups of laborers, some are oversup- 
 plied and some are undersupphed. How the relative 
 
The Principles of Wages 459 
 
 supplies of labor affect the relative wages of labor may be 
 shown by way of illustration. Philip D. Armour, the 
 great packer, once showed a Chicago newspaperman about 
 his office. It transpired that a comparatively young man 
 sitting at a desk in the corner of the big room was drawing 
 a salary of $18,000 a year. "But, Mr. Armour," said the 
 newspaperman, "could you not hire nine men at $2,000 a 
 year who could do more than he does?" "No," said the 
 millionaire packer, "one hundred $2,000 men could not 
 do the work he does." Joseph French Johnson relates 
 this incident and adds "that men are paid, in the long 
 run, in proportion to their power of production. The 
 executive's salary seems exorbitant to the day-laborer, 
 yet the pay of the executive and of the laborer is deter- 
 mined by the same law — executive ability is comparatively 
 scarce, muscle is abundant; hence the one is dear and the 
 other cheap." 
 
 12. Thought and Execution. — It has been observed many 
 times, but none too many, that some men act before they 
 think, while others think before they act; the invariable 
 conclusion is that only the latter are worthy of their hire. 
 Production is but the wise adjustment of things, and this 
 means a thought or plan executed. The most ingenious 
 plan is in itself of no avail, for it is productive only as it is 
 executed. If it be idle no purpose is served, if it take a 
 wrong course it works destruction, if it goes aright it 
 effects production. The direction of productive agencies 
 is in obedience to a plan, frequently ill devised perchance, 
 none the less a plan. The productivity of an agent de- 
 pends quite as much upon the plan directing it as upon 
 its own powers, because it works poor or well and to pur- 
 poses good or bad, depending upon the plan. Much de- 
 
460 Introduction to Economics 
 
 pends upon the plan; the dynamite works good in con- 
 structing a road-bed, evil in destroying a newspaper 
 plant, together with the lives of men; poison works well in 
 killing rats and ill in killing people; there is a world of dif- 
 ference whether a razor is used to sever a man's beard or 
 his head. 
 
 The wise direction of productive agents is but the 
 carrying through of a good plan with discretion. Entre- 
 preneurs capable of so planning as to turn productive force 
 to its greatest account, and managers with sufficient wis- 
 dom to direct forces most effectively in the execution of 
 plans are regretfully scarce, and are the most valuable of 
 men because they are the most productive. 
 
 13. To illustrate: Let us get at this thought in another 
 way. Assume a situation in which raw materials, machinery, 
 buildings, and other resources, both natural and produced, 
 exist in great abundance, but in a state of poor adjust- 
 ment. Within this situation there is an army of unskilled 
 laborers. A few inefficient managers, among whom exist 
 petty Jealousies, causing them to work at cross-purposes, 
 direct the different operations of production. Long hours 
 and persistent toil enable all concerned to eke out a liv- 
 ing. 
 
 To put it in figures, let us say that the simi total of aU 
 this productive power yields an annual output of $300,000. 
 Assume now that a change comes over the chaotic situa- 
 tion, that an entrepreneur, capable of the most ingenious 
 and far-seeing plans — such as a Carnegie or a Henry Ford 
 — comes into control, and that an executor of plans or 
 director with the rare ability of a Schwab is given the 
 post of manager to make these plans effective in opera- 
 tion. As if by magic a happy change overcomes the situ- 
 
The Principles of Wages 461 
 
 ation, for order is brought out of chaos in obedience to the 
 one plan devised by the new master. 
 
 In the new order the merits of men are quickly discerned 
 and the most fit are shouldered with responsibility and 
 promoted according to their worth. Weak managers are 
 envious of the capable because they fear them and will 
 deny any promotion that may give talent an opportunity 
 to make itseK known. Not only are the men assorted and 
 set to tasks becoming their abilities, but also the machinery 
 and aU forms of industrial equipment are readjusted to 
 facilitate one another as do the parts of a powerful engine. 
 Antagonism gives way to co-operation, waste energy to 
 efficiency, and decentralization to unified direction. 
 
 In addition to a well-ordered production an effectual 
 agency takes over the distribution of the products. Pat- 
 terns and quantities are offered upon the market as the 
 seasons warrant and the caprices of the purchasers demand. 
 Pushing now the sale of this, withholding that, determin- 
 ing to whom sales shall be made, at what prices, upon 
 what terms, and a hundred other matters, vital to the 
 life of a business, are under expert direction and control. 
 The costs of doing business go down and incomes go up. 
 
 Let us now assume that the income mounts from 
 $300,000 to $1,000,000. The entrepreneur and the man- 
 ager, what are they worth to the situation? The answer 
 is: $1,000,000 — $300,000, or $700,000. In a competitive 
 market ability, as potatoes or anything else, commands a 
 price in keepiag with its value, hence the high price for 
 talented labor and the low price for common labor. 
 
 14. The Wage System in Proportionality. — The problem 
 of determining wages is concerned with the laborer's 
 part in the larger problem of the proportionaUty of all 
 
462 Introduction to Economics 
 
 productive factors. Different industries bid for these pro- 
 ductive factors in the competitive market, and the prices 
 paid, whether wages or rent, are based directly upon the 
 worth of the services such agencies may render. Again 
 the rule presents itself: short factor «»-^ large output »-♦- high 
 pay; or long factor ■►->■ small output »->- low pay. 
 
 15. The Bargain Theory. — Many are unaware that the 
 productive power of labor is the determining factor in 
 wages; they see merely the surface of the problem and 
 regard human service only in the aspect of a thing salable 
 going to the highest bidder. They take the so-called "bar- 
 gain theory of wages" at full face value, believing, as they 
 do, that the rate of wages is fixed by bargaining, and that 
 every game of deceit or violence played by the laborer has 
 the effect of enhancing his wage. No one denies the im- 
 portance of organized bargaining power on the part of 
 labor. Its importance is that the unscrupulous employer 
 cannot take undue advantage of labor in scaling wages 
 below their normal competitive rate. There is, however, 
 an upper limit beyond which Tqo skill at bargaining can 
 raise wages — that is the productive power of labor. For 
 one who produces hats the price of his product is fixed in 
 the open market; he has different costs to meet, and the 
 prices received for his hats less his costs (for machinery, 
 rent, and raw materials) leaves a range more or less defi- 
 nitely bounded in which wages are fixed. The upper limit 
 of this range is the upper limit of the bargaining power 
 of labor. 
 
 16. The wage system means that the entrepreneurs, 
 either directly or indirectly through their hired managersj 
 buy the labor of other men at a competitive price. So 
 common is this system that the economic organization is 
 
The Principles of Wages 463 
 
 sometimes called "the wage system." The term is inapt, 
 however, because it falls so far short of expressing the 
 whole situation. Agriculture is our most important indus- 
 try and only one-fourth of the work in that field is per- 
 formed for wages outside the family. So also professional 
 men as well as the proprietors of small shops in the busi- 
 ness world devote themselves to their own undertakings. 
 
 17. Equal Wages for Equal Tasks. — Our study of mar- 
 ket prices led to the fact that there cannot be different 
 prices for the same commodity in the same market. This 
 truth holds true respecting the wages of labor. The farmer 
 must pay the same wage, whether his hired men work upon 
 barren soil or in a fertile field. 
 
 Jones and Smith each owns a livery-stable, and these are 
 located on opposite corners. The equipment of Jones's 
 stable is a sorry assortment, and, in consequence, his trade 
 is small. In Smith's stable are blooded horses and the 
 best equipment and, in consequence, his trade proves 
 highly remunerative. The work is such, assume it, that 
 each of the owners must employ two men. It goes with- 
 out saying that the two men in Smith's employ are in posi- 
 tion to produce more than the other two. Should they 
 strike for an additional dollar a day, the two from Jones's 
 stable, being on the alert to improve their wage, if but 
 slightly, will underbid and take the job. It is the compe- 
 tition among laborers in the same class which levels their 
 wages to a uniform rate. 
 
 18. Wages Equal the Marginal Product of Labor. — It is 
 the productivity of that portion of labor which is employed 
 under the most unfavorable circumstances that determines 
 the rate of wages received by a group of laborers. 
 
 During the ha3Tng-season farmers take full advantage 
 
464 Introduction to Economics 
 
 of promising weather. Suppose that a farmer has ten 
 fields of grass, varying in quality from the most fertile 
 field of timothy and clover to the poorest field of rag-weeds, 
 thistle, and dock. The hay ripens, and upon a cloudless 
 morning the farmer is early afield, with such help as is 
 available, and mows the ten fields. All goes well and by 
 the following afternoon the grass under the hot sunshine 
 has come to perfect cure. Now storm clouds appear, 
 threatening to ruin the crop with rain. He must "make 
 hay while the sun shines," or lose all. Near by is the cross- 
 roads store, the "loafer's Joy" for the idle men of the com- 
 munity. In desperation he hastens thither for help. The 
 ragamuffins cease their idle game of quoit to bargain with 
 the farmer. What wage will be paid ? 
 
 The farmer reasons, let us say, that there will be suffi- 
 cient time for thirty men, an average of three to a field, to 
 save the hay. But unfortunately he finds only twenty- 
 four men available — enough to save only eight fields. 
 
 Suppose that he would be willing to pay $ioo to have 
 the hay in field number one saved, and $90 for the saving 
 of number two, $80 for the third, and in order $70, $60, 
 $50, $40, $30, $20, $10. Rather than no help the farmer 
 would, if he had to, pay $100 for the services of the first 
 three, but he is anxious to pay as little as he may. Rather 
 than receive no pay, any three of the laborers, if need be, 
 would work for $10, but they will take as much as may be 
 had. There being but sufficient labor to save the first 
 eight fields, and the eighth being worth I30, it follows that 
 the farmer could not pay more than $30 for the marginal 
 laborers. It was shown in the above paragraph that equal 
 pay for equal tasks governs wages, therefore no three 
 laborers can receive more than $30 or $10 each. The 
 
The Principles of Wages 465 
 
 laborers, on their part, can force the employer to pay them 
 as much as $io each, for their services are worth that sum. 
 Applying the thought in this example to the whole field 
 of labor or to any non-competing group, we shall find that 
 there is more work to be done than there are workers to 
 do it. Labor ever3rwhere has scarcity and utility and can, 
 therefore, command a wage. The wage, under competi- 
 tive conditions, will be determined by the marginal pro- 
 ductivity of labor. 
 
 19. The Time Element. — In most cases the product of 
 labor does not mature at the time when the labor is ex- 
 pended and the wage paid. If the marginal product of 
 labor will be worth $10 when it matures, say a year after 
 the labor is expended, the present wage could be no more 
 than the present worth of the product. The customary 
 economic formula reads: Wages are determined by the dis- 
 counted marginal product of labor. 
 
 20. Exercises. — i. Is there any difference between a 
 wage and a rent, except that one is paid for the produc- 
 tive services of men and the other is paid for the services 
 of productive agents other then men ? 
 
 2. Would a superior workman prefer to dig coal under 
 a time or piece wage? Should a manufacturer of shoes 
 decide to change from a time to a piece wage, what would 
 be used as a guide for setting the new piece wage ? After 
 this change, assume that the workmen increase the output, 
 will the average employer increase the piece wage to fur- 
 ther stimulate the output? Do unions favor the time or 
 the piece wage ? Why ? 
 
 3. Is the time or piece wage best adapted for the follow- 
 ing kinds of laborers: Farm-hands, stone-cutters, office 
 boys, hat-factory hands, barbers, paper-hangers, railroad- 
 brakemen ? 
 
466 Introduction to Economics 
 
 4. "I pay my men a piece wage, so the loss is theirs — 
 not mine — if their output is little." Criticise this state- 
 ment, which was made by a prominent employer. 
 
 5. Distinguish between wages and profits. 
 
 6. To be sure, the wage-fund theory is unsound, but 
 what of it ? It is inoffensive and harmless. The harangue 
 against it is of no more than mere academic interest. 
 Prove this to be false. Prove that the effect of machinery 
 is in the long run and in most cases to increase wages. 
 
 7. Why does skilled labor command higher wages than 
 unskilled labor? Assume a condition under which the 
 unskilled would get the higher wage. 
 
 8. Why is there equal pay for equal tasks under free 
 competition ? 
 
 9. Who is the marginal laborer? 
 
 10. Under the conditions set forth in paragraph 18 could 
 the wage of a laborer be other than $10. 
 
 11. Prepare a written argument in proof of the last state- 
 ment in this chapter; namely, "wages are determined by 
 the discounted marginal product of labor." 
 
 12. A corporation has decided to vary its wage pay- 
 ments from week to week to conform with the variations 
 of a set of index numbers; if the index numbers show the 
 purchasing power of money to go up wages will be corre- 
 spondingly cut, and vice versa. Would you predict any 
 labor troubles for this company during a period of rising 
 prices? during a period of declining prices? 
 
CHAPTER XXI 
 CAPITAL 
 
 I. Introduction. 2. Marginal desirability. 3. The labor-cost theory of 
 value. 4. Criticisms. 5. Productive agents classified. 6. Interest as 
 wages of past labor. 7. Rent in the labor-cost theory. 8. Bases of criti- 
 cism. 9. Only valuable land is cultivated. 10. A productive agent as a 
 composite of different single factors. 11. Any factor which is an integral 
 part of a productive agent is valuable. 12. Valueless land and valueless 
 composite agent. 13. Marginal land. 14. Other arguments. 15. Land 
 as capital. 16. Capital. 17. Capital contrasted with wealth. 18. Ac- 
 quisitive powers which are not wealth. 19. Extension of the capital con- 
 cept. 20. Capital a right to income. 21. Exercises. 
 
 I. Introduction. — With the passing of time the economy 
 of self-sufficiency is being more completely displaced by 
 the division of labor and the extensive use of machinery. 
 The newer economy is one of interdependence or an econ- 
 omy of exchange requiring evaluations in terms of money 
 and trading by means of money. . The definitions of capital 
 are so numerous as to confuse and bewilder the reader, 
 but the tendency is to regard capital as the present money 
 worth of a person's right to valuable income. Upon one 
 point there is agreement, namely, that interest is a per 
 cent, and that it is the payment for capital. Interest is a 
 per cent of what? You cannot speak of so much shelter 
 as a certain per cent of a house, nor of a quart of milk as 
 a fixed per cent of a cow. Before you may say that a cer- 
 tain return is five per cent of an agent, you must evaluate 
 and reduce to their money equivalents both the return and 
 
 467 
 
468 Introduction to Economics 
 
 the agent. Interest is a per cent of a value-sum which is 
 expressed in terms of money. 
 
 Capital, then, is a value-sum expressed in terms of 
 money. Capital looks to the future and not to the past; 
 the capital value embodied in a machine is not determined 
 by what the machine cost nor by what its output has been, 
 but by the expected future returns from it. 
 
 Suppose that you ask a manufacturer why his product 
 sells high. Would you be satisfied should he reply that it 
 sells high because of high-priced labor, high-priced raw 
 materials, high rents, and so on? This type of reply is 
 well known to business men, and to their customers who 
 encounter it so frequently. It is no explanation, however; 
 it avoids explanation by shifting from the price of one 
 thing back to that of another. The price of a good or the 
 capital value of an agent is not explained by an appeal to 
 the past nor by a shift to the price of something else. 
 
 Other considerations: Whether controlled by a monop- 
 oly or owned by competitors, whether produced by nature 
 or by the labor of men, whether material as land or imma- 
 terial as a franchise — these are matters of no consequence 
 in the definition of capital. Capital is a value concept, 
 and, to give the following discussion a proper setting, I 
 shall restate a portion of the reasoning on value. 
 
 2. Marginal Desirability. — ^We have seen that the rela- 
 tive values attributed to goods depend upon their relative 
 marginal desirabilities. Desirability connotes the fitness 
 of a good to gratify a desire, be that desire reasonable, 
 ridiculous, or reprobatory. Take bread, for example, and 
 the question of its desirability must refer to a particular 
 unit of it relative to the desire of some individual. The 
 desirability of bread in general is immeasurable, and the 
 
Capital 469 
 
 idea is absurd because it serves no practical purpose. All 
 ambiguities are banished when the thought is limited to 
 the individual desirer and to a unit of the supply. 
 
 What is the desirability of shirts in general? No man 
 knows or has need to care. J. F. Johnson asks, what is 
 the desirability of a shirt to the poor man who has only 
 one, and must lie in bed while his wife carefully launders 
 it for him? This question puts the problem aright: it 
 shows desirability to be a personal or individual matter; 
 it enables us to express desirability which, in the case 
 assumed, would be equal to the discomfort he would suffer 
 should the wife ruin the precious garment upon the iron- 
 ing-board. Assume now that this poor man is prospered 
 through the death of his rich uncle, that he inherits thirty 
 shirts, all of grade A and alike in every particular. What 
 now is the desirability of a shirt? Upon the assumption 
 that no one would care to buy one of these second-hand 
 shirts, he would be little perturbed should a mishap upon 
 the ironing-board ruin one. In other words, the shirts 
 being the same in quality, we may say that his marginal 
 desirability of shirts is negligible. 
 
 Marginal desirability as an explanation of value is insep- 
 arable from scarcity. The desirability of a unit depends 
 upon the intensity of the individual's desire for it, and 
 this intensity itself depends upon the nimiber of units 
 ahready possessed, for it is a law of physiology as well as 
 of psychology that desires grow less as the amount pos- 
 sessed increases until satiety is reached. This (satiety) is 
 the point zero where desirability ends and there is no 
 value. The economic importance imputed to things 
 (value) is based upon desirability, and desirability upon 
 desire, and desire upon the limitation of supply. 
 
470 Introduction to Economics 
 
 The fitness of a good to minister to well-being is in itself 
 no explanation of value, for if so, air and water would be 
 our most valuable possessions. Nor will scarcity alone 
 explain value, for if so, fortune would attend the catching 
 of house-flies in the winter-time. Desirability combines 
 these two qualities. 
 
 Heretofore, we have studied the forces which limit sup- 
 plies of goods, likewise analysis has been made of the laws 
 of demand. These are the ultimate forces back of the 
 marginal desirabilities of goods. The principle of relative 
 marginal desirabihties, as we have seen, has left in ruins 
 the doctrine that when a trade is made one party gets 
 cheated; it furnishes us the basis for a unified theory of 
 value. 
 
 3. The Labor-Cost Theory of Value. — Note the contrast 
 between the modern view, just expressed, and the old 
 labor-cost theory of value. This latter theory erroneously 
 teaches that the price or value' of a good is proportional to 
 the amount of labor apphed in its production or to the 
 wages paid for that labor. If article A cost one day's 
 labor and article B cost two days' labor, then, according 
 to the old idea, the value of B is twice that of A. Value: 
 value :: labor cost : labor cost. Were this theory sound, 
 that is, if the relative values of articles are proportional 
 to labor costs or wage outlays, it is a mere truism that only 
 labor costs can enter into value. If you account for the 
 price of wheat by the labor cost of producing it, you are 
 forced to prove that other outlays, as rents, are in reality 
 
 ' Value in the labor-cost theory meant the exchange power of a thing. In 
 this book value is defined as the importance which an individual attributes 
 to a good or service, be that good or service salable or not. Price in the 
 broad sense covers the idea of exchange value. 
 
Capital 471 
 
 not costs at all. So much for the theory which teaches 
 that value is proportional to labor cost or to the wages paid 
 for that labor. 
 
 4. Criticisms. — Certain embarrassing questions confront 
 the advocates of this hackneyed theory: (i) One finds a 
 precious stone worth $500; is its value determined by its 
 labor cost ? No, for it has no such cost. (2) A monopoly 
 artificially raises the price of a good; how is labor cost 
 responsible for the rise? The answer is, in no sense. (3) 
 Does the value of money depend upon its labor cost? 
 Even the labor-cost theorists answer in the negative. (4) 
 Wine grows better and sells for a higher price when allowed 
 to age for a number of years. A sprout worth fifty cents 
 grows through time into a tree worth a hundred dollars. 
 What has labor cost to do with the increase of prices caused 
 by growth or improvement through time? Labor-cost 
 advocates regard these as mere exceptions to what they 
 call the "true theory." (5) How account for the value of 
 labor itself? Another exception. (6) And does labor cost 
 determine the value of land, minerals, and other natural 
 products? Again, no. Is it not surprising that thought- 
 ful men should teach a doctrine so monstrous ? 
 
 5. Productive Agents Classified. — The entrepreneur 
 knows that wages do not form his only cost of doing busi- 
 ness. He must pay for materials and pay numerous hires, 
 rents, and fees. He asks, if cost determines price, why 
 include only wage costs and omit others of equal impor- 
 tance? In reply, the labor-cost doctrinaire is forced to 
 make this artificial classification of productive agents: 
 
 (a) Land — so defined as to include all natural agents. 
 {b) Capital — so defined as to include all artificial agents 
 created by labor. 
 
472 Introduction to Economics 
 
 (c) Labor — human effort, be it mental or physical. 
 
 6. Interest as Wages of Past Labor. — According to the 
 above classification, which is based upon the labor-cost 
 theory, capital consists of productive goods made by 
 human labor. In other words, "capital is canned labor" 
 — ^past labor having taken the form of present goods. 
 Then, interest or payment for capital is payment for past 
 labor. Both wages and interest are thus labor costs. 
 
 To this point capital has been made to consist of pro- 
 ductive goods — of tools, instruments, machines, and so 
 forth, created by labor and used to produce more wealth. 
 "We have been told," says F. A. Fetter, "at one moment 
 that rent was not measured by labor or due to it, but was 
 a surplus gained without labor, and in the next we have 
 seen the wealth that was paid over to the landlord as rent 
 used by him as capital and defined as the product of 
 labor."! 
 
 Just here trouble arises for the untenable theory, requir- 
 ing a shift in thought. It is necessary to the argument to 
 prove that the returns on capital are uniform, and that 
 no surplus arises from it. To prove that the per cent of 
 return is uniform for all capital, they must quit the idea 
 of capital as tools and shift to the idea of capital as value. 
 We have seen that competition tends to maintain uniform- 
 ity of returns on capital; if lo per cent is returned in 
 the shoe business, and only 5 per cent in the hat business, 
 capital will be shifted from the less to the more remunera- 
 tive employment. Because capital is paid a uniform com- 
 petitive return, it earns no surplus. No surplus going to 
 capital, the labor-cost theorists tell us that all the interest 
 on capital is a true labor cost. 
 
 ' Proceedings of American Economic Association, December, 1900, p. 240. 
 
Capital 473 
 
 7. Rent in the Labor-Cost Theory.— The entrepreneur 
 spends money for labor, for agents created by labor, and 
 for natural agents. But the theory tells us that cost de- 
 termines value, and that the only cost is labor cost, there- 
 fore the money paid for the use of natural agents must be 
 eliminated from cost. Call interest the wages of past 
 labor, and wages the payment for present labor, but the 
 payment for the use of natural agents cannot be called 
 wages since labor did not create such agents. The labor- 
 cost theorist defined rent as the payment for the use of 
 land. He believed rent to be no part of cost, thought 
 that it was a surplus over and above cost. If rent is not 
 an element of cost, he tells us that it can have no bearing 
 on value. How they attempt to demonstrate the propo-v 
 sition that rent is not a cost will now be shown. 
 
 If the different bushels of a supply of wheat are of uni- 
 form grade, they will sell for a uniform price in the market. 
 Like bushels of wheat in a market at a given time will 
 sell at the same price. But the cost of producing the dif- 
 ferent bushels is not the same. Some may be produced 
 on superior soil and near the markets; some may be grown 
 on inferior soil and distant from the market. Costs vary, 
 but the price is uniform. Which cost is it that determines 
 the price? The greatest cost — that portion of the supply 
 which is produced at the greatest cost determines the price 
 of every portion of the supply. But the greatest cost is 
 upon the marginal land — the land barely worth cultivat- 
 ing. Such land is so inferior that no rent is paid for the 
 use of it. Then if production at the greatest cost deter- 
 mines price, and if this greatest cost takes place where no 
 rent is paid, it must follow that rent does not enter into 
 the cost that determines value. This thought was cogently 
 
474 Introduction to Economics 
 
 expressed by Ricardo: "Corn is not high because a rent is 
 paid, but a rent is paid because corn is high." 
 
 8. Bases of Criticism. — The labor-cost theory of price, 
 requiring, as it does, capital to be defined as "stored-up 
 labor," has been on the defensive from the moment it was 
 first penned. The theory of land rent, the artificial dis- 
 tinction between land and capital, and the false theory of 
 distribution based upon this classification, compose the 
 defense works of the labor-cost theory. The opposing 
 forces, who classify land as capital, attack this doctrine 
 (a) by pointing out exceptions to it, (&) by showing that 
 all cultivated land pays a rent, thus making rent an ele- 
 ment of cost, (c) by showing that there is no such mar- 
 ginal land as the theory assumes, {d) by showing that 
 valuation as a price appraisal is affected by cost only as 
 cost affects supply, and finally, (e) by ranking land, with 
 all other privately owned sources of income, as capital. 
 
 9. Only Valuable Land is Cultivated. — ^Having aheady 
 noted certain exceptions to the labor-cost theory, we shall 
 now see that worthless land is not cultivated. A ton of 
 coal from a worthless mine will sell for the same price as 
 a ton of like quality from the most remunerative mine. 
 But why does capital refuse to operate a mine where the 
 costs of digging a ton are equal to or greater than the 
 price of the ton when marketed? Any schoolboy can 
 give the answer; capital seeks investment only where there 
 is a promise of profit. The scrap-heap engine is valueless, 
 except for junk, not because it could yield no more ser- 
 vices, but because the cost of getting such services equals 
 or outweighs their worth. Likewise, land is not cultivated 
 when the cost of getting services from it is equal to or out- 
 weighs the worth of such services. Because such land 
 
Capital 475 
 
 affords no net yield, it is of no value. Only valuable land, 
 land that renders net uses above cost, is cultivated. 
 
 The land, tools, seed and labor jointly produce a crop. 
 In our economy it is unthinkable that a farmer would use 
 valueless tools, valueless seed, and valueless land, because 
 the result would be a valueless crop. There is no more 
 judgment in using valueless land than in using valueless 
 seed or tools. It is inconceivable that worthless land 
 could produce a valuable crop, because land is valuable 
 by virtue of its valuable yield. 
 
 The value of the crop reverts value to the agents, each 
 and all, which produce it. It would appear a strange 
 decision should the swift runner accredit all his speed to 
 the right leg, denying just due to the left; and not less 
 strange should we accredit all the hfting to two when it 
 requires the combined effort of three men to raise a weight; 
 and not less strange should we accredit the valuable crop 
 to tools and men when it requires tools, men, and land 
 to produce it. Proof of the value of land lies in the valu- 
 able product of which it is an essential factor of produc- 
 tion. Any land which produces a valuable income must 
 itself be valuable, but the purpose of competitive produc- 
 tion is a valuable yield, therefore none other than valuable 
 land is utilized. But the tenant cannot have valuable 
 land gratuitously; he must pay a rent for the use of it. 
 We now see that only valuable land is cultivated, and that 
 such land commands a rent, consequently rent is a part 
 of the cost of producing agricultural products. Because 
 land rent is a part of cost, the pure labor-cost theory fails. 
 
 10. A Productive Agent as a Composite of Different 
 Single Factors.— We have seen that a single agent is non- 
 productive, and is valueless unless there are other factors 
 
476 Introduction to Economics 
 
 to combine with it. An axe cannot cut wood, neither 
 can a man; it takes the two combined, for the mutual 
 interaction of agents liberates each the productive power 
 in the other. Arid land produces nothing, and is valueless 
 unless water is in prospect. Turn a river into the barren 
 area and the combination, land and water, becomes pro- 
 ductive and valuable. Since neither factor alone could 
 produce and because it requires mutual contact for each 
 factor to liberate the productive capacity in the other, it 
 follows that the productive agent is a compound agent 
 made up by uniting a number of single factors. Does land 
 make the water valuable? or does water make the land 
 valuable? Each liberates the productive capacity in the 
 other, but the two in one are valued. 
 
 II. Any Factor Which Is an Integral Part of a Produc- 
 tive Agent is Valuable. — Consider a rich agricultural State 
 like Minnesota, with its many lakes and rivers. One asks, 
 is not the water there which is used in production a free 
 good? The water in the lakes or rivers is free, be- 
 cause it exists in such abundance as to render the short 
 factor, land, incapable of liberating its productive capacity. 
 Suppose now it were possible for the owner of a bonanza 
 farm in the wheat belt of Minnesota to sell and remove 
 separately the moisture from his farm. The water would 
 not be free, but it would in fact require the total price of 
 the farm to buy it. If one thinks of the air as a separate 
 thing it is free, but, integrated with the chemical quahties 
 of the soil, the farmer would not have it permanently 
 removed, were this possible, for a price less than that of 
 the farm. To harness a free agent and make it an inte- 
 grated part of a composite productive agent is to make it, 
 as part of the composite agent, valuable. A farm is more 
 
Capital 477 
 
 than land; it is the combined productive qualities that 
 grow a crop. Man wastes no effort to harness an agent 
 which is without promise of a valuable return. The con- 
 clusion follows that, except for miscalculation and poor 
 judgment, all cultivated land is valuable and, therefore, 
 commands a rent. Let us give this thought a different 
 statement. 
 
 12. Valueless Land and Valueless Composite Agent. — 
 The writer has in mind an investment of $100,000 made by 
 a Louisiana capitalist, in the fruitless attempt to convert 
 a seemingly bottomless swamp into productive soil. The 
 venture failed and the money was lost because there was 
 no productivity in the situation to exploit. A composite 
 agent is valueless when one of the essential factors is 
 unproductive. 
 
 Suppose that this swamp had responded to good treat- 
 ment, that the composite agent (the land, the capital ex- 
 pended and embodied in its improvement, together with 
 the other essential factors) had produced an annual net 
 yield of $10,000. This capitalized at 5 per cent would 
 give a present worth of $200,000. This yield could not 
 be subdivided, and the different portions of it attributed 
 to the different factors in the composite agent. But why 
 will a man farm except for a yield? And if yield there 
 be, its value is reflected, without exclusion, to the factors 
 which compose the integrated agent of production. The 
 process of capitalization is such as to make all land under 
 cultivation valuable and rent-bearing. 
 
 13. Marginal Land. — Another way of showing that rent 
 is a part of the cost of production is by showing that there 
 is no one land margin for all purposes. What is marginal 
 land ? It is land on the outer edge or fringe of cultivation 
 
478 Introduction to Economics 
 
 — beyond the margin it would be economically unproduc- 
 tive to go. Land may be marginal either because it is 
 physically unproductive or because it is distant from the 
 market. These are instances of the extensive margin. 
 There is also an intensive margin. There is a limit beyond 
 which it would not pay to make further expenditure even 
 upon the most fertile acre, for, although more uses might 
 be pelded, the extra cost entailed would outweigh the 
 additional income. This point at which profits cease and 
 loss begins is the intensive margin. The margin is, in pure 
 theory, a boundary-line separating the land fit (valuable) 
 for cultivation from the unfit (valueless). It is comparable 
 to the line separating time into past and future. One's 
 last breath is now in the past and his next breath belongs 
 to the future; a mere line separates time past from time 
 future. The above definitions have been given in another 
 connection, but it is well to refresh the memory at this 
 point. 
 
 Land suitable for the grazing of cattle may be physically 
 inferior, and far distant from the market. The same can- 
 not be said of land suitable for truck-farming. To express 
 this differently, the extensive margin for truck-farming 
 will be far within the margin for grazing purposes. Like- 
 wise marginal land for factory sites will usually be within 
 the margin of land used for growing cotton. In other 
 words, there are numerous land margins corresponding to 
 the numerous uses for land. 
 
 Assume that land which is marginal for vegetable-gar- 
 dening would yield $5 rent per acre if used for the grow- 
 ing of wheat. This $5 must be paid by the vegetable- 
 gardener. It is part of his cost of production, although 
 he is working land which is marginal for his purpose. 
 
Capital 479 
 
 Now that land rent is seen to be a part of cost, the 
 labor-cost theory of value will cease to bother us. So long 
 as this theory survived, however, the labor-cost theorists 
 had to classify land (natural agents) as distinct from 
 capital. They could not speak of land as capital and then 
 term interest the wages of past labor. 
 
 14. Other Arguments. — ^A classification of any conse- 
 quence must be true to fact and serve a definite purpose. 
 We have seen that the old classification failed in its pur- 
 pose as a proof that labor is the only cost and sole source 
 of value. I shall now examine the truth of the claims that 
 land is unlike capital.' These claims may be briefly stated 
 and refuted. First claim: Land is immovable; capital 
 movable. 
 
 Portability is not a basis for distinguishing capital from 
 land; if it is, an ofl&ce-building must be reckoned as land. 
 The only economic relevancy in the moving of things is 
 this — by moving a thing from where it is less useful to 
 where it is more useful, there is created place utility. 
 Place utility is created by making things more accessible 
 to the market. It is common knowledge that new or 
 improved lines of transportation make land more accessi- 
 ble to the market. 
 
 Second claim: Land is a gift of nature; capital is a 
 product of labor. 
 
 Improved land, as any finished good, is a joint product 
 of man and nature. The question of origins is of interest 
 for some purposes, but not for economic purposes. 
 
 Third claim: The supply of land is fixed; capital is 
 increasable. 
 
 1 Davenport's Economics of Enterprise, chap. XI, deserves careful study 
 on this point. 
 
480 Introduction to Economics 
 
 Land as a productive agent is increased, in the economic 
 sense, by whatever increases its productivity. The exten- 
 sion of transportation, the draining of swamps, irrigation, 
 new methods of cultivation, extensive and intensive utiliza- 
 tion — any means of getting more from land increases land 
 as an economic factor. When one thinks of land as a 
 fixed number of square miles, he is thinking in terms of 
 geography — ^not economics. The economist measures pro- 
 ductive agents in terms of their capacity or output, and 
 not in terms of their weight, bulk, or area. There is 
 much difference between the two words "supply" and 
 "amount." 
 
 The economists who make the above classification tell 
 us that the capacity of agents is measured in terms of the 
 output of these agents. It is also said by them that all 
 capital goods come from the land. Then, how can they 
 say that a fixed capacity (or supply) turns out an ever- 
 increasing yield ? We may ultimately reach the final eco- 
 nomic limit to the supply of land forces, but when that is 
 reached we shall also have reached the final limit to the 
 output of capital goods. 
 
 Fourth claim: Land obeys the law of diminishing returns; 
 capital does not. 
 
 This, it should be said, is not now generally accepted 
 by economists. Economists now know that should any 
 productive agent cease to obey the law of diminishing 
 returns, it would lose the element of scarcity and become 
 a free good. 
 
 Fifth claim: Land yields a differential surplus; income 
 from capital is uniform. 
 
 The thought is that the products of labor are reproduci- 
 ble. If a house costing $10,000 yields 10 per cent on the 
 
Capital 481 
 
 investment, others will build houses in the same vicinity, 
 and will continue building until the return on capital is 
 reduced to normal. On the contrary, it is stated that if 
 one invests $10,000 in a tract of land, a new line of trans- 
 portation or boom in building may increase the return to 
 a large surplus above normal. Land is, according to the 
 argument, non-reproducible, therefore the landlord may 
 enjoy a durable surplus. 
 
 But should the income be increased to |i,ooo, or 10 per 
 cent on the cost price, would the land still be worth only 
 $10,000? Not so — ^its capitalization would increase; if 
 the interest rate be 5 per cent, the capitalization would be 
 doubled. There is no difference between the percentual 
 returns on land and other durable sources of income. 
 
 Likewise, if one tract of land yields more than another, 
 the difference is not a surplus gain, for the better tract will 
 be capitalized higher than the inferior tract. The incomes 
 on the two tracts will tend to equality of percentual in- 
 comes. 
 
 All durable agents being capitalized on the basis of 
 anticipated yield, it follows that the present capital value 
 of land or other agents is such as to allow no surplus except 
 in case of a miscalculation. 
 
 15. Land as Capital. — Whenever a thing is valuable, 
 there is a reason for attributing value to it; land as a 
 productive factor is valuable for the same reason that other 
 factors are valuable, namely, the command it gives the 
 owner over prospective incomes. The estimated worth of 
 its future incomes discounted to their present worth gives 
 the capital value of land. Capital is one's control over 
 incomes expressed in terms of money. The possession of 
 land puts one in control of valuable incomes. Land ex- 
 
482 Introduction to Economics 
 
 pressed in terms of money is capital and it obeys all the 
 laws of capital. 
 
 i6. Capital. — Interest is a pajonent for the use of capi- 
 tal, and it pays for nothing else. Where interest is there 
 must be a capital sum. But interest is always expressed 
 as a per cent. A per cent of what ? Of a certain sum ex- 
 pressed in terms of money. One cannot say that $ioo is 
 5 per cent of a motor-truck, but if the motor-truck be 
 capitalized or priced at $2,000, then $100 becomes 5 per 
 cent of the capital sum. The return on a capitalized sum 
 takes the form of interest. 
 
