UC-NRLF
POLITICAL ECONOMY FOR
BEGINNERS
MACMILLAN AND CO., LIMITED
LONDON . BOMBAY . CALCUTTA
MELBOURNE
THE MACMILLAN COMPANY
NEW YORK . BOSTON . CHICAGO
ATLANTA . SAN FRANCISCO
THE MACMILLAN CO. OF CANADA, LTD.
TORONTO
POLITICAL ECONOMY
FOR BEGINNERS
BY
MILLICENT GARRETT FAWCETT, LL.D,
TENTH EDITION
MACMILLAN AND CO., LIMITED
ST. MARTIN'S STREET, LONDON
1911
vv
Copyright
First Edition 1870, Second 1872, Third 1874, Fourth 1876,
"80, Sixth 1884, Seventh 1889, Eighth 1896,
Ninth 1904, Tenth 1911.
RICHARD CLAY AND SONS, LIMITED,
BRUNSWICK STREET, STAMFORD STREET, S.E., AND
BUNGAY, SUFFOLK.
PREFACE TO THE FIRST EDITION
WHEN I was helping my husband to prepare a third
edition of his Manual of Political Economy ', it occurred
to us both that a small book, explaining as briefly as
possible the most important principles of the science,
would be useful to beginners, and would perhaps be
an assistance to those who are desirous of introducing
the study of Political Economy into schools. It is
mainly with the hope that a short and elementary
book might help to make Political Economy a more
popular study in boys' and girls' schools that the
following pages have been written. In order to adapt
the book especially for school use, questions have been
added at the end of each chapter.
CAMBRIDGE, 1870.
3G0465
PREFACE TO THE SECOND EDITION
IN preparing a second edition of this little book, I
have made no alterations in its general character and
scope. Each page has, however, been carefully revised,
and at the end of each chapter I have added, after
the questions, a few little puzzles, which the learner is
expected to be able to solve for himself or herself;
they may also, in cases where this book is used in a
class, serve as a vehicle for introducing a discussion.
I am greatly indebted to Mr. E. E. Bowen of Harrow
School for his kindness in suggesting this addition ; and
I am also specially indebted to Prof. J. E. Cairnes for
many most valuable criticisms, of which in preparing
this edition I have largely availed myself.
LONDON, 1872.
PREFACE TO THE FIFTH EDITION
THE principal alteration in this edition of Political
Economy for Beginners, is the adoption of Prof. Jevons'
enumeration of the qualities which should characterise
the substance selected to serve as money. I have gone
through each chapter very carefully, and have altered
and enlarged a great many of the illustrations, en-
deavouring to make them apposite to the economic
conditions of the present time. I have also added an
index at the end of the book, which I hope may add
to its usefulness to teachers and their pupils.
LONDON, June 1880.
PREFACE TO THE SIXTH EDITION
I HAVE endeavoured in the present edition to make such
alterations and additions to this little book as the cir-
cumstances of the time seemed to require. The principal
among the latter are references to the theories propounded
by Mr. Henry George in Progress and Poverty, and to
recent experiments in England and on the Continent of
Europe in co-operation and profit sharing. Mr. Sedley
Taylor, Trinity College, Cambridge, has made a special
study of the subject of profit sharing, and I am mainly
indebted to him and to his book {Profit Sharing, by
Sedley Taylor, M.A., Kegan Paul and Co.) for the facts
contained in the present edition.
September 1884.
PREFACE TO THE SEVENTH EDITION
THIS edition has been prepared without making any
material alteration in the plan or character of Political
Economy for Beginners. As on former occasions, I have
brought the little book up to date as to facts and
figures, and I have substituted new illustrations, in some
cases, in the place of old ones. It has also been
endeavoured to throw some light, from the teaching
of economics, on one or two of the problems of the
present day, such as that which is associated with the
words "the unemployed." The facts and figures I
have used are for the most part taken, unless some other
authority is quoted, from the Statesman's Year Book
1887, published by Messrs. Macmillan and Co., and
from the Statistical Abstracts for Great Britain and
foreign countries published annually as blue-books.
LONDON, December 1888.
PREFACE TO THE EIGHTH EDITION
THE principal changes in the present edition are in the
form of expansions. Socialism, or, as it is now some-
times called, collectivism, is rather more fully treated
than in former editions. A similar remark applies to
the subject of bi-metallism.
The recent changes in the history of co-operation and
co-partnership rendered it necessary to treat this subject
in a new chapter, in which attention has been called,
among other things, to the beginning of agricultural
co-operation in Ireland, to the remarkable success of
the Raiffeisen credit banks in Germany and Italy, and
to the efforts now being made to start similar organ-
isations in the United Kingdom.
The effect on the price of agricultural produce brought
about by cheapening and facilitating its transit from the
most distant markets, is one of the most important
economic facts of our time ; and has modified many of
the conclusions formerly arrived at upon the effect of
increased population on the rent of land and on the
price of food. By taking account of these and other
changes in economic development, I have endeavoured
to bring this little book up to date, and I hope it may
still prove helpful to beginners.
LONDON, Jtily 1896.
PREFACE TO THE NINTH EDITION
IN preparing a ninth edition of this little book, I have
acted on the same principles which have guided me on
previous occasions. The pruning knife has been used
and dead wood cut out. New examples have, in many
instances, been given, taken from recent events, such as
the South African War, the Brussels Sugar Convention,
the passing of another Irish Land Act, the development
of agricultural and industrial co-operation in England
and Ireland, and the fiscal controversy of 1903-4.
In some or all of these the intelligent boy or girl is
already interested or prepared to be interested. My
wish is that this little book should help towards the
understanding of these and similar subjects and in the
application of economic principles to the problems of
every day.
I am much indebted to Sir George Livesey for in-
formation concerning the continuous growth of co-
partnership in the South Metropolitan Gas Works; to
Lord Monteagle and to the Rt. Hon. Sir Horace
Plunkett for an account of the satisfactory growth of
the Raiffeisen banks and other forms of agricultural
co-operation in Ireland.
xii PREFACE TO THE TENTH EDITION
For statistics I have relied on the Statistical Abstracts,
the Board of Trade Blue Book, Cd. 1761, 1903, Mulhall's
Dictionary of Statistics, The Statesman's Year Book and
the Journals of the Royal Statistical Society.
LONDON, March 1904.
PREFACE TO THE TENTH EDITION
IN preparing the tenth edition of this little book my
thanks are due for valuable information courteousl)
afforded by the Rt. Hon. T. W. Bailey of the Irish
Land Commission ; the department of Agriculture and
Technical Instruction for Ireland; and the Irish Agri-
cultural Organisation Society.
For other statistical information I have relied upon
the Statistical Abstracts for the United Kingdom and for
Foreign Countries and upon The Statesman's Year
Book.
My aim has been as heretofore to bring, the book up
to date by deleting illustrations which had become
obsolete, and by adding new ones suggested by recent
events. I hope in this way to keep up the living interest
of the subjects dealt with.
LONDON, October 1911.
INTRODUCTION
Political Economy is the science which investigates
he nature of wealth, and the laws which govern its
'reduction, Exchange and Distribution.
As \vealth is the subject of political economy it is necessary
t ) understand precisely what wealth is.
Wealth is anything which has an exchange value.
' his definition will be readily understood if the student re-
c dls some things which, however useful and indispensable,
c mnot be considered wealth. Thus, the air we breathe has
n > exchange value ; no one will exchange anything for any
q aantity of air, because everyone can freely and without any
1; bour obtain as much air as he requires. In the same way
tl e light of the sun has no exchange value. In many places
\\ iter has no exchange value. Water, however, acquires an
e: change value in all places where the natural supply is
r sufficient to meet the wants of the inhabitants. In large
f vvns, for instance, water is supplied by means of canals and
ac ueducts, and in this case it has an exchange value, and
m ly consequently be regarded as wealth.
Many most mischievous errors have been fallen into by
persons who have mistaken the true nature of wealth. For-
merly it was almost universally considered that " wealth " and
money" were synonymous terms. Acting on this belief,
the wealth of a country was estimated by the amount of gold
and silver it contained ; and artificial restraints were placed
upon commerce, with the view of preventing the precious
B
2 INTRODUCTION
metals' from' bemg sent- out- of the- country. There are many
excuses for the persons who made the mistake of confound-
ing money and wealth. Like many others, they mistook the
sign for the thing signified. Wealth is always estimated in
money. The income of a rich man is said to be so many
thousand pounds ; the national revenue and the national
expenditure are said to be so many million pounds.
These and hundreds of similar facts caused the true nature
of money to be misunderstood. The best way of arriving at
a trustworthy conclusion respecting it is to look back into
history, and see what other nations have done who have not
made use of gold and silver coin. The money of the Chinese
once consisted of small cubes of pressed tea ; there are
certain tribes of Indians who use a sort of shell as money ;
the pre-historic Greeks used cattle as a medium of exchange,
and they substituted pieces of metal impressed with the image
of an ox only when they began to trade across the seas.
Adam Smith speaks of some Arabs who also used cattle for
money ; they fell into the same error as those who thought
that wealth was the same thing as money, for they thought
that no country could be wealthy that did not possess vast
herds of cattle. When they first heard of France and wished
to form an idea of its wealth, they asked how many cattle it
contained. There have been times in the history of every
country when the use of money, even of a rude description,
was unknown ; all exchange then had to be carried on by
means of barter.
Thus if a man who had two boats were in need of a spear,
he would offer a boat in exchange to anyone who would give
him a spear. Though commerce could not flourish under
such a system of exchange as this, yet it is idle to assert that
these barbarous communities possessed no wealth, for we
previously explained that wealth was anything that had an
exchange value.
The real nature of Money. What then is money? It
is a measure of value, and a medium of exchange. When it
is said that money is a measure of value, it is virtually
affirmed that any substance is money which is selected by
universal consent to serve as a standard by which the value
INTRODUCTION 3
of all other commodities may be estimated. That this sub-
stance need not be gold or silver has been shown above ; in
fact, any article might be selected to serve as a measure of
value.
The meaning of the assertion that money is a medium of
exchange is that the exchange of commodities is usually
transacted through the medium of money. Thus a farmer
who wished to sell barley and buy guano would not probably
effect a direct exchange of these two commodities ; he would
sell the barley for money, and with this money he would
buy the guano.
The mercantile system. The error of identifying wealth
with money led to the policy, briefly alluded to above, of
doing everything to foster the accumulation of gold and
silver. With this end in view statesmen did all they could
to encourage the export trade of their own country, and
to discourage importations from abroad by placing heavy
duties on imported goods, and by giving bounties on exports.
At the time when this policy was prevalent in England, very
large duties were placed upon French wine, brandy, silks, lace,
etc., with the object of preventing large quantities of these
commodities being bought in England ; for this, it was
argued, would decrease England's wealth by causing money
to be sent from England to France. The fallacies of this
policy, which is known as the Mercantile System, were first
exposed by Adam Smith in his great book The Wealth of
Nations, published in 1776. In this work he pointed out the
errors of a book called England's Treasure in Foreign
Trade, which was the guide of the statesmen who carried
out the Mercantile System. The object of this book
actually was to shew that home trade was of little conse-
quence, because it did not increase the amount of gold and
silver in the country. Adam Smith's work explained, for
the first time in England, the true nature of money, and
shewed that if all restrictive duties were discontinued the
exports and imports of a country would tend to be equal.
Free trade. This part of our subject will be more fully
explained in a subsequent chapter ; at present it is only
necessary to add that the policy of removing restrictive
E 2
4 INTRODUCTION
duties on imports and allowing commerce to take its natural
course is known as the Free Trade Policy.
With these few introductory remarks we pass to the con-
sideration of the first of the three great branches into which
our subject is divided, viz., the Production of Wealth.
QUESTIONS ON THE INTRODUCTORY CHAPTER.
1. What is Political Economy?
2. What is Wealth ?
3. What is Money ?
4. Enumerate some of the articles which have at various
times been used as Money.
5. What is Barter ?
6. Describe the Mercantile System.
7. Whence arose the errors of this system ?
8. By whom and how were the errors of the Mercantile
System first combated ?
9. By what Policy has the Mercantile System been
superseded ?
1. Could a man be said to be wealthy, if he had not
sixpence in the world?
2. Was the Spartan nation poorer because it prohibited
gold?
3. Is barter quite extinct in England ?
SECTION I
The Production of Wealth.
IT was stated in the Introduction that Political Economy
investigated the laws which regulate the Production, the
Exchange and the Distribution of Wealth.
The three requisites of Production. It is proposed in
this section to dwell solely upon the Production of Wealth.
There are three requisites of production, by the combined
agency of which wealth is produced. These are Land,
Labour and Capital. In order that the various functions of
these three requisites may be clearly explained, and that the
peculiar office which each performs in the production of
wealth may be accurately defined, this section will be divided
into three chapters, under the heads of Land, Labour and
Capital.
CHAPTER I. On Land.
Land as an agent of Production. A few moments'
reflection will reveal the indispensable nature of the service
which land renders to the production of wealth. There is
no article of commerce the origin of which cannot be either
directly or indirectly traced to land. Look round the room
in which you sit, or look at the clothes you wear, and you
will notice that you can see nothing that has not been de-
rived from the land. A piece of woollen cloth, for instance,
is derived from the land. The wool from which it is made
has been originally taken from the back of a sheep, which
lived on the grass, turnips, etc., grown on the land. Calico
5
6 PRODUCTION SECT, i
can be traced even more directly to the land. The cotton
plant, from the fibres of which calico is made, is the pro-
duction of the land. All manufactured articles are made
either of animal, vegetable, or mineral productions, all of
which are derived from the land.
In fact the importance of land as an agent of production
is so great that the French economists, in the time of Adam
Smith, asserted that land was the sole source of wealth. It
will, however, be shewn that Labour and Capital are also
indispensable to the production of wealth.
Circumstances which increase the productive power
of land. There are many circumstances that increase the
productive power of land. The beneficial effects of the
artificial manures which chemistry has brought within the
reach of the farmer are well known. We need do no more
than allude to the modern inventions of the numerous
machines, such as the reaping and thrashing machines,
which do so much to increase the productive power of land,
labour and capital. Many large tracts of country, such as
the fens of Cambridgeshire, which were once useless swamps,
have been turned into rich corn land by means of drainage-
It is evident that the productiveness of such land is mainly
dependent on the labour and capital that have been devoted
to its improvement.
Large and small farming. Much controversy has been
carried on as to the relative advantages and disadvantages
of large and small farming. One of the principal advantages
of large farming is that it makes the use of improved
machinery much more available. A farmer who rents 800
acres will find it pay him to use the steam plough and steam
thrashing-machine ; and he will be able to avail himself or
all the latest improvements in the manufacture of agricultural
implements. A flock of 1000 sheep does not require twice
as many shepherds as a flock of 500. The housing of a
large number of cattle does not cost so much per head as
the housing of a smaller number.
The principal advantage of small farming is that the farmer
being himself a labourer, and being continually working
with and among his assistants, there is no probability of the
CHAP, i ON LAND 7
work being neglected ; the strongest motives of self-interest
prompting the farmer to the most strenuous exertions.
A distinction between peasant proprietors and
peasant tenants. While dwelling on the influence of
small farming in stimulating the industry of the farmer,
it should be stated that the remarks just made apply much
more powerfully in the case of peasant proprietors than in
the case of peasant tenants. Nothing can be more depress-
ing to the industry of the peasant tenant than to know that
the more he exerts himself the more certain he is to have
his rent raised. The peasant proprietor reaps all the fruit
of his hard work himself ; whereas the peasant tenant often
knows that increased exertions would benefit not himself
but his landlord. The peasant tenants in some parts of
Italy suffer almost incredible hardships from want of suffi-
cient food. Everything which their land produces, except
the barest pittance of Indian corn, is taken from them in the
form of rent. Ireland, before the passing of the Land Acts
of 1870, 1881, 1885, 1887, 1903-9, afforded another example
of the evils arising from the system of peasant tenant farmers.
Before the earlier of these Acts were passed, the tenant usually
held his land from year to year ; he was liable to have his rent
raised if he improved the land, and he was liable to arbitrary
eviction, without compensation for such improvements as he
had been able to carry out. The Act of 1870 gave him a
claim for compensation for improvements and for arbitrary
eviction ; and legalised the Ulster custom of the sale of the
tenant right. The Act of 1881 went a long way towards
giving the tenant the advantages of proprietorship, for it
conferred upon him the power to appeal to the Land Court
to fix a " fair rent " ; the rent so fixed was supposed by the
Act of Parliament to be unalterable for fifteen years, and
the tenant's interest in his holding thus created can be sold
by him, the landlord having merely the first choice of be-
coming its purchaser. The Act of 1885, generally known as
Lord Ashbourne's Act, enabled the tenant, with the consent
of his landlord, to become the purchaser of his holding ;
the money that he requires for this purpose is advanced by
the Government, and the tenant by paying four per cent, on
8 PRODUCTION SKCT. i
this sum for forty-nine years clears off both principal and
interest, and will become the owner of the fee simple of the
land. The interest paid to the Government is generally
about twenty per cent, less than the former rent. Another
Irish Land Act was passed in 1887, one of the provisions of
which legalised the lowering of the judicial rents fixed for
fifteen years by the Act of 1881, in accordance with the fall
in agricultural prices. The Act of 1903 (Mr. Wyndham's
Act) was a further extension of the principle of Lord
Ashbourne's Act. It authorised the advance to a body
called The Estates Commissioners of ^100,000,000, spread
over fifteen years, from the Imperial Exchequer, to be used
in making advances to tenants to enable them to purchase
the fee simple of their holdings ; and it likewise provided a
"bonus" of i 2,000,000 to be used to induce landlords to
sell on terms acceptable to the tenants. The Wyndham
Act broke down largely because it was based on the
expectation that all money to be advanced to purchasing
tenants could be provided by Government stock bearing
interest at 2| per cent. But it turned out after the passing
of the Act, that money could not be raised on these terms.
It was provided by the Act that any loss due to the issue of
the Stock at a discount should be borne by a fund known as
the Irish Development Grant. This fund soon became
completely exhausted owing to the continued and increasing
demands upon it. In the year 1909, agreements to purchase
were pending amounting to ^56,000,000, and owing to the
insufficiency of the Development Fund, the loss due to the
fall in the Government Stock would have been thrown upon
the Irish ratepayers, causing an annual charge on the rates
of about ,250,000 for sixty-eight-and-a-half years, or if all the
agricultural land in Ireland were sold the charge on
the rates would have amounted to ,877,000 annually.
Mr. Birrell, therefore, by his Land Act of 1909, provided
that for all pending purchases the loss should be borne by
the Treasury and not by the ratepayers ; while, as regards
future purchases, it was provided that vendors should be
paid in a 3 per cent, stock and the purchasers should pay
32 per cent, instead of 3^. The bonus to landlords to
CHAP, i ON LAND 9
induce them to sell was also modified by Mr. BirrelPs Act.
Formerly the bonus was a fixed percentage on the purchase
money. But Mr. Birrell's Act provides for a graduated
bonus ranging from 3 to 18 per cent., diminishing in
accordance with the number of years' purchase at which
the land is sold. The 12,000,000 limit to the total sum
available as bonus, was at the same time removed. 1
Most contradictory accounts are given by different writers
to the results of small proprietorship on the Continent,
it there are some agricultural products which are seldom
iccessfully cultivated in those countries where small farming
unknown. Fruit farming and poultry rearing are rarely
:cessful but in those localities where small farming pre-
tils. A similar remark applies to dairy farming. An
llustration of the difference between the agriculture of the
mtinent of Europe and England may be given by the fact
lat in 1909 the United Kingdom imported from foreign
nmtries no less than .7,233,932 worth of eggs. 2 This may
due in part to the soil and climate of some of the countries
Europe being more favourable for poultry farming than
lose of England ; but there must be other causes as well ;
>enmark, for instance, sends us annually more than
2,000,000 worth of eggs, 3 and it has not a better climate than
our own. A more powerful cause is probably to be found
in the fact that Denmark's chief source of wealth is
agriculture, and that the land is very much subdivided
into small holdings. The peasant farmer thinks no trouble
too great if it results in profit, and he is therefore
peculiarly successful in such an industry as poultry
farming, where everything depends on personal work and
constant attention to small details. English farming is done
on a much larger scale and in many districts by capitalist
farmers. Who has not heard in the country the continual
complaints of the difficulty of getting good milk and butter?
1 See short Sketch of the Irish Land Acts, Their History and
Development, by the Right Hon. W. F. Bailey, Estates Com-
missioner.
2 Statistical Abstract, United Kingdom, 1895-1909.
3 Statistical Abstract, Principal and Minor Foreign Countries.
io PRODUCTION SECT, i
People say " The farmers' wives are such fine ladies now, that
they are too grand to do what their mothers and grand-
mothers did before them, that is, get up at five o'clock and
do the dairy work themselves." This remark points out the
difference between large and small farming ; the fact being
that in modern times the size of farms has very greatly
increased ; the farmer and his wife are therefore removed
from the social position they formerly occupied, and they will
no longer work like their own labourers. When everything
has been said on both sides respecting the advantages of
large and small farming, the question still remains an open
one. In a future chapter it will be pointed out that there is
a way of combining the advantages of both systems, by
giving labourers a direct pecuniary interest in the soil which
they cultivate.
QUESTIONS ON CHAPTER I. On Land.
1. What are the three requisites of the Production ot
Wealth ?
2. Shew that Land is an indispensable agent of Production.
3. Mention some of the most obvious means of increas-
ing the Productiveness of the Land.
4. Enumerate some of the advantages and disadvantages
of large and small farming.
5. Why should a distinction be made between peasant
proprietors and peasant tenants ?
1. If the Irish Land Acts have the effect of consolidating
the small farms into a smaller number of much larger farms,
would this probably cause any change in the production of
butter in Ireland?
2. Milton exchanged the copyright of Paradise Lost for
^15. It had an exchange value and was consequently
wealth. What had Land and Capital to do with the pro-
duction of this wealth ? 1
1 The French socialist Fourier, in the scheme which he elaborated
for the reconstruction of society, placed ' ' Talent " among the re-
quisites of Production, and assigned to it a certain definite share
(one-fourth) of the wealth resulting from the combined efforts of the
members of the society.
CHAP, ii ON LABOUR 11
CHAPTER II. On Labour.
Labour a requisite of Production. In the Introduction,
when the nature of wealth was explained, an example was
given of a commodity which in some circumstances cannot
be regarded as wealth, and yet in other circumstances
certainly constitutes wealth. It was shewn that water has
no exchange value so long as it is supplied spontaneously in
sufficient quantities by the bounty of nature, because no one
will buy what he can obtain gratuitously and without labour ;
but water immediately becomes wealth when labour is re-
quired to convey it to the spot where it is needed. In the
same manner, all commodities which have an exchange
value have been made available for consumption by many
different kinds of labour. It is in fact almost impossible to
enumerate all the different kinds of labour which have been
required to produce such a simple thing as bread. Bread,
it is true, may be said to be the result of the labour of the
baker, but his work is only a very small part of the great
amount of labour employed in producing bread. There are
the miller who grinds the wheat, the reaper and the sower,
the ploughman who prepares the land, the agricultural
implement maker who manufactures the plough, and the
miners who obtain the metal of which the plough is made ;
besides these there are the waggoners, bargemen, sailors,
and others, who convey the materials to the places where
they are wanted ; the shipwrights who build the ships, and
so on in never-ending succession.
Definition of the exact service which Labour renders
to Production. The exact service which Labour renders
to the production of Wealth is defined by Mr. Mill to be
"putting things into fit places," or "moving one thing from
or to another." This simple definition is so comprehensive
as to include all the varied operations of industry. " Labour
then, in the physical world, is always and solely employed in
putting objects in motion ; the properties of matter, the laws
of nature, do the rest."
Take as an example the labour which is employed in
building a house. How are bricks made ? By moving a
12 PRODUCTION SECT, i
certain kind of clay from the place in which it is found ;
by pressing it into a mould and by bringing it in contact
with fire. How are planks made ? By moving an axe through
a tree, and by moving a saw through the fallen trunk. It is
unnecessary to enumerate further instances of the application
of the principle that " man has no other means of acting
upon matter than by moving it." (Mill's Principles of
Political Economy ', pp. 32, 33.)
Many examples of the extent to which skilled labour
can add to the value of commodities may be taken from
the various operations of watch-making. For instance, one
pound weight of the microscopically small steel screws used
in watches is worth six pounds weight of pure gold, or more
than ,280. In an article on watch-making by Miss Faithfull
in the Victoria Magazine, the following description is given
of the "hair-spring" which every watch contains : "A hair-
spring weighs only 15^5^ of a pound troy. In a straight
line it is a foot long. With a pair of tweezers we draw one
out in spiral form till it is six inches long ; but it springs
back into place, not bent a particle from its true coiling. It
must be exquisitely tempered, for it is to spring back and
forth 18,000 times an hour, perhaps for several generations.
A pound of steel in the bar may cost a dollar ; in hair-springs
it is worth 4,000 dollars."
Though no wealth can be produced without labour, yet
there are some kinds of labour which may be very useful but
which do not assist the production of wealth. This labour is
called " unproductive." Political economists have differed
widely in their definitions of unproductive labour. This has
partly arisen from some economists attaching an implied
reproach to the epithet " unproductive." There is however
no reproach conveyed in this term, unless the production of
wealth is the only worthy object of existence. Mr. Mill's
definition of Productive Labour is " that which produces
utilities fixed and embodied in material objects."
Labour which is indirectly productive. The question
then arises, " Is the labour of a teacher unproductive?" A
schoolmaster may not with his own hands produce " utilities
fixed and embodied in material objects," but through his
CHAP, ii ON LABOUR 13
instrumentality the number of productive labourers may be
vastly increased. Let us suppose, for example, that a school-
master educates fifty boys taken from lives of idleness and
vice in the streets of London ; if he trains them in habits of
intelligent industry, a very great number of them will prob-
ably become productive labourers. Is the inventor of a
machine an unproductive labourer when by means of his
invention the productiveness of other men's labour may be
increased a hundredfold ? These questions must certainly
be answered in the negative. A distinction must therefore
be drawn between labour which is indirectly productive and
that which is directly productive. In the former class we
place the labour of the schoolmaster, the inventor, the police-
man, etc. ; in the latter we place the labour of the shipwright,
the shoemaker, and all those labourers whose manual work
produces utilities fixed and embodied in material objects.
Unproductive Labour. Unproductive Labour is that
which neither directly nor indirectly helps to increase the
material wealth of the community. The labour of an opera
singer, an actor or a public reader is unproductive. The
labour of a statesman is generally unproductive, although
occasionally it is indirectly productive of wealth. The aboli-
tion of the corn laws, for instance, and the adoption of a
free trade policy, caused an enormous increase in the material
wealth of this country. 1 But it must be remembered that the
work of statesmen in getting rid of protection consisted in
releasing trade from the shackles which the mistaken policy
of previous generations of statesmen had imposed upon it.
It is very often the case that when the labour of statesmen
appears to be indirectly productive in the highest degree, it
gains this characteristic because it undoes the mistakes
of former statesmen. It is therefore very difficult to say
whether on the whole the labour of statesmen is indirectly
productive of wealth, except in so far as it guarantees the
security of life and property.
Sometimes the labour of productive labourers turns out to
1 This statement has recently been disputed by those who desire
to revive protective duties. It can, however, hardly be denied on a
review of the facts that free trade has caused an immense improve-
14 PRODUCTION SECT, i
be unproductive ; as for instance in the case of the laboui
which produced the numerous unfinished canals which were
abandoned about the time when it became apparent that rail-
roads would supersede water-carriage. On the contrary the
ment in the condition of the general mass of the people of this
country. In 1842, when Sir Robert Peel began his series o:
financial reforms which culminated in the entire abolition of pro
tection, nearly 1200 different articles, many of them of primar)
necessity, were subjected to import duties. Wheat was more thar
three times its present price, wages were low, distress was chronic.
In the agricultural districts of Somersetshire, Wiltshire and Dorset-
shire wages were only Js. or 8s. a week. In Lord Morley'.'
Life of Cobden the weekly budget of a farm labourer in Somerset
shire, with a wife and five children, in the year 1840 is given :
s. d.
Half a bushel of wheat 40
Grinding, baking, and barm 6
Firing 6
Rent i 6
6 6
leaving out of the total earnings o seven shillings a balance of six-
pence, out of which to provide a family of seven persons with
clothing, tea, sugar, potatoes, and all the other necessaries of human
existence. It is not claimed by the advocates of free trade that the
whole of the improvement between 1840 and the 2Oth century is due
to free trade. It is in part due to education, to improved means oi
communication both by sea and land, to the greater productiveness
of labour in consequence of steam and better machinery. But all
these ameliorating circumstances have been at least as actively
operative in Germany as they have been in England ; the main in-
dustrial difference between England and Germany is that while
England for more than half a century has enjoyed the advantages of
free trade, and has had the world for her granary and her stock-
farm, Germany has remained a strictly protectionist country. A
comparison of the wages, hours of work, and cost of bread in Ger-
many and in England is very strikingly in favour of England. Com-
paring the wages in fifteen skilled trades in both countries the Board
of Trade Blue Book, Cd 1761, shews (p. 289) that they are 425. a
week in England, against 24^. in Germany. Taking larger groups
of trades it is estimated that if 100 represents an average family
income in the United Kingdom, 69 represents the corresponding
figure in Germany. The hours of labour are also about half as long
again in Germany as in England ; while the price of wheat, which
was TJOS. lid. a quarter in England in 1909 was 48^. 5^/. a quarter
in Germany, the excess in Germany being principally attributable
to the import duty of js. 1\d.
CHAP, ii ON LABOUR 15
labour 01 an unproductive labourer sometimes becomes, as it
were by an accident, productive of wealth. Through the labour
of scientific chemists, discoveries have been made which
have greatly facilitated many industrial processes. It will
thus be seen that it is sometimes difficult to decide concern-
ing any class of labourers whether their labour will prove
productive or unproductive. Before a final decision can be
given the result of their work must be known. The more
difficult a piece of work is, the more impossible is it to tell
beforehand, as the proverb says, whether the workman " will
make a spoon or spoil a horn."
Adam Smith's Three Advantages of Division of
Labour. There are many circumstances which greatly
increase the productive power of labour. Foremost among
these must be placed the Division of Labour. In many
industrial processes, such as that of making a glass bowl, a
great number of workmen are employed, each one of whom
performs a single operation. One man blows the glass into
shape ; another polishes it ; another makes deep flutings on
it ; then it is repolished by another ; and after a variety of
more or less delicate operations, a highly skilled workman
engraves upon it some beautiful and artistic figures. The
various advantages which are produced by the division of
labour were enumerated, as follows, by Adam Smith. ist r
The dexterity of the workman is increased. 2nd, Time is
saved by the workman not passing from one employment to
another. 3rd, Suitable machinery is more likely to be
invented, if the mind of the workman is concentrated on a
V- "special process.
An illustration of the first advantage. The increased
dexterity of the labourer is by far the most important advan-
tage derived from the division of labour. In some of the
manufactures of such a town as Birmingham, the dexterity
of the workmen produced by division of labour is quite mar-
vellous. In the pen manufactory the sole occupation of some
of the workmen is to take the pens from the machine in
which they are made : this is done with such wonderful
rapidity that the spectator can scarcely follow with his eye the
movement of the workman's hand. This dexterity can only
1 6 PRODUCTION SECT, i
be acquired by the workman devoting himself to a single
operation.
An illustration of the second advantage. An illus-
tration of the advantage gained by the workman not passing
from one employment to another may be taken from what
every one has seen at a railway station. When the lamps
in the carriages are being taken out, one man goes on the
top of the carriages, takes out a lamp, throws it down to a
man who puts it into a rack for the purpose of holding lamps.
In this manner thirty or forty lamps can be taken out in a
very few minutes ; whereas if one man performed the whole
of the work, and had to ascend and descend the carriages
with every two or three lamps he removed, it w r ould probably
take him more than half an hour to take out as many as with
the assistance of another man he removes in five minutes.
An illustration of the third advantage of the division
of Labour. Adam Smith says that the third advantage of
the division of labour is the invention of a great number of
machines which facilitate and abridge labour, and enable one
man to do the work of many. Adam Smith gives a good ex-
ample of the importance of this advantage. When the first fire-
engines were constructed a boy was employed in opening and
shutting a valve. This was his only work, and he thought
that if he could contrive some plan by which the valve
opened and shut without his assistance, he could spend all
his time at play ;. he accordingly tied a string from the
handle of the valve to another part of the machine, by means
of which the valve opened and shut at the proper time with
out demanding any attention on his part.
A fourth advantage of division of Labour. Adam
Smith failed to mention one other most important advantage
derived from the division of labour. The omission was first
pointed out by Mr. Babbage. This advantage is that each
workman can be employed solely upon the work which he
can do best. It is very wasteful to employ a man who is
capable of doing work worth TOJ. a day, to do some unskilled
work worth only 2s. a day. The old saying, that it is
no good to put a race-horse to plough, may be used to
suggest an illustration of the fourth advantage of division of
CHAP, ii ON LABOUR 17
labour. To return to our example of the glass bowl ; it
would manifestly be quite useless to employ an unskilled
labourer to engrave a delicate pattern upon the glass ; and
it would be very wasteful if the skilled workman, who is
perhaps paid at the rate of ,$ per week, were obliged to
perform operations which could be equally well done by a
boy receiving 8s. or 9.9. per week.
Perhaps it may not be out of place to mention one or two
disadvantages connected with the division of labour. A
turner who spends his whole life in making front legs of
chairs has no responsibility for the chair as a whole : he
merely turns out, to pattern, so many gross of legs of chairs
per week or month. Hence the intelligence and artistic
perception of the workman are not awakened. Chairs are
manufactured which are neither strong, comfortable nor
beautiful ; and this is probably due to the division of labour
which makes no one man responsible for the chair as a whole.
Excessive division of labour also tends to reduce the labourer
to a mere machine : he can perform one particular operation
with great dexterity ; but if his task is changed his skill and
usefulness vanish. His intelligence may be naturally good
and it may have been developed by the other circumstances
of his life ; but where division of labour is carried to a very
great length, it is hardly developed by his daily work.
Free Trade a division of Labour. The division of labour
is a great subject, and should be carried beyond the work-
shop and the manufactory. Free trade is simply an exten-
sion of the principle of the division of labour. By breaking
down the artificial barriers which have been erected between
nations, each country, instead of being obliged to depend
entirely on home manufactures, can devote its energies to
those branches of trade or agriculture to which natural
circumstances or national peculiarities have especially
adapted it.
Co-operation of Labour. Great as the effect of the division
of labour is in increasing its productiveness, it is probable
that the co-operation of labour is a still more powerful
agent in augmenting the efficiency of labour. Co-operation
of labour has been defined as "the combined action of
1 8 PRODUCTION SECT, i
numbers" ; the meaning of the term may be illustrated by
an example. In hauling a life-boat up a steep beach the
combined labour of a great number of men is needed, and in
this way the boat is drawn up in a comparatively short
time. If one man attempted to draw up the boat by himself
his labour would be thrown away.
Simple and complex Co-operation of Labour. There
are two kinds of Co-operation of Labour.
ist, Simple Co-operation ; or the co-operation which takes
place when several persons help each other in the same
employment ; for instance, in lifting a heavy weight, as in
the example just given.
2nd, Complex Co-operation ; or the co-operation which
takes place when several persons help each other in different
employments. An instance of complex co-operation of labour
may be found in the labour which is employed to manufac-
ture a piece of cotton cloth. In this case many different
kinds of labour, employed in different ways and in different
places, combine or co-operate together. Those who sow the
cotton seed, and after the pod is ripe pack it in bales for
exportation ; the sailors who convey it from America to
England ; the artisans who perform so many operations
upon the raw cotton before it is converted into cloth, com-
bine their labour in order to produce a piece of calico.
Another instance of complex co-operation, or several persons
helping each other in different employments, is found in the
assistance which agricultural labour tand manufacturing
labour render each other. In other words, when "one body
of men having combined their labour to produce more food
than they require, another body of men are induced to com-
bine their labour for the purpose of producing more clothes
than they require, and with those surplus clothes buying the
surplus food of the other body of labourers."
Mr. Wakefield's theory of Colonisation. A consider-
ation of the mutual benefits which town and country
labourers derive by exchanging the surplus products of their
industry formed the basis of Mr. Wakefield's theory of
Colonisation.
Mr. Wakefield pointed out that the plan of granting to
CHAP, ii ON LABOUR 19
each family of settlers in a new colony a tract of fertile land,
large enough to supply all its wants, tends directly to dis-
courage the growth of commerce and the progress of civilisa-
tion. A certain amount of rude abundance may be obtained,
but each family being isolated and independent there is
neither inducement nor opportunity for enterprise, and no
motive to produce more than is required for the consumption
of the household. To remedy this Mr. Wakefield proposed
that, as far as possible, there should be, in every colony, a
town population side by side with the agricultural population.
Division of labour would thus be greatly encouraged, and
production would be stimulated, for a market would be
found for the sale of agricultural produce in the town ; the
inhabitants of which would in return be compelled to ex-
change some articles of manufacturing industry.
The use of Tools and Machinery. Having mentioned
two causes which act very powerfully in increasing the produc-
tiveness of labour, viz. Division of Labour and Co-operation
of Labour, we now pass to a third, the importance of which
must be evident to all ; viz. the use of tools and machinery.
There is no industry which is independent of the use of
tools ; even the rudest agriculture could not be carried on
without a spade, nor the plainest sewing without a needle ;
and in nearly all branches of industry the introduction of
elaborate machinery is rapidly becoming general. There
are two ways in which machinery increases the productive-
ness of labour. One in which it supersedes or takes the
place of the labour of individuals, as in the case of the reap-
ing-machine, or the sewing-machine ; and the other in which
machinery achieves that which no amount of unassisted
human labour could perform ; such as propelling an express
train at sixty miles an hour. In the first case machinery, by
enabling a few persons to do the work previously performed
by a great many, sets free a large quantity of labour, which
seeks employment in other directions. In the second case
it opens new fields of enterprise, which tend to absorb the
labour set free by the introduction of machinery into other
industries.
The productive power of Labour is increased by the
C 2
20 PRODUCTION SECT. I
skill, intelligence, morality and trustworthiness of the
labourer. The three principal material agencies have now
been mentioned which increase the productive power of
labour. But there are other than material agencies, which
must not be passed over. These are the skill, intelligence,
morality and trustworthiness of the labourer.
That the skill of the workman increases the pioductive
power of labour is so self-evident as scarcely to need illus-
tration. In many industries the necessary skill cannot be
acquired without a long apprenticeship, and it is frequently
several years before the labour of the apprentice is remuner-
ative to his master ; for from want of skill the apprentice
frequently spoils the materials of his industry.
The Intelligence of the Labourer. The importance 01
the diffusion of intelligence among workmen and work-
women, as a means of increasing the productiveness of
labour, can hardly be exaggerated. An unintelligent work-
man performs his task mechanically ; he does what he has
learnt to do, and no more ; he suggests no improvements.
If the industry in which he is engaged becomes depressed
and he consequently loses his employment, he can turn his
hand to nothing else ; and he and his family soon become
dependent on the rates, or on private charity.
The Morality of the Labourer. The morality of the
labourer is also an important agent in increasing the pro-
ductiveness of labour. All intemperance greatly diminishes
physical strength. The habitual drunkard is usually incap-
able, even when he is sober, of performing any severe labour,
and habits of intemperance nearly always produce premature
decay and death. The morality and the intelligence of the
labourer are intimately connected with each other. An un-
intelligent person can never enter into intellectual enjoyment,
and can seldom appreciate innocent pleasures. The general
diffusion of education is very important from the economical,
as well as from other points of view. Education stimulates
the intelligence and thus makes the labourer more efficient ;
it also tends to make him more temperate, because it opens
to him new sources of healthy and innocent pleasure and
recreation. There was a very decided decrease in crime
CHAP, ii ON LABOUR 21
and pauperism in England and Scotland after the passing
of the Elementary Education Act in 1870; and it maybe
fairly concluded that to a considerable extent the improve-
ment was due to education. The decrease in crime between
1870 and 1895 was about 25 per cent., and the decrease in
pauperism was about 20 per cent. This decrease in crime
and pauperism in England and Scotland since 1870 is the
more satisfactory', when it is remembered that it is an actual
decrease, and not merely a decrease in proportion to the
numbers of the population : the diminution in crime and
pauperism having been accompanied, in (ireat Britain, by
an increase of population, during the same period, from
25,000,000 in 1870 to 34,000,000 in 1895.
The Value of Trustworthiness in the Labourer. If
labourers are untrustworthy, it is necessary to employ persons
whose only business is to see that the labourers do their
work. If people could be trusted, the labour of overlooking
and watching might be saved, and drafted off to some other
employment. It must also be remembered that if labourers
require to be watched they will always find opportunities of
shirking their work, no matter how careful the overlooker
may be. This is particularly the case in agriculture, where
the nature of the various occupations, and the great distance
over which the labourers are scattered, render supervision
extremely difficult.
Before leaving the subject of productive and unproductive
labour, it may be well again to enumerate those causes
which increase the productiveness of labour. These causes
are divided into two classes :
MATERIAL and MORAL.
The Division of Labour.
The Skill, \
The Intelligence, j
The Morality,
The Trustworthi-
of the
Labourer.
The Co-operation of La-
bour.
The Use of Machinery
and Tools. | ness
Having now discussed the meaning of the terms pro-
ductive and unproductive labour, it will be necessary, before
investigating the functions of capital, that the student
22 PRODUCTION SECT. I
should know what is meant by productive and unproductive
Consumption.
Productive and Unproductive Consumption. The
distinction between productive and unproductive labour
must be borne in mind, and it will then be seen that the
productive labourer is also the productive consumer, and
vice versd. All the consumption of the productive labourer
is not productive consumption, but only that part of it which
is employed in sustaining him whilst he is engaged in pro-
duction. All luxuries must be consumed unproductively,
because the consumption of them does not assist future
production. All waste is unproductive consumption ; and
instead, as some suppose, of being beneficial to society,
is in reality injurious to it. If the mere consumption of
commodities were productive of wealth, no matter whether
the object for which they are consumed is useful or not, the
quickest way for a nation to become rich would be to burn
down houses, manufactories and public buildings, destroy
the railways and docks, and pull down the telegraph wires. 1
There can be little doubt that such conduct would soon
produce great activity in the building and engineering
trades ; but their gain would be at the expense of the
general loss. An American paper, after the great fire at
Chicago, remarked what an excellent thing that great
calamity had been for the building trade. The writer did not
seem to remember that all that the building trade gained,
and much more, had been lost by the owners of the property
that had been burnt. These remarks may be concluded by
a very excellent illustration in explanation of this point
taken from the writings of M. F. Bastiat : " Have you ever
witnessed the anger of the good shopkeeper Jacques Bon-
homme, when his careless son happened to break a square
of glass ? If you have been present at such a scene, you
will most assuredly bear witness to the fact, that every
one of the spectators, were there even thirty of them, by
common consent apparently, offered the unfortunate owner
1 War affords one of the most striking examples ot unproductive
consumption on a large scale.
CHAP, ii ON LABOUR 23
s
this invariable consolation, 'It is an ill wind that blows
nobody good. Everybody must live, and what would become
of the glaziers if panes of glass were never broken ?' Now
this form of condolence contains an entire theory which it
be well to shew up in this simple case. . . . Suppose it
cost 6 francs to repair the damage, you say that the accident
brings 6 francs to the glazier's trade that it encourages that
rde to the amount of 6 francs I grant it ; I have not
word to say against it ; you reason justly. The glazier
comes ; performs his task, receives his 6 francs ; rubs his
hands ; and in his heart, blesses the careless child. All
this is that which is seen. But if, on the other hand, you
come to the conclusion that it is a good thing to break
windows, that it causes money to circulate, and that the
encouragement of industry in general will be the result of
it, you will oblige me to call out, * Stop there ! your theory
is confined to that which is seen ; it takes no account of
that which is not seen.'
" It is not seen that as our shopkeeper has spent 6 francs
upon one thing he cannot spend them upon another. It is
not seen that if he had not had a window to replace he
would perhaps have replaced his old shoes, or added
another book to his library. In short, he would have
employed his 6 francs in some way which this accident
has prevented.
" Let us take a view of industry in general as affected by
this circumstance. The window being broken, the glazier's
trade is encouraged to the amount of 6 francs ; this is that
which is seen.
" If the window had not been broken, the shoemaker's
trade (or some other) would have been encouraged to the
amount of 6 francs ; this is that which is not seen.
" And if that which is not seen is taken into consideration,
because it is a negative fact, as well as that which is seen,
because it is a positive fact, it will be understood that
neither industry in general, nor the sum total of national
labour, is affected, whether windows are broken or not.
"Now let us consider Jacques Bonhomme himself. In
the former supposition, that of the window being broken, he
24 PRODUCTION SECT, i
spends 6 francs, and has neither more nor less than he had
before, the enjoyment of a window.
" In the second, where we suppose the window not to
have been broken, he would have spent 6 francs in shoes,
and would have had at the same time the enjoyment of a
pair of shoes and of a window.
" Now as Jacques Bonhomme forms a part of society, we
must come to the conclusion, that taking it altogether, and
making an estimate of its enjoyments and its labours, it has
lost the value of the broken window."
This illustration exhibits the folly of the excuse so often
made for waste and luxurious extravagance, i.e. that they
are good for trade.
A knowledge of one of the first principles of political
economy is sufficient to shew that society is no gainer by the
reckless expenditure of the spendthrift. This subject cannot,
however, be further investigated without entering upon an
explanation of the functions of capital. This introduces
another branch of the science of political economy, and
must be reserved for a future chapter.
QUESTIONS ON CHAPTER II. On Labour.
1. Shew that labour is indispensable to the production of
wealth.
2. Enumerate sojne of the different kinds of labour
necessary to produce such a commodity as bread.
3. Define the exact service rendered by labour to
production.
4. What is productive labour ?
5. Shew that unproductive labour is often indirectly very
productive.
6. How does division of labour increase its productive-
ness ? Quote Adam Smith's three advantages of division
of labour.
7. What fourth advantage has been pointed out by
Mr. Babbage?
8. Is there any drawback to the usefulness of division
of labour ?
CHAP, ii ON LABOUR 25
9. Shew that Free Trade is simply division of labour.
10. What is co-operation of labour ?
11. Define simple and complex co-operation.
12. What is Wakefield's theory of colonisation?
13. In what ways does machinery increase the pro-
luctiveness of labour ?
14. What moral agencies increase the productiveness
labour ?
15. What is productive and unproductive consumption ?
1 6. Shew by M. Bastiat's example that unproductive con-
imption does not conduce to national prosperity.
1. Is the air in a diving-bell wealth, and if so why ?
2. Is the labour of a boy writing Virgil for a punishment
luctive or unproductive ?
3. What kind of co-operation of labour is there in a game
of cricket, and what division of .labour between the different
parts of the human body ?
4. What are the advantages gained by division and
co-operation of labour in games ?
5. What is the effect of tue division of labour which now
universally prevails, on the highest kind of artistic skill ; as,"
for instance, Herr Kreisler's violin-playing ?
6. Is the co-operation of labour in a game of cricket
simple or complex ?
7. In a game of cricket is the co-operation of any labour
required except that of the players ?
8. Is smoking a productive or unproductive consumption
of wealth ?
9. Would it be good for trade if an earthquake shook
down all the houses in London ?
10. Would it be good for trade if an explosion of gun-
powder blew up the Houses of Parliament ?
11. State the economic result of your father's gardener
knocking off one of his quarts of beer.
12. What would become of undertakers if people left off
dying ?
26 PRODUCTION SECT, i
CHAPTER III. On Capita/.
It is erroneous to suppose that Capital and Money
are synonymous. Capital is sometimes spoken of as if it
were synonymous with money ; if this were so it would not
be true that Capital was one of the three requisites of the
production of wealth, for money in itself does not assist in
the production of wealth. A few pages back the use and
functions of money were explained, and if this explanation
is borne in mind it becomes evident that money is not iden-
tical with either wealth or capital. It must not be forgotten
that money is a measure of value and a medium of exchange :
in other words that it is a substance which is selected by
universal consent to serve as a standard by which the value
of all other commodities may be estimated, and which con-
sequently may be exchanged for all other commodities.
A Definition of Capital. Capital may be defined as
that part of wealth which is saved in order to assist future
production. It is sometimes objected that capital is not
really necessary to the production of wealth, because a
savage, for instance, may gather the berries and roots on
which he subsists without the help of any previously stored
up wealth ; or a civilised man' ' thrown naked on a desert
island may by his labour applied to the land gradually
accumulate and create wealth. The objection however is
fanciful rather than essential. The moment the savage
shapes a flint and uses it as a tool, he is no longer inde-
pendent of capital ; the moment Robinson Crusoe saves
back half the berries gathered on Monday to supply himself
with food while he works uninterruptedly at his canoe on
Tuesday, he is no longer without capital. It may be stated
broadly, that in the conditions of modern life and modern
industry, capital is one of the requisites of production.