 The word capital is derived from the Latin caput, a head, 
 a source. The classical Latin at times used the word caput 
 for a sum of money put out to interest. We continue to 
 speak of the principal of a money loan as capital. Bor- 
 rowers in turn regarded capital as funds to invest. The 
 idea was extended to include estimates in terms of capital, 
 not only the sums borrowed and lent, but also the money 
 worth of one's rights in goods. 
 
 17. Capital Contrasted with Wealth. — During the season 
 of 1918 three gentlemen jointly produced 5,000 bushels of 
 potatoes in Monmouth County, New Jersey. At the end 
 of the season potatoes were selling at $1.50 a bushel, mak- 
 ing their total output worth $7,500. The potatoes as such 
 were wealth, and $7,500 the price of that wealth. Each of 
 the three producers had thus a capital of $2,500. Had the 
 price been 50 cents a bushel, the sum of wealth would stiU 
 have been 5,000 bushels, but the capital of each would 
 have been only $833.33. Had the price been $5 a bushel, 
 due to scarcity of potatoes throughout the country, the sum 
 of wealth controlled by these men would stiU be 5,000 bush- 
 els, but each would have a capital of $8,333.33. Wealth 
 
Capital 483 
 
 and capital sometimes move in opposite directions— de- 
 creasing wealth may mean increasing capital, and vice versa. 
 
 These men sold the crop to a merchant in London for 
 $7,500, allowing him ninety days' time for payment. The 
 merchant was in this country at the time, and tendered 
 his note for the amount, payable at a New York bank. 
 In transit the potatoes were sunk. The wealth thing (the 
 potatoes) ceased to exist and with it the capital of the pur- 
 chaser, but the capital of the sellers was not affected. The 
 capital ($2,500) of each of these men ceased to be the money 
 worth of his control over the wealth and became a claim 
 against an individual. 
 
 18. Acquisitive Powers Which Are Not Wealth.— There 
 is much capital which is not wealth at all. 
 
 Good-will: The words "Gold Dust" s3Tnbolize the good- 
 will enjoyed by the Fairbanks Company for their washing 
 powder of that name. A trade-mark is never more than 
 a sjmibolfor good-will, and it serves two purposes: It safe- 
 guards good-wiU as a source of profit, and enables pur- 
 chasers on their part to identify the goods they desire. 
 Good-will is established for a good when purchasers learn 
 to like it and caU for it in preference to other similar goods. 
 So, also, is good-will established for a firm when, through 
 tactful, prompt, and honest dealings a collective friendli- 
 ness is created which insures future patronage. Good-will 
 is valuable because, representing, as it does, both trade- 
 getting and trade-holding, it is a cause of income. It is 
 the largest asset of many a successful business man. But 
 good-will does not take the form of lands, buildings, rolling- 
 stock, clothing, food, or any other wealth — it is not wealth 
 at all. It brings no more goods into society; it merely en- 
 bles individuals to acquire more income from others. Good- 
 
484 Introduction to Economics 
 
 will is acquisitive, not productive in nature. As a source 
 of valuable private income, however, it is capital. 
 
 Franchise: When a city votes a franchise to a company 
 to operate a bus-line or street-railway, it creates no object 
 of wealth. A franchise is a right of an individual or com- 
 pany to enjoy a privilege which is denied to others. It is 
 capital but not wealth, nor does it, as such, produce wealth. 
 All we can say is that it is a private acquisitive source of 
 valuable income. It is capitalized, as is durable wealth, 
 on the basis of its income, and is capital in the true sense 
 of that word. 
 
 Monopoly rights, and other sources of mere acquisitive 
 income, cannot be termed wealth. We should be counting 
 twice to term them wealth. But as sources of valuable 
 private income they must be classified as dapital. 
 
 19. Extension of the Capital Concept. — During the Mid- 
 dle Ages land was not an object of purchase and sale; it 
 was no more a marketable thing than are public highways 
 or city parks to-day. The different forms of wealth in 
 cities meanwhile were salable, and they were expressed, as 
 are salable goods to-day, in terms of their money worth. 
 Since land was not priced, or capitalized, the landlord 
 could not speak of his returns as interest, for interest is a 
 per cent of a capital sum. His returns were called rentals. 
 
 Due largely to differences in salability, town property 
 came to be thought of in terms of its money worth, and 
 was called capital, but there was no occasion for attaching 
 a money price to land, and it was thought of as different 
 from capital. 
 
 The past century has witnessed a vast extension of cap- 
 italistic enterprises, every form of natural resource has be- 
 come readily salable by means of stocks and bonds. All 
 
Capital 485 
 
 wealth has become liquid and the money economy all-per- 
 vasive. 
 
 20. Capital a Right to Income. — The lender thinks of 
 capital as the principal of a money loan; he parts with 
 the money, however, when he loans it, and his capital is 
 but the money worth of the right he holds against the 
 borrower. The borrower looks upon capital as money 
 invested, or to invest, but when once he has invested it 
 his money is gone and his capital becomes the money 
 worth of his expected incomes. A sale on credit is but 
 another form of lending. The seller's capital takes the 
 form of a right, bearing interest, against the purchaser. 
 If paid at the time of sale the seller is in command of a 
 capital fund to be invested. 
 
 Any form of durable wealth is such because of the in- 
 come it promises. Wealth ownership is but a right to 
 income. If its value is expressed in money this wealth 
 becomes capital and the returns upon it are interest. 
 
 Unsalable forms of wealth, such as one's clothing, the 
 food on his table, or his mother's picture, are not capital. 
 Capital is always forward-looking, is a more or less durable 
 source of private income. It may represent the present 
 money worth of real productive agents, or of predatory 
 sources of income. It is a summation of value rather than 
 of welfare, and may reflect scarcity rather than abundance. 
 Capital is the present worth, expressed in money, of a per- 
 son's right to secure expected valuable incomes. 
 
 The next chapter will deal with the interest problem as 
 an outgrowth of the capitalization of expected incomes. 
 
 21. Exercises. — i. Contrast the two theories of value 
 presented at the beginning of this chapter. 
 
486 Introduction to Economics 
 
 2. Can you think of two exceptions to the labor-cost 
 theory of value which are not mentioned in the fourth 
 paragraph of this chapter? 
 
 3. Why was it necessary to classify productive agents 
 as land, labor, and capital, in order to defend the labor- 
 cost theory of value ? 
 
 4. By what reasoning did the older economists make 
 interest on capital a form of wages ? 
 
 5. How did they rule rent out of the cost of produc- 
 tion? 
 
 6. If none but valuable land is cultivated, does it foUow 
 that land rent is a cost in the production of agricultural 
 products? Defend your answer. 
 
 7. It is argued that land differs from capital upon the 
 grounds of (i) portability, (2) origin, (3) fixation of supply, 
 (4) diminishing returns, (5) surplus returns. Criticise 
 these as to their truth or error and as to their economic 
 relevancy. 
 
 8. Contrast wealth and capital. Mention some acquisi- 
 tive sources of private gain which are capital but not 
 wealth. 
 
 9. What changes have brought about an extension of 
 the capital concept ? Define capital. 
 
 10. Criticise the following quotations from Economic 
 Studies, by Walter Bagehot: (a) "When new capital comes 
 into cotton-spinning, this means not only that new money 
 is applied to paying cotton operatives, but also that 
 new money is applied to buying new spinning-machines." 
 (P. 48.) 
 
 Formulate a definition of capital from the use made of 
 the word in this quotation. 
 
 (J) "Between a loaf of bread and a steam-engine, be- 
 tween a gimlet and a piece of bacon, there looks as if there 
 were reaUy nothing in common, except that man made 
 both. But, though the contrast of externalities is so 
 great, the two have a most essential common property, 
 which is that which political economy fixes upon; the pos- 
 sible effect of both to augment human wealth. Laborers 
 
Capital 487 
 
 work because they want bread; their work goes farther if 
 they have good tools, and therefore economists have a 
 common word for both tools and bread. They are both 
 capital and other similar things are, too." (P. 50.) 
 
 According to the quotation what is the "essential com- 
 mon property" of capital "which political economy fixes 
 upon?" 
 
 Does land have this "common property"? 
 
 If "both tools and bread" are capital, can a distinction 
 be made between capital and consumption goods? 
 
 From the thought in this quotation could you exclude 
 good health from a definition of capital ? What productive 
 agents could you exclude ? 
 
 (c) "Thus, for the present discussion, the acquired skill 
 of a laborer is capital. ... It is a productive thing made 
 by man, as much as any tool; it is, in fact, an immaterial 
 tool which the laborer uses just as he does a material one. 
 It is co-operative capital as much as anything can be. 
 And then, again, the most unlikely-looking and luxurious 
 articles are capital if they reward and stimulate labor. 
 Artisans like the best of rabbits, the best bits of meat, green 
 peas, and gin; they work to get these; they would stay idle 
 if they were not incited by these, and therefore these are 
 capital." (P. SI.) 
 
 If "the acquired skill of a laborer is capital," would 
 his other productive capacities or qualities — his muscle, 
 reasoning faculties, willingness to work — ^be capital ? 
 
 If capital' be that which stimulates labor, is one's love 
 for his wife and family to be termed capital ? 
 
 Would this quotation make wages — the reward for 
 labor — capital ? 
 
 Would you judge from this quotation that capital is 
 stimulus to work? or the reward for working? or the power 
 to work? or a tool with which to work? or the things, as 
 "green peas and gin," which work would create? 
 
 {d) Other quotations: "The rest is left in money, and 
 this we call the saving, the new capital." (P. 171.) " Cap- 
 ital obtained by abstinence." (P. 169.) "You can say 
 
488 Introduction to Economics 
 
 that the capitalist must be in possession — of certain arti- 
 les possessing exchangeable value." (P. 185.) 
 
 Are the words saving and abstinence synonjmis? 
 
 Judging from these quotations, what things are to be 
 included in capital? 
 
 (e) A good definition contains one and only one funda- 
 mental idea. Can you formulate a good definition of 
 capital which embodies all that Bagehot has said? 
 
 Would such a definition make capital tangible or intan- 
 gible? productive or merely acquisitive? external to man 
 or a quality of man ? In so far as money fits into the defi- 
 nition would it be money invested? or money saved? or 
 money to be acquired ? 
 
CHAPTER XXII 
 INTEREST 
 
 I. The productivity theory. 2. The interest rate unaffected by varia- 
 tion in production. 3. Unproductive loans. 4. The money fallacy. 5. 
 Variation of bank interest. 6. Gross interest and net interest. 7. Time- 
 discount. 8. Illustration. 9. Time-discount in capitalization. 10. Capi- 
 talization and interest. 11. Adjustment of interest to capitalization. 12. 
 The present worth of a bond. 13. Money loans analogous to investments. 
 14. The interest rate reflects time-discount. 15. Fallacy of inversion. 16. 
 Interest involved in simple exchanges. 17. Preference for present posses- 
 sion. 18. Apparent exceptions. 19. The consumption idea. 20. Reasons 
 for differences in time-discount among persons. 21. Exercises. 
 
 1. The Productivity Theory. — ^Ask the common man, 
 "What determines the rate of interest?" He will consider 
 this a simple common-sense question and give, with an 
 air of confidence, one or the other of the following replies: 
 "The rate of the productivity of capital determines inter- 
 est," or "The rate of interest is determined by the supply 
 of loanable money on the market." These replies, how- 
 ever, are false; they represent two of the most persistent 
 fallacies in economics. 
 
 One observes that the rate of return on different types 
 of business tends to be about the same. A $50,000 store, 
 or mill, or farm, or mine will return a net yield of $2,500. 
 He reasons from the capital value of the agent to the money 
 worth of the product, and concludes that the rate of in- 
 terest is proportionate to the productivity of capital. 
 
 2. The Interest Rate Unaffected by Variation in Produc- 
 tion. — Does the capital value of a farm determine the 
 price of the crop, or is it the price of the crop that deter- 
 mines the capital value of the farm ? Can you sell your 
 
 489 
 
490 Introduction to Economics 
 
 crop for $i,ooo because your farm is worth $20,000, or is 
 your farm worth $20,000 because you can sell the annual 
 crop for $1,000? The order of thought must be the reverse 
 of that assumed by the productivity theorist. The farm 
 produces crops, but the capital value of the farm does not 
 determine the price of the crop; it is the price of the crop 
 that determines the capital value of the farm. 
 
 Assume now that because of the discovery of a new proc- 
 ess the annual crop of the farm is increased from $2,500 to 
 $5,000. Does it follow that the rate of interest is doubled, 
 that it has increased from 5 to 10 per cent ? The answer is, 
 the rate of interest has been neither increased nor diminished. 
 The capital value of the farm, however, has been doubled. 
 
 It is the capital value of the agent and not the rate of 
 interest which is affected by a change in the productivity 
 of agents. 
 
 3. Unproductive Loans. — Furthermore, a vast amount 
 of capital is borrowed at interest for purposes of consump- 
 tion. This capital produces nothing other than immediate 
 gratification for the consumer. Should we assume that 
 all entrepreneurs owned their productive agencies, and 
 that no capital is borrowed for productive enterprise, still 
 we should find that much capital would be borrowed at 
 interest for pure consumptive purposes. Here the bor- 
 rower's motive for paying interest cannot be the yield of 
 such capital. The productivity theory fails both for loans 
 to be used productively and to be used for the immediate 
 gratification of desires. 
 
 4. The Money Fallacy. — ^The other fallacy, above men- 
 tioned, is that if money is plentiful interest will be low, 
 and vice versa. Interest, it is said, is but the price of 
 money. As the price of potatoes is low when the crop is 
 
Interest 491 
 
 abundant, so the price for the use of money will be low 
 when it is plentiful. The faulty notion that the rate of 
 interest is lowered by a large issue of paper notes has a 
 strong hold on the public mind. 
 
 Why do men borrow money? They borrow in order 
 that they may purchase goods — tools of production, food, 
 land, clothing, and other. The farmer borrows money with 
 which to stock his farm. The mere issue of money wiU not 
 increase goods. Double the money and you do not double 
 the construction of railways and machine-shops, nor do you 
 multiply by two the number of horses, swine, and cattle. 
 
 Goods remain the same while the money doubles, with 
 the result that, other things equal, it requires two dollars 
 to do the money-work formerly done by one. Prices dou- 
 ble, and the borrower must demand $200, whereas he 
 would have borrowed $100 before the increase in the 
 quantity of money. 
 
 Because prices, other things being equal, vary with the 
 quantity of money, the demand for money varies with the 
 quantity of it. Other things the same, the demand for 
 money will double when the quantity of it is doubled, and 
 vice versa. Interest is the price paid for a money loan, 
 and, like any other price, it marks the point of equilibrium 
 between supply and demand. 
 
 Professor Irving Fisher says that "an examination of 
 the figures for per capita circulation of money in the 
 United States for thirty-five years shows that in about 
 half of the cases, when money grows more abundant, in- 
 terest is higher, and in half of the cases it is lower. In 
 other words, interest changes with absolutely no relation 
 to the quantity of money in circulation." ' 
 
 ' Elementary Principles of Economics, p. 359. 
 
492 Introduction to Economics 
 
 5. Variation of Bank Interest. — The operations of banks 
 le^d many to believe that an abundance of money makes 
 interest low; they observe that when the banks have sur- 
 plus funds they lower the rate in order to attract borrowers. 
 It is true that the banker's prosperity consists in keeping 
 his funds active; it is as much against his interest to have 
 idle money as it is detrimental to the merchant to have an 
 idle stock of goods. 
 
 He is compelled by law and custom to maintain certain 
 reserves. When his reserves are far above requirements, 
 he artificially lowers the rate in order to put his idle money 
 to work. When his reserves are low, he must protect 
 them, and the way to do this is to raise the rate high 
 enough to discourage borrowers. Thus the bank rate is 
 artificially varied with respect to reserves, and it is not 
 necessarily in keeping with the true rate of interest pre- 
 vailing in industry. 
 
 When a considerable portion of the money in the com- 
 munity flows into the banks, the banker will lower his 
 rate; but when a relatively larger share goes into the tills 
 and pockets of the people, the bank will raise its rate. 
 
 6. Gross Interest and Net Interest. — ^It is advisable to 
 keep in mind the distinction between net or true interest 
 and gross interest. It is well known that the merchant 
 who sells on time has many bad debts and difficulties of 
 collection which are burdensome and costly. His risk is 
 covered in part by charging a higher price; the honest who 
 punctually pay their debts are made to pay a higher price 
 because of the shortcomings of others. In the same man- 
 ner, when money is loaned to promote an uncertain enter- 
 prise or hazardous undertaking, or if the borrower is 
 doubtful, the charge exacted for the loan will be raised to 
 
Interest 493 
 
 a point at which it will be a compensation for the amount 
 of risk. The ordinary rate of interest on safe securities 
 will not attract capital to an employment known to be 
 uncertain in its returns, or exposed to dangerous accidents. 
 The manufacture of explosives, shipping projects when 
 enemy submarines are threatening, mining operations of 
 uncertain types, are compelled to pay the true interest 
 for their capital and an additional amount to cover risk. 
 Thus gross interest covers both net interest and insurance. 
 
 Furthermore, the gross interest is high on petty, short- 
 time loans. If one has $20,000 to loan, he has little diffi- 
 culty of bookkeeping and labor if he places it out on a safe 
 first mortgage to one person for a number of years. But 
 if he loans to a thousand or more persons, in small sums 
 for varying periods of time, he has much clerical worry 
 and extra cost. To cover this cost he must require a rate 
 higher than that prevailing on safe long-time loans. Gross 
 interest then covers three payments — -net interest, insur- 
 ance for risk, and cost of doing business. 
 
 7. Time-Discount. — In order to set a number of princi- 
 ples in their true relationship, the example of the evalua- 
 tion of a farm may be given. The order of thought runs : 
 Farm ■►-*• crop (usance) ■►-♦- value of crops (value of usance) 
 «•-* rents »>►-> time-discoimt '»-*■ present capital value of the 
 farm. 
 
 The farm and crops form the physical basis for the value 
 problem. Then arises the rent problem, which is con- 
 cerned with the valuation of usances as they arise, and the 
 payment of rent by one person to another for the tem- 
 porary uses of the productive agent. Following and 
 closely akin to the rent problem comes the principle of 
 .time-discount, which has to do with finding the present 
 
494 Introduction to Economics 
 
 worth of a series of future rents or usance values. The 
 present monetary worth of the sum of the future rents of 
 an agent is, of course, the capitalized value of the agent. 
 
 It is clear that agents are valuable because they produce 
 a valuable yield, but if the capital value of an agent is 
 determined by its future yields, how shall we account for 
 the limited capital value of a durable agent? 
 
 Let us consider an acre of land whose net annual 3aeld 
 is $io. So far as we know, it will continue this )deld 
 through time. Why is it not worth oo, an incalculable 
 sum? Why does it have a limited capital value of $200? 
 Time-discount is the answer. Were there no time-dis- 
 count, there would be no limit to its capital value. Why 
 will the borrower exchange $106 a year hence for the pos- 
 session of $100 now? Time-discount. Time-discoimt is 
 involved in the valuation of every agent which lasts be- 
 yond the present. 
 
 In the capitalization of any durable agent three ideas 
 must be kept in mind; the value of the usance (yield), the 
 distribution of usances (yields) through time, and time- 
 discount. 
 
 8. Illustration. 
 
 $50 $50 $50 $50 $50 
 
 A 
 
 Figure No. i 
 
 Let (A\ represent a productive agent, and the length 
 the lines to the right wiU represent the present worth of of 
 succeeding annual incomes. It will be observed that each 
 income when it arises is worth $50, but that the present 
 value of each grows less and less as it is postponed farther 
 and farther through time. The total length of all these 
 
Interest 495 
 
 lines, representing as they do the present worth of each suc- 
 cessive income, is equal to the present worth of the agent.* 
 
 9. Time-Discount in Capitalization. — Capitalization is 
 the process of determining the present money worth 
 of durable sources of valuable incomes. Time-discount 
 neither precedes nor follows this process; it is itself the 
 essence of the process. 
 
 High time-discount means a low capitalization, and 
 vice versa. This must be so, for the present capital value 
 is but the summation of the present worth of all the antici- 
 pated incomes. If one highly discounts a future income, 
 its present worth must be small, and the total present 
 worth of all incomes must be low when all are highly dis- 
 counted. 
 
 Time-discount enables us to compare the value of pres- 
 ent consumable goods with that of future goods; it gives 
 the basis for exchanging present ripe goods for the durable 
 agents of production. Exchange or trade is based upon 
 the present worth of goods. The economic world centres 
 in the present. Present ripe goods and services may be 
 compared and exchanged against each other without time- 
 discount, but every valuation and exchange involving dura- 
 ble or future goods would be impossible without time-dis- 
 coimt. 
 
 In the language of Professor Fetter, "Whenever two 
 
 ' To give a formula: Suppose a rent-bearer jdeld equal annual rentals (o) 
 in perpetuity, and the rate of time-discount, r, then the value of the agent, 
 or its present worth, P, might be expressed by the geometrical infinite series: 
 
 Lb a 0- d 
 
 P .= 1 1 1 h etc. to 00 
 
 i-l-r {i + rY {i + r)' (i -i- r)* 
 Taken from Fetter's Principles of Economics. 2d. ed., 1910, p. 586. See 
 Tanner's Algebra, pp. 336-339. 
 
496 Introduction to Economics 
 
 non-synchronous gratifications, rents or series of rents, are 
 exchanged, they must be discounted to their present worth 
 to be made comparable." ' 
 
 ID. Capitalization and Interest. — In keeping with com- 
 mercial usage interest is here defined as a payment for 
 contract loans made in terms of money. Interest is ex- 
 pressed as a per cent; it expresses the exchange ratio of 
 the present capital value of an agent to that of an annual 
 yield of that agent. If $ioo now is exchanged or loaned 
 for $105 to be paid a year hence, we say that the interest 
 is s/ioo, or 5 per cent. Thus interest is but a percentual 
 expression of the time-discount on money loans. 
 
 Men borrow money in order to invest it in other things. 
 Because money is readily exchangeable for other goods, it 
 follows that the same time-discount involved in the capi- 
 talization of goods also prevails in money loans. 
 
 II. Adjustment of Interest to Capitalization. — ^We have 
 made clear that the price of durable goods involves some 
 rate of time-discount. Business men borrow and pay in- 
 terest for money with which to buy these durable goods. 
 The contract interest or price paid for the use of this 
 money will approximate the rate of time-discount which 
 determines the price of durable goods. Were interest on 
 money lower than the rate of time-discount at which 
 goods are priced, all would be borrowers and lenders 
 would disappear. Certainly all would borrow money at 
 a low interest to invest in durable goods yielding a higher 
 rate of return. Lenders would disappear, for would one 
 loan money at 3 per cent which he could invest at 8 per 
 cent? 
 
 What, on the contrary, would result were interest on 
 ' American Economic Review, March, 1914, p. 74. 
 
Interest 497 
 
 money higher than the rate of time-discount on the future 
 returns of durable goods? The result would be that none 
 would desire to borrow. What motive would there be for 
 borrowing at lo per cent to invest at 4 per cent? Men 
 will cease to borrow the moment that interest on money 
 exceeds the rate of time-discount involved in the capitaliza- 
 tion of goods. Precisely the same cause that would drive 
 borrowers from the market would multiply lenders in the 
 market. The moment interest on money attains a higher 
 rate than investments will yield, lenders are multiplied 
 and borrowers are absent. 
 
 The demand for money and the supply of it reach an 
 equilibrium which conforms in the long run to the rate of 
 time-discount in the capitalization of durable goods. Ex- 
 pressed differently, the interest or price paid for the 
 present use of money conforms to the price of durable 
 agents. 
 
 12. The Present Worth of a Bond. — ^The purchase of a 
 government or corporation bond may, with accuracy, be 
 spoken of either as an "investment," or as a "money loan." 
 The price of the bond is the discounted future payments — 
 principal and interest — specified on the face of the bond. 
 Consider a $1,000 " 5 per cent" ten-year bond. This bond 
 is an obligation on the part of the issuer to pay $50 a year 
 for ten years, and to return the $1,000 at the end of the 
 loan period. What is the selling price of the bond ? The 
 solution consists in finding the total present worth of each 
 $50 payment and that of the principal due ten years hence. 
 Assume that the time-discount as expressed in the rate of 
 interest is 5 per cent. The first $50 payment due one 
 year hence has a present value of $47.62, or $50 -e- 1.05. 
 The present value of the second payment is $50 -J- (1.05)% 
 
498 Introduction to Economics 
 
 or $45.35; the present value of the third is $50 h- (1.05)', 
 or $43.19, and so on to the tenth, whose present worth is 
 $50 -ir (1.05)", or $30.69. The present value of the princi- 
 pal is $1,000 -e- (1.05)1", or $613.94. Adding these, we find 
 $47.62 + $45.35 + $43.19 + $41.14 + $39.17 + $37.31 
 + $35-53 + $33-84 + $32-22 + $30.69 + $613.94 equals 
 $1,000. 
 
 13. Money Loans Analogous to Investments. — ^As the 
 money paid for a bond may be considered either as a loan 
 or as an investment, so the money paid for shares of stock 
 or for land or buildings may, by analogy, be regarded in 
 the same way. - Assuming a discount rate of 5 per cent, a 
 farm from which is expected a net annual yield of $2,000 
 will be worth $40,000. The purchaser makes 5 per cent on 
 his money, as he would by loaning his money or by pur- 
 chasing a bond. So closely akin is time-discount in the 
 capitalization of goods to the interest on money that many 
 writers call them both interest. 
 
 14. The Interest Rate Reflects Time-Discount.— While 
 these concepts are closely related, they are not to be con- 
 fused. The rate of interest is a mere arithmetical expres- 
 sion of the more subtle concept of time-discount, or diflfer- 
 ence in the value of like goods at different times. 
 
 The rate of interest is strictly a monetary concept, and 
 lending money at interest is of comparatively recent origin. 
 Long before men began to puzzle over interest on money 
 they were valuing deferred incomes and durable goods. 
 Men were putting a present worth upon more or less dura- 
 ble sources of income, and carrying on trade in these long 
 before there was a money economy to furnish an arithmetic 
 interest rate. But could they put a present valuation 
 upon durable goods or future incomes apart from time- 
 
Interest 499 
 
 discount ? This is unthinkable, for without discount there 
 would be no limit to the value of durable goods. 
 
 Could man place a present capital value on durable 
 sources of income apart from a rate of interest P^ I 
 answer in the affirmative, and offer as proof the fact that 
 this was done prior to the money economy, and is still 
 done in countless instances. 
 
 The rate of interest no more accounts for the value ratio 
 between durable agents and their annual yield than a yard- 
 stick accounts for length. 
 
 15. Fallacy of Inversion. — There are authors who see 
 clearly that interest as a value problem has to do with 
 the discounting of values through time. They clearly dis- 
 tinguish interest as a time-price from rent as a product-price 
 problem. They see that the essence of interest is time, 
 while that of rent is productivity. What they do not see 
 is that both historically and logically the capitalization of 
 productive or acquisitive agents must be given priority 
 above interest. 
 
 Noteworthy economists not infrequently fall into this 
 fallacy of inversion. To state the fallacy in the form of a 
 question and answer: How determine the rate of interest 
 yielded by a capital agent? This question, according to 
 the fallacious reply, cannot be answered without a knowl- 
 edge of the value of the agent; and the value of the agent 
 cannot be obtained without assuming a rate of interest 
 and using it in discounting the income which the agent 
 yields. Note that the answer to the question is assumed, 
 not accounted for. To assume a rate ready-made neither 
 gives a theory nor accounts for anything. There is no 
 more reason for assuming the rate of interest than for 
 ' See Davenport's Economics of Enterprise, pp. 231-232. 
 
500 Introduction to Economics 
 
 assuming prices in general. In fact, the above does assume 
 prices, for it is by means of the assumed interest rate that 
 prices are found. To assume the interest rate is to beg 
 the whole question and account for nothing. 
 
 i6. Interest Involved in Simple Exchanges. — The busi- 
 ness man notes the doings of Wall Street, or scans his 
 morning paper to find the interest rate ready-made for him. 
 To explain interest or determine why the rate is this or 
 that is not his task. A more difficult task confronts the 
 economist; he can neither assume the rate nor borrow it 
 from the market; he must account for and explain it. 
 
 His starting-point is found in the present price of durable 
 goods or deferred incomes. He has the data for determin- 
 ing interest in simple exchanges on the market. Before 
 there can be exchange, goods must be discounted to their 
 present worth in order that their values may be com- 
 pared. The ratio between the exchange value of a good 
 and a deferred yield of that good shows the rate of time- 
 discount, and this rate governs the interest that will be 
 paid for a money loan. If Crusoe on the lonely island 
 meets in trade a wandering adventurer, some rate of time- 
 discount marks their transactions, and this gives sufficient 
 data for the simple arithmetical calculation of a rate of 
 interest. 
 
 17. Preference for Present Possession. — Possession, in 
 our exchange economy, gives one control over whatever 
 goods or services he would acquire; it puts at his disposal 
 incomes either present or future. The motive for dis- 
 counting incomes is not based wholly upon "impatience 
 for present enjoyable goods," for time-discount prevails in 
 the capitalization of goods where there is no thought of 
 consuming incomes by the person who does the discount- 
 
Interest 501 
 
 ing. It is the value of incomes which is discounted — what 
 the person who discounts incomes proposes to do with 
 them is another question. He may consume them now or 
 later, may enjoy them himself, or give them to another, 
 may reinvest them or leave them for heirs. Regardless 
 of the disposal he would make of the incomes, he discounts 
 their value through time and this is the significant thing 
 in the interest problem. 
 
 Possession or ownership gives one the disposal of in- 
 comes for consumption or other purposes. Apart from 
 possession, one would have no value and no occasion for 
 discounting value through time. Possession in some form, 
 either present or future, is a condition which is presup- 
 posed in the discount market. Without possession there 
 would be no investments, no capitalization, no exchang- 
 ing, no borrowing at interest. It is the time aspect in the 
 value of our possessions that causes us to pay more for the 
 present possession of $ioo at hand than for the present 
 possession of the right to collect $ioo a year hence. 
 
 Apart from possession there would be no need for such 
 a word as capital, and without capital no need for such 
 a word as interest. Why is not man himself capital? 
 Capital is a possession and man is not possessed. He 
 never gets capitalized, although he is productive, and this 
 simply because he is not a private possession. Enslave 
 him, however, then possession arises and with it capitaliza- 
 tion, capital, and interest. 
 
 The motive back of possession is to secure the disposal 
 of valuable incomes; it is a part of human nature to desire 
 this disposal now rather than at a distant future time; this 
 preference for the present over the future disposal of in- 
 comes is itself time-discount. 
 
502 Introduction to Economics 
 
 i8. Apparent Exceptions. — An apparent exception to 
 the desire for present over future possession is found in 
 the use of goods in their proper seasons; coal in winter, 
 straw hats and ice in summer. If it is July, one prefers 
 coal in January rather than at the present. But it is value 
 referred to in time-discount rather than the physical thing. 
 Translate a ton of coal into $io in money, and you will 
 find that $io in hand is worth approximately $10.30 six 
 months from now. To the average householder the coal 
 has no value for present purposes; its present value is its 
 future value discounted. Seasonal goods are made com- 
 parable and subject to commercial transactions only when 
 translated into value. 
 
 Other apparent exceptions arise from the fact that man 
 naturally prefers possession or disposal of present incomes 
 to that of deferred incomes. For instance, people buy 
 Kfe insurance with the full knowledge that no income will 
 accrue until after death. They have the disposal of the 
 income when they choose the beneficiary, otherwise no 
 insurance would be written. But the puzzle is this: How 
 does the present outlay of money for incomes after death 
 show a natural disposition in men to prefer disposal of 
 present over future value incomes? Translate the future 
 income and the present outlay into value, and the pre- 
 miums now paid will be less than the final income. Time- 
 discount means but one thing— preference for present over 
 future value income. 
 
 19. The Consumption Idea. — It has been shown that 
 time-discount is not limited to enjoyable income for con- 
 sumption. Distinction must be made between time-dis- 
 count and the motives for such discount. Consimiption 
 is but one among many such motives; the term possession 
 
Interest 503 
 
 covers them all. ; Possession is one's best economic friend, 
 for it gives him power and prestige among his fellows, 
 shields him from personal want, provides him the happy 
 sense of security unknown to those who walk the street in 
 search of a job; finally, it gives him such disposal as he 
 wills over income. 
 
 Does impatience for present consumption motivate one 
 to borrow money at interest with which to pay for insur- 
 ance collectible after death? Do not large capitalists 
 emphasize the building of fortunes rather than consump- 
 tion? They invest in railroads, works of construction, 
 corporations, and durable sources of income. Old men 
 invest in unimproved lands with little hope of ever enjoy- 
 ing consumable returns from them. Should returns ma- 
 ture while they live, the chances are they will be reinvested 
 in durable goods; in this manner consumption wiU be 
 postponed. 
 
 We must be mindful that the handling of large volumes 
 of capital, together with the bulk of important monetary 
 transactions, appertains to the large corporations and 
 industrial enterprises whose incomes are deferred. Here 
 capital is handled on such a scale as to far exceed all other 
 monetary transactions which affect the interest rate. 
 
 In every such transaction there is, and must be, in- 
 volved a rate of time-discount, otherwise there would be 
 no means of capitalizing as a basis of the necessary ex- 
 changes and investments. The things discounted are the 
 future value incomes from these capital agents. Are they 
 discounted for purposes of ready consumption ? Is the idea 
 of ready consumption a prerequisite of discount? By no 
 means. 
 
 The millionaire who could not consume his possessions 
 
504 Introduction to Economics 
 
 in a lifetime invests for an additional million with as much 
 ardor as he did for his first dollar, and in every such 
 investment he discounts future incomes just as truly as 
 the hungry tramp gives higher appraisal to a present din- 
 ner than he does to a distant one. 
 
 Present possession tends to guarantee or underwrite 
 one's future as well as his present. Wealth in hand may 
 serve present needs or provide means for future support. 
 Man lives according to a plan, ill devised perhaps, none 
 the less a plan. Possession enables him to look to the 
 future with confidence. At the basis of his plan of life 
 must be disposal of income. This disposal of value in- 
 comes he prefers now rather than later, and the extent of 
 this preference is his time-discount. 
 
 The theory of interest is an answer to this question: 
 What premium will people pay for the possession of a 
 present income stated in terms of money as compared 
 with an equivalent income in terms of money at a future 
 time? The answer requires an analysis of time-discount, 
 and time-discount is based upon the motive of posses- 
 sion. 
 
 20. Reasons for Differences in Time-Discoimt among 
 Persons. — Differences in the psychology of persons as well 
 as differences in incomes explain the various degrees of 
 time-discount among persons. 
 
 Differences in the psychology of persons: Emotions kin- 
 dle thought and inspire intellectual action. They burn 
 the objects of our desires indeUbly into consciousness, and 
 thus at times vitiate balanced judgment by giving undue 
 weight to some things over others. When it is a matter of 
 present self-interest, emotion turns the magnifying end of 
 the telescope to our intellectual eye, it turns the minimiz- 
 
Interest 505 
 
 ing end when our future interest is concerned. The emo- 
 tional medium deflects our thought as water deflects the 
 sunbeam. Emotions are not compelled, not felt because 
 they should be, but felt when there is impressive cause. 
 The more concrete the cause, the more intense is the emo- 
 tion. One scandalous instance of a brutal drunkard whip- 
 ping his wife will win votes for prohibition, whereas cool 
 interest attends the writings of the economists on the 
 inefficiency of labor occasioned by the rum habit. Let 
 orators rave and gesticulate wildly on abstract charity, 
 but the effect is not comparable to that of the helpless 
 widow and child dying of hunger in a miserable tenement. 
 Vividly felt examples are to thought what fuel is to fire, 
 and these examples are in the living present rather than in 
 the unfelt future. We wince with a shriek from present 
 contact with a hot stove, and are little moved by the 
 thought of future pain. Such are emotions that present 
 hunger, cold, and need, that present emergencies and plea- 
 sures stand as convincing witnesses before the bar of judg- 
 ment; they make a stronger case than is possible for the 
 absent feelings of the future. The weight of approval 
 favors the disposal of incomes for present rather than for 
 future needs. The nature of our emotions predisposes 
 the mind to time-discount.^ 
 
 Edtication tends to dispel short-sighted emotions. It is 
 forward-looking and constructive, and as such it oftentimes 
 sacrifices the present to the future by using present pos- 
 session and effort as a source of future income. The boy 
 who patiently strives for higher education is converting 
 present toil into future reward. Thrift and education go 
 hand in hand. Waste and indulgence characterize the 
 ' See Halleck's Psychology, chap. X. 
 
.506 Introduction to Economics 
 
 ignorant who are devoid of foresight. This is shown in 
 their scanty savings for the future, in their high time- 
 discount and rate of interest. 
 
 Lffve of posterity is one of the greatest incentives to 
 thrift. It inspires one both to produce and to save for 
 the welfare of his children. This means, of course, a high 
 estimate on future incomes or a low time-discount. It is 
 thought that the disposition to provide posterity is the 
 greatest single influence in holding down the rate of in- 
 terest. A severe inheritance tax or other threat to the 
 sure delivery of one's saving to his children would be a 
 most deadening influence on thrift and a direct cause of 
 increasing the rate of discount. 
 
 Self-control is in part a matter of habit and in part a 
 trait of character. The habitual drunkard loses the habit 
 of thrift when enslaved to a base appetite, and would 
 mortgage his future promise for the temporary gratifica- 
 tion of the spree. The sons of foolish rich men are per- 
 mitted to accustom themselves to expensive luxuries. 
 They are ignorant of the enforced frugality which is im- 
 posed upon sons, rich or poor, who are wisely forced to 
 save and to learn the value of income through the toil of 
 earning it. Spending is a habit easy to acquire, and when 
 acquired there is Httle disposition to save. There can be 
 little provision for future welfare when the mind is disposed 
 to spendthrift habits. High time-discount prevails when 
 appetites and customs are formed contrary to the principle 
 of thrift. Again, traits of character, such as a feeble will 
 or pessimistic turn of mind, affect time-discount. With- 
 out wiU-power one will hardly deny his present emotions 
 to save for the future; in other words, he will have a high 
 time-discount. 
 
Interest 507 
 
 The pessimist may regard the future from two points 
 of view; first, in his dyspepsia or cough he may find direful 
 forebodings looking to a termination of life. "What's the 
 use" to save for a future after death? He will consume 
 rather than save. "Soul, thou hast much goods laid up 
 for many years, take thine ease, eat, drink, and be merry"; 
 to-morrow you may die. Expectation of a short hfe will 
 cause a high time-discount. Secondly, the pessimist may 
 look for the worst in the form of a long life full of want, 
 worry, and woe. In preparation, he will deny his present 
 wants in order to provide for his future needs. The felt 
 necessity of providing for the future means a low time- 
 discount. 
 
 Differences in the incomes of persons: Incomes differ in 
 their distribution through time; they also differ in size, 
 and they are not equally certain of arriving. 
 
 Regarding the distribution of incomes through time: (a) 
 For a period there may be no incomes, then they begin 
 and grow larger. If one goes into the dry-goods business 
 in a stable New England city, he will at first undergo the 
 cost of securing a site, building, stock of goods, and mer- 
 cantile equipment. Then follows a period of building a 
 business, of studying the market, advertising, and court- 
 ing good-will. Next comes a period of business growth 
 and prosperity. Finally, when the business has grown 
 to the extent of the market, it has reached a stage of 
 returns more or less constant. From first to last the in- 
 come curve would look somewhat as shown in figure on 
 next page. 
 
 This curve represents incomes deferred, and at the be- 
 ginning of this period one will have ordinarily a high time- 
 discount. Why? Financial burdens are pressing, while 
 
508 Introduction to Economics 
 
 incomes years hence are promising. If by discounting 
 some of these future incomes he could secure means to 
 meet his present burdens, he would surely discount, and 
 that, too, at a high rate. 
 
 / 
 / 
 
 J"' 
 
 
 
 Figure No. 2 
 
 (6) Some incomes, as the remuneration for professional 
 services, start at a small figure and grow step by step to 
 large returns. For the reason just given, time-discount 
 would be high in the earlier stages of the course of in- 
 comes. 
 
 (c) Certain incomes tend from the beginning to be more 
 or less constant. Incomes of this type are found among 
 those who own improved real estate, stable businesses, and 
 among passive capitalists who loan on long-time contracts. 
 The owner of a constant income, other things being equal, 
 is likely to have a normal time-discount. 
 
 {£) The mining business typifies a course of income that 
 is large, in its early stages, but which diminishes as time 
 advances. Growing costs accompany the driving of en- 
 tries farther and farther from the mouth of the mine. 
 Some of the best-known mines in this country have been 
 
Interest 509 
 
 abandoned, not because the coal is exhausted, but because 
 the increasing cost of securing it has come to equal the 
 price of the coal. After the initial cost of opening the 
 mine, a curve representing the course of incomes will 
 appear as follows : 
 
 -L^o^ 
 
 FlGTJRE No. 3 
 
 (e) The size of income has its bearing on time-discount. 
 The poor — those whose incomes are small — tend to have 
 a high time-preference. The sting of poverty arouses the 
 emotions in behaK of present self-interests. Present hun- 
 ger is more appealing than a sound argument for a good 
 breakfast next year. The poor man knows that he should 
 save, that he cannot have his cake and eat it, too, but his 
 present need makes the stronger appeal, for how could he 
 have a future unless he maintains the present ? 
 
 (/) The uncertainty of income affects time-discount. If 
 one contemplates a short hfe because of ill-health, or pessi- 
 mism, or a hazardous occupation, he will have, as we have 
 seen, a high time-discount. If he lives under an unstable 
 government or where outlaws as Villa abound, or if a dan- 
 gerous military power seeking conquest threatens invasion, 
 the effect will be that of high time-discount. During the 
 Civil War many who were in the territory of Sherman's 
 march to the sea abandoned all idea of saving; they burned 
 their houses and destroyed their property rather than risk 
 its capture by the foe. Time-discount is high where there 
 
510 Introduction to Economics 
 
 is risk of securing income. Loans to a questionable char- 
 acter are always at a high rate. On the contrary, if one 
 has a good present income, and if there are chances of his 
 losing it in the future, his time-discount will be low, for he 
 will wish to save a portion of his present means as a pro- 
 vision against a possible "rainy day." 
 
 The following chapter is a continuation of the same subject. 
 The exercises will follow the completion of the discussion. 
 
CHAPTER XXIII 
 INTEREST, FURTHER CONSIDERED 
 
 I. Determining a rate of interest. 2. Borrowers. 3. Adjustments in the 
 market. 4. The supply side of the money market. $• The order of 
 thought: Production and discount. 6. Questions and answers involving the 
 foregoing principles. 7. Exercises. 
 
 I. Determining a Rate of Interest. — In a previous chap- 
 ter we saw how, through the operations of supply and de- 
 mand, a common market price is established among indi- 
 viduals with different valuations in mind. We find a 
 common rate of interest or market price on money loans 
 in a similar manner. Time-discoimt is an individual mat- 
 ter varying from person to person, but the market rate of 
 interest, Hke the market price of corn, is the same for each 
 and all. 
 
 I shall not take space to repeat the process of finding 
 the market price, or equating-point between supply and 
 demand, where there are numerous buyers and sellers. A 
 simple illustration will suffice. 
 
 Let us imagine the case of a professional man who is 
 fifty-five years of age. He now has abundant savings and 
 a large income, but he looks forward to the not-distant 
 future when his income will diminish below what his 
 needs require. His foresight and mature judgment enable 
 him to paint mentally a vivid picture of his future circum- 
 stances, and teach him the necessity of skimping now that 
 he may have larger funds at his future disposal. Will he 
 be a spendthrift now and highly discount his future in- 
 fill 
 
512 Introduction to Economics 
 
 comes for his present disposal? Precisely the contrary, 
 for he will wish to take from his present abundance and 
 add to his future funds for the coming need. How may 
 he do this? This may be accomplished by loaning, for 
 the amoimt now loaned is subtracted from his present pos- 
 sessions and when future pa3anent is made the principal 
 plus interest will then be added to his possessions. As- 
 simie that his time-discount is so low that he would be 
 willing, if necessary, to take i per cent iaterest. 
 
 On the other hand, let us consider a young man better 
 equipped with imagination than judgment, who is begin- 
 ning a business career. He has limited means and high 
 expectations for a prosperous future. He may be a new 
 graduate with diploma in hand, looking forward to a home 
 in the millionaire row, with every amusement at his com- 
 mand, and with learning enough to confoimd the wisest. 
 Youth may indulge in castle-building, for these are the 
 only structures whose final cost do not exceed the original 
 estimate. But after revelling for a time in these imagina- 
 tive sweets, too often the dry bread of actual toil becomes 
 exceedingly distasteful. The happiest moments of life are 
 those of fond anticipation; or as the Vicar of Wakefield 
 would say: "It has been a thousand times observed, and I 
 must observe it once more, that the hours we pass with 
 happy prospects in view are more pleasing than those 
 crowned with fruition. In the first case we cook the dish 
 to our own appetite; in the latter nature cooks it for us." 
 
 At any rate, our young man, now pressed for means and 
 distanced by his competitors, would gladly trade a portion 
 of his anticipated bounty for the present possession of 
 funds. He who would discount the future at a prodigious 
 rate in behalf of his present rate becomes a borrower. 
 
Interest, Further Considered 513 
 
 Assume that his time-discount is so high that he would be 
 willing to pay lo per cent if he had to do so. 
 
 These two men — the one a lender who would take i per 
 cent, and the other a borrower who would pay lo per cent 
 — meet and bargain on a loan. While the lender would 
 take I per cent, he is anxious to get as much as he can. 
 And while the borrower would pay as much as lo per cent, 
 he is anxious to pay as little as possible. Perhaps they 
 haggle and chaffer for advantage; the borrower may offer 
 2 per cent while the lender offers to take 9 per cent; they 
 give and take, finally, adopting the trader's rule: they split 
 the difference and agree on 5 per cent. The interest rate 
 thus determined may not exactly coincide with the time- 
 discoimt of any borrower and lender, regardless of how 
 many there may be. 
 
 2. Borrowers. — ^There are numerous purposes for bor- 
 rowing money at interest, but these may be divided into 
 three classes: to secure profit from immediate transactions; 
 to invest in durable sources of income; to secure present 
 enjoyable goods and services. 
 
 (a) Borrowing to secure present profits is the cause of a 
 large voliune of money loans. An unscrupulous broker 
 found a purchaser who offered $1,000 for a certain lot. 
 Knowing that the real owner would sell it for $400, the 
 broker wished to purchase it at the lower in order to sell it 
 at the higher figure. Finding no accommodation at his 
 bank, he approached a loan shark, who advanced him $400 
 on condition that he return $500 within fifteen days. 
 The broker made the loan, bought and sold the lot, paid 
 the lender $500, and cleared $500 on the transaction. Was 
 this a loan made at the equivalent of an annual rate of 
 some 600 per cent? Certainly not. From the standpoint 
 
514 Introduction to Economics 
 
 of the borrower it was all but a pure case of an ill-gotten 
 profit of $500; it was as if he had surreptitiously traded 
 $500 for $1,000. The $100 gross interest had in it but a 
 small tincture of real interest. 
 
 Much money is borrowed for short periods and at call 
 to purchase goods for immediate resale at a profit. Trans- 
 actions on stock and produce exchanges are financed by 
 such loans. Bank loans for such transactions are not in- 
 frequently at rates far in excess of the true market r'ate. 
 Examples of gross interest in transactions for immediate 
 profit might be multiplied. 
 
 Any one, whether his time-discount be high or low, will 
 be a borrower when he can secure immediate profit. In 
 short periods, time-discount plays but a minor part; to 
 secure profits is the motive upon which the borrower acts. 
 
 (6) Borrowing for Purposes of Consumption: Economists 
 who reason that interest is wholly a matter of the discount- 
 ing of values through time are, in so far, correct, but when 
 economists take the next step and base time-discount upon 
 the impatience for present consumption, they commit 
 gross error. They reason as though borrowers were ruled 
 wholly by their stomachs and love for present ostentation. 
 Economists are correct in basing interest on time-discount, 
 but are erroneous in limiting time-discoxmt to enjoyable 
 goods for ready consumption. High time-discount means 
 a low appraisal upon remote incomes and the sources of 
 such incomes. With little regard for the future, the im- 
 provident are willing to pledge recklessly their future in- 
 come as security for money loans to obtain enjoyable 
 goods. Moreover, what care they to offer an exorbitant 
 interest ? For the deferred payment of it will be made with 
 future incomes which at present are lightly appraised, 
 
Interest, Further Considered 515 
 
 I shall now give as brief a statement as possible of this, 
 as I believe, false consumption theory. Money loans, of 
 course, will go to the borrowers offering the highest inter- 
 est, and the highest interest will be offered by those hav- 
 ing the highest time-discount; but, according to the theory, 
 time-discount is limited to enjoyable goods for consump- 
 tion, therefore the highest interest will be offered by those 
 who are at once most greedy for present consumption and 
 least regardful for future incomes. 
 
 The reader will note in the statement just given that no 
 mention is made of borrowing for investment in business 
 enterprises. In fact, the theory assumes that borrowers 
 are of a weak-willed, short-sighted, spendthrift type. 
 These same thinkers tell us that the lenders have a low 
 time-discount, that they are the far-sighted, self-controlled 
 men who save. 
 
 (c) Borrowing for Investment in Durable Sources of In- 
 come. There are two reasons for not limiting borrowers to 
 those who desire the ready means of gratification: {a) The 
 large majority of loans are made for investment in enter- 
 prises to bear future returns; {b) the spendthrift class who 
 seek to borrow for present enjoyable goods have limited 
 credit, are without sufiicient means of securing the repay- 
 ment of loans to keep up the demand side of the money 
 market. 
 
 Turn now to the theory held in this chapter, namely, 
 time-discount, as limited to the discounting of value rather 
 than to the discounting of any particular form of income. 
 It is based upon the desire to have the present possession or 
 disposal of a sum of capital. This disposal may be made 
 for consumption, life-insurance, education, investment, or 
 any other purpose. This is at once in contrast with the 
 
516 Introduction to Economics 
 
 consumption theory, for it admits that largest of all bor- 
 rowing classes — the conservative type with a low time- 
 discount who borrow for durable investments. 
 
 It is not true even in a majority of cases that borrowers 
 are those with high time-discount. Some students who 
 read this may feel that they are living examples of the fal- 
 sity of the claim. The conservative and far-seeing who 
 have a keen appraisal of their economic well-being in the 
 future have low time-discount, yet they are the very type 
 of people who will undergo present hardships and make 
 interest payments at high rates in the present for the 
 means preparatory to their future welfare. 
 
 An example, perhaps not strictly economic in all its 
 bearings, yet illustrative of the point, is that of a young 
 man in my class at the time of this writing. To go through 
 college he has, he tells me, relinquished a present salary of 
 $1,500 and is borrowing $600 a year. He does not have 
 an established credit, and must pay 10 per cent annual 
 interest. Is this large present sacrifice of $2,160 a year 
 ($1,500 relinquished -f- $600 loan -|- $60 interest) because 
 he so highly estimates the present dollar and so Ughtly 
 regards the future? On the contrary, his low time-dis- 
 count — relatively high regard for the future — causes the 
 present sacrifice of high interest, of money and diligent 
 labor. He is not a lender, but a borrower at an extortion- 
 ate rate, and that because of his low time-discount. 
 
 Let us turn now to the conservative type of investors. 
 Our thought goes from the struggling youth, trying to get 
 ahead in the world, and from the ignorant who squander 
 needlessly, and from the spendthrifts who would mortgage 
 their future for present consumption. Instead, we shall 
 have in mind men of means and established credit, the far- 
 
Interest, Further Considered 517 
 
 sighted generals of industry who are conservative in their 
 time-discount. These are the reliable borrowers on a large 
 scale whom the banks, trust companies, and other loan 
 institutions are pleased to have as customers, and upon 
 whom these institutions chiefly rely. 
 
 In former times the borrowers were the poor who, as in 
 cases of famine, must secure means from the more fortu- 
 nate to provide their necessities of life. Then the obliga- 
 tion for a loan rested against the person of the borrower. 
 At common law, debtors could be imprisoned for debt. 
 But custom has changed; the chief borrowings to-day are 
 for investments in one form or another, and the obligation 
 for the return of the loan rests upon the property of the 
 borrower rather than upon his person. This legal change 
 enables only those of means to make important loans. 
 Whereas the poor were formerly the borrowers, to-day the 
 wealthy are the chief borrowers. 
 
 But why would a conservative investor pay for a money 
 loan a rate of interest higher than his time-discoxmt ? It 
 is because his present appraisal of future incomes is so 
 high as to Justify the present sacrifice. When the market 
 rate of interest is 5 per cent, let us assume that the investor 
 has an opportunity to buy a mill which promises a durable 
 annual net income of $1,000. This will be capitalized at 
 a sale price of $20,000. But if the time-discount of the 
 investor should be two per cent, his personal price appraisal 
 of the mill would be $50,000. He will be glad to trade 
 $20,000 for what to his mind is $50,000. What is more, 
 he will be willing to give a large boot in addition to the 
 $20,000 for the mill. His rate of capitalization is 3 per 
 cent lower than the market rate, and this justifies him in 
 offering his note for a period of time, at any rate up 
 
518 Introduction to Economics 
 
 to 3 per cent in excess of the market rate. Investors in 
 remote incomes are willing and anxious to borrow money 
 even at above market interest, note the fact, simply be- 
 cause of their low time-discount. 
 
 It is unthinkable that the half-wits, improvident, and 
 short-sighted — those who would deny the future for the 
 present and squander durable wealth for ready consump- 
 tion — that this impatient and high time-discount class 
 should hold up the demand side of the money market. 
 Imagine our banks and great conservative loan institutions 
 as rendezvous exclusively for the highly impatient. These 
 could not support a loan market because they do not have 
 sufficient security or borrowing power. 
 
 Interest eats night and day, and the more it eats the 
 hungrier it grows. The spendthrift borrower soon has his 
 financial foundation gnawed from imder him, for debts at 
 interest mount with accelerating speed and hasten the 
 unwary to bankruptcy. Idle avarice and lazy economy 
 cannot, for long, support a money market. 
 
 3. Adjustments in the Market. — The above illustration 
 of the investor in the mill is not offered as typical, for in 
 our exchange market, where exchanges turn on the slight- 
 est margin of advantage, individual appraisals are closely 
 adjusted to the market rate. The advantage of an extreme 
 case is that it tends to objectify how the business man 
 reasons as to the rate of interest he could afford to pay for 
 money. The business man, first, makes a study of the pro- 
 ductive agent, analyzes the probable costs and receipts in 
 order to anticipate the net incomes; secondly, he deter- 
 mines his own price appraisal of the agent; third, he 
 finds the sale price at which he could make the purchase; 
 fourth, he compares his own price appraisal with the sale 
 
Interest, Further Considered 519 
 
 price. If his price appraisal exceeds that of the sale price, 
 he will be anxious to invest and would, if necessary, pay 
 interest exceeding the market rate for money to make the 
 purchase. 
 
 Disregarding exceptions, the price appraisal of active 
 business men will closely approximate the market price of 
 established institutions whose incomes are fairly constant. 
 These concerns are capitalized at the rate of discount which 
 prevails in the money market. This market rate of time- 
 discount, or rate of capitalization, is at the equating-point 
 between those with high and low time-discount. The 
 sellers of these investments will be those whose time- 
 discount exceeds the market rate of capitalization, and the 
 buyers, consequently the borrowers, will have a lower 
 discount. 
 
 4. The Supply Side of the Money Market. — If consump- 
 tion loans are made by those with high time-discount and 
 investment loans made by those with low time-discount, 
 one may ask who is left to do the loaning ? It is answered; 
 the large class of passive capitalists such as retired busi- 
 ness men of wealth, those in the investment market who 
 now hold idle funds in anticipation of a more favorable 
 investing period, widows and children to whom funds are 
 left, the idle rich. Also banks, trust companies, life-insur- 
 ance companies, savings and loan associations — ^in sum, 
 the institutions which collect surplus and idle funds into 
 reservoirs of loanable funds. 
 
 5. The Order of Thought: Production and Discount. — 
 Many thinkers still cling to the productivity theory of 
 interest. They make bold the claim that the time-discount 
 theory is strangely dissociated from the production of 
 wealth. I shall refute this false conception by giving a 
 
520 Introduction to Economics 
 
 brief review of the order of thought which encompasses 
 both production and discount. 
 
 There could be no discounting of values through time 
 unless such values were in prospect. Productive agents 
 yield shoes, hats, food, and other valuable products, not 
 all at once, but distributed through different periods of 
 time. This is true of all agents, as land, tools, or ma- 
 chines. 
 
 The production problem studies that group of facts hav- 
 ing to do with combining materials into the best composi- 
 tion, giving them proper form, putting them in the right 
 place, and distributing them in their proper season, so 
 that they are suitable for the gratification of desires. 
 
 These many ends of production may be combined in 
 the one word usance. Back of usance are the productive 
 agents which beget it. These agents obey a number of 
 laws, chief of which is resistance, inaptly called by some 
 diminishing returns. This law deals with the limited pro- 
 ductive capacity of agents in a limited period of time. 
 This limiting force gives explanation of the scarcity and, 
 therefore, the value of usance. Because the usance is 
 valuable, men pay a price, called rent, for the temporary 
 uses of these usance-producing agents. 
 
 The rent problem, then, is a study within the field of 
 production. Were we to stop with the rent problem, we 
 should end with the rise of valuable incomes distributed 
 through time and rent paid for the temporary uses of pro- 
 ductive agents. But this is not enough; these agents are 
 capitalized, bought, and sold in the market, and in our 
 money economy funds are borrowed at times to effect 
 these exchanges. 
 
 As we further proceed, however, a new and different 
 
Interest, Further Considered 521 
 
 problem from production arises; it is the problem of time- 
 discount. This begins where the problem of production 
 ends. It assumes these valuable incomes, distributed 
 through different periods of time, as ultimate facts, and 
 concerns itself with discounting the value of these incomes 
 through time to their present worth. But what is their 
 present worth ? It is the capitalized value or present price 
 of the right to secure or control such incomes. If you own 
 land, that ownership is your right to the income from it, 
 so with any other agent, whether it be a house, or mill, or 
 franchise, or monopoly right. Control over value-income, 
 not the form of the agent, is the important thing, and this 
 control is capital. 
 
 Time-discount, then, as applied to productive agents or 
 mere acquisitive rights to income, is itself the very essence 
 of capitalization. 
 
 Now exactly this same time-discount applies to money. 
 Who would give $i,ooo now for the return of $i,ooo ten 
 years hence? It is the language of custom and business 
 to limit the word interest to payments on money. Much 
 is lost and little gained in the vain attempt to apply the 
 term interest in the general field of capitalization. 
 
 6. Questions and Answers Involving the Foregoing 
 Principles: 
 
 (o) What is the effect of a change in the interest rate upon 
 saving? 
 
 There are persons who would save if the rate of interest 
 dropped to zero, yes, even if they had to pay negative 
 interest to get their money in safe hands. These are ex- 
 ceptions. Others would save more because of a lowering 
 of the rate of interest. Consider a parent whose prevail- 
 ing motive is to provide for his children. In order to pro- 
 
522 Introduction to Economics 
 
 vide them a reasonable income of, say, $5,cx)0 a year, he 
 must save $200,000 if the interest rate is 2>^ per cent, 
 $100,000 when interest is 5 per cent, $50,000 when the 
 rate is 10 per cent. But as high wages lead to short hours 
 among the improvident, and longer hours among the 
 thrifty, so a sudden shift to a higher interest rate would 
 make the stronger appeal to save among the thrifty who 
 have most to save. 
 
 Time-discounts do not become adjusted to rapid changes 
 in interest rates. If such adjustment took place immedi- 
 ately, modifications of the interest rate would have no 
 effect on saving. 
 
 (&) Would a non-changing high irate of interest cause more 
 saving than a non-changing low rate? 
 
 Contrary to the generally accepted opinion, this ques- 
 tion must be answered in the negative. The very form of 
 the question involves an inversion of cause and effect in 
 the explanation of interest. A firm rate of interest, 
 whether high or low, accompanies a stable market with 
 an established rate of discount. If this discount on the 
 future is large, it means certainly a weak disposition to 
 practise present self-denial in order to save. If your time- 
 discount is high, you would sacrifice your provision for the 
 future in behalf of a spendthrift loan. When competition 
 has worked its effect in a stable market such as we assume, 
 a high interest rate will coincide with or reflect the large 
 discount of the future. A high interest rate, therefore, 
 symbolizes the degree of preference for present over future 
 incomes. As interest is high, the disposition to save is 
 low. All know that future incomes are capitalized low 
 whe"!! the rate of interest is high. Is not the disposition 
 to sell one's future provisioning at a discounted price to 
 
Interest, Further Considered 523 
 
 get ready money the antithesis of the disposition that 
 would deny the present to save for the future? 
 
 Time-discount that would take from the future in behalf 
 of the present works contrary to saving. Low interest 
 likewise expresses the rate of time-discount and capitaliza- 
 tion. Low interest expresses a low discount of the future, 
 consequently a high disposition to save. In a well-adjusted 
 market a large discount or high unwillingness to save is 
 exactly counterbalanced by a high interest or reward for 
 saving. Whatever the rate of discount, it will be equal to 
 the rate of interest that rewards saving. The causal 
 sequence is from the disposition to save, to the rate of 
 interest, and not the reverse. Then, in a community 
 where interest is permanently high, there will be no greater 
 motive for saving than in a community where interest is 
 low. 
 
 (c) Is there a tendency to erect lasting structures, to con- 
 struct durable highways, bridges, and other lasting improve- 
 ments during periods when the interest rate is high or during 
 the period when it is low? 
 
 Conservative investments, which take durable form, are 
 made at times of firm confidence in the future; they indi- 
 cate a high appraisal of future incomes. During such 
 periods time-discount is low and the rate of interest like- 
 wise low. Because a low interest rate reflects a high 
 appreciation of future incomes, a marked disposition to 
 provide for the future, it follows that durable or lasting 
 structures will be made when the interest rate is low. 
 
 {d) What is the motive for paying interest? 
 
 The entrepreneur borrows money with which to buy 
 productive agents which will yield future valuable returns. 
 These deferred incomes are discounted in the price of the 
 
524 Introduction to Economics 
 
 agent yielding them. His present value outlay is, there- 
 fore, smaller than the anticipated returns. His motive fcr 
 paying interest is to secure this growth in value through 
 time. If he invests wisely this growth in value will be 
 sufficient, both to pay the interest and to leave him a gain. 
 
 (e) Can there be a zero rate of interest ? 
 
 In exceptional cases, money is loaned without interest, 
 but other conditions, such as friendship, fear of thieves, 
 and so forth, enter in to complicate the problem. There 
 are also exceptional cases, as when one is hard put to it 
 for means, when money would not be loaned for many 
 times the market interest. Exceptions aside, one can no 
 more conceive of a zero rate of interest than of a limitless 
 capitalization of durable sources of income. The two 
 amount to one and the same thing. Were interest zero, 
 time-discount would also be zero, the present worth of a 
 dollar fifty years hence would be a dollar. There could 
 be no limit to the present capital value of a permanent 
 agent yielding a penny annually. 
 
 {{) Why is the interest rate high during periods of war? 
 
 During wars there is great social unrest, and timid capi- 
 tal hesitates to venture into durable enterprises. Business 
 ventures are hazardous, because the future is uncertain. 
 Ordinary processes of saving and loaning are in disuse. 
 War materials are destroyed in enormous quantities, men 
 are withdrawn from normal productive pursuits, and pro- 
 duction is carried on with meagre equipment. Demand 
 turns from durable enterprises and calls for present con- 
 sumable goods. This demand for goods to meet tempo- 
 rary needs brings further halt to permanent improvements. 
 Accompanying this enforced neglect of saving and durable 
 investments is a high time-discount. Borrowers are will- 
 
Interest, Further Considered 525 
 
 ing to pay back considerably more than a dollar in the 
 future for the present loan of a dollar. The economic 
 pressure of the present, together vdth the uncertainty of 
 the future, make for high time-discount and its effect — a 
 high rate of interest. 
 
 7. Exercises. — i. If the net income from a building is 
 $500 a year and the rate of interest is 5 per cent, what 
 would be the price of the building ? Show how you make 
 the calculation and point out the different steps in your 
 reasoning. 
 
 2. Should a new street-railway make more accessible 
 the building referred to in the above question so that its 
 net yield should increase from $500 to $1,000, how would 
 the price of the building be affected? Would the rate of 
 interest be changed ? 
 
 3. Can one who adheres to the productivity theory of 
 interest explain why interest is paid for unproductive 
 loans? 
 
 4. Criticise the following: Interest is a price and obeys 
 all the laws of price. So a large quantity of money means 
 a low rate of interest. 
 
 5. Should the rate of time-discoimt change from 6 to 4 
 per cent, what change would take place in the price of a 
 farm whose annual net yield is $4,000 ? 
 
 6. What is the relationship between the price of dura- 
 tive goods, the rate of interest, and time-discount? 
 
 7. If it is now August you would prefer a fur coat in 
 January, five months later, rather than at the present. 
 We prefer goods in their season, whether their proper 
 season be now or later. Do these statements form excep- 
 tions to the time-discount theory of interest? Does time- 
 discount have reference to physical goods as such or to 
 values ? 
 
 8. Summarize the reasons for differences in time-discount 
 among persons as given in Chapter XXII, paragraph 20. 
 Can you give other reasons? 
 
526 Introduction to Economics 
 
 g. Explain how differences in time-discount cause some 
 to be lenders and others to be borrowers. 
 
 10. How is the rate of interest determined in the mar- 
 ket? 
 
 11. Point out different motives for borrowing. 
 
 12. Could spendthrift borrowers support the money 
 market? Why? What class of borrowers best support 
 the money market ? Why ? 
 
 13. (a) Aristotle claimed that, as money does not pro- 
 duce money, nothing more than the return of the principal 
 sum lent can equitably be claimed by the lender. Answer 
 this argument. 
 
 (b) Now, criticise Franklin's statement to the opposite 
 effect: "Money makes money, and the money that money 
 makes, makes more money." 
 
 14. Do laws fixing a rate of interest work well in prac- 
 tice? (See Hadley's Economics, 139-143.) 
 
 15. In the World Almanac you may find the legal rate 
 of interest in the different states. What explanation can 
 you offer for these differences ? 
 
 16. One says: "I can prove that the amount of money 
 deitermines the rate of interest. Does not the Bank of 
 England raise the rate of discount (interest) when gold is 
 leaving the country? During panics, when it is almost 
 impossible to borrow money, is there not a rise in inter- 
 est?" How would you answer this? 
 
 17. The capital value of an agent goes up as the interest 
 rate goes down. Explain. 
 
CHAPTER XXIV 
 
 FORMS OF INDUSTRIAL OWNERSHIP: THE 
 CORPORATION 
 
 I. Introduction. 2. Individual ownership. 3. Limits to private own- 
 ership. 4. Partnership. 5. Limited partnerships. 6. The disadvantages 
 of a partnership are many. 7. Joint-stock association. 8. Corporations. 
 9. The advantages of corporations. 10. General corporation acts. 11. 
 Directors. 12. Election of directors: Dummy directors. 13. Cumulative 
 voting. 14. Inside information of stockholders. 15. Negotiability of 
 stock certificates. 16. Securing funds. 17. Funds from creditors. 18. 
 Issuing notes. 19. Issuing bonds. 20. Issuing stocks and bonds. 21. 
 Questionable practices. 22. Remedies. 23. Foresight in business. 24. 
 An educational transformation is now in process. 25. Exercises. 
 
 I. Introduction. — Ours is an exchange economy whose 
 fundamental characteristic is private property. Some form 
 of ownership, or else the want of it is, therefore, at the 
 basis of our industrial problems. Whether it be a ques- 
 tion of the distribution of food products, or of regulating 
 production, or of rate control, or of price maintenance, or 
 of the enforcement of property rights, or of poverty against 
 riches, or of conscription — these and many more are ques- 
 tions of private property. The extent of the relationship 
 of the state to industry must be determined on grounds 
 of private property. So, also, must be determined the 
 rights of private parties in the business dealings of man 
 with man. From earliest times the institution of private 
 property has been subject to modification and change. 
 Public opinion is now in a transitory stage, and this makes 
 the form of ownership not a problem of the next century, 
 but of to-morrow. These problems of ownership— for that 
 
 527 
 
528 Introduction to Economics 
 
 matter all economic problems — must be approached from 
 the standpoint of conditions that are. To this end the 
 student should read broadly and spare no effort in obtain- 
 ing a clear insight into the problems of ownership. A 
 business may be owned by an individual, partnership, joint- 
 stock association, or corporation. 
 
 2, Individual Ownership. — Ownership by an individual 
 is the oldest and simplest form of ownership. What may 
 the individual own? He may own tangible forms of 
 wealth, or rights against another, or rights to do some- 
 thing to the exclusion of others. Material wealth, called 
 objects of ownership, falls into two classes: (i) Immovables 
 or land and durable improvements, such as houses; (2) 
 movables or things not attached to the land. In legal 
 terminology the first class (immovables) is known as real 
 property, and the second class (movables) is known as 
 personal property. 
 
 One may own rights against another person, as a right 
 to compel him to pay a promissory note or to pay damages 
 in case of a trespass on property (wealth). Under this 
 heading may be considered the right to recover stolen 
 goods and to enforce contracts. 
 
 Lastly, a person may own rights to do something to the 
 exclusion of others. Examples of this kind of ownership 
 are patents, copyrights, trade-marks, and franchises. A 
 patent legally guarantees an individual the exclusive privi- 
 lege of using a new process a given number of years; a 
 copyright likewise excludes competition for a specified 
 time. A trademark is a symbol, name, or other device 
 which one puts upon goods to distinguish them from like 
 goods of other persons. If A adopts a trade-mark, "Royal 
 Pens," to distinguish his product, B cannot use the same 
 
Industrial Ownership: The Corporation 529 
 
 words or words so similar in sound, for instance, "Loyal 
 Pens," as might deceive the average purchaser. A fran- 
 chise is a pubKc grant giving individuals or private groups 
 of individuals privileges which belong to the state. It 
 gives the right of eminent domain, the right to levy tolls 
 and charges for public utilities. 
 
 3. Limits to Private Ownership. — There are, necessarily, 
 restrictions upon the private ownership of all forms of 
 wealth. Could a real-estate owner prevent a right of way 
 through his land, the public at large would be deprived of 
 common carriers. The public welfare must be protected 
 against a private interest; the state, therefore, reserves 
 the right to compel a landlord to surrender a right of way 
 at a fair market price. This right is termed the right of 
 eminent domain. It is exercised whenever public safety, 
 interest, or expediency so requires. Another restriction on 
 private ownership is that of the right of way. The boun- 
 dary of an owner's farm extends to the middle of the pub- 
 Kc road, but he dare not put his fence there; the owner's 
 lot extends to the middle of the street, but he dare not 
 block the street. Close the highway, however, and the 
 owner takes control without further ado, though subject 
 to a definite right of use. 
 
 Another consideration, ownership is the right of use in 
 a broad and strictly correct sense. The pubhc right of use 
 is pubHc ownership, but this right extends over all forms 
 of wealth and is exercised when necessity requires. This 
 fact makes the state a joint owner of wealth. A tax on 
 wealth, therefore, is but the share which the state as joint 
 owner receives from the annual income of that wealth. If 
 the annual income from a farm is $100, assuming the rate 
 of interest to be 5 per cent, the price of the farm would 
 
530 Introditction to Economics 
 
 be $2,000. If the tax be $25, it follows that the share of 
 the state in the farm is $500, and that of the individual is 
 $1,500. Furthermore, private ownership is restricted 
 from the imposition of a nuisance upon the public. The 
 smell from an ill-kept fish-market, stable, tannery, or fer- 
 tilizer-plant will not be tolerated in a residential district. 
 
 4. Partnership. — The proprietor of a large business sees 
 his task grow more and more arduous with the growth of 
 that business. The business comes to be divided into 
 departments. Capital, special skill, and knowledge are 
 required in the development of the business. Need arises 
 for mechanics, efficiency experts, accountants, salesmen, 
 and managers. The pressure of increasing responsibilities 
 may cause the proprietor to invite others with special skill 
 or capital to join with him as partners in the enterprise. 
 A partnership or firm is a group of persons who have 
 united their capital or energies and jointly carry on a 
 business, acting as if one person or entity, and sharing as 
 common owners the profits of the enterprise. 
 
 It should be clear that the mere fact of sharing profits 
 is not the test of a partnership. If the landlord lets his 
 farm on shares, agreeing to take one-half of the products 
 of the farm as rent, this would not be a partnership but a 
 lease. If a book-agent receives one-half of the profits on 
 his sales, this again is not a partnership, but an agency. 
 In every partnership there must be a community of inter- 
 ests, a prosecution of business in common with a view to 
 profits. A owns capital, B is an expert manager, and C 
 is a skiKul salesman. A furnishes all the capital to start 
 a mail-order house; B and C put in their services in man- 
 aging the business and selling the goods. They agree to 
 share profits. This is clearly a partnership because it 
 
Indiistrial Ownership: The Corporation 531 
 
 meets the test of a partnership. It is a community of 
 interest, a common prosecution of business with a view 
 to profits. 
 
 5. Limited Partnerships. — In a general partnership every 
 member is liable legally and morally for the acts of every 
 other member. Each partner is hable for all the debts 
 and obligations of the firm. A and B are partners in a 
 small business. A borrows $50,000 in the firm's name, 
 pockets the money, and leaves the country. The creditor 
 may exhaust the assets of the partnership and, if these are 
 insufficient, go against the private property of B to make 
 up the deficiency. In a limited partnership, however, one 
 or more of the partners, called special partners, are not 
 liable for the partnership debts beyond the sum each has 
 contributed to the capital. The law requires such part- 
 nerships to have at least one general partner whose liability 
 is unlimited. 
 