An example of the service which Capital renders to
Production. Agricultural operations could not be carried
on unless the labourers were supported by wealth which
had been previously accumulated. Many months elapse
between the sowing of the seed and the time when the
produce of that seed is converted into a loaf of" bread. It is
CHAP, in ON CAPITAL 27
therefore evident that the labourers cannot liv r e upon that
which their labour is assisting to produce ; but they are
maintained by that wealth which their labour or the labour
of others has previously produced. This wealth is Capital.
Formerly the service which the wealth produced by past
labour rendered to future production was more apparent ;
because farmers, instead of paying their labourers in money,
paid them by giving them so much corn, potatoes, beer,
cider, etc. This was called paying "in kind." A some-
what similar method of paying labourers is also known as
" truck," which has been restrained and regulated by many
Acts of Parliament. The farmer now exchanges his wealth
for money, and distributes that portion of it which he gives
as wages to his workpeople in money also. Wages are now
almost universally paid in money ; this money is the repre-
sentative of wealth previously accumulated, and renders the
same assistance to future production as the food with which
the labourer was formerly remunerated. Let it then be
remembered that the wealth which is distributed as wages
to productive labourers is capital, and that it renders an
essential service to production by maintaining the labourer
whilst he is engaged in assisting future production. It must
always be remembered that the money, in which the wages
are distributed, is not capital : but the food, clothing, etc.,
for which this money is exchanged, are capital. Gold and
silver cannot of themselves maintain labour ; they are useless
unless they can be exchanged for the necessaries of life.
During the hardships suffered by the French army in the
retreat from Moscow, the difficulties of carriage made it
necessary to abandon the treasure-chest. Its contents were
seized by some of the soldiers, who rilled their pockets and
knapsacks with the gold. But they did not keep it long ;
it was entirely useless in alleviating their wretchedness ; the
weight of it, in fact, increased their distress. They soon
flung it out upon the snow rather than endure the burden
of carrying it. This incident illustrates the uselessness of
money unless it can be exchanged for commodities which
are capable in themselves of supporting life or increasing its
pleasures.
28 PRODUCTION SECT, i
It is objected by Mr. Henry George in Progress and
Poverty that it is fundamentally erroneous to say that wages
are paid out of capital. He contends that wages are paid
from the value of that which labour produces, and that labour
thus produces its own remuneration : he urges that if a
labourer is paid 16.?. for a week's ploughing, it is because a
ploughed field has a higher value than an unploughed field,
the labourer has created wealth, and the wealth thus created
or some part of it is the wages of labour. It is no doubt true
that the ultimate source of both wages and profits is the value
of that which labour and capital combine to create ; but as
long as the whole risk of the business is undertaken by the
capitalist, who pays to those engaged in the work certain
weekly wages for months and sometimes for years before the
commodity can be brought into the market, who pays those
wages even if the commodity should ultimately prove un-
saleable, it seems clear that wages are paid out of capital,
that is, out of wealth which has been saved with the object 01
assisting future production. The Kentish farmer, for in-
stance, pays wages for planting and training hops ; he does
this because he expects the price he will get for the hops will
repay him all he has spent in wages and something more ;
but this expectation may be disappointed ; a blight, a cold
June or a July hailstorm may render his crop almost worth-
less. If labour were paid directly from the value of the
commodity it produces, the labourers who planted and
trained the hops would in such a case get nothing ; but in
the present state of society labourers are not in a position to
take this risk, they have generally speaking no reserve on
which they can live if their labour results in a loss. Hence
they are compelled to sell their labour to the capitalist for a
definite price which is probably on an average lower than
what they would receive if they could afford to take the
risk of the fluctuations of trade : they however secure
the advantage, which in their present circumstances is
all-important, of a certain weekly income.
The wages-fund. The wealth which is expended in wages
is called by some economists the wages-fund. This expres-
sion must not be understood to imply that each capitalist
CHAP, in ON CAPITAL 29
possesses a special fund which he must devote to the pay-
ment of wages and to no other purpose ; but simply that in
the absence of great industrial changes, each industry requires
its wages-capital to be in a certain proportion to its other
capital, i.e. to its buildings, machinery and raw material :
and therefore that an increase in the non-wages capital, if
the conditions of industry remain unchanged, necessitates a
proportional increase in the wages capital or wages-fund. 1
It must be remembered that the wealth expended in wages
is not all employed to support productive labourers. A
considerable proportion of it is distributed to those whose
labour is strictly unproductive. Only that portion of the
wages-fund which supports productive labour is capital.
The wages-fund, therefore, resolves itself into two leading
divisions : ist, that which supports productive labour and
forms a part of the general capital of the country ; and 2nd,
that which supports labour not creative of wealth, and goes
in unproductive expenditure.
An example of another service which Capital renders
to Production. The maintenance of the labourer is not
the only service which capital renders to the production of
wealth. All wealth which is set aside to assist future pro-
duction is capital. Buildings, machinery and tools which
assist the production of wealth, constitute capital. Many
manufactures cannot be profitably carried on without the
erection of large buildings and costly machinery. Take
for an example the case of the manufacture of woollen cloth.
The manufacturer, besides the capital which he requires for
wages, must also have a vast amount of capital in buildings,
tools and machinery. It must not be supposed that the
whole wealth of the manufacturer is capital ; a part of his
wealth is spent in various luxuries ; that part only of his
wealth is capital " which he designs to employ in carrying on
fresh production." In the words of Mr. Mill, " What capital
1 It is not desirable in an elementary book to enter at length into
the controversy on the wages-fund theory. Those who wish to do
so are referred to Thornton On Labour, pp. 84, 85, Cairnes' Lead-
ing Principles of Political Economy, pp. 218, 219, and Prof. H.
Sidgwick's Principles of Political Economy, Chap, vin, Book 1 1.
30 PRODUCTION SECT, i
does for production is to afford the shelter, protection, tools
and materials which the work requires, and to feed and
otherwise maintain the labourers during the process. These
are the services which present labour requires from past, and
from the produce of past labour. Whatever things are
destined for this use destined to supply productive labour
with these various pre-requisites are capital."
A demand for commodities not a demand for labour.
It was said above that the part of the wealth of the manu-
facturer which he spends in luxuries does not constitute
capital, but that part only is capital which is employed in
carrying on fresh production. But it may be said that the
wealth which he gives for luxuries maintains labour. If, for
instance, he spends ^50 upon lace, may it not be asserted
that this ^50 maintains the labourers who make the lace,
and that therefore it is employed as capital, exactly in the
same way as if the manufacturer had employed it in his own
business ?
This brings us to a most important proposition respecting
capital, one which it is essential that the student should
thoroughly understand.
The proposition is this A demand for commodities is not
a demand for labour.
The demand for labour is determined by the amount of
capital directly devoted to the remuneration of labour : the
demand for commodities simply determines in what direction
labour shall be employed.
An example. The truth of these assertions can best be
shewn by examples. Let us suppose that a manufacturer of
woollen cloth is in the habit of spending ,50 annually in lace.
What does it matter, say some, whether he spend this ^50
in lace or whether he use it to employ more labourers in his
own business ? Does not the ^50 spent in lace maintain the
labourers who make the lace, just the same as it would
maintain the labourers who make cloth, if the manufacturer
used the money in extending his own business ? If he ceased
buying the lace, for the sake of employing more clothmakers,
would there not be simply a transfer of the ^50 from the
lacemakers to the clothmakers ? In order to find the right
CHAP, in ON CAPITAL 31
answer to these questions let us imagine what would actually
take place if the manufacturer ceased buying the lace, and
employed the ,50 in paying the wages of an additional
number of clothmakers. The lace manufacturer in con-
sequence of the diminished demand for lace would diminish
the production, and would withdraw from his business an
amount of capital corresponding to the diminished demand.
As there is no reason to suppose that the lacemaker would,
on losing some of his custom, become more extravagant, or
would cease to desire to derive income from the capital
which the diminished demand has caused him to withdraw
from his own business, it may be assumed that he would
invest this capital in some other industry. This capital is
not the same as that which his former customer, the woollen
cloth manufacturer, is now paying his own labourers with ;
it is a second capital ; and in the place of ^50 employed in
maintaining labour, there is now ^100 so employed. There
is no transfer from lacemakers to clothmakers. There is
fresh employment for the clothmakers and a transfer from
the lacemakers to some other labourers. (Mill's Principles
of Political Economy, vol. I. p. 102.)
This example illustrates the fallacy of the popular notion
that luxurious expenditure is good for trade. No benefit
is conferred upon the wages-receiving classes by the con-
sumption of luxuries ; and if the money given for luxuries
be withdrawn from such an employment as farming the
labourers suffer in two ways. In the first place, as shewn
in the above example, the wages-fund is diminished by an
amount corresponding to that given for the luxuries ; and in
the second place, the production of wealth and consequent
reproduction of capital are checked.
Another example. This last point can be best explained
by another example, which will further illustrate the truth of
the assertion that a demand for commodities is not a demand
for labour. A farmer sells his wheat for the purpose of
purchasing commodities. If these commodities are con-
sumed unproductively, an amount exactly equalling their
value is abstracted from the capital of the country. If
however these commodities are consumed productively, the
32 PRODUCTION SECT, i
capital of the country is increased. In other words, if with
the money obtained by selling his wheat the farmer buys
velvet, this purchase in no way assists production. It may
add to the pleasure and gratification of the purchaser ; but
when it is worn out, so much wealth has been consumed
without any productive result whatever. If however the
farmer uses the money for which he sells his wheat in paying
his labourers, they spend it in procuring the necessaries of
life ; these are consumed productively, for they maintain the
labourer while he is assisting to produce future wealth. In
the first case the purchase of the velvet leads to no result
beyond the pleasure of the purchaser ; in the second case
the purchase by the labourers of bread and beef leads to the
reproduction of wealth.
That part of wealth which consists of luxuries cannot be
consumed productively, therefore the consumption of luxuries
decreases the capital of a country ; for capital is that part of
wealth which is set aside to assist future production. But it
may be said that the capital of a country is decreased by the
persons who manufacture articles of luxury, and not by those
who purchase them. This remark would not be made if it
were remembered that articles of luxury would not be made
if there were no demand for them. A demand for com-
modities does not increase the amount of capital and labour, but
it determines the direction in which they shall be employed.
Another illustration. As a further illustration of the
principle just enunciated, let it be supposed that the owner of
a valuable picture intended to sell it, in order to buy jewelry.
The intended purchase, if it were carried out, would have no
more effect upon the wages-fund and the condition of the
labourer, than would be produced if by some accident the
picture were destroyed, and in consequence the purchase of
jewelry prevented. If the picture were destroyed the demand
for jewelry would be diminished by the amount of the value
of the picture ; the manufacturer of the jewelry would with-
draw a corresponding amount of capital from his business ;
but he would, in all probability, still continue to employ it as
capital, and therefore the capital of the country would be
neither increased nor diminished.
CHAP, in ON CAPITAL 33
Another aspect of the subject. It has been shewn that
the purchase of luxuries has no beneficial effect upon the
wages-fund and the condition of the labourer, but there is
still another case to be considered. A farmer, instead of
spending ,200 in employing labourers to improve his land,
spends the same sum in paying labourers for painting,
papering and otherwise decorating his house. In each case
the ^200 goes directly into the pockets of the labourers, and
it may therefore perhaps be thought that each employment
of the money is equally beneficial to the labourers. The
immediate result is the same, but the ultimate result may be
widely different. In the first case the wages are consumed
by labourers who cause a reproduction of wealth, from which
capital may be saved, and the wages-fund increased. In
the second case the benefit to the labourers cannot extend
beyoftd the time when they are actually receiving the wages ;
for their labour causes no reproduction of wealth, and con-
sequently it can produce no augmentation of the capital of
the country.
Capital is the result of saving. Enough has been said
to shew that capital is the result of saving, and not of
spending. The spendthrift who wastes his substance in
riotous living decreases the capital of the country, and there-
fore the excuse often made for extravagance, that it is good
for trade, is based upon false notions respecting capital. If
two tons of coals are consumed in producing an English pine-
apple in March, the wealth represented by that coal is wasted,
or at any rate it produces only the very inadequate return of
giving two or three people a pleasant taste in their mouths
for a few minutes. If the same coal had been used to smelt
iron or to make gas, it would have had a much more
productive result.
All unproductive consumption decreases the national
capital, or tends to prevent its increase. Almsgiving,
therefore, confers no benefit on the labourer comparable,
with a productive expenditure of wealth, which increases
the national capital, and consequently augments the wages-
fund.
Capital in order to fulfil its functions must be con-
D
34 PRODUCTION SECT, i
sumed. Though capital is the result of saving, it must not
be supposed that hoarded wealth increases the capital of the
country. Capital, in order to fulfil its functions, must be
consumed. It should be borne in mind that capital is that
part of wealth which is set aside to assist future production ;
and that the way in which it assists production, is in feeding
and maintaining the labourers, and in providing the shelter,
protection, tools and materials which the work requires. If
this definition is remembered, it becomes evident that all
capital is consumed, partially or wholly, in performing its
functions. The food which sustains the labourer is immedi-
ately consumed ; the buildings, machinery and tools which
the work requires are gradually consumed or worn out. It
will, however, be at once perceived that the food which
sustains the labourer does not perform its functions in the
same way as the buildings, machinery and tools. *This
indicates a very important distinction.
Circulating Capital. A part of the capital employed in
any industry, such as that which provides the food of the
labourers and the fuel which is consumed in the furnaces,
only can perform its function once. This is called circulating
capital. The definition of circulating capital given by Mr.
Mill is as follows : " Capital which fulfils the whole of its
office in the production in which it is engaged, by a single
use, is called circulating capital." (Prin. Pol. E. vol. i,
p. 112.)
Fixed Capital. Besides the capital which is consumed
in giving food to the labourers, or in providing materials and
fuel, there is in nearly every industry a large amount of
capital in a far more permanent form, such as buildings,
machinery, etc. The plough will fulfil its office of preparing
the earth for receiving the seed a very great number of
times before it is worn out. Buildings which are erected for
the purpose of protecting the workmen and the materials of
their labour are in a still more permanent form. This sort
of capital, which exists in a durable shape, and which is not
destroyed by a single use, is called fixed capital.
The whole return upon circulating capital is imme-
diate ; the return on fixed capital is extended over the
CHAP, in ON CAPITAL 35
period during which the capital is used. The entire
value of .the circulating capital together with the profits upon
it are replaced by the value of the immediate product ;
whereas in the case of fixed capital, the value of the immedi-
ate product only covers so much as is worn out together
with the profit on the whole. The farmer looks to obtain by
the sale of his crops a full and immediate return for all the
capital which he has used in paying his labourers, and in
procuring seed. But if he purchases a steam plough he will
use it a great number of times and for many successive
years, and the return upon the original expense will therefore
be extended over as long a period as the plough is used.
This fact explains the reason why labourers are often
temporarily injured by the conversion of circulating into
fixed capital. The wages of labourers, called the wages-
fund, are, as before stated, circulating capital ; therefore
any circumstance which decreases the amount of circulating
capital must cause a corresponding decrease in wages. For
example, if a manufacturer withdraws circulating capital to
the amount of ^1000, for the purpose of buying machinery,
a considerable number of men are thrown out of employ-
ment, whose competition in the labour market must cause a
fall in wages.
The injury to the labourer is, however, only temporary in
most instances, where circulating capital has been converted
into fixed capital. The introduction of machinery vastly
increases the reproductive power of labour, and it therefore
causes a rapid augmentation of capital ; the wages-fund is
in consequence ultimately increased. As an example it may
be mentioned that the capital which was needed for the
construction of the railways in England was probably in
part withdrawn from the circulating capital of the country.
The labourers consequently suffered through a temporary
reduction of the wages-fund. But the wealth of England
has been so immensely increased by the construction of
railways that the ultimate result has been to increase the
demand for labour, and thus to raise wages. Consequently,
the temporary injury to the labourer has been more than
compensated.
D 2
36 PRODUCTION SECT, i
The unemployed. The history of industry in this country
during the last quarter of a century has been characterised
by a very rapid development of the use of labour-saving
machinery ; in other words there has been a transfer, in a
very large number of trades, from circulating to fixed capital;
consequently the proportion of wages-capital to the total
capital employed in trade has tended to grow smaller. A
few examples of the effect of the introduction of labour-saving
machinery may here be quoted from addresses given in 1887
and 1888 by Lord Playfair. In making boots and shoes,
five-sixths of the labour formerly used has been dispensed
with ; in milling corn, the diminution has been three-fourths ;
in making agricultural implements 600 men could in 1888
turn out as many machines as in 1873 were turned out by
2145 men. In 1870 steam-ships required 47 hands for every
looo tons burden ; in 1888 only 28 were required. In the
cotton trade, the speed of the spindles was, in 1874, 4000
revolutions a minute ; in 1885 the speed had increased to
10,000 revolutions a minute. These and similar changes,
covering almost the whole field of industry, are producing an
effect very similar to that which was produced by the first
introduction of steam machinery ; the country as a whole is
richer, and the working classes share to a large extent the
advantages derived from the increased facilities of pro-
duction ; but the displacement of labour by machinery has
fallen with great severity upon certain sections of the work-
ing class. When almost every given operation of trade
causes the employment of fewer workmen, the least skilled,
the least steady, the least industrious, the least trustworthy,
the least strong, are certain, by a process of natural selection,
to be the first to be thrown out of work. To such circum-
stances as have been here referred to may be attributed in
part, if not wholly, the demonstrations of "the unemployed"
which characterised the winters of 1886, 1887, 1888, and
1903 in London, and in nearly every large centre of
population all over England. 1
1 The problem suggested by the words "the unemployed" is
by no means easy of solution. Many causes probably combine to
produce it. One of these may be the development of the power
CHAP, in ON CAPITAL 37
There are two motives which produce a desire to
save. It has already been remarked that Capital is the
result of saving. It is therefore evident that increased
capital implies increased saving. The desire to save differs
in intensity in different ages and countries. It is generally
produced by two motives: First, a prudent foresight for the
future; secondly, the desire to acquire wealth by invest-
lents. In this country both these motives act with great
>rce ; this is partly owing to the national character and the
ibits of the people, and partly to the security of life and
>roperty which exists here. In uncivilised communities a
lesire to save is scarcely ever prevalent. This arises from
the inability of uncivilised persons to look forward to the
iture ; with such the present is everything ; the future is
blank about which they do not trouble themselves. The
lesire to save is also checked in some cases by the insecurity
of property. In those countries where there is no settled
government, the owner of wealth is by no means sure that
he will be allowed to retain his possessions. He is the
object of the envy and rapacity of his neighbours, every
one of whom is perhaps looking out for an opportunity of
robbing him.
Joint-Stock Companies. In a country like England
the desire to save is promoted by the variety of means of
investing small capitals, which if separately applied would
not often be productive of wealth. If a professional man,
for instance, has saved ^100, he has probably neither oppor-
tunity nor inclination to employ this sum in any business,
but if he wishes to use it as capital he can invest it in a
joint-stock company ; that is, a mercantile undertaking the
capital of which is provided by a large number of persons.
of trades' unions, and the stringency with which they insist on a
given rate of wages in a given trade, no member of the union being
allowed to receive less. In such cases the rate of wages fixed by
the union may fairly represent the value of an average man's labour ;
but if a man through old age, illness, intemperance, or any other
cause falls below this average, he ceases to be worth the trades'
union rate of wages, and as he must not receive less he very often
cannot be employed at all, and is added to the ranks of the un-
employed.
38 PRODUCTION SECT, i
It is therefore evident that joint-stock companies are
advantageous to the country by the facility they afford for
increasing the amount of wealth which is used as capital.
The amount of actual paid-up capital of registered joint-
stock companies in the United Kingdom increased more
than threefold between 1888 and 1909, viz. from over
^600,000,000 to over ^2,123,000,000.
There are no means available for testing the total
amount of savings which are made annually, but the sum
deposited in the Post Office and Trustee Savings Banks
shewed a very marked increase between 1888 and 1908.
In the former year the total due to the depositors was
^104,961,000 and in the latter year ,212,364,164. This
indicates the existence of a large margin between income
and necessary expenditure, which may be used as capital to
promote the production of wealth.
The honesty and trustworthiness of commercial men have
a great and obvious influence on the use of savings as
capital. If people lose their money in fraudulent companies
they are less desirous of saving in the future. They say to
themselves, " It is better to spend all I have, than to throw
money away upon companies like those promoted by a
Whitaker Wright or a Jabez Balfour."
A Glut of Capital. Some persons imagine that no harm
is done by checking the supply of capital, for they say that
if it were not for circumstances of the kind just described,
and >the luxurious expenditure of the rich, there would be
more capital than could be employed ; or, in other words,
there would be " a glut of capital." If the nature of
capital is borne in mind it will be seen that it is quite
unnecessary to fear any evil results from the increase of
capital. It has been frequently stated that capital is that
part of wealth which is set aside to assist future production,
by providing the shelter, protection, tools and materials
which the work requires, and by feeding and otherwise
maintaining the labourers during the process of production.
If the supply of capital is increased, it will be engaged in
some fresh employment, or else it will be absorbed in the
industries already existing. In both these cases there will
CHAP, in QUESTIONS ON CHAPTER II L 39
be a greater amount of circulating capital, and the wages-
fund will be augmented ; unless therefore the increase in the
wages-fund is counterbalanced by a corresponding increase
in the numbers of those among whom the wages are dis-
tributed, wages will rise, and the condition of the labouring
Esses will be improved.
t is therefore evident that any circumstances which in-
ase capital tend powerfully to ameliorate the condition of
poor. The most important practical conclusions may be
~~ drawn from this fact, for it shews that the capitalist, and not
the spendthrift or the almsgiver, is he who renders the truest
rrvice not only to himself, but to the whole community.
The principal propositions concerning the Production of
Wealth have now been stated, in the three chapters on
Land, Labour and Capital. The explanation of the functions
of capital has probably presented some difficulty to the
beginner. It is essential that these difficulties should be
overcome ; for until they are thoroughly mastered it is impos-
sible clearly to understand the more complicated questions
which will be discussed in the section on the Distribution of
Wealth.
QUESTIONS ON CHAPTER III. On Capital.
1. What is Capital ?
2. Shew by examples that capital is a requisite of pro-
duction.
3. What is meant by the wages-fund ?
4. Define the various ways in which capitaj assists pro-
duction.
5. Prove that the wealth consumed in luxuries is not
capital, and does not therefore assist production.
6. Prove by examples that a demand for commodities is
not a demand for labour.
7. Why is it erroneous to suppose that luxurious expen-
diture is good for trade ? Give examples.
8. Capital is the result of saving, but does hoarded wealth
add to the capital of a country ?
9. What is the difference between fixed and circulating
capital ?
40 PRODUCTION SECT, i
10. Of what does circulating capital principally consist ?
n. In what way are labourers sometimes temporarily
injured by the conversion of circulating into fixed capital ?
12. What circumstances produce and foster a desire to
save ?
13. How does commercial morality act upon the accu-
mulation of capital ?
14. What is meant by a "glut of capital" ?
15. Shew that the danger of a glut of capital is imaginary.
1 6. Prove from the propositions enunciated in this chapter
that the capitalist is the real benefactor of the wages-
receiving classes, and not the spendthrift or the almsgiver.
1. Is my ink capital ? If I have 500,000 gallons of it, is
that a glut of capital ?
2. Is a cart-horse capital ? And if so, is he fixed or
circulating ?
3. Are fire-arms capital ?
4. If a boy consumed a shilling's-worth of penny tarts
every day, would he cause an increased demand for labour ?
5. If a man kept ^5000 shut up in a box, would it be
capital ?
6. If he invested it in a railway, would it be capital?
7. If he invested it in a loan to a nation to enable it to
carry on a war, would it be capital ?
8. If there is a law which permits one class of persons to
rob another class without affording the latter any redress,
what effect does this law have on the accumulation of
wealth ?
9. Is the labour of a cook productive or unproductive?
SECTION II.
On the Exchange of Wealth. Introductory Remarks.
Exchange implies the existence of private property.
The expression "exchange of wealth" implies the existence
of property. It also implies that property is possessed not
by society at large but by individuals and classes. If property
were possessed by the whole community in the same way as
that described in "The Acts of the Apostles" as the custom
of the early Christians, there could be no such thing as
exchange of wealth. " Neither said any of them that aught
of the things which he possessed was his own ; but they
had all things in common." " Neither was there any among
them that lacked : for as many as were possessors of lands
or houses sold them, and brought the prices of the things
that were sold, and laid them down at the apostles' feet :
and distribution was made unto every man according as he
had need."
Socialism. If the state of things described in these
verses were general the dream of the socialist would be
realised. Property would not be destroyed, but " the ex-
change of wealth " would be a meaningless expression, for
no one could exchange that which belonged as much to
every one else as to himself. The exchange of wealth
consequently implies the existence of individual property ;
it might therefore have appeared appropriate to discuss the
laws of the distribution of wealth among certain classes and
persons, previous to explaining that which is comprehended
under the term " exchange of wealth." The opposite course
42 EXCHANGE OF WEALTH SECT, n
has however been here adopted, because until the meanings
of the words " value " and " price " are properly understood,
and until the causes which regulate the value of commodities
are thoroughly grasped, it will be difficult to present in a
short space a clear view of the circumstances which deter-
mine the distribution of wealth into rent, wages and profits.
It is therefore proposed in this section to explain the meaning
of the terms value, price and cost of production, and to
state the causes which determine the value of three classes
of commodities, viz. those whose number is absolutely
limited ; those which cannot be increased without increasing
the cost of producing them ; and those which can be in-
creased without becoming more expensive. The nature and
functions of money will also be explained.
Before closing these preliminary remarks it is perhaps
desirable to revert to the subject of socialism alluded to on
the previous page. The fundamental idea of socialism is
that individual property ought not to exist ; that all ought to
labour to the extent of their capabilities, and to receive in
proportion to their needs, not in proportion to work done.
Modern Socialism, which has become a not inconsider-
able force in recent years, demands the nationalisation of
the land and of all the instruments of production, that is
of all capital. Karl Marx may be regarded as the founder
of modern Socialism, and his work Das Kapital is its chief
text-book. Modern Socialism, which is frequently spoken
of on its economic side as " collectivism," has in England
taken the practical form of promoting the transfer to the
State or the municipality of various duties and responsibilities
hitherto devolving on the individual. Its adherents wish
the State to fix the hours of labour, the rate of wages, and
other conditions of employment ; they also favour the
acquisition of property and industrial enterprises, with or
without compensation to their present owners, by the State
or the municipality, as leading in the direction of the
realisation of their scheme for the complete nationalisation
of the land and all the other instruments of production. In
every country some duties and responsibilities are discharged
by the individual, and some by the community collectively.
INTROD. EXCHANGE OF WEALTH 43
The division between individualism and collectivism is by
most people regarded as a matter of expediency : the modern
socialist regards it as a matter of principle, and loses no
opportunity of minimising the responsibilities of the in-
dividual and magnifying those of the State. He looks
forward to a time when the State, having acquired all the
land and all the instruments of production, shall be the
absolute arbiter of the supply of all commodities ; he is
confident that this would cause all poverty to cease to exist :
competition would vanish, every one would work for a short
time daily (generally estimated at from two to four hours) ;
all wants would be amply supplied, and every one would
enjoy abundant leisure. With the millennium thus existing
in his imagination, he contrasts the existing state of society,
usually exaggerating its defects and shutting his eyes to its
merits. It should however be remembered that the evils of
our present social system, whatever they may be, are, in the
main, produced by defects in human nature, such as sloth,
vanity, greed, selfishness, self-indulgence, and the like ; and
that as long as these exist they will bear their crop of
ensuing misery. The modern socialists have not shewn
that their system will cut at these roots of moral and
economic evil. On the contrary, some of them, by attacking
marriage and the family, and by desiring to weaken parental
responsibility, have sought to undermine what is morally the
strongest part of the existing constitution of society. They
would also take away what is economically the strongest
motive which induces men and women to overcome their
physical and mental repugnance to hard work the desire
to provide for their own wants, and the wants of those de-
pendent on them. In newly settled countries the stupendous
labour that is required to " subdue the earth " and render it
productive will not be undertaken at all unless the settler
can look forward to becoming the owner of the soil ; nothing
less than that is sufficient to induce him to overcome his
natural repugnance to the years of privation and uninter-
mitting toil, necessary to make it into a homestead yielding
sufficient for the support of a family.
It must not be overlooked that every individual is capable
44 EXCHANGE OF WEALTH SECT, n
of performing many different kinds of labour which are
productive of well-being to the community in very differenl
degrees. The community benefits not so much by exacting
a certain amount of task work from each of its members, as
by anything that stimulates each of them to do the best
kind of work of which he is capable. For example, the late
Count Leo Tolstoi, the Russian socialist, was a writer ol
fiction of the very highest order of merit. His novels are
translated into every European language, and are part of the
most valued literary treasures of modern times ; but under
the regime of voluntary socialism to which in the later years
of his life he submitted himself he employed himself in shoe-
making. The world is undoubtedly the poorer that Count
Tolstoi could satisfy his conscience, which told him it was
his duty to labour, by sitting at his cobbler's last, instead of
doing intellectual work of which perhaps not five other men
in Europe were capable. If the wants of every man and
woman are to be satisfied, as the collectivists promise, by a
few hours of daily mechanical toil, the inducement to face
and overcome the difficulties of the higher kind of production
will be enormously, and perhaps fatally, weakened.
The economic defects of Socialism. There are many
economic objections to be urged against socialistic schemes.
In the first place self-interest, one of the most powerful ot
all the incentives to exertion, is only partially operative ; a
man will not work with the same energy and zeal if the
results of his labour are to be shared by the whole com-
munity of which he is a member, as he will if he is able to
secure the whole fruit of his toil for himself and his family.
In the second place the existing checks to improvidence and
recklessness, with regard to the future, are withdrawn. All
the members of the socialistic society are supposed to be
actuated by the loftiest sense of duty to their fellow-
labourers. In the present order of things a poor man has
to work hard to keep himself and his family, if he has one,
from want ; he knows that every additional child that he has
will for some years be a constant source of expense ; he
therefore has the most powerful incentives to exertion and
providence. But in a socialistic society such a man would
INTROD. EXCHANGE OF WEALTH 45
know, whether he worked energetically and unceasingly or
slowly and irregularly, that he and his family, however
numerous it was, would be maintained ; he would also know
that it was quite unnecessary to make any provision in case
of his own death, for his family would never be allowed to
want. Ebenezer Elliott, the Corn-Law Rhymer, satirised
the defects of communism in the following verse :
" What is a Communist ? One who hath yearnings
For equal division of unequal earnings ;
Idler or bungler, or both, he is willing
To fork out his penny and pocket your shilling."
A recognition of the tendency of socialism to weaken the
prudential restraints on population led to the adoption in all
the American communistic societies of the most absolute
control over marriage and the number of births. Two of
the most prosperous of the American socialistic communities
are strictly celebate ; in others celibacy is honoured and
encouraged : and even in those societies where the opposite
principle prevails the governing body limits or promotes the
natural growth of population as the prosperity of the com-
munity declines or increases, with as much ease as an
English Chancellor of the Exchequer increases or reduces
the income tax. It would therefore seem that in avoiding
the economic defect of weakening the prudential restraints
on population, practical communism runs into the equally
serious political defect of destroying individual liberty, and
encouraging an amount and kind of government control
which a free people would find quite intolerable. This was
notably the case in the socialistic constitution of Sparta,
where the most minute affairs of daily life were watched and
controlled by the central authority of the State.
Notwithstanding these radical defects in socialism the
upholders of the present state of things ought not to con-
demn it as a monstrous and wicked absurdity. The present
system does not work so well as to be absolutely incapable
of improvement ; and though it may not be thought desirable
that an alteration of existing economic arrangements should
be made in the direction of socialism, we ought to be ready
to admit that some improvement is necessary in a community
46 EXCHANGE OF WEALTH SECT, n
in which a considerable proportion of the population are
either paupers or are on the brink of pauperism. It ought
also to be remembered that some of the characteristic
defects of communism are embodied in the existing state
of society. The Poor Law system is practically socialistic.
The system of paying workmen fixed weekly wages stimulates
the motive of self-interest even less than it is stimulated in
a communistic society. It is often remarked that workmen
paid in this way only seem to care how little work they can
do, and at the same time avoid dismissal. The remuneration
of many of the servants of the State does not depend upon
work done. Clergymen and ministers of State receive the
same pecuniary rewards, whether they do their work ill or
well, and in some cases if they leave it undone altogether.
These remarks are not made in order to uphold socialism,
but to shew that the proposals of the socialists should not
be looked upon with hatred and derision, but should receive
respectful consideration from all who desire freedom of
discussion and action. If the defects of the existing system
were borne in mind, and if it were also remembered that
the early Christians were among the many religious societies
who have practised socialism, it may reasonably be supposed
that the denunciation of socialistic doctrines would be less
passionate and declamatory.
Space does not permit a description of the various
modifications of socialistic doctrines which have been pro-
pounded in France by Fourier and St. Simon, and in Eng-
land by Robert Owen. For a detailed and most interesting
account of these schemes, and of the manner in which
modifications of them have been carried into practice in the
American Communistic Societies, the reader is recommended
to turn to M. Reybaud's Les Reformateurs Modernes, to Mr.
A. J. Booth's works on Saint-Simon and Robert Owen, and
to Mr. Nordhoffs Communistic Societies of the United States.
There is also a short and interesting sketch of the leading
socialistic schemes of the last century -in Mr. J. S. Mill's
Principles of Political Economy (pp. 245 263, vol. I.). It is
important to remember that socialism, or, as it is sometimes
called, communism, has no connection with the principles of
CHAP. I VALUE AND PRICE 47
the commune of Paris. The name that was given to the
Parisians who, in the year 1871, resisted the authority of the
Versailles Government, was derived from the demand they
made for the communal, i. e. municipal, independence of
Paris. None of the leaders of that party upheld socialistic
principles.
QUESTIONS ON THE INTRODUCTORY REMARKS OF
SECTION II. On the Exchange of Wealth.
1. What is Socialism?
2. Describe the modern doctrine of " Collectivism. "
3. What economic disadvantages are connected with
Socialism ?
4. Name some of the principal promoters of socialistic
theories.
1. Do you think Socialism would interfere with the
present division of labour ? If every one received the same
reward, who would do the disagreeable work ?
2. If Socialism caused diminished production and a
multiplication of the consumers of wealth, would it ultimately
benefit even the very poorest?
CHAPTER I. Value and Price.
A thorough comprehension of the terms "value" and
" price," their difference, and their relation to each other, is
essential to a firm grasp of nearly all economic truths.
Definition of Value. The value of any commodity is
estimated by comparing it with other commodities, or by
ascertaining the quantity of other commodities for which it
will exchange. Thus if a pound of tea will exchange for two
pounds of beef, it may be said that the value of a pound of
tea is two pounds of beef. It is therefore evident that the
term "value" implies a comparison ; for when "it is said that
the value of a pound of tea is two pounds of beef a com-
parison is made between beef and tea.
As value implies a comparison, it is also evident that the
value of a commodity varies from either of two causes from
something having its source in the particular commodity, or
48 EXCHANGE OF WEALTH SECT, n
from something having its source in the commodities for
which it is exchanged; or, as it has elsewhere been expressed,
the value of a commodity varies from either intrinsic or
extrinsic causes. For instance, tea may increase in value
through a diminution in the supply ; this would be a
variation produced by an intrinsic cause. Or it may increase
in value owing to a decrease in the value of some commodity
for which it is exchanged, such as cloth ; this would be a
variation produced by an extrinsic cause. From this con-
ception of value as a relation existing among commodities in
general, it necessarily follows that there never can be a
general rise or fall in values. For the expression "a general
rise in the value of commodities" implies that all commodities
will exchange for more of all other commodities ; and this
is as absurd as saying that every tree in a garden is higher
than every other tree. When there is a rise in the value of
any commodity there is a corresponding fall in the value of
some other commodity. Thus if it is said that the value of
meat is greater now than it was twenty years ago, it is
virtually affirmed that a given quantity of meat will now
exchange for a larger quantity of some other commodity,
such as corn, than it would twenty years ago. In this case
the value of corn as compared with meat has declined.
Value also implies exchange, for it is by ascertaining the
number of other commodities for which any particular
article will exchange, that its value is determined.
Barter as a medium of Exchange. In some primitive
communities all buying and selling are carried on without the
use of money, by the direct exchange of commodities. Thus
if one man had more food than he wished to consume he
would seek to exchange it with some other man who could
give him in return some article which he required, such as
a canoe or a set of bows and arrows. This method of ex-
change, some' modern examples of which could be suggested
by any schoolboy, is called barter ; it is necessarily very
clumsy, and as long as it is the sole means of exchange in
any country commerce is always extremely restricted. The
inconvenience arising from barter suggested the use of
money. A substance was by universal consent selected to
CHAP. I VALUE AND PRICE 49
serve as a measure of the value of all other commodities
and also as a medium of exchange. By the use of this
substance the necessity of barter was obviated. The man
who had more oxen than he required and who wished to
obtain clothing or armour in exchange for them, was no
longer obliged to seek some other man who was willing to
make such an exchange with him ; he simply had to sell
his oxen to any one who was willing to purchase them for
so much money ; and with this money he could purchase
the other commodities which he required from any persons
who were willing to dispose of them.
A Definition of Price. The value of a commodity
estimated in money is termed its price. Price, therefore,
has been defined as a particular case of value ; for, as
previously stated, the value of a commodity is estimated
by the quantity of other commodities for which it will ex-
change. If therefore a commodity, such as a yard of
cloth, will exchange for five shillings, it may truly be said
that the value of a yard of cloth is 5-r. ; but because money
has been selected to serve as a universal measure of value
and medium of exchange, it is more convenient to give an-
other name to its exchange power. The sum of money for
which a commodity will exchange is therefore called its price.
When the price of a commodity such as meat is spoken
of, a comparison is made between meat and the precious
metals ; but when the value of meat is spoken of, a com-
parison is made between meat and all other commodities.
Hence it is evident that though there cannot be a general
rise or fall in values, there can be a general rise or fall in
prices, because it is quite possible that various circumstances
might cause all commodities to exchange for an increased
or decreased amount of money. For instance, if the money
circulating in any particular country were suddenly doubled,
while population and trade remained stationary, there would
inevitably be a general rise in prices. 1
1 It is estimated that during the war in South Africa, 1899-1902,
^41,000,000 sterling was added to the circulation. This in itself
goes far to account for the inflation in prices in the years immedi-
ately succeeding the conclusion of peace.
50 EXCHANGE OF WEALTH SECT, n
From the above definitions it is proved that the value of
all commodities except money would not necessarily be
affected if prices were doubled or trebled. Such an event
would not effect any change in the relations of various
commodities to each other. If, formerly, a yard of velvet
was worth 3 Ibs. of tea, the relative value of these com-
modities would not be disturbed if the tea were 4^. instead
of 2.s. a lb., and the velvet 12s. a yard instead of 6^. It
is therefore evident that a rise or fall of general prices does
not affect the value of any commodity except money. If
there is a rise in prices an increased amount of money has to
be given in exchange for commodities ; or, in other words,
the value of money has decreased. If, on the other hand,
prices fall, the same amount of money will exchange for an
increased quantity of other commodities, or, in other words,
the value of money has increased. These considerations,
however, lead to a further explanation of the nature and
functions of money, which must be deferred to the next
chapter.
QUESTIONS ON CHAPTER I. Value and Price.
1. What is value ?
2. Prove that there cannot be a general rise or fall in
values.
3. What is meant by bartering commodities ?
4. By what means has the necessity for barter been
obviated ?
5. What is price ?
6. Can there be a general rise or fall in prices ?
7. If prices were suddenly doubled, what would be the
effects of such a change on the value of commodities ?
1. Is a rise in the value of bread resulting from a bad
harvest produced by an extrinsic or an intrinsic cause ?
2. Is a country richer if the prices of all commodities rise ?
CHAP, ii ON MONEY 51
CHAPTER II. On Money.
The Functions of Money. In the last chapter the incon-
venience of a system of barter was described, and it was
stated that the necessity of this system of exchange had been
obviated in all civilised countries by the use of money. That
is to say, that a substance has been selected by which to
measure the value of all other substances, and also to serve as
a medium of exchange. If a substance had not thus been
selected as a measure of value, there would be no means of
stating what the wealth of an individual was, but by repeating
a catalogue of all his possessions. Thus in the first chapter
of the Book of Job, the wealth of Job is described in this
manner, " His substance also was seven thousand sheep, and
three thousand camels, and five hundred yoke of oxen, and
five hundred she asses, and a very great household." But if
it were now asked what the wealth of a country like England
was, it would be almost impossible to give a reply, if it were
necessary to enumerate all the articles which the nation
possessed. It would also be very difficult to say how much
wealth an individual possessed if there were not a measure
of value. It would, for instance, be necessary, in stating the
wealth of a rich nobleman, to enumerate the number and
height of the trees on his estates, the amount and descrip-
tion of furniture in his houses, the number of horses, motors,
carriages, etc., that he possessed : it would take weeks to
make an inventory of his possessions ; and after all a perusal
of it would afford no definite notion of his wealth.
This disadvantage is obviated by the use of money, for the
wealth of individuals and nations is now measured by the
standard of the precious metals, and is said to be so many
thousand or so many million pounds.
The convenience of the use of money as a medium of
exchange has already been dwelt upon, when the nature
of barter was explained. It was then stated that a country
can never reach a great commercial position until barter is
superseded by the use of some more convenient method of
exchange. Money was aptly described by the late Professor
E 2
52 EXCHANGE OF WEALTH SECT, n
Bonamy Price as a tool for effecting exchanges, just as a
hammer is a tool for driving nails. It is possible to exchange
commodities without using money either as a measure of
value or a medium of exchange ; but in such a case the
transaction is so cumbrous and clumsy that it may be very
well compared to the attempts of a carpenter to work without
his tools.
It is evident that the substance selected as money must be
easy to carry about. A system of barter would hardly be
more prejudicial to the interests of commerce than the use of
a substance as money such as wood, or iron as in Sparta
which does not contain great value in small bulk. If such a
substance were used as money it would be necessary, when
making even small purchases, to be followed by a horse and
cart carrying one's money. These considerations prove that
it does not necessarily happen that the substance selected as
money should be either gold or silver ; these commodities
have usually been chosen in civilised countries because they
possess in a peculiar degree the combination of qualities
desirable in any substance acting as a measure of value and
as a medium of exchange.
Various Substances have been used in different
Countries as Money. Though gold and silver have been
generally selected as the substances best fitted to be used as
money, yet some countries have used other commodities in the
same capacity. The Chinese formerly used pressed cubes of
tea ; some African tribes use a particular sort of shells ; the
Greeks, the Arabs and many other ancient nations have used
cattle ; l salt has also been used as money in Abyssinia ; and
hides and dressed leather in other countries. But it may
perhaps be stated, that experience has proved that gold and
silver more perfectly fulfil the functions of money than any
other substances. For it must be remembered that the
substance selected as money must serve as :
ist, A general standard of value.
1 It is well known that the English word " pecuniary " is derived
from the Latin " pecus "--cattle ; and also that the words " cattle,"
"chattel" and "capital" are all derived from the same root,
" caput " = head.
CHAP, ii ON MONEY 53
2nd, A general medium of exchange.
The substance selected as Money should possess seven
Qualities.
The late Prof. Jevons in his book called " Money " enumer-
ated seven qualities which should be possessed by the
substance selected to serve as money. These are :
1. Intrinsic Value.
2. Portability.
3. Indestructibility.
4. Homogeneity.
5. Divisibility.
6. Stability of Value.
7. Cognizability.
The 1st quality is Intrinsic Value. The importance of
the first of these qualities is easily recognised. The substance
selected to serve as money should be valued for its own sake,
not merely in its capacity as a medium of exchange and
measure of value. If money were not composed of a sub-
stance which is generally prized, it would not be universally
accepted in exchange for other commodities. It may be
thought that the circulation of bank notes is an exception to
this rule : but the exception is apparent only. A bank note
represents gold : it is a promise to pay gold on demand : and
it is only when the public have perfect confidence that this
promise will be kept that notes are accepted as equivalent to
the sum of money which they represent. From various
causes gold and silver have always been greatly valued", even
in the most barbarous countries and in the most remote ages
of antiquity. Their brilliancy, great durability and malle-
ability have caused them to be much prized for purposes of
decoration and ornament in all ages and among all nations.
For these reasons gold and silver possess in an eminent
degree the first quality (intrinsic value) which should
characterise the substance selected to serve as money.
The 2nd quality is Portability, or, as it is sometimes
expressed, great value in small bulk. The fact that gold and
silver fulfil this condition in various degrees, is manifest.
The difficulty of procuring gold and silver, their consequent
rarity, and the fact that they are universally prized, contribute
54 EXCHANGE OF WEALTH SECT, n
to enhance their value. There are other substances, such
as diamonds and other precious stones, which contain a very
far greater value in a much smaller bulk ; but diamonds
would be a most inconvenient substitute for money ; a
diamond the size of a pin's head might be worth from 2os. to
305-., and the inconvenience of handling such small objects and
the danger of losing them would be insuperable obstacles to
using diamonds as money instead of gold and silver. It is
therefore evident that though the substance selected as money
should contain great value in small bulk, the difference
between the bulk and the value of the substance should not
go beyond a certain point. Gold would be extremely unfit to
make small payments with. A piece of gold of the value of
sixpence would be almost as inconvenient a substitute
for a silver sixpence as a diamond would be for a
sovereign. In the same manner silver could not take the
place of our copper coinage. In India, where there is no
gold coinage, the inconvenience of carrying sufficient silver
money for current expenses is very great, and leads many
people to carry a cheque book instead of a purse, and pay for
everything with cheques.
The 3rd quality is Indestructibility. This is one of the
most obviously necessary of all the seven qualities. If the
pupil tries to imagine the inconvenience of using some perish-
able and easily damaged commodity as money, he will easily
appreciate the importance of money being comparatively
indestructible. If, for instance, one's cash consisted of eggs
or cream, an accidental fall or a thunder-storm might destroy
its value and consequently its exchange power. Gold is in
a special degree indestructible, although no substance is
entirely so. Neither fire nor water destroy or corrode gold.
The golden ornaments discovered by Dr. Schliemann which
had been buried for thousands of years were as brilliant and
perfect as new gold.
The 4th quality is Homogeneity. This means that the
substance used as money should be of a uniform quality,
otherwise it would fail to have uniformity of value. Gold
and silver can be reduced by the processes of refining to
exactly the same degree of fineness ; so that one ounce
CHAP, ii ON MONEY 55
of gold is of exactly the same value as another ounce.
Precious stones would be a very inconvenient substitute as
money for gold and silver, because they do not possess
homogeneity. The value of a diamond depends in part on
its brilliancy and colour, and these vary very much ; so that
it does not at all follow that two diamonds of equal weight
and size and equally well cut have equal values.
The 5th quality is Divisibility, without loss of value.
Two half-ounces of gold are exactly equal in value to one
ounce, but with many substances division would greatly
reduce the value. With rough diamonds, for instance, the
rule for finding the value is to square the number of carats
and multiply by the value of one carat. Thus taking the
value of one carat to be two pounds, we find a diamond of
6 carats to be worth ^72, and a diamond of 12 carats to be
worth .288; 6x6x2 = 72. 12x12x2 = 288 It therefore
appears that a diamond of twelve carats could not be
divided into two of six carats each without losing half its
value.
The 6th quality is Stability of Value. This uniformity
of value is of great importance with regard to the first
function of money, i.e. to act as a general standard of value.
It is impossible from the nature of things that there should
be any absolutely invariable standard of value. It was one
of the economic schemes originated by Robert Owen to
make labour the standard of value, and to enact that a fixed
and uniform value should always attach to an hour's labour.
It is obvious, however, that the value of labour is more
variable than almost anything else that could have been
thought of ; and that there is no reason either in justice or
common sense why an hour's labour from such a man as Sir
Joshua Reynolds should exchange at an equal value for an
hour's labour of the man who blacked his shoes. Owen's
Labour Exchange, which had a short-lived popularity in the
year 1832, was soon broken up through its inherent error ot
valuing all labour alike.
All substances known to us are liable to variations in
their value. The utmost that can be obtained, therefore,
in the substance selected as money is that the variations
56 EXCHANGE OF WEALTH SECT, n
in value should be slight and gradual. If the value of
the substance selected as money fluctuated very rapidly,
the terms of every monetary contract would be disturbed.
Suppose, for instance, wheat was selected as a general
standard of value ; in this case if A borrowed 10,000 qrs.
of wheat from B, promising to pay him at the end of six
months, when the time to pay arrived the value of wheat
might have increased or decreased, owing to quite unfore-
seen circumstances, as much as 20 or 30 per cent. If the
value of wheat had increased 30 per cent. A would virtually
have to repay fo B 30 per cent, more than he borrowed ;
because the same quantity of wheat would exchange for 30
per cent, more wealth than it would have done six months
before. If therefore the value of the substance selected to
serve as money were subject to sudden fluctuations, every
commercial transaction would be reduced to -a gambling
speculation, for no one could with certainty foretell what
would be the value of money in a few months' time.
The value of gold and silver varies less than that of
almost any commodities which also possess the other char-
acteristics which qualify a substance to fulfil the functions
of money.