 6. The Disadvantages of a Partnership are Many. — Each 
 of the partners has a controlling voice in the management 
 of the firm. Conflicting opinions may work to the injury 
 of the policy of the company. The firm is not well adapted 
 to collecting large amounts of capital. It must for the 
 most part depend upon the partners for funds. The fact 
 of unlimited liability of the partners may cause a loss of 
 private property in addition to the original investment. 
 This is to be commended in the sense that it makes the 
 management conservative and careful. The main disad- 
 vantage seems to be that the duration of a partnership 
 depends upon the life or the caprice of a partner. The 
 partnership is dissolved with the alienation, or withdrawal, 
 or insanity, or death, or bankruptcy of a partner. Because 
 a partnership may have only a short life, it is unsuited for 
 
532 Introduction to Economics 
 
 the formation of large business transactions and contracts 
 which extend over considerable periods of time. 
 
 7. Joint-Stock Association. — ^Joint-stock associations are 
 partnerships in which the capital is divided into shares 
 which are owned by the partners. These differ from ordi- 
 nary partnerships in two respects: (i) They are not dis- 
 solved by the same causes. The shares are transferable; 
 for instance, if a shareholder dies, his shares pass to his 
 estate; if he sells his shares, the purchaser succeeds to his 
 rights. Partners may withdraw or new partners may be 
 introduced without a dissolution of the firm. (2) Share- 
 holders do not embarrass the management of the firm; 
 they elect directors and officers who manage the firm. 
 Only the ofiicers have authority to bind the firm in any 
 financial obhgation. None the less, each partner stands 
 personally Uable for the obligations (debts or contracts) 
 of the firm. 
 
 8. Corporations. — A corporation is an artificial person 
 created by law for some specific purpose or purposes. The 
 members of a corporation are not the corporation; members 
 may withdraw or die, but the artificial person continues. 
 As a legal person it owns property, may incur debts and 
 form contracts, may sue and be sued, and carry on busi- 
 ness as a natural person. The corporation has no con- 
 science, no power to think, but the law regards its officers 
 as agents empowered to carry on all business of the cor- 
 poration. This form of ownership is found in all na- 
 tions. At first it applied only to large enterprises, such 
 as steamship companies and railroads, later to smaller 
 enterprises, and to-day all kinds of enterprises, large and 
 small, are at liberty, and find it feasible to adopt this form 
 of organization. 
 
Indtistrial Ownership: The Corporation 533 
 
 9. The advantages of corporations over other forms of 
 ownership are, among others, permai^ency, limited liabil- 
 ity, transferability of shares, concentration of manage- 
 ment, and adaptability for securing large funds of capital. 
 
 Permanence: Stockholders may come and go, may re- 
 tire, sell their stock or die, but the corporation continues 
 to live. It is adaptable to the undertaking of long-time 
 contracts. There are, to be sure, exceptions to the per- 
 manency of a corporation in cases where charters are 
 granted for a limited number of years, as, for example, real- 
 estate companies in Massachusetts, which have a life not 
 exceeding fifty years. 
 
 Limited Uability[: A partner in a bankrupt firm may 
 lose his entire investment and, further, he may be forced 
 to sacrifice his personal holdings to satisfy the creditors of 
 his firm. He may be compelled to make good a foolish or 
 fraudulent contract made by his partner. But if the cor- 
 poration fails the stockholder, generally speaking, will lose 
 no more than his securities in the corporation. Some 
 exceptions will be found to the rule of limited liability in 
 state laws, the one important exception being, that the 
 stockholders of national banks are all subject to a double 
 liability. Limited liability is given by many authorities 
 as the reason why the corporate form of ownership has 
 increased so rapidly in recent years. 
 
 Contrary to the popular conception, limited liability was 
 not always an essential feature of the corporation. In 
 England limited liability was not adopted till 1855, and 
 even now English companies must claim this attribute by 
 inserting the word "limited" in connection with their 
 names. 
 
 Transferability of shares: A share of stock is a unit of 
 
534 Introduction to Economics 
 
 ownership in a corporation. Shares are represented by 
 certificates of stock. If a corporation has issued a thou- 
 sand shares, the owner of one share owns one thousandth 
 part of the corporation. If the entire stock of a railroad 
 corporation is bought up by a group of persons, they own 
 the raikoad. If an owner wishes to sell his stock it is 
 easy to find a buyer. If an owner has one hundred shares 
 for sale, he may sell to a hundred different purchasers, or 
 to fifty, or to one purchaser, depending upon the wishes 
 and purchasing power of the buyer. Sales are made easy 
 because the size of the sale can be adjusted to the means 
 of the buyer. It is difl5.cult for an individual to sell his 
 farm or other private holdings. It is impossible for a 
 partner without the consent of his partners to dispose of 
 his interests in the partnership without destroying the 
 firm. The welfare of a firm depends upon the business 
 ability of the partners, but the case is otherwise in a cor- 
 poration which is managed by the directors rather than by 
 the owners. Widows, elderly persons, children who have 
 inherited money — any and all classes may buy stock, 
 according to their means, without any change in the 
 policy of the company. 
 
 Concentration of management: A stockholder may own 
 99 per cent of the stock in a corporation and still have no 
 authority to transact business for it, since duly appointed 
 officers, and only these, can transact the corporation's 
 business. In this way a heavy responsibility is concen- 
 trated upon the few officers in a large corporation, and 
 they have great power either for good or for evil. 
 
 The corporation is an excellent institution for a large 
 class of people who have inherited or otherwise acquired 
 means, but who are themselves without the experience or 
 
Industrial Ownership: The Corporation 535 
 
 ability to utilize their means effectively. Two conclusions 
 are to be deduced from this fact: (i) It is to the interest 
 of society that the direction of capital be removed from 
 the hands of the weak to the hands of the strong; (2) the 
 incompetent rich, through bad management, may soon 
 squander their means, whereas removing their control by 
 giving the direction of their holdings over to a strong 
 financial director will have the effect of maintaining their 
 fortunes. The corporation, it is argued, tends to main- 
 tain large fortunes, but just the opposite may be true, for 
 it puts wealth in salable form. 
 
 Securing large capital : A century ago the only securities 
 which the investing public could buy were government 
 obligations, as the early stock exchanges knew no other 
 form of securities. The field was closed for investment 
 to those of limited means, since these securities were sold 
 in large amounts, so the small investor welcomed the cor- 
 poration with its transferable shares sold in any amount 
 to accommodate the purchaser's means. This new form 
 of saving and investment had other advantages. It mul- 
 tiplied the sources from which corporations might draw 
 funds. Corporate securities are purchased by all classes 
 — the humble who work for a pittance, the day-laborer, 
 and the wealthy aristocrat. Some American corporations 
 have upward of 100,000 stockholders. This inflowing of 
 capital from thousands of sources provides the enormous 
 funds necessary to finance our large industrial enterprises. 
 
 10. General Corporation Acts. — A charter is, so to 
 speak, the soul of a corporation. The first step in form- 
 ing a corporation is for the interested individuals or incor- 
 porators to prepare a charter (articles of incorporation or 
 certificate of incorporation). The charter contains a num- 
 
530 Introduction to Economics 
 
 ber of provisions, including the name of the corporation, 
 its objects, amount of capital stock, and like provisions. 
 Application is made to the state to have the charter 
 granted, and when a state does so, it creates a corporation. 
 
 Formerly the state legislatures granted charters. When 
 incorporators wished a charter, a bill for that purpose was 
 introduced in the legislature, referred to proper commit- 
 tees, debated through both houses, and signed by the 
 governor of the state, each charter requiring a separate 
 and special act. A century ago the granting of a charter 
 was not an arduous task for our legislatures, because so 
 few of them were requested. As time went on corporations 
 grew more and more popular, and the numerous demands 
 for charters outgrew the capacity of the legislatures to 
 grant them. Were charters granted in this manner to- 
 day, it is doubtful whether legislatures could find time to 
 serve their normal functions. But the time-consuming 
 labor of this system was not its most serious aspect. 
 
 In some instances, it proved a cheap and effective means 
 for unscrupulous candidates for the legislature to buy 
 votes. If a group of influential business men desired to 
 form a corporation for a particular purpose, meanwhile 
 wishing to prevent others from incorporating for the same 
 purpose, they could secure their evil aim through their 
 representative in the legislature. A legislator who has 
 power to grant special privileges is tempted to favor the 
 political boss in order to win his support. This system, 
 moreover, leads to political log-rolling. A from Henry 
 County says to B from Clay County: "Vote with me in 
 behalf of my boss, and I will vote with you in behalf of 
 your boss." In this way conspiring groups could control 
 the granting of charters and exclusively serve the favored 
 
Industrial Ownership: The Corporation 537 
 
 few. This unfair system of granting charters led to so 
 much favoritism and political corruption that the public 
 called for reform. 
 
 This contemptible system was reformed by "enabling 
 acts" or "general corporation laws." An enabling act, in 
 so far as it applies particularly to corporations, is a general 
 corporation act defining the purposes for which corpora- 
 tions may be lawfully formed, the powers which they may 
 possess, the number of incorporators and stockholders, the 
 manner and lawful purpose of issue of capital stock, and 
 so on. Thus the law definitely defines the conditions 
 under which a charter will or will not be given. This 
 enables any group of citizens, regardless of "pull," or poli- 
 tics, or wealth, to secure a charter, if they fulfil the require- 
 ments of the act. It is thought that this transfer from 
 special grants to enabling acts was the most important 
 reform in business methods during the nineteenth century. 
 It at once facihtates the granting of charters, stamps out 
 an important means of political corruption, and enables 
 all competitors to share the benefits of the corporate form. 
 The charter of a corporation, formed under general laws, 
 consists of the general law and its one particular certificate 
 of incorporation or articles of association. 
 
 II. Directors. — ^As above indicated, the stockholders 
 own the corporation and share its earnings. Ownership 
 implies the power to control, but the stockholders control 
 a corporation only indirectly. They elect the directors 
 and the directors elect the ofiicers who directly manage 
 the corporation. The directors usually comprise a small 
 group of leading stockholders. Their intimate relations 
 with each other and with the workings of the corporation 
 make of them a watchful and effective working unit. 
 
538 Introduction to Economics 
 
 They have power to appoint and to remove officers. The 
 policy and direction of the corporation is really in the 
 hands of the directors. The interests of the stockholders 
 are subject to the directors; unreliable directors have many 
 means of enriching themselves at the expense of small 
 stockholders. The stockholders regard the personnel of 
 the directors as of vital importance. 
 
 12. Election of Directors: Dummy Directors. — ^Directors 
 are elected by the majority vote of the stockholders, each 
 stockholder usually having one vote for each share of stock 
 he owns. Should one person own over 50 per cent of the 
 shares, he can elect all the directors. It is not unusual 
 for a small group to maintain a community of interest and 
 dominate the control of corporations. In these cases the 
 large mmiber of small stockholders have no control over 
 the policy and direction of their holdings. 
 
 A dummy director does not vote his own will; he serves 
 the interests of his master and votes as he is told. A 
 director, dimimy or other, usually must hold at least one 
 share of stock. One who owns over 50 per cent of the 
 shares may go through the legal form of transferring a 
 share to each of a sufficient number of dummies to "pack" 
 the board. After this work of deception, he casts the 
 necessary niunber of votes to elect his select dummies, 
 thus "packing" the board and assuming imperial rule. 
 
 13. Cumulative Voting. — This work of iniquity is de- 
 feated in some places by cumulative voting. By a power 
 of cimiulative voting the minority stockholders may elect 
 representation proportioned in number to the number of 
 shares they hold. The following example will make clear 
 the principle of cumulative voting. If we assume that 
 three directors are to be elected, a stockholder owning 20 
 
Industrial Ownership: The Corporation 539 
 
 shares may cast 20 votes for each of the three directors, 
 or 60 votes for one director. If there are 2,000 shares of 
 stock, and 1,480 shares are owned by the majority holders, 
 while 520 shares are held by the minority, the minority 
 by casting triple votes for one director would give him 
 1,560 votes. This is a larger vote than the majority could 
 muster for each of three candidates by casting single 
 votes. The minority would elect one director and the 
 majority two. 
 
 14. Inside Information of Stockholders. — The owner of 
 a share is part-owner of the corporation, and it would 
 seem that any man should be allowed the privilege of 
 examining into his own property. To deny him this 
 privilege would seem contrary to the character and pur- 
 pose of private property, yet minority stockholders as a 
 rule are not permitted to investigate the books of a cor- 
 poration. There is a sound reason for this. Large com- 
 peting corporations make every effort to excel the rival, 
 each competitor working out new inventions, new processes, 
 and trade secrets in the contest for advantage in the mar- 
 ket. These secrets and inner workings of a corporation 
 are advantage points which opposing competitors would 
 like to secure. Now, if your business has secret advantages 
 which enable it to excel my business, I would buy a share 
 in your company if that would permit me to examine your 
 books and thereby acquire certain of your advantage 
 points. To reveal or make common knowledge of one's 
 advantage points would deaden one's incentive, retard 
 individual initiative, and introduce a spirit of lethargy in 
 business. It would have a deadening effect like t|iat pro- 
 duced by public ownership. The conclusion to be drawn 
 from this reasoning is that the denying of inside informa- 
 
540 Introduction to Economics 
 
 tion to the minority holder protects rather than infringes 
 upon private property. 
 
 This is not to deny that the stockholder should have 
 some information. This he receives from well-managed 
 companies in regular reports issued annually, and in some 
 cases even quarterly or monthly. In these reports finan- 
 cial information, such as is contained in balance-sheets and 
 income statements, is given as well as information regard- 
 ing the operations of the company. 
 
 15. Negotiability of Stock-Certificates. — If one owns a 
 share of stock in a corporation, his ownership is evidenced 
 by a written instrument called a stock-certificate. The 
 stock-certificate is not itself the ownership, any more than 
 a ticket is a ride on a train. The certificate is to the own- 
 ership of stock what a deed is to the ownership of land: it 
 is merely a written evidence. If you lose your certificate 
 or a rogue steals it, you still remain a shareholder. A far 
 better evidence of ownership is secured by referring to the 
 books of the company in which are entered the names of 
 stockholders and the number of shares held by each. 
 Should stock-certificates be fully negotiable? Should the 
 real ownership pass from person to person with the transfer 
 of the certificate? This is a debatable question and the 
 argmnents pro and con may be stated briefly. 
 
 Affirmative: (i) Full negotiability would facilitate sales, 
 for there would not be the delay and trouble of transferring 
 names on the books of the company. (2) It would assist 
 stock-exchange brokers who make investigations back of 
 the certificates to determine rightful owners. (3) It would 
 make certificates more acceptable to banks for loans. 
 
 Negative: (i) If to obtain a certificate would render one 
 secure in ownership, it is argued that there would be a 
 
Industrial Ownership: The Corporation 541 
 
 premium upon forgery and theft. Where transfers take 
 place on the books of the corporation, there is thought to 
 be no incentive for iniquitous persons to steal or forge the 
 rightful owner's name to a certificate. Moreover, if cer- 
 tificates were negotiable, as are national bank notes, there 
 would be the danger of losing them, and thereby losing 
 one's ownership in the corporation. (2) The corporation 
 would be unable to keep a record of its stockholders. This 
 would encourage fraud on the part of stockholders and ren- 
 der it very difficult to detect such fraud. (3) Close akin 
 to this last point is the fact that the responsibility of stock- 
 holders would be lessened because they would not be 
 known. The corporate form has come into such general 
 use and it embodies tremendous capital, therefore it has 
 tremendous powers either for harm or for good. 
 
 Despite these negative arguments, which sound plausible 
 when first encountered, the weight of reason, the sanction 
 of legislation in the important states of the Union, and the 
 tendency of public opinion seem to favor the full negotia- 
 bility of stock-certificates. Laws making stock fully nego- 
 tiable have been passed recently in Pennsylvania, Massa- 
 chusetts, New York, and other states. 
 
 16. Securing Funds. — The corporation receives its funds 
 from those who purchase its bonds or notes, and those 
 who buy its stock; it is also aided by means of loans at 
 banks, by those who sell it goods on short-time credit, and 
 by the surplus or undivided earnings left in the corpora- 
 tion. One who is a large creditor of a corporation might 
 well lend it assistance in times of trouble. His purpose in 
 maintaining the strength of the company would be to pro- 
 tect the worth of the notes or bonds which he holds against 
 it. But it is very unusual that a small creditor assists a 
 
542 Introduction to Economics 
 
 corporation, because he is almost always protected in that 
 the first claims to be settled are those of the creditors. 
 
 Stockholders will at times contribute to a corporation or, 
 what is the same, turn the earnings back into the company 
 rather than take them out in the forms of dividends. 
 Stockholders may largely increase their dividends by con- 
 tributing funds for the installation of a new improvement 
 or method that will augment earnings. By far the most 
 important way in which stockholders aid corporations is 
 to turn the surplus back into the working assets of the 
 company. To this particular type of aid has been attrib- 
 uted in large part the financial strength of the Carnegie 
 Steel, Baldwin Locomotive Works, the Lehigh VaUey Rail- 
 road, and others. Shortsighted stockholders insist on im- 
 mediate dividends, even to the extent of stunting the 
 growth of their company. Farsighted stockholders will 
 not bleed the company, but will enable it to grow upon 
 the strength of its own earnings. 
 
 If one takes out $20 in dividends, he isolates it from the 
 benefits of large-scale business. Small isolated sums are 
 largely deprived of earning power, whereas if small sums 
 are allowed to remain in the corporation they co-operate 
 with or become a part of large capital, and take on all the 
 advantages of large scale business. During the growth of 
 a corporation up to the point of largest efficiency, there is 
 an ever-accelerating cumulative strength gained by turning 
 earnings back into the company. If one takes out $20 in 
 annual dividends for five years, he will have received $100, 
 but ordinarily if he leaves the dividends in the company 
 the price of his stock will have increased more than $100. 
 
 17. Funds from Creditors. — There are three ways of 
 securing funds (or their equivalent) from creditors. First, 
 
Indv^trial Ownership : The Corporation 543 
 
 a company may so manage its business as to keep itself 
 constantly indebted to trade creditors. If a manufactur- 
 ing or mercantile company buys, say, on ninety days' time 
 and plans its purchases at such intervals that they may 
 be met in large part by notes receivable, it may carry on a 
 large business relative to its invested capital. Assume 
 that a mercantile company so plans its deferred payments 
 as to keep itself constantly in debt $50,000 to trade credi- 
 tors; it would thus have the use of that sum of money as 
 truly as if it had made a loan in the open market. It would 
 have continually the use of $50,000 without interest. The 
 Roman law fulfilled the logic of such transactions when it 
 regarded a sale of goods on credit as a sale for cash with a 
 loan of the cash to the buyer from the seller. Funds may 
 be secured from creditors, also, by the issue of notes or 
 the issue of bonds. 
 
 18. Issuing Notes. — If a corporation wishes to borrow 
 for a comparatively short period of time, it will ordinarily 
 issue notes. A note made to a bank will usually run not 
 over sis months, but notes sold to the public are likely to 
 rim from two to ten years. The denominations of notes 
 vary with circumstances. If a loan is made from a single 
 large syndicate, a note may be made for $50,000 or $100,000 
 or more. Ijf, however, notes are offered for sale to the 
 general investing public, they will be issued in small de- 
 nominations. 
 
 Notes, as a rule, are objectionable as a means of securing 
 large sums of money. They move too slowly to satisfy 
 the requirements of a commercial bank. On the other 
 hand, they do not run long enough to satisfy the average 
 individual who desires a steady return from a durable 
 investment. The time limit of notes generally falls be- 
 
544 Introduction to Economics 
 
 tween the time limit of banks and of individuals. The 
 issuing company has no means of foretelling whether the 
 public will absorb its entire note issue, nor can it predict 
 the possibilities of renewing its notes if it becomes neces- 
 sary to do so at the date of their expiration. 
 
 With these objections in mind, it becomes a fair question 
 as to why a corporation would ever issue notes. There 
 are, however, occasions which make it advisable and all 
 but imperative for a corporation to issue notes. Financiers 
 becoming expert in reading the signs of the times know 
 the good times and the poor times for making bond issues. 
 If a company is in temporary need of finance at a poor 
 time for a bond issue it will be well to issue short-term 
 notes in order to defer the bond issue. If a company is 
 constructing an improvement which promises immediate 
 returns it may be wise to issue notes. 
 
 19. Issuing Bonds. — Selling bonds, or selling notes, is 
 borrowing money. The written promise, secured or un- 
 secured, of an individual to pay is called a note. The 
 short- time written obligation of a company is called a note; 
 the written promise to pay issued by a government, or the 
 long-time written obligations to pay issued by a corpora- 
 tion is called a bond. If you hold a government's bond 
 or corporation's bond, that government or corporation is 
 indebted to you. 
 
 Is it wise to borrow, or is there any sound reason for 
 remaining heavily indebted to others ? The great majority 
 of persons will answer an emphatic "no." This dislike 
 for debt is inherited; in former times businesses were not 
 financed by means of credit. The borrowers were the 
 poor who obligated both their person and their property 
 to the wealthier classes in ord^r to secure necessities in 
 
Indmtrial Ownership: The Corporation 545 
 
 times of need. Debtors have been put in stocks, hanged 
 by the thumbs, suffered long terms of imprisonment, be- 
 cause of inability to pay their debts. Later the obligations 
 for debts came to rest upon the individual's wealth rather 
 than upon his person. To-day wealth is its own guarantee 
 for the borrowings used to improve or to create it. The 
 large debtor class to-day consists of the wealthy who have 
 the means to guarantee and thereby make possible large 
 borrowings. Because large indebtedness yields large re- 
 turns, the wealthy have become the large debtor class. 
 What reason does a financier have for putting a million in 
 a business rather than loaning it at the market rate of 
 interest? He does it simply because he anticipates a 
 larger return from an investment in business than from an 
 ordinary loan. The excuse of a business for being is that 
 it pays more than the loan market. If one can borrow 
 funds at 6 per cent and makfe them earn ten per cent in 
 his business, it will be wise to borrow. There is, of course, 
 a limit beyond which a corporation should not extend its 
 borrowings. It is both common practice and sound policy 
 for progressive corporations to maintain debts. 
 
 20. Issuing Stocks and Bonds. — A corporation may be 
 profitable, enjoying good- will and its securities in demand 
 at the very time when it is approaching decay. A plant 
 may be ruined by a change in demand. For instance, an 
 oil company recently came to naught because the oil de- 
 posits became exhausted. A lumber company failed when 
 by an unfavorable decision in court it lost the title to a 
 boundary of timber; and a brick plant was rendered worth- 
 less when left to one side by a change in the line of trans- 
 portation over which its products moved. Examples might 
 be multiplied of failures of corporations due to new inven- 
 
546 Introduction to Economics 
 
 tions, or processes, or fashions, or substitutes, or exhaus- 
 tion of raw materials, or legal reverses, or manipulations. 
 
 In any case where danger threatens the future prosperity 
 of a corporation the management will prefer to sell stocks 
 rather than bonds. Sell your holdings while prices are 
 high; let the price dwindle in another's hands. Again, 
 corporations find it good policy not to declare exceptionally 
 high dividends, for high dividends meet with public dis- 
 favor and frequently cause expensive litigation. This may 
 be avoided by issuing more capital stock as a stock divi- 
 dend, in which no formal payment is received by the cor- 
 poration for the stock. 
 
 On the other hand, one will prefer to maintain his own- 
 ership if a business has promise of increasing returns. The 
 case would be different, of course, should the buying pub- 
 lic have an exaggerated estimate of the future prosperity 
 of a company. In this caSe the present price of stock 
 would justify its sale. Buying stock is but bu5dng future 
 incomes, and skilful promoters may deceive the bu3dng 
 public. Buyers pay high prices for stock at times which 
 yields no returns at the time of purchase. The anticipated 
 future incomes discounted to their present worth deter- 
 mine the price of a share of stock or of any other source of 
 income. 
 
 Ordinarily the wise promoter studies his proposition 
 intensively and has a truer foresight than the buying pub- 
 lic. If his estimate of future returns is higher than that 
 of the public, he will prefer to borrow — issue bonds — rather 
 than sell stock. Bonds bear a fixed return and, therefore, 
 usually sell higher than stock which would yield an equally 
 large return. To own bonds gives the holder no control in 
 the management of a company, therefore stockholders 
 
Industrial Ownership: The Corporation 547 
 
 wishing to retain management will sell bonds. A com- 
 pany will sell bonds, also, when the borrowed funds will 
 3deld a larger return than the interest paid on the bonds. 
 
 21. Questionable Practices. — The corporation is the 
 most important and the most efl&cient form of business 
 organization, and it is at the same time the most efi&cient 
 business device at the disposal of rascals. At times corpo- 
 rations are so intricately devised that individual responsi- 
 bility is completely hidden. Among the more common 
 reprehensible acts of corporations are the following: 
 
 (i) Majority stockholders sometimes elect themselves to 
 ofl&ce and vote such large salaries upon themselves as to 
 deprive the minority stockholder of profits. This, where 
 permitted, is legalized robbery: it is a means whereby one 
 confiscates the property of another. It is not less culpable 
 than the act of a state official who would surreptitiously 
 appropriate state funds. 
 
 (2) Majority stockholders determine the buying of cor- 
 porations, and this may enable them to sell their own prop- 
 erty to the corporation at such prices as they choose. For 
 instance, let us assimie that a prominent corporate director 
 owns a near-by piece of land. He may direct his corpora- 
 tion to buy the land at a figure named by himself. Such 
 exorbitant prices may leave no profits for minority stock- 
 holders. This practice, it should be added, is illegal both 
 in common law and under the Clayton Act. 
 
 (3) Another means of defrauding minority stockholders 
 is to form a new company to take over the business of the 
 old company. If, for instance, the managers of a store 
 become well known, if through honest dealing they acquire 
 public good-will, they may establish a new store and carry 
 the trade with them. 
 
548 Introduction to Economics 
 
 (4) The officers and directors have the inside information 
 of a corporation and can use it to their own private advan- 
 tage. If they foresee a decline in stock they can sell while 
 the price is high, and when the price reaches the bottom 
 they can buy treasury stock. If they foresee a rise in 
 stock they may buy the stock of minority stockholders 
 and reap the advantages of a rise, or if they anticipate 
 that the company is approaching receivership they may 
 trade stock for notes held by creditors. These notes will 
 be good because they hold first lien against the assets of 
 the company, whereas the stock may be worthless paper. 
 A partial remedy for such abuses is the law, in New York 
 State and other places, making it illegal for a director to 
 "sell short." 
 
 (S') Directors may vote themselves fees for attending 
 meetings. They may be exorbitant, and they represent 
 Just so much being subtracted from the stockholders' divi- 
 dends. Probably the writers on the subject make more 
 of this abuse than is justified ; it is not unusual, rather it is 
 a common practice in many corporations, for directors to 
 get a gold piece for attending meetings. 
 
 (6) It is not unusual for the directors to juggle ac- 
 counts. If they wish to boost the price of stock they 
 may have the profits revealed and the losses concealed. 
 Where accounts are subject to audit, a good showing 
 may be made at the date of the balance-sheet by bor- 
 rowing money which, as is understood by private agree- 
 ment, is to be returned immediately afterward. Fake 
 sales may give to slow, cheap stock an active, valuable 
 appearance. This is a means of speculation whereby the 
 books record large sales at good prices, but in fact a secret 
 agreement is made at the time of sale to the effect that 
 the stocks are to be taken back within a short time. 
 
Industrial Ownership: The Corporation 549 
 
 (7) Unscrupulous directors may inflict loss or even 
 bankruptcy upon companies for whose management they 
 are responsible. This reduces the price of stocks to a 
 minimum, and the controlling directors buy them up. 
 Such infamy in the past was not an uncommon means of 
 defrauding minority stockholders. 
 
 (8) The last form of manipulation which I shall mention 
 is the trick of cheating creditors. The lowest type of mer- 
 chant is the one who buys on credit, sells, pockets the 
 money and goes into bankruptcy. A similar line of action 
 is the conduct of the most inferior class of corporate direc- 
 tors, who borrow to the full extent of their credit, split a 
 melon, allow the assets of the company to decline, and go 
 into bankruptcy. It must be added that such abuses are 
 very rare. 
 
 22. Remedies. — Cunning rascality is fast becoming a 
 thing of the past in business life. Lawyers are no longer 
 regarded as a "bunch of banditti"; downright fraud no 
 longer characterizes the activities of banks and stock 
 exchanges; lending is not now a game of usury. Sound 
 moral conduct is the prevailing characteristic of modern 
 business activity, although there are among us scoundrels 
 who would oppress the weak, and certain disgraceful prac- 
 tices are yet to be eradicated. Many persons will commit 
 acts in secret that they would condemn in public. The 
 fact that men will practise the highest order of conduct 
 when held individually responsible for their acts makes it 
 imperative that we go behind the legal person (corpora- 
 tions) and expose the natural persons, the real perpetrators 
 of unfair practices. Inasmuch as men weigh their conduct 
 when under public opinion, publicity is an effective remedy 
 for manipulations. Cumulative voting has much promise 
 for good, because it would give minority stockholders rep- 
 
550 Introduction to Economics 
 
 resentation in the management, and minority stockholders 
 would do well to attend meetings and take an active inter- 
 est in their corporation. In the corporate by-laws there 
 should be inserted provisions as to the salaries of officers, 
 the limit to which a corporation may incur debts, the 
 amount of surplus to be set aside each year and other pro- 
 visions for protection. A most effective guarantee of busi- 
 ness honor would be for certified public accoimtants to 
 make frequent and searching investigations into the con- 
 duct of large businesses. 
 
 23. Foresight in Business. — ^To-day every part of the 
 world is doing business with every other part. The enor- 
 mous size of business units, their complex relationships 
 with one another, and their interdependence impose social 
 and moral conditions which were not in the minds of men 
 prior to the Industrial Revolution. Great factories employ 
 thousands of men for ofi&cers, clerks, agents, and laborers; 
 they buy and sell on credit the world over. Modern busi- 
 ness is based on trust and confidence; these are absolute 
 essentials both in the internal organization of single enter- 
 prises and in the business relationships of industries with 
 one another. 
 
 Since enterprises are organized for future work, we must 
 have forethought. Business must be conducted by hon- 
 orable and foresighted individuals, or it must be conducted 
 under governmental restrictions and regulations. In the 
 very nature of things, legislators cannot be expected to 
 take the far-sighted view of the higher type of business 
 men. They feel the urgent pressure of consumers for 
 lower rates and prices; they have the vote-catching and 
 political rather than the industrial point of view. They 
 too often forget that high prices stimulate large crops, and 
 
Industrial Ownership: The Corporation 551 
 
 that paying rates make possible the most efScient service. 
 They are capacitated neither by training nor position to 
 conduct industry intelligently. Shipping and commerce 
 under public regulation in England during the war is a 
 striking example of bungling and waste at the hands of 
 the inexperienced. 
 
 Reference so far has been made to the higher order of 
 business men, but many business men are short-sighted, 
 are actuated by the nearness of the reward, and are extor- 
 tionate. Fortunately theirs is a policy of self-destruction. 
 In the Middle Ages the people thought that there must be 
 public regulation of the charges and services of those who 
 produced common necessities. For instance, it was thought 
 that the community was at the mercy of a public baker, 
 and that he could reduce the people to penury through 
 starvation prices. We now reason that extortionate prices 
 would react upon the baker, reducing him to penury. 
 Competition springs up to reduce unfair prices, and an 
 indignant community welcomes the newcomers with all 
 the trade. Able business men are guided by considera- 
 tions of pubhc policy that compel them to look years and 
 even generations ahead. 
 
 24. An educational transformation is now in process. A 
 few years ago business was regarded as a game of chance 
 and cunning trickery, and a man's business was looked 
 upon as "his own business." While men were severely 
 trained for engineering and the so-called learned profes- 
 sions, business training was neglected. A man of no apti- 
 tude for anything else might go into business, but to-day 
 special institutions are established to train men and women 
 for business. High schools and universities throughout the 
 country are adding departments of business training, the 
 
552 Introduction to Economics 
 
 purpose of this training being to give to men and women 
 a knowledge of the scientific principles which underlie and 
 guide business phenomena. One mastering this training 
 becomes possessed of a public point of view; he is enabled 
 to co-operate with the true mission of the state, which 
 would make private acquisition coincide with social pro- 
 duction. 
 
 We have seen how unprincipled competitors tend to 
 lower the standard of competition. By paying low wages, 
 requiring long hours and by refusing to put in safety 
 appliances, they can produce cheaper, and undersell and 
 drive worthy competitors from the market. In self-defense 
 worthy competitors are forced to the low standard set by 
 the unworthy. We shall now see how the unfittest tend 
 to bring burdensome legislation upon the fittest. 
 
 The people must resort to legislation for protection against 
 corporate abuses. It was the short-sighted and extortion- 
 ate methods of certain railway officials which brought the 
 railroads under the burdensome, but necessary, restrictions 
 of the Interstate Commerce Law and succeeding legislation. 
 If these laws put the railroads to cost and inconvenience, 
 they must be last to complain, for why did they unwit- 
 tingly force the public to its last resort for self-defense? 
 They were the least fit corporate directors whose unfair 
 methods forced the public to enact and enforce trust legis- 
 lation. A wise policy rigorously enforced on the part of 
 business men would have been more lucrative in the long 
 run, would have spared the necessity of burdensome legis- 
 lation, would have avoided much expensive litigation, and, 
 above all, would have given the public trust and confi- 
 dence rather than distrust and dislike for the corporate 
 industries of the country. 
 
Industrial Ownership: The Corporation 553 
 
 Sound business practice reaches beyond the internal 
 workings of an industry, for industries have a public respon- 
 sibility and must fit their policies into the general scheme 
 of social well-being. Much, not all, state regulation is a 
 necessary evil and is necessitated by the short-sighted who 
 are ignorant of their own self-interest. The chief means 
 of hastening our educational process is publicity. We must 
 be educated to a clear understanding of directors' responsi- 
 bility. Under the corporate form their borrowing power is 
 increased and their personal liability is diminished, and 
 they are permitted to speculate with other people's money. 
 This is a patent cause of unintelligent abuse of the corpo- 
 rate form. Increased power and diminished responsibility 
 form a dangerous compound. While the corporate form 
 increases productive power, it also increases acquisitive 
 power; it is a license for the unscrupulous unless the sense 
 of responsibility is made commensurate with the sense of 
 power. 
 
 25. Exercises. — i. The individual may own real prop- 
 erty, personal property, and the right to do something to 
 the exclusion of others. Examples of such rights are pat- 
 ents, copyrights, trade-marks, franchises. Define each of the 
 terms itaHcized. 
 
 2. What bearing does the safeguarding of the public 
 weMare have upon the limitations of private property ? 
 
 3. What is the object of forming a partnership? What 
 are its chief characteristics? 
 
 4. Jones loans a firm— Smith and Brown— $10,000 to be 
 invested in the business, with the understanding that he is 
 to receive one-third of the profits. Watt seUs goods to the 
 firm. Watt sues Jones as a partner along with Smith and 
 Brown. Is Jones liable to Watt ? 
 
 Would Jones be liable as a partner if it were agreed that 
 
554 Introduction to Economics 
 
 he should receive 6 per cent in any case and 15 per cent of 
 the profits ? 
 
 5. Two views of partnerships: {a) A partnership haS no 
 entity apart from the persons who compose it, i. e., a part- 
 nership is a band or agency of individuals for convenience 
 of business, and so all income from partnership operation 
 is individual income; {V) partnership has an entity as 
 distinct from the individuals who compose it as if it were 
 a corporation. 
 
 Would a partnership have to pay an income tax which 
 is administered according to the first view? the second 
 view? (Contrast the act of October 3, 1913, with the act 
 of September 8, 1916, on this point. At this writing a 
 proposed law adheres strictly to the first view above men- 
 tioned.) 
 
 6. How does a joint-stock association differ from the 
 ordinary partnership? How do they resemble partner- 
 ships? 
 
 7. Paragraph 8 speaks of a corporation as an artificial 
 person; other terms might have been used, as legal person, 
 legal entity. What is meant ? 
 
 8. Distinguish a share of stock from a stock certificate. 
 How is stock transferred ? 
 
 9. Explain how directors are usually chosen, and enu- 
 merate their powers. Do you favor cumulative voting? 
 Why or why not ? 
 
 10. Who is a stockholder? What are his rights? May 
 he have more than one vote ? Does he declare dividends ? 
 If not, who does ? What is a dividend, and who gets it ? 
 
 11. What are the functions of a receiver? By whom is 
 he employed ? What is a receiver's certificate ? Is it more 
 or less desirable than a bond? (For answer see any book 
 on corporation finance.) 
 
 12. In raising funds under what conditions would you 
 think it advisable to issue notes? bonds? preferred stock? 
 common stock ? 
 
 13. Summarize the questionable practices of corpora- 
 tions that are outlined in this chapter. How does the in- 
 
Industrial Ownership: The Corporation 555 
 
 creasing foresight in business (paragraph 23) tend to eradi- 
 cate these practices ? 
 