The 7th quality is Cognizability. It should be easy to
recognise if money is genuine. The sound which gold makes
when rung on the counter is a ready test which is often used :
the absence of smell or taste is another way of distinguishing
false coin from true. In order to ensure cognizability the
substance used as money should be coinable, and the coining
of money should be performed by the Government ; the
whole credit of the State is then pledged to ensure that
the standard money in circulation is of full weight and of a
given fineness of metal.
It will be evident on consideration that many of the
seven qualities just enumerated react upon each other. For
instance, the portability and the indestructibility of gold are
among the principal causes of its possessing the 6th quality,
stability of value. A commodity which is very bulky in
proportion to its value, commands very different prices in
different localities : coal, for instance, is frequently 6^. a ton
CHAP, ii ON MONEY 57
at the pit's mouth and at the same time ,1 2s. od. a. ton in
London. But if a commodity can be transferred at a trifling
cost from the place where its value is lower to that in which
it is higher, a tendency is constantly in operation to preserve
approximate uniformity of value. So also with the quality
of indestructibility. All commodities which are perishable
or the annual supply of which is ordinarily consumed within
the year are liable to great fluctuations of value. A perish-
able commodity such as fresh fish must be sold within a
limited period. Customers must be had at any price, and
accordingly in Billingsgate market the price of fish often
varies on the same day 50 or 100 per cent. Corn is not
easily destructible if it is well stored, but it is liable to great
variations in value owing to the fact that the annual supply
is ordinarily consumed within the year ; if the corn harvest
all over the world is 30 per cent, short of the average, the
whole of the world's supply of corn for the year would be
reduced by 30 per cent., and the rise in value of corn would
be enormous. But if the annual supply of gold fell off 30 per
cent, the effect on the value of gold would hardly be felt at
all, because the diminution in the annual supply of 30 per
cent, would only affect to a very trifling degree the entire
stock of gold in the world.
An illustration from M. Bastiat. An immense number
of fallacies have been committed under the idea that money
is the sole source of wealth. Every one knows that the more
money he has the richer he is, and this has led to the con-
clusion that the more money there is in circulation the richer
will be the community which possesses it. The error of this
conclusion is well illustrated by the following example of
M. Bastiat : " Ten men sat down to play a game, in which
they agreed to stake 1000 francs. Each man was provided
with 10 counters, each counter representing 10 francs. When
the game was finished, each received as many times 10 francs
as he happened to have counters. One of the party, who
was more of an arithmetician than a logician, remarked that
he always found at the end of the game that he was richer
in proportion as he had a greater number of counters, and
asked the others if they had observed the same thing.
58 EXCHANGE OF WEALTH SECT, n
' What holds in my case,' said he, ' must hold in yours, for
what is true of each must be true of all.' He proposed
therefore, that each should have double the former number
of counters. No sooner said than done. Double the number
of counters were distributed ; but when the party finally rose
from play, they found themselves no richer than before.
The stake had not been increased, and fell to be propor-
tionally divided. Each man, no doubt, had double the
number of counters, but each counter, instead of being worth
10 francs, was found to be worth only 5 ; and it was at length
discovered that what is true of each is not always true
of all."
There is not a Double Standard in this Country. It
may be thought that as in this country there are gold, silver
and copper coins in circulation, there is not only a double,
but a treble standard. This is not, however, the case. The
silver and copper coinages are subsidiary. Their repre-
sentative value is greater than their intrinsic value. If the
silver contained in twenty shillings were melted down, its
exchange value would be less than \ sterling. Two new
half-crowns weigh one ounce ; but the price of silver, which
is quoted almost daily in the newspapers, has for many
years been much lower than 6od. per ounce. The present
price (September 191 1) is i\\d. per ounce. The English silver
and copper coins are issued and used because they provide a
convenient means of making small payments ; but they are
not legal tender beyond a certain amount. No debt of more
than 4os. can be discharged in silver unless the creditor
consents ; and, in the same way, no debt of more than is.
can be discharged in pence. The bronze of which pence and
half-pence are made is worth about lod. per pound troy, and
this weight will make nearly 40 pennies. The Government
therefore make a profit on all the silver and bronze coins
they issue. These subsidiary or token coins are really akin
in their nature to bank notes, in so far as their intrinsic value
is less than their nominal value. Great injustice would be
done if it were attempted to make these token coins legal
tender for an unlimited amount, but as it is no one is injured ;
the Government make a profit which renders it possible to
CHAP, ii ON MONEY 59
convert gold bullion into coin free of charge, and this profit
also renders the Mint more than self-supporting, while the
public are supplied with a much more convenient coinage
than they would have if every penny contained bronze of the
value of o^jyth part of a pound sterling ; for in this case every
penny would weigh about two ounces (as much as four half-
crowns), and the inconvenience of carrying such coins would
be felt by every one. Another inconvenience would arise if
it were endeavoured to make every penny exactly equal in
value to .>}<yth part of a sovereign ; for the weight of these
pennies would have to be altered with ever)' fluctuation in
the value of bronze.
Bi-metallism. Much controversy took place a few years
ago (1886 1896) on this subject. The term bi-metallism
means that the relative value of gold and silver should be
fixed by law ; that the Mints should be " open," that
is prepared, on demand, to coin any amount of either
metal ; and that debts to any amount should be discharge-
able in either silver or gold at the option of the debtor, at
the ratio fixed by law. A large number of economists and
some statesmen advocated bi-metallism in the belief that a
nearer approach to a fixed standard of value would thus be
gained than by a single standard of either gold or silver.
The theory on which this belief is founded is one which is
very easy to understand : in practical application however
the subject is extremely difficult ; and, as far as actual
experience goes, bi-metallism as it formerly existed in the
Latin Monetary Union and in the United States broke down
and was abandoned in 1873. The theory of bi-metallism is,
that if several countries agree to fix by law the relative value
of silver and gold (making for instance 15^ parts 'of silver
always legally exchangeable for one part of gold), whenever
the actual value as regulated by cost of production failed to
correspond to this legal ratio, it would immediately become
profitable for all debtors to discharge their debts in the metal
that had depreciated in value ; thus a greater demand for it
would be created and a smaller demand for the metal that
had risen in value ; and this diminished demand for the
dearer metal and the increased demand for the cheaper
60 EXCHANGE OF WEALTH SECT, n
would tend to restore gold and silver to the ratio fixed by
law.
France and the Latin Monetary Union. Bi-metallism
existed in France from 1785 to 1873, at the ratio of 154 to
one; and in 1865 the Latin Monetary Union was formed,
the chief member of which is France, and under the terms
of which Belgium, Switzerland, Italy, Greece and Roumania
assimilated their monetary system to that of France : the
ratio was 15^ to one, the Mints were "open," and debtors
could discharge their debts to any amount in either gold or
silver coin. The United States also hadabi-metallic system,
at a slightly different ratio, till 1873. It should perhaps be
explained that the Mints being " open " to both gold and
silver does not mean that the possessor of 15^ kilogrammes
of silver could bring it to the French Mint and take away one
kilogramme of gold in coin. It means that his 15^ kilo-
grammes of silver would be exchanged for the same weight
of silver coin, and that its legal value would be the same as
that of one kilogramme of gold, namely 3100 francs.
It is pointed out by bi-metallists that all through the
period of the great gold discoveries in Australia and
California (1850 1864), when the annual supply of gold pro-
duced was suddenly multiplied six or seven times, and the
production of silver showed merely a slight increase, this
legal ratio between gold and silver was maintained in France,
although the actual value of the two metals did not cor-
respond to it, gold having fallen and silver having risen in
relative value. The practical consequence of this was, that
silver, being more valuable out of France than in it, poured
out of France, and gold took its place. In the twenty-three
years from 1830 to 1852 France imported and coined
^91,000,000 worth of silver and a very trifling amount
(3,500,000) of gold. During the next twelve years, 1853
1864, the silver coinage simply poured out of France. She
exported ^68,000,000 worth of silver, and was so seriously
inconvenienced by the want of small change that a token
silver coinage was introduced in 1864, and gold five-franc
pieces were put in circulation. At the same time that silver
was pouring out of France, because silver was undervalued
CHAP, ii ON MONEY 6 1
by the French ratio, gold was pouring in for the corresponding
reason that the ratio fixed by the French law over-valued
gold. In the twelve years from 1853 to 1864, France imported
and coined gold to the amount of \ 17,000, ooo. 1
Gresham's Law. The facts above referred to, which are
not disputed either by bi-metallists or mono-metallists, afford
a very interesting example of what is known as Gresham's
Law. Put briefly, this is that bad money drives out good.
That is to say, where there is a double standard, and debts
can be legally discharged by either of two kinds of currency,
that which can be obtained at less cost will be preferred to
that which can only be obtained at a greater cost. This is
what happened in France during the years referred to ; gold
went down in value and silver relatively to gold went up ;
and the depreciated gold drove out the appreciated silver.
Both mono-metallists and bi-metallists cite the example of
France and the other countries of the Latin Union in sup-
port of their own views. The mono-metallists assert that it
proves their contention that both metals cannot form a
standard at the same time ; that in fact what is called bi-
metallism is in reality an alternating standard, that from 1850
to 1865 gold drove out silver, and that if the Mints had been
kept open to silver after 1873 silver would have driven out
gold. The bi-metallists, on the other hand, have no doubt
established that the large absorption by France of the new
gold checked the fall in its value which the Californian and
Australian discoveries tended to produce. But the com-
paratively slight fall in the value of gold was not all due to
French bi-metallism ; its fall in value was also checked by
the universal development of commerce and trade which
marked the period of the gold discoveries. This develop-
ment was the result of many causes ; the gold discoveries
themselves had no small share in it ; it was also partly due
to the influence of free trade and the facilities of transport
resulting from the development of the railway system and
the application of steam to shipping. There is considerable
difference of opinion among economists even yet, as to
1 See " Some Statistics bearing on Bi-metallism," by Mr. J. Barr
Robinson, Journal of the Statistical Society ', Sept. 1895.
62 EXCHANGE OF WEALTH SECT, n
the degree to which the great gold discoveries lowered the
value of gold. Professor Cairnes and Professor Jevons
estimated it at 15 per cent., while the Rt. Hon. Leonard
Courtney, M.P. (now Lord Courtney), believed it to have been
about 30 per cent.
This comparatively slight fall in the value of gold in face
of an enormous increase in its production is contrasted by
bi-metallists with the heavy fall in the value of silver which
has taken place since 1873, together with a fall in gold prices
indicating a rise in the value of gold estimated at 30 per
cent. 1 ; and the stability of the earlier period is attributed
by them to the action of the bi-metallic'law in France and
the rest of the Latin Monetary Union. The fall .in prices
which characterised the period from 1873 to 1896 is attributed
by them to an actual scarcity of currency, due to gold having
been adopted as the standard in Germany and the United
States, and the free coinage of silver having been suspended
by the Mints of France and the other countries of the Latin
Union. In this argument they appear not to give due
weight to the following considerations :
i. Although silver has been "demonetised" in Germany
and in the United States, and although the Mints of the
countries forming the Latin Union are no longer open to
silver, these nations -continue to use silver to a very large
extent as a medium of exchange : the silver in circulation in
Germany, for instance, is estimated to be worth ^32,000,000;
that of France reaches the enormous value of ^90,000,000 ;
that of the United States ^26,000,000 ; that of Austria
; r 3,ooo,ooo. 8 Therefore if money is regarded as a tool
for carrying on exchanges, it is obvious that silver still
discharges its function in this capacity even in those countries
which have a gold standard or which have ceased to keep
their Mints open to silver at a fixed ratio to gold. The
alleged "artificial famine of money" due to a supposed
disuse of silver cannot be regarded as having a real existence.
Moreover the appreciation of gold, as indicated by the fall in
1 See article by Rt. Hon. Leonard Courtney, M.P. , Nineteenth
Century, April 1893.
2 See paper in Journal of Statistical Society, Dec. 1895, by Mr.
L. C. Probyn, p. 578.
CHAP, ii ON MONEY 63
prices, has been followed by a great increase in its supply.
The output of gold in 1894 amounted to nearly ,36,000,000,
i.e. nearly ,5,000,000 in excess of the highest sum it reached
in the period of greatest production in the early years of the
Californian and Australian discoveries. The total annual
production of gold all over the world has increased enor-
mously since 1886, when it was only about .20,000,000.
The increase was due partly to new discoveries on the Rand,
at Yukon, and in Western Australia, but also, and very
largely, to improved methods of extracting the metal from
the ore. The total production of the world reached the
highest point then known in 1899, .60,000,000. For the five
years ending 1900 it averaged more than ; 50,000,000. ! In
1908 it exceeded ,80,000,000. 2
2. With the development of banking and credit, paper
money plays a very large part as a medium of exchange.
France has a paper circulation estimated at the value of
; 1 39,000,000 ; and the United States of ^233,000,000. In
no country is banking more developed than in the United
Kingdom, and although we have not a very large paper
circulation in the form of bank notes (about ,40,000,000),
yet other forms of credit, such as cheques and bills of
exchange, dispense with the use of coin in all but what
may be called the petty cash transactions of commerce
and everyday life. The distinctive characteristic of the
currency of England in comparison, for instance, with that
of France is the small amount of gold, silver and paper in cir-
culation per head of population. The population in the two
countries is approximately the same ; but while the total circu-
lation is nearly ,9 per head in France, it is less than ,3 per
head in the United Kingdom. The cause of this is to be found
in the almost universal habit of banking in England ; all
savings and most current incomes may be practically said to
be in banks in one form or another ; and banks dispense
with the use of actual cash to an enormous extent by means
of the clearing house. The method by which this is done
is described in a later chapter. It is sufficient here to
1 Paper in Journal of the Royal Statistical Society, Sept. 1 901, by
Mr. Wynard Hooper, " The Recent Gold Production of the World."
2 Article "Gold," Encyclopedia Britannica, nth edition.
64 EXCHANGE OF WEALTH SECT, n
say, that at the bankers' clearing house in London in 1894,
cheques were exchanged to the value of ^6,337,000,000,
showing that buying and selling to that amount had taken
place without the actual use of a single coin. 1 In 1902 the
sum cleared at the bankers' clearing house in London was
,10,029,000,000; in 1909 it was ^13,5 2 5, 000,000. Gold in
this case is not the tool used for carrying on exchanges : it is
simply used as a standard of value, and its use as a medium
of exchange is as completely dispensed with as under a system
of barter.
3. The fall in gold prices which characterised the period
1881-1896 was due very largely to a cheapening of the cost
of production of nearly all commodities owing to the intro-
duction of labour-saving machinery and improved means of
transit, enabling goods to be sent from all the ends of the earth,
so that the area of competition has become or is becoming
world-wide. Our wool, meat and fruit come from Australia,
our wheat from India and America, because Nature does
more and man less in the production of these things there
than in England, and therefore they are cheaper, even when
the cost of carriage across the world has been added to their
first cost of production. It is this, and not a supposed
"famine of money," that has caused bad times to the
English agriculturalists. There is no famine of money : if
an investment is offered to the public that appears likely
to combine the attractions of fair interest and good security,
such investments are subscribed for in a day four or five
times over. For example, in February 1896 the Government
of the United States issued a loan of ^100,000,000. In a
few hours the whole sum was subscribed for six times over.
If the fall in prices had been due primarily to an apprecia-
tion of gold rather than to the reduction in cost of production
of nearly all agricultural and manufactured produce, its effect
would also have been seen in the fall of wages ; but, notwith-
standing the large increase in population in the United
1 It must be remembered that the bankers' clearing house in
London, though the most important in existence, because London
is the commercial capital of the world, is only one of several similar
institutions. There are clearing houses in most of the large pro-
vincial towns of England, as well as in foreign countries. The Pro-
CHAP, ii ON MONEY 65
Kingdom, it is universally agreed that the rate of wages,
both for men and women, has risen ; that is to say, from
decade to decade a larger number of people are receiving a
larger sum of money per head as weekly wages. If there
were a real "famine of money" this would be impossible.
4. The fall in the value of silver has been due chiefly to
the great fall in its cost of production since the great silver
discoveries in Colorado and Montana in 1871. From 1851
to 1855 the average production of silver per year all over
the world was 28,000,000 ounces : from 1871 to 1875 tne
average per year was 63,000,000 ounces : from 1891 to 1894
the average per year was 1 50,000,000 ounces. Some of the
silver mines of Nevada are moreover so rich in gold that
they would pay to work for the gold alone, even if the silver
fell to a much lower value than it has hitherto touched.
The fall in the value of gold at the time of the great dis-
coveries in 1850 was checked, as described in the preceding
pages, partly by the bi-metallic system in France, and partly
by the great extension of trade in the gold-using countries.
No similar circumstances have been in operation to check
the fall in the value of silver. On the contrary, Germany
adopted a gold standard at the very time when the new
supplies of silver were beginning to send down its value, and
although she continues to use silver very largely as a medium
of exchange, her reserve is kept in gold, and her demand
for gold increased while she had large stores of silver to
dispose of.
The bi-metallic system standing alone even over so large
an area as the Latin Union and the United States was not
sufficient to prevent the heavy fall which ensued, and has
since been progressing. France abandoned the free coinage
of silver at the ratio of 15^ to one in 1873, because to keep
it up would be to offer a ruinously high price for all the
depreciated silver in the world. Similar considerations led
the United States at the same time to give up their ratio,
which then stood at 16 to one. No satisfactory answer has
vincial bankers' clearing houses in England in 1909 cleared
cheques amounting to ^673, 000,000, making with the London
Clearing House the enormous total of ; 1 4, 198,000,000.
F
66 EXCHANGE OF WEALTH SECT, n
yet been given by bi-metallists to the question, Why did
France abandon her bi-metallic system in 1873 if bi-metallism
is able to accomplish all that its most zealous advocates
claim for it ? Its equalising tendency is operative only as
against minor variations in cost of production of the two
metals ; and if any marked change takes place through new
discoveries of either metal unaccompanied by commercial
developments which counteract their full effect, the ratio
fixed by law would have to be abandoned, and another ratio
as nearly as possible assimilated to the real relative value
of the metals would have to be substituted for it. The uncer-
tainty attending such changes, the political and possibly
corrupt means of bringing them about, could not but have
a very disastrous effect upon trade and upon the well-being
of the whole community. Even now when bi-metallism is a
theory and not in practical operation, the difficulty of agree-
ing upon a ratio between the two metals is one that has not
been successfully grappled with by its adherents. Most
economists advocate a ratio appoximating to present
market values ; but France, which has a reserve of silver
estimated, at the old ratio of 15^ to one, at ^50,000,000, and
the United States, which holds a reserve of silver, at the
same ratio, worth ^100,000,000, will not consent to a ratio
which would lower the value of their store of silver by nearly
one-half. And thus international bi-metallism, even as among
those who advocate the system, stands at a deadlock, be-
cause no working solution has been offered to the difficulty
of fixing the ratio.
One more practical consideration bearing on the subject
may be mentioned : the silver-producing countries and the
countries owning large reserves of silver have a permanent
pecuniary interest in advocating bi-metallism, especially if
they could get the ratio fixed at something above the
present value of silver. As far as regards India, England
would benefit by bi-metallism ; but as regards her general
commercial position she would be a loser by it, because she
more than any other nation is the creditor of other countries ;
and bi-metallism puts the creditor at a perpetual disadvan-
tage. Under bi-metallism, whatever the turn of the market
CHAP, ii ON MONEY 67
may be, the debtor has the choice of taking advantage of it
and paying what he owes in whichever of the two metals is
depreciated in comparison with the legal ratio.
The difficulty in India is a very real one, because India
receives her revenue in silver, and has to make large pay-
ments in gold. In 1893 the free coinage of silver was
stopped at the Indian Mints (the Indian Government
exercises an absolute control over the coinage of rupees), and
a notice was issued that until further orders gold would be
received in exchange for Government rupees, at ,\ for fifteen
rupees. There appears to be no prospect of the reopening
of the Indian Mints to silver ; the ultimate aim may probably
be the establishment of a gold standard with a silver circula-
tion. In itself the closing of the Indian Mints to silver
must have had the effect of still further depreciating its
value as compared to gold ; but already, as will be explained
in the next paragraph, this anticipated result has been
counteracted by the large output of the South African and
other new gold-fields. If the difficulties arising from the
heavy fall in the value of silver attendant on the large increase
in its production during recent years can be successfully tided
over, the risks incurred by the maintenance by England of
her present system seem less than those she would incur
by taking part in an international bi-metallic experiment.
The future conditions of the production of gold and silver
are absolutely uncertain. Already, while almost every
bi-metallist was only the other day pointing to the decreased
production of gold as a probably stable element of the
problem under consideration, the production of gold has
gone up by leaps and bounds, and no one can foretell from
year to year whether its further supply will not be rapidly
augmented. It has been already mentioned that the output
of 1894 was nearly ,5,000,000 in excess of the largest output
of any one year during the great discoveries of the period
from 1850 to 1860, and that the average for the five years
ending 1908 was ^77,000,000 a year. All the gold-producing
countries in the world are j increasing their output, and
new gold-fields have been discovered. It is probable
therefore that gold will tend to go down in value and in
F 2
68 EXCHANGE OF WEALTH SECT, n
the absence of counteracting circumstances prices will
rise. If, on the other hand, immense new discoveries of
silver should be made while the conditions of the production
of gold remained unaltered, the downward course of silver
in value, which has been the predominant feature of the last
thirty-five years, would be accelerated. With these un-
certainties as an essential feature of the problem, an attempt
to fix by law the value of one commodity in the terms of
another would partake of the nature of a gambling transaction,
and it would be one in which, from circumstances just
referred to, the risks of loss incurred by England would be
peculiarly and specially heavy.
QUESTIONS ON CHAPTER II. On Money.
1. What are the functions of money?
2. Describe what is meant by a measure of value ; and
give an illustration.
3. Describe what is meant by a medium of exchange ;
and give an illustration.
4. Is the substance selected as money necessarily gold or
silver ?
5. What substances have been used at different times and
in different countries as money ?
6. Enumerate the qualities which the substance selected
as money should possess.
7. Explain and illustrate the importance of each of these
qualities.
8. What substances possess these qualities in an eminent
degree ?
9. What are the special disadvantages of using labour as
the standard of value ?
10. What is the standard of value in England ?
11. What is the position of the silver and copper coinage
in England to the gold sovereign ?
12. Repeat the excellent example by means of which
M. Bastiat has illustrated the true nature of money.
13. What is meant by "bi-metallisrn" ?
14. Describe the monetary system of France up to 1873.
CHAP, ii ON MONEY 69
15. Why did France then close her Mint to the coinage of
silver ?
1 6. What is Gresham's Law ?
17. Give an illustration of its operation in France during
the gold discoveries of 1850 1864.
1 8. What other causes were there at work to check the fall
in the value of gold ?
19. Name some of the practical considerations operating
against bi-metallism.
1. In India there is no gold coinage. What should you
say was the effect of this on the mode of paying small
debts? If you had /io to pay away in about ten different
shops, should you like to start out for the purpose with 100
florins in your pocket?
2. Does a man who discovers a gold mine add to the
wealth of the country?
3. What would be the effect on the general wealth if
everyone suddenly found that the quantity of money in his
possession was doubled ?
4. Would buying and selling come to an end if all the
gold, silver and copper in the world were destroyed ?
CHAPTER III. The Value of Commodities.
Commodities, when considered in relation to their
Value, may be divided into Three Classes.
ist, Those which possess a monopoly value, and whose
supply cannot be increased ; such as the pictures of a
deceased artist.
2nd, Those whose cost of production increases as an
additional supply is produced ; such as agricultural and
mineral produce, where the area of supply is limited.
3rd, Those whose supply can be increased without
increasing their cost of production ; such as manufactured
commodities.
Cost of Production. In enumerating these three classes
of commodities the expression " Cost of production " has
been employed. Mr. Mill has defined "cost of production "
as consisting mainly of wages and profits. Prof. Cairries
70 EXCHANGE OF WEALTH SECT, n
however, has adopted a different definition, and one which
seems more in harmony with the actual facts of the case :
he has shewn that the ultimate elements of cost of pro-
duction are toil, abstinence and risk, the first of which is
endured by the labourer, the second by the capitalist, and
the third, in varying proportions, by both the labourer and
the capitalist. The reward of the toil and risk of the labourer
is wages ; the reward of the toil, abstinence and risk of the
capitalist is profits. It is evident where the competition of
labour and capital is such as to ensure that the amount of
wages and profits in all trades shall be strictly proportionate
to the toil, risk and abstinence endured, that profits and
wages are the pecuniary measure of the real cost of pro-
duction ; and in such cases it is a matter of indifference
whether in economic reasoning cost of production is defined as
consisting of wages and profits, or of toil, abstinence and risk.
It is an error to speak, as people sometimes do, as if the
capitalist had not to work at his business. The investor
who merely takes shares in a commercial company is no
doubt a capitalist who does not do any work ; but in this
case the profits he receives are less, and moreover he has
to pay some one else to do the work, without which no
business undertaking can be successfully conducted. A
successful man of business requires industry, energy, re-
source and courage, a knowledge of markets, and a power
of managing men. A man of capacity who works at his
business must be paid for his work, as well as for the use of
his capital.
Before particularising the causes which regulate the value
of the three classes of commodities above mentioned, it will
be necessary to enter into an explanation of demand and
supply in their relation to value. It may, perhaps, simplify
the investigation if we use the word price instead of value.
There is no inaccuracy in doing this, because, as previously
explained, price is a particular case of value ; the supposition
must, however, be made that any change in the price of
a commodity is produced by some change in the value of
the commodity itself, and not by any change in the value of
gold. Thus, if it is said that the price of tea has risen,
CHAP, in THE VALUE OF COMMODITIES i\
it must be supposed that this rise is produced by an increase
in the value of tea, and not by a decrease in the value
of gold.
The effect of Demand and Supply upon Prices. It is
often said that the price of a commodity depends on demand
and supply ; this is perfectly true, but the expression is
sometimes used by those who could not clearly define its
signification. The real relation between prices and demand
and supply may be briefly expressed thus : The price of
commodities must be such as to equalise the demand with
the supply. As a general rule the demand increases with
a diminution of the price, and as the price increases the
demand diminishes. Suppose, for instance, that a house is
going to be sold by auction, and that there are six persons
who wish to buy it ; they will compete against each other
for the purchase of the house. The price of the house will
be gradually raised, until at length five out of the six com-
petitors retire from the contest, and the house becomes the
property of him who offers the highest price for it ; this
price must be such as to cause the other competitors to
withdraw their demand. For, if this be not the case, and if
the other competitors offer the same or a higher price for
the house, the contest will be unconcluded. When, there-
fore, there is free competition between the buyers and sellers
of commodities, the market price of any article must be
such as to equalise the supply to the demand. In the
example just given six persons, A, B, C, I), E and F, desire
to purchase a house ; the price, therefore, of the house is
raised to such a point as to oblige , C, D, E and F to with-
draw their demand ; the only demand which remains is that
of A ; the demand is therefore made equal to the supply.
It is, however, evident that in such a case as that just
described, the price which the house fetches may be such
as to provide a greater reward for the capital and labour
engaged in building the house than is current in the trade.
If this is so the supply of houses will be increased as quickly
as the circumstances of the case permit. But this increased
supply will tend to reduce the price of houses to such a
point that the reward obtained by the labour and capital
72 EXCHANGE OF WEALTH SECT, n
engaged in the trade returns to its ordinary level. In a
similar way if the price which the house fetches yields less
than the ordinary reward to capital and labour, the master
builders and labourers will employ their capital and labour
in other industries : the supply of houses will fall off, until
prices return to such a point as to pay the capitalist and
labourer the current profits and wages of the trade.
This continual variation of market price, on either side of
the normal price, or that regulated by cost of production,
has been compared by Mr. Mill to the perpetual fluctuation
of the waves of the sea. " The sea everywhere tends to a
level, its surface is always ruffled by waves, and often agi-
tated by storms. It is enough that no point, at least in the
open sea, is permanently higher than another. Each place
is alternately elevated and depressed ; but the ocean preserves
its level."
The circumstances which regulate the Price of the
first of the three classes of Commodities. It has just
been stated that when exceptionally high profits are realised
by the sale of any particular commodity the supply of it is
stimulated, and that an effect is thus produced which reduces
profits and prices to their natural rate.
There are, however, some commodities the supply of
which cannot be increased, however high a price they
realise. The prices, therefore, of such articles as the pictures
of the old masters, ancient sculptures, the wine of any
particular vintage, rare prints and books, never permanently
approximate to the original cost of producing them. What,
then, it may be asked, regulates the price of such com-
modities ? As previously explained, the price of these
articles must be such as to equalise the demand with the
supply. To some this may seem impossible, for it may be
said that everyone would like to possess one of Raphael's
pictures ; the demand, therefore, is indefinitely large, whilst
ihe supply is small and stationary. It now becomes neces-
sary to define what is meant by demand ; it cannot be
merely the desire to possess the commodity, for nearly
everyone would desire to possess a Raphael. Desire for a
commodity does not constitute demand unless it is combined
CHAP, in THE VALUE OF COMMODITIES 73
with the power of purchasing ; this combination of a wish to
possess with a power to purchase has been aptly called
"effectual demand." It is this effectual demand only that
exercises an influence on prices. Here, then, we see two
things, demand and price, each depending on the other.
The demand depends on the price, as the price increases the
demand decreases ; and the price depends on the demand.
The supply is a fixed quantity ; the 'equality ultimately to
be produced between the demand and supply cannot be
accomplished by increasing the supply, it must therefore
be produced by increasing the price to such a point that
all demand is withdrawn save that which is equal to the
supply. Let it be supposed that a picture by a deceased
artist is offered for sale. If the price were fixed at ,100
perhaps thousands of people would wish to buy it ; if the
price were raised to ,500 the demand might be reduced to
that of fifty people ; if the price were still further raised to
,1000 the demand might be reduced to that of ten persons,
who would keenly compete against each other for the pos-
session of the picture. Finally, the price might be pushed
up to ,1800, and the demand might be reduced to that of
two individuals, A and B. B has perhaps decided not to
give more than ,1900 for the picture, whereas A might be
willing to give as much as ,2000. The price, therefore, will
be fixed at some point between ,1900 and ,2000. What this
point shall be is determined by what Adam Smith termed
the higgling of the market. The owner of the picture may
know that A will give ,2000 rather than lose the picture ;
whereas A may not know that B has determined to give no
more than ,1900. In such a case, the owner of the picture
may induce A to give him ,2000 for it ; but if A knows that
B will only offer ,1900, and that the owner of the picture is
determined to sell, he will of course offer a sum only slightly
exceeding ,1900. We may suppose this sum to be ,1910.
At this point the effectual demand is equal to the supply ;
for B withdraws his demand when the price exceeds ,1900,
and the only demand which remains is that of A, who becomes
the possessor of the picture.
Every article which has an exchange value is char-
74 EXCHANGE OF WEALTH SECT, n
acterised by two qualities, viz. Value in use, and Diffi-
culty of obtaining it.
The inquiry into the causes which regulate the price of
such a commodity as the picture of a deceased artist is not
yet exhausted. It may be asked, Why should A be willing
to give ^2000 for the picture whilst B will only offer ^1900?
This question leads to a further investigation of the elements
of value. The exchange value of every commodity is influ-
enced by two circumstances ; its intrinsic utility or value in
use, and difficulty of attainment.
Under the first head, value in use, are comprehended
those qualities which satisfy some want or gratify some
desire. Both these elements are present in every commodity
which has an exchange value. Where difficulty of attain-
ment is absent, an article, however indispensable or beautiful,
possesses no exchange value. Thus air, though indispensable
to life, ordinarily possesses no exchange value, because
every one can obtain without difficulty as much air as he
requires. But the air in a diving bell has an exchange
value, because it would be impossible to obtain it without an
expenditure of labour and capital.
The most beautiful flowers have no exchange value in the
meadows and woods where they grow, because there every
one can obtain as many of them as he pleases. But they
possess exchange value when they are brought into towns,
for here the element " difficulty of attainment " again becomes
active.
On the other hand, where "value in use" is absent no
commodity has an exchange value, however difficult it may
be to obtain ; for no one will purchase that which neither
satisfies a want nor gratifies a desire. The top brick in the
chimney would have a large supply of " difficulty of attain-
ment," but its value in use would not be more than that of
any other brick, and therefore it would not have more
exchange value.
The price of commodities is influenced in different degrees
by these two elements. " Difficulty of attainment" generally
exerts more influence in regulating the price of an article
than " value in use." For instance, the value in use of a pair
CHAP, in THE VALUE OF COMMODITIES 75
of boots is so great, that probably few would dispense with
them even if they cost five guineas a pair. But in this case
the element " value in use " is only partially operative, and
the price is almost entirely determined by "difficulty of
attainment." It must however be remembered that value in
use is always present, otherwise the article would command
no price whatever. It has been explained that " effectual
demand " consists of a wish to possess combined with a power
to purchase. It is this effectual demand which influences
the price of commodities. It is evident that "a wish to
possess " any article is absolutely controlled by its value in
use, that is, its power to satisfy some want or gratify some
desire. The power to purchase any article is, on the other
hand, controlled by the difficulty of its attainment. Thus, if
a man came to me and offered to sell me 100 hearses, a great
bargain, I should not be in the least inclined to close with
him, because the hearses would have "no value in use" to
me, and therefore I should have u no wish to possess " them.
On the other hand, if I knew that on a certain day such
pictures as the Rembrandts in the National Gallery were
going to be sold by auction, I should not therefore think it
possible that I could become the possessor of one of them.
My "desire to have" them would be very great; but "the
power to purchase" would be entirely absent, because the
" difficulty of attainment " of such treasures would send the
price up far beyond my reach.
In the previous example of the causes which regulate the
price of such a commodity as one of Raphael's pictures, the
element * value in use " is more operative than " difficulty of
attainment." The difficulty of attainment is the same to A
and B ; the supply is absolutely limited, the price is there-
fore determined by the pecuniary value which A and B
respectively set upon the gratification they will derive from
possessing the picture. It is impossible here to analyse the
causes which make A fix upon ,2000 as the pecuniary value
of the pleasure he will derive from the picture, whilst B
thinks his desire for it is not worth more than ^1900, It is
quite possible that each possesses an equal desire for the
picture, and that it would afford them both an equal amount
76 EXCHANGE OF WEALTH SECT, n
of gratification ; but B may be a less wealthy man than A,
and he may therefore not feel justified in spending an equally
large sum in the purchase of the picture.
It is therefore evident that the price of an article, the
supply of which is absolutely limited, is mainly determined
by the pecuniary value which certain individuals set upon its
power to satisfy some want or gratify some desire ; difficult"
of attainment is not however absent, even in this case ;
because the price diminishes as the difficulty of attainment
decreases, and would cease to exist if difficulty of attainment
were entirely absent.
The price of Agricultural Produce. The causes must
now be examined which regulate the price of those com-
modities whose supply can only be increased by a greater
proportional outlay of labour and capital, and which therefore
become more expensive as the supply is increased. Agri-
cultural produce was formerly the most important of the
commodities belonging to this class ; but since the improve-
ment in means of transit has brought within our available
means of supply all the most productive regions of the earth,
it is no longer correct to say that an increased demand for
agricultural produce can only be satisfied by increasing the
cost of production. As a matter of fact the increased
demand of a larger population has been accompanied by a
marked and nearly continuous fall in prices. But in order to
illustrate the tendency, when the area of supply is limited,
for an increase of population to cause an increase in the
price of food, let us consider an example in which we may
suppose that the inhabitants of a small island are entirely
dependent for food on what they can grow themselves. Let
it be supposed that a party of emigrants arrive on an island,
and form a village, and that they select, as they naturally
would, the most fertile ground available for their purpose.
We will also suppose that this village consists of fifty persons,
and that all the food which they require is raised on the
fertile land immediately surrounding their settlement. In
the course of a few years the population of the village
increases from 50 to 150: it is therefore evident that the
community requires three times as much food as it did when
HAP. in THE VALUE OF COMMODITIES 77
rst it was formed. Where is this increased supply of food
> come from ? It is replied, by going a few miles out of
le village there is abundance of fertile land from which the
dditional food can be supplied. This is quite true ; for we
ave given the village the advantage of placing it in the
lidst of a fertile district. But the food which is raised a
;w fniles out of the village will not be brought to market at
3 small a cost as that which grows close at hand. The cost
f carriage must be paid for by the consumers. Suppose
lat wheat grown immediately on the confines of the village
ad been sold at los. a quarter ; the corn raised on equally
jrtile ground at a few miles' distance could be grown at a
imilar cost ; but the labour of conveying this corn to the
lace where it is required must be remunerated, and it
lay be supposed that the rate of remuneration is <)d. a
uarter. When therefore the corn reaches the village its
rice is los. <)d. a quarter. The price of all the corn con-
umed in the village will therefore be raised ; for those who
wn the land immediately joining the village will not con-
inue to sell their corn at los. a. quarter when corn in no way
uperior to theirs realises IQJ. 9^. In this example it has
ieen supposed that the community is surrounded by an
bundant supply of equally productive land, and that there-
are when an increased supply of food is required the only
.dditional cost incurred is the expense of carriage. But it
5 easy to perceive that the increased labour of obtaining an
.dditional supply of food would be greatly augmented if it
vere necessary to resort to land not only less conveniently
ituated but also less fertile. Every quarter of corn grown
m land of inferior productiveness might require thirty per
:ent. more capital and labour to produce it and bring it to
narket ; if this were the case the price of corn throughout
he community would be increased thirty per cent.
There is yet another case to be considered, in which the
idditional supply of food could not be provided except at
i much greater cost. Suppose that the village community
k vere settled on a small island, or in a mountain valley shut
in by rocks, where an extended area of cultivable land was
not attainable. The additional supply of food which the
7 8 EXCHANGE OF WEALTH SECT, n
increased population of such a village would require could
only be obtained by improving the cultivation of the land
already under the plough, by an increased application of
labour and capital. It is however well known that after
a certain point, even with the advantages of improved
machinery and scientific farming, double the amount of
capital and labour does not double the produce ; and the
cost of the increased quantity of food might very possibly
be twice as much per quarter as that which was formerly
required by the smaller population.
Where the area from which food can be obtained is
limited, a growth of population tends to increase the
price of food. Where the food supplies of a people are
drawn from a limited area, it is obvious, from the examples
just given, that a growth of population exerts a direct
tendency to increase the price of food, and also that the
growth of population is limited by the limitations of food
supply. No nation can have a population of 40,000,000 if
its available food supply only suffices for 8,000,000. The
tendency of the growth of population to increase the cost of
food, which was so acutely felt in our own country up to
comparatively recent years, has been -completely counter-
acted by various political, economical and industrial changes,
the most important of which are the abolition of the corn
laws, the development of the agricultural resources of our
colonies and other countries, and the improvement and
cheapening of the means of transit. These changes enable
the increased population of the United Kingdom to be
fed from Australia, America, India and the most distant
regions of the earth, wherever food can be produced at the
lowest cost. Thus, though the population of England and
Wales nearly doubled between 1841 and 1894, being
15,914,148 in the earlier and 30,060,763 in the later year,
the price of wheat reached the enormous figure of Sis. 6d.
a quarter in January 1839, and was only 26s. ^d. in January
1894, averaging 22 s. lod. for the whole of the year. More-
over, when, either from legal enactment, or from war, or
from imperfect communication with other countries, a nation
is dependent wholly or chiefly on the agricultural produce
CHAP, in THE VALUE OF COMMODITIES 79
raised within its own borders, it is liable to suffer from
extreme variations in prices. The aim of the corn laws for
many years was to keep wheat at a steady Sos. a quarter ;
but all attempts to secure uniformity were a failure, because
when the country was mainly dependent on its home supply,
a good or a bad harvest, a fine summer or a frost in
June made all the difference between plenty and scarcity.
Whereas now that our wheat comes from all over the world,
the effect of a bad harvest in one region is counteracted by
that of a good harvest in another, and the variations in the
price of wheat from month to month or from year to year are
trifling.
The Leiter "corner in Wheat" in 1898. It is evident
that in a country such as England, which allows a free
import of wheat, the fluctuations in its price will be reduced
to a minimum ; because having the whole world for our
granary, the effect of a bad harvest in one locality is
counteracted by that of a good one in another. The
advantages of drawing our main food supplies from a
widely-extended area are also very marked in that they tend
to prevent artificial scarcity caused by attempts to buy up the
whole stock and then selling it at a monopoly price. This
used to be called " forestalling," but is now called " making
a corner" in such and such a commodity. In 1898 an
American named Leiter tried to make a " corner in wheat."
A shortage in the world's wheat harvest encouraged him to
make the attempt to buy up the whole stock. In this he
was fortunately foiled in consequence of the immense area
his operations would have had to cover.
One may form some estimate of the effect of increased
population upon the price of food by considering those
commodities which cannot be, to any considerable extent,
imported. The price of milk and new-laid eggs has in-
creased ; and if the population goes on increasing, there is
no doubt that these and similar perishable commodities will
get dearer still, unless science is able to provide some better
means of preserving them than is known at present. The
rise in the price of butcher's meat, which at one time
threatened to be very great, has been checked by the im-
8o EXCHANGE OF WEALTH SECT, n
portation of fresh meat from New Zealand, the United
States and other distant countries. The problem of how
to supply England with dead meat from the colonies has
been solved. Excellent New Zealand and Australian fresh
beef and mutton can now be bought in London and other
large towns at prices varying from -$\d. to <)\d. a pound. The
meat is neither tinned, salted nor frozen, but is preserved
during the voyage in a chamber through which there con-
stantly passes a current of air reduced to a temperature only
slightly above freezing-point. In the colony of New Zealand
this trade has grown up almost entirely since 1880, and
from that one colony the mother country received in 1895
128,000,000 Ibs. of fresh meat, and in 1900, 206,000,000 Ibs.
The other principal sources of supply beyond what is grown
at home are the United States, Argentina, Denmark and
Canada.
A summary of the laws governing the price of
Agricultural Produce. The following is a brief summary
of the causes which regulate the price of agricultural
produce.
An equality must be effected between the demand and
the supply. When the demand is in excess of the supply
the equality cannot be restored, as with some other com-
modities, by withdrawing a corresponding portion of the
demand. For the demand for the necessaries of life must
always bear a proportion to the number of the population.
The demand for the staple food of a nation does not vary in
an inverse ratio with its price. People must either eat or
die, whether bread is dear or cheap ; the effect therefore of
the price of bread upon the demand for it is very small, for
people are obliged to relinquish every unnecessary expendi-
ture before they diminish their demand for bread. It was
said above that the demand for necessaries could not be
withdrawn in the same manner as a demand for other
commodities. This is true, it cannot be withdrawn in the
same way ; but it can be and is diminished by starvation
and semi-starvation. But this means of reducing the de-
mand necessarily diminishes the number of the population,
so it still remains true that the demand for necessaries must
CHAP, in THE VALUE OF COMMODITIES 81
always be proportionate to the number of the population.
When, therefore, the demand is in excess of the supply?
equality is restored, not by decreasing the demand, but by
increasing the supply. Free trade, and improved means of
transport and carriage, and the competition of producers all
over the world have enabled the wants of a largely in-
creased population to be supplied, at a considerably lower
level of prices than formerly prevailed, because the area
from which supplies are drawn is now almost indefinitely
extended.
The productions of Mines and Fisheries. What has
been stated with regard to agricultural produce is also true
with regard to the produce of mines and fisheries. When an
increased demand for fish takes place, the demand is satis-
fied by resorting to less productive or more distant fisheries ;
hence the cost of production (that is the labour and risk
incident to production) is increased, and prices rise. The
area from which the supply of fresh fish can be obtained is,
from the nature of the case, limited. Nevertheless, here
also new and more productive sources of supply have been
made available by improving the means of communication.
A few years ago a lobster for which 5^. would be charged
in Dublin could be bought for 6d. or \od. in Donegal. Now
that the west of Ireland has got light railways, this difference
cannot be maintained ; the price of fish will tend to go up
in Donegal and to go down in the more populous places.
The effect on the prices of fish, mining produce and agri-
cultural produce of the improvement and development of
means of communication is to render much more available
the most productive sources of supply. It is this which has
almost destroyed Cornish mining : the copper and other
ores formerly produced there can now be obtained at less
cost from other and more distant sources of supply.
The Laws which govern the Price of Manufactured
Commodities. When illustrating the general theory of
value the laws regulating the price of manufactured com-
modities were referred to ; but it may be desirable more
fully to explain their nature, for manufactured articles are
those whose supply can be increased without increasing
G
82 EXCHANGE OF WEALTH SECT, n
their cost of production. They therefore form the third
of the classes into which commodities are divided in respect
of their price.
It has been previously stated that the price of such
commodities is governed by their cost of production, in so
far as free competition exists among their producers. It is
now necessary fully to explain of what elements their cost
of production is composed. It may perhaps be thought
that there is no reason to distinguish between the laws
governing the price of agricultural and mineral produce,
and those governing the price of manufactured commodities,
because the raw material of all manufactures is derived in
one way or another from the land. It is true that in the
production of both, Nature and man must co-operate ; but
in the case of agricultural and mineral produce, and in that
of manufactured produce, they co-operate in very different
proportions. With some raw minerals, for example a
nugget of gold, their value is almost entirely the free gift
of Nature. This is an extreme example ; but in the case of
agricultural and mineral produce the markets of the world
are more and more supplied from those regions where
Nature does most and therefore the cost is least ; the co-
operation of man's labour occupies a far more important
place in the production of manufactured commodities. The
price of the raw material no doubt forms a part of the price
of manufactured commodities ; but with most manufactures
it does not form an important part. Take the instance of a
piece of cotton cloth. The number of processes which the
cotton goes through is so great that the price of the raw
material forms but a small part of the cost of producing
the cotton cloth. The raw cotton is grown in America ; it
has to be packed on board ship, and conveyed across the
ocean to Liverpool ; when it arrives in England it goes
through almost innumerable processes, carried on by dif-
ferent classes of labourers, all of whom have to be remuner-
ated ; the capital also which is required for carrying on
these various processes must be replaced and rewarded by
the ordinary rate of profit. An instance has already been
given on p. 1 1 of the value of a bar of steel being multiplied
CHAP, in THE VALUE OF COMMODITIES 83
by 4000 by the process of manufacturing it into hair-springs
for watches.
The principal Element of Cost of Production. It is
therefore seen that the principal element in the cost of pro-
ducing a manufactured commodity is labour ; the abstinence
and skill of the capitalist is also an important component of
the cost of production ; the influence of the price of the raw
material is in most cases of minor consideration as com-
pared with the cost of labour and abstinence. The price
realised by the commodity must be, as previously explained,
such as to yield a sufficient inducement to the capitalist and
the labourer to continue their exertions.
It very often happens that the cost of the production of
manufactured commodities, even when there is no variation
in the cost of the raw material, diminishes when the supply
is increased. When production is carried on on a large
scale, many of the processes of manufacture can be
economised. Steam-power, in nearly all cases where it
can be applied, effects an immense saving both of capital
ind labour. Unless, however, there is a large system of
production steam-power cannot be successfully introduced.
Hand-loom weaving, for instance, could never have been
superseded by steam-power and machinery, if production
m a large scale had not taken the place of production on
i small scale. As a rule, the expenses of carrying on
Business do not increase in proportion to the quantity
)f business done. The same buildings can very often
Lccommodate an increased number of workmen. The
>verlooker and the designer can superintend and direct
he labour of a large number of workmen as well as that
if a smaller number. The book-keeping department does
:iot require a proportionate increase of clerks and account-
ants when business transactions are doubled or trebled.
It is also obviously much easier to have complete division
:f labour where production is carried on on a large scale
F'or instance when the hand-loom was used, all the
Drocesses of weaving cloth were performed by one indi-
/idual. Now each process is performed by a separate set
}f workers, and production is thereby greatly assisted.
G 2
84 EXCHANGE OF WEALTH SECT, n
A small capitalist who carries on a limited trade cannot
afford to purchase expensive machinery, because he would
not be able to keep it in full work. There are some com-
modities for which there is a very limited demand, the
cost of whose production would be greatly diminished if
a largely increased supply were wanted. A remarkable
instance of this is afforded by the manufacture of small
rowing-boats. A machine was some years since invented
for the manufacture of these boats which would have
effected a reduction in their cost of 30 per cent. The
machine was not, however, adopted by boat-builders, for
this reason ; the machine works so rapidly that it would
soon turn out more planks than are required for all the
boats built in a year. If, therefore, a boat-builder went
to the expense of buying one of these machines he would
most likely not require to keep it at work more than one
month in the year. During the eleven remaining months
the machine would be lying idle, and not returning any
profit to its owner. This machine will therefore probably
never be used unless the demand for boats should very
largely increase ; or unless all the boats required in several
countries could be made by the same builder.
Cost of Labour to the Capitalist does not vary
with the amount of Wages. It must be borne in mind
that the cost of labour to the capitalist does not always
vary with the amount of wages which he pays his men ;
it varies in proportion to the value of the product as
compared with the wages given. For instance, it is well
known that skilled, and therefore highly-paid labour, is
more remunerative in such a business as watch-making
or glass-blowing than unskilled labour ; the former is
therefore less costly than the latter, although the wages
of the unskilled workman may be only half as much as
those of the skilled workman. When some railways were
being made in France, it was found by the late Mr. Brassey,
the great railway contractor, that it was to his advantage to
bring over large numbers of English navvies ; for although
they received twice as large wages as the French navvies,
they did more than twice as much work. The labour of
CHAP, in THE VALUE OF COMMODITIES 85
the Englishman was therefore not so costly as that of the
Frenchman, although the Englishman's wages were double
those of the Frenchman.