 14. A corporation may be dissolved by the expiration of 
 the time for which it was chartered, or by the decree of a 
 court for various causes such as insolvency, non-use of fran- 
 chise, abuse of charter powers, violation of law, fraudulent 
 and illegal acts. The directors or stockholders may apply 
 for permission to surrender the charter whenever they 
 deem such a course beneficial to the interests of the stock- 
 holders. Upon dissolution, after all debts and claims are 
 paid, the remaining assets are divided among the stock- 
 holders in proportion to their holdings. (HufiEcut.) 
 
 (a) Define the itaUcized words. 
 
 (6) Prepare and answer (in writing) four questions based 
 upon Huffcut's statement. 
 
CHAPTER XXV 
 LARGE-SCALE PRODUCTION AND MONOPOLY 
 
 I. Control by best talent. 2. Selection of men. 3. Distribution of 
 talent. 4. Standardization aids the purchaser. 5. Steady demand in a 
 broad market. 6. The quantity of demand. 7. Other advantages of large 
 production, with or without monopoly power. 8. The best size of estab- 
 lishment. 9. Some advantages of monopoly. 10. Cutthroat competition. 
 II. Two types of establishments. 12. Lower costs from costlier tools. 13. 
 The cost of tools limited by saving. 14. The competitor. 15. Factors 
 should reproduce themselves. 16. Monopoly control. 17. Advertising 
 waste. 18. Salesmanship. 19. Inequality of classes. 20. Elimination of 
 independent businesses. 21. Monopoly deadens initiative. 22. Summary 
 and conclusion. 23. Conclusion of chapter. 24. Exercises. 
 
 The student must be on his guard against confusing 
 large production with monopoly. Some purely competi- 
 tive concerns are far more wealthy and powerful than are 
 some monopoUes. Size is not the distinguishing feature 
 between competition and monopoly. But large competi- 
 tive production and monopoly have many of the same ad- 
 vantages. 
 
 I. Control by Best Talent. — The large establishment, 
 competitive or monopoHstic, comes to be directed by supe- 
 rior talent. Real genius is rare in any kind of activity, as 
 rare in business as in letters or in military leadership. If, 
 in a single line of business, there are fifty individual, one- 
 man concerns, all will not be directed by high-grade talent. 
 The wastes of inefl&ciency attend the self-seeking activities 
 of the mediocre. If, however, these fifty concerns are 
 united under the control of an able director, the result will 
 be that the labor, raw material, and machinery will be 
 
 556 
 
Large-Scale Production and Monopoly 557 
 
 effectively co-ordinated. Large production furnishes the 
 only means whereby the few able generals of industry may 
 control. And the wisest utilization of the agencies of pro- 
 duction is the sole guarantee of the largest industrial out- 
 put. 
 
 2. Selection of Men, — Methods of precision characterize 
 the large industrial business or combination. A severe 
 system of selection brings the trained intellect to the fore, 
 where, as in large production, fitness is the test for place 
 and ranking. Men in the ranks are watched, timed, and 
 graded for long periods of time. It is to the self-interest 
 of the employer to promote and, therefore, hold the right 
 man. A condition in which labor is congregated and capi- 
 tal combined is in sharp contrast with the condition where 
 one-man concerns are competing. The large and well- 
 managed establishment has a number of departments, and 
 in the course of his development the young man has an 
 opportunity to be tried out in the several fields of labor. 
 One may be a natural salesman and at the same time have 
 little or no ability as a manager. Superior talent has its 
 limitations, and the large corporation furnishes the several 
 opportimities in which the young man may be tested and 
 his natural adaptability discovered. Under the so-called 
 Emerson ef&ciency method of wage payment, if a laborer 
 is not 80 per cent efl&cient — ^mathematically calculated — he 
 is put to another task. Only a large business could afford 
 all the preliminary studies necessary to install such a 
 system. 
 
 In early times the father left the control of the business 
 to his children. This succession was not determined by 
 the fitness of the child. Again, it requires but little capital 
 to start a small business. The ease of starting such an 
 
558 Introduction to Economics 
 
 enterprise is an open invitation to the unfit, and, in the 
 aggregate, it means a vast waste of productive capacity. 
 It is estimated that 20 per cent of the personnel of the 
 small retail groceries changes each year. These changes 
 represent a want of scientific knowledge, a haphazard or 
 rule-of-thumb procedure which aggregates enormous social 
 waste. 
 
 Macrosty's words are well chosen: "Rule of thimib is 
 dead in the workshop; the day is with the engineer and 
 the chemist with their methods of precision; in the count- 
 ing-house and board-room there is no longer a place for 
 the huckster, or gambler; the future is with the commercial 
 statesman, whether in a large individual business or a 
 combination." ' 
 
 3. Distribution of Talent. — "The advantage of manage- 
 ment by the best talent is a matter also of the proper dis- 
 tribution of talent. Some man in his independent estab- 
 lishment may have been peculiarly successful on account 
 of his skill as a salesman; another, on account of his organ- 
 izing ability; a third, on account of his special technical 
 knowledge, and so on. If these various competing estab- 
 lishments all unite into one, to each man can be given 
 the department for which he is peculiarly adapted, and in 
 that way the joint establishment gets the advantage of 
 the peculiar skill of each."^ 
 
 4. Standardization Aids the Purchaser. — There are few 
 skilled buyers; one may have bargaining power and yet be 
 a poor Judge of quality. The good buyer must be a judge 
 of men as well as of goods; he must be a judge of the mar- 
 ket in order to anticipate demand, and to take advantage 
 
 ' H. W. Macrosty, The Trust Movement in British Industry, p. 337. 
 ' Jenks, The Trust Problem, p. 41. 
 
Large-Scale Production and Monopoly 559 
 
 of the varying conditions of supply. Able buyers com- 
 mand large salaries because there are so few of them. 
 Moreover, the knowledge of expert buyers is limited to 
 one or, at most, to two or three kinds of goods. This 
 being true, how can the average consumer be guaranteed a 
 wise purchase in our modern complex markets? A large 
 number of small producers but adds to his confusion, thus 
 making a purchase little more than a gamble. The large 
 establishment, however, standardizes its output and main- 
 tains a uniformly good quality. Its trade-mark gradually 
 becomes a guarantee of quality and thus a protection to 
 the unskilled buyer. 
 
 5. Steady Demand in a Broad Market. — The large com- 
 bination can extend its business over a broad territory, 
 whereas, generally speaking, the small establishment is 
 limited to a smaller territory. The local concern is sub- 
 ject to local conditions of prosperity or depression. But 
 the large business covering a vast territory is not neces- 
 sarily embarrassed by a local depression. The depression 
 in one locaUty may be offset by the prosperity in another. 
 The local demand, moreover, is altogether seasonal in 
 many cases. This compels the local producer to suffer the 
 inconveniences of an irregular demand. He is confronted 
 with the problems of maintaining his labor supply, of stor- 
 ing goods produced out of season, of making satisfactory 
 agreements with the suppliers of raw material, and of the 
 constant utihzation of his plant. 
 
 A specific case will reveal some of the chief advantages 
 of a broad market. A dealer in lawn-mowers informs me 
 that his company sells machines in this country, Australia, 
 Central and South America, and in Europe. There is 
 always a mowing-season somewhere within this vast area. 
 
560 Introduction to Economics 
 
 At those times of the year, when large orders are coining in 
 from South America there will be practically no orders from 
 North America. Excepting a period of about six weeks, 
 orders will be coming in from some parts of the world. 
 During these six weeks the plant is run at full speed, and 
 the machines produced during this period are loaded on 
 slow boats, which reach the Pacific Coast in time for the 
 opening of the market there. These slow shipments by 
 boats are less expensive than shipments by rail. 
 
 This broad market makes a constant demand; it enables 
 the plant to run the entire year; it avoids the necessity of 
 carrying a large idle stock for considerable portions of time. 
 
 6. The Quantity of Demand. — The stock of a large sell- 
 ing establishment which sells loo units of a particular 
 commodity a week may be much less than the aggregate 
 stock of twenty-five concerns whose combined sales are 
 loo units a week. To make this clear, let us study the 
 variations of demand. First, demand varies with times 
 and seasons. Lawn-mowers are demanded in the season 
 when the grass begins to grow, overcoats in the fall, and 
 straw hats in the spring. Second, demands are ephemeral. 
 If the fashion leaders appear in russet shoes, the demand 
 for such shoes will begin, grow into a "craze," then de- 
 cline, and ultimately die. A skilful buyer can fairly pre- 
 dict the demand in such cases. 
 
 Third, there are chance variations of demand. One day 
 hair-brushes are called for, the next day many tooth- 
 brushes, the third day neither. The merchant kills his busi- 
 ness by always being "just out" of the particular good the 
 customer wants. The merchant must carry a stock which 
 in variety and amount will meet these chance variations of 
 demand. Customers will pass by a dozen small shops in 
 
Large-Scale Prodtcction and Monopoly 561 
 
 order to trade with the big store, because they know that 
 they can usually get what they want in the big store. 
 
 The small shop has no basis for figuring these chance 
 variations, and must therefore carry a large idle or reserve 
 stock in order to compete successfully with the large store. 
 On the other hand, the store which is making a large vol- 
 imie of sales can closely approximate these chance varia- 
 tions. The larger the number of individual sales the 
 greater is the tendency to maintain a constant daily mean 
 or average number of sales. It has been calculated that 
 if a large store sells 64 times as many goods as a small 
 store, it will have to carry a stock not 64 times as large, 
 but only 8 times as large. Now, since it sells 64 times as 
 many goods and carries a stock only 8 times as large, the 
 stock charge on a single article will be only one-eighth as 
 much in the large as in the small store. If one merchant 
 suppKes a town he will have to carry but one-eighth as 
 many goods as would 64 competing merchants.' 
 
 7. Other advantages of large production, with or without 
 monopoly power, may be expressed in the following sum- 
 mary form: 
 
 (a) For the handling of massive materials the large con- 
 cern is equipped ^th the best facilities. 
 
 (6) The large concern enjoys the full advantages of a 
 
 ' It is said in Professor Ely's Monopolies and Trusts that "The mathe- 
 matical theory of probability teaches that the larger the number of indi- 
 vidual variations around an underlymg mean, the greater the tendency 
 of these variations to give a steady value of that mean. Those running 
 over tend more and more to balance those running imder; and, according 
 to the theory, the mean of a number of variations differs from the true under- 
 lying mean by a quantity varying inversely as the square root of the total 
 number of variations." See Merriman, Text-Book of Least Squares, p. 89, 
 or any other work on the subject. The above examples are fonnd in Dr. 
 Ely's book. 
 
562 IntrodiLction to Economics 
 
 division of labor, of separate departments, and it can buy 
 the very best machinery. 
 
 (c) The large factory saves by-products. Cottonseed is a 
 by-product of cotton fibre; hide, bone, and fats are by- 
 products of meat. Under the old hand-processes it did 
 not pay to save cottonseed, but under new processes it 
 is accumulated in large quantities and converted into 
 valuable products. 
 
 {d) The Standard Oil Company maintains an experiment 
 station in which there are made chemical investigations of 
 the most elaborate and extensive kind. In fact, a regular 
 investigating department is devoted to the problem of 
 fully utilizing all the elements of crude oil. As a conse- 
 quence, that company has in the market over three 
 hundred by-products. Many of these valuable products 
 are made from parts of the oil which would have been 
 thrown away by a small plant. A large automobile con- 
 cern is reported to have set aside $3,000,000 with which 
 to perfect a tractor. No small company could do this. 
 There are numerous social and industrial needs which can 
 be served only by large capital. 
 
 (e) Small concerns suffer more from had debts than do 
 large concerns, especially those with some monopoly 
 power. Keen competition causes a rather liberal exten- 
 sion of credit. When the American Steel and Wire Com- 
 pany was formed the loss from bad debts for the constitu- 
 ent companies was reduced from K of i per cent to Ks of i 
 per cent. 
 
 (/) Cross-freights often aggregate a large total loss for 
 a number of competing companies. In a large country 
 like this freight rates are significant items in the sale of 
 goods. If an oil-refining company in New Jersey suppHes 
 
Large -Scale Production and Monopoly 563 
 
 customers in Illinois, while a refinery near Cliicago supplies 
 customers in New Jersey, there must be large and unneces- 
 sary freight costs. Should these companies combine under 
 one management freights would be saved because customers 
 would be supplied from the nearest refinery. It is esti- 
 mated that $500,000 was saved annually in cross-freights 
 by the formation of the American Steel and Wire Com- 
 pany. 
 
 (g) Cross-deliveries in cities are no less wasteful than are 
 cross-freights. The following statement may be far from 
 accurate, but it is suggestive. These figures were dis- 
 played in 1912 at a national dairy show at Chicago. It 
 represents the actual wastes of the present distribution of 
 milk in an American city. 
 
 Present System An Efficient System 
 
 173 distributors, requiring the ser- A simple efficient agency could ren- 
 vices of: der superior service with: 
 
 356 men and many families. 90 men. 
 
 360 horses. 5° horses. 
 
 305 milk- wagons. 25 horse-drawn trucks and 6 motor- 
 trucks. 
 
 2,509 miles of delivering 62,300 
 
 quarts to 45,000 homes. 300 miles travel. 
 
 $76,600 invested in milk-room equip- 
 ment. $7S,ooo equipment of one sanitary 
 
 milk-depot. 
 
 $108,800 invested in horses and wag- 
 ons; $282,500 total investment. $100,000 building and real estate. 
 
 $2,000 daily cost of distribution. $600 daily cost of distribution. 
 
 $720,000 total yearly cost. $220,000 yearly cost of distribution. 
 
 Resulting economies; better service, purer milk, $500,000 
 saving a year, or over 66^ per cent.' 
 
 (h) The capacity of a number of competitors often excels 
 the needs for the output. Prior to the formation of the 
 
 » This example taken from Materials for the Study of Elementary Eco- 
 nomics (p. 911) by Marshal, Wright and Field. Chicago University Press. 
 
564 Introduction to Economics 
 
 Whiskey Trust the distillers had probably 60 per cent 
 more capacity than the market required. When the trust 
 was formed it closed a number of the weaker distilleries 
 and ran the more ef&cient ones constantly. This tended 
 to make the business more steady, to keep the labor em- 
 ployed, and to enable the idle distilleries to be transferred 
 to other lines of employment. 
 
 (z) The formation of agencies to sell the output of a num- 
 ber of companies may frequently result in large savings. 
 For instance, there are a large number of small competing 
 coal companies in Indiana. "The Indiana coals," says 
 President Van Hise, "are of a kind that deteriorate rapidly 
 when taken out of the mine. Several varieties and sizes 
 of coal are produced; to obtain one size, other sizes must 
 be made. If an order comes to a mine for a certain size, 
 corresponding orders may not come for the other sizes, but 
 such orders may come to an adjacent mine. If a group of 
 mines may co-operate so that the orders will equalize them- 
 selves among the different varieties and sizes of coal, it is 
 evident the waste will be greatly reduced."' 
 
 8. The Best Size of Establishment. — ^All of the above 
 advantages, which have been alleged by different scholars 
 in favor of combination, may be enjoyed by the large com- 
 petitor as well as by the monopoly. The large competitive 
 establishment may be manned by superior talent, and do 
 business throughout an extended market. The large com- 
 petitive establishment has a demand, is equipped with the 
 best facilities, enjoys a division of labor, saves by-products, 
 and maintains an investigating department. It can so 
 locate its plants as to save in cross-freights, and it can 
 adjust its capacity to its market. 
 
 ' Concentration and Control, p. 92. 
 
Large- Scale Production and Monopoly 565 
 
 We might enumerate arguments pro and con on the 
 question of the best size of establishments. But the whole 
 argument briefly and accurately summarizes itself in this: 
 there is but one best adjustment of means to the end of the 
 greatest net return. This best adjustment would not con- 
 tain relatively short or long factors; it would not have too 
 much building for the machinery, or fewer laborers than 
 the machinery demanded. It would have neither a short- 
 age nor an oversupply of raw materials or managerial 
 ability. There would be a proper proportionality of all 
 the factors to one another throughout the establishment. 
 This is but half of the story and the other half is that the 
 establishment must be properly adjusted to the extent of 
 the market. 
 
 9. Some Advantages of Monopoly. — ^Apart from the 
 problems of size and proportionality there are certain con- 
 siderations which seem to favor monopoly. A brief sur- 
 vey of the arguments for and against monopoly will follow. 
 Among the advantages of monopoly now to be considered 
 are: the elimination of cutthroat competition, the saving 
 of invested capital through a proper installation of im- 
 provements, the reduction of the costs of advertising and 
 selling. 
 
 10. Cutthroat Competition. — ^Assume a number, say ten, 
 of competitors who are producing a commodity the cost per 
 unit of which diminishes as the volume of output increases. 
 It will most certainly be to the advantage of each competi- 
 tor to broaden his market and increase the number of his 
 sales in order that he may increase his production. By 
 enlarging his production, the cost per unit of output dimin- 
 ishes, and, if fortune favors him, he can undersell and drive 
 his competitors from the market. Obviously each com- 
 
566 Introduction to Economics 
 
 petitor will desire to be the largest producer and will, 
 therefore, lower his price in order to take the market. 
 From the fact that each concern desires to be the largest, 
 it follows that the total productive capacity of the ten 
 concerns above assiuned outgrows the total demand of 
 the market for their product. Cutthroat competition be- 
 tween these producers will tend to destroy the gains fox 
 each and all. This, moreover, means a large social waste, 
 for when productive capacity overreaches the demand the 
 several plants must be idle a considerable portion of the 
 time. These competitors will sooner or later deem it wise 
 to form a combination to regulate prices and to restrict the 
 output in the interest of all. Thus it is seen how cutthroat 
 competition results in combination and monopoly. 
 
 II. Two Types of Establishments. — Productive estab- 
 lishments may be divided into two classes with respect to 
 overhead costs. A raiboad is typical of one class. It 
 must have large invested capital in the form of rights of 
 way, road-bed, stations, terminals, and the like. It must 
 have these facilities whether the traffic be light or heavy, 
 whether it transports a thousand or a hundred thousand 
 car-loads of goods. Once the equipment is provided, the 
 particular or special cost of transporting an additional 
 passenger or commodity to a certain point is negligible. 
 General costs or overhead charges are very high in com- 
 parison with particular costs. There are many industries 
 in which overhead charges are very high in comparison 
 with particular costs. Some of them are: iron and steel 
 blast-furnaces, beet-sugar, cement, paper and wood pulp. 
 
 In other industries particular costs are high in compari- 
 son with overhead charges. The making of millinery and 
 lace goods is largely a matter of individual skill, and does 
 
Large-Scale Production and Monopoly 567 
 
 not require a heavy investment of fixed capital. Clothing, 
 signs, and advertising novelties, some kinds of printing and 
 publishing are exemplary of this class. 
 
 Industries in the latter class can adopt new improve- 
 ments with comparatively little inconvenience or, generally 
 speaking, they may turn to a new and different line of 
 business without material sacrifice. If the opening up of 
 a new car-line eats too heavily into his profits, the owner 
 of a line of jitney-buses can either select a new line or, 
 through trade, convert his property into the form of a 
 grocery-store. But the case is entirely different where the 
 investment is largely in the form of fixed capital which 
 could be used in no other capacity. 
 
 12. Lower Costs from Costlier Tools. — The rapidity with 
 which mechanical inventions follow one another is amaz- 
 ing. Valuable machinery may become obsolescent over a 
 week's end. At any time important changes are apt to 
 arise, the installation of which would work general revi- 
 sion throughout a factory. Should each producer be 
 ready on a moment's notice to act with fearless vigor 
 in scrapping the old and substituting the latest improve- 
 ments, even though such change would render the pre- 
 vious investment worthless ? 
 
 One's self-interest calls for the largest net gain. But 
 the conditions for acquiring net gain vary with the change 
 of circumstances. If land advances in price and wages 
 double, the high cost of these factors will not justify the 
 farmer in maintaining cheap or obsolescent tools. In 
 keepmg with the law of proportionality, he should scrap 
 the old and stock up with superior tools, for when his tools 
 are ineffective he must employ more of costly labor and 
 use more of high-priced land to produce a given crop. To 
 
568 Introduction to Economics 
 
 retain a tool or machine in use oftentimes proves to be far 
 more costly than the original purchase-price of such agent. 
 The cost of a superior tool may be far more than offset by 
 the saving in wages and land rent. 
 
 13. The Cost of Tools Limited by Saving.— But the 
 extra cost for tools must not exceed the saving in rent and 
 wages. You lose if the cost for improved tools is $500, 
 while the saving in rent and wages is only $400. Indus- 
 tries with large fixed capital must make sure that addi- 
 tional earnings wiU be large before the old is scrapped and 
 the new installed. 
 
 If your plant represents a fixed capital of $10,000 whose 
 annual earnings amount to $500, the complete installation 
 of improved machinery, costing, say, $10,000, will destroy 
 the old plant, let us assume, as if a fire had levelled it to 
 the ground. No argument is needed to show that your 
 loss in the form of the old plant is $10,000. Would the 
 new installation pay ? 
 
 The loss in the form of the old plant of $10,000, together 
 with the cost of the new, represents a total of $20,000. It 
 would pay to make the new installation only upon the 
 condition that it would yield a return that, at least, would 
 be capitalized at $20,000. 
 
 14. The Competitor. — ^Assume now that a competitor 
 enters the field, and that his plant is stocked with the new- 
 est and best. Although his plant represents a fixed capital 
 of, say, only $10,000, yet the improvements are such that 
 he can displace you as effectively as the new machine for- 
 merly displaced the old cobbler. Does your ruin mean a 
 social gain ? If so, it is well. 
 
 Against the notion that your ruin is but an incident in 
 social gain, you would perchance urge two points: (a) The 
 
Large-Scale Production and Monopoly 569 
 
 first effect of the new investment is to destroy $10,000 in 
 the form of the existing plant; and {b) the second effect is 
 that it destroys a potential $10,000 industry in another 
 field of production. You will urge, and rightly so, that 
 the test of social gain is met only when the new plant 
 earns a return sufficient to justify a cost of $20,000. 
 
 15. Factors Should Reproduce Themselves. — A paying 
 factory reproduces itself. Its parts gradually wear out 
 and are replaced by the newest and best. Such replace- 
 ments, however, are paid out of the proceeds of the past 
 set aside. We say, for instance, that each item of the mer- 
 chant's stock must normally sell at a price which will 
 replace that item with one of equal price, together with a 
 surplus sufficient to cover all the costs of selling it, and 
 which will make some contribution to the expense of keep- 
 ing up the building. Any item failing to do this is carried 
 at a loss; and the merchant who continues to carry items 
 at a loss will see his stock diminish and ultimately dis- 
 appear. Likewise, a manufacturing plant gradually dimin- 
 ishes in worth unless the items composing it produce a 
 sum sufficiently large to enable the owner to purchase 
 another item of the same character, which in turn will 
 produce enough to install its successor. The factory's 
 equipment of this year, so to speak, is the offspring of 
 last year's equipment, now largely destroyed. Next year's 
 equipment will be the result of present equipment. 
 
 Upon applying this reasoning to a manufacturing plant 
 in which heavy fixed capital is involved, it will follow that 
 in many cases sudden changes will involve heavy social 
 losses. The maximum social gain requires that the mate- 
 rial changes be slow enough, in most cases, to enable the 
 enterprise to get the chief utilities out of fixed capital. 
 
570 Introduction to Economics 
 
 But a competitor is encouraged to install the new, and, if 
 possible, to drive existing plants out of business. Personal 
 gains are made oftentimes at the expense of existing plants 
 and also at a loss to society. 
 
 i6. Monopoly Control. — The purpose of a monopoly is 
 to secure the largest net gain. Ordinarily, a monopoly 
 would utilize a machine until wear and tear would make it 
 advisable to secure a new one, at which time it would put 
 in the most up-to-date machine. But if the transaction 
 should promise a net gain, the self-interest of the monopo- 
 list should at any time cause him to scrap machinery, 
 replacing it by the newest and best. If on Monday morn- 
 ing he installs a machine costing $10,000, his self-interest 
 would make it advisable for him to scrap it on Tuesday 
 morning for an improved machine, if such would ytield him 
 a net return on the total cost. In other words, the mo- 
 nopolist would find it fitting and proper to do what society 
 ought to do — introduce improvements upon the principle 
 of net gain. Society is fast coming to recognize the advisa- 
 bihty of monopolies, under public control, with respect to 
 railroads. This is true because competition is morfe waste- 
 ful, and all but impossible among railroads, because of the 
 large overhead costs as compared with particular costs. 
 Upon precisely the same grounds we should reason with 
 respect to certain other industries with large fixed capital. 
 
 17. Advertising Waste. — It is estimated that the annual 
 outlay for advertising amounts to over $1,000,000,000 in 
 the United States. Probably the larger part of this huge 
 sum may be counted as social waste and this is a waste of 
 competition. On the other hand, much advertising is 
 socially productive. Consiuners are taught through ad- 
 vertising to know the variety, quality, and relative merits 
 
Large-Scale Production and Monopoly 571 
 
 of goods, to know the most effective uses to which they 
 may be put. It stimulates desire to acquire the best, thus 
 bringing about the introduction of modern improvements. 
 Within recent years advertising has largely eliminated the 
 drudgery of the housewives. It has put the washing- 
 machine in the place of the washboard, has substituted 
 the vacuum cleaner for the scrub-broom, the electric iron 
 for the flat-iron, and the fireless cooker and gas range for 
 the coal and wood stove. Such advertising is educational; 
 it raises the standard of living. 
 
 Advertising that is merely acquisitive is social waste. 
 If a $10,000 soap advertisement but supports the extrava- 
 gant claim of a competitor; if it is designed merely to solicit 
 trade from a competitor, it mu^t be classed as social waste. 
 The individual may thus increase his sales, but at the 
 expense of another. There is a fairly well-defined limit 
 to the amount of soap used; if an alluring advertisement 
 of Pears's causes a larger sale of that brand, it will mean a 
 smaller sale of other brands. Society is a loser when the 
 wealth within it is so utilized as to fatten one's purse at 
 the expense of another's. 
 
 The literature on advertising argues that competitive 
 advertising more than pays for itself. Such advertising, 
 it is said, creates a large demand, thus securing to the 
 manufacturer the advantages of large orders and thereby 
 fosters large production, which enables him to lower his 
 price. This claim is groundless in the case of merely 
 acquisitive advertising. Purely acquisitive advertising — 
 advertising that does not educate or enhance the volume 
 of sales of, say, soap — enters into the price of the product 
 and is paid by the final consumer. 
 
 There is an elastic limit to the amount which the pur- 
 
572 Introdttction to Economics 
 
 chaser can spend for the different classes of goods. And 
 the effect of the competitive appeals is not necessarily to 
 increase the amount of business along a particular line; 
 rather it has the effect of destroying the appeal of other 
 competitors. This writer recently asked an advertising 
 manager his reason for inserting an expensive page adver- 
 tisement in a prominent journal. His response was: "Did 
 you note that my ad was directly opposite the page ad of 
 our competitor ? " When I answered in the afl&rmative he 
 continued: "Well, I simply put it in there to kill the effect 
 of his." The purpose and effect of much advertising is of 
 this negative wasteful nature. 
 
 In most instances large competitive concerns enjoy the 
 same economies as do monopolies, but this is not true in 
 case of competitive advertising. Advertising wastes are 
 most pronounced in the selling campaigns of large compet- 
 ing interests. Monopoly control would have the effect of 
 destroying advertising waste and of maintaining such ad- 
 vertising as would teach the public regarding the merits 
 and uses of goods. Its expensive advertising might be 
 used, as in the case of oil and tobacco, to build up a new 
 foreign market, whereas under competition such expendi- 
 tures too often partake of the nature of a cutthroat scram- 
 ble for the local market. 
 
 i8. Salesmanship. — Much that has been said on adver- 
 tising will apply to salesmanship. Salesmen with the gift 
 of personality and persuasive powers are rare and expen- 
 sive. Two salesmen may be handling equal lines of goods. 
 They may work equally hard, meet the same number and 
 class of customers, yet the one may take the sales from 
 the other. Competing manufacturers know the advan- 
 tage of personahty in salesmen. Each concern desires 
 
Large-Scale Producticm and Monopoly 573 
 
 salesmen who can most effectively demonstrate its goods 
 to retail merchants and other distributors, who can please 
 these customers by advising them as to the selection of 
 goods, the amount to be carried, and as to the best method 
 of exhibiting and handling the goods. In short, each com- 
 peting manufacturer wants salesmen who can take the 
 trade from the other competing firms, and who can tie the 
 customers up with the manufacturer they represent. 
 
 These rare and skilful salesmen learn to look out for 
 themselves. The fact is, they tend at times to tie the 
 customers to themselves rather than to the firms they 
 represent. The customers learn to trust such men, are 
 glad to see them come, are pleased to have their advice on 
 what to carry, how to sell it, how to meet new styles and 
 changing conditions. The good salesman never abuses the 
 confidence of his customers, never oversells a small mer- 
 chant and always has the "you" point of view when in 
 their stores. While all this may seem excellent for the 
 manufacturer represented, it may be, and often is, dan- 
 gerous for him. Such a salesman will ask an exorbitant 
 salary and his firm is all but compelled to pay it, and 
 cheerfully at that, for his grasp of the market is known to 
 competing manufacturers, who will gladly pay him a high 
 salary. To hire him would be to secure his services, mean- 
 while buying the market which he controls. 
 
 With the formation of a monopoly, however, there is 
 but one source of supply, and the expensive salesman is no 
 longer needed for competitive purposes. "Work is organ- 
 ized," to quote President Van Hise, "so that a travelling 
 salesman or agent does the work in a given community 
 for a large concern instead of several for the different plants 
 of that concern. When the American Steel Hoop and Iron 
 
574 Introduction to Economics 
 
 Company was formed, about two hundred salesmen were 
 discharged." ' 
 
 The remainder of this chapter will consider some evils 
 or disadvantages of monopoly. 
 
 19. Inequality of Classes. — It is an imfortunate state of 
 affairs where the few opulently rich are standing upon the 
 substratum of general poverty; such is not consistent with 
 democracy.' Privately owned monopoly power and the 
 universal franchise are not companionable. The majority 
 vote determines who pays the taxes and finances public 
 works. If I am poor and you are rich, I should vote for 
 a high tax on you and a light tax on myseK. If you have 
 a monopoly which oppresses me, charges me a high price 
 and kills my chances for competition, do you expect me to 
 vote to sustain your power ? 
 
 The house of want becomes jealous and suspicious of 
 the house of have. This jealousy and suspicion grow into 
 envy and ultimately into open conflict. The rule of the 
 czar must ultimately succumb to the rule of the people. 
 Men naturally hope for the destruction of that which they 
 fear, and they fear the giant monopoly. 
 
 Professor T. N. Carver uses this homely though most 
 fitting illustration: "I will take the common house cat, 
 whose diminutive size makes her a safe inmate of our 
 household, in spite of her playful disposition and her lik- 
 ing for animal food. If, without the slightest change of 
 character or disposition, she were suddenly enlarged to 
 the dimensions of a tiger, we should at least want her to 
 be muzzled and to have her claws trimmed, whereas if she 
 were to assume the dimensions of a mastodon, I doubt if 
 any of us would want to live in the same house with her. 
 ' Concentration and Control, p. 14. 
 
Large- Scale Production and Monopoly 575 
 
 And it would be useless to argue that her nature had not 
 changed, that she was just as amiable as ever, and no 
 more carnivorous than she always had been. Nor would 
 it convince us to be told that her productivity had greatly 
 increased and that she could now catch more mice in a 
 minute than she formerly could in a week. We should be 
 afraid lest, in a playful mood, she might set a paw upon 
 us, to the detriment of our epidermis, or that in her large- 
 scale mouse-catching she might not always discriminate 
 between us and mice." ' 
 
 20. Elimination of Independent Businesses. — From earli- 
 est times the term odious has been applied to monopoly, 
 the reason being that monopoly deadens incentive, de- 
 stroys independent businesses, and by means of artificial 
 scarcity works personal extortion. Artificial scarcity is as 
 effective in cutting short your rations as is a fire, famine, 
 or pestilence. 
 
 In any industry the effect of monopoly is to make a 
 small class of employers and a large class of hired workers. 
 Independent concerns are eliminated. Absolute private 
 monopoly would be industrial despotism. There may be 
 "good trusts" and "bad trusts," as in government there 
 may be good despots and bad despots, but the point is 
 that we don't want the despot. Broad powers are not to 
 be trusted to individual hands. Such is human cupidity 
 that the results are contrary to social welfare when private 
 parties have the opportunity to aggrandize themselves at 
 the expense of others. The temptation is too great when 
 individuals are at liberty to vote the public's money into 
 private pockets. The point is frequently made that mo- 
 nopolies have in many cases actually lowered prices. This 
 
 1 Essays in Social Justice, p. 332. 
 
576 Introduction to JEconomics 
 
 is not denied, nor is it claimed that all such reductions of 
 price are intended to crush competition. The decisive 
 point is that it rests on the discretion of the monopoly to 
 gouge the consumer at will. A well-ordered democracy 
 demands a wide distribution of ownership and responsi- 
 bility. The problem of ownership is more than a mere 
 matter of eflSciency and price. It is a problem of an in- 
 creased sense of individual responsibility which is best 
 secured by increasing the numbers engaged in independent 
 pursuits. A wide distribution of ownership causes a bet- 
 ter distribution of wealth, and thereby reduces pauperism 
 and crime. 
 
 It is claimed that monopolies eliminate private concerns 
 by means of bargaining power — the power to exact unfair 
 prices — rather than by superior productive efficiency. 
 There are a few monopolies caused solely by a government 
 grant or a limited natural resource, but in the main the 
 monopoly problem is a question of advantage in trading. 
 Intelligent efforts to equalize bargaining power will take 
 care of the monopoly problem. Recent legislation recog- 
 nizes that common carriers are monopolies with such bar- 
 gaining power that they can exact unfair rates. This 
 recognition has led to rate control. Also, it has declared 
 against combinations in restraint of competition. 
 
 21. Monopoly Deadens Initiative. — To paralyze incen- 
 tive is to deaden and demoralize industry: It must be 
 admitted that unbridled competition is wasteful, and that 
 it may go to the extreme of industrial anarchy. General 
 Walker's example of the burning theatre' furnishes a fit- 
 ting illustration of this. He says: The destruction of life 
 occasioned by the mad competitive rush for an exit from a 
 'Political Economy (advanced course), p. 267. 
 
Large-Scale Production and Monopoly 577 
 
 burning theatre is a vivid case of the waste of unbridled 
 competition. And the saving of life caused by the exit of 
 the crowd under the regulation of a well-ordered police 
 force is a forceful example of the need for regulation. 
 Discipline can cause no force, but it can save much waste. 
 As between unbridled competition and monopoly, give us 
 the latter. At best, there will be wastes in any human sys- 
 tem, but the wastes under regulated competition are not 
 comparable to the losses sustained under the lethargy of 
 monopoly. Competition keeps open the ways of progress 
 by providing a fair and equal chance for all. 
 
 Monopoly kills the incentive for superior workmanship. — 
 If you are compelled to buy your automobile from me, 
 why should I lie awake at night plaiming and devising how 
 to cut the cost here or improve the quality there in order 
 to gratify most highly your wishes? But the case would 
 be different and stir me to the highest incentive for supe- 
 rior workmanship if you were at liberty to choose from 
 any one of a dozen producers. I should work for the best 
 in quality, the best in salesmanship, the lowest in price. 
 The truth of this seems to find evidence in the steel busi- 
 ness. Prior to the formation of the trust the Carnegie 
 Company was the best-organized steel company in the 
 world, and it was manned by the most efficient steel- 
 makers. It was second to none in its accomplishments 
 and methods. The same, it is thought, cannot be said for 
 the trust. The trust has vast resources and the best 
 management that money can hire. But the best manage- 
 ment cannot overcome the lethargy of monopoly. 
 
 22. Summary and Conclusion.— Many writers fail to 
 differentiate among monopolies. One group begins its 
 treatment of the subject by explaining "the breakdown of 
 
578 Introduction to Economics 
 
 competition" and follows by condemning our "blind faith 
 in competition." They never weary in pointing out the 
 "wastes of competition" and they paint in glowing colors 
 the virtues of all monopoly control as a panacea for all 
 industrial ills. Another group of writers would destroy 
 monopolies without further ado. They think that one 
 principle governs all forms of monopoly, and that unbridled 
 competition may be universal in business affairs. 
 
 A one-point-of-view, whether for or against monopoHes, 
 is fallacious. We should justly condemn as a quack the 
 practitioner in medicine who would treat acute appendi- 
 citis and sore eyes with the same cure-all remedy. We 
 should be no less severe in condemning the one-point-of- 
 view economist. We must diagnose, then prescribe. It 
 will be found in the following chapter that different monop- 
 olies obey different principles, that all cases of monopoly 
 are not covered by a common blanket principle. 
 