There is another aspect in which the effect of the efficiency
of labour may be considered. The increased efficiency of
labour is capable of conferring a vast benefit upon the
labourers themselves. Increased efficiency signifies that a
given quantity of capital and labour becomes more pro-
ductive of wealth. If, therefore, prices remain unchanged,
the profits of capital and the wages of labour may both be
increased by the increased efficiency of labour. Suppose
that education increases the efficiency of the labour of the
agricultural peasant. It may very possibly have this effect
by making him more intelligent, more trustworthy, and
more sober. His employer could in this case increase his
wages without decreasing his own profits or his landlord's
rent, and without raising the price of agricultural produce.
The Profits of Capital. It will not be possible here
to state the various agencies which produce the average
rate of profit at different times and in different countries.
The subject will be dwelt upon in a future section on the
distribution of wealth. It is sufficient here to state that
causes are constantly in operation which tend to, make the
interests of capital in all trades in the same country and at
the same time approximate to an average. When capital
appears permanently to realise higher profits in one trade
than in another, these additional profits ought not in strict
accuracy to be looked upon as profits of capital : they are
either wages of labour, compensation for risk, for the dis-
agreeableness of the occupation, or for its dishonourable
reputation ; or these exceptional profits may be the con-
sequence of a natural or an acquired monopoly. Sometimes
those engaged in a particular trade agree together to form
what is called a " corner " or a " ring " ; a few years ago a
" ring " was made in quinine ; that is a few capitalists
agreed to buy up all the quinine in the world, and having
done this they proceeded to double its price and thereby
secure to themselves enormous profits. This is an instance
of exceptionally high profits resulting from an acquired
86 EXCHANGE OF WEALTH SECT, n
monopoly. When all the disturbing causes above enumerated
are removed, it will be found that the interest of capital
tends to an equality.
The nature of capital has been already explained ; it is
now therefore sufficient to state that the profits of capital
are the share of the wealth, produced by the joint agency
of land, labour and capital, which is allotted to capital.
The amount of this reward differs at different times and in
different nations. In some countries capitalists obtain a
clear return of ^10 a year upon every ^100 which they
invest in trade, besides what they receive as compensation
for risk and as wages for superintendence. When this is
the case the rate of interest is said to be 10 per cent. In
most countries the average rate of interest is much lower ;
in England it is about i\ per cent.
The relation between Profits and Prices. It must
always be remembered that the reward of the capitalist
and of the labourer (i.e., their profits and wages) must be
contained in the price of the commodity which they have
combined to produce. This price must (if the manufacture
is to be continued) be sufficient to yield to the capitalist and
labourer the rate of profits and wages current in the trade at
that time. If the price is less than this the labourer and
capitalist would earn more by engaging in other industries,
and the production of the commodity would be checked.
Therefore any circumstance which raises the rate of profit
current in a country, or 'which raises the rate of wages in
any particular trade without increasing the efficiency of
labour and capital, will cause a higher price to be paid for
the commodity produced.
It will, however, be obvious on a brief consideration that
the rate of profits and wages will be in the main dependent
on the efficiency of a given exertion of capital and labour
resulting in a large production of commodities. When this is
the case cost of production is low, wages and profits are
high, and prices may be low. It is thus seen that high
profits do not always accompany high prices, nor low profits
low prices. Suppose, for instance, that a village carpenter
invents a machine which increases the productive power
CHAP, in THE VALUE OF COMMODITIES 87
of his capital and labour 50 per cent. Where he before
made ten boxes or ten tables, he is now able to make, by
the same expenditure of capital and labour, fifteen boxes
or fifteen tables. It is evident that unless prices decline
he will realise 50 per cent, more as a return to his capital
and labour. His wages and his profits have both increased ;
and the cost of production has decreased. It is not, how-
ever, probable that he would be able permanently to retain
the whole of the advantage of his invention. The increased
supply of boxes, chairs, tables, etc., would ultimately cause
a reduction of price. The demand, it has often been
repeated, must be made equal to the supply. The supply
is in this case increased 50 per cent. It may be supposed
that the supply was equal to the demand before this increase
took place. The carpenter will therefore find it necessary
to reduce the price of his manufactures, if he desires to
find customers for them. He may perhaps find by experi-
ence that a reduction of 15 per cent, in the price is
sufficient to sell all his stock. He therefore parts with this
portion of the advantage produced by his invention, and
retains an addition to his own wages and profits of 35 per
cent. In this case wages and profits are both increased,
whilst the cost of production and ultimately prices are
diminished.
In the case just investigated it has been supposed that
the village carpenter who invents this machine has no rival,
of his own trade, in his locality. But suppose there were
three or four carpenters in the same village ; they would as
soon as possible procure similar machines ; the supply of
chairs, tables, etc., would be very largely, increased. Each
carpenter, in order to find purchasers, would try to undersell
the others, and finally they might be induced to part with
the whole of the advantage of the invention to their
customers ; the wages and profits of the carpenters would
return to their former level, and prices would be reduced
50 per cent. This example shews :
ist. That when the efficiency of labour and capital are
increased, wages and profits rise, and the cost of production
is diminished.
88 EXCHANGE OF WEALTH SECT, n
2nd, That when this increased efficiency takes place,
wages and profits may rise, simultaneously with a decrease
in prices.
3rd, That where free competition exists between capitalists
on the one hand, and labourers on the other, the whole
benefit arising irom the increased efficiency of capital and
labour is generally gained by the consumer. That is to say,
that increased efficiency decreases prices, and does not per-
manently raise the wages of labour or the profits of capital.
It should be here pointed out that although increased
efficiency generally operates in reducing the price of the
particular article in question, and does not raise the money
wages of labour or the profits of capital, yet if the article
cheapened by the invention be one which enters into the
consumption of labourers and capitalists, the real reward of
labour and capital is increased ; that is to say, the money
distributed in wages and in profits has a greater purchasing
power. If the article cheapened be boots, the wages of
labour, though remaining at the same sum, would in reality
be increased because the same amount of money would
exchange for an increased number of commodities. In the
manner just indicated, capitalists and labourers have benefited
by the application of steam to industry. The whole advan-
tage of the immense addition which is thus made to the
efficiency of capital and labour could not be retained by the
labourers and capitalists in the form of a universal increase
in wages or a higher general rate of profit. Competition of
other labourers and capitalists prevented that. The ultimate
benefit which they derived from the increased efficiency of
labour and capital was in the consequent reduction in price
of nearly all manufactured commodities. This point will be
hereafter further explained.
A summary of the effect of Demand and Supply on
Prices. The following is a brief summary of the manner
in which the prices of the three classes of commodities
above enumerated are acted upon by demand and supply.
It must be borne in mind that the price in the case of all
these commodities is adjusted in such a way as to equalise
the demand with the supply.
CHAP, in THE VALUE OF COMMODITIES 89
In the case of the first class of commodities, those whose
supply is absolutely limited, the supply is made equal to the
demand by raising the price to such a point that the demand
exceeding the supply is withdrawn.
In the case of the second class of commodities, where the
area from which supply can be obtained is limited, the supply
cannot be increased without increasing cost of production.
But this tendency of an increased demand to cause an
increase in cost of production is counteracted where, as in
recent years in the United Kingdom, the development of
trade and improved facilities of communication have brought
within reach of the home markets much more productive
sources of supply.
In the case of the third class of commodities, whose
supply can be indefinitely increased without increasing their
cost of production, when the demand is in excess of the
supply, prices rise, and a portion of the demand is with-
drawn ; but this manner of equalising the demand to the
supply is only temporary ; when the price of a commodity
rises above what is necessary to provide the current rate of
wages and profits to its producers, production is greatly
stimulated. This increased production increases the supply,
and prices fall ; the adjustment of the supply to the
demand ultimately taking place by means of an increased
supply.
Having now investigated the causes which regulate the
prices of the three classes into which commodities are
divided, the next chapter will be devoted to an explanation
of the value of money.
QUESTIONS ON CHAPTER III. The Value of Commodities.
1. Into what classes are commodities divided in relation
to their value ?
2. What is " cost of production " ?
3. What are the principal elements of cost of production
as stated by Mr. Mill ?
4. What other definition has been given by Prof. Cairnes
of cost of production ?
90 EXCHANGE OF WEALTH SECT, n
5. What is the accurate explanation of the expression
that "prices depend upon demand and supply" ?
6. Give an illustration of the manner in which the adjust-
ment of prices equalises demand and supply.
7. Explain the manner in which the tendency is exerted
to make the market price of a commodity approximate to a
sum just sufficient to yield the current rate of wages and
profits to the labourer and capitalist who produce it.
8. This approximation takes place only when the supply
of the commodity can be increased. In what manner is the
price of those commodities adjusted the supply of which is
absolutely limited ?
9. What is "effectual demand"?
10. By what two qualities is every article characterised
which has an exchange value ?
11. Are these qualities always present in the same degree ?
12. Give illustrations.
13. Which quality is the more active in determining the
price of such a commodity as one of Raphael's pictures ?
14. Describe the operation of an increased demand for
agricultural produce in causing an increase in its cost of
production and consequently in prices.
15. How has this tendency been counteracted in the
United Kingdom ?
1 6. Mention some other commodities which are subject
to the same laws as those which regulate the price of
agricultural produce.
17. Name the last of the three classes into which com-
modities are divided in respect of their value.
1 8. Are the laws which govern the price of manufactured
commodities the same as those which regulate the price
of agricultural produce ?
19. Explain the reason of the difference existing between
them.
20. Illustrate the manner in which the price of manu-
factured commodities -is sometimes decreased when the
supply is augmented.
21. In what manner does efficiency of labour act' upon
cost of production ?
CHAP, in THE VALUE OF COMMODITIES 91
22. What is the connection existing between wages,
profits, cost of production and prices ?
23. Show by an illustration that, under certain circum-
stances, profits and wages can both be raised without
increasing prices.
24. What practical conclusion can therefore be drawn
respecting the connection of prices with the rate of profit
and the wages of labour ?
25. When there is a general increase of efficiency of
labour and capital, in what way do labourers, capitalists and
consumers benefit ?
26. Give a summary of the laws which regulate the price
of articles of vertu, agricultural produce and manufactured
commodities.
1. If the poor people took to eating grass, could the
baker increase the size of his penny loaf?
2. What view of cost of production is taken by Hood in
the lines :
" Oh, men with sisters dear, men with mothers and wives !
It isn't linen you're wearing out, it's human creatures' lives " ?
3. If the cost of producing food remains the same, what
will be the effect if the population of England goes on
doubling itself every 60 years ?
4. If a machine is invented that greatly facilitates the
production of a particular commodity, do you think the
inventor should take out a patent for it, and thus secure the
advantages to himself instead of allowing, by the effect of
competition, the consumers of the commodity to obtain all
the benefit of the invention ?
5. It has been said that the demand for a thing in-
fluences the price of it. Does the desire of a pauper to
have a carriage influence the price of carriages? And if
not, why not ?
6. Supposing that all the members of my household
decline to eat New Zealand meat, will the importation produce
any effect on my butcher's bills ?
92 EXCHANGE OF WEALTH SECT, n
7. Suppose meat were cheaper, and my bucher's bills
were consequently reduced one-third, should I be perma-
nently any better off, if about the same time I had nine
people to keep instead of six ?
CHAPTER IV. On the Value of Money.
It is not at all an uncommon thing to hear people talk
about the price of money. This expression is very often used
respecting the rate of interest ; when those who borrow
money have to pay for the loan a large sum over and above
the amount they receive, the price of money, or the rate of
interest, is said to be high. When borrowers only pay a
small sum for the use of the loan, the price of money, or the
rate of interest, is said to be low. It will, however, be shewn
that, apart from its commercial signification, the expression
"the price of money" has no meaning whatever. It has
been said in a former chapter that the value of a commodity
is its exchange power, or the number of other commodities
for which it will exchange. It was then explained that
price is a particular case of value, that is, the value of a
commodity estimated in money. When therefore the price
of money is spoken of in any other sense than that indicated
above, it is equivalent to mentioning the value of money
estimated in money. This is, of course, a foolish expression ;
it might as well be said that the price of ten pounds was ten
sovereigns, or that the price of a shilling was two sixpences.
It is impossible to measure the value of a commodity by
comparing it with itself.
The value of Money. The value of money is its ex-
change power : when money exchanges for a large quantity
of other commodities, or in other words, when prices are
low, the value of money is high : when money exchanges
for a small amount of other commodities, or in other words,
when prices are high, the value of money is low.
The value of Money is regulated by the same laws as
those which determine the value of other mineral
produce. It is sometimes erroneously supposed that the
value of money is invariable, because an ounce of gold can
CHAP, iv ON THE VALUE OF MONEY 93
ahvays be exchanged for the same amount of money.
Whether prices are high, or whether they are low, an ounce
of gold can always be exchanged at the Mint for ^3 \fs.
\Q\d. Those who think that this fact proves the value of
gold to be unalterable would also be likely to believe that
the value of land is unchangeable, because an acre of land
can always be divided into four plots of a quarter of an acre
each. The fact that an ounce of gold will always exchange
for 3 \TS. \o\d. only shews that an ounce of gold will
divide into three sovereigns and that part of a sovereign
which is represented by \"js. \o\d.
It must be borne in mind that the value of the precious
metals is regulated in the same manner as the value of
other mineral products. The value therefore of the precious
metals is adjusted by an equalisation of the demand with
the supply. As the demand increases the value rises, and
the production of an increased supply is also stimulated.
If this increased supply is obtained from less productive
sources, the cost of production will be increased, and the
value of the precious metals will be augmented. If however
the increased supply is obtained by the discovery of more
productive mines, the cost of production will be reduced
and the value of the precious metals will diminish. The
yield of silver in America was enormously increased in the
second half of the nineteenth century owing to the discovery
of very productive mines. From the years 184910 1858,
the yield of silver from American mines was of the value of
, 1 0,000 per annum. About the year 1861 the yield began
largely to increase ; from that date the total annual supply
throughout the world suddenly and largely increased owing
to the large output of the American mines : from 1861 to 1865
the total production averaged 5^ million kilos, per year ; by
1885 it had reached 14 millions, and by 1890, 17 millions. 1
This and some other circumstances, referred to in the
previous chapter, caused a serious fall in the value or
1 See annual report of Mr. Preston, of the United States Mint,
Times, December 2, 1895. But the production of silver
declined after the above date, and in 1900 it was 5,300,000 kilos.
See article " Silver" in Encyclopedia Britannica, nth edition.
94 EXCHANGE OF WEALTH SECT, n
purchasing power of silver, and occasioned great anxiety
and inconvenience to those countries which, like India, have
silver for their standard currency. It does not affect the
value of the English currency, because our silver coins are
merely tokens ; twenty shillings have never contained a
value of silver equivalent to the value of the gold contained
in a sovereign. Gold is our standard currency, and is the
only legal tender for the payment of debts of more than 40.?.
in amount. The value of silver has already declined from
6od. an ounce to 24^. an ounce (September 1911).
The circumstances which influence the Demand for
Gold and Silver. It has been previously explained that
the demand for a commodity is regulated by its value. To
this rule money is no exception. To carry on a given
amount of business about forty times more silver
would be needed than gold : and why ? Because silver is
now (1911) nearly forty times less valuable. The quantity ot
money required in any country will depend partly on the
cost of its production, and partly on the rapidity of its
circulation. The principal use to which gold and silver are
devoted is the formation of money ; but they are also used
in many processes of art and manufacture. The demand
which each country has for gold and silver therefore depends
on their value ; on the national wealth and population ; the
number of times commodities are bought and sold for money ;
and the activity of the arts and manufactures in which gold
and silver are required.
When it is said that the demand for money depends on
the national wealth, it must not be supposed that the wealth
of a nation can be accurately measured by the amount of
gold and silver which it keeps in circulation. The wealth
of an individual is not measured by the quantity of money
which passes through his hands. He uses various substitutes
for money, such as cheques and bank notes, for nearly all
his larger payments ; but he is obliged to use money for
his smaller payments ; for paying weekly wages, and for
defraying daily expenses, such as cab fares and hotel bills.
It is therefore seen that though the amount of money used
by any individual is not by any means a measure of his
CHAP, iv ON THE VALUE OF MONEY 95
wealth, still his demand for money generally bears some
proportion to his wealth ; as his wealth increases he employs
more servants, or more labourers, he takes longer and
more expensive journeys, and his daily expenses probably
increase.
As it is with an individual so it is with a nation. The
demand for money is not an accurate measure of national
wealth, but it bears some proportion to the wealth and
population of a country. Thus, in a country of 20,000,000
inhabitants, a very far larger number of persons are in receipt
of money wages than in a country containing 10,000,000 in-
habitants. The increased demand for money has not however
been proportionate to the increase of population and wealth
in this country during the last twenty years. This is doubt-
less owing to the facilities of banking which now so largely
prevail. An immense quantity of buying and selling is trans-
acted every day in England by means of cheques without
the use of a single coin of any kind. It has been already
said that in proportion to the extent of its commerce England
probably employs less actual coin than any other country.
The way in which cheques obviate the use of gold and silver
will be explained in detail in the chapter on " Credit and its
influence on prices " : the way in which cheques take the
place of coin, at the moment when they are used, is however
so obvious as not to require any explanation. Formerly large
business payments were made by means of money. Farmers
who came to market to buy or sell corn or stock always
expected to pay and to be paid in money. In this way on a
market-day in a country town thousands of pounds would
change hands. But in these large transactions the use of
money is now entirely dispensed with. Farmers and those
who buy of them bring their cheque-books to market ; the
use of money is not required except for the purpose of pay-
ing the expenses incurred on the journey. Although there-
fore the demand for money bears some proportion to the
wealth and population of a country, yet the proportion is not
fixed and definite ; it is governed by the habits and customs
of the community, and it is liable to alterations with every
extension of the credit system.
96 EXCHANGE OF WEALTH SECT, n
The demand for precious metals is also influenced, to
a very great degree, by the number of times commodities are
bought and sold for money. If, for instance, a piece of
linen, after it is manufactured, is sold for money to a whole-
sale dealer, who in his turn sells it again for money to a
retail shopman, who sells it to a lady to make shirts for a
missionary basket, the same piece of linen is exchanged
for money four t times before it is put to its ultimate purpose.
It is evident that such a series of transactions must require
a far greater quantity of money than would be used if the
cloth were sold by the manufacturer to the consumer. It
may here be remarked that it has become customary to
dispense with the use of money in large trade transactions.
The wholesale dealer would in all probability now pay the
manufacturer with a cheque or with a bill of exchange, and
the retail tradesman would pay the wholesale dealer in the
same way ; by these means the quantity of money in circu-
lation is greatly economised. The example, however, shows
how the demand for gold and silver in each country is partly
regulated by the number of times commodities are bought
and sold before they are used.
It is hardly necessary to enter into an explanation of the
manner in which the demand for gold and silver is affected
by the quantity of those metals used in arts and manufactures.
It has been said that the value of gold and silver is regulated
by the same laws as the value of other mineral produce ; any
circumstance therefore which causes an increased use of the
precious metals in arts and manufactures will, if other things
remain unchanged, cause an increased demand for gold and
silver, and this increased demand would cause their value
to rise.
Illustrations shewing the action of increased Demand
and Supply upon the Value of Money. In order to in-
vestigate more fully the action of demand upon the value of
gold and silver, let it be supposed that no substitutes for
money, such as bank notes and bills of exchange, exist. Let
it be further supposed that the supply of gold and silver
cannot be augmented by fresh discoveries or by foreign
importations. These suppositions reduce the problem to
CHAP, iv ON THE VALUE OF MONEY 97
great simplicity. We will now take the case of a country
whose inhabitants carry on their commercial transactions
entirely by gold and silver coin, the amount of which they
have no means of increasing. Let it be supposed that in
such a community a great increase in the production of
wealth takes place, that all manufactures are doubled, and
that population increases. In such a case the same amount
of money is used to carry on twice as much buying and
selling ; general prices must therefore have declined one-
half, or, in other words, the value of gold and silver has
doubled. Let us take another illustration. It may be sup-
posed that the trade, population and manufactures of a
community are stationary ; and that all payments are made
in money. The money which such a community keeps in
circulation may be said to be ^10,000,000. Owing to the dis-
covery of gold or silver mines, or to foreign importations, the
quantity of money in circulation is increased by ,2,000,000.
The same quantity of commodities is bought and sold the
same number of times ; the same number of people receive
wages ; but the circulation of the country is increased by
one-fifth. Under these circumstances a corresponding rise
must take place in wages and in prices, the value or the
exchange power of gold having decreased 20 per cent. This
example shows that, in the absence of counteracting circum-
stances, every increase in the quantity of gold and silver in
circulation diminishes the value or purchasing power of gold.
The first example proved that if wealth were increased with-
out a corresponding increase in the amount of money in
circulation, the value or purchasing power of gold must
increase. Increased prices do not necessarily indicate in-
creased prosperity.
It is perhaps hardly necessary to point out that the increase
of wealth on the one hand, and the increase of the circulation
on the other, never actually produce their full effect upon the
value of gold and silver. In the above examples it was
necessary to assume the absence of counteracting circum-
stances, which in reality are always present. In the first
example it was supposed that a great increase of manu-
factures and population took place without any increase in
H
98 EXCHANGE OF WEALTH SECT, n
the quantity of gold and silver in circulation. Hence it was
said that the value of money would be greatly increased ;
but when the value of money is augmented, the supply is
stimulated ; and with the growth of commerce various sub-
stitutes for money are nearly always adopted. Such counter-
acting circumstances as these usually suffice to prevent great
and sudden fluctuations in the value of money.
The Effect of the Gold Discoveries in California and
Australia. In the second example a great augmentation of
the money in circulation was supposed to take place, without
any increase in population or wealth. A very great increase
in the amount of money in circulation took place about the
year 1850, when the great discoveries of gold were made in
Australia and California. Previous to 1850, the annual yield
of gold from all sources was about ^10,000,000 ; but for the
five years between 1852 and 1857 the Australian and Cali-
fornian gold-fields each yielded as much as this ; the annual
supply of gold for these years consequently trebled. It was
at first predicted, by all the most competent authorities, that
this immense increase in the annual supply of gold would
cause the value of gold rapidly to decline, and produce a
marked rise in general prices. These predictions, however,
were not fulfilled ; indeed it was for some time doubted
whether the gold discoveries had produced any effect on
general prices. After the most careful investigation, it was
estimated that in 1870 the value of gold had decreased, since
1850, by about 15 per cent. 1 This comparatively slight
decrease bore no proportion to the increase in the supply of
gold. It is therefore interesting to inquire why it was that
this very large increase in the annual supply led to such an
insignificant decline in the value of gold. One reason may
be found in the indestructibility of gold ; although the increase
in the annual supply of new gold amounted to 300 per cent.,
the increase to the total amount of gold in use throughout
the world was very much less great. The exact amount of
gold in use before 1850 cannot be known ; but good judges
1 The principal authorities on the subject of the effect of the gold
discoveries on prices are the late Professor Cairnes and the late
Professor Jevons.
CHAP, iv ON THE VALUE OF ATONE Y 99
have estimated it at ^5 60,003,000. l The new discoveries did
not increase this amount in any one year by more than
about 5 per cent. ; and it took more than 20 years after the
discovery of the new gold-fields to double the stock of gold
in the world.
The excessively high rate of production of gold was not
maintained in Australia and California for more than a few
years. The richest deposits were quickly exhausted, and the
annual yield of gold, which in 1856 reached ,32,000,000, fell
in 1860 to ,18,000,000, and in 1881 it was ;2i, 500,000. 2 But
perhaps the most important of the reasons why the gold
discoveries did not produce more effect in lowering the
value of gold are to be found in a variety of circumstances
which led to a very great development of trade and industry
simultaneously with the gold discoveries, thus causing the
new gold to be absorbed without producing a marked rise in
prices.
ist, The commerce not only of England but of the whole
civilised world then began to feel the full effect of the
application of steam to industry and to means of transit.
2nd, The adoption of free trade in England caused our
commerce to advance with a rapidity before unknown.
Between 1848 and 1860 England's exports advanced in value
from 60,000,000 to ,135,000,000; in 1886 they reached
1 The total stock of gold in the world was estimated in 1894-5
to be about 720,000,000. In 1900 it was estimated to have-
reached 847, 000,000. In arriving at this figure "25, 000,000
annually are allowed for the use of gold in the arts and manufactures,
and for loss from wear and tear. See Journal of the Statistical
Society, p. 423, September 1901.
2 It has been pointed out in a previous chapter that since 1881
there has been a great development in the annual production of
gold. The quinquennial average rose from
1886 1 890 = 22, 640,000
1 89 r 1 895 = 3 1 ,000,000
1896 1900 = 50,432,000
1904 1 908 = 7 7, ooo, ooo
The largest gold producing country in the world is the Transvaal.
The supply from the Rand mines was almost wholly suspended by
the war, but production was resumed in 1902 and by 1909 it had
[,000,000. See article,
lition.
t-i^ WUJ LSUl |_Jl WVIUIV,LJ.^H VYCLO *^9UfcU^VI Ail 1 yW.
reached a yield within the year of nearly 31, (
" Gold," Encyclopedia Britanmca, nth editic
TOO EXCHANGE OF WEALTH SECT, n
^212,000,000; in 1900 they attained the highest value then
recorded, viz. ^291,191,996. In 1907 this high figure was
immensely increased, and the total value of the exports of the
United Kingdom reached the value of ^426,035,083, the
highest on record. At the same time the imports increased
even more rapidly, and in the record year 1907 reached the
total value, less the re-exports, of ,553,865,858. All the addi-
tional buying and selling which these figures imply go far to
account for the absorption of the new gold.
3rd, Railways and other works of public utility began to
be carried out in India, causing many millions of silver to
be sent to that country to pay wages, etc. This silver was
obtained to a large extent by withdrawing the silver in
circulation in France and other countries, the currency thus
withdrawn being replaced by gold. It has been estimated
that in seven years ,43,000,000 of English capital was thus
expended in India.
4th, More recently the demand for gold has been further
enhanced by France, Germany and other countries substi-
tuting a gold for a silver standard, while the United States,
which for many years had an inconvertible paper currency,
has resumed specie payments.
It has been already pointed out that the advocates of bi-
metallism contend that these circumstances combined have
done more than counteract the effect of the gold discoveries
of 1850, and maintain that between 1874 an d 1896 there was
not a plethora but a scarcity of gold, producing a rise in its
value and a consequent fall in prices. That there was a fall
in prices is unquestionable ; though to what degree this fall
is due to an appreciation of gold, or to a reduction in cost of
production of nearly all other articles, is still disputed. The
facts above enumerated are however sufficient to call to
mind the large number of modifying circumstances which,
in our complex industrial organisation, prevent an increase
in the supply of the precious metals from exercising its full
effect on prices. It should be borne in mind that the four
circumstances above mentioned, as having produced the
absorption of the new supplies of gold, were quite indepen-
dent of the gold discoveries ; the development of commerce
CHAP, iv ON THE VALUE OF MONEY 101
in England, the growth of- papulatie'n" arid V&Utft consequent
on free trade, and the accompanying expansion of trade to
the East, would have taken place whether the gold-fields had
been discovered or not. They were not in any sense pro-
duced by the augmentation of the supply of gold. Had the
gold discoveries been made at a time when commerce and
population were stationary, no general benefit would have
been reaped by any countries except those actually in posses-
sion of the gold mines ; and the benefit to these countries,
it must be remembered, consists principally in increasing
their purchasing power. Australia and California, as Prof.
Cairnes has pointed out, benefited by the gold which they
produced in so far as they parted with it by purchasing the
commodities produced by other countries. They also no
doubt benefited in consequence of the very rapid immigra-
tion consequent on the gold discoveries. Nothing causes
so much excitement as the discovery of new gold-fields ;
thousands of emigrants flocked to Australia directly the
news of the gold discoveries reached them. Thus the
population of Victoria increased in the six years between
1851 and 1857 from 77,000 to 410,000; and this rapid in-
crease of population in a sparsely peopled and fertile colony
is very conducive to the development of its resources and
the consequent increase of its wealth. The gold discoveries
stimulated trade between the regions where they were made
and other parts of the world in another way. At the begin-
ning of the gold discoveries in Australia, an ordinary
labourerwith no expensive machinery could find on an average
a quarter of an ounce of gold a day. This means that he
was earning at the rate of about i a day : hence wages
in all parts of Australia for all kinds of manual work rose to
about the same rate, and shepherds, carters, etc., were paid
^i a day. It is easy to see how much this stimulated their
demand for all kinds of manufactured and other produce,
and what activity it would cause in the chief trades supplying
them with necessaries and luxuries.
The gold discoveries have been of great service to the
whole mercantile world because they increased the supply of
the circulating medium just at the time when the growth of
102 EXCHANGE OF WEALTH SECT, n
commerce au.rit tr,p, increase most needful. It would have
been a great commercial misfortune and embarrassment if
the gold discoveries had taken place at a time when trade
was stationary ; the terms of all monetary contracts would
have been disturbed by the alteration in the value of gold.
Everyone would probably have had more money, but the
purchasing power of money would have decreased. It must
not be forgotten that if general prices are doubled, a man
who formerly had a pound a week is no better off if he is
now in receipt of two pounds a week ; because the two
pounds will only exchange for the same quantity of com-
modities that could formerly be obtained for one pound.
M. Bastiat's illustration, at the end of the second chapter of
this section, demonstrates the truth of this assertion. If, in
a game of cards, the stake remain unchanged, it matters
little how many counters are used to represent the stake.
The fewer the counters, the greater the value they represent ;
the greater the number of counters, the less is their
exchange power.
QUESTIONS ON CHAPTER IV. The Value of Money.
1. What is the meaning of the phrase "price of
money " ?
2. Why in an economic sense is such an expression
meaningless ?
3. What is the value of money? Why is it sometimes
erroneously supposed that the value of money is invariable ?
4. Into what class of commodities must money be placed
in relation to its value ?
5. How is the value of the precious metals regulated ?
6. What circumstances have occasioned a fall in the value
or purchasing power of silver ?
7. Name the principal circumstances which produce a
demand for gold and silver.
8. Explain the manner in which the demand for money
varies with national wealth and population.
9. By what means is the use of money, in large commercial
transactions, usually dispensed with ? Give an illustration.
10. Illustrate the manner in which the demand for money
CHAP, iv QUESTIONS ON CHAPTER IV 103
is increased when commodities are bought and sold for
money many times previous to their consumption.
1 1 . Shew by an illustration the action of increased demand
upon the value of money.
12. Shew by an illustration the action of increased supply
upon the value of money.
13. Why do the results described in these examples never
actually occur ?
14. What circumstances generally counteract the effect of
increased demand for gold and silver ?
15. What has been the effect of the gold discoveries upon
the value of money ?
16. Enumerate the circumstances which caused the de-
crease in the value of gold after the great discoveries in 1850
to be comparatively so slight.
17. Describe the action of these circumstances on the
demand for gold.
1 8. Were the gold discoveries the cause of the increased
trade and population of England ?
19. What would have been the result had the gold dis-
coveries been unaccompanied by an increase of wealth and
population ?
1. Suppose a wealthy millionaire desired to confer a
benefit upon the inhabitants of some island that had no
commercial relations with the outside world, would he
accomplish his object by doubling the amount of money
possessed by each of the islanders ?
2. If population and commerce increased so that twice
as many people were receiving wages, and twice as much
buying and selling took place, what would be the effect on
general prices and wages, supposing that the supply of money
remained the same ?
3. If you could choose which of two Australian vessels
should be lost, one laden with gold and one containing a cor-
responding value of wool and corn, which would you select ?
4. Would the wealth of England have been increased if
the country had contained gold mines, instead of our iron
and coal ?
SECTION III
The Distribution of Wealth. Introductory Remarks.
Wealth is divided into Rent, Wages and Profits. In
a previous section on the Production of Wealth it was stated
that the three agents of Production were Land, Labour and
Capital. It is therefore evident that Wealth is distributed
between those who respectively own these agents of produc-
tion, i.e. between the Landlord, the Labourer and the
Capitalist. The share allotted to the Landlord is termed
Rent ; that possessed by the Labourer is called Wages, while
that belonging to the Capitalist is termed Profits. Wealth is
therefore divided into three parts, viz. the Rent of Land, the
Wages of Labour, and the Profits of Capital. In the follow-
ing chapters the proportions which these three parts bear to
each other will be pointed out, and the circumstances will be
explained which cause an increase in one and a correspond-
ing decrease in another. It will for instance be shewn why a
decline in general profits causes an increased amount to be
paid as rent. This and many other interesting economic
problems will easily be solved by those who rightly under-
stand the laws which govern the distribution of wealth.
Rent, Wages and Profits are in various countries
owned by different combinations of persons. In the case
of agricultural industry, Rent, Wages and Profits are nearly
always in this country allotted to three distinct classes, viz.
Landlords, Labourers and Capitalists. It must however be
borne in mind that in other countries different modes of
distribution prevail. In many parts of the Continent the
104
CHAP. I THE RENT OF LAND 105
same individuals frequently possess all three of the agents ot
production. Land, Labour and Capital being in this case
provided by one person called a peasant proprietor, he derives
all the wealth which they are capable of producing, viz. Rent,
Wages and Profits. In Ireland and in India labour and
capital are in many cases provided by the same individual,
who is a peasant tenant. In this case the tenant can fairly
claim both wages and profits as his own, the rent only being
the due of another person. From these examples it is seen
that, in different countries, Land, Labour and Capital are
owned by different combinations of persons, or, in other
words, different tenures of land prevail.
QUESTIONS ON THE INTRODUCTORY REMARKS ON
SECTION III
1. Into what shares is wealth divided, and to what pro-
ductive agents do these shares correspond ?
2. Are these shares always owned by different persons ?
3. Mention some of the modes prevailing in different
countries of distributing these shares.
CHAPTER I. The Rent of Land.
A definition of Rent. Rent is that share of wealth which
is claimed by the owners of land ; it is the price which is paid
to them for the use of their land. The rent of land is regu-
lated in some countries by custom, and in others, as in
England, by competition. The regulation of rent by com-
petition means that, subject to certain conditions, the land-
lord will let his land to the farmer who offers him the best
price for it. When rents are determined in this way there is
virtually a bargain between landlord and tenant, just as
there is between the buyer and seller of any ordinary
commodity.
It is proposed first to explain the principles which deter-
mine the rent of land as regulated by competition, and then
briefly to describe some of the tenures which are controlled
io6 DISTRIBUTION OF WEALTH SECT, in
by custom. It is unnecessary in this place to inquire how
the owners of land originally came into possession of that
which neither they nor any other persons have assisted to
produce. It is sufficient to recognise that the land is in
the possession of certain individuals, and the conclusions
arrived at in this section will be based on this recognition.
Rent is the effect of an appropriated natural monopoly.
Land being absolutely limited in amount and the demand
for it being very general, the owners of land can nearly
always obtain a rent for it. "The reason why landowners
are able to require rent for their land, is that it is a commodity
which many want, and which no one can obtain but from
them." (Mill's Principles of Political Economy, vol. i. p.
SOS-)
A further analysis of the nature of Bent. The rent
of agricultural land is regulated by two circumstances : the
fertility of the soil, and the convenience of situation. When
either of these conditions is altogether absent land can com-
mand no rent. Thus no one will pay rent for land which is
so barren that the produce yielded by it is insufficient to
remunerate the capital and labour expended in its cultivation.
On the other hand, the most fertile land sometimes yields
no rent, on account of the inconvenience of the situation in
which it is placed. There are tracts of land in America,
Africa and Australia in this condition ; they are far removed
from the great centres of population ; roads, railways and
water-carriage all being absent, there are no means of dis-
posing of the abundant crops which the land is capable of
producing. Such land as this consequently yields no rent.
Some land of great natural fertility, situated most conveni-
ently for the disposal of the produce, yields no rent ; because
the crops are either wholly destroyed or greatly injured by
swarms of hares and rabbits. The loss arising from this
cause was not borne by the owner of the land only ; it was
also felt by the entire nation, which suffered a loss similar to
that which it would have to bear if the natural fertility of the
soil were reduced to an extent corresponding to the damage
done by the hares and rabbits. The farmer may be com-
pensated by reduction of his rent ; but the consumers of
CHAP. I THE RENT OF LAND 107
agricultural produce have to give an increased price for it,
in consequence of the diminution of the production. 1
Land in all countries varies greatly in fertility and in con-
venience of situation, and the rent of land, where rent is
regulated by competition, varies in exact proportion with the
productiveness 2 of the soil. If, for instance, there are two
farms, one of which, owing to its superior productiveness,
yields a much larger return to capital and labour than the
other, the rent of the more productive farm will exceed that
of the less productive farm by an amount exactly equalling
the pecuniary value of the advantages of the first farm over
those of the second farm. But it may still be asked,
"What determines the amount of rent paid by the two
farms ? It is quite evident that the more productive farm
will pay a higher rent than that paid by the less productive
farm ; but what determines the rent of the latter?" In
answering this question it will be necessary to explain
Ricardo's theory of rent.
Ricardo's theory of Rent. The rent of the less pro-
ductive farm is determined by the pecuniary value of the
excess of its productiveness over that of the worst land in
cultivation which pays only a nominal rent. This is a short
statement of Ricardo's theory of rent, which we will now
proceed to prove. In every country there is some land so
barren or so inconveniently situated that the produce yielded
by it is only sufficient to pay the wages of labourers who till
it, and to yield the ordinary rate of profit to the farmer. This
land can obviously pay no rent, for if it did pay rent the cul-
tivator would not receive the ordinary rate of profit upon his
capital. The land would therefore cease to be cultivated if
rent were exacted, for men will not continue to employ their
capital in an occupation which yields less than the ordinary
rate of profit.
The margin of cultivation. The rent of any particular
1 In 1 88 1 an Act was passed enabling tenants of farms to destroy
hares and rabbits ; since that time therefore the evil spoken of above
has been greatly lessened.
2 Productiveness is here and in other places intended to signify
both fertility and convenience of situation.
loS DISTRIBUTION OF WEALTH SECT, in
land is therefore determined by the excess of its produce over
that yielded by the least productive land in cultivation which
pays no rent. This land is described by Ricardo as being
upon the margin of cultivation, because land of still inferior
productiveness, though free from rent, would not yield the
ordinary rate of profit to the cultivator if agricultural prices
remained unchanged. This leads to the second part of the
explanation of Ricardo's theory.
The position in the scale of productiveness of the
margin of cultivation determines the price of agri-
cultural produce. It is evident that the productiveness
of the land on the margin of cultivation varies greatly at
different times and in different countries. The price of
agricultural produce is determined by the cost at which
the most costly portion is raised ; or, in other words, by the
position in the scale of productiveness of the margin of cul-
tivation. The questions therefore remain to be decided,
" What determines the position in the scale of productive-
ness of the cultivated land that pays no rent ? " and " Why
would land which is on the margin of cultivation in Australia
yield a large rent if it were in England ? " A consideration
of the price of agricultural produce furnishes the answer to
both these questions. The position of the margin of culti-
vation is determined in all countries by the necessities of
the population and the means at their command of satisfy-
ing them ; supposing that the area from which food can be
obtained is absolutely limited, an increase of population
necessitates a resort to less fertile land within that area.
This is a lowering of the margin of cultivation, and would
produce a rise in the price of agricultural produce and also
a rise in rent. On the other hand, where the area from
which food can be obtained is indefinitely extended through
improved means of communication with foreign countries,
the increased demand for food of an increased population
may be satisfied without causing a lowering of the margin
of cultivation. This happened in England during the
years 1878-1900. The increased supply of food demanded
by an increased population was met by increased facilities
for obtaining food from abroad. There was therefore a
CHAP. I THE RENT OF LAND 109
fall in prices and a consequent raising of the margin of
cultivation shewn by some land falling out of cultivation and
by a general reduction of agricultural rents.
Where agricultural produce is cheap the margin of culti-
vation is high, as it is in Australia, where the cultivation of
none but highly productive land is profitable. As agricul-
tural produce becomes dearer the margin of cultivation
descends, because it then becomes profitable to cultivate
soils of inferior productiveness. The truth of this assertion
may be made evident by an illustration. Suppose that the
price of agricultural produce suddenly rose one-third. The
returns of farmers would be increased by a corresponding
amount. The profits of farmers would then greatly exceed
the average rate. But the competition of other traders
would prevent farmers from permanently appropriating
exceptionally large profits. The farms would consequently
be let at increased rents. The land formerly on the margin
of cultivation would now yield rent, and the margin of
cultivation would consequently descend.
A very striking example of the fact that the margin of
cultivation varies from year to year, with changes in the
price of agricultural produce, may be seen on Salisbury
Plain. Some of the land there is so barren that it does not
pay a farmer to cultivate it unless the price of agricultural
produce is high. When therefore prices were high some
of the most barren land was cultivated, and the thin crops
raised upon it remunerated the farmer for the capital and
labour expended upon it. But when prices declined this
land ceased to be cultivated, because the sale of the pro-
duce did not give a fair return to capital and labour. In a
previous chapter the great rise in the price of coal which
took place about 1872 was referred to ; and it was then
shown that this rise in price caused seams of coal to be
worked at a profit which were so comparatively unproductive
that they had to be abandoned when prices fell. The margin
of cultivation (if this expression may be used in reference
to a mine) declined when prices rose, and returned to its
normal condition when the era of exceptionally high prices
came to an end.
r io DISTRIBUTION OF WEALTH SECT, in
An increase of population tends to increase the
price of agricultural produce. It must be borne in
mind that a lowering of the margin of cultivation can be
produced only by an increase in the price of agricultural
produce, because increased prices are necessary to render
the cultivation of land below the margin of cultivation
profitable. It has previously been pointed out that no
circumstance is so potent in producing an augmentation of
the price of agricultural produce as an increased demand
for it, consequent on an increase in the population. An
increase in the population necessarily implies an increased
demand for agricultural produce. This increased demand
raises the price, and it therefore becomes profitable to culti-
vate land of inferior productiveness to that formerly on the
margin of cultivation. Hence an increase in population,
causing an increased demand for agricultural produce, tends
to raise its price and produce a lowering of the margin of
cultivation. 1
The increase of population tends to raise the rent of land
in two ways. In the first place, by stimulating the demand
for agricultural produce it increases the value of it ; and
in the second place, in consequence of the lowering of the
margin of cultivation, the share of the produce allotted to
the landlord as rent is increased. For rent has been defined
as the difference in value between the productiveness of any
particular land and that of the worst land in cultivation
which pays no rent. Hence, when the margin of cultivation
is lowered, this difference becomes greater and the rent of
all land is increased. Let it be supposed that the value of
the productiveness of some particular farm is represented by
the number 100, and that the value of the productiveness of
the land on the margin of cultivation is represented by 30.
Then the rent of the first farm is represented by the number
70 ; but if the margin of cultivation is lowered so that the
value of the productiveness of the worst land in cultivation
1 The tendency exists, though, as frequently pointed out, it is
counteracted when improvement in the means of communication
brings the produce of more productive land within the reach of the
consumer.
CHAP. I THE RENT OF LAND in
which pays no rent is represented by 20, then the rent of
the first farm becomes equal to a sum represented by the
number 80.
A brief recapitulation of Eicardo's theory. The rent
of any particular land is the difference between its pro-
ductiveness and the productiveness of the worst land in
cultivation which pays no rent, that is, the land on the
margin of cultivation. Any circumstance therefore which
causes the margin of cultivation to descend increases rent,
because it increases the difference between the productive-
ness of any particular land and that of the worst land in
cultivation which pays no rent.
There is a certain antagonism of interest between
the owners of land and the consumers of agricultural
produce. From Ricardo's theory of rent may be deduced
the proposition that in some respects there is an antagonism
of interest between the owners of land and other classes
of the community. The increase of population exerts a
powerful influence to increase rents ; but if carried beyond
a certain point it is disastrous to the general interests of the
community. If it were not for the fact that the rates for the
relief of the poor are to a very great extent a charge on
land, this antagonism of interest would be much more
powerful than it is. If the landlords were relieved from the
cost of pauperism it would be actually advantageous to the
pecuniary interests of the owners of the soil that people
should marry recklessly, and bring large families into
existence, so that population might be increased and rents
raised. Regarded from this point of view, it is a wise
precaution which has entailed on landlords the disagreeable
as well as (to them) agreeable results of over-population.
If landlords were relieved from bearing the cost of pauperism
they would really grow rich on the improvidence of the
poor. The very same circumstance which produced the
increased wealth of the one class would deepen the misery
and degradation of the other. Hence while the landlord
was becoming more and more wealthy, the struggle for
existence among the very poor would become more and
more intense. The tendency of this antagonism of interest
ii2 DISTRIBUTION OF WEALTH SECT, in
is to a great extent counterbalanced by the cost of
pauperism ; and there are fortunately many other respects
in which the interests of the owners of land and those of
the general community are identical. Another example
may be given of antagonism of interest between landowners
and the rest of the community. The population generally
benefits by any circumstances which make food cheap :
hence the importation of wheat from America and India, of
beef and mutton from Australia, New Zealand and Canada,
have been an immense advantage to the general community
and to the labouring classes in particular. But they have
caused great losses, through necessary reductions in rent, to
the owners of land : and their losses have to some extent
been shared by farmers.
In some respects Interests of Landlord, Capitalist
and Labourer are identical. Notwithstanding that in-
creased pauperism and increased rents arise from the same
cause, it does not follow that the interests of landowners
and of other classes are necessarily opposed under all
circumstances. On the contrary, the interests of the land-
lord, the capitalist and the labourer are in some respects
the same. All are interested in rendering land, capital and
labour as productive as possible. It is conceivable that
some agencies may vastly increase the productive power of
land, labour and capital ; in this case the share of wealth
allotted to each might be increased, because there would
be more to distribute as rent to the landlord, profits to the
capitalist, and wages to the labourers. A few years ago the
wages paid to agricultural labourers in the south of England
were so low, and at the same time the prices of food
were so comparatively high, that it was contended that the
efficiency of the labourer was very materially reduced. The
labourer was habitually underfed and unsuitably clothed, he
became prematurely old and feeble ; this being so, many
who knew intimately what his daily life was asserted that if
he were a slave or a cart-horse it would serve the pecuniary
interests of his owner to feed, house and clothe him better
than he could afford to feed, house and clothe himself upon
his wages. It was therefore argued that if the labourer
CHAP, i THE RENT OF LAND 113
received higher wages, his labour would become more
efficient, and he would consequently be a more valuable
servant to his employer. The improvement in the labourers'
condition which has lately taken place did not however
proceed from the enlightened self-interest of their employers.
It was due to a combination of causes, among which may
be mentioned ist, The great fall in the price of provisions
consumed by the labourers, such as cheese and bacon,
owing to the recent great importation of these things from
America, etc. This raised the daily standard of comfort of
the entire class. 2nd, The gradual spread of education
awakened the 'agricultural labourer to the fact that he was
worse off than other labourers ; he became discontented
with wages at qs. a week ; railways and steamships gave
him (materially speaking) the power to move to places
where his labour would be better paid ; the energy and
enterprise which were the result of education gave him the
moral power which the move required. Until a few years
ago the agricultural labourers were practically excluded
from the influence of competition. They were too ignorant
and too timid to leave their homes in search of better paid
employment. They were almost as incapable of independent
action as the sheep and cattle they tended in the fields.
Now however this state of things has come to an end ;
there is a constant flow of population out of the agricultural
counties into the manufacturing centres. It is perhaps
too soon at present to say what the effect of this change
will be on rent and on the profits of the farmers ; it may
however be hoped that, when the present rather transi-
tional condition of things is over, the farmers as well
as the labourers will benefit from the improvement in the
intelligence and material comfort of the labourer. One fact
may be mentioned in support of the reasonableness of
this expectation. In Scotland and Northumberland the
labourers have long been in a position very greatly superior
to the labourers in the south of England ; they are better
educated, better housed and better paid ; and not only are
rents higher and the general condition of agriculture more
satisfactory, but the labour bill on farms of a similar size
I
ii4 DISTRIBUTION OF WEALTH SECT, in
and nature is actually less in those districts where wages are
high than in those where wages are low. The labour bills
of two farms of 380 acres, each requiring the same kind of
labour, the one in Aberdeenshire and the other in Norfolk,
have been compared ; the Scotch labourers were paid 2os. a
week, the Norfolk labourers 14^., yet the labour bill for the
year was only ^510 in Aberdeenshire compared with
^800 in Norfolk. The superior intelligence and energy of
the labourer more than compensated the Scotch farmer for
the higher rate of wages he was paying.
Population not a measure of National Prosperity.
There are a vast number of economic problems which will
be solved with perfect readiness by those who have a
thorough grasp of Ricardo's theory of rent. A right under-
standing of this theory and of the proposition enunciated
in Section I., that a demand for commodities is not a
demand for labour, will enable the student to detect and
avoid some of the most common fallacies, which are often
propounded as if they were self-evident truths. Such, for
instance, as the statement so often either expressed or
implied in the newspapers and elsewhere, that the prosper-
ity of all countries is accurately measured by the growth
of their population that in proportion as population in-
creases, national prosperity also increases. This statement
is, no doubt, within certain limits true in a country like
Australia, where there is abundance of fertile land, and
where consequently the necessaries of life are very cheap.