 There are government monopolies organized for govern- 
 ment profit and others organized to render service at cost 
 or gratuitously. Here different principles are involved. 
 There are private monopolies, some of which are natural 
 and obey the principle of increasing costs, others are capi- 
 talistic and obey the principle of diminishing costs per unit 
 of commodity output. Here again different principles are 
 involved. Some monopolies have large fixed capital, while 
 others with Httle fixed capital survive through unfair prac- 
 tices and illegal agreements. Again, different principles 
 are involved. 
 
 23. Conclusion of Chapter. — i. The greatest productive 
 efficiency, on the whole, is to be found in competition 
 rather than in monopoly. The technical advantages of 
 large production may be enjoyed by the large competitor 
 a.s well as by the monopolist, 
 
Large-Scale Production and Monopoly 579 
 
 2. Regulated monopoly is preferable to unbridled com- 
 petition of the cutthroat type. A business, such as a rail- 
 road, requiring large fixed capital and operating subject 
 to the principle of diminishing costs is in nature a monopoly 
 and should be regulated as such. Antimonopoly moves in 
 such cases are positively destructive. No one will sink 
 large capital in such enterprises unless he may enjoy the 
 protection which the nature of the institution demands. 
 
 3. Monopolies which result from artificial combination 
 or unfair practices should not be tolerated. The majority 
 of manufacturing concerns such as steel, oil, tobacco, and 
 sugar, soon reach the magnitude of the single business unit 
 where the point of maximum efficiency is attained. The 
 great corporation increases its size not by enlarging the 
 single individual units, but by increasing the nimiber of 
 such units. The independent producer whose plant has, 
 in all of its parts, attained to the best adjustment enjoys 
 all of the technical advantages of the large concern which 
 controls a number of business units. What is more, he 
 enjoys all the advantages of competition; he has no monop- 
 oly to make him secure. Despite opinions to the contrary, • 
 it is the consensus of opinion that one secure in monopoly 
 power tends to become listless, non-inventive, indifferent 
 to new methods and economies. 
 
 24. Exercises. — i. If fifty small concerns unite it be- 
 comes possible for the best talent to direct the business. 
 But does a combination afford the opportunity for the 
 selection of the best men ? 
 
 2. Were you offered two cakes of soap — Ivory and an 
 unknown brand — you would take the standardized soap, 
 but for all you know the unknown brand is better. 
 
 Two important economic principles are involved in the 
 above statement. What are they ? 
 
580 Introduction to Economics 
 
 3. In this chapter the paragraphs i to 7 inclusive point 
 out fifteen advantages of large-scale production. Show 
 whether each of these advantages may be enjoyed by the 
 large competitor as well as by the monopolist. 
 
 4. To quote from C. W. Gerstenberg's Principles of 
 Business (767-768): "To make a pair of 'ladies buck 
 shoes' takes five feet of 'buck' at $.80 a foot. The small 
 pieces left over are used to make children's shoes. What 
 is the material cost of a pair of ladies' shoes ? Should we 
 say $4, on the ground that we used up the five feet of leather, 
 and that anything obtained from the smaU pieces is 'foimd 
 money'; or shall we say that it is less than $4; that the 
 leather in the children's shoes did cost something ? If the 
 latter, what figure should we use? There are two figures 
 which can be used — (i) the cost of similar small pieces of 
 leather if purchased in the open market; or (2) the price 
 which would be realized if the pieces were disposed of." 
 Answer the questions raised. 
 
 What is the by-product, the small pieces of leather, or 
 the children's shoes? 
 
 5. Base your answer to each of the following questions 
 upon the assumption that an estabHshment has attained 
 the "best size" and adjustment of factors. 
 
 {a) Are there any short or long factors? 
 
 (6) What bearing has the extent of the market for the 
 products of an establishment upon the "best size"? 
 
 (c) Were the estabhshment enlarged would it necessarily 
 follow that the cost per unit of output would increase? 
 ' that the cost would decrease? that the cost would remain 
 constant ? 
 
 {d) Or would the enlargement of the establishment so 
 increase the supply as to lower the price, thus diminishing 
 the profits ? 
 
 (e) Is the "best size" of an establishment fixed at the 
 point where there is the best technical adjustment of phy- 
 sical factors, or at the point which will yield the largest 
 returns in terms of money ? 
 
 6. What conditions favor cutthroat competition? Does 
 
Large-Scale Production and Monopoly 581 
 
 cutthroat competition lead to the formation of a monop- 
 oly ? Defend your answer. 
 
 7. Why may it sometimes cost more to retain a tool or 
 machine in service than the original purchase price of it ? 
 
 8. What fixes the maximum that you could afford to pay 
 for a machine which would displace one already in use ? 
 
 9. Do the same economic principles bear upon com- 
 petitors and monopolists with respect to scrapping old 
 machinery and installing new? 
 
 10. Under what conditions is advertising productive? 
 When is it a social waste? Can you distinguish between 
 acquisitive and productive advertising ? 
 
 11. Suppose that a number of competing companies are 
 formed into a monopoly, with the result that 200 salesmen 
 are discharged, {a) Would this show that the services of 
 these men had been merely acquisitive rather than pro- 
 ductive? (&) Should you conclude from this that the 
 monopoly proved itself productive by displacing labor ? 
 
 12. What do you care if monopolies do eliminate the 
 small independent businesses ? Is your answer based upon 
 a feeling of S3Tnpathy for the person ousted or upon the 
 effect which monopoly control has upon social well-being ? 
 
CHAPTER XXVI 
 MONOPOLY AND MONOPOLY PRICE 
 
 1. Motive in competition and monopoly. 2. The test of monopoly. 
 3. Temporary monopoly. 4. Capitalistic monopolies, s- Other forms of 
 monopoly. 6. Skilled labor. 7. Legal monopolies. 8. Natural monopo- 
 lies. 9. Quasi-natural monopolies. 10. Voluntary and enforced patronage. 
 II. Limitation of the market. 12. A summary of market limitations. 13. 
 Monopoly price. 14. Increasing costs. 15. Institutions of diminishing 
 costs. 16. Monopoly prices vaiy. 17. Domestic and export prices. 18. 
 Limitations on monopoly price. 19. Exercises. 
 
 1. Motive in Competition and Monopoly. — Monopoly 
 and competition are antonyms. Complete monopoly 
 means the absence of competition. Conversely, free com- 
 petition means the absence of monopoly. Monopolies 
 may be local, national, or international. Whether in the 
 country village or in the large city, or in one nation or in 
 many nations, the oneness of an industry's control with 
 respect to price-making is monopoly. But a monopoly 
 price is not free from competition, for although a seller 
 may have undisputed ownership of a complete supply it is 
 the competition on the side of buyers which makes possible 
 a high monopoly price. 
 
 Competition means a contest between persons or groups 
 of persons; it is the attempt of contending parties to get 
 the same thing. And this attempt is unrestrained by any 
 outside force. Some writers deny group competition and 
 speak of "each actor . . . separately and individually." 
 But this is an error because group competition is found in 
 
 582 
 
Monopoly and Monopoly Price 583 
 
 all forms of human endeavor. There is social competition 
 such as competition between church organizations, socie- 
 ties, and the like. In athletics, for instance, the Giants 
 are united in team-work, contesting vigorously against the 
 Braves. College teams are contesting against one another 
 in various activities. The competition between social 
 organizations or athletic clubs is the same in spirit as the 
 competition between large corporations, each composed of 
 nimierous stockholders. Wherever found, competition im- 
 plies contest. Contest between persons or groups is alto- 
 gether different from monopoly which implies oneness of 
 control. 
 
 Each individual seeking gain through monopoly is like- 
 wise actuated by the selfish motive of maximum returns. 
 "On the scent or in the fight he makes common cause with 
 his pack. But in the division of spoils he is still a solitary 
 eater." ^ The socialist's concept of brotherhood exists no 
 more inside than outside the monopoly or trust. The indi- 
 vidual's motive is the same in competition or in monopoly 
 — it is largest self-gain. 
 
 2. The test of monopoly is the power to suppress compe- 
 tition and to control prices through unified demand or 
 a manipulation of supply. This power may consist of a 
 oneness of demand or of a oneness of supply. When 
 one person or a combination of persons is the sole 
 purchaser of a commodity such oneness of buying power 
 is termed a buying monopoly. At an enormous cost 
 a pipe-line has been constructed, connecting Cincinnati 
 with the natural-gas field in southern West Virginia. 
 The great cost of constructing a competing line over 
 this long distance is, considering the market, prohibitive. 
 ' Davenport's Economics of Enterprise, p. 476. 
 
584 Introduction to Economics 
 
 This fact gives the controlling corporation a bujong 
 monopoly over the owners of the g3.s-wells. Or one 
 may take example from the distribution of milk in large 
 cities. A large corporation may establish receiving-sta- 
 tions throughout the rural districts, to which the farm- 
 ers deHver milk. These stations are rather expensive to 
 construct, equip, and maintain. The amount of milk com- 
 ing in to one station is usually not sufficient to justify a 
 competitor's entering the field, thus leaving the owner of 
 the receiving-station in control of a buying monopoly. In 
 case a local competitor should establish a receiving-station 
 at one point, the large concern, maiataining a chain of 
 such stations covering the principal milk sections of one 
 or more states, would increase the price to the farmers 
 at the competing point until the small competitor is dis- 
 couraged and quits. 
 
 One has a selling monopoly if he has bought up the avail- 
 able supply, or if he has control of the power to produce 
 a good. 
 
 3. Temporary Monopoly. — To buy up the available sup- 
 ply of a reproducible good gives a temporary rather than 
 a permanent monopoly. One's purpose in buying up a 
 supply, generally speaking, is to raise the price in order to 
 secure a profit on his investment. But as soon as the price 
 is materially raised producers increase their output as 
 speedily as possible in order to seU at the higher price, 
 thus giving the monopoly but a temporary existence. 
 
 The manufacturer of a commodity may enjoy a tempo- 
 rary monopoly. There are a niomber of instances in which 
 a single combination produces 75 per cent or more of the 
 output along certain lines. Such a combination must sup- 
 ply, for the time being, a majority of the purchasers. If it 
 
Monopoly and Monopoly Price 585 
 
 makes the price higher the customers must pay the price 
 or do without, since the other sources of supply are insuffi- 
 cient to meet their needs. What is more, the small com- 
 petitor will hesitate to undersell the corporation possessed 
 of abundant capital, for if it comes to a price war the larger 
 could drive the smaller concern from the market. But if 
 the large concern maintains exorbitant prices it cannot long 
 maintain its monopoly power. There is always potential 
 competition in the form of new capital and enterprises 
 seeking investment, or of invested capital seeking more 
 remunerative employment. In case one concern main- 
 tains an exorbitant price this potential competition, sooner 
 or later, will become effective. 
 
 4. Capitalistic monopolies are those which by virtue of a 
 great combination of capital can suppress competition and 
 control the market. In the last paragraph it was pointed 
 out that in case a corporation maintained exorbitant prices 
 potential competition will become effective. But a capi- 
 talistic monopoly usually takes a more conservative course 
 — holding its price low enough not to tempt competitors 
 to enter the field. The large concern can hold its prices 
 slightly higher than can its small competitor. This is true 
 because the large concern is better known. If wisely man- 
 aged, its output maintains a high commercial standard 
 and reputation. It gives a large assortment and quality 
 of goods along its line, thus enabling it to fill orders 
 satisfactorily. The average merchant would rather pay a 
 small fraction more to a single large house which can 
 supply his various needs along certain lines than to 
 divide up his orders among a number of small competi- 
 tors, thus making shipments more irregular and less de- 
 pendable. 
 
586 Introduction to Economics 
 
 5. Other forms of monopoly calling for consideration 
 ate skilled labor, legal, natural, quasi-natural or public 
 service. Particular attention has been given to capital- 
 istic monopolies because under existing conditions they 
 illustrate the chief essentials of monopoly power. Their 
 formation illustrates the characteristic trend of modern 
 industry. 
 
 6. Skilled labor, in the form of closed shops, has a 
 monopoly. It can maintain high prices for its services 
 through restrictive systems, such as apprenticeship, which 
 limits the number who may enter the occupation. This 
 form of monopoly, however, is constantly threatened by the 
 invention of new machinery, by technical colleges which 
 are training men for such work, and by schools and other 
 educational means furnished by the employers. 
 
 7. Legal monopolies have been organized in some coun- 
 tries for revenue purposes. France has a monopoly of 
 the manufacture of tobacco; Saxony controls the salt sup- 
 ply, and Japan the turpentine supply. Tobacco and salt 
 are particularly good revenue-getters. They are consumed 
 in abundance and the price may be so fixed as to leave a 
 large residue of profit between cost of production and 
 selling price. The United States has a legal monopoly on 
 the post-ofiice, but not for revenue purposes. Govern- 
 ments have such monopolies on minting — converting bul- 
 lion into coin. 
 
 In certain cases the control of copyrights and patents 
 may give important monopoly powers. There are two 
 purposes for the govermnent's granting such monopoly 
 privileges : (a) They promote improvements in scholarships 
 and in the arts; {b) they protect capital which is employed 
 to manufacture the article patented or to publish the con- 
 
Monopoly and Monopoly Price 587 
 
 tributions copyrighted. As an instance in keeping with 
 this last point we may cite the experience of Herbert Spen- 
 cer's invention of a very desirable type of chair. Had it 
 been patented there would have been competing capital 
 for the privilege of manufacturing it. But he took out no 
 patent and could find no manufacturer willing to under- 
 take the risk of producing it. 
 
 8. Natural monopolies consist in the ownership of cer- 
 tain natural resources, such as the ownership of the an- 
 thracite-coal field, the Kimberley diamond-mines in South 
 Africa, and favorable building sites, mineral springs, and 
 the like. In order that a monopoly may be formed of 
 such natural resources there must be a limited amount of 
 these. A natural monopoly controlling a commodity like 
 coal comes to have tremendous if not dangerous powers 
 in the community. 
 
 g. Quasi-natural monopolies include such public-service 
 corporations as street-railways, railroads, telephones, tele- 
 graphs, water and gas plants. One characteristic of these 
 institutions is that their services are consimied in connec- 
 tion with the plant. One cannot have a street-car ride 
 expressed to him as he could a farm-product. If a water 
 company or gas or telephone company has extended its 
 pipes or wires into one's house he must deal with it for the 
 time being, or do without. If a rival enters the field it is 
 at the cost of needless dupUcation. 
 
 This pomt introduces the second characteristic of pub- 
 lic-service corporations: the company on the ground can 
 outcompete a new rival because it can do with Httle money 
 as much as the new rival can with a large outlay. To 
 illustrate, if the growth of population in a city makes an 
 extra demand for lighting, the gas or electric company can 
 
588 Introduction to Economics 
 
 extend its pipes or lines at little cost to supply the demand. 
 But the new rival would be at great cost in constructing a 
 new plant before he could compete. These institutions 
 can increase their output, to a certain point, at a diminish- 
 ing cost. If it should cost $20,000 to establish a light- 
 ing-plant and if only 5,000 lights were demanded, the 
 fixed costs per light would be $4. If the demand calls 
 for 10,000 lights the fixed cost per light would be ap- 
 proximately $2. Then, if we assume that the particular 
 costs per light remain the same, there would be decreas- 
 ing costs with an increase of output. One company can 
 meet the total demand of a city far more cheaply than 
 can two companies. 
 
 Moreover, one company is more desirable because it is 
 more convenient than a niunber of competing companies. 
 Competition between different telephone systems in the 
 same city causes pubhc inconvenience. Nobody desires 
 more than one car-line in the same streets. We grow im- 
 patient at times with one water company for tearing up 
 the streets. What if there were a dozen competing com- 
 panies ? 
 
 Competition between public-service corporations can- 
 not be permanently maintained because of the principle 
 of decreasing cost. There is, for instance, an elastic limit 
 to the nvmiber of electric lights needed in a city. It costs 
 a company less per Hght to furnish a large number of 
 lights. If there are a number of competitors, each com- 
 pany will attempt to undersell its rivals in order to increase 
 its sales and volume of output. It can then produce at 
 the lowest cost. All the competitors might increase their 
 output and lower their costs of production, but this would 
 cause the market to be ovfersupplied. Such would prove 
 
Monopoly and Monopoly Price 589 
 
 a losing venture, because the competitive price of their 
 products would tend to be lower than would their costs of 
 production. In all like cases combination would be wise 
 for the competitors as well as for society. 
 
 10. Voluntary and Enforced Patronage. — ^The natural 
 and quasi-natural monopolies are in a position to command 
 enforced patronage. The merchant holds the patronage 
 because of past satisfactory dealings. To make his future 
 more than an accident he must have the collective friendli- 
 ness of customers. He acquires this collective friendliness 
 or good-will through tactful, fair dealing. He enjoys 
 voluntary patronage; the quasi-natural monopoly enjoys 
 enforced patronage. "The railroad lunch-counter, the 
 exclusive cab or baggage transfer-line, the gas, electric, 
 or telephone company, and the street-car companies ex- 
 pect continued patronage, but this anticipation arises 
 chiefly out of the public's necessity, not from their pref- 
 erence." 
 
 11. Limitation of the Market. — ^Monopoly power has 
 been approached by scholars from the point of view of 
 supply. This is due to the fact that monopolies control 
 price by controlling the supply. But a more careful study 
 of supply must be approached through a study of demand. 
 One group of writers teach that monopoly power is derived 
 from the control of some natural advantage in furnishing 
 the supply. Another group teaches that the control of 
 large capital alone may give monopoly power. Now, de- 
 mand for goods is in reality a demand for the productive 
 power to furnish these goods; the limitation of a demand 
 for a certain class of goods limits in turn the amoimt of 
 productive power devoted to the output of that class of 
 goods. The natural limitation of the demand for a good. 
 
590 Introduction to Economics 
 
 then, is a protection to a corporation from competition if 
 the corporation occupying the field has sufficient produc- 
 tive capacity to supply the demand. In all forms of mo- 
 nopoly there are natural limitations either in the form of 
 demand or of physical limitations. 
 
 If, for instance, the population on an assumed island 
 demand aimually x units of sugar, and if within their 
 territory a factory were established with an annual capac- 
 ity of X units, a new factory would hesitate to enter the 
 field. If a new factory did enter, its purpose would be to 
 force itself into the monopoly rather than to bring about 
 legitimate competition with the established concern. For 
 a short time after the entrance of the new concern there 
 would be overproduction for the island, cutthroat com- 
 petition, a price war, idle labor and capital in both con- 
 cerns for a considerable portion of the year. This game 
 would force compromises, agreements, and finally com- 
 binations. Numerous examples of a similar nature prove 
 that in a large society the ultimate consequences would be 
 the same as those indicated for a limited society. Why is 
 this so ? Because the market demand is limited. 
 
 12. A Summary of Market Limitations.^ — Some of the 
 influences which limit the market demand for goods will 
 now be mentioned, (a) The consumer cannot spend more 
 than his income, {b) We have seen that his income is 
 divided into nmnerous lines of expenditure, that if he 
 spends more along certain lines he must spend less along 
 others; thus expenditures limit each other, (c) The con- 
 sumer is ever measuring his present against his desire for 
 future goods, he saves to the extent that he denies his 
 present for his future gratification. It is interesting to 
 ' Cherington's Advertising as a Business Force, chap. V. 
 
Monopoly and Monopoly Price 591 
 
 note how the seller of a rather expensive article, say, of the 
 Encyclopaedia Britannica, can secure purchasers whose in- 
 comes are limited and who are disposed to save. The 
 problem is to make a fair portion of the possible buyers 
 figure that, incomes and savings considered, the price is 
 not prohibitive. This is accomplished by splitting the 
 price into small instahnents, so that it looks small; by ex- 
 plaining how delay means waste, because the price is to be 
 increased after a certain time; by treating the price as neg- 
 ligible compared with the worth of the goods. One is 
 likely to change his course if convinced that what he had 
 considered saving is in reahty wasting. 
 
 {d) Price habits tend to become fixed. This fact is be- 
 coming more pronounced to the extent that packaged and 
 branded goods take the place of bulk goods in the market. 
 Ties, collars, shoes, gloves, hats, tobacco, matches, and a 
 thousand others, are sold under rather well-established 
 price habits. This fact makes competition largely a mat- 
 ter of service and of skill in selling. It tends to substitute 
 quality and satisfaction for the old haggling method under 
 the "let the buyer beware" principle. 
 
 (e) Present saving on the part of customers tends to 
 limit the present market, but it has the effect of extending 
 the future market. Savings enter, sooner or later, into 
 the production of more goods. And, as previously stated, 
 in an exchange economy a good is a demand for another 
 good. The richer the community the greater is the de- 
 mand for the produce which the consumers desire. 
 
 (/") Numerous appeals to the consumer neutralize one 
 another. Recently an author was wondering how the 
 consumer could save anything. "We expend a billion 
 annually teaching him to spend, and but an insignificant 
 
592 Introduction to Economics 
 
 fraction of that sum on teaching him to save." After 
 some deliberation he arrived at. the conclusion that, "only 
 the foreign element can save because they cannot read the 
 ads." Because both observation and statistics are against 
 these comments, we conclude that the consumer has a will 
 of his own, and, further, that numerous appeals deaden the 
 effect of one another. If no other advertising existed, the 
 housewife would experience a strong appeal from the page 
 advertisement in her home journal devoted to Pearl La 
 Sage's "Great Parisienne Beauty Marvel," but when she 
 finds that over half her journal is devoted to appeals, the 
 mere fact of their multiplicity deadens the efifect one of the 
 other. 
 
 (g) The final consumer determines the market limit for 
 all producers. An apparent exception to this is the fact 
 that modern production takes the form of a chain of con- 
 cerns from the raw material to the finished product; iron- 
 ore mining «»-^ smelting into pig iron «»->- steel-making ■•->■ 
 wire-making. 
 
 In such a chain — fAyBycY D*) — B may be the sole 
 purchaser of A's product, and the sole source of C's supply. 
 B thinks of C as his only market, and so in turn C regards 
 D. On further analysis it is clear that D does not limit 
 C, nor does C limit B. They are the consumers supplied 
 by D, who limit in turn the output of D, C, B, A. Supply 
 travels, so to speak, in the direction from A to the con- 
 sumer: 
 
 A »-»• B ■•-> C »-♦■ D *>-♦■ Consimier, 
 
 whereas demand travels in the opposite direction: 
 Consumer »->■ D ■»->■ C »-*■ B «•-»■ A. 
 Demand begins and supply ends with the consumer. 
 
Monopoly and Monopoly Price 593 
 
 13. Monopoly price, we have seen, is fixed at the point 
 where in the judgment of the monopolist the largest net 
 return will ultimately be secured. In most cases, not all, 
 the monopolist will make fewer sales if the price is high 
 and more sales if the price is low. Monopoly prices as 
 well as competitive prices are always at the equating-point 
 of supply and demand. The monopoly, demand present, 
 controls the price only because of its power to control 
 supply. 
 
 {a) The simplest case in monopoly price-making is found 
 in a few cases where little or no cost of production is found 
 and where the supply is limited. Suppose that one has 
 inherited a collection of antiques. Assume that the col- 
 lection is well known, so that no advertising or other costs 
 are necessary for their marketing. What price will the 
 owner place upon the collection? If the items compos- 
 ing the collection are virtually the same the monopolist 
 could either sell them at a uniform price and all at one 
 time, or he could sell each item separately and at different 
 prices. The latter method would bring a larger total price, 
 because the lowest price received by selling them one at a 
 time would be the same as the uniform price on the items 
 if sold at the same time. Assimiing, however, that he 
 sells all at once, he would fix the price at the highest point 
 that would clear the market, that is, at the highest figure 
 at which all the items would be bought. The monopoly 
 price in this instance might be the same as if the collection 
 were sold to a group of competing buyers, by a group of 
 competing sellers. 
 
 (b) The case would be different if one had a monopoly 
 of an unlimited commodity where no cost is involved. Mo- 
 nopoly always implies a property right; so let us say that 
 
594 Introduction to Economics 
 
 one owns a natural well, affording all but an exhaustless 
 supply of most highly desired mineral water. Then a 
 price may be fixed so high that "he may only occasionally 
 sell a pint to a king or a millionaire, while if he fixes a very 
 low price he may sell to every peasant and yet get a very 
 low return." The monopolist's problem is to determine 
 the price at which the number of sales multiplied by the 
 price per sale will earn him the largest net return. It is 
 incorrect to think of monopoly prices as always extor- 
 tionately high, for instead they are frequently lower than 
 competitive prices. Nor is it correct to think of them as 
 always low, for at times they are far above competitive 
 prices. It is correct to think of monopoly price as being 
 fixed at the point where the highest net return will result. 
 
 (c) The elasticity of consumption enters a new element 
 into our reasoning on monopoly price. There are some 
 commodities, such as the primary necessities, where the 
 volume of sales varies but little with a movement in price. 
 The market demand for such commodities is inelastic. 
 Take milk, for example, which is a common necessity. 
 Without milk the dinner would be spoiled, and yet even 
 though its price is high it forms but a negligible fraction 
 of the cost of the meal. Too much milk also spoils the 
 dinner. In any case, whether the price be high or low, we 
 will buy about the same amount of milk. The monopolist 
 will most assuredly fix the price high. 
 
 For other commodities, luxuries, and semiluxuries, the 
 market demand is elastic. Their volume of sales increases 
 with a lowering of price and decreases with a rising of the 
 price. By lowering his price the monopolist does two 
 things: first, lowers the profits on each sale and, secondly, 
 secures a larger number of sales. His purpose will be to 
 
Monopoly and Monopoly Price 595 
 
 strike the point where sales multiplied by profits will yield 
 the largest return. But he meets with other complica- 
 tions; he must determine whether an increase of output 
 will be at constantly decreasing or increasing costs. 
 
 {d) If the monopolist's cost per unit of output remain 
 constant, ?>}i would be the monopoly price in the follow- 
 ing table: 
 
 Price 
 
 No. Sales 
 
 Gross Yield 
 
 Cost 
 Per Unit" 
 
 Total Cost 
 
 Profits 
 
 lo 
 9 
 
 7 
 
 i,ooo 
 2,ooo 
 S,ooo 
 
 lOjOOO 
 
 IO,0OO 
 
 i8,ooo 
 42,500 
 70,000 
 
 8 
 8 
 8 
 8 
 
 8,000 
 16,000 
 40,000 
 80,000 
 
 2,000 
 
 2,000 
 
 2,500 
 
 — 10,000 
 
 1 For sake of simplicity costs are taken as uniform, whether the jdeld be 
 small or large. 
 
 14. Increasing Costs. — In many cases the cost per unit of 
 output increases as the volume of output increases. Other 
 things remaining the same, this will be found true in the 
 mining of coal. The greater the amount mined the greater 
 will be the distance underground at which mining opera- 
 tions will be carried on. The extra cost of moving the 
 coal over the longer distance to the entry of the mine must 
 be subtracted from the profits. Within the Kanawha 
 Valley coal-fields there are mines which formerly returned 
 large profits, but to-day they are abandoned. They are 
 abandoned, not because the coal has been exhausted, but 
 because the mining has been pushed so far from the en- 
 trance that the cost of operation leaves no profit. With 
 this thought in mind, how would the anthracite-coal 
 monopoly fix its price ? It would, first, consider the quan- 
 tity of coal sold at various prices; it would consider, sec- 
 
596 Introduction to Economics 
 
 ondly, the increasing costs brought about by the different 
 quantities sold at the different prices. If the demand is 
 inelastic the monopolist will sharply restrict output. This 
 would secure a large profit on each ton sold, and would 
 reduce somewhat the volume of sales, thus keeping down 
 costs. Another policy might be to vary the prices up- 
 ward from time to time in such manner as always to secure 
 the highest net returns for the time being. 
 
 15. Institutions of diminishing costs, those whose cost 
 per unit of output diminishes as the volume of output in- 
 creases, generally find it advisable to maintain low prices. 
 This is always true with respect to commodities for which 
 there are good substitutes at reasonable prices. It is true 
 when for any other reason the market demand for such 
 goods is elastic. But in case of goods for which the mar- 
 ket demand is inelastic the price will be high. The princi- 
 ple of diminishing costs could not operate in case of a 
 monopoly, if the market demand were inelastic. Physi- 
 cally it could operate, but there would be a negligible de- 
 mand for the increased output. 
 
 Public utilities are institutions whose cost per unit of 
 output diminishes up to a certain point. Some years ago 
 the elevated railroads in New York City reduced the fare 
 from ten cents to five cents. The nmnber of fares col- 
 lected the last year on the ten-cent basis was 115,109,591. 
 The very next year on the five-cent basis the number of 
 fares increased to 158,963,232. These figures indicate that 
 the company suffered an immediate loss. But it is now 
 thought that, pohtical considerations aside, the change 
 has in the long run been profitable. One street-car line in 
 Chicago, some years ago, tried a rate of twelve rides for a 
 quarter, as an experiment. So phenomenal was the in- 
 
Monopoly and Monopoly Price 597 
 
 crease in traffic that the lower fare proved, it is said, more 
 remunerative than the five-cent rate. 
 
 1 6. Monopoly Prices Vary. — Monopoly price, we have 
 seen, is so fixed as to allow the largest net return. In keep- 
 ing with this principle, a monopolist will vary his prices 
 in different places. There is an English wine which is in 
 ill repute at home, where it sells at a low price; the same 
 wine is highly esteemed in the fashionable circles of Paris, 
 where the monopoUst holds it for a high price. Americans 
 are comparatively wealthy and spend rather freely, whereas 
 in comparison the ItaKans are poor and spend their means 
 more sparingly. An American company is said to sell the 
 same lawn-mower cheaper there than at home. Monopo- 
 lies charge class prices when practicable. Railroads are 
 exemplary of this, as a few instances will show: They run 
 special trains with extra charge, charge different prices for 
 single tickets and commuter's thirty- trip tickets; charge 
 prices differing entirely out of proportion to the difference 
 of service for first and second class tickets; parlor-cars and 
 drawing-rooms and other special features are provided to 
 appeal to different classes. 
 
 17. Domestic and Export Prices. — ^Large corporations 
 and monopolies sometimes sell in a foreign market cheaper 
 than at home. This practice is invariably condemned in 
 the home market. To avoid this pubhc disfavor, the 
 monopolist spares no effort to conceal the fact that he 
 favors the foreign market in price. The pubhc dislikes a 
 monopoly at best, and this dislike is kindled into acute 
 resentment by the idea of discrimination in favor of for- 
 eigners. It is not a consistent poKcy of monopolies to 
 favor the foreign market in price, yet there are probably 
 very few monopohsts who do not at times sell at a low 
 
598 Introduction to Economics 
 
 price in the foreign market. This practice is technically 
 known as "dumping," and is done in order to protect the 
 home market, to keep the plant going, and to develop 
 a foreign field. 
 
 The home demand for a particular product changes from 
 time to time, depending upon the seasons of the year and 
 upon the variations of industrial prosperity. At those 
 periods when the demand in the home market is cut short, 
 as well as in periods of prosperity, the monopoly desires fully 
 to employ its plant. It must keep the capital employed 
 because the interest charge for idle capital is no less than 
 for active capital. A chief problem for the monopoly is 
 to maintain a large and well-organized labor force. This 
 would be all but impossible were a plant forced to run 
 intermittently. To build up and sustain a nicely adjusted 
 organization throughout a large concern requires a rather 
 steady output. Large concerns oftentimes buy practically 
 all of the output of certain raw materials. When the 
 plant is constantly employed it buys these raw materials 
 regularly and in large quantities, thus securing a depend- 
 able supply at favorable prices. Thus, in order to keep 
 the plant fully employed, to avoid the wastes of idle capi- 
 tal, to maintain an organized force of laborers and to be 
 guaranteed a steady supply of raw materials, combinations 
 frequently lower the export price in order to dispose of a 
 surplus. This tends to maintain a rather steady price in 
 the domestic market. Such a policy is wise for the monop- 
 oly in that it protects the most desirable market. This 
 policy is also advantageous for the domestic market be- 
 cause it ehminates wide price fluctuations. It removes an 
 undesirable speculative or gambling feature from business. 
 
 Again, certain concerns, oil and tobacco, for instance, 
 
Monopoly and Monopoly Price 599 
 
 consistently maintain a low price in certain foreign fields 
 in order to introduce their product and thus develop a 
 foreign market. 
 
 1 8. Limitations on Monopoly Price. — There is an elastic 
 market demand for the great majority of commodities. 
 The monopolist would find his price limited even on a 
 necessity such as wheat, for if it is high rye or corn would 
 be substituted. If anthracite coal is priced too high other 
 fuels will be used. A lumber monopoly would find its 
 price limited by other building materials — ^brick, cement, 
 or stone. If the boat-line asks too much for moving sand 
 and building-stone, the sand and building-stone will not 
 move. The Chesapeake and Ohio Raihoad is the chief 
 outlet for the great Kanawha Valley coal-field. Neverthe- 
 less, this road must limit its rates, for the coal cannot be 
 mined if the rates absorb the profits. Other coal-fields will 
 supply the market and over other roads. Thus monopoly 
 price is limited by the principle of substitution and, in some 
 cases, by the abandonment of industries, which depend on 
 the monopoly. 
 
 Again, potential competition in case of capitalistic mo- 
 nopoHes always threatens to enter the field. Then, too, 
 the monopoly must reckon with legal interference. If the 
 monopoly price be exorbitant, public inspection and litiga- 
 tion are likely to follow. Corporations practise ingenious 
 devices at times to hide large returns so as to give an 
 appearance of normal to swollen incomes. 
 
 19. Exercises. — i. "The exclusive privilege of making 
 and selling a product is a monopoly in its completest form 
 . . . and it can raise the price of what it sells without hav- 
 ing in view any other consideration than its own interest." 
 (J. B. Clark.) What is omitted in this definition? 
 
600 Introduction to Economics 
 
 Monopoly used as a synonym for scarcity: "Landown- 
 ership is perhaps the greatest single monopoly with which 
 society must grapple. There is np sense of the word in 
 which the private ownership of land is not monopolistic. 
 Were there enough land to go around, and some to spare, 
 landownership would be in no sense a monopoly." (Scott 
 Nearing.) Criticise this statement, mainly from the stand- 
 point of the use of the word "monopoly." 
 
 "Monopoly is such a degree of control over the supply 
 of goods in a given market that a net gain will result to 
 thesellerif a portion is withheld." (F. A. Fetter.) Would 
 this include a buying monopoly ? Will withholding a por- 
 tion always secure a net gain for the monopoly seller ? 
 
 "A monopoly, as the derivation of the word implies, is 
 a restriction imposed by a government upon the sale of 
 certain services." (A. L. Perry.) Would this definition 
 hold in the days of Queen Elizabeth ? Will it serve now ? 
 
 2. What is the test of monopoly? 
 
 3. Emmierate the kinds of monopoly mentioned in this 
 chapter. 
 
 4. In a so-called capitalistic monopoly are there natural 
 limitations which protect the monopoly? (See section 
 II above.) 
 
 5. What is the practical importance of studying market 
 limitations such as are outlined in paragraph 12 above? 
 What suggestions might such a study give one who is 
 planning an advertising campaign for the Franklin auto- 
 mobile ? 
 
 6. In what sense can a monopoly "fix the price" ? 
 
 7. What motive guides the monopoly in the determina- 
 tion of the price of its product ? 
 
 8. If you had a monopoly of salt which you sell at eight 
 cents a pound, would you raise the price should the gov- 
 ernment levy a tax of one cent a pound on it ? If so how 
 much? 
 
 Substitute a good for which there is a very elastic mar- 
 ket demand for the word salt in the above, and formulate 
 your reply. 
 
Monopoly and Monopoly Price 601 
 
 9. "When a commodity is at a monopoly price, it is at 
 the very highest price at which the consumers are willing 
 to purchase it." (David Ricardo.) 
 
 What consumers, all or a particular class ? 
 
 Is the statement true if it means the highest price which 
 the most wealthy would pay ? 
 
 If he means the highest price that some class would pay, 
 would the same be true in case of any competitive price? 
 
 10. Does it make any difference in your reasoning on 
 monopoly price of a good whether the cost of production, 
 with an extension of output, is constant, increasing, or de- 
 creasing ? 
 
 11. Why do corporations sometimes sell cheaper in the 
 export market than in the domestic market? Is this ever 
 justified? 
 
CHAPTER XXVII 
 
 CONTROL OF TRUSTS 
 
 I. Trust defined. 2. Pools. 3. Statements in point by Taussig and 
 Jenks. 4. Railroads during the World War. 5. The situation at the close 
 of the war. 6. The legal form of trusts. 7. From trusts to holding com- 
 panies. 8. From holding companies to mergers. 9. The purpose of trust 
 legislation. 10. The hazard of the business man. 11. Competition and 
 attempt to monopolize. 12. Common law on restraint of trade. 13. 
 Laissez-faire and control. 14. The Sherman Anti-Trust law. 15. The 
 prevention of trusts. 16. The Standard Oil case. 17. Prevention or de- 
 struction. 18. Trust regulation. 19. Need of further legislation. 20. 
 Unfair methods of competition. 21. The Anti-trust legislation of 1914. 
 22. The Federal Trade Commission. 23. Holding companies and interlock- 
 ing directorates. 24. The Webb-Pomerene act. 25. Exercises. 
 