In such a country an increase of population augments the
national wealth because an additional supply of labour
as wanted to develop its great natural resources. But in
some countries, such as India, an immense increase has
taken place in the population without a corresponding-
increase in wealth ; the standard of comfort of the popu-
lation has been lowered, and vast numbers are constantly
living just on the verge of pauperism and starvation. The
people have no reserve of any kind, and the failure of a crop
immediately brings the pinch of want ; they cannot meet
bad times by giving up luxuries in order to buy necessaries ;
they have no luxuries ; they have no cheaper kind of food to
CHAP. I THE RENT OF LAND 115
which they can resort ; they are already at the bottom of
the scale of human existence, and to fall any lower means
actual famine. It is obvious that in a country in such a
situation as this, increase of population is in itself no
indication of increased prosperity.
Rent does not increase the price of Agricultural
Produce. One of the most important conclusions deduced
from Ricardo's theory is that rent does not form a part of
the price of agricultural produce ; or, in other words, that
agricultural produce would be no cheaper if all rents were
remitted. We have seen that the price of agricultural
produce is determined by the position of the margin of
cultivation. The price of the produce must be such as to
remunerate the capital and labour expended in tilling the
worst land in cultivation which pays no rent. If prices were
less, this land would cease to be cultivated, and the margin
of cultivation would rise. But this cannot take place because
the demand for agricultural produce would not be diminished
by the remission of rents, and therefore as large a quantity
of agricultural produce would be required as before ; and,
as previously stated, the demand for agricultural produce
determines the position, in the scale of productiveness, of the
margin of cultivation.
The rent of land, regulated by competition and consisting
of the excess of its return above the return of the worst land
in cultivation, is called the rack-rent.
One of the objections sometimes urged against Ricardo's
theory is that there can be no cultivated land rent free, as
all farmers have to pay rent. It is no doubt true that there
are few farms entirely composed of land which is so unpro-
ductive that it yields no rent ; but many farms contain
portions of such land, and though the rent may be reckoned
upon the total number of acres of which the farm is com-
posed, the rent would not be decreased if that land were
subtracted which yields only sufficient produce to give the
ordinary rate of profit to the cultivator, and to pay the wages
of the labour expended in its cultivation. It is also objected
to Ricardo's theory that farmers and landlords know nothing
about it, and do not regulate the rent of land in accordance
1 1 6 DIS TRIE UTION OF WE A LTH SECT. 1 1 1
with it. This is something like saying that the discoveries
of anatomists must be wrong because most people live all
their lives without knowing how their bodies are put
together. People can eat what agrees with them without
understanding the process of digestion, and they can pay
or receive a rack-rent without ever having heard of Ricardo's
theory.
The influence of custom on Rent. Throughout this
chapter it has been assumed that rents are entirely regulated
by competition. In England and Scotland this, is almost
invariably the case, but in most countries custom has a
powerful influence in regulating rents. In some parts of
Italy and France, for instance, a tenure prevails called
the metayer tenure, in which the produce of the soil is
divided in a certain fixed proportion between the owner
of the land and the cultivator. This proportion is usually
one-half, but in some districts the owner of the land receives
as much as two-thirds. The proportion allotted to the
landlord is fixed by custom, and not by competition.
Custom also regulates what part of the capital necessary
for tilling the soil shall be provided by the landlord. In
some places he supplies all the stock, implements and seed
which the cultivation of the land requires ; in other districts
the landlord furnishes the cattle and the seed, and the
labourer provides the implements. The customs seem to be
quite arbitrary, and are controlled by no fixed rule. Political
economy cannot therefore define what circumstances de-
termine the proportion in which the produce of a farm is
distributed between the metayer tenant and his landlord.
It will, however, be useful to consider the influence of the
metayer system on the rent.
The influence of the metayer system on Rent. In
those cases where rents are regulated by custom rather than
competition, the landlords are compelled to sacrifice some
part of what may be called the economic rent as defined
by Ricardo's theory. In Tuscany, for instance, the metayer
rent is two-thirds of the produce, on soils of all degrees of
productiveness. Now it is evident that if one-third of the
produce of the least productive farm in Tuscany is sufficient
CHAP. I THE RENT OF LAND 117
to remunerate the cultivator for his capital and labour, one-
third of the produce of the most productive farm in Tuscany
must be more than sufficient to give the same rate of wages
and interest to its cultivator. Under the metayer system
the tenant shares with the landlord the advantage arising
from the superior productiveness of the soil. Under the
rack-rent or competition system all the surplus which
remains after paying wages to labour and the current rate
of profit to the farmer is claimed by the landlord as rent,
so that tenants do not reap any permanent advantage
from the superior productiveness of their farms. Under the
metayer system the cultivator obtains some part of this
surplus, he therefore possesses a beneficial interest in the
productiveness of the soil. It is probable that this fact
exercises a powerful influence in stimulating his industry,
and the metayer tenure, though disadvantageous to land-
lords, may be beneficial to the general community. The
economic defect of the metayer system is that it tends to
prevent the expenditure of capital in permanent improve-
ments. For instance, a metayer farm might want draining ;
the landlord would know that if he provided the necessary
capital for drainage the farm would be more productive, but
that he would not be able to obtain more than one-half or
two-thirds of its increased productiveness. Similar con-
siderations deter the expenditure of capital on the part
of the tenant. It must not however be overlooked that
under the rack-rent system there is no inducement for a
tenant to employ his capital in permanent improvements,
unless he holds a sufficiently long lease to enable him to
secure a satisfactory return on his expenditure.
The custom of Ulster Tenant-right. In some parts of
Ireland, especially in Ulster, the amount of rent received by
landlords is reduced by. what is called the Ulster Tenant-
right. According to this custom the in-coming tenant pays
to the out-going tenant a certain sum, partly as a considera-
tion for the good-will of the farm, and partly as compensation
for unexhausted improvements. The sum paid for good-will
is really a part of the economic rent. If the in-coming
tenant had not to pay this sum, he would be obliged to
ii8 DISTRIBUTION OF WEALTH SECT, in
pay more rent. The custom therefore divides the ecqnomic
rent into two parts, one of which is capitalised and paid by
the in-coming tenant to the out-going tenant ; the other
part is paid in the usual manner annually to the landlord.
The economic advantage of this custom is that it gives
practical security of tenure to the tenant, by recognising
that he has a proprietary right in the soil. On the other
hand, it is stated that the custom is economically pernicious
because it reduces the capital of the in-coming tenant just at
the time when he wants it most to stock his new farm. In
answer to this objection it may be urged that the capital
of the tenant would not be invested in the land at all if
it were not for the security of tenure which the tenant-right
gives. The practical effect of the Ulster Tenant-right seems
to be most satisfactory. Those parts of Ireland where it
operates present a most favourable contrast to those dis-
tricts where no similar custom prevails. The Ulster custom,
although very prevalent, had formerly no legal sanction.
Prior to 1870 there were really two laws in Ireland, one
the law of the land, and one sanctioned by the customs
and habits of the people. The Irish Land Act of 1870
reconciled these two conflicting systems by legalising the
Ulster custom of tenant-right. The Irish Land Act of
1 88 1 has supplemented that of 1870, and the Act of 1881 has
necessitated that of 1887. The attempt made by the Act of
1 88 1 to fix rents for 15 years was signally unsuccessful. The
effort to fix by law what is essentially dependent on variable
circumstances is foredoomed to failure. An Act of Parlia-
ment might as well have been passed to suspend the law ot
gravitation. This futile provision of the Act of 1881 led to
fresh legislation in 1887. The general effect of the Irish
Land Acts of 1870, 1881 and 1887 has been to create or
rather to legalise a joint ownership in the land between the
tenant and the landlord. The Acts of 1903 and 1909, as
previously explained, further facilitated the purchase by the
tenants of their holdings. The old copyhold tenure in
England is an instance of another kind of dual ownership.
The Cottier and Conacre Tenancies of Ireland. The
Cottier tenancy of Ireland may be described as a tenure in
CHAP, i THE RENT OF LAND 119
which the rent was forced up beyond the rack-rent by the
competition of an excessive population. The nominal rent of
a cottier tenure was sometimes fixed at an amount exceeding
in value the whole of the produce of the land. Under this
wretched system the tenant knew that the landlord would
be obliged to leave him just sufficient potatoes to keep
himself and his family from starvation. He was never able
to pay the full nominal rent ; he was therefore constantly in
arrears with his landlord. He had no motive for energy
and industry, for the landlord was able to appropriate all
the results of his labour in payment of the arrears of rent.
At the same time the tenant had no prudential motives to
restrain him from marrying and having a numerous family,
for he was aware that the landlord could not deprive him
and his children of the bare necessaries of life. No system
of land-tenure could have been more mischievous in its
economic, social and moral results than the cottier tenancy
of Ireland.
There is in Ireland another sort of tenure called Conacre.
Under this system it was the practice of a landlord who
required work done on his estate to pay the labourers by
giving them a small plot of manured land rent-free.
Having now described the nature of Rent as regulated by
competition, and explained the character of some tenures
which are controlled by custom, the wages of labour will be
next considered.
QUESTIONS ON CHAPTER I. The Rent of Land.
1. What is rent? Explain what is meant by rents being
determined by competition.
2. What is the reason why landlords are able to require
a rent for their land ?
3. What two elements must always exist in land which
pays rent ?
4. What determines the rent of any particular land ?
5. What is meant by "the margin of cultivation " ?
6. What determines the position of the margin of culti-
vation ?
120 DISTRIBUTION OF WEALTH SECT, in
7. Give an illustration of the manner in which the
margin of cultivation varies with the price of agricultural
produce.
8. What determines the price of agricultural produce ?
9. In what two ways is rent increased by the lowering
of the margin of cultivation ?
10. Briefly recapitulate Ricardo's theory of rent.
1 1. In what sense are the interests of landowners opposed
to those of all other classes of the community ?
12. In what respects are the interests of landlord, farmer
and labourer identical?
13. Shew that low wages are not always profitable to the
farmer and the landlord.
14. In what way does an increase of population affect
the prosperity of a country like Australia ?
15. What is the effect of increased population on the
prosperity of a country like India?
1 6. Prove that rent is not a part of the price of agricultural
produce.
17. Are rents always regulated by competition ?
1 8. Describe the metayer tenure.
19. Does the landlord under this system get as large a
share of the produce as he does where rent is regulated by
competition ?
20. What are some of the advantages and disadvantages
of the metayer tenure ?
21. Describe the Ulster custom of tenant-right. What
are its advantages and disadvantages ?
22. What is the Cottier tenure of Ireland ?
23. Describe its disadvantages.
24. What is Conacre ?
1. If a farmer pays a rack-rent for his farm, will it
make any difference to him whether the land be barren or
productive ?
2. If a hundred square miles of fertile land could be
added to the area of England, what effect would it have on
the price of agricultural produce ?
CHAP, ii THE WAGES OF LABOUR 121
3. If you were going to be a farmer, would you rather
pay a rack-rent, or would you prefer being a metayer
tenant ?
4. If all the landlords in England excused their tenants
paying rent, would bread be cheaper?
5. If all farmers instead of paying their rent to private
individuals paid it into the national exchequer, what effect
would it have on the general wealth of the country ?
CHAPTER II. The Wages of Labour.
That part of wealth which is given in exchange for
labour is called wages. Mr. Henry George's objection to
the statement that wages are paid out of capital has been
referred to on a previous page. It is certainly important
never to forget that the ultimate source both of wages and
profits is the value of that which labour and capital combine
to produce : but as the capitalist is in a position to wait for
his reward till the commodity produced is ready for market,
and as the labourer in the present condition of society
generally speaking cannot wait, the labourer's share of the
value of the commodity is advanced to him by the capitalist
in the form of weekly wages ; and in this sense wages are
paid out of capital and are part of the expenses of the
production of any particular commodity.
Wages as regulated by Competition. Wages, like rent,
may be regulated either by custom or by competition. They
are, however, for the most part, regulated by competition,
that is to say, the labourer tries to get as much as possible
in exchange for his labour, and the employer tries to obtain
labour at the least cost to himself. There are, of course,
exceptions to this general assertion ; there are many labourers
who would not leave an old master in order to gain an in-
crease of wages ; and it not unfrequently happens that an
employer hires labourers partly out of charity, and would
not part with some of his labourers even though he could
get their work done for a smaller amount of wages. Such
circumstances as these are, however, the exception, and
not the rule. Employers and workmen may be regarded as
122 DISTRIBUTION OF WEALTH SECT, in
the buyers and sellers of a commodity. Employers want to
obtain labour ; workmen want to sell it. Employers will
try to get labour as cheap as possible, but their competition
between themselves tends to raise wages. Suppose that
owing to an increase of trade the demand for labour is very
active, employers, rather than be deprived of the labour
which enables them to obtain their profits, will raise wages
in order to retain the services of their employees. The
employed try to sell their labour for as much money as
possible, but their competition between themselves tends to
depress wages. Suppose that three labourers are anxious to
obtain work of an employer who only wants the services of
one of them. Assuming that all three are equally good
workmen, and competition to be unrestricted, the situation
will be gained by him who will consent to take the lowest
wages. If, on the other hand, three employers are seeking
the services of one labourer, he will be hired by the employer
who offers the highest wages. It must however be remem-
bered, that the whole industrial population of a country does
not compete indiscriminately for all employments. It is
rather divided into a series of layers, within each of which
considered separately there is a real and effective compe-
tition ; but as between the different layers or groups com-
petition is practically inoperative. Thus the lowest class of
manual labourers are not in competition for the same kind
of employment as the skilled artisan ; and again, the skilled
artisan is not in competition with the professional classes.
This limitation of competition is one of the most powerful of
the causes which produce different rates of wages in different
kinds of employment.
Circumstances which regulate the Amount of Wages.
In some industries a much larger proportion of the capital
employed has to be devoted to wages than in others. In
other words, some industries require a greater proportional
amount of labour than others. For instance, the "wages-
capital " of a farmer of arable land bears a much larger pro-
portion to his total capital than does the " wages-capital " of
a stock farmer, because more labour is needed on an arable
farm than on a stock farm. Therefore the character of the
CHAP, ii THE WAGES OF LABOUR 123
national industries influences the amount of the wages-fund
or wages-capital of a country ; and average wages in any
country depend upon the proportion between its wages-fund
and the number of the labouring population. Changes in
the character of industry throughout a nation such as that
which took place in England during the nineteenth century
by the application of steam machinery to manufactures
temporarily injured the labouring classes, because it caused
a transfer to be made from wages-capital to fixed capital in
the shape of machinery. But the injury was only temporary
in its nature, because production was so enormously
stimulated by the use of machinery that new wealth was
quickly created which its owners desired to use productively
as capital ; new demands for labour consequently sprang up,
and the amount of capital devoted to the payment of wages
instead of being diminished was in the end largely increased.
It has been pointed out on p. 35 that a similar cause, viz. a
great extension of the use of labour-saving machinery, has
been in active operation since about 1873 > a d this was
probably one of the causes of the depression and scarcity of
employment among the poorest classes which attracted so
much attention during the winters of 1885-6-7-8. It is how-
ever certain that in this, as in former instances, the injury to
the labouring classes, though very real for the time, was
temporary ; and that they, in common with all other classes,
ultimately benefited largely by the increased cheapness or
commodities and by the consequently increased purchasing
power of wages. It cannot be doubted that the general
result of the introduction of machinery has been favourable
to the working-classes.
Trades' unions. It is sometimes objected that if wages
are regulated by the ratio between wages-capital and the
number of the labouring population, such organisations as
trades' unions must be powerless to influence wages,. The
contrary is however the case ; the managers of a trade's
union watch the general condition of the trade to which its
members belong ; and they are enabled to judge with toler-
able accuracy when the condition of the trade is such as to
justify a rise or to necessitate a reduction in wages. If, for
124 DISTRIBUTION OF WEALTH SECT, in
instance, there has been a rise in prices without any corre-
sponding increase in cost of production, as there was in the
coal trade in 1872, the unionists know that their members
are entitled to a rise of wages, and their organisation enables
them to obtain this rise of wages more rapidly and certainly
than would be the case if they waited till the labour market
was influenced by the natural increase in the demand for
labour which exceptionally high profits are sure to bring
about. After a long period of depression between 1876 and
1888, the English coal trade began to revive and prices went
up; the leaders of the trade's union took advantage of this,
and demanded and obtained successive advances in wages,
amounting in all to 40 per cent, between October 1888
and March 1890. Then prices began to decline, and the
employers, in June 1893, demanded a reduction of one
quarter on the total increase of wages since -1888. This led
to a prolonged and very bitter struggle which lasted three
months, during which it was estimated that although the
number of men on strike was 300,000, the total number thrown
out of employment by the strike was as many as 1,000,000.
The price of coal rose to an extraordinarily high figure ; all
the heaps of refuse coal-dust outside the mines were sold
at high prices. The labouring classes suffered doubly : first
through the high price of coal ; and secondly, in many cases,
by loss of employment, for the coal trade affects nearly
every other trade. The men eventually were, however,
triumphant in the main matter in dispute ; they went back
to work at the old rate of wages. But it may be doubted
whether the struggle did not cost more than it was worth.
The direct cost in loss of wages and profits was estimated at
^30,000,000. This case may serve as an example of the
influence of trades' unions on wages, a subject which will be
more fully discussed in a future chapter. A favourable
example of their influence is afforded by the successive
increases which they were able to secure, with but little
difficulty, in the three years 1888-90. Whether their influence
was favourable or the reverse, in resisting a reduction in
1893, it was at any rate successful, and the number of
tons raised in 1894 having been greater than that of any
CHAP, ii THE WAGES OF LABOUR 125
previous year, they cannot be said to have permanently
damaged the trade. 1
The influence of Population on Wages. The greatest
difficulty hitherto in permanently improving the condition of
the labouring population has arisen from the fact that an
increase of the wages-fund has been almost invariably
followed by a corresponding increase in the number of the
wages-receiving class. At the time of the repeal of the corn
laws, it was thought by some ardent repealers that the cheap
food which the abolition of the duty on corn brought to every
cottage in the kingdom would permanently improve the con-
dition of the labouring poor ; it was said that there would
be no more starvation and no more pauperism. The work-
houses, it was confidently asserted, would soon be in ruins.
The result proved far otherwise. The cheap food, which
the repeal of the corn laws brought to England, stimulated a
vast increase of population ; the benefit which might have
been derived from a plentiful supply of cheap food was
absorbed by the demands of millions of hungry mouths.
For a long time the principal effect, on the labourer, pro-
duced by the repeal of the corn laws was that cheap food
enabled him, not to live in greater comfort, but to support
an increased number of children. These facts lead to the
conclusion that no material improvement in the condition of
the working-classes can be permanent, unless it is accom-
panied by circumstances which will prevent a counter-
balancing increase of population.
The importance of raising the Standard of Comfort.
No circumstance would prevent over-population so effectually
as a general raising of the customary standard of comfort
among the poorer classes. If they had accustomed them-
selves to a more comfortable style of living, they would use
every effort not again to sink below it. Ricardo says on
this subject : " The friends of humanity cannot but wish
that in all countries the labouring classes should have a taste
for comforts and enjoyments, and that they should be stimu-
lated by all legal means in their exertions to procure them.
1 See articles on " The Coal Dispute of 1893," Economic Journal,
December 1893, and March 1894.
126 DISTRIBUTION OF WEALTH SECT, in
There cannot be a better security against a superabundant
population." It is because there has recently been such a
distinct advance in the standard of comfort among the
agricultural labourers, that there is every reason to hope that
the improvement they have effected in their condition will
be permanent. The younger generation are prepared to
enter other employments, to move to other localities and
emigrate to other countries rather than endure the life which
their forefathers led. Many circumstances have combined
within the last forty years to raise the habitual standard
of comfort among the English working-classes. x Perhaps the
chief of these is the Education Act of 1870. When people
are educated they endeavour by all the means in their power
to release themselves from the degrading squalor which
usually accompanies over-crowding. The spread of educa-
tion is one of the chief means by which it may "be hoped
intemperance will be successfully combated. Increasing
temperance has certainly raised the habitual standard of
comfort. Education may have benefited the working-classes
in yet another way : by developing their intelligence it would
make them more efficient as labourers, and thus render it
possible for them to receive higher wages without reducing
profits. Increased facilities in travelling and increased
knowledge of the condition of their brethren in Australia,
New Zealand, South Africa, America and Canada have also
tended to raise the habitual standard of comfort at home.
A cabinet-maker, for instance, would no longer submit to
very low wages in England when he hears from "a comrade
who has emigrated to Australia that he could easily earn
los. a day if he came to Rockhampton or Sydney.
Malthus on Population. Malthus, in his celebrated essay
on population, showed that there is a constant tendency in
animal life to increase beyond the nourishment prepared for it,
and that therefore unless there are some checks placed upon
population, the total production of food would in course of
time be insufficient to supply the wants of mankind. It has
been thought by some that Malthus was manifestly in the
wrong, because there appears no likelihood of' the means
of subsistence becoming insufficient for the wants of the
CHAP, ii THE WAGES OF LABOUR 127
population of the globe. It must, however, be remembered that
what Malthus said was, that this insufficiency would prevail
if there were no checks on population. These checks do
exist, and are in active operation in every country ; that is to
say, in every country either the total number of births of
which the population is capable does not take place, or else
a large proportion of those who are born, die. The popu-
lation is kept down, either by prudence, or by such agencies
as war, famine and disease. The germs of existence both
in the animal and vegetable kingdoms, if they could freely
develop themselves, would, as Malthus showed, fill millions
of worlds in the course of a few thousand years. "Necessity,
that imperious, all-pervading law of nature,, restrains them
within the prescribed limits. ... In plants and irrational
animals the view of the subject is simple. . . . Wherever
there is liberty, the power of increase is exerted ; and the
superabundant effects are repressed afterwards by want of
room and nourishment." He then showed that man had the
same tendency to increase beyond his means of subsistence,
and that where no other checks restrained the increase of
population it is reduced by the difficulty of obtaining food,
by disease, and by other agencies which bring misery and
degradation in their train. But beside these positive checks
on population, there are also preventive or prudential checks ;
and in his essay on population he examines the condition of
many countries in order to ascertain whether the prudential
or the positive check is the more operative. In most countries
both checks are in operation : in London the number of
children who die of diseases produced by unsuitable food,
insufficient food, clothing, and attention, and from over-
crowding is appalling, and is a blot upon the civilisation of
this country ; for it is hardly necessary to say that as civilisa-
tion advances, the prudential check grows stronger, and the
positive check less active. 1 The civilisation of a country
1 Since 1900 there has been in the United Kingdom a marked
reduction in infant mortality. The reduction has been from about
167 per looo to 109. It is still higher than it ought to be. In the
Commonwealth of Australia it sank between 1901 and 1908 from
in per looo to 77.
128 DISTRIBUTION OF WEALTH SECT, in
might also be measured by comparing the activity of the
prudential check with that of the positive check.
A right conception of the importance of population is
fundamental to an understanding of the causes which
regulate the wages of labour. An increase in population,
unaccompanied by counterbalancing circumstances, acts
upon the condition of the labourer in two ways : it increases
the price of food by rendering a resort to less productive soils
necessary ; and by increasing the number of the wages-
receiving class it increases the competition in the labour
market and tends to reduce wages.
Emigration is an insufficient remedy for Over-Popu-
lation. Emigration has been considered by some a sufficient
remedy for over-population. There are, however, many
objections to relying on emigration as the sole means or
checking the natural increase of population. In the first
place, those who are the poorest and the most destitute have
not the means to emigrate, and if means were provided by
the Government or by a national subscription, the colonies
would very probably object to being made the receptacles of '
the pauperism of the Old World. The Government of the
United States in 1883 very properly refused to allow ship-
loads of destitute Irish families to be landed in that country
unless those who paid for the passage of these emigrants
would also provide them with subsistence for a certain period.
It therefore appears that those whom we are anxious to get
rid of, other countries do not willingly accept ; whilst those
who are prosperous and in good employment have no motive
to leave their occupations. In the second place, unless
prudential checks are in operation, the place of those who
have emigrated will soon be filled by a new generation. And
in the third place, emigration cannot be looked upon as a
permanent remedy for over-population, because in the course
of time the colonies will be as thickly peopled as the old
countries of Europe now are, and the principal advantage of
emigration will then cease to exist. Notwithstanding the
incompleteness of this remedy for over-population, emigration
may at the present time do great good, if it is accompanied
by increased activity of the preventive or prudential check
CHAP. II THE WAGES OF LABOUR 129
upon population. For some time to come every skilled
labourer who reaches America, Australia, or South Africa will
be a source of wealth to those nations, whilst his absence
will tend to reduce the overstocked labour markets of
Europe. The voluntary emigration of labourers from Ireland
to America has no doubt been very serviceable to both
countries ; and a somewhat similar movement on the part
of English agricultural labourers, although on a very much
smaller scale, has recently produced a very marked im-
provement in the condition of those who have remained at
home, whilst skilled farm-hands are most warmly welcomed
in Canada, Australia and New Zealand.
The effect on Wages of a local Decline in Profits. An
historical survey shews that the rate of profit has in all
countries declined with the increase of wealth and popu-
lation. The causes which have produced this universal
decline in the rate of profit will be investigated in the next
chapter ; it is sufficient here to shew the influence on wages
of a local and not a general decline of profits. Suppose that
the labourers engaged in any particular trade are receiving
such an amount of wages that their employer's capital is
remunerated by no more than the average rate of profit. If
these men strike for higher wages, and succeed in obtaining
them, the employer will carry on his business at a com-
parative loss, that is, he will be receiving less profit than he
would realise in other trades. He will therefore be careful
not to extend his business ; and if the loss remain permanent
he will gradually withdraw his capital, and invest it in other
trades. The benefit, therefore, that the labourers derive
from a rise in wages which causes profits to sink below the
average rate is only temporary. If it be true that previous
to the agricultural strikes which took place a few years ago,
farmers were gaining something less than the ordinary rate
of profit upon their capital, the success of the labourers in
obtaining higher wages must produce a change in the
conditions of agricultural industry. The farmers will not
go on employing their capital for a less reward then they
could obtain in other employments. Possibly the increased
wages will make labour more efficient ; if this be the case,
K
130 DISTRIBUTION OF WEALTH SECT, in
the farmer will be compensated for his extra outlay by better
crops, or by employing fewer hands. Possibly the higher
rate of wages will induce the farmer to use more machinery
than he has hitherto done ; the size of farms will be in-
creased, and the use of the steam-plough, the reaping-
machine and the hay-making machine will become universal.
If this be the case, the farmer will employ comparatively few
men ; and those he does employ will be highly-skilled
agricultural mechanics who will receive correspondingly high
wages. In the meantime the extinction or the removal of
the old-fashioned labourer, of the type suggested by the
nickname " Hodge," will be a process accompanied by
acute suffering and much bitter heart-burning. Hodge is not
quick to emigrate, he is still less quick in developing into an
agricultural engineer, or a town artisan ; and his sufferings
must be put down as a set-off against the advantages of a
highly-skilled and highly-paid class of agricultural labourers.
There is another way in which the farmer may be com-
pensated for his loss, if his profits are reduced below the
ordinary rate in consequence of the higher wages obtained
by the labourers. His rent may be reduced. If this alter-
native be practicable, it would be accompanied by far less
suffering than that involved in the summary extinction of
Hodge. 1
The effect of increased Efficiency upon the Rate of
Wages. Another means of increasing wages is provided by
any circumstance which increases the efficiency of labour.
If more wealth is produced by the joint agency of land,
labour and capital, there will be more to distribute as rent
to the landlord, wages to the labourer, and profits to the
1 Since this was written there has been a continuous and heavy
fall in agricultural prices and a very general reduction of farm rents
all over England, accompanied by a very considerable improvement
in the condition of the agricultural labourer. Much is heard of
agricultural distress : the farmer and the landowner have no doubt
suffered severe losses; but the labourers are probably better off than
they ever were before, and this must be set on the other side of the
account when estimating the condition of agriculture as a whole.
On the other hand, the smaller number of labourers required on
farms has tended still further to swell the ranks of the unemployed
jn London and other large towns.
CHAP.'ii THE WAGES OF LABOUR 131
capitalist. If education, or any similar agency, should
cause the labourer to work with more intelligence and with
more honesty, the efficiency of labour would be increased.
The labourer would make a better use of his tools and
materials, and the labour of superintendence and watching
might be dispensed with ; in this way wages might be in-
creased, because more wealth would be produced ; the cost
of production at the same time would be diminished and the
salary of the overlooker would be saved.
All the various schemes 1 which have been devised with
the object of making the labourers benefit in the increased
efficiency of their labour are based on this principle : viz., that
when labourers are given a direct pecuniary interest in
the efficiency of their labour, they will work with greater zeal,
intelligence and economy, and will accordingly produce work
of greater value ; the extra value thus produced is after-
wards divided, in shares previously agreed upon between the
labourers and their employers. Some of the best-known and
most successful profit-sharing businesses will be described in
Chapter 4, Section III.
Local and temporary circumstances cause the Rate
of Wages constantly to fluctuate. The above remarks
indicate the general causes which regulate the wages of
labour, but it must not be overlooked that local and tempor-
ary circumstances produce great fluctuations in the rate of
wages. Just as the price of commodities continually varies
on each side of the sum which is exactly sufficient to provide
the current rate of wages and profits to their producers,
so the price of particular kinds of labour constantly fluctuates
above and below the general average, produced by the pro-
portions between the demand for labour and the number of
the labouring population.
Do High Prices produce High Wages ? It is some-
times said that high prices produce high wages. The mean-
ing of such an expression will be rightly understood only by
those who know that no circumstance can produce a per-
1 The best English work on this subject is Mr. Sedley Taylor's
book, Profit Sharing ( Kegan Paul, 1884). Sec also Report to the
Board of Trade on Profit Sharing, 1891 [C. 6267].
K 2
l& DISTRIBUTION OF WEALTH SECT. Hi
manent effect upon the condition of the labouring popula-
tion, if the ratio between the wages-fund and the number
of the wages-receiving classes remains unchanged. Bear-
ing this fact in mind, let us investigate some instances
in which it is said that high prices produce high wages,
and that low prices produce low wages. There are many
cases in which high prices produce no effect whatever upon
wages. Prices of articles, the supply of which can be in-
creased, depend upon cost of production. Cost of production
consists of the following elements : labour, abstinence and
risk. No one will incur either of these elements of cost
without receiving as great a reward as he can obtain ; the
price of the article must therefore provide the current rate
of wages and profits. If an increased amount of labour,
abstinence and risk is required to produce the commodity,
its price must be increased ; or if any circumstance should
enable its producers to secure a larger reward for their
services, its price must also be increased. In the first case
where we supposed that a greater exertion of labour, absti-
nence and risk was necessary to produce the commodity,
its price would necessarily be increased without raising
either the profits of capital or the wages of labour. The
price of an article may also be increased by taxation,
without any corresponding increase in the wages of labour.
There are however some 'circumstances in which increased
prices produce a temporary effect in raising wages. Suppose
that there is a greatly increased demand for such a com-
modity as cotton cloth. For a time the equalisation between
demand and supply will be effected by increasing the price
of cotton goods. The new prices will perhaps provide
the manufacturers with exceptionally large profits, and this
circumstance will cause a largely increased supply of cotton
goods. For this purpose the employment of new capital will
be required ; the manufacturers will perhaps erect neu
mills, and employ new capital in setting up machinery ;
to work this machinery an increased number of labourers
will be required. This increased demand for labour will
cause an increase in wages ; here, then, is a case in which
high prices have produced high wages. But these high
CHAP. II THE WAGES OF LABOUR 133
prices and high wages are sure to attract the competition
of other manufacturers and other labourers, who think that
they would like to share these high profits and high wages.
Production is therefore still further augmented in con-
sequence of the competition of other capitalists ; the supply
of labour is also largely increased owing to the competition
of other labourers. The increase of the supply causes the
price of cotton cloth to return to a point closely approximat-
ing to its former position ; the price may even sink below
what is necessary to provide the ordinary rate of wages
and profits current in the trade before the rise took place.
In either of these cases wages and profits must both
decline in a degree corresponding with the fall in price.
The manner in which the fall of wages is brought about
may be described as follows : Production is checked ;
manufacturers no longer realise exceptionally high profits :
they may perhaps be making less than the ordinary rate
of profit. Hence they will strive to reduce the supply ; they
will not extend their buildings, and they may probably keep
their men on at half-time. In such a case what will be the
effect on the wages of labour ? We have supposed that the
high wages which accompanied the original increased supply
attracted a large number of workmen, who were anxious to
share the prosperity of the trade. Hence when trade is
dull and manufacturers are desirous of reducing production,
there is a largely increased number of workmen who are seek-
ing employment. These circumstances will most undoubt-
edly produce a decline in wages. If the men resist such a
decrease and refuse to work for lower wages, it might be to
the manufacturer's interest, if his profits were less than the
ordinary rate, to shut up his mills ; and in this event thou-
sands of workmen would be out of employment altogether.
In thus illustrating the temporary nature of the effect of high
prices upon wages, an extreme case has perhaps been taken.
In all cases, however, where the competition between
labourers is active, exceptionally high wages are sure to
produce an additional supply of labour, which will, sooner
or later, reduce wages to their former level. This is an
illustration of the theory of supply and demand, as explained
134 DISTRIBUTION OF WEALTH SECT, in
in a previous section. When the demand for labour is in
excess of the supply, an equalisation between demand and
supply is effected by an increase in the price of labour.
The higher wages, however, attract an increased supply of
labour, and the equalisation finally takes place at a lower
rate of wages. An illustration of the effect of high prices
on wages may be taken from the great rise in the price of
coal and the subsequent addition made to the wages of the
miners in the years 1872-5. In this case the miners were
able to obtain the maximum of advantage ; they were really
masters of the situation because they possessed what almost
amounted to a natural monopoly of the trade. Other
labourers unused to the work could not be introduced to
compete with them and run down wages ; as they possessed
this advantage, they were able for some time to prevent
the price of coal from going down by strictly limiting the
supply, or, as it is called, the " output " of each man per
week. Hence they made the most of their opportunities. In
course of time, however, the higher wages of coal-miners
attract the competition of young men from the surrounding
agricultural and other industries, and the number of those
seeking employment in the higher paid industry increases,
while a corresponding decrease takes place in the lower
paid employments, An equalising tendency is thus estab-
lished, until the higher wages paid to miners are no more
than just enough to compensate them for the extra risk and
disagreeableness of their work.
Where competition is active the effect of a local de-
pression of Trade upon Wages is only temporary. When
wages are below the average and trade is dull, an influence is
exerted by these very circumstances to restore wages and
profits to their normal condition. Manufacturers will not
go on producing commodities at a comparative loss, and
intelligent workmen will not goon labouring at an occupation
in which they receive lower wages than they could obtain
elsewhere. The supply of capital and labour engaged in the
depressed trade is accordingly reduced ; production is
decreased, and the supply being diminished prices rise, and
wages are restored to their former level.
CHAP. II THE WAGES OF LABOUR 135
Charitable assistance ought to be distributed in such
a way as to facilitate the operation of economic laws,
not to thwart them. It frequently happens that when an
industry is much depressed, and the profits and wages realised
in it are very small, there is temporarily great distress among
the workmen, numbers of whom are thrown out of work alto-
gether. Where competition is active, and no efforts are made
to check its operation, many of the workmen will, under
such circumstances, find work in other employments, and
frequently in other localities ; the distress in this way is
relieved without the agency of private charity or parochial
assistance. In too many instances, however, workmen are
encouraged, by the help they receive from the poor-rates
and private charity, not to change their employment, but
to remain in the locality where trade is depressed, and
not to seek fresh employment elsewhere. The hand-loom
weavers of Bethnal Green for many years carried on an
unequal struggle with the power-loom, and many of them
suffered extreme hardships through the great reduction
which took place in their wage-earning power. The best
way of helping these poor men would have been to endeavour
to shew them that the change which had taken place in their
industry was one that was likely to be permanent, and
charitable assistance would have been wisely bestowed in
enabling them to learn some fresh trade or to migrate to
some other locality.
In a similar way it was found that the most effectual way
of helping the starving peasantry of Western Ireland in
the last quarter of the nineteenth century was not by doling
out to them just enough potatoes and meal to enable them
to live on in their wretched bogs, but to connect the
districts where they live with the railway system so as to
enable them to get a market for the fish and other
commodities they are able to produce, and also to give them
the means of carrying their labour to a more productive
soil.
Free competition among labourers always tends to reduce
exceptionally high wages, and to raise wages when they are
exceptionally low. Competition, however, acts much more
136 DISTRIBUTION OF WEALTH SECT, in
slowly in equalising the price of labour in different localities
than in regulating the price of commodities. The difference
between the price of corn, for instance, in London and in
the most remote counties in England can never remain in
excess of the cost of conveying the corn from the one place
to the other. The price of labour is, however, not so readily
influenced by competition. A labourer may be aware that
he will earn is. a week more by migrating to an adjoining
county, but he has to consider whether he has the means of
meeting the expense of removing himself, his family and his
little stock of furniture. He may also be reluctant to forsake
the place in which he has spent all his life, and to leave his
old friends.
Competition was till lately almost inoperative among
the Agricultural Labourers. Such feelings as these have
until recently acted very powerfully with the agricultural
labourers. Many of them were very simple ignorant people,
who had never been beyond the limits of their own parishes.
To them a place a hundred miles off was more unknown, and
apparently more inaccessible, than Central Africa is to an
ordinarily well-informed person. Hence competition, which
must always act more slowly on the price of labour than on
that of commodities, was almost inoperative in many agricul-
tural districts. As previously explained, this state of things
is gradually coming to an end. Cheap railways and the penny
post have brought all the places in such a country as England
close together, and agricultural labourers are beginning to
move from places where wages are low to places where wages
are higher, almost as freely as the ordinary artisan.
The strikes that occurred from 1880-4 among agricultural
labourers in different parts of the country caused a consider-
able amount of migration and emigration to take place.
There can be little doubt that the movement for higher wages
will gradually spread all over the country, and that migration
and emigration will follow as the natural consequences of the
peasant waking up to the fact that it is possible for him to
better his condition.
Competition is still to a very large extent inopera-
tive among women workers. Even more than agricultural
CHAP, ii THE WAGES OF LABOUR 13?
labourers women have suffered as wage-earners from not
taking advantage of the principle of competition. In some
counties in England, especially in the cotton-weaving and
spinning districts of Lancashire and Yorkshire, women's
wages are as high as men's ; whereas in East London and
in other places we hear of women working for wages as low
as S.T. or 8s. a week. Mr. Charles Booth, who has made a
special study of the industrial condition of London, states
that there is no uniformity in women's wages in the same
trade even in places quite close to each other. This implies
a want of organisation and a want of knowledge. If women
had efficient trades' unions, knowledge of the conditions of
the various trades employing women would be acquired, and
labour would migrate from the worse paid to the better paid
industries ; and equality of conditions in the same trade and
in the same place would almost immediately follow. 1
Adam Smith's Five Causes which produce Differences
of Wages in different employments. If competition acted
freely among all classes of labourers, the inequalities of wages
for the same work in different localities would cease to exist.
There are, however, differences in wages in different employ-
ments which are permanent in their character. Adam Smith
has thus enumerated the five causes which produce different
rates of wages in various employments :
ist, The agreeableness or disagreeableness of the em-
ployments themselves.
2nd, The easiness and cheapness, or the difficulty and
expense, of learning them.
3rd, The constancy or inconstancy of employment in them.
4th, The small or great trust which must be reposed in
those who exercise them.
5th, The probability or improbability of success in
them.
1 In the autumn of 1911 a strike of women workers in the South
of London was organised and a Trades' Union formed which led
almost immediately to an increase of wages varying from is. to 2s.
weekly. Trades' unionism among women workers has greatly in-
creased since 1900. The Women's Trade Union League estimated
in 1910 that there were then in the United Kingdom 160,000 women
unionists. See Englishwomen? s Year Book, 1911,
138 DISTRIBUTION OF WEALTH SECT, in
To these must be added the limitation of competition
among the higher and lower sections or groups into which
labourers are divided, which practically limits the choice
of a labourer, selecting his employment, to trades of about
the same grade as that in which he was born. The son
of an agricultural labourer, for instance, would in general
be as powerless to choose the employment of a banker's
clerk as he would be to select that of a prime minister or an
archbishop.
Mining industry affords several examples of the manner
in which the agreeableness or disagreeableness of an employ-
ment acts upon the wages of those engaged in it. The
miners who work underground receive much higher wages
than those who are employed in the less dangerous and more
agreeable occupation of breaking, sifting and washing the
ore on the surface. No workmen would enter into an
occupation which is exceptionally dangerous or injurious to
the health, unless they were compensated for the risk they
incur by an exceptionally high rate of wages. Those who
labour in a coal mine receive, over and above the ordinary
wages current in the district, a sum sufficient to induce them
to risk their lives in a peculiarly dangerous occupation.
Other things being equal, the more dangerous a mine is, the
higher are the wages of those engaged in working it.
Under the head " agreeableness or disagreeableness of
an employment " may be included those occupations which
bring respect or contempt and dislike upon those who
practise them. The payment given in exchange for the ser-
vices of officers in the Army and clergymen is, as a rule,
extremely small. Many, however, enter the Church or the
Army on account of the social position which members of
these professions obtain. The dignity accruing to their
position is a compensation for the small remuneration which
they receive. On the other hand, those who practise a trade
which brings upon its members contempt and dislike are
compensated by a large amount of wages. No one would
voluntarily undertake the duties of a hangman, for example,
if he were not induced to do so by the hope of receiving
exceptionally large wages. It is not an uncommon circum-
CHAP, ii THE WAGES OF LABOUR 139
stance for a nobleman to give his cook a higher salary than
his private secretary. This may be partly accounted for by
the fact that a certain amount of contempt attaches to the
office of a man-cook, whereas the employment of a secretary
is considered to be quite compatible with the character and
sition of an educated gentleman.
It is also obvious that the higher salary earned by the
>k is in great part due to the second of Adam Smith's
ises. If wages in any employment are influenced by
easiness and cheapness, or the difficulty and expense,
learning it, it is not unreasonable that the cook should
have more wages than the secretary. Any moderately
well-educated person is capable of performing the duties of a
secretary at a day's notice : whereas a really first-rate cook
cannot perhaps be made in less than five years, and he will
probably remain a student of culinary art all his life. Com-
pare the work of a man like Soyer with the ordinary routine
work of a secretary, and it is obvious that the capacity to
perform the first is difficult and expensive to acquire, whilst
it is the easiest and least expensive thing in the world for a
man of ordinary education to acquire a complete knowledge
of the second.
There are many industries which require a long appren-
ticeship before skill in them can be secured ; and there are
other industrial operations which can be almost as well
performed by a novice as by a practised hand. These
differences produce a corresponding difference in the rates of
wages. A shipwright or a glass-blower has to spend many
years in acquiring the skill which his trade requires. During
the first half of a long apprenticeship, he earns nothing at
all ; considerable expense is therefore incurred by him in
learning his trade. For this expense, and for the difficulties
which have to be overcome in acquiring the necessary skill,
he will in after-life be compensated by receiving a higher
rate of wages than those workmen whose occupation entails
neither difficulty nor expense. The trade of a crossing-
sweeper, for instance, and that of a copying clerk are very
easy and cheap to acquire. A broom is all that is required
in the one case, and a knowledge of reading and writing in
140 DISTRIBUTION OF WEALTH SECT, in I
the other. Hence wages in such employments are much
smaller than those earned by the skilled mechanic.
Difficulty of attainment is a most important element in
determining wages in those employments where the requisite
skill is acquired partly by long practice and is partly the
result of natural endowments. The large remuneration
received by first-class opera-singers, for example, is not due
solely to the expense of acquiring their proficiency. An
inferior singer may have taken quite as much pains to
cultivate her voice, and may also have incurred as great an
expense in obtaining her musical education. The reason
\v\\y prime donne obtain such large sums is that they possess
what may be described as a natural monopoly. There is
a very general demand for the best kind of vocal music,
which few beside themselves can give.
The constancy or inconstancy of an employment produces
an influence on the rate of wages prevailing in it. No one
would enter an employment in which on an average he would
only be able to work nine months in the year, if he were not
compensated by receiving during these nine months an
exceptionally high rate of wages. Some trades, such as
malting, cannot be carried on in hot weather ; others, such
as building, are stopped by frost ; dockyard labourers are
liable to perpetual interruptions in their employment. Such
workmen, therefore, as maltsters, bricklayers, and dockyard
labourers receive a higher rate of wages than they would be
able to obtain if they were not liable to be frequently out of
work.
The amount of trust which must be reposed in those
engaged in a particular occupation exercises a very great
influence upon the wages they receive. The more trust-
worthiness required the higher must be the wages given. It
is essential that such persons as bankers, cashiers, jewellers'
assistants, engine-drivers, railway guards, policemen and
postmen should be men in whom a considerable amount of
confidence can with safety be reposed. Men are not placed
in these positions until they have shewn their employers that
the uprightness and steadiness of their characters can be
relied on. When they have proved themselves to be trust-
CHAP, it THE WAGES OF LABOUR 141
worthy they can justly claim a higher rate of wages as a com-
pensation for the responsibility which their position entails.
In most trades the prospect of success is almost a certainty;
an agricultural labourer or a journeyman tailor cannot have
many doubts as to the probability of his succeeding in the
trade he has chosen. Such considerations as these apply
more to the professions than to trades ; but there are some
cases in which wages are influenced by the probability or
improbability of success. A man who is about to emigrate
may well feel that there is considerable uncertainty whether
he will succeed in the new life upon which he is about to
enter. He may not know whether he will find work in the
colony to which he proposes to go ; but he is certain that if
he does get work he will receive higher wages than he could
ever hope to earn at home.
It will be observed that most of Adam Smith's five causes
of different rates of wages in different employments operate
through the degree to which they limit the competition in
various trades. For instance, the disagreeableness of an
employment limits the numbers of those who engage in it ;
if the disagreeableness is extreme, only a few persons will be
willing to endure it however high the wages might be ; and
these few may be regarded as, in a sense, the possessors of a
natural monopoly. The hangman may be cited again as a
case in point. Again, the difficulty and expense of acquiring
a trade raises wages in it only so far as it limits the numbers
of those who go into it. Thus the spread of education is
likely still further to depress the wages of clerks ; because as
long as those who could read and write were few in number,
skill in this respect brought an increase of wages ; but this
advantage will vanish when the power to read and write
becomes universal. And so also with trustworthiness and
sobriety ; as long as these qualities are exceptional they will
bring higher wages to their owners ; if they should ever
become universal, they will no longer command a monopoly
price. These considerations are necessary to a complete
understanding of Adam Smith's five causes of differences of
wages in different employments ; for if it were universally
true that the disagreeableness or the responsibility of an
142 DISTRIBUTION OF WEALTH SECT, in
employment was always compensated by higher wages, the
scavenger, the coal-miner, the stoker, the charwoman, and
the maid-of-all work would earn higher wages than a Lord
Chancellor or a prima donna. In calculating the effect of
Adam Smith's five causes of different rates of wages in
different employments, allowance must always be made for
the degree m which they limit competition in the trades
affected by them.
QUESTIONS ON CHAPTER II. The Wages of Labour.
1. What are wages ? Is custom or competition the main
regulator of wages ?
2. How is the average rate of wages determined ?
3. In what manner alone, therefore, can the condition of
the labouring classes be improved ?
4. By what means has the wages-fund, in such a country
as this, been greatly increased ?
5. Why has not the condition of the labourer improved in
proportion to this increase of the wages-fund ?
6. Describe the principal effect of the repeal of the corn
laws upon the condition of the labourer.
7. What are the main features of Malthus' essay on
population ?
8. Into what classes does he divide the checks upon
population ?
9. As civilisation advances, which of these checks becomes
the more powerful ?
10. In what two ways does an increase of population
deteriorate the condition of the labourer ?
n. Why is emigration an insufficient remedy for over-
population ?
12. Describe the influence of the average rate of profit
upon the wages- fund.
13. Are labourers ultimately benefited by an increase ol
wages which reduces their employers' profits below the
average rate ?
14. How does the increased efficiency of labour affect the
wages-fund ?
CHAP, n QUESTIONS ON CHAPTER 11 143
15. Is the price of labour subject to fluctuations?
16. Do high prices produce high wages? Give illus-
trations.
17. Describe the manner in which competition raises
exceptionally low wages, and reduces exceptionally high
wages.
1 8. Why does competition act much more slowly upon the
wages of labour than upon the prices of commodities ?
19. Indicate some of the limitations of competition as
between different classes of labourers.
20. Has the condition of the agricultural labourers been
improved by competition ?
21. Would the wages of women be improved by greater
freedom of competition ?
22. Enumerate Adam Smith's five causes which produce
different rates of wages in different employments.
23. Give examples of the effect of these five causes upon
wages.
24. What is the controlling principle which lies at the
root of Adam Smith's five causes of different rates of wages
in different employments ?
1. Mrs. Browning makes Aurora Leigh say :
"It takes a soul
To move a body : it takes a high-souled man
To move the masses even to a cleaner stye.
Your Fouriers failed
Because not poets enough to understand
That life develops from within/'
Compare this with what political economy teaches as to
the importance of " raising the standard of comfort," if an
improvement in the condition of the labouring classes brought
by increased wages is to be real and permanent.
2. Will the labourers in a depressed trade be more
benefited by receiving charity or by being assisted to
migrate to other localities where their labour is required ?
3. Give any reasons which are suggested by the contents
144 DISTRIBUTION OF WEALTH SECT, in
of the last chapter, why the salaries earned by governesses
are in general so small compared with those which are earned
by men engaged in teaching.
CHAPTER III. On the Profits of Capital.
Profit is the reward of Capital for the service it
renders in the Production of Wealth. Capital was
defined, in a previous section, as that part of wealth which
is set aside to assist future production. Capital is con-
sequently the result of saving ; but, in order to fulfil its
functions, it must be either wholly or partially consumed.
It is evident that the owners of wealth will not consent to
its being appropriated to assist future production, unless
they are rewarded by a share of the produce. This share
is termed profits. It is thought by some, that it is an
injustice that capital should receive any reward for its part
in the production of wealth. Capitalists are by such persons
denounced as selfish usurers, and the interest which their
wealth returns to them is regarded as if it had been stolen
from the public. M. Bastiat combated these notions (which
at one time were very prevalent in France) in a series of
little tracts, in which by a number of examples he shewed
the real nature of the profits of capital, " proving that it is
lawful, and explaining why it should be perpetual." The
following is an abridgment of one of his examples. " There
was once in a village a poor carpenter, who worked hard
from morning to night. One day James thought to himself,
'With my hatchet, saw and hammer I can only make
coarse furniture, and can only get the pay for such. If I
had a plane I should please my customers more, and they
would pay me more. Yes, I am resolved, I will make
myself a plane.' At the end of ten days, James had in his
possession an admirable plane, which he valued all the more
for having made it himself. Whilst he was reckoning all
the profits which he expected to derive from the use of it, he
was interrupted by William, a carpenter in the neighbouring
village. W 7 illiam, having admired the plane, was struck with
CHAP, ill ON THE PROFITS OF CAPITAL 145
me ;
T;
r
the advantages which might be gained from it. He said to
es :
You must do me a service ; lend me the plane for a
year.' As might be expected, James cried out, ' How can
you think of such a thing, William ? Well, if I do you this
service, what will you do for me in return ?'
W. Nothing. Don't you know that a loan ought to be
gratuitous ?
/. I know nothing of the sort ; but I do know that if I
were to lend you my plane for a year, it would be giving it
you. To tell you the truth, that was not what I made
for.
W. Very well, then ; I ask you to do me a service ; what
service do you ask me in return ?
J. First, then, in a year the plane will be done for. You
must therefore give me another exactly like it.
W. That is perfectly just. I submit to these conditions.
I think you must be satisfied with this and can require
nothing further.
J. I think otherwise. I made the plane for myself and
not for you. I expected to gain some advantage from it.
I have made the plane for the purpose of improving my
work and my condition ; if you merely return it to me in a
year, it is you who will gain the profit of it during the whole
of that time. I am not bound to do you such a service
without receiving anything in return. Therefore, if you wish
for my plane, besides the restoration already bargained for,
you must give me a new plank as a compensation for the
advantages of which I shall be deprived.
These terms were agreed to, but the singular part of it
is, that at the end of the year, when the plane came into
James's possession, he lent it again ; recovered it, and lent
it a third and fourth time. It has passed into the hands
of his son, who still lends it." Let us examine this little
story. The plane is the symbol of all capital, and the plank
is the symbol of all interest. If therefore the yielding of
the plank by the borrower to the lender is a natural and
equitable remuneration, we may conclude that it is natural
and equitable that capital should produce interest. We
L
146 DISTRIBUTION OF WEALTH SECT, in
may also conclude that interest is not injurious to the
borrower. James and William are perfectly free as regards
the transaction to which the plane gave rise. The fact of
William consenting to borrow proves that he considers it an
advantage to himself. He borrows because he gains by
borrowing.
The Profits of Capital are composed of three elements.
The interest on capital, namely, the sum which a borrower
gives to the lender for the consideration of a loan, forms only
a part of the Profits of Capital. The Profits of Capital are
composed of three elements : interest on capital, compen-
sation for risk, and wages of superintendence. The interest
on capital, at any particular time and in any country, can be
ascertained by the interest yielded, at the same time and in
the same country, by those securities which involve no risk
and no labour of superintendence. In this country, Govern-
ment stock affords such a security. Those who invest money
in the Funds are with reason confident that they run no risk of
losing it, and the possession of stock does not involve any
labour. The owners of Government stock receive about 3^
per cent, interest on their capital, and therefore 3^ per
cent, is the current rate of interest at the present time
(1911) in this country. If more than this is now given in
this country for a loan, it is because the lender has not
complete confidence in the ability of the borrower to pay ;
and therefore compensation for risk increases the sum which
is given for the loan. If the profits of capital were no greater
than the interest on capital, no one would take the trouble or
incur the risk of entering into business. If the employment
of money in trade yielded only a profit of 3^ per cent., mer-
chants and shopkeepers would withdraw their capital from
business and buy Government securities. The profits of
capital are greatest in those pursuits in which the greatest
risk is incurred and where the labour of superintendence is
most costly ; the variableness of these two elements produces
great variations in the rate of profit in different trades. A
butcher, for instance, realises larger profits than a draper
because his labour of superintendence is more disagreeable,
and he also incurs greater risk, for in this climate a thunder-
CHAP, in ON THE PROFITS OF CAPITAL 147
storm or sudden alteration from cool weather to intense
heat is often sufficient to destroy his whole stock of meat.
In uncivilised countries, the insecurity of property causes .
compensation for risk to form a very large proportion of the
profits of capital. Speaking of the state of society in some
parts of Asia, Mr. Mill says, "Those who lend, under these
wretched Governments, do so at the utmost peril of never
being paid. In most of the native states of India, the lowest
terms on which any one will lend money, even to the Govern-
ment, are such that if the interest is paid only for a few years,
and the principal not at all, the lender is tolerably well
indemnified." It is notorious that a spendthrift who has run
through all his own property, can raise money only by pro-
mising an enormously high rate of interest. The money-
lenders exact from him 60 or 70 per cent, as interest, for they
know that there is a very great chance that they will never
be paid at all. If they are paid, their profits are sufficiently
large to compensate them for their frequent losses. There
was a case in the papers of a Cambridge undergraduate
who borrowed money at the rate of 75 per cent. The
father of the young man refused to pay the debt because
his son was not of age when it was contracted, and the law
upheld him in his refusal. But the money-lender can well
afford occasionally to lose both principal and interest, because
it appears that he is able to find a considerable number of
young men foolish enough to accept loans from him on the
exorbitant terms just quoted. The profits of the money-
lender are increased not merely by his risk of loss, but by
the dishonourable character of his business, which protects
him from the competition of honest men, and from that of
men who, whether they are honest or the reverse, desire the
good opinion and esteem of their neighbours.
The Bate of Interest is the same in all trades in the
same country and at the same time. If compensation
for risk and for dishonourable reputation, together with the
wages of superintendence, are eliminated from profits, the
interest on capital alone remaining, the amount of this
interest will remain constant in all trades at the same time
and in the same country. The interest on the capital of the
L 2
148 DISTRIBUTION OF WEALTH. SECT, in
farmer, the grocer and the manufacturer inevitably tends to
an equality, at the same time and in the same place ; the
differences in the profits of these individuals are caused by
the differences in the risk and reputation which they incur
and in the wages which they receive for superintendence.
It is not therefore true that profits in different trades tend
to an equality ; for the risk >in some occupations is per-
manently greater than in others, and this risk must receive
compensation ; some trades also require more superin-
tendence than others ; and the wages paid for particular
kinds of labour vary in the manner described in the
previous chapter. There must therefore always be natural
and permanent differences in the rate of profit in different
employments. The interest on capital alone remains
constant in various trades at the same time and in the same
country.
An explanation of the causes which produce a
decline in the Rate of Interest as Wealth and Popu-
lation increase. An inquiry may now be made into the
causes which produce a decline in the rate of interest, as
wealth and population increase. This leads to a very in-
teresting example of Ricardo's theory of Rent. The amount
of the reward given to labour and capital must ultimately
depend on their efficiency. That is to say, any circumstance
which causes the same amount of labour and capital to
produce more wealth must, if other things remain unchanged,
produce a corresponding increase in wages and interest. On
the other hand, any circumstance which causes a given
quantity of labour and capital to produce less wealth dimin-
ishes the amount distributed as wages and interest. If
while a man is consuming a sack of wheat he can produce a
sack and a half, the reward for his labour and capital is at
the rate of 50 per cent. But if he has to move away to less
fertile land, so that he only produces a sack and a quarter of
wheat while he consumes a sack, his wages and profits
are reduced to 25 per cent. As the margin of cultivation
descends, that is to say, as land of less and less fertility has
to be cultivated to supply the needs of the population, wages
and profits tend to decline, and rents to increase ; because
CHAP, in ON THE PROFITS OF CAPITAL 149
rent is the excess in productiveness of any particular land
over the worst land in cultivation that pays no rent. Ricardo's
theory shews that, as population increases, 1 the augmented
demand for food causes a resort to less fertile or less con-
veniently situated soils. The required food is therefore
produced at a greater proportionate expenditure of capital
and labour ; in other words, a given amount of labour and
capital is less productive of wealth, and wages and interest
nsequently decline.
The Law of Diminishing Productiveness. A similar
effect is produced if the additional food required has to be
raised upon land already in cultivation. When agriculture
has advanced to a certain stage, in the absence of any
special discoveries, doubling the capital and labour applied
to any particular land does not double the produce ; " or, to
express the same thing in other words, every increase of
produce is obtained by a more than proportional increase in
the application of labour to the land." (J. S. Mill, Principles
of Pol. ., Vol. i, p. 217.) Every successive dose of capital
applied to the land yields a less and less return. If it were
otherwise, if every dose of capital yielded a proportional
return, the whole economic condition of the world would be
changed. A single farm might raise produce sufficient for a
whole nation ; and the only limit to the increase of popu-
lation would be that of finding standing-room.
The law of diminishing productiveness shews why profits
and wages tend to decline, and why they are much higher
in a new than in an old country.
The following illustration will suffice to prove that, in
fact, this is the case. In England wages and interest are
lower than they are in Australia. In England the margin
of cultivation is low : soils are here cultivated, with the
greatest care, which would not be used at all in Australia.
The same amount of capital and labour, expended in agri-
1 It has been explained in a previous chapter how the reduction
of cost of carriage has counteracted this tendency in recent times ;
the larger needs of an increased population being met, not by resort
to less productive soils, but by resort to more fertile regions which
were formerly out of the range of European markets.
ISO DISTRIBUTION OF WEALTH SECT, in
culture, is much more productive of wealth in Australia than
in England ; hence the reward of labour and capital is
greater in the former country than in the latter. From these
facts it is proved that profits do not depend upon the wages
of labour, but upon the efficiency of labour ; that is to say,
upon the proportion which the amount of wages paid bears
to the productiveness of labour. In Australia wages are
higher than in England, but the cost of labour is less
because labour is more productive in Australia than in
England. That this is true is proved by the fact that profits
are greater in Australia than in England, and the rate of
interest is also higher.
High Prices do not denote Large Profits. Nothing
can be more erroneous than to suppose that high prices
invariably denote large profits. It is true that a sudden
demand for a commodity sometimes causes its price to be
temporarily raised beyond what is sufficient to return the
ordinary rate of profits and wages to its producers. But, as
frequently explained, the competition of capital and labour
causes these high wages and profits to be reduced ; prices
being permanently regulated, where free competition pre-
vails, by cost of production. In the previous chapter it was
explained that high prices do not produce high wages ; the
same reasoning applies to the case now before us. Take as
an example the price of cotton goods. The cost of production
consists of the following elements : labour, abstinence, and
risk ; the cost of an article may also be increased by tax-
ation. An increase in any of these elements will increase
the cost of production, and consequently tend to raise the
price of commodities. For instance, the labour necessary
to the production of the cotton may be greatly increased,
owing to the sudden failure of the ordinary sources of
supply ; or increased taxation may be imposed on the raw
material or on the manufactured cotton ; in either of these
cases prices will be augmented without causing any increase
in the profits of capital ; in fact the increased cost of all the
other elements of cost of production would actually tend to
diminish the profits of capital ; and therefore higher prices
would be accompanied by a decline in the rate of profit.
CHAP, in ON THE PROFITS OF CAPITAL 151
At the time of the American war, the difficulty and expense
of obtaining raw cotton very greatly increased the price of
cotton goods ; at the same time manufacturers were sus^
taining heavy losses, and wages were so much reduced that
the memorable cotton famine ensued. That high prices do
)t make high profits is shown by the simple consideration
that the rate of profit represents a proportion, and that a
proportion cannot be determined by one factor simply, but
spends on the relation in which this stands to the other.
ic rate of interest in fact depends on the costliness of the
other elements of cost of production, and as by far the most
important of these elements is labour, it is sufficiently
accurate to say, as stated above, that the rate of interest
depends on the cost of labour. It has frequently been
stated that both profits and wages must ultimately be con-
tained in the price realised by the article produced by the
joint exertion of capital and labour. Hence it is seen that
the greater the proportion of this price which has to be
conceded to labour, in the form of wages, the less remains
to be enjoyed by the capitalist, as profits. Cost of Labour
to the Capitalist, therefore, depends on the proportion of the
value of the product, due to the joint exertions of capital
and labour, which is secured as the reward of labour.
On what does the Cost of Labour depend? It is now
therefore desirable to ascertain accurately on what the cost
of labour to the capitalist depends. Mr. Mill has described
the cost of labour as a "function of three variables." That
is to say, the cost of labour to the capitalist is influenced by
three circumstances, each.of which is liable to variations.
These circumstances are
1. " The efficiency of labour.
2. " The wages of labour (meaning thereby the real reward
of the labourer).
3. " The greater', or less cost at which the articles com-
posing that real reward can be produced or purchased."
If the efficiency of labour is increased while the wages of
labour and the cost of the necessaries of life are unaltered,
the cost of labour to the capitalist is diminished. If the
wages of labour are increased, without a corresponding
152 DISTRIBUTION OF WEALTH SECT, in
increase in the efficiency of labour, the cost of labour to the
capitalist is increased.
If the articles composing the real reward of the labourer
become less costly, without his obtaining more of them,
wages decline, and the cost of labour to the capitalist is
diminished.
The rate of profit depends upon the share of the total
produce resulting from a given exertion of labour and
abstinence which is allotted to labour ; and it will be found
on consideration that any variations in the general rate of
profit must be produced by variations in one or more of the
three circumstances above enumerated.
An Example. In such a country as Australia the efficiency
of labour is very great, owing to the large extent of fertile
land ; and the cost at which the necessaries of life can be
obtained is for the same reason very small. These circum-
stances are sufficient to produce a high rate of profit,
together with a high rate of wages.
Workmen are not ultimately benefited by a rise in
wages which causes their employers' profits to sink
below the ordinary rate. In explaining the relation
between wages and profits in the last chapter, it was said
that the labourers in any particular employment derive no
permanent benefit from a rise in wages which reduces their
employers' profits below the ordinary rate. But it may be
urged that if all the working-men in such a nation as Great
Britain combined in their demand for higher wages, they
would be able to obtain a larger share of the wealth produced
by capital and labour, and the current rate of profit pre-
vailing in this country would be reduced. Laying aside
the innumerable obstacles to such perfect organisation and
unanimity amongst all classes of workmen which such a
demand would require, let it be supposed that a universal
demand for higher wages takes place throughout the United
Kingdom, that the demand is conceded, that profits are
decreased, and that the rate of interest is reduced from 3^
to \\ per cent. Such a reduction would tend in two ways to
reduce capital and ultimately wages. The higher the rate
of interest the greater is the inducement to save. A fall in
CHAP, in ON THE PROFITS OF CAPITAL 153
the rate of interest from 3^ to i per cent, would cause
many persons to expend their wealth in their own enjoy-
ments rather than employ it productively as capital. A
reward of i los. a year for every ^ico which they abstain
from spending would not be sufficient in a great many
instances to induce persons to save. Hence, the supply of
capital would be checked. On the other hand, there are
many persons who would say, " We cannot live on the
income yielded by i^ per cent, on our capital; as we cannot
get more than this here we will invest in some foreign
enterprise, in an Indian tea-garden, an American railway,
or a Peruvian mine." A large amount of capital is conse-
quently exported, whilst at the same time the accumulation
of capital is checked by decreasing the inducement to save.
Such circumstances would gradually produce a very great
diminution in the capital of the country. Circulating capital
always bears some proportion to the gross amount of capital.
As previously explained in Section I, Capital is divided into
Fixed Capital and Circulating Capital. If, therefore, the
capital of a country is diminished, both these portions of it
will in all probability be reduced. The principal employment
of circulating capital is the maintenance of labourers ; that
is, paying the wages of labour. A decrease in the amount
of circulating capital will therefore inevitably produce a
decrease in the wages of labour. Hence, it is seen that any
circumstance which materially reduces the rate of interest
in a country checks the accumulation of capital, and leads
to the export of capital. The capital of the country is
thereby reduced, circulating capital is diminished, and
wages fall.
If the rate of interest is unduly decreased by the demand
of labourers for higher wages, the sufferings of the working-
classes when the consequent reduction of circulating capital
takes place will probably be very acute. The increased
wages which for a time they were able to secure would
have stimulated a considerable increase of population.
When, therefore, the reduction of wages takes place, the
labourers find that their numbers have increased, and that
their means of subsistence are diminished. Misfortune
154 DISTRIBUTION OF WEALTH SECT, in
comes upon them like a two-edged sword that cuts both
ways. The labouring population of the East End of London
was a few years since suffering under this double calamity.
The expenses which a working-man necessarily incurs are
much larger in London than in most places ; house-rent and
fuel are dear, and the rates are extremely high ; the wages
of labourers are therefore necessarily higher in London
than in such a place as Glasgow. The consequence of this
has been that one of the principal trades of the East End
of London, shipbuilding, was for a time carried on by
capitalists at a comparative loss ; it has consequently been
gradually removed from London to such ports as Glasgow,
where labour and the requisite materials can be obtained
cheaper than in London. During the time in which high
wages were being realised by the London workmen a large
increase in population was stimulated, and the miseries
produced by the subsequent stagnation of trade were thus
greatly aggravated.
The Export of Capital widens the area of Com-
petition. The principal effect of the export of capital upon
profits is that it widens the area of competition. It has
been said that when the profits realised in a particular trade
are exceptionally high, the competition of other capitalists
gradually reduces profits to the ordinary rate. If this is
true between one trade and another in the same country,
it is also true, though in a more limited degree, between
one country and another. Competition is not so active
between different countries, because in many cases the
export of capital would be attended by great loss and
inconvenience. A shopkeeper in London may find his
expenses so heavy that, when he has deducted wages for
superintendence and compensation for risk, his capital only
returns him an interest of 2 per cent. He may at the
same time be well aware that the interest on capital in
Australia is 10 per cent., and yet there may be insuperable
obstacles to prevent him from entering into business in
Australia. The difficulty of obtaining authentic information
respecting the best way of investing his money in that
country, the distance which he would have to travel, the
CHAP, in QUESTIONS ON CHAPTER III. 155
expense he would incur if he determined upon emigrating,
and many other considerations, would very probably be
sufficient to deter him from leaving his own country or
investing in foreign enterprises. The obstacles which have
hitherto to a large extent prevented the export of capital
are gradually becoming less powerful. As intelligence is
more widely diffused, and the means of locomotion and
communication are improved, the export of capital has
steadily increased. In many parts of the Continent there are
a great number of manufactures which are carried on by
Englishmen with English capital. A large firm of stocking
manufacturers at Nottingham have a branch of their busi-
ness established in Saxony. If by a strike their workmen
in England should succeed in getting such wages as to
reduce the profits of the Nottingham trade below those
realised in Saxony, the heads of the firm would no doubt
take every opportunity of reducing the Nottingham business
and increasing the manufacture of stockings in Saxony. In
other words, there would be an export of fixed and circulat-
ing capital from England to Saxony. Such a phenomenon
as a manufacturer carrying on his business in a foreign
country was almost unknown a century ago, but it will in all
probability become more and more common until the rate
of profit realised in different countries is more nearly similar
than it now is.
The three great divisions into which wealth is divided
have now been investigated ; this section cannot, however,
be brought to a close without explaining the effect of trades'
unions, strikes and co-operation upon wages and profits.
This explanation will form the subject of the following
chapter.
QUESTIONS ON CHAPTER III. The Profits of Capital.
1. What is the real nature of the profits of capital?
2. Shew by an example that profits are just and should
be perpetual.
3. Of what three elements are the profits of capital
composed ?
156 DISTRIBUTION OF WEALTH SECT, in
4. What is the interest on capital, and how can the rate
of interest in any country at any particular time be ascer-
tained ?
5. Why does the rate of profit vary in different trades ?
6. Explain the effect of insecurity of property upon
profits.
7. Is the rate of interest variable in the same country
and at the same time ?
8. Why does the rate of interest decline as population
increases ?
9. Give an illustration shewing that the rate of interest
declines as the margin of cultivation descends.
10. It is sometimes said that profits depend on the rate
of wages ; explain why this is inaccurate, and state on what
profits really depend.
1 1. Do high prices necessarily denote large profits ?
12. Give an example shewing that higher prices are
sometimes accompanied by a decline in the rate of profit.
13. On what three variables does the cost of labour to the
capitalist depend ?
14. In what two ways does a reduction of the rate of
interest in any particular country tend to decrease the
national capital ?
15. Explain the effect of such a decrease on the condition
of the labouring classes.
1 6. What therefore is the effect of the export of capital
upon profits ?
17. Why does competition act more slowly between
different countries than between different trades in the same
country ?
1 8. Why is the export of capital likely to increase ?
1. How can the fact be accounted for that the profits of
a speculator on the Stock Exchange are larger than the
profits of farming ?
2. Is usury wicked ? Were the laws regulating the rate
of interest any good ?
3. What effect has the export of English capital on the
rate of profit in England?
CHAP. Hi QUESTIONS ON CHAPTER III 157
4. Suppose the whole labouring population of the world
by a combination succeeded in obtaining wages so large that
capital was deprived of any share of the wealth it assisted
lo produce ; what effect would this have on production, and
on the welfare of the entire community?
5. Shew that a high rate of profit sometimes indicates
hat a country is in a satisfactory condition, and some-
imes the reverse. Illustrate this by the United States and
Mexico.
CHAPTER IV. On Trade? Unions, Strikes and Co-
operative Societies.
The Functions of a Trade's Union explained. A
Trade's Union is a society formed by the workmen engird
n any particular trade ; this society generally fulfils the
louble purpose of a benefit club and an organisation for
>rotecting the interests of the workmen by obtaining for
hem such advantages as higher wages, shorter hours of
abour, etc. The utility of trades' unions as benefit clubs is
indeniable. Each member of a trade's union is compelled by
he rules of his society to contribute a certain weekly sum to
ts funds. In the case of illness or loss of work he obtains
issistance from these funds, and in the case of his death
us family receives a certain sum of money from the same
source. In point of fact a trade's union is an assurance
:ompany. The assistance which trades' unions render to
vorkmen is so considerable, that no members of such unions
is the Amalgamated Carpenters and Joiners', or the Amalga-
nated Engineers', 1 are ever known to be in receipt of parish
relief.
1 To give an idea of the importance and prosperity of some of
these societies, the following figures may be quoted from Mr.
Frederic Harrison's address at the Trades' Union Congress in
September 1883. The engineers' union in 1867 had 33,325 mem-
bers, in 1882 they had 50,000 and an income of ^124,000 a year.
The boiler-makers in 1867 were 6405 ; in 1882 they were 27,408
and their income was ^67,000 a year. The iron-founders in 1882
were 11,400 with an income of 42,000 a year. In the six years
beginning with 1876, a period of great stagnation of trade, seven
of the leading trades' unions spent in allowances to members out of
158 DISTRIBUTION OF WEALTH SECT, in i
The other function of a trade's union, namely, that of
protecting the interest of workmen by obtaining for them ,
the highest possible rate of wages, is that by which unionism
is best known, and it is this which has made it so extremely
unpopular with the capitalist classes. For though unions
are not necessarily connected with strikes, a strike could not
be successfully carried on without some such organisation as
a trade's union supplies.
Strikes. Notwithstanding the loss which workmen and
employers have frequently suffered in consequence of strikes,
few would now assert that workmen have not the right to
join an association for the protection of what they believe to
be their interests. Let us inquire what a strike really is. It
is neither more nor less than a refusal on the part of work-
men to sell their labour on the terms offered by those who
desire to buy it. No one thinks a corn merchant or any
other trader is culpable if he refuses to sell his goods at the
price offered by his customers. If it be justifiable for a
merchant to refuse the terms offered by those who wish to
buy his commodities, it cannot be wrong for a workman to
do the same ; and if it be right for one man to refuse to work
on the terms offered by his employer, it cannot be wrong for
ten, a hundred, or a thousand men to do the same. The
conduct of workmen in striking for higher wages, or to resist
a reduction, may be either prudent or imprudent, but it can
never deserve censure as morally wrong. "Every one has a
right to do all that he wills, provided he infringes not the
equal freedom of any other person." If this moral law had
always been observed by trades' unionists they would have
deprived their enemies of all semblance of an argument
against the right of combination. This law is constantly
violated by all classes of the community, and workmen have
not herein shewn themselves superior to the rest of humanity.
In times past, and especially while the Legislature was
engaged in a foolish and unjust endeavour to suppress
work nearly ,2,000,000 sterling, and of this only ^162,000, or less
than 9 per cent., was spent in trade disputes. Mr. Harrison
reckoned that unions usually spend only about I or 2 per cent, of
their available resources in strikes.
CHAP, iv ON TRADES' UNIONS, ETC. 159
trades' unionism by law, the men were frequently guilty ot
using force and violence to compel those workmen to join
their societies who would otherwise have been unwilling to
become members of trades' unions. Constant annoyances,
bodily violence, and even murder, were weapons which
trades' unionists at one time employed in order to prevent
the competition of non-unionist workmen and workwomen.
Such conduct deserved and received the strongest censure ;
but the fact that acts of violence were occasionally com-
mitted by unionists does not affect the right of freedom of
combination, which is all that rational upholders of trades'
unions contend for. The fact that some men abused the power
which this right confers affords no reason why all should be
deprived of it. It should be an encouragement to those
who try to get rid of unjust class legislation, that since trade
unionism has become legal, acts of violence on the part of
unionists perpetrated with the object of promoting the sup-
posed interests of their union have become rarer. Rattening^
which means hiding or destroying the tools of non-unionist
workmen, is now very little practised.
One very important use of a trade's union is that it tends
to place the workmen who are making a bargain with regard
to wages in a position of equality with the capitalist. Work-
men usually have no private store of savings which would
enable them to live for more than a few days without work ;
an isolated workman, unsupported by a union, is therefore
in a very disadvantageous position in case of a dispute with
his employer with regard to wages. The loss of work to the
workman in this position means starvation or the work-
house ; the loss of labour to the employer means simply a
pecuniary loss. One man stakes his life or his liberty and
the other his purse. Trades' unions do much to remedy
this inequality; for when a strike is agreed upon they supply
their members with the means of subsistence while the strike
lasts. This function of trades' unions and benefit clubs,
aided as well by poor law relief, is probably the principal
reason why commercial depression, stagnation of trade, and
consequent difficulty in obtaining work, do not in this country,
as in France, lead to political disturbances. In England the
160 DISTRIBUTION OF WEALTH SECT, in
agencies above referred to protect the working-classes from
the fear of starvation, which is nearly always found to be
the motive power of dangerous popular tumults.
In consequence of their connection with strikes, trades'
unions have attracted more notice than other associations
for mutual aid which have long existed among the working-
classes. But Returns published by the chief Registrar of
Friendly Societies shew that trades' unionism is only one
among many of the means which the working-classes have
devised for the promotion of thrift and for mutual protection
against adversity. For instance, the members of Building
Societies were, in 1887, almost twice as numerous as the
members of Trades' Unions ; and if the members of Trades'
Unions, Industrial and Provident Societies and Building
Societies are added together, the Trades' Unionists are
found to form rather less than a fifth of the whole. 1
Some of the means employed by Unionists to obtain
High Wages explained. It has been said that the object
of a trade's union is to obtain for its members the highest
possible rate of wages. Although trades' unionists are often
accused of setting at defiance every principle of political
1 The returns of Industrial and Provident (Co-operative) Societies,
making returns to the Registrars of Friendly Societies, shew the
following increase between 1887, 1893 and 1908. The figures
are
ENGLAND AND WALES.
1887 1893 1908
No. of societies making
returns 950 1,333 : >487
No. of members ... 755, 61 1 1,057,866 2,071,875
Total capital ,10,180,726 i4,777,oS9 ,28,504,337
SCOTLAND.
No. of societies making
returns 320 346 339
No. of members ... 139,293 204,826 393,280
Total capital 1,627,589 3,237,106 5,215,991
IRELAND.
No. of societies making
returns 7 39 4*7
No. of members ... 587 3,338 70,460
Total capital 2,726 26,856 i 93,731
CHAP, iv ON TRADES* UNIONS, ETC. 161
162 DISTRIBUTION OF WEALTH SECT, in
competition for employment in the trade. 1 No hatter may
have more than two apprentices at the same time. No
solicitor may have more than two pupils in his office at the
same time. No master mason will work without an inferior
under him. No King's Counsel will go into court without
a junior barrister with him. This curious resemblance is
not quoted in defence of the restrictive rules of trades'
unions, but merely to show that the learned and the un-
learned have resorted to the same means for protecting the
interests of their own profession or trade. No doubt both
believe that these restrictions are good for themselves in
particular and for the community in general. But if the
restrictions are unjustifiable in the one instance, they must
be so in the other.
There are Combinations amongst Employers as well
as amongst Workmen. There are trades' unions in a
great many businesses and professions which are called by
other names. Some of the opponents of unionism overlook
the fact that combinations are formed by the employers as
well as by the employed. The iron masters, for instance,
have their quarterly meetings at which they agree upon the
wages to be offered for particular sorts of work during the
ensuing three months. When they resolve upon a reduction
of wages, they agree that the alteration shall be simultaneous
throughout the whole district ; just as workmen, in any
trade, agree to strike work on a particular day, when they
are contending for higher wages.
Trade Combinations imply hostility: while this
remains strikes and lock-outs will continue to occur.
The combinations existing among employers are justifiable
on exactly the same grounds as the combinations of work-
men. The hostility which such combinations imply may be
deplorable ; it certainly leads to much misery and pecuniary
1 In February 1884, a strike was commenced by the weavers'
union at Kidderminster, because one of the carpet manufacturers
there was employing women to weave velvet and plush used in
upholstery at looms formerly occupied by men. In September 1910,
a successful strike against the employment of women compositors
was carried out in Edinburgh.
CHAP, iv OJV TRADES' UNIONS, ETC. 163
loss ; but while the hostility remains no good can be done
by attacking the right of combination. Trades' unions and
associations of employers would not exist in their present
form, unless there were an antagonism of interest between
workmen and their employers. Those, therefore, who most
deplore the frequency of strikes, and the misery and heart-
burnings they produce, should endeavour to remove the
antagonism of interest between employers and employed, of
which strikes and lock-outs are only the outward and visible
signs. A "lock-out" is really a strike of the masters. The
men make some demand for shorter hours or for higher
wages, which the employers refuse to grant. The men per-
sisting in their demand, the employers throughout the
district discharge all their workmen. Their gates are
closed ; and production is entirely suspended, until one or
other of the parties gives way, or until some compromise
is agreed to by both.
Boards of Conciliation and Arbitration. In many
trades boards of conciliation and arbitration exist for the
object of settling disputes which may arise between em-
ployers and employed: and since 1890 Chambers of Com-
merce have taken an active part in the creation of these
boards. The coal-miners of Durham have had a board of
conciliation in existence since 1873 on which employers and
employed are represented in equal numbers. The County
Court Judge of Durham is the chairman and has the cast-
ing vote. The board has frequently had a most beneficial
influence in settling trade disputes. The boards of concilia-
tion and arbitration have no power to enforce their awards ;
their success must depend upon the conditions agreed upon
being loyally observed on both sides. Nothing can be more
beneficial than the operation of these boards when once a
dispute has arisen ; and by promoting friendly intercourse
between employers and employed they have some in-
fluence in preventing disputes ; but it must be borne in mind
that they deal with the symptom the strike, and not with
its cause the antagonism of interest. They cannot there-
fore be regarded as complete and efficient remedies for
strikes.
M 2
1 64 DISTRIBUTION OF WEALTH SECT, in
QUESTIONS ON CHAPTER IV. Trades' Unions, and
Strikes.
1. What is a trade's union?
2. What two functions does a trade's union usually
fulfil ?
3. Why are trades' unions unpopular with the capitalist
classes ?
4. What is the connection between trades' unions and
strikes ?
5. What is a strike ?
6. Can it be shewn that men have no right to strike ?
7. What are the main advantages of trades' unions to their
members ?
8. Explain some of the rules by means of which trades'
unionists have endeavoured to raise the wages given in their
own employments.
9. Describe the similarity between the rules of trades'
unions and the etiquette of the medical and legal pro-
fessions.
10. Give an instance of the combination of employers, and
shew that their right to combine for the protection of their
interests is as incontestable as that of their employes.
1 1. What is the real cause of strikes and lock-outs ?
12. How can this cause be removed?
1. Write an exercise describing the advantages which work-
men obtain from combination, and point out that in driving a
bargain with their employer it is only by means of combina-
tion that they can place themselves in a position fully to
protect their own interests.
2. If you were a member of a trade's union, and a
strike were resolved upon, would you advise that the strike
should be commenced when trade was active or when it was
dull?
CHAP, v ON CO-OPERATION 165
CHAPTER V. Co-operation and Co-partnership.
Co-operation, Co-partnership and Profit-sharing.
Many schemes have been propounded, with the view of
removing the antagonism between capital and labour, by
making employers and employed feel that their interests are
in the main identical. The fundamental principle of all these
schemes is that workmen should have a direct pecuniary
interest in the prosperity of the trade in which they are
engaged ; this interest may be created by the workmen
owning the whole or some part of the capital which their
industry requires. When the whole of the capital an
industry requires is furnished by the workmen engaged in
it, an instance is afforded of pure co-operation, and antagon-
ism between capital and labour is of course annihilated.
When workmen own only part of the capital, they enter into
partnership with their employers, and the scheme is accord-
ingly known as co-partnership. Identity of interest between
capital and labour may also be created by the plan which is
known as profit-sharing, according to which, without requir-
ing the labourer to become a- capitalist, it is agreed between
masters and men that when the profits of the business in
which they are jointly concerned exceed a certain sum, say
10 per cent., these extra profits shall be divided between
capital and labour in fixed proportions. It is the essential
characteristic of profit-sharing that by stimulating con-
scientious work and economical use of tools and materials, it
creates the extra profit which is afterwards divided. Mr.
Sedley Taylor has thus expressed this principle in his book
on Profit-Sharing previously referred to (see p. 131) : " It is
most important to bear in mind, when profit-sharing is being
discussed, that the system, far from being a scheme for
enriching workmen out of the pockets of their employers, has
at its command potential energies capable of opening an
entirely new source of profits, and so creating the fund which
it proposes to distribute." l
1 Profit-Sharing, p. 63, by Sedley Taylor, M.A., Trin. Coll.
Camb. The Report to the Board of Trade on Profit-Sharing, 1891
[C. 6267], price 4^., gives a clear account of various systems of
1 66 DISTRIBUTION OF WEALTH SECT, in
Trades' unionists often oppose co-operation. The
fundamental idea of co-operation is in direct antagonism to
that of trades' unionism. Trades' unions imply a condition
of war between capital and labour, and exist for the purpose
of enabling labour to hold its own against capital. But co-
operation in its various forms aims at bringing about a con-
dition of peace ; it seeks to remove the antagonism between
capital and labour and to make their interests identical.
Trades' unionists have accordingly often been among the
keenest opponents of co-operation. An example of this will
presently be given in the account of the resistance by the
Gas-Workers' Union to the adoption of profit-sharing in the
South Metropolitan Gas Works in 1889. It may also be
mentioned as an additional example that there are several
co-operative boot and shoe manufactories in the neighbour-
hood of Leicester and Northampton, and during a strike in
1895, which affected the whole of the rest of the trade, the
co-operative societies went on working without interruption ;
this fact was somewhat bitterly commented on by the organs
of trade unionism, as if it afforded proof that the co-operators
were disloyal to the class to which they belonged. The
antagonism of trades' unionism to "co-operation is one of
the difficulties with which the latter has to contend in
England.
Co-partnership in France. Many most successful ex-
amples of co-operation, co-partnership and profit-sharing
have been given in France, where experiments in industrial
reorganisation seem to flourish more than they do in this
country. In 1876 the proprietor of the well-known Paris shop,
the Bon Marche, in the Rue du Bac, adopted in his business,
employing more than 3000 persons, a combination of the
principles of profit-sharing and co-partnership. This experi-
ment has been entirely successful, and has led to the conver-
sion of the business into a limited liability company, of which
the capital is ,800,000. Of this sum .300,000 is held by
the employes and ,500,000 by the widow of the original
proprietor.
Profit-sharing, and a list of firms in England, France and the
United States which had adopted it,
CHAP, v ON CO-OPERATION 167
Among successful experiments in profit-sharing mention
should be made of the institutions founded by the late M.
Godin, an iron-founder at Guise. He not only introduced
the principle of profit-sharing, giving to each workman a
share of profits proportionate to the value of his work, but
his main idea was to elevate the whole condition of the
employe's. He had begun life himself as a workman, and
from eleven years old till early manhood he had toiled from
five in the morning till eight at night. In his own account
of his life he wrote : " I said to myself, * if ever I lift myself
above the condition of the workman, I will seek means to
render his life happier and to lift labour from its degradation.'"
His whole life was devoted to carrying this idea into practice.
He gathered those who worked for him into a group of
buildings which he called a Familistere. M. Godin employed
more than 1200 workmen ; and 550 men with their families
lived in the Familistere. Each family had its own set of rooms
and enjoyed as much privacy as it desired ; the rent was
extremely moderate, equal to 8s. a month for two rooms.
Beside the private apartments of each family, there are, for
the common use and enjoyment of all, schools, nurseries, a
theatre, co-operative stores, a library, a reading room, a cafe
and gardens. M. Godin lived in the Familistere himself, and
no detail of management was too minute for his attention.
He invented an improved cradle for the babies ; and as his
original business was not of a nature to give employment to
women, he set up a stocking factory, where the wives and
daughters of his workmen could earn their living. Among
other advantages enjoyed by the employes, medical attend-
ance in their own homes was provided for them, a liberal
allowance was made for sick pay during illness and for
pensions during old age. In 1880 M. Godin sold his
business to his Associated workmen for ; 180,000. They
paid him 5 per cent, on this, or ^9000 a year, besides ^600
for managing the concern. The profits of the business after
paying this and all other charges were formed into a sinking
fund, with the object of paying off the debt of ,180,000 to
M. Godin, when the business became the entire property
of the workmen. M. Godin died in 1888 and left all that
1 68 DISTRIBUTION OF WEALTH SECT, in
part of his property which the French law gave him power
to dispose of, to the Society of the Familisttre. He described
the principle which animated his life's work in the following
words : " To respect, protect, develop all human life over all
the world, by the worship of work and of peace and by the
love of humanity." 1
The best known and in many respects the most perfect
example of the good results of profit-sharing is afforded by
the Maison Leclaire, a house decorating firm in Paris. This
society was founded by M. Leclaire, the son of a poor village
shoemaker, who in his twentieth year was working as a
labourer upon wages of 3^. a day. From this humble begin-
ning he quickly succeeded in raising himself to be the head
of a large business. This in itself is no uncommon circum-
stance ; but Leclaire was a very uncommon man, for instead
of being content with the personal enjoyment of the wealth
he had thus honourably earned, he set himself to devise a
scheme to enable all his workmen to become his partners.
" I asked myself," he says in his account of his life, " could a
workman in our business, by putting more heart into his work,
produce in the same lapse of time z. e. a day a surplus of
work equivalent to the value of an hour's pay, i. e. 6d.t Could
he besides save i\rl. a day by avoiding all waste of the
materials entrusted to him, and by taking greater care of
his tools?" If these questions could be answered in the
affirmative Leclaire foresaw a clear extra profit of more than
^3000 a year. (He employed 300 men and there were 300
working days in the year.) He did answer these questions
in the affirmative, and the result shewed that he was right.
He divided his profits with his workmen for the first time in
1841, and the sum thus annually divided increased very
rapidly as the scheme began to take effect in stimulating the
zeal and trustworthiness of the labourers. The plan adopted
was this : there was a mutual aid society established among
Leclaire's workmen, which at first was almost identical with
an ordinary benefit society. The capital of this society grew
1 See Times, Jan. 6, 1886 ; also Associated Homes, by Mr. E.
Vansittart Neale, and also Twenty Years of Co-partnership at Guise,
translated by Mr. Aneurin Williams.
CHAP, v ON CO-OPERATION 169
and increased and was invested in the business ; hence the
mutual aid society became a partner as it were, and all its
members participated in the profits. The business has
made steady progress from its beginning ; it was so judi-
ciously organised by Leclaire that his death, which occurred
in 1872, did not interfere with its prosperity. At the time of
Leclaire's death the business turn-over of the house was
about ,80,000. Ten years later in 1882 it was ,125,580.
The total amount distributed as the men's share in the profits
between 1842 and 1882 was ;i 17,000. The number of men
among whom the distribution was made in 1882 was 998.*
Co-operative Creameries in Ireland. Considerable
progress has been made in a form of agricultural co-opera-
tion in the south and west of Ireland, in what are known as
Co-operative Creameries, of which the Rt. Hon. Sir Horace
Plunkett was the originator. The plan pursued is to establish
a creamery, which is really a butter factory ; the farmers
in the neighbourhood are invited to become shareholders, in
the proportion of a ^i share for every cow they possess. All
the shareholders send in their milk once or twice daily to
the creamery ; it is immediately measured, tested and paid
for, in proportion to the quantity of cream it yields. The
butter-milk and skim-milk are returned. The whole of the
cream thus collected is converted into butter, on the most
approved methods. Uniformity as well as excellence of
quality is specially aimed at, as this is one of the most im-
portant conditions for commanding a good market. In April
1894 there were 33 of these co-operative dairies in Ireland
with eight branches. In April 1895 there were 56 with eight
branches, and 15 more in the course of formation. In 1901
there were 196, with 33,064 members and a turnover of
,844,139. In 1902 there were 247, with 41,299 members
and a turnover of ,1,039,615. 2 In 1909 there were 835
societies with 91,661 members and a turnover of ^2,394,469.
1 I am indebted to the late Mr. W. H. Hall as well as to
Mr. Sedley Taylor for the details of M. Leclaire's scheme of co-
operation.
2 See Reports of the Irish Agricultural Organisation Society,
Limited, for 1902 and 1910.
170 DISTRIBUTION OF WEALTH SECT, in
These associations do not confine themselves simply to
dairying ; their general aim may be described to be to
enable their members to buy cheap and sell dear, instead of
buying dear and selling cheap. Thus in the purchase of
manure alone, four of these societies in 1894 effected a saving
for their members of ^4249. They collect and sell poultry,
eggs, etc. ; and they own agricultural machinery, which their
shareholders can have the use of at a moderate cost. It
must be remembered that in Ireland the farms are mostly
very small, and the farmers do the actual manual work of
their farms with their own hands. The co-operation required,
therefore, is not so much that of a union of capital and
labour, but that of mutual association enabling a number of
small farmers, by banding themselves together, to command
many of the advantages of the large farmer.
Co-operative Credit Banks. The principle of co-opera-
tive banking is to bring, by means of association, the advan-
tages of credit within the reach of small producers who
could not otherwise obtain a loan except at usurious interest.
If a rich man or a large manufacturer requires a loan for the
development of his business he can easily obtain it, because
by mortgaging his property or in some other way he is able
to give good security for its repayment. But the position of
a poor man is quite different. However advantageously he
could lay out a small capital in reproductive industry, he has
great difficulty in obtaining a loan because he cannot offer
legal security for its repayment. But this difficulty can be
overcome by combination ; and an association of fifty or one
hundred small cultivators or small producers, by making
themselves jointly and severally responsible for debts con-
tracted with their consent by any one of them, can offer
security which is " good " in the strict commercial sense of
the term.
The Schultze-Delitzsch and Eaiffeisen Credit Banks.
Credit banks for small cultivators and small producers have
had a very great success in Germany and Italy and some
other continental countries. The Raiffeisen banks were
started by a gentleman of that name in 1849 ; and the
Schultze-Delitzsch banks, also named after their founder, in
CHAP, v ON CO-OPERATION 171
1851. Unlimited liability of each for all and all for each
is their essential principle. The Raiffeisen banks are for
agriculturists only : each bank is strictly limited to its own
parish or hamlet; this secures the personal knowledge of
each other by the members, without which the unlimited
1 ability principle would be unworkable : no loan is made
c xcept for strictly reproductive purposes ; every member
i pplying for a loan must not only satisfy the committee upon
this point, but must produce two sureties who are respon-
f ible to the society for seeing that the loan is applied in
i he manner specified : if the money borrowed is used to
turchase or to make anything insurable, it must be in-
ured. Tools, buildings, machinery, the lives of animals, for
nstance, must all be insured. These various precautions
>rotect the society from loss. The managers, with the excep-
ion of the secretary, receive no salary ; the banks do not
;xist for the purpose of making a profit, but to bring the use
>f small loans within the reach of the small cultivator.
Driginally no shares were issued, but now each member must
lave one share and one only, and the same interest is paid on
his as that which is charged for a loan. During the first ten
'ears, from 1849, only four of these banks were founded, but
,ince that time they have increased rapidly. In 1891 there
vere 135 Raiffeisen banks with 70,000 members in Neuwied ;
77 banks with 9247 members in Baden ; 276 banks with
19,000 members in Wurtemburg ; 190 banks with 20,239
tiembers in Westphalia.
Banks have been started and have worked successfully on
;he Raiffeisen principle in Italy, 1 Austria, France and Russia.
Nearly all who have had personal experience of their working
speak of their excellent moral effect, as well as their useful-
ness from the economic point of view. A drunkard, a profli-
gate, or an idler would have little chance of being accepted
as a member, because his neighbours would not be likely
voluntarily to make themselves responsible for money
advanced to him. From Italy we hear of old men beginning
to learn to read and write, because illiterates are not accepted
1 See article in Manchester Examitter, Feb. 28, 1896 : " Rural
Banks in Italy," w& Journal of Statistical Society, Dec. 1895.
172 DISTRIBUTION OF WEALTH SECT, in
as members. These banks also promote neighbourly feeling
and active helpfulness one to another on the part of their
members. Sig-nor Vollemberg, who started Raiffeisen banks
in Italy, writes that they "act as a practical school of social
education. Where formerly, in envy or indifference, men
quietly or even joyfully watched the misfortunes of their
neighbours, community of interests now excites an affectionate
solicitude which finds expression in help and counsel. Since
all are personally responsible, each one concerns himself in
the welfare of all, through which his own particular welfare
is secured." l Raiffeisen banks form a very important
feature of agricultural co-operation in Ireland. There was
one only in 1895 5 m 1 9 2 there were 145, with more than
6600 members ; in 1909 there were 234, with 16,050
members. 2
The Schultze-Delitzsch banks have the same fundamental
principle of unlimited liability as the Raiffeisen banks ; but
they differ from them in the following particulars : they are
for all classes of small producers, not agriculturists only ;
their officials are paid ; shares are issued in the ordinary
way, and high dividends are paid on them. They have had
a very remarkable success. In 1877 there were 1827 of
these associations in Germany, with over 1,000,000 members,
owning ^8,000,000 of capital, and doing a business of the
annual amount of ( ^iio,ooo,ooo. 3 In 1883 the number of
these banks had increased to 3500, and they had made a
more than proportional increase in membership and in
capital.
It may seem strange that in Great Britain, where banking
1 See article on "Agricultural Credit Banks," by Mr. R.
Yerburgh, M.P., reprinted from Mark Lane Express Almanac,
1895 ; and also Reports from Her Majesty 's Representatives
Abroad on the Raiffeisen System, Commercial No. 6, 1895 [C.
7896].
2 See Reports of the Irish Agricultural Organisation Society,
Limited, for 1902 and 1910, also Ireland in the New Century, by
the Rt. Hon. Sir H. Plunkett.
a Economics of Industry, by Prof, and Mrs. Marshall, p. 223, also
Co-operative Agricultural Credit in Germany and Switzerland,
1902, by H. de F. Montgomery, Department of Agriculture and
Technical Instruction for Ireland.
CHAP, v ON CO-OPERATION 173
is more developed than in other European countries, very
small progress has been made in co-operative banking. The
reason probably is that in England the tendency has been for
production to be carried on both in agriculture and manu-
factures on a large scale : the small producer and the small
firmer have given place to the man with large capital. In
Scotland the field that would otherwise have been occupied
l>y co-operative banks has been filled by what is known
;.s the "cash credit" system adopted by ordinary banks.