 I. Trust Defined. — Common parlance applies the word 
 trust to any form of large production or monopoly. This 
 inexact usage renders the term incapable of scientific dis- 
 cussion. More accurately speaking, a trust is not a pub- 
 lic utility, nor is it a legal or natural monopoly. It rests 
 upon no special franchise, no right of eminent domain, no 
 single important patent. The following are public utihties, 
 not trusts; railroads, telegraphs, telephones, water-sup- 
 plies, gas and electric plants. 
 
 Trusts apply to industrial combinations, manufacturing 
 corporations in particular, with such technical and finan- 
 cial powers as to dominate in some line of production. 
 They may or may not be monopolies, but they are formed 
 to avoid the wastes of competition. It is fair to assume 
 that the goal of such combinations is at least some mo- 
 
 602 
 
Control of Trusts 603 
 
 nopoly power. So much for trusts in the economic sense. 
 The legal concept of the word should wait for treatment 
 until after a discussion of the pool. 
 
 2. Pools. — The pool was the usual form of combination 
 prior to the era of trusts. It will not do to say that the 
 pool is an institution belonging only to the past, for while 
 legally dead, there are evidences of its actual survival. 
 This form of combination is held together by an agreement 
 on the part of competitors to accomplish one or more of 
 the following: to Hmit production, to maintain prices, to 
 divide territory, to divide profits. 
 
 Competing manufacturers have formed pools, some of 
 which have accomplished good. There are examples 
 where the association maintained a uniform inspection for 
 the output of the several companies in the pool. Each 
 manufacturer, in consequence, turned out a product of 
 high standard. The output was marketed at a reasonable 
 price, because under the pool there were no cross-freights, 
 better transportation rates, minimum costs of marketing, 
 and few bad debts. 
 
 The chief examples of pools, however, have not been 
 among the manufactories but among the railroads. In 
 the early days railroads were looked upon just as any 
 other form of competitive business. Shippers were at 
 hberty to drive the best bargain possible with the rail- 
 roads, and the railroads were permitted to offer discrimi- 
 nating rates to attract shippers. 
 
 The fixed capital of a railroad is large and its particular 
 cost for moving a unit of freight is negligible, so its interest 
 lay in getting a large volume of freight even though the 
 rates were low. Long-distance freights were probably 
 lower in this country than in any other nation. Yet ship- 
 
604 Introduction to Economics 
 
 pers and the public generally objected because the rates 
 were so discriminating as to hinder, in many cases to de- 
 stroy, competition among shippers. Certain large man- 
 ufacturing monopolies owe their existence to unfair rail- 
 road rates. These effects of unfair rebating upon other 
 kinds of business caused rebating to fall into opprobrium. 
 
 In fairness to the railroads, however, it must be said 
 that they did not welcome the rebating which they them- 
 selves practised. They wished to get as much as possible, 
 but the nature of their business forced them to practise 
 rate discrimination as a competitive necessity. As a 
 means of relief from this competition, so costly for both 
 the public good and the roads, the railroads sought to form 
 pools. Regarding the wisdom of permitting such pools, 
 I shall quote the opinions of two eminent authorities. 
 
 3. Statements in Point by Taussig and Jenks.i — "The 
 natural step for competitive railways is to put an end to 
 competition by combining to fix rates once for all. Hence 
 railway pools and combinations appeared at an early date, 
 as a means of putting an end to 'ruinous' or 'cutthroat' 
 competition. Such pools are hard to hold together, at 
 least under the English and American law, which make 
 them void and non-enforceable; but, so far as they go, 
 they check the tendency to special rates for favored ship- 
 pers. They are thus a means of furthering equality of 
 treatment and equality of industrial opportunity. Whether 
 or no it be sound policy to prohibit combinations and price 
 agreements in other industries, almost all careful observers 
 of railways agree that as to them such prohibition is un- 
 wise. None the less, our Interstate Commerce Act pro- 
 hibited combination of any sort; and the prohibition was 
 
 'Taussig's Principles of Economics (2d ed., 1915), II, pp. 379-380. 
 
Control of Trusts 605 
 
 made even more drastic by the general anti-monopoly act 
 of 1890, known as the Sherman Law." 
 
 In an address before the reconstruction committee of the 
 National Civic Federation (December 2, 1918) Professor 
 J. W. Jenks said;' "I suppose you were all very much 
 impressed, as I was, with the fact that when Secretary 
 McAdoo was made director-general of the railways, his very 
 first order was to permit universal pooling of the railroads. 
 That is to say, under the powers that were given him, and 
 in these extraordinary war times, he did exactly what all 
 of the railroad managers, all of the economists, who had 
 studied the subject, and the Interstate Commerce Com- 
 mission itself from its very first organization on to the 
 present time, had recommended. The bitterest discussions, 
 at the time the Interstate Commerce Act was passed in 
 1887, were over the anti-pooling section of the Act. The 
 railroads favored pooling under government supervision. 
 But Congress put into the law the anti-pooling clause, 
 and in spite of the fact that the first Interstate Commerce 
 Commission, under the wise leadership of Judge Cooley, 
 and many of the succeeding Interstate Commerce Com- 
 missions have recommended that that anti-pooling clause 
 be repealed and pooling under government supervision be 
 permitted, the political feeling of the country has been 
 against it; and it was not until we were under the stress 
 of war that the advantages of centralized action could be 
 secured." 
 
 4. Railroads During the World War. — ^Experience as 
 well as the theory of the case attest to the wisdom of rail- 
 way combinations. Hampering legislation has endeavored 
 to enforce competition among raihroads, even though the 
 1 National Civic Federation Review, December 20, 1918. 
 
(506 Introduction to Economics 
 
 laws of economics necessitate combination. In conse- 
 quence of this legislation the maximum utilization of the 
 roads has been prevented. When the war came the rail- 
 roads were forced to assume a gigantic task, they were 
 strained to the breaking-point under the compulsion of 
 making vast additions to their normal volume of freight. 
 One of two things had to be done; either legislative restric- 
 tions had to be removed, or the government had to take 
 over and operate the roads. The latter was chosen, for 
 the public opinion back of this legislation was un3delding. 
 That it might correct the results of its own decrees, the 
 government had to become the operator, so as to ignore 
 the decrees. Now that the war is over and the govern- 
 ment has the roads, all are interested to know what it is 
 going to do with them. 
 
 S. The Situation at the Close of the War. — Three mea- 
 sures are advocated for the railroads : absolute private own- 
 ership and operation, absolute government ownership and 
 operation, private ownership and operation under the gov- 
 ernment's supervision. Absolute private ownership and 
 operation now seems impossible. Such laws as the Adam- 
 son bill of August, 1916, fixes the scale of wages the owner 
 must pay. The owner is not free in the making of con- 
 tracts which fix his costs of operation. Nor is he at liberty 
 to make those contracts which determine his income. The 
 Interstate Commerce Commission fixes the rates, which are 
 the source of income. One governmental body determines 
 the outgo and another fixes the income; between these 
 stands the owner to pay the bills as best he can. They 
 were not far-seeing statesmen who would fix upon these 
 means for the promotion of improvements and the growth 
 of railway systems in keeping with the needs of a rapidly 
 developing country. 
 
Control of Trusts 607 
 
 A discussion of the controversial point of public owner- 
 ship and control would not serve our purpose here. The 
 sounder judgment, in my opinion, looks toward such a 
 modification of existing legislation as will give the public 
 the benefits of private ownership and control, but under a 
 governmental supervision that will at once safeguard the 
 public interests and free the railroads from artificial re- 
 straints. 
 
 Enough has been said to show that the efforts to do 
 away with pools have conspicuously failed of their object. 
 With respect to manufacturing companies, when they have 
 been forbidden to form contracts for their mutual benefit 
 they have found ways of evading the law. The old way 
 to evade the law was to form a trust. 
 
 6. The Legal Form of Trusts. — The word trust in its 
 economic sense has been defined, and it is in this sense that 
 the word is now used. In the legal formation of a trust 
 the holders of voting stock in the competing companies 
 would surrender, in most cases, a majority of all their stock 
 to a board of trustees. Thus a central board controlled 
 the vote and directed the policy of the companies. A 
 single voting trust for the competing companies secured 
 harmony in action as to kind of product, volume of output, 
 and price. The holders exchanged their stock for trust 
 certificates, and were paid dividends proportionate to the 
 certificates. The Standard Oil Trust was formed in 1882, 
 but the so-called trust period was from i888 to 1897. 
 
 7. From Trusts to Holding Companies. — Under the pres- 
 sure of the law the pool gave way to the trust, then the 
 trust proved to be illegal and was given up in favor of the 
 holding company. In the year 1889 the state of New Jer- 
 sey assumed the responsibility of changing the trust policy 
 
608 Introduction to Economics 
 
 of the United States. In that year New Jersey enacted 
 an amendment to its corporation law which read: 
 
 " Any corporation may purchase, hold, sell, assign, transfer, 
 mortgage, pledge, or otherwise dispose of the shares of the capital 
 stock of, or any bonds, securities, or evidences of indebtedness cre- 
 ated by, any other corporation or corporations of this or any other 
 state, and while owner of said stock may exercise all the rights, 
 powers, and privileges of ownership, including the right to vote 
 thereon." 
 
 Now, a company in any state is at Kberty to take out its 
 articles of incorporation in any other state; therefore, any 
 company desiring the privileges of a holding company 
 would turn to the state of New Jersey. Thus, an enact- 
 ment of this one state legalized holding companies in 
 reality for the whole coxmtry. In order to hold their cor- 
 porations, other states followed in the lead of New Jersey. 
 This is an excellent example of how competition among 
 states leads to loose legislation. Under the governorship 
 of Woodrow Wilson that state again led the way in 1913, 
 when it passed the "Seven Sisters Act" which made illegal 
 holding companies for the purpose of monopolizing or in 
 restraint of trade. 
 
 Under the trust form the stock is simply placed in the 
 hands of trustees for management. Whereas the holding 
 company actually owns the stock of the constituent com- 
 panies. The management and operation in the holding 
 company are virtually the same as under the trust. The 
 difference between the two is a matter of form rather than 
 of reality. 
 
 Some leading examples of holding companies are the 
 Standard Oil Company, the United States Steel Corpora- 
 tion, and the American Tobacco Company. In 1911 the 
 
Control of Trusts 609 
 
 first and the last of the above-named companies were dis- 
 solved. These were test cases proving the holding com- 
 pany to be illegal when it exists in restraint of trade. 
 Again, under the pressure of law, combinations began to 
 take on a new form of organization. Since 1904 mergers 
 have become important. 
 
 8. From Holding Companies to Mergers. — The merger 
 is the final stage in the concentration of control. There 
 are no constituent companies in the merger. The master 
 company buys in and cancels the stock of other compa- 
 nies. The only outstanding or remaining stock is that 
 of the master company. To take an example from Presi- 
 dent Van Hise:' "If, for instance, the different companies 
 of the United States Steel Corporation — the Federal Steel, 
 the Carnegie Steel, and others — cease to exist by their 
 stock being cancelled and stock of the Steel Corporation be 
 the only existing issue, we should have the final stage of 
 corporation management for this gigantic company." 
 
 This is a brief history of the changing forms of combina- 
 tion. But despite these changes in form the fact of con- 
 centrated control persists. "The trust problem" is the 
 problem of obtaining a proper disposition of the central- 
 ized control over industries. 
 
 9. The Purpose of Trust Legislation. — The purpose of 
 trust legislation is to declare a public industrial policy 
 and to provide the means for making that policy effective. 
 Its essence is to prevent artificial monopoly and to main- 
 tain competition. Our legislatures and courts have not 
 been indifferent to questions of efficiency in the manufac- 
 ture of physical commodities, but such questions have 
 been regarded as of little consequence in comparison with 
 
 • Concentration and Control, p. 71. 
 
610 Introduction to Economics 
 
 such matters as the scope of individual initiative, an 
 equitable distribution of wealth, and a fair field for all 
 producers. Our public policy has in view not so much the 
 technical advantages of monopoly or competition as the 
 economic organization which will give us the kind of society 
 we want. Competitive trade fosters a healthful social 
 stimulus: It bears a social character which monopoly de- 
 stroys. Competitive prices are governed by forces outside 
 of any one man. They are democratic, not despotic; they 
 are accepted as fair and do not bear the sting of personal 
 extortion. Any contract to control prices or restrain com- 
 petition is declared void, as against the pubUc policy. 
 
 We have seen that public utilities are not competitive 
 in nature. It has been pointed out that artificially to en- 
 force competition among such institutions is harmful. An 
 enlightened public policy must be based upon an analysis 
 of the economic nature of industries. Analysis must pre- 
 cede any attempt to eliminate abuses and to preserve 
 initiative and flexibility. Our policy aims to shield the 
 public against the lethargy of industrial monopoly, which 
 shows itself in poor service, uneconomical production, high 
 and discriminating prices. It would insure a "square 
 deal" to investors and employees. 
 
 Our laws are not yet so complete as to remove uncer- 
 tainty among business men by defining what they may 
 and may not do. As yet, unfortunately, well-meaning 
 capitalists refrain at times from undertaking needed enter- 
 prises because our laws are not specific and they are not 
 well adjudicated. Business men with the most commend- 
 able motives may find their enterprises subject to costly 
 litigation and possible dissolution. The public policy and 
 the law are not in complete harmony. 
 
Control of Trusts Gil 
 
 10. The Hazard of the Business Man. — But our laws 
 must be expressed in general terms, for if we specifically 
 define or enumerate the acts to be considered illegal, un- 
 scrupulous competitors will be quick to invent a new 
 means of disobeying the spirit of the law. It has been 
 aptly said that we dare not define the word "fraud," for 
 our definition would be defrauded as soon as we made it. 
 Then, if we cannot protect the honest business man by 
 specifically defining illegal acts, it would be well could we 
 have a board or commission with power to advise on such 
 matters. A capitalist, for instance, wishes to estabUsh a sell- 
 ing agency which would necessitate his making a number 
 of contracts with other business men. Would his agency 
 be legal? Would his contracts be enforcible? If he con- 
 sults his own attorneys they can render him only unofficial 
 advice. There is no one to whom he may turn for an 
 authoritative reply. He trusts to luck, takes the risk, 
 and hazards his capital. After his business is under way 
 the Attorney- General may institute suit against him: He 
 fights the suit for the existence bf his business and it is 
 only upon the outcome of this costly suit that he learns 
 whether his business is legal or illegal. 
 
 Why, then, do we not estabKsh a commission to advise 
 the undertakers of business enterprises? The fact is that 
 some members of Congress and perhaps the majority of 
 citizens throughout the country were of the opinion that 
 the Federal Trade Commission would perform this very 
 function. But it is the function of the court to interpret 
 the law. Congress could not constitutionally confer such 
 authority on a commission. Congress is not at liberty 
 to transfer the powers of the judiciary, for authority to 
 take away powers implies the authority to abolish. 
 
612 Introduction to Economics 
 
 In a sense, the frequent change of administrations with 
 the consequent enactment of new trust legislation is un- 
 fortunate. Frequent changes in legislation disturb busi- 
 ness. It takes time for business to become thoroughly- 
 adjusted and for the laws to become reasonably adjudi- 
 cated. Stable conditions give confidence to capital. 
 
 II. Competition and Attempt to Monopolize. — To obtain 
 the largest net returns from an establishment is primarily 
 a technical problem of efficiency. It is a problem of ad- 
 justing the different parts of an establishment to each 
 other, and of conforming the size of the establishment to 
 the market. The most wisely adjusted plants have com- 
 petitive advantages; their minimimi costs of production 
 enable them to undersell less efficient rivals. This com- 
 pels the less efficient to bestir themselves, to adopt the 
 newest and best or be left behind. 
 
 Deductions from these simple truths have led thoughtful 
 economists to grave errors. Some have advanced the 
 claim that it is illogical to prohibit attempts to monopolize 
 because monopoly is at once the goal and the natural result 
 of competition. Competition weeds out the inefficient and 
 leaves the battle to the strong. This argument has been 
 advanced largely with respect to industrial establishments. 
 That this argvunent is full of error I shall now proceed to 
 show. 
 
 In the first place, it mistakes different things for the 
 same thing. "To compete" and "to attempt to monopo- 
 lize " are not the same, but antagonistic in principle. The 
 legitimate competitor would not build up his own house 
 by tearing down his competitor's house; his purpose is 
 different — it is to build a better house than that of his 
 neighbor. If one competitor builds a better ferry-boat 
 
Control of Trusts 613 
 
 than another he may take the bulk of the trade: If he 
 sinks his competitor's boat or drives him from the river 
 with a shotgun, again he will take the trade. It will be 
 admitted, however, that these methods of enlarging trade 
 differ. An "attempt to monopolize" is an attempt to 
 eliminate competition. Except in a very few instances of 
 large fixed capital industrial monopolies are artificial and 
 obtained by predatory methods. To use the wording of 
 Professor A. A. Young, "The contention that 'to compete' 
 and 'to attempt to monopolize' are synonymous is clearly 
 unsound. They are definitely antagonistic in princi- 
 ple." 1 
 
 Those who advocate the above view still adhere to the 
 antiquated doctrine that monopoly is the final limit of all 
 so-called institutions of increasing returns. And this in 
 spite of the fact that for fifteen years it has been estab- 
 hshed that the limit of diminishing costs is the point of 
 best proportionality and not that of monopoly. 
 
 12. Common Law on Restraint of Trade. — The purpose 
 of restraint of trade is to monopolize or to attempt to 
 monopolize. The common law has held that contracts 
 for this purpose are illegal and non-enforcible. Reasonable 
 restraints, however, have been permissible. English courts 
 have held that where the purpose of a contract is the pro- 
 tection of one's own business, it is legal even though it 
 seriously hampers competition. On the whole, common- 
 law cases have declared illegal contracts which act to the 
 detriment of a third party. Public opinion is and has 
 been antagonistic to combination. The general trend of 
 public opinion and of the courts has been to the doctrine 
 that combination has hurtful powers not possessed by the 
 ^Journal of Political Economy, vol. 23, p. 215. 
 
614 Introduction to Economics 
 
 individual acting alone. It has been held that certain 
 acts are legal for an individual, but that these same acts 
 would be illegal if done in combination with others. It is 
 significant that in the past particular interest has been 
 attached to the rights of individual litigants rather than 
 to the rights of the general public. To-day emphasis falls 
 upon the point that the community must be protected 
 from unfair practices. 
 
 13. Laissez-Faire and Control. — ^The doctrine that the 
 government should keep its hands off business relations 
 was good for its time and place, but changing conditions 
 have rendered it obsolescent. In a community of small 
 business concerns laissez-faire vivifies a healthful rivahy in 
 serving the pubhc. But modern methods of industrial 
 warfare under the rule of laissez-faire would vitiate the 
 forces of natural economic laws and render monopoly con- 
 trol intolerable. The government must define and enforce 
 the proper limits of industrial enterprise. Laws unenforced 
 are but pious declarations of principle. The doctrine of 
 laissez-faire had as its goal the protection of property, the 
 freedom of person, and the stimulation of production. 
 "To let alone" was regarded a fit and proper means of 
 guarding the people's interests. 
 
 Conditions differ, for to-day monopoly threatens the 
 people's interests. To protect social interests we must 
 have the regulating power of law. "The official who re- 
 strains the plimdering monopoly, preserves honest wealth, 
 and keeps open the field for independent enterprise does 
 on a grand scale something that is akin to the work of the 
 watchman who patrols the street to preserve order and 
 arrest burglars." ^ The old doctrine of laissez-faire and 
 ' John Bates Clark, Essentials of Economic Theory, p. 385. 
 
Control of Trusts 615 
 
 the new idea of restraint are one and the same in essence 
 and purpose. The former would not have competition 
 destroyed: The latter would have competition preserved. 
 Both adhere to the faith that natural development de- 
 pends on competition. 
 
 14. The Sherman Anti-Trust Law. — ^The common-law 
 proved inadequate to deal with the unfair practices of 
 monopolies and trusts. Restraints of trade were treated 
 as questions of private rights and the broader aspects of 
 public policy were virtually ignored. The public, there- 
 fore, was not- behind the law, making sure its enforcement. 
 Meanwhile, large combinations were extending their influ- 
 ence and the people felt the pressure of their power. Con- 
 flicts of interest as between producers and consumers were 
 difficult of adjustment, due to the complex? economic prob- 
 lems in modern industry which neither side understood. 
 Nor were the courts possessed of clear vision. The cases, 
 for the most part, involved complex economic problems, 
 and lawyers rather than economists decided them. 
 
 An awakened public opinion first turned against the 
 raibroads and the Interstate Commerce Act of 1887 was 
 passed. This was followed by the Sherman Act of 1890. 
 The purpose of this act was to protect the public against 
 the evils of trusts. The act declared against contracts, com- 
 binations, or conspiracies in restraint of trade or commerce. 
 It provided that persons who monopolize or attempt or 
 conspire to monopolize any part of the trade or com- 
 merce between states, or with foreign countries, shall be 
 punished. The punishment for disobeying the law may 
 be by fine (not more than $5,000), br imprisonment 
 (not more than one year), or both, in the discretion 
 of the court. 
 
616 Introduction to Economics 
 
 15. The Prevention of Trusts, — In the last several years 
 no Kttle has been said and written on "trust-busting." 
 Many thoughtful persons believe that under our laws 
 existing trusts cannot be destroyed and competition re- 
 stored. Others believe that the restoration of competition 
 is possible in the fields now dominated by trusts. The 
 fact is that vigorous enforcement of anti-trust laws are too 
 recent to warrant a conclusion on the restoration of com- 
 petition. The Sherman Law was little more than a dead 
 letter prior to 191 1. The methods by which the law was 
 enforced were too gentle to test its power. The punish- 
 ment of offenders consisted of a Ught fine rather than 
 imprisonment. It was good business for corporations to 
 break the law. If one is fined $5 for an act which profits 
 him $10, it is good business to perform the act. These 
 fines have been much like the student's matriculation fee 
 — a necessary nuisance, but when paid it is settled once 
 for all. It has rarely happened that a trust has been pun- 
 ished more than once. Other trusts escaped fine, merely 
 being informed that their acts were illegal. Trust activi- 
 ties are Uttle restrained under such enforcement. Not the 
 terminology of the law but the rigor of its enforcement is 
 the significant thing. Trusts fear but little the possibility 
 of a fine, but the lawbreaker does fear the jail. 
 
 16. The Standard Oil Case. — ^A few noteworthy cases 
 having to do with holding companies were tried under the 
 Sherman Act. Among these the Standard Oil case of 1911 
 is typical. The Standard had bought many of the sub- 
 sidiary companies and had established outright a number 
 of others. The whole company was firmly knit together 
 and the majority stock was controlled by a small group 
 of closely associated individuals. How did the court pro- 
 
Control of Trusts 617 
 
 ceed to dissolve the combination and restore competition 
 among the several companies? 
 
 The court decreed that the stock in the different con- 
 stituent companies should be divided pro rata among the 
 stockholders of the holding company. If, for example, A, 
 B, and C each owned one-third of the stock of the Stand- 
 ard Oil or holding company, they would each come to 
 own one-third of the stock of each subsidiary company. 
 The court permitted the same persons to be elected as 
 officers or directors of two or more of the subsidiary com- 
 panies. Yet the officers of the different companies were 
 enjoined from making any agreements among themselves 
 to restrain trade. The court prohibited some other formal 
 means for securing imity of control. The court left pre- 
 cisely the same community of interest, the same persons 
 owning jointly the same properties. And thus the holding 
 company was "busted" and the Sherman Law enforced. 
 
 17. Prevention or Destruction.^The prevention of 
 trusts would be far easier than the destruction of existing 
 trusts. The courts seem to be hindered by precedent and 
 form. Certain trusts have dodged the law and main- 
 tained their existence by changing the form of their organ- 
 ization, although in essence they have remained the same. 
 The purpose of the men who conspire under the protec- 
 tion of a legal form remains unchanged. To quote from 
 Durand's excellent httle bookri "Difficult as it may be 
 to break up trusts abeady formed and firmly knit together, 
 there seems no serious difficulty in preventing by law the 
 formation of new trusts. Indeed, it is noteworthy that 
 
 ' The Trust Problem, pp. 39-40. This writer is particularly indebted 
 to Dr. Durand's book for the treatment of several of the topics here 
 discussed, especially the next topic— "Trust Regulation." 
 
618 Introduction to Economics 
 
 since the government began somewhat actively to bring 
 proceedings under the Sherman Anti-Trust Act, ahnost no 
 trusts have been organized. If a proper control over the 
 organization of corporations and over their acquisition of 
 corporations and over their acquisition of property and 
 securities were exercised by the states and by the Federal 
 Government, the attempt to organize new trusts would be 
 nipped in the bud." 
 
 i8. Trust Regulation.— A policy of regulation is based 
 upon the existence of trusts and it assumes that they are 
 to continue. We have seen that no blanket principle can 
 apply to all trusts; some few trusts (public utilities and 
 natural monopolies are not trusts) having large fixed capi- 
 tal are in nature possessed of monopoly power and should 
 be regulated accordingly. As for railroads, even the courts 
 have urged that the common-law principle of allowing con- 
 tracts in "reasonable" restraint of trade is necessary and 
 desirable.^ A new judicial distinction, doubtless a trouble- 
 some and unworkable one, has come to the fore within the 
 last few years. It is that "good trusts" are to be distin- 
 guished from "bad trusts." The latter to be restrained and 
 the former to be upheld in its agreements upon "reasonable " 
 prices and other contracts which wiU not "unduly" restrain 
 trade. Consumers regard all trusts as bad; interested par- 
 ties pronounce them good. Who is the judge ? Right here 
 lies the difficulty. This policy requires the government to 
 act as judge and its judgment must be based upon fact. 
 
 Contemplate the enormousness of the task which the gov- 
 ernment must assume and the matter will appear at once 
 impracticable, if not unworkable. Government regulation 
 upon the basis of "good" will compel the government vir- 
 ■i66W. S. 329; 171 W. S. 567. 
 
Control of Trusts 619 
 
 tually to prescribe what are to be reasonable prices and 
 profits. The machinery for government regulation must 
 be vast and expensive. Investigation of the facts must be 
 continuous, for a good trust may become bad over a week's 
 end. The government must get frequent data, must keep 
 up with changing costs of raw materials, labor, obsoles- 
 cence, and new investments. The complex principle of 
 joint costs must not escape attention. The investigation 
 of to-day will be antiquated by the changing demand of 
 to-morrow. 
 
 The accounting problem is not least among the difi&- 
 culties. The Interstate Commerce Commission has had 
 its full quota of difficulty in its attempt to secure a work- 
 able accounting system in one line of industry. In this it 
 has not whoUy succeeded after painstaking effort, although 
 its problem is simple in comparison with that of securing 
 satisfactory results among a vast number of trusts, differing 
 in nature and necessarily in systems of accounting. Good 
 accountants are scarce and their services costly, yet thor- 
 ough regulation will require double work in accounting. 
 The trust must have its accountants in order to keep its 
 business straight, and as a basis for its management and 
 price policy. The government must have its corps in 
 order to render judgment on the work of the trust. The 
 complicated machinery and double work required for any- 
 thing approaching thorough regulation would offset the 
 reason given for allowing the good trust to exist — the rea- 
 son of efficiency. Furthermore, if "good" be the criterion 
 for a trust's existence, it must follow that any combination 
 which meets the test must be allowed to form itself into a 
 trust and its existence protected for such time as it be- 
 haves itself. Prevention is the safer method. 
 
620 Introduction to Economics 
 
 19. Need of Further Legislation. — The Sherman Law 
 was worded in terms so general as to permit of a variety 
 of interpretations. The term, "restraint of trade," was a 
 vital part of the law, but it was nowhere defined in the 
 statute. In rendering the opinion in the Standard Oil case 
 Chief- Justice White argued that Congress did not define 
 the term in order "to leave it to be determined by the 
 light of reason." He said that if literally and narrowly 
 interpreted it would deny the right to contract as to sub- 
 jects embraced in interstate trade. Thus it would tend 
 to restrain rather than promote interstate trade. But in 
 the dissenting opinion Justice Harlan said that "... Con- 
 gress prohibited every contract, combination, or monopoly 
 in restraint of commerce, it prescribed a simple, definite 
 rule that all could understand. ..." 
 
 Also, differences of opinion arose as to whether the law 
 applied to labor-unions and to railway combinations. A 
 narrow interpretation made it a weapon against strikes 
 and boycotts. This was not in keeping with the spirit of 
 the act, and was enough to call for an amendment of the 
 law. Again, in its application to railroads it overlapped 
 the Interstate Commerce Act. Raihroads are natural 
 monopolies; rate agreements are inevitable, and therefore 
 call for regulation rather than enforced competition. 
 These facts called for a revision of the law or for further 
 legislation to maintain competition in cases of trusts as 
 such. 
 
 20. Unfair Methods of Competition. — The purpose of 
 this paragraph is to give an idea of the nature of unfair 
 methods of competition in order that we may appreciate 
 a leading problem which the legislation of 1914 attempted 
 to solve. We shall briefly enumerate some unfair methods 
 which are characteristic of all such practices. 
 
Control of Trusts 621 
 
 One prominent American corporation^ is noted for the 
 ingenious methods which it used in overcoming competi- 
 tion. It used "lighting brands" which were sold in com- 
 petition with the goods of other companies at or below the 
 cost of production. Meanwhile it did not grow poor, 
 because it was securing handsome profits on brands out- 
 side of the fighting arena. There were many, among them 
 some labor-unions, who refused to patronize this so-called 
 trust. Thereupon the corporation in question bought 
 up twenty or more concerns and ran them as supposedly 
 independents. These concerns went through the outward 
 forms of competition with their owner and were for a time 
 well supported by the opponents of the trust. Other 
 methods employed by this concern were those of forming 
 exclusive contracts with dealers who sold its products, 
 whereby such sellers were not to receive supplies from com- 
 peting companies. It furthermore placed the business of 
 its competitors under secret espionage. 
 
 Such practices are destructive, never constructive. 
 Their purpose and effect is to destroy the business of others. 
 Oftentimes a smaller corporation, threatened with ruin be- 
 cause of the unscrupulous procedure of a successful rival, 
 will wish to sell its holdings if only at a nominal sum. 
 But at least one successful rival boasts thus: "We are re- 
 ceiving overtures to buy out opposition. We will not buy 
 them out; we knock out." In a criminal indictment ^ 
 brought against the company that made the above 
 boast the following charges, among others, were enumer- 
 ated: {a) Inducing, hiring, and bribing employees of 
 competitors to reveal the secrets of their business; (&) 
 bribing common carriers, telegraph and telephone com- 
 
 1 Meyer Jacobstein's The Tobacco Industry in the United States. 
 Columbia University Studies, 1907. 
 
 2 Indictment presented February 22, 1912. Federal Reporter, vol. 201, 
 pp. 699-705. 
 
622 Introduction to Economics 
 
 panics, to reveal secrets relative to the carriage of competi- 
 tors' goods; (c) falsifying to banks to the injury of com- 
 petitors in order to prevent their securing needed funds; 
 {d) also falsifying to prospective purchasers regarding the 
 merits of the competitors' goods; (e) instructing its agents 
 how to remove essential parts and thus cause a speedy 
 breakdown of the competitors' product; (/) cutting prices 
 to a prospective buyer of a competitor, or taking a com- 
 petitor's product in exchange and advertising it as "junk" 
 "For Sale at Thirty Cents on the Dollar"; (g) offering 
 "knockers" or a defective product, which it constructed 
 in imitation of the competitor's product, and using the 
 same to demonstrate the inferiority of the rival's goods; 
 {h) bringing harassing lawsuits against competitors, buy- 
 ing off their agents, and so forth. 
 
 21. The anti-trust legislation of 1914 consists of two 
 statutes, the Federal Trade Commission Act and the Clay- 
 ton Act ("an Act to supplement existing laws against un- 
 lawful restraints and monopolies and for other purposes"). 
 The President signed the first September 26, 1914, and the 
 last twenty days later. In the preceding national election 
 the Progressive party, led by Mr. Roosevelt, stood for the 
 policy of "monopoly-accepted-and-regulated " ; the Repub- 
 lican party, led by Mr. Taft, stood for the policy of "mo- 
 nopoly-prosecuted"; the Democratic party, led by Mr. 
 Wilson, stood for the policy of " competition-maintained- 
 and-regulated." 
 
 These acts are but two parts of the same legislation 
 and are to be considered together. The Trade Commission 
 Act embodies the provisions against unfair methods of 
 competition (which logically belongs in the Clayton Act), 
 otherwise it provides the machinery and methods to make 
 the Clayton Act effective. 
 
 Unfair methods of competition, whether on the part of 
 
Control of Trusts 623 
 
 firms or individuals, are declared unlawful. As in the 
 Sherman Act, "unfair methods" are not defined. This 
 term is so vague that business men must be left in doubt 
 at times as to the legaKty of their acts. Yet, as above 
 pointed out, to specifically define what are illegal acts 
 would provide the unscrupulous a means of disobeying the 
 spirit of the law while obeying the letter. However, a wise 
 provision is inserted which protects the well-meaning law- 
 breaker. It is that no penalty shall be given for the initial 
 offense. The Trade Commission and the courts are, in the 
 light of reason, to interpret as to the fairness or unfairness 
 of methods as cases arise. 
 
 22. The Federal Trade Commission. — ^A function of the 
 commission is to be "smelling around all the time for 
 rats." And when unfair practices are found it is signifi- 
 cant that the proceedings against such practices begin 
 with the commission. The commission is not obliged to 
 take action, and neither the court nor a prosecuting attor- 
 ney can take the initiative, therefore the unscrupulous 
 trust, in matters of unfair competition, is at the mercy of 
 the commission. It is compelled to proceed only "if it 
 shall appear to the commission that a proceeding by it in 
 respect thereof would be to the interest of the pubHc." 
 Many argue that the law is weakened by virtue of leaving 
 its enforcement to a body who are not compelled to act. 
 None the less, the provision seems wise in light of the end- 
 less toil which would be occasioned if proceedings were 
 brought in all cases — the trivial as well as the important. 
 The commission nips in the bud needless litigation by 
 issuing orders to offenders to discontinue unfair practices. 
 In case its orders are disobeyed, application is made direct 
 to the circuit court of appeals for enforcement. In this 
 
624 IntrodtLctum to Economics 
 
 particular the Federal Trade Commission is less powerful 
 in its field than is the Interstate Commerce Commission 
 in the field of transportation, for since 1906 a penalty has 
 been provided for disobejong its orders. 
 
 But it is a problem of deep significance as to whether or 
 not a commission is strengthened by giving it power to 
 enforce its commands. Though used in a different con- 
 nection I shall use the wording of President Hadley to 
 make clear this point: "In the days of its (the Massachu- 
 setts Railroad Commission)' most successful operation it 
 had practically no power except the power to report; but 
 its reports showed such a clear understanding of the points 
 at issue that they were accepted as authority by impartial 
 men on both sides. The Interstate Commerce Commis- 
 sion was in some respects modelled upon the Massachusetts 
 commission, and such success as it has enjoyed (President 
 Hadley wrote this in 1896) has been based on its power of 
 applying sound economic principles to difficult cases. It 
 is true, though it sounds paradoxical, that the power of 
 these commissions is lessened by increasing their powers. 
 They are engaged in building up new laws, new traditions, 
 and new methods of business, where it is absolutely essen- 
 tial that their reasoning should command the assent of 
 clear-headed men on both sides. When they cease to rely 
 on their reason and faU back on authority, they lose the 
 educational power which is the source of their dominant 
 influence." ^ 
 
 The commission, as a body of expert investigators into 
 the facts of unfair practices injurious to the public inter- 
 est, is easily the important feature of the new legislation, 
 for indeed the law as such embodied little not found in 
 
 ' Parenthesis mine. ' Hadley's Economics, p. 177. 
 
Control of Trusts 625 
 
 the Shennan Act. The findings of the commission, with 
 an unimportant exception, are treated by the court as con- 
 clusive. Its powers for investigation (except in cases of 
 banks and common carriers) are unlimited. It can de- 
 mand and examine the books and papers of corporations; 
 it can command witnesses to appear and testify. It is 
 significant that the law makes witnesses immune from 
 prosecution on their testimony. It can require annual 
 reports or special reports on any subject-matter it desires 
 from all companies engaged in interstate or foreign com- 
 merce. These reports will reveal a vast amount of infor- 
 mation, previously unobtainable, and of inestimable im- 
 portance in dealing with the trust problem. 
 
 The law forbids the commission's making known "trade 
 secrets" and names of customers; otherwise it is at liberty 
 to give its findings publicity. A chief characteristic of 
 Professor Jenks's The Trust Problem, first published in 
 1900, was his insistence upon publicity as the primary 
 force in the control of trusts. Public sentiment, however, 
 was not then ripe for such a measure, and trust officials pre- 
 ferred to hold council behind closed doors. But the wisdom 
 of a policy of publicity was apparent, and it has grown 
 gradually into public favor. The corporations themselves 
 are coming more and more to adopt the policy. Many of 
 them upon their own initiative are making full reports to 
 the public. Public and business sentiment is ripe for a 
 full measure of pubKcity and the policy has taken the 
 form of law.' It is fortunate that the Federal Trade Com- 
 
 > The Bureau of Corporations (established in rgoa) was a body of expert 
 investigators, but could not determine what information it might make 
 public. Probably valuable findings have not been published. In its field 
 the Interstate Commerce Commission, through publicity, has rendered in- 
 valuable aid. 
 