Jnder this system over-drafts on current accounts were
egularly allowed, the advances being secured to the bank
>y two sureties or " cautioners " as they are called in Scot-
and. In Ireland where small farming prevails far more
han in any other part of the United Kingdom, the tenants
vho now possess a property in their tenant right have an
tvailable asset on which they can obtain an advance of
noney from the ordinary banks. The Land Act of 1903
md 1909, by facilitating the purchase of their farms by the
enants, will make Ireland much more than before a country
>f peasant proprietors. This will place at their command an
idditional security for any loan they may desire to raise.
Co-partnership, Profit-sharing and Co-operative Pro-
luction. There have been a great many experiments in co-
Dperative production and profit-sharing in England, a large
lumber of which have been failures. One chief cause of this
iisappointing result is that the promoters of these experiments
:oo often acted as if they believed that the co-operative
Drinciple, without either business experience or capacity, was
sufficient to secure industrial success. Where experiments
n co-partnership and co-operative production have suc-
ceeded, it has been where there has been a fortunate com-
bination, in the managers or directors, of an enthusiastic
belief in the beneficial influences of co-operation with business
knowledge and ability and the power of governing men. An
instance may be given in the history, since 1889, of the South
Metropolitan Gas Company. In that year the managing
director and chairman of the company, the late Sir George
Livesey, conceived the idea of profit-sharing or co-partnership
as a means of securing mutual confidence between employers
174 DISTRIBUTION OF WEALTtf sfcCT. ill
and employed, and of inducing the men to take a real interest
in the welfare of the company. The Gas- Workers' Union
and the Coal-Porters' Union had lately been formed, and the
company were continually harassed by what they felt to be
unreasonable demands on the part of these unions, and also
by the evidence of hostility and antagonism which they
constantly displayed. In October 1889, Sir G. Livesey made
to the whole of the workmen, numbering about 3000, the
following offer : those who would sign an agreement to
work upon given terms for twelve months 1 were offered a
share in the profits of the company in the form of a per-
centage on their wages ; and in order to make the advantages
of this offer at once a tangible reality, its effect was to be
retrospective ; that is to say, the company, in October 1889,
offered to every man who accepted the agreement, and who
had been three years in their service, a bonus of 8 per
cent, calculated on one year's wages : thus if a man were
receiving 30^. a week he would, if he accepted the com-
pany's terms, be at once credited in their books with a sum
of rather more than ^6 ; and besides this he would in future
participate in the profits earned in proportion to his wages.
About 1000 out of the 3000 men employed by the company
accepted this offer, and the sum credited to them by the
company amounted to ^8000 ; this sum is generally spoken
of as a " nest-egg " ; for while future bonuses were to be
withdrawable as soon as they became due, the "nest-egg"
was to remain in the nest for a period of five years. As the
profits of the company are regulated by Act of Parliament
and are made to depend on the price of gas, rising as the
price of gas falls, and falling as the price of gas rises, the
participation in profits by the workmen gave them a direct
pecuniary interest in trying to make gas as cheap as pos-
sible ; that is, it was a constant stimulus to them to work
with efficiency and economy.
It is not difficult to understand that the Unions vehemently
objected to the plan proposed ; as it took from them the
power of ordering a strike at a few days' notice. It was
1 The power of individuals to leave during the term for which
they had signed the agreement was safeguarded in the contract.
CHAP, v ON CO-OPERATION 175
quite open to any man, or any number of men, to refuse the
offer of the directors, and to say, " No, we prefer the power
to strike to the share in your business you are offering
us ; " but they went far beyond this, and demanded of the
directors that the agreement voluntarily offered by them
and voluntarily accepted by a thousand of their men should
be cancelled. This monstrous demand, at variance with
every principle of individual liberty, was sturdily resisted
by the directors. Sir G. Livesey guaranteed to every man
who had accepted his offer that he should be protected at
any cost, and by all the power which the company or the
law could command, and throughout the strike which fol-
lowed he was as good as his word. The Unions were
thoroughly beaten, and from that time the profit-sharing
principle has steadily developed, and has become one of
the most satisfactory features in the growing prosperity of
the company.
Besides the share in the profits which was the funda-
mental principle of the scheme as originally propounded
in 1889, a further development has enabled the workmen
to become shareholders, and on December 31, 1895, they
held .25,628 in the shares of the company, besides owning
a sum of ,33,227 in the form of accumulated bonus, interest
and savings ; making in all 58,855 owned by the workmen
in the business. In 1903, 4500 of the employes of the
company owned stock and deposits amounting in value to
nearly ,200,000. The title "profit-sharing," which was
originally used, has been changed to "co-partnership," as
more completely descriptive of the existing conditions. An
important step in the direction of true co-partnership
was taken in 1896, when workmen owning shares were
allowed to elect representatives to sit on the Board of
Directors. The employe's now have three representatives
on the Board, two workmen and one officer. After seven
years' experience the managing director reported in 1904 that
the Workmen Directors have been a complete and unqualified
success. There were 25 19 workmen who owned more than ,5
and less than ,50 in the company, 321 who owned between
50 and 100. The average per man worked out at ,47 a
176 DISTRIBUTION OF WEALTH SECT, in
head. The system has been such a marked success from
every point of view that it was adopted by the Crystal
Palace and District Gas Company in the year 1894, and is
working well there also. The average per man which is
held in this company is .35.
One satisfactory feature of the system is that although the
bonuses (except the initial nest-egg) are withdrawable as soon
as they become due, a very small proportion is actually
withdrawn. When the scheme was first started, about half
of the annual bonus was withdrawn each year ; in the year
ending July 31, 1903, only 7 per cent, of the bonus was with-
drawn. The scheme has therefore promoted thrift to a very
remarkable degree.
Besides the money advantage to employers and employed,
Sir George Livesey and many of the workmen have repeatedly
expressed their satisfaction at the friendly spirit which has
grown up among them since the profit-sharing scheme
came into operation. Sir George Livesey said in his
evidence before the Labour Commission, 1892: "It gave,
in place of hostility and antagonism, peace and good-will ;
in place of doubt and mistrust, confidence ; and in place
of sullen, discontented workmen, a body of cheerful, will-
ing, capable workers with whom it was a pleasure to be
associated.'''
A desire to give the workmen a direct and obvious pecuniary
interest in their own individual efficiency has led (March 1904)
to the adoption of what is called the " premium system " in
the Government dockyards. The scheme is described in the
official circular as enabling workmen to earn in addition to
their ordinary weekly wages, extra remuneration for doing
work more quickly than in the fixed time allowed for it. Thus
if the time allowed for a certain piece of work is 48 hours, and
the man finishes it in 36 hours, he saves a quarter or 25 per cent.,
and he is credited with an extra 25 per cent, of the time taken
to do the job ; i.e. he saves 12 hours, a quarter of 48, and is
credited with 9 hours, a quarter of 36. In the illustration
just given, if the man were a mechanic earning 36^. a week
of 48 hours, or gd. an hour, his premium would amount to
gd. x 9 = 6 s. gd.
CHAP, v ON CO-OPERATION 177
"It is hoped that the introduction of the premium system
will lead to the workmen taking an increased interest in their
work, machines, tools and equipment generally, and to keen-
ness on their part in pointing out to their officers where
improvements may be made and time saved." l
Co-operative Production in England.- There are a
considerable number of manufacturing co-operative societies
in England and Scotland, though comparatively few of them
have maintained that complete identity between capital and
labour which is the co-operators' ideal. The majority of
co-operative productive associations in England do not make
it a sine qua non that their shareholders and their workers
should be the same people. It has probably been found in
actual working that it was not practical to make this an
absolute rule ; but where it has been departed from the
chief of the co-operative manufacturers compromise by the
adoption of profit-sharing among the workpeople who are
not shareholders. A typical example may be given in the
history of the Hebden Bridge Fustian Manufacturing
Society. This society began in 1868, by about thirty of the
workpeople agreeing to combine together to save threepence
a week each, in order to get a small sum to set up fustian
cutting on their own account. The society was not registered
till 1870. No one was allowed, in the first instance, to be
a member who was not engaged in the trade ; the object
3f the society was defined as " to find employment for its
members by the manufacture and sale of fustians, and for
chat purpose to accumulate ^1000, by contribution of money,
labour and profits." The ^1000, however, was not forth-
coming from the members of the association, and it was
resolved to throw open the share list to the public. The
association began to work, however, long before they had
2ven a tenth of the capital at which they originally aimed.
1 The official circular was given in full in The Times, February
29. 1904, p. 7.
2 See Co-operative Production, by Benjamin Jones, Clarendon
Press, Oxford, 1894 ; and Co-operative Workshops in Great Britain,
1895, by Thomas Blandford ; and The Formation of the Hebden
Bridge Society, by Joseph Greenwood.
N
178
DISTRIBUTION OF WEALTH SECT. HI
At the end of the year 1870 there were 95 members ; the
capital was ^82 i8s. 3^., the sales amounted to ^55, and
profits to ^3 is. 8d. From this very small beginning the
Hebden Bridge Factory has gone on steadily, and in the
early years, rapidly growing. The bonus given on labour
is allowed to accumulate, and is placed to share account
until the worker has ^20 invested in the society. The
bonus, depending as it does on profits earned, has varied
considerably in amount. In some half-years it has been as
high as a shilling in the pound on wages, and in others as
low as threepence ; while in some few half-years no bonus
has been paid at all. The business of the society, which
was at first confined to fustian-cutting, now embraces
weaving, dyeing, and the manufacture of ready-made
clothing. The following figures show the growth of the
society :
CAPITAL.
MEMBERS.
SHARE.
LOAN.
RESERVE.
SALES.
PROFITS.
1870
95
83
3
55
3
1880 384
15,693
3,065
556
18,625
i,774
1890 684
21,764
9,081
1,595
38,794
3,499
1894 769 24,904
8,770
2,890
40,317
4,i7i
1903
858
28,481
2,071
3,123
43,594
3,306
Co-operative Stores. Some misapprehension may arise
by confusing co-operation with the so-called " co-operative "
stores which have become so popular in London and other
large towns. The real nature of co-operation is a union
between capital and labour. In such institutions as the
Civil Service Stores and the Army and Navy Stores, there
is not necessarily any connection between capital and labour.
Each of these is a joint-stock company, the shares of which
are owned, for the most part, by those who do not contribute
by their labour to the success of the store. The shopmen
and superintendents may own shares, but it is not an essen-
CHAP, v ON CO-OPERATION 179
tial part of the undertaking that they should do so. A co-
operative store relies for its success, not on a union of capital
and labour, but mainly upon the ready-money principle, and
in bringing the producer into more direct communication
with the consumer, by which means the profits of two or
three " middlemen " may be saved and prices reduced. The
" co-operation " which exists in a store is not a co-operation
between capital and labour, but between the consumer and
the distributor. The prices of commodities sold in the co-
3perative store just named are less than those charged in an
Drdinary shop, because no bad debts are made, no expensive
idvertising need be resorted to, no costly shop-fronts need
DC kept up, and the cost of carriage of goods sold is not
Dome by the proprietors of the business. There is no reason,
ixcept the difficulty of overcoming the prejudice against
mything new, why nearly all tradesmen should not conduct
heir business on the same principles as the co-operative
.tores.
The Rochdale Pioneers. The most celebrated of co-
>perative stores is that of the Rochdale Pioneers. In this
ociety the ready-money principle is strictly adhered to, and
he goods are sold at the ordinary retail prices. The accounts
; re made up quarterly, and the profits are divided in the
1 Dllowing manner : 5 per cent, per annum is allowed as
i iterest on the shareholders' capital, 2\ per cent, of the pro-
\ ts are devoted to educational purposes ; and the remainder
i > divided among the purchasers, each customer receiving
i n amount proportionate to the sum which he has expended
ii purchasing commodities at the store. The Rochdale
1'ioneers' Society, which was started by workmen, and began
in 1844 with sufficient capital only to buy one chest of tea
and a hogshead of sugar, has achieved such a remarkable
success that it has found imitators all over the country. In
Rochdale itself there were, in 1894, three of these stores,
with 18,785 members ; a share and loan capital of ,457,871 ;
an annual trade of ,391,080 ; and a profit for the year of
^53>33- Mr - Benjamin Jones, in his book Co-operative
Production, gives many interesting examples to shew that
the co-operators in the North of England were really pioneers
N 2
i8o DISTRIBUTION OF WEALTH SECT, in
in many important social reforms ; they devoted part of
their profits every year to educational purposes ; they insti-
tuted the weekly half-holiday for their employes long before
the custom became general, and were earliest in the field in
shortening the hours of labour ; they also acted on the prin-
ciple laid down by the Married Women's Property Act long
before there was any legal sanction for their doing so. Co-
operation in its various forms is one of the best products
of the energy and self-help of English working men and
QUESTIONS ON CHAPTER V. Co-operation, etc.
1. Describe co-operation, co-partnership, and profit-sharing,
and give illustrations of each.
2. Does profit-sharing involve any pecuniary sacrifice on
the part of the employers ?
3. What are its special advantages ?
4. Describe the principle of the Raiffeisen and Schultze-
Delitzsch credit banks.
5. Explain why trades' unionists are not always friendly to
co-operation.
6. What is a co-operative store ? Upon what principle is
it based ?
7. Why can lower prices be charged in a co-operative
store than in an ordinary shop ?
8. Give a brief account of the Rochdale Pioneers' store.
SECTION IV
On Foreign Commerce, Credit and Taxation
THIS section comprises chapters on Foreign Commerce,
Credit and its influence on prices, and Taxation. It will
perhaps appear that foreign commerce and credit should
have been explained in the section headed " The Exchange
of Wealth." It however seems that in a short and elemen-
tary book there are many advantages in separating the
subjects usually comprised under the head " Exchange of
Wealth." A knowledge of the meaning of value and price,
of the causes which regulate the prices of commodities, and
of the true nature of money, is essential to a right under-
standing of the causes which determine the respective
amounts of rent, wages and profits. At the same time the
subjects of foreign commerce and credit, if introduced prior
to the consideration of the distribution of wealth, might
have wearied and perplexed the beginner. These subjects
have therefore been reserved for the fourth and last section.
CHAPTER I. On Foreign Commerce.
A development of Foreign Commerce ensures division
of labour. The great advantage derived from foreign
commerce is that which is obtained by division of labour.
If countries trade freely with each other, the natural
consequence is that each nation gradually increases the
production of those commodities for the manufacture of
181
182 ON FOREIGN COMMERCE, ETC. SECT, iv
which circumstances have specially adapted it ; at the same
time it decreases the manufacture of those commodities
which it has no particular facilities for producing. In this
way the cost of production is diminished, and capital and
labour work with their maximum efficiency. Take an
example : France has great natural advantages for the
manufacture of wine ; her climate and the habits of her
people cause the cultivation of the vine to be carried on
with great success. Such countries as France, therefore,
produce not only sufficient wine to supply their own wants,
but also enough to satisfy the demand of countries like
England, the climate of which is unsuited to the cultivation
of the vine. The advantage of foreign trade is that we can
get from foreign countries either what we could not produce
at all for ourselves ; or else we get commodities in exchange
for a smaller expenditure of labour and capital than it would
cost us to produce them ourselves.
Protection is disastrous to the general interests of the
community. The salt mines of Cheshire and those
existing in Salzburg and other parts of Germany give to
that country and to England special advantages for the
production of salt. In the absence of protective duties
probably all the salt required in France would be provided
by England and Germany ; the salt procured in Northwich
and Droitwich is of excellent quality, and requires com-
paratively so little labour to render it fit for use that it may
be almost regarded as a free gift of nature. This salt can
therefore be sold at a very low price, while at the same
time it is superior in quality to that produced by the more
elaborate processes employed to manufacture salt in France.
In a word English salt is both better and cheaper than
French salt, 1 and would command the market if the trade
were free. But the French protectionist says : " This must
not be, there is a large class of industrious people in France
engaged in the industry of making salt, and a branch of our
home trade would be destroyed if English salt were admitted
1 A great portion of the salt used in France is procured by the
evaporation of sea-water. It is coarse in quality compared with
English salt.
CHAP. I ON FOREIGN COMMERCE "183
into France duty free. We must levy so large an import
duty on English salt as to bring up its price to something in
excess of the price of the salt produced in France ; this will
keep English salt out of France and encourage a branch of
native industry." This is accordingly done : a heavy import
duty is levied on foreign salt, which is thus kept out of the
market. It is quite true that this policy " protects " the salt
trade in France ; that is, it induces a certain amount of the
disposable capital and labour of France to engage in a trade
which is comparatively unproductive of wealth. What the
protectionist forgets, however, is that if the protection were
withdrawn and the unproductive trade in consequence
ceased to exist, the capital and labour engaged in it would
not remain idle ; they would seek some other employment
in which the wealth produced would be a sufficient recom-
pense without the adventitious aid of protection. If the
salt manufacturers of France were undersold by the salt
manufacturers of England, the former might for a time
suffer pecuniary loss ; but the ultimate result would be that
they would gradually withdraw their labour and capital from
a comparatively unremunerative trade, and employ them
in some other industry, for which France possesses excep-
tional advantages. Thus there is no loss, but a transfer of
capital and labour from a comparatively unremunerative
employment to one in which they would work with greatly
increased efficiency. In such a case, the total production
of wealth is increased, and the national capital consequently
augmented.
An illustration of this transfer of capital and labour from
one kind of industry to another may be seen in what is
happening now in English agriculture, in the face of the
recent large imports of food from America, Australia, New
Zealand, and other distant parts of the world. The English
farmer is being undersold in regard to a large number of
commodities. With a few exceptions here and there, the
English farmer does not cry out for protection ; but he casts
about to discover what kinds of crops he can still produce
where he can hold his own against imported commodities.
The next few years will probably see a great many farms
1 84 ON FOREIGN COMMERCE, ETC. SECT, iv
turned into huge market-gardens, because fresh flowers, fruit
and vegetables cannot be so largely imported as the less
perishable commodities just referred to. A movement has
already begun in this direction ; and it should be remembered
that the general body of consumers, having to spend less for
their necessaries, such as bread, meat, and cheese, will have
more to spend upon such luxuries as flowers and fruit.
Similar causes have also produced a movement in English
agriculture from arable to pasture. In the breeding of horses
and in production of fresh milk and cream the English
farmer feels the pressure of foreign competition less than in
the production of wheat and other corn crops.
The cost of Protection to the consumer. This leads
to a consideration of the effect of protection upon the
consumers of the commodities produced in the protected
trades. Protectionists have usually no consideration what-
ever for the consumers. They busy themselves much in
protecting the producers, but they never consider the con-
sumers : and it must be remembered that if the article
protected is a necessary of life, to overlook the interests of
the consumer for the supposed benefit of the producer, is
to prefer the well-being of a part to the well-being of the
whole. Let us consider what is the effect of the protective
duty on salt in France upon the entire body of the French
people. In the first place they have to put up with an
inferior article. This is a disadvantage which it is hardly
possible to measure in money, but it is nevertheless a very
real and distinct disadvantage, for besides the annoyance
o'f having coarse and gritty salt at table, there is also to
be considered the effect of using an inferior kind of salt
for agricultural and manufacturing processes. But if the
pecuniary loss involved through using an inferior article
cannot be accurately measured, that arising from an increase
in price can be reckoned up with a very considerable degree
of exactitude. Those acquainted with the trade assert that
the protective duty raises the price of salt in France one
halfpenny a pound. Now the annual consumption of salt in
France for domestic purposes is 350,000,000 Ibs., therefore
the French people are fined ,750,000 every year in the extra
CHAP, i ON FOREIGN COMMERCE 185
price they pay for their salt ; and no one is one halfpenny
the better ; for this ,750,000 is a measure of the natural
disadvantages the French producers of .salt labour under
compared to the English producers of salt. It is as if a man
had a beautiful spring of water close to his door but situated
in his neighbour's garden : the neighbour says he may take
all he likes for a rent of ^4 a year ; he will not however
accept the offer because he has a spring of his own. l>m
his own spring is a mile away and the water is not so good ;
moreover instead of getting all he wants for 4 a year he has
to pay a boy 3-r. a week or 7 i6s. a year in order to bring
him one pail of water every day. He therefore fines himsHf
in three ways. He has an inferior kind of water ; he has
less of it ; and he pays ^3 i6j. more for it. And no one is
benefited by this expenditure, not even the boy who gets the
3-y. a week ; he could earn 6d. a clay in a hundred different
ways quite as easily as he earns it by carrying the water ; the
6d. a day is no more than a bare compensation to him for
the labour he endures': no favour is conferred on him ; he
gives full value for what he receives.
The effect of Protection on Wages. We have now
traced the effect of protection on the prices of protected
commodities : it is almost invariably the case in protectionist
countries that among the protected articles there are many
of the daily necessaries of life. Where this is so, protection
decreases the wages of labour ; the real reward of the
labourer is diminished because his money-wages will ex-
change for a smaller quantity of commodities. And on the
other hand free trade, by decreasing prices, tends to increase
the real reward of the labourer, and confers a direct benefit
upon thousands of people. If any necessary of life is
cheapened one of two things must occur, either the cost of
production is decreased, or the real reward of the labourer
is increased. If wages remain the same, after the price of a
necessary is decreased, the real reward of the labourer is
augmented, because his money-wages will exchange for a
larger quantity of commodities. If, on the other hand,
wages are decreased in proportion to the increased cheapness
of a necessary, the real reward of the labourer remains the
1 86 ON FOREIGN COMMERCE, ETC. SECT, iv
same, whilst the cost of production is decreased. It is
therefore evident that the benefits attending a decrease in
the price of any of the necessaries of life are much more
general in their operation than the supposed benefit which is
conferred upon producers by protecting them against foreign
competition. A decrease in the price of a commodity also
leads to an increased accumulation of capital ; for the
expenditure of consumers being reduced, they have greater
opportunity of saving, and a larger amount of wealth is
consequently employed as capital. In striving to protect
the producers of a commodity, protectionists thus inflict a
much deeper injury upon the whole community than at first
sight appears.
Protection often produces results that are little expected by
its promoters ; for instance, it often prevents new industries
being established in the protected country. It was stated in
the London papers at Christmas 1883 that for the first time
the Paris Figaro had issued a large illustrated Christmas
number after the fashion of our Illustrated London News
and Graphic. The presses for printing this number were
set up in London, and there was considerable outcry on
this subject in the other Parisian papers. The secretary
of the Figaro admitted that his paper could be as well
printed in Paris as in London, but said that while in
London each press cost ,200, in Paris it would have cost
from ^600 to 700. This enormous difference in cost was
to a great extent due to the French import duties on foreign
machinery.
The wastefulness of Protection is another of its most
striking features. There is a considerable trade in the
neighbourhood of Smyrna in gathering and boiling down
liquorice for the English market. But for the American
market the plant has to be shipped raw, that is containing
90 per cent, of water, because the American tariff virtually
prohibits the introduction of the manufactured liquorice.
Hence for every ounce of liquorice that is brought to
America nine ounces of water are brought also, which is
boiled away after being uselessly carried across the ocean
thousands of miles. Of course those who consume the
CHAP. I ON FOREIGN COMMERCE 187
liquorice have to pay for carrying the nine-tenths of water
thus thrown away.
The Sugar Convention, 1902. For many years after
1870 the sugar refining industry of Great Britain was sub-
jected to very severe competition, especially from France,
the Government of which gave its own sugar producers and
refiners a bounty on the growth and export of sugar. For
some years it was calculated that the French taxpayers were
called upon to pay as much as ^4,000,000 annually in the
form of bounties on sugar. The number of sugar refiners
in England dwindled from sixty in 1864 to thirty in 1882, and
to fifteen in 1903. But the consumption of sugar had been so
extraordinarily stimulated in England by its cheapness that
the fifteen refiners in 1903 were doing far more business
than the sixty in 1864. The annual payment by the general
public of France of ^4,(xx,ooo was in fact, though not in
intention, a gift to the general public of England, enabling
English people to obtain sugar at something less than
cost price. Sugar was far cheaper in England than in the
countries where it was produced, being about \^d. per Ib. in
England as compared with about 3^. a Ib. in Germany, and
even for a time as much as %\d. a Ib. in France. The
consumption of sugar in England under these circumstances
increased very readily, and became far higher than that of
any other European country or that of the United States.
Yearly consumption of sugar in the United Kingdom per
head of population in 1902 :
Ibs.
United Kingdom .... 787
United States 6870
Germany 27-11
France ...... 26*80
Austria- Hungary .... i6'87
Russian Empire .... 9'58
Italy 679
The cheapness of sugar in the United Kingdom not only
promoted a large domestic consumption, but was likewise
very favourable to such trades as jam and biscuit making.
The large consumption of sugar in England was also an
1 88 ON FOREIGN COMMERCE, ETC. SECT, iv
advantage to the Exchequer because, when it was necessary
to raise extra taxation on account of the South African war,
it was found that \d. a Ib. on sugar brought in nearly
,7,000,000 annually to the revenue.
It was however argued that it was an unsatisfactory
condition of things to be obtaining sugar in part as a gift
from foreigners. Representatives of the English sugar trade
felt that they were being subjected to an unfair competition,
and repeated efforts were made by agreement with the sugar-
producing countries to induce them to put an end to the
bounty system. In 1902 an International Convention was
formed in Brussels, representing all the chief countries
interested in the sugar trade. The object of the Con-
vention was to extinguish bounties either by the pro-
hibition of the import of bounty-fed sugar or by the
creation of countervailing import duties. The necessary
legislation for giving effect to the decisions of the Convention,
in the United Kingdom, was passed in 1903 and came into
operation in September of that year. The effect of the
extinction of the bounties was to raise the price of sugar
in England from 6^. id. a cwt. to &s. ^d. a cwt., or 38 per
cent., and to cheapen sugar abroad. The higher price in
England has naturally been accompanied by a decreased
consumption, estimated to be as much as 26 per cent. The
sugar refiners of England may benefit temporarily by the
extinction of the bounties ; but other trades such as jam and
biscuit making and the manufacture of confectionery have
suffered by a rise in price of their raw material, and if these
businesses are placed at a disadvantage in competing for
foreign markets and consequently produce on a smaller scale,
while the domestic consumption is also curtailed, it may be
doubted whether the advantage even to the sugar refiners
will be more than temporary. The abolition of the bounties
was advocated very largely on account of the benefit which
it was supposed would accrue therefrom to the sugar
plantations of the West Indies. A gift of ,250,000 was
made in 1902 by the British Parliament to the West Indies
to enable them, as it was said, to tide over the time until
the Convention came to their relief. This gift was treated
CHAP. I ON FOREIGN COMMERCE 189
by the United States as a bounty, and the West Indian
sugar which before had had a preferential access to the
American market, because it was not bounty fed, was then
penalised by the United States tariff. At the same time
Russia, considering herself injured by the Convention, im-
mediately threatened to retaliate by enhancing her already
exorbitant duty on Indian tea.
These circumstances afford a very good example of the
immense complications and intricacies of foreign trade, and
the difficulty of interfering with it without producing totally
unexpected results. Measures supposed to be beneficial to
the West Indies caused a threatened penalisation of trade
in the East Indies. A gift of a quarter of a million from
the Imperial Parliament to aid a declining industry had the
effect of accelerating its downward course. Here are some
of the visible results of the Sugar Convention policy. An
invisible but none the less real result is that the people of
the United Kingdom, having to spend more upon their sugar,
have less to spend on clothes, books and other articles, and
a diminished power of saving. If sugar rises in price by
\d. a Ib. without decreasing its consumption, this means
that .7,000,000 annually is taken from the pockets of the
people and the consumers only get exactly what they got
before. The other trades which would have benefited if
these ,7,000,000 had been spent among them have suffered
a loss none the less real because it cannot be tabulated in
statistical tables.
The arguments of Protectionists applied to the in-
troduction of railways. The plea of protection might have
been urged with great force by the owners and drivers of
stage-coaches at the time of the introduction of railway
travelling : they might have said that these new-fangled
railroads would cause many hundreds of people to be thrown
out of employment ; that coach-proprietors and the owners
of roadside inns would be ruined ; that the national character
would deteriorate, and that the race of horses would in a few
years become extinct. All this very possibly was said, but
with no avail. The coach-drivers and proprietors and the
inn-keepers were a very small body compared with the rest
190 ON FOREIGN COMMERCE, ETC. SECT, iv
of the community ; the good of the many was preferred to the
profit of the few : and a wonderful development of commerce
and other innumerable advantages derived from railway
travelling have resulted.
In the time of Charles II. the Thames watermen petitioned
that hackney coaches might only be allowed to ply for hire
in London in directions running north and south, so that all
persons desiring to be conveyed east or west should be
compelled to go by water.
The Candlemakers' Petition. M. Bastiat, in the follow-
ing witty sketch, has placed in strong relief the absurdity of
protection.
THE CANDLEMAKERS' PETITION. 1
"Petition of the Manufacturers of Candles, Waxlights,
Lamps, Candlesticks, Street- Lamps, Snuffers, Extin-
guishers, and of the producers of Oil, Tallow, Resin,
Alcohol, and generally of everything connected with
Lighting.
" To Messieurs the Members of the Chamber of Deputies.
" GENTLEMEN,
" We are suffering from the intolerable competition of a
foreign rival, placed, it would seem, in a condition so far
superior to ours for the production of light, that he abso-
lutely inundates our national market with it at a price
fabulously reduced. The moment he shows himself our
trade leaves us all consumers apply to him ; and a branch
of native industry, having countless ramifications, is all at
once rendered completely stagnant. This rival, who is no
other than the Sun, wages war to the knife against us, and
we suspect that he has been raised up by perfidious Albion ;
inasmuch as he displays towards that haughty island a
circumspection with which he dispenses in our case.
" What we pray for is, that it may please you to pass a
1 Many paragraphs of this petition have been omitted ; but it is
hoped that nothing has been left out which is essential to the line
of argument adopted.
CHAP. I ON FOREIGN COMMERCE 191
law ordering the shutting up of all Windows, Skylights,
Dormer-Windows, Outside and Inside Shutters, Curtains,
Blinds, Bull's-eyes; in a word of all Openings, Holes,
Clinks, Clefts, and Fissures, by or through which the light
of the Sun has been allowed to enter houses, to the prejudice
of the meritorious manufactures with which we flatter our-
selves we have accommodated our country, a country
which, in gratitude, ought not to abandon us now to a strife
so unequal.
" We urge the* following reasons in support of our request :
First : if you shut up as much as possible all access to natural
light, and create a demand for artificial light, which of our
French manufactures will not be encouraged by it ?
" If more tallow is consumed, then there must be more
oxen and sheep ; and consequently we shall behold the
increase of artificial meadows, meat, wool, hides ; and, above
all, manure, which is the basis and foundation of all agricul-
tural wealth.
" If more oil is consumed, then we shall have an extended
cultivation of the poppy, of the olive, and of colewort.
These rich and exhausting plants will come at a right time
to enable us to avail ourselves of the increased fertility
which the rearing of additional cattle will impart to our
lands.
"Our heaths will be covered with resinous trees. Nu-
merous swarms of bees will, on the mountains, gather
perfumed treasures, now wasting their fragrance on the
desert air, like the flowers from which they are derived,
No branch of agriculture but will then exhibit a cheering
development.
"The same remark applies to navigation. Thousands
of vessels will proceed to the whale fishery, and in a short
time we shall possess a navy capable of maintaining the
honour of France, and gratifying the patriotic aspirations of
your petitioners.
" But what shall we say of the manufacture of articles
de Paris? Henceforth you will behold gildings, bronzes,
crystals, in candlesticks, injamps, in lustres, in candelabra,
shining forth in spacious ware-rooms, compared with which
192 ON FOREIGN COMMERCE, ETC. SECT, iv
those of the present day can be regarded but as mere
shops.
" No poor Resinier from his heights on the sea-coast, no
coal-miner from the depth of his sable gallery, but will rejoice
in higher wages and increased prosperity.
" Only have the goodness to reflect, Gentlemen, and you
will be convinced that there is perhaps no Frenchman, from
the wealthy coal-master to the humblest vendor of lucifer
matches, whose lot will not be ameliorated by the success of
our Petition. If you urge that the light of the Sun is a
gratuitous gift of nature, and that to reject such gifts is
to reject wealth itself, under pretence of encouraging the
means of acquiring it, we would caution you against giving a
death-blow to your own policy. Remember you have hitherto
always repelled foreign products, because they approximate,
more nearly than home products, to the character of gratui-
tous gifts. To comply with the exactions of other monopo-
lists, you have only half a motive ; and to refuse us, simply
because we stand on a stronger vantage-ground than others,
would be to adopt the equation, + x + = - ; in other
words, it would be to heap absurdity upon absurdity.
" Nature and human labour co-operate in various propor-
tions (depending on countries and climates) in the produc-
tion of commodities. The part which nature executes is
always gratuitous ; it is the part executed by human labour
which constitutes value and is paid for. If a Lisbon orange
sells for half the price of a Paris orange, it is because natural,
and therefore gratuitous, heat does for the one what artificial,
and consequently expensive, heat must do for the other.
When an orange comes to us from Portugal, we may con-
clude that it is furnished in part gratuitously, in part for
an onerous consideration ; in other words, it comes to us
half-price as compared with those of Paris.
" Now it is precisely the gratuitous half (pardon the word)
which we contend should be excluded. You say, How can
national labour sustain competition with foreign labour, when
the former has all the work to do, and the latter only does
one half, the Sun supplying the remainder ? But if this half,
being gratuitous, determines you to exclude competition, how
CHAP, i ON FOREIGN COMMERCE 193
should the whole, being gratuitous, induce you to admit
competition ? If you were consistent, you would, while
excluding as hurtful to native industry what is half gra-
tuitous, exclude a fortiori and with double zeal that which
is altogether gratuitous. Once more, when products such as
coal, iron, corn or textile fabrics are sent us from abroad, and
we can acquire them with less labour than if we made them
ourselves, the difference is a free gift conferred upon us.
The gift is more or less considerable in proportion as the
difference is more or less great. ... It is as perfect and
complete as it can be when the donor (like the Sun in
furnishing us with light) asks us for nothing. The question,
and we ask it formally, is this : " Do you desire for our
country the benefit of gratuitous consumption, or the pre-
tended advantages of onerous production ? Make your choice,
but be logical ; for as long as you exclude foreign fabrics,
in proportion as their price approximates to zero, what in-
consistency would it be to admit the light of the Sun, the
price of which is already at zero during the entire day \"
Foreign trade will be advantageous to both countries
only when the relative cost of the commodities ex-
changed is different in each country. Having now
explained the general principles of Free Trade, and the
advantages which nations derive from foreign commerce,
let us inquire into the actual effect of the exchange of com-
modities between two such countries as France and England.
In the first place, it must be borne in mind that no profit
arises from the exchange, by two countries, of one com-
modity for another, unless the relative cost of the two
commodities is different in the two countries. Both com-
modities may be cheaper in the one country than in the
other, but they will not be exchanged unless their relative
cost is different. For instance, gloves and spirits may both
be cheaper in France than in England ; it may therefore
appear evident that France will never send gloves to England
in exchange for spirits ; but suppose that in France four
pairs of gloves are equal in value to a gallon of spirits,
whilst in England four pairs of gloves will exchange for one
gallon and a quarter of spirits. In this case a French glove-
Q
194 ON FOREIGN COMMERCE, ETC. SECT, iv
merchant would gain a quarter of a gallon of spirits for
every four pairs of gloves which he exchanged with England ;
and the exchange might accordingly take place with ad-
vantage to both countries. If, however, the relative value
of gloves and spirits were the same in each country, no
exchange of these commodities would take place, because
the merchants conducting such an exchange would realise
no profit by the transaction. If four pairs of gloves equal in
value a gallon of spirits in France and in England, a French
glove-merchant would not seek to effect an exchange with
an English spirit-merchant, because he would not gain
anything by so doing. It has now been proved that the
relative cost of the commodities which afe exchanged must
be different in the two countries effecting the exchange.
But the amount of difference has not yet been defined.
The difference must be at least sufficient to cover the cost of
conveying the commodity from the one country to the other,
and to leave a margin of extra profit to the exporter. For
no merchant will undertake the trouble and risk of exporting
a commodity to a foreign country, if the price realised by
the exported commodity is such that his profit is no greater
than he would have obtained by selling the commodity in
his own country.
The terms of the exchange are regulated by an
equalisation of Demand and Supply. The minimum
difference in the relative value of the commodities has been
defined ; but the difference may temporarily be much more
than sufficient to cover the cost of carriage and to leave a
small margin of profit for the exporter. Suppose, for instance,
that a ton of coal in France will exchange for a quarter of
wheat, whilst in England at the same time a ton of coal will
only exchange for one-third of a quarter of wheat. We may
assume that the English coal-merchant considers himself
sufficiently recompensed if, in England, a ton of coal
exchanges for one-third of a quarter of wheat ; but hearing
that in France he could get three times as much for his coal,
he resolves upon exporting it to that country. The question
now arises, Will he be able to secure the whole two-thirds of
a quarter of wheat as extra profit upon every ton of coals he
CHAP. I ON FOREIGN COMMERCE 195
sends to France ? In answer to this question we refer to
Section II, in which it was shown that the price of a
commodity is adjusted by an equalisation of demand and
supply. We have supposed that the English merchant
sends coal to France and obtains wheat in exchange for it ;
by this transaction it is evident that the supply of foreign
wheat in England is increased, and therefore the demand
for home-grown wheat diminishes ; for similar reasons the
amount of coal sent to France is increased, and consequently
the demand for French coal diminishes. Now it was shown
in Section II, when the theory of Value was explained, that
if other things remain unaltered, an increase in the demand
for a commodity causes an increase in its price ; and that a
reduction in the demand for a commodity decreases its
price. In other words, the price of a commodity is adjusted
by equalising the supply with the demand. It is evident
therefore that the exchange between England and France
of coal and wheat affects the price of these commodities
in both countries. In England the price of coal is increased
because the demand is increased ; and the price of wheat
declines because the supply is augmented. The opposite
effect is produced in France ; the price of coal declining,
and that of wheat increasing. It is now evident that the
exchange between the two countries will not be made on
the same terms as were at first agreed upon. There will no
longer be a difference of two-thirds of a quarter of wheat
in the exchange power of coal in the two countries ; in
England the exchange power of coal will have increased,
in France it will have diminished ; and finally, if competition
is quite unchecked, the difference in the price of coal and
wheat in the two countries will only be sufficient to cover the
cost of carriage from one country to the other, and to afford
a reasonable remuneration to the capitalist for the risk and
trouble which exportation entails. The price of a commodity,
in so far as there is free competition among its producers,
depends ultimately upon its cost of production. Cost of
carriage is frequently an important element in the cost of
production of imported commodities. When import and
export duties are removed, the cost of carriage is the
O 2
196 OiV FOREIGN COMMERCE, ETC. SECT, iv
principal cause of the difference of price of the same com-
modity in different countries. This is rendered more clear
if the exchange is supposed to take place between two places
where legislative enactments do not attempt to check the
free interchange of commodities. For instance, Lancashire
produces cotton goods, whilst Lincolnshire grows a great
quantity of wheat. The difference in the relative value of
wheat and cotton cloth in Lincolnshire and Lancashire
would be very considerable if these counties were prevented
from exchanging their commodities for those produced in
other localities. As it is, however, the difference in the
price of wheat and cotton in Lancashire and Lincolnshire
can never be greater than suffices to cover the expense of
conveying these commodities from the one county to the
other. In France, previous to the Revolution, the protective
spirit was so active that wheat could not be sent from one
province to another in that country. The consequence was
that the greatest variety of prices prevailed ; wheat being
plentiful and cheap in one place, whilst at another, owing to
a bad harvest, it was very scarce and extremely dear. The
same state of things prevailed at an earlier period of our own
history. In Mrs. J. R. Green's Henry II. she describes the
keen commercial rivalry which then prevailed between town
and town. The most strenuous efforts of every township
" were given to secure the exclusive right of trading. Free
trade between village and village in England was then, in
fact, as much unknown as free trade at this day between the
countries of modern Europe." Pp. 44-5.*
The manner in which the supply of an exported
commodity is equalised with the demand. It is not
difficult to trace the manner in which the supply of an
exported commodity is equalised to the demand, by an
adjustment of the price. It has been assumed that an
English merchant by sending coal to France and obtaining
in exchange for each ton a quarter of wheat, realises an
extremely high profit. It therefore follows that the English
merchant will export as much coal to France as he can ;
1 Henry II. by Mrs. J. R. Green. Macmillan & Co.
CHAP. I ON FOREIGN COMMERCE 197
other merchants will also do the same, in order to participate
in the exceptionally high profits. In this way the supply of
coal is very largely increased in France, and in order to be
able to sell it the exporters are obliged to reduce its price ;
at the same time, owing to the reduction of the supply of
coal in England, its price is raised in that country. Hence
the inducement to export coal is checked in two ways. The
value of coal is raised in England and depressed in France ;
merchants no longer obtain as much as two-thirds of a
quarter of wheat more in France than in England ; what
they do obtain in exchange for their coal in France is
ultimately only sufficient to pay the cost of carriage and to
recompense them for their risk.
Retaliation and Eeciprocity. ' These two words in
practice mean the same thing : reciprocity is the friendly,
and retaliation is the unfriendly way of describing an
identical policy. " If you tax our goods we will tax yours,''
or " hitting back," is retaliation ; whereas its correlative,
"Any favour you shew us we will shew you," is reciprocity.
The argument for retaliation is very plausible. Why, it is
argued, should we allow American, German, French and
Russian produce duty free into our ports while these
countries charge a high import duty against ours ? The
answer is because we benefit by receiving as much as
possible, not as little as possible, in exchange for the goods
and services which we render to other countries. Moreover,
departing from the merely theoretical defence of the British
policy of free imports to an investigation of the actual effects
of retaliation upon the commerce of those countries which
have given it a fair trial, it is proved that a tariff war between
nations is almost as destructive to commercial well-being as
a war in the ordinary sense of the term. There was a tariff
war between France and Switzerland from January, 1893 to
August, 1895. The result was that the value of French
exports to Switzerland fell in the three years by a sum equal
to 104,895,000 francs, or nearly half of its former amount.
In the same period Swiss imports to P' ranee declined by 35
per cent., or more than a third of its former amount. The
mutual trade thus extinguished between France and Switzer-
198 ON FOREIGN COMMERCE, ETC. SECT, iv
land was acquired by Austria, Germany, Belgium, Italy and
England. When France and Switzerland saw how much
they were losing by their tariff war they brought it to an
end ; but though the trade between the two countries
instantly showed the good effect of the cessation of re-
taliatory duties, the business which had been diverted did
not return in full to its old channels. In 1902 the business
between the two countries had not recovered the prosperity
which had been destroyed by the mistaken policy of the
tariff war.
The Tariff War between France and Italy of 1888-
99. The result of this tariff war was that in the years it
lasted Italian exports to France sank 57 per cent., and
France's exports to Italy 50 per cent. The enormous decline
in trade between the two countries represents, so far as can
be judged, a very greatly prolonged rather than a temporary
loss, for the activity of trade was only very slowly recovered.
Friendly commercial relations were resumed in February
1899, but not before the tariff war had cost France and
Italy ^120,000,000 sterling, and "in spite of the new
commerical treaty Franco- Italian trade has not shown
any permanent improvement since the War of Tariffs
the total volume not exceeding the half of what it was
before." 1
When there is an exchange between two countries,
the profit of each country varies inversely with its
demand for the imported goods. In the case of the
exchange of commodities between two countries, the greatest
profit is realised by that country whose demand for the
imported commodity is the less urgent. Thus, in the case
of exchange previously investigated, any increase in the
demand for coal in France would cause the English im-
porters of coal to obtain more favourable terms of exchange ;
the value of coal would rise, and the importers would obtain
a larger quantity of goods in exchange for it. This increased
value would not, however, be maintained, because it would
attract a larger supply ; if the value were permanently
1 Parliamentary paper, Commercial No. I, 1904, " Tariff Wars
between certain European States," Cd. 1938, p. 21.
CHAP. I ON FOREIGN COMMERCE 199
increased it would denote that the cost of production had
increased in consequence of the increased demand causing
less productive mines to be worked.
It must be borne in mind that the direct benefits of foreign
trade consist in increasing the productive powers of the
world by enabling each country to apply its capital and
labour to those industries in which they will be most efficient.
In so far as this is done, commodities are produced with the
least possible expenditure of capital and labour. On this
point Mr. Mill says, " There is much misconception in the
common notion of what commerce does for a country. When
commerce is spoken of as a source of national wealth, the
imagination fixes itself upon the large fortunes acquired by
merchants rather than upon the saving of price to the con-
sumers. But the gains of merchants when they enjoy no
exclusive privilege are no greater than the profits obtained
by the employment of capital in the country itself. . . .
Commerce is virtually a mode of cheapening production ;
and in all such cases the consumer is the person ultimately
benefited ; the dealer in the end is sure to get his profit,
whether the buyer obtains much or little for his money."
Besides the economical advantages derived from foreign
trade it also produces moral and intellectual effects of the
greatest importance. By keeping up a constant communi-
cation between widely different nations, it enables each
people, by comparing its own laws, institutions and manners
with those of other countries, to profit by the example or to
take warning by the fate of other nations. Commerce ought
also to teach nations that they do not profit by each other's
misfortunes, but that each country has a direct interest in
the welfare and prosperity of every other.
The strongest case which the opponents of free trade
have ever made is the following : If a nation engages in
foreign trade the commodities which it exports will rise
in value, while those which it imports will decrease in value.
This is evident both from a priori reasoning and from
experience. The exported commodities will become dearer
because the demand for them is increased ; the imported
commodities will become cheaper because their supply
V
200 ON FOREIGN COMMERCE, ETC. SECT, iv
is increased. The principal exports of such a nation as
America consist of the necessaries of life, such as wheat and
other agricultural produce, in return for which it receives
(say the protectionists) articles of luxury, such as rare wines
and costly lace. Now it is urged that this foreign trade
must be disadvantageous to the bulk of the population
because it increases the price of necessaries, and decreases
only the price of luxuries. This argument does not touch
the main advantage of foreign commerce : viz., such a
division of labour, that each country produces those com-
modities for the manufacture of which it has peculiar and
natural advantages. The result of protection in America is
to withdraw a portion of her capital and labour from her
most productive industries, in order to employ them in
industries that are less productive. The argument cannot
moreover be regarded as a fair statement of facts. The
United States are still pursuing a policy of protection, not
only in respect of luxuries but of necessaries as well.
Foreign articles, whether necessaries or luxuries, are merci-
lessly taxed ; a fine of as much as 100 and 200 per cent,
being levied on some of them. Such articles as boots and
foreign clothing of all kinds are subject to heavy imposts ;
and at the same time the exportation of corn and breadstuffs
to Europe is carried on on a large scale.
An example of the effect of Protection in America.
Mr. Wells, at one time Special Commissioner of the United
States Revenue, issued a report by no means favourable to
the opponents of free trade. Mr. Wells' views were the
more striking because when he received the appointment of
Commissioner of Revenue he was a strong protectionist,
and he was led to change his opinions on the subject by the
facts which came under his observation during his official
experience. His report shewed that the tariffs imposed
were so heavy as to be a most serious burden to the industry
of the country. The following example shews the way in
which these tariffs depressed trade. Mr. Wells stated that
"in 1869 an enterprising citizen of the North- West visited
England for the purpose of contracting for an iron vessel
suitable for the grain trade of the upper lakes. As foreign-
CHAP. I
ON FOREIGN COMMERCE
201
built ships are not admitted on the American registry, it was
proposed to take over the vessel in sections simply to serve
as a pattern, and at the same time it was intended to import
skilled workmen, and to establish an iron shipbuilding yard
in the vicinity of Chicago. But when the duties varying
from 38 to 66 per cent, on the various articles employed in
the construction of the vessel came to be calculated, they
were found to amount to so much that the project had to be
abandoned." The whole population is taxed in the partially
successful attempt to protect the interest of a few hundred
American ironmasters. To such circumstances as that just
narrated the commissioner attributed the decline in American
shipping which caused so much discussion a few years ago
in the States. The decline in the foreign shipping trade
of the United States is most remarkable. In 1875 the
United States carried 31 per cent, of their foreign commerce
in their own ships ; in 1886 they only carried 2ii per cent.
In the quinquennial period ending 1899, the proportion had
slightly risen to 22*3 per cent. In 1860 the United States
merchant navy ran a neck-and-neck race with that of Great
Britain. In 1896 the position was entirely changed : viz.
TONNAGE.
CARRYING POWER. TONS.
1860
1896.
i860.
1896.
British
United States
5,7IO,OOO
5,350,000
IO,4OO,OOO
4,770,000
7,22O,OOO
7,960,000
3O,6OO,OOO
II,850,OOO
In 1896 the total tonnage of the world, whether steam or sail-
ing, amounted to 24,090,000 tons. Of this the United Kingdom
with Canada owned 9,950,000 tons, or more than two-fifths.