626 Introduction to JEconomics 
 
 mission, with its unlimited opportunity to observe and 
 investigate the trusts, should have this power. Constant 
 touch with these problems will eminently fit the commis- 
 sion to advise with respect to needed trust legislation. 
 
 Returning to other features of the law, it is noteworthy 
 that labor-unions and "agricultural or horticultural" asso- 
 ciations are not covered by these statutes. 
 
 23. Holding Companies and Interlocking Directorates. 
 — The Clayton Act declares it illegal for one company to 
 buy the stock of another when it would lessen competition 
 or tend to monopoly. This is but a repetition of previous 
 law against the holding company. A famous decision (the 
 Northern Securities decision) as early as 1904 made it 
 clear that such cases fall definitely within the scope of the 
 Sherman Act. 
 
 The law forbids interlocking directorates (the same per- 
 sons acting as directors of different corporations) in large 
 banks and in other corporations whose capital, surplus, 
 and undivided profits aggregate over $1,000,000. This 
 portion of the act has met with public approval. May it 
 not be, however, that we give too much emphasis to the 
 monopoly power of interlocking directorates, and too little 
 emphasis to the common ownership of corporations? A 
 safer provision, though one for which public sentiment is 
 not ripe, would be to deny to private ownership the privi- 
 lege to form monopoly. None the less, this phase of the 
 law has much promise of good. 
 
 24. The Webb-Pomerene Act. — Both the Sherman Act 
 of 1890 and the Clayton Act of 1914 forbid combination in 
 restraint of trade, but in so doing they not infrequently 
 forbid combination in promotion of trade. Suppose that 
 Jones, Smith, and Brown are, competitors in the oil busi- 
 
Control of Trusts 627 
 
 ness; the first two combine and institute certain so-called 
 UQfair methods for mutual advantage in promoting the 
 trade. The combination effects economies, and Brown is 
 outdistanced in the output, the service, and the price. 
 Two results follow: The trade of the combination is pro- 
 moted, while that of Brown is restrained. The Sherman 
 and the Clayton laws play their part by coming to the aid 
 of Brown, but in so doing they hamper the promotion by 
 Smith and Jones. If to restrain one interest is to promote 
 another, it follows that to remove the cause of the one is 
 to eliminate the cause of the other. 
 
 The Webb-Pomerene Act of 191 8 appears to stand in 
 striking contrast with the two acts above named. The 
 purpose of the law is to promote export trade by permitting 
 combinations among competitors for the sale of goods in 
 foreign markets. The law limits itself to foreign trade; it 
 would permit no league of competitors whose power would 
 affect trade in the United States. This law stands for 
 combination, while the Sherman and Clayton Acts stand 
 for competition; it is in this sense that the law of 1918 
 appears in contrast with the other two. Considering, how- 
 ever, that the Webb-Pomerene law is applicable only in 
 the foreign field, may it not be that the three laws are con- 
 ducive to the same ends ? 
 
 No satisf3dng answer can be given this important ques- 
 tion within the space at my disposal. Suffice it to say 
 that exporting combinations can amass the large capital 
 which is necessary to enable the small as well as the large 
 producers to participate in foreign trade. Competition 
 must be had in the home market if the small producer 
 share his due portion of trade; exporting combinations 
 must be had if the small producer share his due portion 
 
628 Introduction to Economics 
 
 of foreign trade. The American policy favors a fair field 
 for producers large and small. There is a fighting chance 
 for all producers in domestic trade only when competition 
 is maintained. The difi&culties of establishing trade in 
 foreign markets are so great as to deny the privilege to all 
 excepting those who possess large capital. 
 
 The primary advantage of export combinations will be 
 found in the power of great capital. This advantage is 
 primary because of the large capital that is required to 
 establish trade in a foreign market. In some cases we shall 
 be forced practically to create a new demand for our goods. 
 American tobacco, for instance, was introduced into cer- 
 tain markets only after an extensive educational campaign 
 that had to break down religious scruples and to create the 
 taste for tobacco. J. W. Jenks says:' "One may question 
 the value to those peoples of this 'educated taste': one 
 cannot question the skill and power needed to accomplish 
 the result." Strong competition will be met in the foreign 
 market; we must establish connections, maintain selling 
 agencies, employ the ablest salesmen, and advertise exten- 
 sively. These necessary outlays cannot be met without 
 the possession of very large capital. 
 
 The three laws in question declare for domestic competi- 
 tion and for combination in the foreign market. Shielded 
 from restraint at home and aided by combination in the 
 export market, the individual producer is enabled to share 
 the benefits of both markets. Seeing that two of these 
 laws declare for competition while the third favors com- 
 bination, the superficial wiU jump to the conclusion that 
 these laws stand forth in bold contrast. They are, how- 
 ever, not antagonistic in principle. They jointly declare 
 ' The Trust Problem, p. 75. 
 
Control of Trusts 629 
 
 the public policy — that of maintaining at home the kind 
 of industrial society we want, a competing chance in a 
 fair field. Meanwhile provision is made for the most effec- 
 tive marshalling of our forces, so that each and all may 
 share the trade in foreign markets. 
 
 The question may arise as to the reaction this law may 
 cause among foreigners. Will they welcome the fact that 
 America, while refusing to tolerate combinations in trade 
 at home, will advocate combinations for the capture of 
 foreign trade? To the degree that the foreigner will study 
 this law at all, he will view it from the point of view of 
 his own personal interest. The foreign consumer will 
 be the ultimate purchaser of our exported products, and 
 he will probably not be offended at our arrangement to 
 give him the best in service, the first in quality, and the 
 lowest in price. Combination will enable us to do these 
 things. Combination in restraint of trade at home tends 
 to monopolize the domestic market. Combinations on our 
 part to enter the foreign market will, on the contrary, but 
 accentuate competition. For the other nations of the 
 world will compete with America for the same trade, will 
 marshal their forces and exert every effort in the attempt 
 to underbid us and capture the foreign market. 
 
 The Webb-Pomerene Act is new and patience will be 
 required that it may have a fair test. Doubtless imper- 
 fections wiU be exposed in this law and amendments made, 
 but it marks the beginning of a new policy toward export 
 trade. Time alone will test the wisdom of this policy; 
 meanwhile its results will be watched with deepest interest. 
 
 2S. Exercises,^ — i. Define the following: trust, pool, 
 holding company, merger. State the characteristic fea- 
 tures of each. 
 
630 Introditction to Economics 
 
 2. Should a fusion be made of Company A and Company 
 B into a new Company C, should you term this an amal- 
 gamation or a merger ? 
 
 If a fusion is made of Company A into Company B, 
 would this be an amalgamation or a merger ? 
 
 3. Should you think it wise for railroads to form pools? 
 Defend your answer. Will the same argiunents you make 
 in case of railroads hold true in case of farmers? retail 
 merchants ? salt manufacturers ? 
 
 4. State some reasons why the ownership of less than 
 50 per cent of the stock in a holding company may give 
 control. (For brief simimary see Gerstenberg's Syllabus 
 of Corporation Finance, II, chapter XIII.) 
 
 5. Summarize the advantages and disadvantages of 
 holding companies. (See Lough's Corporation Finance.) 
 
 6. Make a brief of this case — ^The Northern Securities 
 Company vs. U. S. (193 U. S. 197). 
 
 Ask no aid from teacher or librarian in finding the case. 
 
 7. How may lax legislation respecting holding compa- 
 nies in one state force other states to pass lenient laws? 
 
 8. Why are not the laws more specific, defining exactly 
 what is and what is not legal, so that business men wiU be 
 freed from all hazards in their investments ? 
 
 9. "To compete" and "to attempt to monopolize" are 
 not the same, but antagonistic in principle. Explain. 
 
 10. Which one of the following views do you think to be 
 nearest the truth, and why? (a) The trust is a natural 
 and inevitable outcome of modern conditions and is a 
 distinct economic gain, {b) The trust is a result of special 
 privileges and corporate abuses, (c) The trust is the 
 greatest invention of this or any other age. (Fetter.) 
 
 11. What relation has combination to large fortunes? 
 to small fortunes ? 
 
 12. What is the pubhc policy with respect to combina- 
 tions with monopoly power? Is the public policy adverse 
 to large-scale production as such? 
 
 13. What was the purpose of the Sherman Anti-Trust 
 Law? 
 
Control of Trusts 631 
 
 14. Is it better to prevent the formation of combinations 
 in restraint of trade or to destroy them after they are 
 formed ? Reasons ? 
 
 15. Point out the chief difficulties that might be encoun- 
 tered in the administration of a policy of trust regulation. 
 
 16. What do you consider the most important feature of 
 the Federal Trade Commission Act ? 
 
 17. Do you consider the Webb-Pomerene Act antagonis- 
 tic in principle to the Clayton Act ? 
 
 If you were doing a small independent business and 
 hoped to reach both the domestic and the export markets, 
 should you wish the repeal of either of these acts ? 
 
INDEX 
 
 acceptances, 318, 319, 327 
 
 Act of 1873, the, 268 
 
 Adams, Prof. B. G., 15 
 
 Adams, H. C, 44 
 
 Adamson bill, 606 
 
 advertising waste, S70"S72 
 
 ^sop, 112 
 
 agricultural stage, the, 9, 10 
 
 agriculturist, the, knowledge of, 10 
 
 Aldrich plan, the, 322 
 
 American Civil War, 61, 83, 90; 
 
 destruction in, 77; lessons of, 77; 
 
 influence of, 77-78 
 American gold dollar, weight of, 
 
 208, 215 
 American Indians, 25 
 American Steel and Wire Company, 
 
 562, 563 
 American Tobacco Company, 608, 
 
 621, 628 
 amoimt, 155-156 
 animals, domestication of, 6, 7 
 antitrust legislation of 1914, 622- 
 
 623 
 Arkwright's water-frame, 45 
 Armour, P. D., 459 
 Asiatic Turkey, 439 
 "assignats," 227 
 
 "bad trusts," 618 
 
 Ball, John, 32, 33 
 
 bank, a, operations of, 292-294 
 
 bank credits, 287-288 
 
 bank interest, variation of, 492 
 
 bank-notes, 302 
 
 Bank of France, the, 306-310; pub- 
 lic duty of, 307; specie reserve of, 
 307-308; deposits of, 308; branch 
 
 banking of, 308-310; elasticity of, 
 
 310 
 bank of the United States, 311 
 banking, and foreign trade, 321-322 
 banking, decentralization of, 317- 
 
 319 
 banking facilities, distribution of, 
 
 320-321 
 banking, prior to national banks, 
 
 310-3" 
 banks, as reservoirs of capital, 288; 
 
 functions of, 305; foreign branches 
 
 of, 328 , 
 bank's liabilities, a, value of, 294 
 barbarian migrations, 16 
 barter and need for money, 197-198 
 Bastiat, Frederic, 107, 434 
 Bentham, Jeremiah, 59 
 Bethlehem Steel Company, the, 187 
 bimetallism, 255-256, 258, 259, 260, 
 
 26r; arguments for, 261-264; 
 
 arguments against, 264-266 
 Bishop Latimer, 34-35 
 Black Death, the, 31; effects of, 31, 
 
 32 
 Bland-Allison Act of 1877, the, 268 
 bond, the present worth of a, 497- 
 
 498 
 borrowers, 513-5x8 
 Bowen, F., 404 
 brassage, 208 
 
 broad market, demand in, 559-560 
 broken-pane philosophy, 434-435 
 Bryan, W. J., 271, 272 
 business, foresight in, 550-551; 
 
 training for, 551, 552 
 business man, the hazard of the, 
 
 611-612 
 
 633 
 
634 
 
 Index 
 
 buyers and sellers, unrevealed price 
 limits of, isg-i6o 
 
 Caimes, John E., 257, 402 
 
 Calais, 30 
 
 Canterbury Tales, 31 
 
 capital, and wealth, 85-86; defined, 
 467-468, 471, 472, 474, 479, 480, 
 481, 482, 53s; contrasted with 
 wealth, 482-483, 484, 48s, SOI, 
 
 S03 
 
 capital items, 295-296 
 
 capitalists, 70 
 
 capitalization, 495, 499; and inter- 
 est, 496, 497 
 
 Carnegie Steel Co., 577 
 
 Cartwright's power-loom, 45 
 
 Carver, T. N., 574 
 
 cash, defined, 204 
 
 centralization, in banking, 306 
 
 centralized banking, 306 
 
 changes affecting wage-earners, 48- 
 
 49 
 charters, 535, 536, 537 
 Chase, Secretary, 312 
 Chaucer, 31 
 
 checks, payments by, 301-302 
 classes, inequalities of, 574-575 
 Clayton Act, the, 547, 622, 626, 
 
 627 
 clearing-houses, agency of, 300-301 
 coinage, 205-206; free, 206-207; 
 
 unlimited, 207; gratuitous, 207 
 Coinage Act of 1853, the, 268 
 coins, selection of, 252-253 
 Colbert, 38 
 Colbertism, 38 
 collateral, 298 
 collective bargaining, 50 
 commodity standard, the, 275-276 
 compensated dollar, the, 276-277 
 compensatory principle, the, 256- 
 
 257. 259 
 competition, 67-68, 582, 583, 588, 
 612; extent of, 68-69; unfair 
 methods of, 620-622 
 
 competition and monopoly, motive 
 
 in, 582-583 
 competitor, the, 568-569 
 complementary agents, 352-353 
 complementary goods, 162-163 
 concentration, tendency toward, 62- 
 
 63 
 Conquest, English, 25 
 consumption, standards of, loi; 
 
 harmony in, loi; elasticity of, 
 
 594-595 
 
 continental currency, 227 
 
 contracts, 71-72 
 
 Cooley, Judge, 605 
 
 copyright, 528, 586 
 
 corporate abuses, protection against, 
 552 
 
 corporations, 532, 536, 537, 538, 539, 
 S40, 541, 542, 543, 544, 545, 546, 
 547, 548, 550; advantages of, 533- 
 535 
 
 cost, defined, 177; and sacrifice, 1 78; 
 and limitation of factors, 178-179; 
 and the price of product, 179-180; 
 a price expression of limitation of 
 agents, 180; increasing, 182-183; 
 opportunity, 183-184; past, and 
 present supply, 185-187; present, 
 and future supply, 185-187; sell- 
 ing below, 187-188; joint, 188- 
 189 
 
 "cost of high living, the," 103- 
 104 
 
 credit, 203; as a substitute for 
 money, 279-280; use of, 280-281; 
 defined, 281-282; the basis of, 
 282-283; facilitates production, 
 283; danger of, 284-286; inelas- 
 ticity of, 319-320 
 
 credit instruments, 203; general and 
 limited acceptability of, 286-287 
 
 creditors, securing funds from, 542- 
 
 543 
 Crompton's mule, 45 
 cross deliveries, 563 
 cross-freights, 562, 563 
 
Index 
 
 635 
 
 cumulative voting, S38-S39 
 
 currency, 203 
 
 cutthroat competition, $6$, 366 
 
 Darwin, 418, 422 
 
 decentralization, 306 
 
 decision in directing expenditures, 
 151-152 
 
 demand: questions and answers, 
 166-170; in abroad market, 559- 
 560; quantity of, 560-561 
 
 demand curve, 164-166 
 
 democratic government, character- 
 istics of, ig, 20 
 
 deposits, bank, 288-290; time, 291; 
 demand, 291 
 
 De Quincey, 15 
 
 desirability, in; diminishing, 112; 
 total, 113-115; marginal, 115- 
 121 
 
 desires, as motives, 98-99, 100; and 
 productive capacity, 102-103; and 
 ultimate wealth, 104-106; and 
 association of ideas, 105-106; 
 altruistic, 106-107; a-nd wants, 
 107-108; repressibility of, 108- 
 109 
 
 differentiation, in social life, 66-67 
 
 diminishing costs, institutions of, 
 596-597 
 
 diminishing money returns, 385 
 
 diminishing returns, the law of, 55, 
 182, 183, 520 
 
 directors, 537, 538, 548, 549; re- 
 sponsibility of, 553 
 
 dividends, 542, 546, 548 
 
 division of labor: in the factory sys- 
 tem, 65-66 
 
 dollar, the purchasing power of a, 
 86-87 
 
 domestic system, the, 40-41 
 
 domestication and indirect produc- 
 tion, 7, 8 
 
 Doomsday Survey, 17, 24 
 
 dumping, 598 
 
 early American economists, 80, 81 
 
 early specialization, mistakes in, 2, 
 3 
 
 East India Company, 39 
 
 economic classes, 70-71 
 
 economic laws, 54-56; and social 
 institutions, 88-89 
 
 economic progress, stages of, 6, 7 
 
 economic rent, 396 
 
 economics, science of, i, 2; subject- 
 matter of, 75-76; laws of, 87; 
 scope of, 88; changes in, 90; and 
 political reform, 90-93; and busi- 
 ness, 93-95 
 
 economist, the requirements of the, 
 2 
 
 economy, primitive, , 15; manorial, 
 15 
 
 education, 505; dissemination of, 78 
 
 eminent domain, 529 
 
 enclosures, 33-35; revival of, 58-60 
 
 England, development of, 23-24; 
 area of, 24; population of, 24 
 
 English commerce, 23 
 
 entrepreneur, the, 70, 71, 349, 356, 
 360, 362, 369, 377, 381, 389, 411, 
 
 439, 440, 443, 444, 4S8, 47i, 473; 
 defined, 342; functions of, 342- 
 343; as middleman, 343-344; as 
 servant of demand, 344-345 
 
 Eskimos, the, 425 
 
 Everett, A. H., 80 
 
 extensive cultivation, 358 
 
 extensive margin, 478 
 
 extensive margin of utilization, 357- 
 358, 359; equality of, 359-360 
 
 factors, elasdc limit of, the, 366-368 
 
 Fawcett, H., 454 
 
 Federal Reserve Act of 1913, 291, 
 
 315, 322; noteworthy features of, 
 
 327-328 
 Federal Reserve Board, the, 322- 
 
 323, 324, 326, 328 
 Federal Reserve Notes, 324-325 
 
636 
 
 Index 
 
 Federal Trade Commission, the, 6ii, 
 
 623-626 
 Federal Trade Commission Act, 622 
 Fetter, Prof. F. A., 326, 365, 400, 
 
 472. 49S 
 feudalism, 15, 16 
 fiat money, 222-223; ^ monopoly, 
 
 225-227 
 fiat theorists, 221, 224 
 fighting brands, 621 
 Fisher, Prof. Irving, 232, 276, 491 
 fixed supphes, 176 
 "Four Great Inventions,'' 45 
 France, 425 
 franchise, 484, 529 
 free banking system of New York, 
 
 the, 311-312 
 freedom of trade, the, 47 
 free-silver agitation, 271 
 funds, transmission of, 327-328 
 
 Gee, Joshua, 409 
 
 George, Henry, 57, 408, 414 
 
 Gibbon, 37 
 
 Gide, 422 
 
 "GoldBill," the, 267 
 
 gold bulUon, mint price and market 
 
 price of, 215-216 
 gold standard, the, 272-274 
 good money, qualities of, 204-205 
 "good trusts," 618 
 good-will, 483-484 
 government supervision, 306 
 "greenbackers," 221 
 greenbacks, 221, 222; and prices, 
 
 223-225 
 Green's Short History of the English 
 
 People, 24-25 
 Gresham, Sir Thomas, 253 
 Gresham's law, 253-254, 255, 257, 
 
 259, 267 
 gross interest, 492-493 
 growth of cities, the, 62 
 guilds, 26; merchant, 27-28; craft, 
 
 29 
 Guizot, 19 
 
 Hadley, President, 4r9, 624 
 
 Halleck's Psychology, res 
 
 Hamilton, Alexander, 266 
 
 Hargreave's spinning-jenny, 45 
 
 Harlan, Justice, 620 
 
 Heam, W. E., loi, 107 
 
 Henry VII, 36 
 
 Henry VIII, 36-37, 105 
 
 high pay and short hours, 404-405 
 
 high rent, and short factors, 381; 
 
 defined, 382 
 hindrances to trade, 28, 29 
 hoarding, its effect on money prices, 
 
 238, 239 
 holding companies, 607, 608, 609; 
 
 and interlocking directorates, 626 
 Hume, David, 409 
 Himdred Years' War, the, 29-30; 
 
 effect on England and France, 30; 
 
 changes during, 30-35 
 
 income, real, and the price level, 
 232-233 
 
 incomes, differences in, 507; dis- 
 tribution of, 507-510 
 
 incorporation, articles of, 535 
 
 increase of numbers, views concern- 
 ing, 409, 410, 411, 412, 413 
 
 increasing costs, 595-596 
 
 increasing gold production, effect of, 
 235-236 
 
 increasing resistance, 386-387 
 
 index numbers, simple, 242-243; 
 weighted, 243-244; Falkner, 244; 
 purposes of, 244-247 
 
 Indiana coal, 564 
 
 industrial classes, beginning of, 42- 
 
 43 
 
 industrial process, the, character- 
 istics of, 334, 335, 336 
 
 industrial revolution, the, 41, 45, 63, 
 70, 336, 439, 444, 55° 
 
 industry, automatic regulation of, 
 72-73; co-operant forces of, 333- 
 334; automatic adjustment in, 
 334 
 
Index 
 
 637 
 
 industries, interdependence of in 
 
 civilized state, 22-23 
 information, conununication of, 129- 
 
 130 
 
 insolvency, real, 299, 300; legal, 299 
 
 intelligence, 99, 100, loi 
 
 intensive margin, 478 
 
 intensive margin of utilization, 356, 
 357; equality of, 3S9-360 
 
 interest, 472, 473, 482, 489, 498, 501, 
 504. SIS, S17. S18, S2I, S22. 523. 
 524, 525; rate of, 490, 491, 496, 
 498, 499, 500; net, 492-493; ad- 
 justment of to capitalization, 496- 
 497; determining a rate of, 511- 
 
 S13 
 interlocking directorates, 626 
 Interstate Commerce Act, 604, 605, 
 
 615, 620 
 Interstate Commerce Commission, 
 
 605, 606, 619, 624 
 inversion, fallacy of, 499 
 issuing bonds, 544-545 
 issuing notes, 543-544 
 issuing stocks and bonds, 545-54? 
 
 Jefferson, Thomas, 267, 268 
 Jenks, Prof. J. W., 604, 605, 625, 
 
 628 
 Jevons, W. S., 265 
 Johnson, J. F., 263, 459, 469 
 joint-stock association, 532 
 Jones, E. D., 285 
 
 Kay's drop-box, 42 
 Kidd, N. G., 119 
 Kimball, Professor, 39 
 knighthood, 31 
 knowledge, 4, 5 
 
 labor, 436, 463, 464, 46s, 473; geo- 
 graphic division of, 64-65; de- 
 fined, 429-430; direct and in- 
 direct, 430-431; demandfor, 431- 
 432; variety of demand for, 432- 
 433 
 
 labor standard, the, 275 
 labor-unions, formation of, 49-51 
 laborer's view-point, the, 442-444 
 laissez-faire, 47, 48; and control, 
 
 614-61S 
 land, 474, 475, 476, 477, 478, 479, 
 
 480,481; as capital, 481, 484 
 large production, and monopoly, 
 
 386; advantagesof, 556, 557, 561- 
 
 S64 
 Lauderdale, Lord, 80 
 legel tender, Act of 1857, the, 268 
 legislation, need of, 620 
 liabilities and assets, 291-292 
 limited agent, 353, 354 
 limited Uability, 533 
 limiting factor, the, 362 
 limping standard, the, 269-270 
 Liverpool, wheat market of, 127, 
 
 128; demand at, 128-129 
 Lollards, 30 
 
 lords of manors, alliance against, 26 
 Louis XIV, 38 
 love of posterity, 506 
 "lump of labor" fallacy, the, 437- 
 
 438 
 
 machinery, 438, 439; effect upon 
 labor, 439, 440, 441. 442, 443i 444. 
 445, 446, 447; and market de- 
 mands, 444-445 
 
 Macrosty, H. W., 558 
 
 "make-work" fallacy, the, 433-434, 
 436 
 
 Maltho-Ricardian School, the, 367 
 
 Malthus, T. R., 409, 412, 413, 416, 
 418, 419, 420, 421, 422 
 
 Malthusian theory, 414-415, 416, 
 418, 419, 420, 421, 422 
 
 man, in his primitive state, 3, 4; 
 power of supremacy, 4; knowledge 
 of natural forces, 4, 5; as user of 
 tools, 22 
 
 management, concentration of, 534- 
 
 S35 
 "Manchester Doctrine,'' the, 48 
 
638 
 
 Index 
 
 manifold note issue, 306 
 
 msinorial system, the, in England, 
 17-19, 20 
 
 marginal desirability, 468-470; and 
 value, 227-229 
 
 marginal land, 477-479 
 
 market, 591, 592; meaning of, 123- 
 124; examples of, 124-126; ex- 
 tended by transportation, 126; 
 broad, 129; extent of, 368-369; 
 adjustments in, 518-519; limita- 
 tion of, 589-590 
 
 market demand, 158; elasticity of, 
 161-162 
 
 market price, 131 
 
 market ratios and price, 130-131 
 
 market supply, 158; movements in, 
 189-190 
 
 Marshall, Alfred, 405, 406 
 
 McAdoo, Secretary, 605 
 
 McCulloch, Secretary, 311 
 
 member banks, 324, 326, 328; re- 
 serves in, 326-327 
 
 men, selection of, 557-558 
 
 mercantilism, 38 
 
 mercantilists, 47 
 
 mergers, 609 
 
 middlemen, 343, 344 
 
 Mill, J. 8., 454 
 
 modem English, rise of, 31 
 
 monetary sjrstem of the United 
 States, 214 
 
 money, 491; and price, 195-196; in 
 exchange, 196; defined, 199-200; 
 definition of, explained, 200-201; 
 functions of, 201-203; stability 
 of, 204; uniform purchasing 
 power of, 204; elasticity of, 205; 
 convenient to handle, 205; dura- 
 bility of, 205; exchange. of, 207- 
 208; convertibility of, 216-218; 
 marginal use of, 229; exchange 
 function of, 229-231; purchasing 
 power of, 231-232; quantity 
 theory of, 236-237; direct and 
 indirect uses of, 346-349 
 
 money expression of wealth, 86-87 
 money fallacy, the, 490-491 
 money loans, 498 
 money market, the supply side of, 
 
 money movements, 251-252 
 
 money wages, 453 
 
 monometallism, 256 
 
 monopoly, 37, 556, 574, 575, 576, 
 578, 579. 582, S86, 59°, 597, 598, 
 602, 612, 613, 614; some advan- 
 tages of, 565; purpose of, 570; 
 evil effects of, 576-577; test of, 
 583-584; buying, 583; selling, 
 584; temporary, 584-585; capi- 
 talistic, 585; legal, 586-587; 
 natural, 587; quasi-natural, 587- 
 589 
 
 monopoly price, 593-595, 597; limi- 
 tations on, 599 
 
 monopoly rents, 382-383 
 
 monopoly rights, 28, 484 
 
 Morosini, Miss Giulia, 436 
 
 multiple or tabular standard, the, 
 274-275 
 
 Napoleonic Wars, 58 
 
 National Bank Act, the, 312-314; 
 
 primary object of, 313; provisions 
 
 of, 314-316 
 national banking system, defects of, 
 
 316 
 National Csish Register Co., 621 
 national forces, in war, 331-333 
 National Monetary Commission, 
 
 316, 321 
 national strength, in an autocracy, 
 
 83 
 national system, the, 36 
 national wealth, 83, 86 
 natural forces, control of, 43-44 
 necessities, 108 
 Newton, 55 
 
 New York system, the, 312 
 Normans, the, 17, 18, 24, 25 
 Northern Securities decision, 626 
 
Index 
 
 639 
 
 opportunity cost, 183-184; kinds 
 
 of, 184-185 
 "outside paper," 299 
 
 panic, of 1837, 311; of 1839, 311; of 
 
 1907, 316 
 Parliament, 30 
 partnership, S30-S31; general, 531; 
 
 limited, 531; disadvantages of, 
 
 531-532 
 past cost and present supply, 185- 
 
 187 
 patents, 528, 586 
 patronage, voluntary and enforced, 
 
 589 
 Peasants' Revolt, the, 32-33; results 
 
 of, 33 
 
 Phillips, Willard, 80 
 
 physical intensive utilization, 35s 
 
 physical science, laws of, s 
 
 Physiocrats, the, 46-47 
 
 piece wage, the, 450-452 
 
 Pitt, William, 410 
 
 pools, 603-604, 605, 607 
 
 population, 408 
 
 pound sterling, weight of, 208 
 
 present cost and future supply, 185- 
 187 
 
 pressiu-e and progress, 8 
 
 price, the problem of, 131-132; defi- 
 nition of, 144-146 (see money and 
 price) 
 
 price level, the, 132-133, 242 
 
 price-making, 133; conditions of, 
 133-142; illustrations of, 156-158 
 
 price movements, 240-241 
 
 prices, domestic and export, 597-599 
 
 principle of resistance, the, 353-354 
 
 private ownership, 528; limits to, 
 
 529-530 
 product returns vs. money returns, 
 
 383-384 
 production, and civilization, 11, 12; 
 defined, 338; texts of, 338-340; 
 social, 340, 341, 346; competitive, 
 
 340, 341, 345, 346; material, 346; 
 and discount, 519-521 
 
 productive agents, 355 
 
 productive capacity, no, 333; and 
 current supphes, 76-77, 78; in- 
 crease of, by dissemination of 
 education, 78; and power of or- 
 ganization, 79 
 
 productive establishments, two types 
 of, 566 
 
 progress, three stages of, 6, 7 
 
 property, its relation to government, 
 19; private, 56-57, 423, 424, 527; 
 defined, 84, 85; real, 528; per- 
 sonal, 528 
 
 proportionality, 369, 371, 372, 407, 
 426; the law of, 361-363, 567; 
 bearing of on distribution of 
 wealth, 363-365; affected by 
 priceof agents, 365-366; and rent, 
 388-389 
 
 prospective prices and present de- 
 mand, 163-164 
 
 purchasing power and supply, 175- 
 176 
 
 purchasing power of money, two 
 meanings of, 233-235 
 
 quantitative precision, 336-337 
 quantity and money retvims, 369- 
 
 370 
 quantity theory of money (see 
 
 money and price) 
 Queen Elizabeth, 37, 86, 105, 253 
 questionable practices, 547-549 
 
 railroads, during the World War, 605- 
 606; measures advocated for, 606 
 
 Raymond, Daniel, 80 
 
 rediscounting, 318 
 
 regional banks, 324, 325, 326, 327, 
 328 
 
 relative wages, how determined, 
 
 458-459 
 rehgion during Hundred Years' War, 
 
 30 
 
640 
 
 Index 
 
 rent, 374. 37s, 376, 377, 378, 379, 
 380, 381, 382, 383, 384, 387, 388. 
 394. 395> 396, 499, 520; defined, 
 37S; time element in, 380; lim- 
 ited by income, 389-390; limited 
 by cost of reproduction, 390; dif- 
 ferential, 391, 392, 474; and 
 wages, 457, 458; in the labor-cost 
 theory, 473 
 
 rent problem, the, 493 
 
 reserve baiJcs, the, 323-324; re- 
 serves of, 325-326 
 
 reserves, 296-298 
 
 restraint of trade, 615; common law 
 on, 613-614 
 
 Ricardo, David, 80, 210, 474 
 
 rich, meaning of, 81, 82 
 
 right of way, 529 
 
 Roman Catholic Church, 30 
 
 Roman fraternities, 27 
 
 Roscher, William, 28r 
 
 Ross, Prof. E. A., 424 
 
 Royal Society, 42 
 
 salesmanship, 572-573 
 
 saving, 521, 522 
 
 scarcity, the notion of, iio-iii 
 
 science, its relation to art, 54 
 
 sciences, the, development of, 5; 
 
 moral or mental, 5; physical or 
 
 objective, 5 
 scientific farming, 43 
 seigniorage, 208-209, 210, 211, 212, 
 
 225; and the purchasing power of 
 
 money, 209-210; in the monetary 
 
 system of the United System, 213 
 self-control, 506-507 
 self-interest, 19, 69-70 
 self-sufficiency, 9 
 Senior, N. W., 177 
 settled life, influence on civilization, 
 
 II 
 Sherman Act, the, 268-269 
 Sherman antitrust law, the, 605, 
 
 615, 616, 618, 620, 623, 625, 626, 
 
 627 
 
 short factor, the, 362, z(>5 
 
 Sicily, 400, 415 
 
 single tax, 374, 375 
 
 slavery, 13, 14, 15, 18 
 
 Smith. Adam, 48, 446 
 
 social changes, in England, 45-46 
 
 social expediency, 57-58 
 
 social legislation, beginning of, 48 
 
 social wealth, 79, 80, 81, 82 
 
 special charter institutions, 312 
 
 specie pa3Tnents, 223 
 
 Spencer, Herbert, 587 
 
 standard of hfe, the, 109-110 
 
 Standard Oil Case, the, 616-617, 620 
 
 Standard Oil Company, the, 562, 
 
 608 
 Standard Oil Trust, the, 607 
 standardization, 337, 558, 559 
 "Statute of Laborers," 32 
 stock, 533, 534 
 stock-certificates, 534; negotiability 
 
 of, 540-541 
 stockholders, 533, 534, 535, 537, 538, 
 
 S4I, 542, 546, 547, 548, 549, 550; 
 
 inside information of, S39-540 
 substitution, 360-361; principle of, 
 
 599 
 
 supplies, 172-175; variety of, 172- 
 173; adjustments of, 173-174; 
 limitations of, 174-175; competi- 
 tion of, 181-182 
 
 supply, 156 
 
 supply and demand, caution in the 
 use of, 154-155 
 
 supply curve, movements in, 190 
 
 supply of labor, 426; location of, 
 399-400; industrial, 401-402; non- 
 competing groups, 402; peculiari- 
 ties of, 404-405, 406, 407 
 
 surplus, 295, 296; and the limit to 
 exchanges, 150-151 
 
 talent, distribution of, 558 
 tariff, the, 374 
 Taussig, F. W., 604 
 tenants, 18 
 
Index 
 
 641 
 
 theory, definition of, 56 
 
 thought and execution, 459-460 
 
 thrift, 10, II, 505, 506 
 
 time-discount, 493-494, 495-496, 
 498, 499, 502, S03, 504, 507, 508, 
 509, SIC, sii, 513, S14, 515, 516, 
 517, 521, 522, 523, 524, 525 
 
 tools, cost of, 568 
 
 trade-mark, 528 
 
 trade regulation, 28, 29 
 
 trades-unions, 48 
 
 trading, 67 
 
 transportation, 60-61 
 
 tribal property, 8, 9 
 
 trust, defined, 602-603; legal form 
 of, 607 
 
 trust legislation, purpose of, 609- 
 610 
 
 trust regulation, 618-619 
 
 trusts, prevention of, 616, 617-618 
 
 Turgot, A. R. F, 355, 356 
 
 undivided profits, 295, 296 
 
 United States, the industrial devel- 
 opment of, 61-62 
 
 United States Steel Corporation, 
 608, 609 
 
 units, equal desirabilities of, 112- 
 
 113; "S 
 usance, 520 
 usance-value, 396 
 utility, 111-112 
 
 valuation, 152-154 
 
 value, definition of, 146-147; an 
 individualistic matter, 147-148; 
 the paradox of, 148-149; labor- 
 cost theory of, 470-471, 479 
 
 valueless land, 477 
 
 Van Hise, President, 564, 573, 609 
 
 variety and trade, 9 
 
 Vicar of Wakefield, The, 409, 512 
 
 wage-fund doctrine, the, 453-455 
 
 wage problem, the, 455 
 
 wage system, the, 461, 462, 463 
 
 wages, 461, 462, 463, 464, 465, 473; 
 defined, 449; and profits, 452- 
 453; real, 453; effect of machin- 
 ery upon, 455-456; and rent, 457, 
 458 
 
 Walker, F. A., 130, 145, 200, 311 
 
 war, lessons of, 78 
 
 Warburg, Paul M., 318 
 
 Wat Tyler, 33 
 
 Watt, James, 43 
 
 Wealth, development of, 25; de- 
 fined, 80; derivation of, 81; 
 meaning of, 81, 82; private, 82; 
 public, 82; per capita, 83; and 
 property, 84, 85; and capital, 
 85-86 
 
 Wealth of Nations, 48 
 
 Webb-Pomerene Act, the, 626, 627, 
 629 
 
 Whiskey Trust, the, 564 
 
 White, Chief- Justice, 620 
 
 White, Horace, 265 
 
 Whitebread, Samuel, 410 
 
 William the Conqueror, 17 
 
 women and children, employment of, 
 
 45 
 Wyclif, John, 30 
 
 Young, Prof. A. A., 613 
 Young, Arthur, 59 
 

 
 
 111