In ship-building the predominance of the United Kingdom
is even more remarkable. The ship-building of the world
in 1897 was 1,570,000 tons, of which 1,050,000 were built in
the British Isles. In 1898 the total was 1,890,000, of which
1,370,000 were British. 1 The necessity of relying upon
1 Mulhall's Dictionary of Statistics, Part II, pp. 8oi-2.
202 ON FOREIGN COMMERCE, ETC. SECT, iv
foreign countries for our supplies of food has forced upon
England the adoption of free trade. This necessity does
not exist in America, and consequently the recognition of
the advantages of free trade is delayed, but there is a very
considerable body of public opinion in the United States
favourable to free trade. The following extract from an
American paper gives some idea of one way in which pro-
tection has increased the cost of living in the United States.
"Taxes on an American when in his clothes Hat, silk, 60
per cent. ; ribbon, 60 per cent. ; alpaca lining for brim, 50
cents a pound, and 35 per cent. ; leather inside, 35 per cent. ;
muslin lining, 7^ cents a square yard ; glue, 20 per cent.
Coat cloth, 55 cents a pound, and 35 per cent, ad valorem;
silk lining, 60 per cent. ; alpaca used therein, 50 cents a
pound, and 35 per cent, ad -valorem; buttons, if worsted,
20 cents a pound, and 35 per cent, ad valorem; worsted
braid, 50 cents a pound, and 35 per cent, ad valorem; velvet
for collar, 60 per cent.; red worsted padding, 50 cents a
pound, and 35 per cent, ad valorem; hemp padding, 40 per
cent. Pantaloons cassimere, 50 cents a pound, and 35 per
cent, ad valorem; cotton used therein, 5 cents a square
yard ; hemp cloth for facing, 40 per cent. ; metal buttons,
30 per cent. Vest, silk or satin, 60 per cent. ; linen lining,
35 per cent. ; silk buttons, 60 per cent. Braces 35 per cent.
Under shirt if silk, 60 per cent. ; if worsted, 50 cents a
pound, and 35 per cent, ad valorem; if cotton, 35 per cent.
Drawers, the same. Shirt, cotton, 5 cents a square yard ;
linen for the front, 35 per cent. Buttons, 35 per cent. Boots
raw hides, 10 per cent. ; tanned leather, calfskin, 30 per
cent. ; if patent leather, 35 per cent. ; soles, 35 per cent.
Neckerchief if silk, 60 per cent. Pocket-handkerchief if
silk, 60 per cent. ; if linen, 35 per cent. Kid gloves 50 per
cent. Pocket-knife 35 per cent. Watch 25 per cent. Silk
watch-chain 60 per cent."
The relation of Imports to Exports. It is an error to
suppose, as many people appear to do, that imports have to
be paid for by the country receiving them in gold : all the
imports which a country receives have of course to be paid
for in some way, and imports in the main are paid for by
CHAP. I ON FOREIGN COMMERCE 203
exports. But in a country such as England, where imports
are permanently and increasingly in excess of exports, there
i.rc other very important methods of paying for imports. It
should be here remarked that the excess of imports over
exports in the United Kingdom, which is said to have
.-.mounted in the aggregate to ,4,000,000,000 in the years
between 1860 and 1903, is not so large as it appears because
of the omission, up to the year 1899, of ships and boats with
heir machinery from the British export tables issued annually
>y the Board of Trade. Economists used to state the
elation of exports to imports to be that they must exchange
it such a value as to produce an equilibrium, in other words
hat exports must pay for imports. Mr. Mill has stated this
endency thus : " The produce of a country exchanges for
he produce of other countries at such values as are required
n order that the whole of her exports may exactly pay for
he whole of her imports." This statement appears to be
it variance with facts, and it should be restated thus : " The
.vhole of the liabilities of any country in respect of goods or
services received from other countries must be balanced by
in equal value of goods or services rendered to them." The
eason why the United Kingdom appears to be receiving in
mports more than she gives to the world as exports, is that
she in part discharges her indebtedness by services of which
10 record is kept in the Board of Trade returns. The first
and most obvious of these services is the ocean carriage of
merchandise and persons, about half of which for the whole
world is done in British ships. The annual earnings of the
merchant fleet of the United Kingdom have been estimated
by Sir Robert Giffin to amount to ^9o,ooo,coo. This repre-
sents a series of services, adding value to commodities by
taking them from the places where they are made or grown
to the places where they are consumed. The additional
value thus conferred on commodities is so immense that
if the total imports of the world are compared with the total
exports of the world, it is found that the value of the imports
exceeds the value of the exports by hundreds of millions;
yet these are the very same goods valued at the port of
departure and the port of arrival respectively. The following
204 ON FOREIGN COMMERCE, ETC. SECT, iv
table shews for the three years 1891, 1896 and 1901 the
aggregate imports into and exports from all the principal
countries of the world :
IMPORTS.
EXPORTS.
EXCESS OF
IMPORTS.
Million
Million
Million
1891
2099
1850
249
1896
2147
1898
249
1 1901
2516
2292
224
Every one is familiar with the fact that the carriage of
goods has to be paid for, and that a commodity at or near
the place of consumption is more valuable than the same
commodity at the place where it is produced. A ton of coal,
for instance, at the pit's mouth may be worth js., while the
same coal in London may be worth i is. An orange may
be worth a farthing in Spain or in the Canary Islands, while
the same orange may be worth id. in London. It is obvious
therefore that carrying, so large a proportion of which is
done in British ships, is a service for which the various
countries of the world pay us by sending us more goods
than we send them.
Another very important service rendered by the United
Kingdom to other countries, and .which places them in her
debt, is the loan of capital. The inhabitants of all wealthy
countries, such as England and France, have enormous
sums in foreign investments. England was first in this form
of enterprise, and from the time of the first making of
railways on the continent of Europe, immense sums have
been invested by England in foreign industrial enterprises. 2
Nearly the whole of the railways in America, Argentina and
India were made with British capital. Irrigation again,
over which hundreds of millions have been spent, and well
1 Board of Trade Blue Book, Cd. 1761, p. 100.
2 In the ten years 1881-90, we lent to colonies and to foreign
countries a sum estimated at no less than .559,000,000 ; for the
ten years ending 1901, the estimated amount lent was ^"472,000,000.
CHAP, i ON FOREIGN COMMERCE 205
spent, in India and Egypt, has been carried out by means of
British capital. Wherever one goes in the world one sees
tiaces of the ubiquitous British capitalist, investing his
money, for which he expects, and generally receives, an
ainual return. The return is not sent to this country in the
form of gold or bullion, but in the form of excess of imports.
Debtor Countries and Creditor Countries. Every
c juntry is either a debtor or a creditor, a borrower or a
lender. Young countries, such as the United States and
t ic Australian colonies, poor countries, such as India and
I .ussia, are debtor countries : they owe to other nations
i lore than other nations owe to them ; consequently their
< xports exceed their imports. This is not necessarily a sign
< ither of improvidence or decadence on their part : they
1 orrow because they could not develop their resources with-
< ut borrowing. In so far as they have borrowed wisely,
i >r industrial and agricultural development, they gain by
1 orrowing quite as much as, if not more than, the lenders
3 ain by lending. Old and wealthy countries such as the
1 Jnited Kingdom and France are creditor countries ; every
i atural resource which they are as yet known to possess is
< eveloped, and is producing wealth to the top. of its capacity.
'. To commercial enterprise which offers a fair return to
< apital and labour here but can command a supply of both.
"* Ve not only have capital sufficient for our own industries :
we are able to lend hundreds of millions to other countries ;
ia other words Great Britain and France are creditor
< ountries, other countries owe more to them than they
owe to the other countries : their imports are accordingly
permanently in excess of their exports.
It should be understood that foreign investments, during
the period when they are being made, that is when capital
has to be transferred from England, say to Argentina or
Canada, do not increase imports ; they have an exactly
contrary effect, they increase English exports. The wealth
that England lends to foreign countries does not go in the
form of gold or bullion, but in the form of goods. But a
movement in the contrary direction is set up directly the
capital invested abroad begins to bear interest ; then year
206 ON FOREIGN COMMERCE, ETC. SECT, iv
by year the country which is using British capital has to pay
the interest which swells the volume of British imports.
Though on the whole other countries owe England much
more than England owes them, yet the South African War
produced a counter current in the other direction. The
Government raised the whole cost of the war, partly by
taxation, and partly by borrowing. The combined deficits
of the four years 1899 to 1903 were more than ,153,000,000,
most of which had to be met by borrowing. A considerable
part of the money so borrowed came from abroad, and
England in so far became a debtor instead of a creditor
country. This checked the excess of imports, and caused
an increase in our export trade, the effect of which did not
immediately cease with the cessation of the war. The excess
of imports over exports was ,101,000,000 in the first seven
months of 1903, as compared with ,113,000,000 and
,111,000,000 in the corresponding period of 1902 and
1901. l
There are certain trades and professions, such as banking,
bill discounting and insurance, in regard to which London
is the centre, not only for the United Kingdom, but for the
world. The profits on these industries in so far as they
accrue in foreign countries all go to swell the excess of
English imports over exports.
Summary. The imports into England are permanently
in excess of the exports from England. The excess averaged
during the ten years from 1893-1903 ,161,000,000 a year.
In 1909 it was ,159,000,000. An equation in English
foreign trade is reached, that is to say all accounts between
England and the countries with which she trades are settled
(i) by English exports; (2) by the profits due to England
on her foreign shipping trade, believed to amount to
,90,000,000 annually ; (3) by interest due on English capital
invested abroad. " The profits which could be identified as
foreign for income tax purposes rose from ,54,500,000 in
1891-210 ,62,500,000 in I9OI-2." 2 These figures however
only include foreign and colonial securities, coupons and
1 Board of Trade Blue Book, Cd. 1761.
2 Board of Trade Blue Book, Cd. 1761, p. 102.
CHAP. I ON FOREIGN COMMERCE 207
railways, and take no account of the return on British
capital invested abroad in miscellaneous industrial enter-
prises, an omission which, together with the profits on bank-
ing and insurance business done by London firms out of
England, it may well be believed covers the comparatively
; mall balance left unaccounted for.
So far from an excess of imports being a sign of unfavour-
able commercial conditions it is the exact reverse; and it
vould be easy for any one conversant with the general
economic condition of any country to say whether its imports
exceeded its exports or vice versd. Every creditor country
nust have an excess of imports, while every debtor
:ountry, unless it is bankrupt, must have an excess of
exports.
The meaning explained of such expressions as
"balance of trade," "unfavourable exchange." In
the days of the mercantile system it was thought a serious
calamity to a country if a part of its exports consisted of
coin or bullion. A country was in fact considered to have
suffered a loss, from foreign trade, exactly equivalent to the
value of the coin or bullion she exported. When a part of a
nation's imports had to be paid for in gold or silver, " the
balance of trade " was said to be against that nation, and
the exchange which she had effected was termed " unfavour-
able." Experience has exposed the fallacy and confusion of
thought of such reasoning. Gold is now exported from the
countries which produce it as an ordinary article of commerce ;
and the rapidity of the growth and the prosperity of Australia,
California and the Transvaal are notorious, and have been
proportionate to the degree in which they have parted with
their gold in exchange for the commodities produced by
other countries. Still, tried even by this test, it is a conclusive
proof that we are not paying for our excess of imports in gold,
that the United Kingdom year by year imports more gold
and silver bullion and specie than she exports. The average
annual excess on the five years ending 1902 was about
,7,000,000. In 1909 the excess was ,7,442,000. l
1 Statistical Abstract, 1903 and 1910.
208 ON FOREIGN COMMERCE ETC. SECT, iv
The following chapter on Credit will explain the manner
in which foreign exchanges are conducted without involving
a constant export and import of the precious metals.
QUESTIONS ON CHAPTER I. On Foreign Commerce.
1. What is the great advantage derived from foreign trade ?
2. Give examples of this advantage.
3. What is meant by Protection, and how do protectionists
justify their interference with foreign commerce?
4. What would follow if protection were withdrawn from
those industries which could not survive foreign competition ?
5. When a native industry would cease to exist unless it
were protected from foreign competition, is loss or gain
inflicted on the nation at large by protecting it ?
6. What large class does the protectionist quite overlook ?
7. Describe the effect produced on wages by the cheapen-
ing of any of the necessaries of life.
8. What effect is produced on the accumulation of capital
by decreasing cost of production ?
9. Apply the arguments of protectionists to the intro-
duction of railway travelling.
10. Give a summary of the arguments contained in the
Candlemakers' petition.
11. Under what conditions will an exchange of com-
modities be advantageous to both countries effecting such
an exchange ?
12. What must be the minimum difference in the relative
value of the commodities exchanged ?
13. When the difference exceeds this minimum, how are
the terms of the exchange determined ?
14. How does foreign commerce affect the prices of
exports and imports ?
15. If foreign commerce were quite unchecked, what
circumstances would still cause the prices of some com-
modities to be different in different countries ?
1 6. To what excess was the protective spirit carried in
France before the Revolution ?
CHAP. I QUESTIONS ON CHAPTER I 209
17. Shew the manner in which the demand and supply of
a foreign commodity are equalised.
1 8. What is "reciprocity"? Give an illustration of its
impracticability in certain cases.
19. What determines the amount of profit realised by each
of two countries effecting an exchange of commodities ?
20. Who reaps the principal advantage from foreign trade ?
21. What is the strongest case which has ever been put
forward by protectionists ?
22. What main advantage of free trade does this argu-
ment disregard ?
23. Is this argument supported by facts ?
24. Shew, by an example, the manner in which protective
tariffs depress industry.
25. What effect is produced on the whole population of
the United States by the increasing cost of living? Quote
the authority for these statements.
26. What is probably the reason why England has recog-
nised the advantages of free trade before America?
27. Describe the relation between the exports and imports
of a country. Why are exports constantly in excess of
imports in some countries, while in others the reverse is the
case?
28. What is meant by " balance of trade " and " unfavour-
able exchange " ?
29. Illustrate the absurdity of supposing that a country
loses an amount exactly equal to the quantity of gold and
silver she exports.
1. In England there are taxes on tea, tobacco, spirits, and
other imports ; are these in any sense protective ?
2. If there were in a village a one-armed cobbler, who
made boots rather worse and much dearer than they could
be made elsewhere, and if the authorities of the village,
in order to encourage native industry, levied a tax on all
boots not made by him, would not this be in accordance
with protectionist principles ? Explain the consequences to
the general well-being of the village.
P
210 ON FOREIGN COMMERCE, ETC. SECT, iv
3. Where in America should you say the free-trade
party was the strongest, in the corn-growing States of the
West, or in the manufacturing districts? And give your
reasons.
4. Why is agriculture more profitable than manufactures
in such a country as Australia ?
5. Trace out the results that would ensue if a country
possessing rich gold-fields were entirely debarred from
purchasing the products of other countries.
CHAPTER II. Credit and its Influence o?i Prices.
Definition of Credit. Credit is a power to borrow. If
the credit of an individual is good, it is because there is
general confidence in his ability to pay, and therefore he
can borrow at a low rate of interest. If the credit of an
individual is bad, he is not able to borrow except at a high
rate of interest, because his ability to pay is doubted. The
credit of different people in the same age and country can be
accurately measured by the rate of interest which they pay
for borrowing. When it is said in the City article of the
Times that the rate of interest is " 2| for the best three
months' bill," it means that 2| per cent, per annum is paid
for a loan by those in whose ability to pay there is perfect
confidence ; a higher rate of interest is paid at the same
time by those whose ability to pay is less undoubted. This
remark does not apply unreservedly to the credit of nations.
" Ability to pay" of course produces its effect upon the credit
of nations as well as upon that of individuals. The credit
of Turkey, until the appointment of the International Com-
mission to manage her finances in 1881, was exceedingly
bad, and Turkish bonds, if they paid anything at all, paid
nearly 12 per cent. ; in the autumn of 1875 the Government
of Turkey announced its bankruptcy by telling its creditors
that only half the interest due to them would be paid in gold,
and even this half was not forthcoming ; some descriptions
of Turkish stock were quoted at a price which, if they paid
at all, would have paid more than 50 per cent. Since that
CHAP, ii CREDIT 211
time however the excise revenues of the Turkish Government
have been handed over to the Commission, who also receive
the Egyptian tribute, and the proceeds of a licence tax which
was established in 1884 ; with these resources the Commis-
sioners have been enabled to resume the payment of interest
on the Turkish debt, and Turkish securities have in con-
sequence risen in value, yielding interest varying, according
to degree of security, from 3^ to 4^ per cent. The debts of
some of the South American Republics formerly yielded an
interest of nearly 6 per cent., while the debt of England yielded
about 2| per cent. This indicated principally the varying
degree of security felt that the interest and capital of the
loan were safe.
The expression "Credit is Capital" is meaningless.
It is sometimes asserted that "credit is capital." A little
consideration shews that this expression belongs to the same
class as " time is money." Credit has already been defined
as "the power to borrow," and it has frequently been ex-
plained that capital is that part of wealth which is set aside
to assist future production ; it supports the labourers and
furnishes the tools, materials and shelter that their work
requires. Now it is evident that a power to borrow can do
none of these things. Credit will not feed and clothe
labourers, nor can it furnish the implements of their industry.
The power to borrow, if exerted, will procure capital, just as
muscular strength will, if exerted, enable a man to carry a
sack of wheat ; but it is as inaccurate to say that credit is
capital as it would be to say that a man's strength is a sack
of wheat.
Banks. The real service which credit performs is that
it enables an increased quantity of the wealth of a country
to be used productively as capital. It encourages the pro-
ductive employment of wealth. Scarcely any one, for instance,
retains a considerable sum of money in his own keeping ;
people keep just sufficient money to pay their daily personal
expenses ; all their money above this amount is generally
deposited in a bank, and is there used for productive pur-
poses. Suppose, for instance, that Mr. A has an income of
^1000. He deposits the whole of his yearly income in a
p 2
212 ON FOREIGN COMMERCE, ETC. SECT, iv
bank, drawing it out in small sums as occasion requires.
In the meantime the banker is employing a considerable
part of this deposit as capital, experience having shewn that
a bank need never keep in the form of money more than
one-third of the sums deposited with it. Mr. A himself, if
he lives up to his income, would never have been able to
employ any part of it as capital, but the banker by accumu-
lating a large quantity of these small capitals, is able, with
advantage to all concerned, to employ two-thirds of the total
amount deposited with him to assist the future production
of wealth. Depositors in a bank in reality lend their money
to the banker, on the condition that they shall be able to
withdraw the whole or any part of their deposits at any
time. In some banks depositors receive interest on their
deposits, if they have been left in the bank more than a
certain time. In most cases, however, the banker is con-
sidered to make a sufficient return to the depositors by taking
charge of their money, and by allowing them to withdraw any
part, or the whole of it, at a moment's notice. It is evident
that a bank could not exist unless the credit of the banker
was good. People would not place their wealth at the
disposal of a man unless they had confidence in his honesty
and in his ability to pay.
Joint-Stock Companies. Another way in which credit
enables an increased amount of the wealth 'that is saved to
be employed productively, is by means of joint-stock com-
panies. Such an undertaking as a railroad requires for its
construction an amount of capital such as scarcely any
private individual could supply. The necessary capital is
therefore subscribed by thousands of small investors. The
required amount is determined by the promoters of the
company; it maybe assumed that this amount is ,1,000,000;
it is accordingly arranged to raise this sum in 20,000 shares
of ^50 each. Any individual, therefore, who has saved ,50,
and who buys one of these shares, becomes a shareholder
in -the railway; he is in fact a partner in a great commercial
enterprise ; this small capital of ,50 is employed in assisting
the future production of wealth, whereas if there had been
no such things as joint-stock companies, it would probably
CHAP, ii CREDIT 213
have been consumed unproductively. Itjs evident that the
success of a joint-stock company depends upon the credit of
its promoters and directors. They have sometimes not de-
served the confidence reposed in their honesty, but this has
nothing to do with the present subject. If their credit had
not been believed to be good the companies could never
have been started. The existence of joint-stock companies
has enabled the middle classes to invest their savings as
capital, and has consequently added enormously to the
wealth of the country. Schemes of profit-sharing and co-
partnership such as that adopted in the South Metropolitan
Gas Works (see chapter 5, section 3) render a similar service
to those living on weekly wages. If such schemes are
largely adopted and rest on a sound foundation of good
faith and credit, they would add greatly to national wealth,
and by promoting thrift cause money to be used as capital
which is now consumed unproductively.
From these illustrations it is perceived that the capital of
the country is practically augmented by the means of credit,
because it offers great facility for the productive employment
of wealth. But besides those just described there are forms
of credit performing other functions, which very materially
facilitate the exchange of wealth, thus producing a very
great influence on the prices of commodities. The forms of
credit to which we refer are bills of exchange, bank notes,
cheques, and book credits.
Bills of Exchange. It was said in the preceding chapter
that foreign commerce did not involve a constant exchange
of gold and silver money between the two countries trading
with each other. It is evident that if the English merchants
who purchase French goods had to send the price of these
goods in money to France, great inconvenience and risk
would be incuried. The necessity of the constant transit of
gold and silver money is obviated in the following way. Let
it be supposed that an English merchant A sells ^1000
worth of coal to the French merchant />', and that a French
merchant C sells .1000 worth of wheat to the English
merchant D. If there were no such things as bills of ex-
change, the result of these transactions would be a transit of
214 ON FOREIGN COMMERCE, ETC. SECT, iv
.1000 in money from B (in France) to A (in England), and
also a similar transit of ,1000 in money from D (in Eng-
land) to C (in France). Now it is evident that the same
result could be attained without any transit of money at
all, if A, the English seller, received ,1000 from D, the
English buyer, and C, the French seller, received ,1000 from
B, the French buyer. This result is effected in the following
way. B, the French merchant, sends to A a. written pro-
mise to pay him the .1000, and D, the English merchant,
sends a similar promise to pay ,1000 to C. These written
promises are called bills of exchange. A has a bill for
,1000 drawn on France, and C has a bill for ,1000 drawn
on England. If they exchange these bills both debts will
be discharged.
Bill discounting. Merchants do not usually effect these
exchanges themselves ; they are generally undertaken by
bill brokers or bill discounters. These persons undertake to
buy the bills drawn on different countries. In the case just
described, A and C would not exchange their bills ; A
would sell his to a bill discounter in London, paying him a
small sum as commission ; and C would sell his to a bill
discounter in Paris. Thus a London bill discounter might
collect ,1,000,000 worth of bills drawn on France, whilst a
French bill discounter might collect ,1,000,000 worth of
bills drawn on England. They would then proceed to ex-
change the bills. The transit of money is as entirely dis-
pensed with as if barter were the recognised medium of
exchange between the two countries.
Bills of Exchange perform many of the functions
of Money, and they therefore produce an effect on
General Prices. Bills of Exchange are very largely used
in domestic as well as in foreign commerce. It is very
unusual for one merchant to pay another in money ; the
debt is usually discharged by means of a bill of exchange ;
that is, a written promise to pay at the end of a certain
time. A three months' bill is a promise to pay at the end of
three months, and so on. Now this bill, up to the time when
it falls due, performs many of the functions of money. The
person who receives it perhaps wants to make a purchase
CHAP, ii CREDIT 215
himself: we will suppose that the bill is for ^1000, and that
its present owner, A y has received it from />'. A now wants
to purchase ^1000 worth of goods of D ; he obtains the
goods and gives to D the same bill for , 1000 which A had
received from B ; at the same time A endorses the bill
(that is, he writes his name on the back of it) as a token
that he will himself pay D should B fail to do so. In a
similar way the bill may be used to make any number of
purchases up to the time it falls due. Every time it changes
hands it receives a fresh endorsement ; so that at the time
when it falls due the back of a bill is sometimes completely
covered with endorsements. It is evident that in such a
case as this a bill performs for a time the functions of money.
Up to the time that it falls due it has the purchasing power
of gold and silver coin. Now it has previously been explained
that any circumstance which increases the amount of money
circulating in a country will, if other things remain unchanged,
increase the prices of commodities. The value (or exchange
power) of any commodity is determined by an equalisation
of supply and demand. If the supply is increased, the value
declines in such a degree as to equalise the demand with
the augmented supply. This is as true of money as of other
commodities ; therefore when the supply of money in a
country is increased, if other things remain the same, the
value of money will decline, its exchange power will diminish,
and prices will rise. It is now easy to trace the influence of
bills of exchange on prices. It has just been explained that
a bill of exchange is, up to the time when it falls due, a
substitute for money ; the employment of bills of exchange,
therefore, produces the same effect upon prices as if a corre-
sponding addition had been made to the gold and silver
currency. If all the business now transacted by means of
bills of exchange had to be carried on with cash payments,
one of two things must happen. Either a corresponding
amount of money must be added to the currency, or general
prices would decline. The use of bills of exchange has
therefore either caused an increase in general prices, or it
has prevented general prices from declining.
Bank Notes. The same effect is produced on prices by
216 ON FOREIGN COMMERCE, ETC. SECT, iv
other forms of credit beside bills of exchange. An issue
of bank notes produces the same effect upon prices as an
increase in the quantity of gold and silver coin. A bank
note is simply a promise to pay ; and the chief difference
between a bank note and a bill of exchange is that the
former is payable at any time on demand, whilst the latter is
payable at some particular time specified on the bill. It is
well known how useful a substitute for money bank notes
provide ; their form and portability render them particularly
convenient instruments of credit. A Bank of England note
is legal tender, and is in this kingdom accepted as readily
as gold. The notes of provincial and private banks are not
legal tender, but they are accepted with the greatest con-
fidence by those who repose trust in the credit of the bankers
who issue the notes. A Bank of England note has the same
purchasing power as gold because the Bank of England is
compelled by law to give gold in exchange for its notes
whenever such an exchange is demanded ; and every one
has perfect confidence in the solvency of the Bank. All
other banks are compelled by law to give either gold or
Bank of England notes in exchange for their own notes.
But this regulation does not compel even the most prudently
managed banks to keep an equivalent in coin for all the
notes they issue. It has been found that no bank need
keep in cash more than a sum equal to one-third of its issue
of notes. For instance, supposing the bank note circulation
of Great Britain, other than that of the Bank of England,
to be about ^30,000,000, it may be estimated that the
various banks retain in specie ^10,000,000 ; the remaining
^20,000,000 is therefore permanently added to the currency.
If these ^30,000,000 of notes were withdrawn, either general
prices would fall or ^20,000,000 in gold would have to
be added to the currency. It is evident that no effect is
produced on prices by an issue of bank notes if a corre-
sponding amount of specie is at the same time withdrawn
from circulation ; because by such a transaction the currency
is neither increased nor diminished. If, however, the issue
of bank notes is increased without a corresponding with-
CHAP, ii CREDIT 217
drawal of specie, general prices will either rise or be pre-
vented from falling".
Cheques. A cheque is a written order to a banker to
pay a certain person a sum of money. If all cheques were
immediately cashed by the person to whom they are payable
they would produce no effect on prices. But in nearly
all cases the cheque is not cashed, but is paid in, by the
person who receives it, to his own bankers. Now let us
trace the effect of this on the prices of commodities. Mr. A
banks with the London, County and Westminster Bank : he
gives a cheque for ^100 to Mr. /?, who banks with Martin's
Bank. This cheque is a written order to the directors of the
London, County and Westminster Bank to pay ^100 to
Mr. B. Mr. B does not take this cheque to the London,
County and Westminster Bank, to get it cashed, but he pays
it in to his account at Martin's Bank. In the course of the
same day Mr. C, who banks with Martin's Bank, gives a
cheque for ^100 to Mr. Z>, who banks with the London,
County and Westminster Bank, and Mr. D pays in the
cheque to his account. At the end of the day Martin's Bank
has a cheque for ^100 drawn on the London, County and
Westminster Bank, and the London, County and Westminster
Bank has a cheque for ^100 drawn on Martin's Bank.
These banks therefore exchange the cheques, and the transit
of specie from one bank to another is entirely dispensed
with.
The Clearing House. An exchange of cheques and bills
drawn on the different banks takes place daily in London at
the clearing house. To this place the bankers send all the
cheques and bills which have been paid in to their banks
during the day, and exchange them for cheques and bills of a
corresponding value drawn on their own banks. In this way
more than ^10,027,000,000 of cheques were exchanged in the
year 1902, whilst to effect this exchange no specie whatever
was required. 1 In 1909 the amount cleared at the London
1 The amounts cleared at the Bankers' Clearing House
have shewn remarkable progress during the last quarter of a
218 ON FOREIGN COMMERCE, ETC. SECT, iv
Bankers' Clearing House had increased to 13,525,000,000.
Formerly after the exchange of cheques all differences were
settled by cash payments ; but this custom is now dis-
continued and the differences are settled by an account kept
at the Bank of England called "the account of the Clearing
Bankers." The balance for or against each bank on the
day's transactions is entered in this account, and thus one
entry per diem suffices for each bank. If, for instance, the
London, County and Westminster Bank holds 100,000 of
cheques drawn on Martin's Bank, while Martin's holds
110,000 of cheques drawn on the London, County and
Westminster, the difference between them would formerly
have been settled by a cash payment of ,10,000 by the
London, County and Westminster Bank to Martin's Bank.
Now however even this comparatively slight use of cash, as
between the different banks, is dispensed with in the manner
just referred to. If, on the total of the day's transactions
with the other clearing bankers, the London, County and
Westminster draws upon them 1000 more than they draw
upon it, the London, County and Westminster is credited
with 1000 in the account of the clearing bankers. Besides
the bankers' clearing house in London, there are provincial
bankers' clearing houses in Manchester, Liverpool, Sheffield,
Leeds, and other large towns where the amount cleared
amounted to an average in the 5 years 1905-9 of
678,600,000 annually. The railway companies also have a
clearing house of their own, where their indebtedness one to
another is discharged in the manner described above.
century. The average annual amount for the following quin-
quennial periods was as follows :
1885-9 6,410,000,000
1890-4 6,789,000,000
1895-9 / 7,981, 000,000
1900-4 9,847,000,000
1905-9 10,675,000,000
For the three separate years 1907-9 the amount was
1907, 12,730,000,000
1908, 12,120,000,000
1909, i3,5 2 5>ooo> 000
CHAP, ii CREDIT 219
It is evident that by the use of cheques and by the
operations of the clearing houses the circulation of the country
is virtually increased by a very large amount, for buying and
selling represented by many thousand millions of pounds
takes place annually in the United Kingdom by means of
cheques, without the exchange of a single farthing of money.
Hence if the same amount of buying and selling went on, and
cheques, or some equivalent form of credit, ceased to be
used, the value of money would rise and general prices would
decline ; because gold and silver coin would be required in a
great number of transactions which are now carried on by
means of cheques.
Book Credits. Book credits can be readily explained.
Suppose that an ironmonger A buys .50 worth of coals
from a coal-merchant /?, and that B buys ^50 worth of
ironmongery from A. Instead of exchanging bills of ex-
change or cheques for .50, A debits B with ,50 in his
ledger, and B does the same to A. Seeing, then, that each
owes the other ^50, they agree to cancel each other's debt,
and the use of money is thus dispensed with.
Credit influences Prices, and not the particular form
which Credit assumes. In describing these different forms
of credit it should be borne in mind that it is credit which
influences prices, and not the particular form credit may
assume. A bank note, a cheque, or a bill of exchange is not
credit, it is simply a declaration of the existence of credit.
Every form of credit which dispenses with the use of money
produces an effect on prices.
The purchasing power conferred by Credit. But there
is another way in which the employment of credit produces
temporarily very great influence on prices. Credit very
greatly increases the purchasing power of every one who
employs it. If all commodities were bought and sold for
money, trade would be very seriously contracted. Suppose,
for instance, that a cotton-spinner desired to make a large
purchase of raw cotton. He might be aware that his supply
of ready money was not sufficient to effect the purchase : he
therefore gives a bill of exchange to the producer of the
cotton, payable at the end of three or six months; if at
220 ON FOREIGN COMMERCE, ETC. SECT, iv
the end of that time he is still unable to pay, he will be able,
if his credit is good, to renew the bill on paying a certain
percentage. It is no doubt true that the purchasing power
conferred by credit may be abused by people incurring
liabilities which it is highly improbable they will ever be
able to meet ; but without credit, speculation would be nearly
impossible, and consequently the number of purchases would
be greatly reduced. Since therefore credit enables a great
many purchases to be made which never could take place if
the payments had to be made with ready money, it is evident
that credit produces an increased demand for commodities.
It has frequently been proved that any circumstance which
increases the demand for commodities tends to increase their
price. Hence credit, by increasing the purchasing power of
individuals, tends to increase the price of commodities.
Credit produces the greatest Effect on the Price of
those Commodities the Supply of which is limited. It
is true that the price of those commodities the supply of
which can be increased tends always to approximate -to the
cost of production ; but speculative purchases are made with
the greatest frequency in those commodities the supply of
which is from exceptional circumstances, expected to be
curtailed. In such cases the price of the commodity is
regulated in the same way as the prices of those commodi-
ties the supply of which is absolutely limited. Thus on the
eve of the Russian war in 1854, it was known that during
the war the importations from Russia of tallow, hemp, etc.,
would be stopped. Large speculative purchases of these
commodities were therefore made with a view to the rise in
price which would be occasioned by the reduced supply.
Every one of these speculative purchases tended of course
to raise the price of Russian goods. In the year 1869 large
speculative purchases of corn were made by several corn-
factors, because owing to the cold and wet weather in May
and June it was thought that there would be a bad harvest,
and that consequently corn would be dear. These specula-
tive purchases tended to raise the price of corn ; and had
the expectation of the speculators been fulfilled they would
have realised large fortunes. Let us see, however, what
CHAP. II CREDIT 221
really took place. These factors gave bills of exchange
for the corn they purchased, expecting that by the time
the bills became due they would have sold the corn again
at a higher price, or that they would be able to renew the
bills in hopes of realising yet larger gains. But although
the wheat crop in England was very bad, there was an
exceptionally large yield in America ; the price of wheat in
America was extremely low, and America immediately began
exporting large quantities of wheat to England ; these cir-
cumstances caused the price of corn steadily to decline.
Several of the speculators were unable to meet their engage-
ments, and many large failures ensued.
A Commercial Panic. If credit can be easily obtained
it is difficult to say how great its influence may be on prices.
When, however, in consequence of credit having been given
too freely, prices become unduly raised above cost of produc-
tion, the expectations of speculators are not fulfilled, and a
large number of merchants are unable to redeem their bills ;
a commercial panic takes place, and credit is for a time
almost entirely suspended. A crisis of this kind always
involves many merchants in ruin, for they are unable, owing
to the suspension of credit, to renew their bills. In conse-
quence of the panic, traders will not accept bills of ex-
change ; bank notes and gold become for a time in great
demand ; prices therefore rapidly fall, possibly as much
below the cost of production as they were previously above
it. Hence it is seen that when the purchasing power of
credit is abused, and prices are forced up far beyond their
natural rate, a commercial panic is very likely to ensue,
during which credit will be as difficult to obtain as it was
before carelessly granted.
The Bank Charter Act of 1844. In order to prevent
the abuse of credit, and, it was thought, to ensure the com-
munity against the great loss and inconvenience of com-
mercial panics, the Bank Charter Act of 1844 was passed.
The promoters of this Act evidently thought that bank
notes were the most important of all the instruments of
credit, and that it was by their means that the purchasing
power of speculators was increased. The Act accordingly
222 ON FOREIGN COMMERCE, ETC. SECT. IV
was devised with the view of restricting the circulation of
notes. The framers of the Act considered that every bank
ought to have an equivalent either in bullion or in property
for its issue of notes. Thus the Funds, and other securities
possessed by the Bank of England, amounted to about
1 6,ocxD,ooo. The Act therefore decreed that if the note
circulation of the Bank of England exceeded the value of
the securities held by the Bank, the governors should be
compelled to keep an equivalent to the excess, either in coin
or bullion. The Act also compels the governors to publish a
weekly statement of the accounts of the issue department ;
these accounts show that the property of the Bank in the
Funds or in gold is equal in value to the whole of the notes
issued. The statement for the week ending Wednesday,
September 27, 1911, may be quoted as an example :
ISSUE DEPARTMENT.
Notes Issued ... ^58,851,505 Govt. Debt ... ^11,015,100
Other Securities 7,434,900
Gold Coin & Bullion 40,401,505
Silver Bullion ..
,58,851,505
58,851,505
The Bank Charter Act also prevented other banks from
increasing their issue of notes, and provided that no bank
established after the passing of the Act should be allowed to
issue notes. The effect of the Act has been to prevent the
inflation of the currency by an undue issue of bank notes.
Bank of England notes are in this country legal tender ;
that is to say, all debts may be legally discharged in Bank
of England notes. A creditor can legally claim to be paid
either in coin or in Bank of England notes ; he is not com-
pelled to accept the notes of any other bank. The Bank of
England is bound by law to give gold, on demand, in
exchange for its own notes : and the Bank Charter Act
gives an absolute guarantee to the public that the Bank shall
always be able to fulfil this condition. By the regulations of
this Act, after the Bank has issued an amount of notes equal
in value to its funded property it can issue no more without
CHAP, ii CREDIT 223
placing in the coffers of the Bank an amount of coin or
bullion corresponding in value to the sum which the notes
represent. The Act therefore ensures that there shall be no
inflation of the currency through an excessive issue of Bank
of England notes, and in this way it provides a guarantee for
the convertibility of the notes of the Bank. The whole of the
credit system of this country centres in the Bank of England.
Every country banker keeps an account with a London
banker, and all the London bankers keep accounts at the
Bank of England. The importance, therefore, of giving a
legal and tangible guarantee for the convertibility of Bank of
England notes can hardly be exaggerated. At the time of
the passing of the Bank Charter Act in 1844, many of its
supporters thought it would have the effect of preventing
commercial panics. Experience has not justified this expecta-
tion. Panics are caused by a collapse of credit following a
period of over-speculation. The Act does not have any effect
in checking over-speculation on the part of merchants and
others. The instruments of credit with which large specula-
tive purchases are made are not bank notes but bills of
exchange. Therefore the operation of the Act during times
of security does not limit the purchasing power of speculators.
When a panic ensues, there is a general desire to discount
bills ; money is at a premium ; every one who owns bills of
exchange is anxious to change them for money, on account
of the general insecurity which prevails. Hence during a
panic the Bank is urged to discount an unusually large
number of bills, and the rate of discount rapidly rises. Now,
on such an occasion, the Bank Charter Act, by restricting
the issue of bank notes, restricts the accommodation the
Bank is able to give ; and on three occasions since its passing,
during the panics of 1848, 1857 and 1866, the Act has been
temporarily suspended, and an issue of bank notes not
represented by gold was authorised. It is obvious that these
suspensions of the Act are in themselves highly undesirable ;
the uncertainty whether the Act will be suspended or not, and
speculation as to the exact moment when the suspension will
be authorised, adds another element of excitement to the
general frenzy which prevails during a panic. Since the last
224 ON FOREIGN COMMERCE, ETC. SECT, iv
suspension of the Bank Charter Act in 1866, the policy of
the Governors of the Bank has been modified in the direction
of keeping a larger reserve of gold coin and bullion. The
whole credit system of Great Britain is built up on the
stability of the Bank of England ; and it is now recognised
by the Governors of the Bank that they must keep a larger
reserve in the proportion to their liabilities than is necessary
in ordinary banks.
Convertible and Inconvertible Paper Currency. It
has frequently been stated that in this country bank notes
can always be exchanged for gold. It is the law of the
country that a private bank should always give gold or
Bank of England notes, on demand, in exchange for its own
notes ; and that the Bank of England should always give
gold, on demand, in exchange for its notes. This regulation
makes ours what is called a " convertible paper currency " ;
that is to say, it can be exchanged at any time for gold. In
some other countries there is an " inconvertible paper
currency" ; where this is the case notes are not convertible
into money on demand, and the paper currency is usually
depreciated, that is, the note is worth less than its face value.
No injustice is done to any one by an issue of inconvertible
notes if they are not made legal tender, because then no one
need accept them who would rather be paid in gold. There
are, however, always many dangers connected with the use of
inconvertible notes. There is, practically, no limit to their
issue, and such enormous sums may be by their means added
to the currency as seriously to disturb the finances of the
country, and to undermine the credit of the Government. The
extraordinarily large- issue of these inconvertible notes in
America during the civil war caused a disparity in value
between the gold and the notes, because it was not confi-
dently believed that the Government would be able to redeem
the notes. Gold was at a premium, and the notes, or green-
backs as they were called, were at a discount. This disparity
rapidly diminished as the United States began to recover
from the effects of the civil war ; and it has now entirely
ceased, because by resuming specie payments the paper
money of the United States has become a convertible
CHAP, ii CREDIT 225
currency. Once during the civil war ,100 in gold exchanged
for ^180 in notes. In Jan. 1870 ^100 in gold exchanged for
^120 in notes, and in July 1871 ,100 in gold exchanged for
;ii2 in notes ; and it remained at about this figure until
shortly before the resumption of specie payments. The
large issue of these notes in America had a very great
influence in raising prices in that country. The loss of
credit sustained by the American Government by too large
an issue of inconvertible notes produced a disparity in value
between gold and green-backs, and this circumstance brought
into existence a class of speculators whose operations were
most detrimental to the interests of legitimate industry.
These people speculated in gold, that is, they treated gold
as an ordinary article of commerce, buying up large quanti-
ties of it in hopes of increasing its value.
The Gold Ring of New York. The speculations of the
Gold Ring of New York became famous all over the
world in the autumn of 1869. The members of the Gold
Ring conspired together to buy up all the gold in the
country, and all the gold cheques. (The latter were in-
struments of credit in the form of cheques, and payable
in gold coin, not in green-backs.) These large purchases
of gold began to produce effect in September 1869, whert
the members of the Ring held nearly all the gold in New
York ; the amount owed to them being estimated at
100,000,000 dollars. As the gold owing to them was
paid in, they stored it away, and the value of the gold
began rapidly to advance. The gold speculators thought
that they would be able to force up the value of gold 100
per cent. The only thing which they feared would mar their
designs was a sale of gold by the Government. Against
this contingency they endeavoured in vain to protect them-
selves ; they therefore were obliged to be content with the
hope that they would raise the price of gold so quickly, that
there would not be time for the Government to suspect
the plot. Their expectations were very nearly realised. In
one morning before twelve o'clock the value of gold rose from
130 to 1 60. At twelve o'clock the Secretary of the Treasury
ordered a sale of four millions of Government gold ; the
Q
226 ON FOREIGN COMMERCE, ETC. SECT, iv
plot of the Ring was frustrated, and in eight minutes the value
of gold fell 12^ per cent. At twelve o'clock it was at 160,
and at eight minutes past twelve it was at 140 ; in nineteen
minutes more the. premium was only 33. (Eraser's Maga-
zine, Jan. 1870.) It is not necessary to dwell upon the injury
inflicted upon legitimate industry by the possibility of such
occurrences as that just described. It casts a hazardous
uncertainty over the transactions of every merchant ; and
all business partakes more or less of the nature of
gambling.
The Cotton Ring 19034. In the autumn of 1903 a
Ring was formed in the United States for quietly buying up
all the available supplies of cotton with the object of forcing
up its price. The speculators had anticipated a serious
shortage in the cotton crop, and the actual shortage was
even more marked than they had expected. This of course
aided their designs. The price of cotton advanced by leaps
and bounds, till by December 23, 1903, its price in Lancashire
was higher than it had been at any time since the cotton
famine caused by the American Civil War. Severe distress
prevailed among the cotton operatives. About the middle
of March 1904 the failure was announced of the chief
speculator whose operations had forced cotton up to famine
prices. A scene of wild excitement was enacted on the New
York Cotton Exchange and prices fell immediately and
rapidly. The man who had been the chief actor in this drama
was a few years before a buyer for a cotton firm, at a moderate
salary. When he devised the scheme of making a ring or
corner in cotton, he used his credit to its utmost extent to
make the necessary purchases ; he was also of course aided
by his previously acquired knowledge of the markets and of
the chief sources of supply all over the world. Such trans-
actions add nothing to the wealth of the world ; they are
pure gambling : all that such a man gains some one else
loses. He became a millionaire, was referred to in news-
papers as the "cotton king," and his gains brought the
sharp pinch of want into thousands of families of cotton
operatives in Lancashire and other parts of the world. The
news of his bankruptcy was hailed with satisfaction. In the
CHAP, ii CREDIT 227
words of a daily paper : " There was great rejoicing on the
Manchester Exchange at Mr. Sully's suspension ... the
general feeling is hopeful . . . prices were from 31 to 38
points down."
The influence of Credit on General Prices is beneficial.
Where credit is kept within legitimate bounds, there is
no doubt that its influence on prices is beneficial to the
general interests of the community. For the use of credit
tends to prevent those fluctuations in general prices which
are always so disastrous to production, owing to the un-
certainty which they cast over commercial transactions.
The manner in which credit tends to prevent fluctuations
in general prices may be perhaps best described by tracing
the operation in this direction of bills of exchange. It has
often been explained that the more buying and selling there
is, the more money is required ; and, if no more money or
substitute for money is forthcoming, prices must decline.
With every increase of buying and selling a direct tendency
is exerted to increase the number of bills of exchange.
If a merchant doubles his buying and selling, he will be
sure to give and receive a far larger number of bills of
exchange. Hence every increase in commerce produces
spontaneously an increased use of credit. A corresponding
influence is exerted when trade declines, for when buying
and selling are restricted, a smaller number of bills of
exchange is employed. If it were not for the use of credit
every fresh development of commerce would produce a
decrease in general prices, and prices would rise during
periods of stagnation in trade. The elasticity of credit thus
has a very beneficial influence in preventing great fluctu-
ations in general prices, although in isolated cases the use
of credit sometimes produces the most rapid variations in the
price of a commodity.
The Direct Economy of a Paper Currency. There is one
more advantage derived from the use of credit, which has
not been noticed. It has been pointed out that the paper
currency of any country forms a more or less complete
substitute for money. If bank notes, cheques and bills
of exchange ceased to be used, a much larger quantity of
Q 2
228 ON FOREIGN COMMERCE, ETC. SECT, iv
gold and silver coin would be required. Hence there is
a direct economy in the employment of these instruments
of credit, because a comparatively worthless substance like
paper is used as a substitute for the highly valuable com-
modities, gold and silver. The material of which a Bank
of England note for ^1000 is composed does not cost
as much as a farthing ; its intrinsic value is inappreciably
small, but owing to the purchasing power which credit con-
fers upon it, it is as useful to its owner as 1000 sovereigns.
The Position of London as the Banking Centre of
the World. The degree to which London has become the
banking centre of the world was brought out in a very
interesting way by Sir F. Schuster, President of the Institute
of Bankers, in an address in July 1903, and again in a paper
read before the Institute of Bankers in December of the
same year. He argued that the International position of
London as the centre of the world's money market was largely
dependent on her Free Trade policy, and because our ports
and our doors were open to the trade of the world.
Mr. Schuster said, " A bill on London is the recognised
medium of settling international transactions, and is made
use of in all parts of the world. . . . There was always a
seller because goods were shipped here ; there was always a
buyer because goods or services were obtained from here,
because our ports were free and because our doors were open
to the trade of the world. ... I really think you must have
lived, or at least travelled, in foreign countries, to realise to
what extent this bill on London enters into daily commercial
life in all foreign countries. Not only in the banks abroad
but in the offices of most leading merchants, the dealing in
such bills is of constant occurrence ; and the names of London
bankers and merchants are as well known in the important
commercial towns all over the world as amongst ourselves."
Mr. Schuster pointed out that use of the bill on London as
an international medium of exchange was not confined to
commercial transactions in which England has a direct share :
" The China merchant who sells tea to Russia or Germany
or silks to the United States, will probably obtain payment
through the medium of the London money market, and
CHAP, ii CREDIT 229
equally the German merchant who sends his goods out to
China. It is needless to multiply instances ; they may be
found amongst almost every article of trade ; the coffee that
is shipped from Brazil into France or Italy, the cotton from
New Orleans to Poland, sulphur from Sicily to the United
States, and agricultural machinery from the United States to
the River Plate : all these trades find their Clearing House in
Lombard Street. This applies not only to goods but to
securities also. If a Dutch capitalist invests his money in
an American Railway, he will probably complete the purchase
by payment in London ; when the United States paid Spain
for Cuba, it was through London that the transaction was
settled, and the same applies to the Chinese payment to
Japan at the close of their war." This is not due solely or
ven mainly to the honourable reputation of the bankers and
merchants of London. . . . "The banker who buys a bill on
London, say at Valparaiso, does not buy it because he wants
the gold ; though he knows that if he has no other use for the
bill, he can obtain gold for it ... but he buys the bill because
he knows he always finds a ready market for it, he can always
sell it to a merchant, in his own place or in some other
country, who requires it, in order to pay for goods or services
rendered to him by England, or to some Government which
has to remit it for payment of interest. There is an absolutely
free market, because there is always a supply and always a
demand, and that really in every part of the world. . . . But
it is owing to our first having established a trade with all
these countries, a trade more important than each carries on
with other countries, that ours has become the supreme money
market. It has been said that trade follows the flag, but
more surely can it be said that banking follows trade, and if
our trade for any reason whatsoever were to be restricted,
were to be confined within narrower channels, then with
absolute certainty others to whom this trade would fall would
oust us from our supreme position in the international money
market. What a disturbance of that position would mean it
is almost impossible to conceive."
230 ON FOREIGN COMMERCE, ETC. SECT, iv
QUESTIONS ON CHAPTER II. Credit, and its influence
on Prices.
1. What is credit ?
2. What is the test of the credit of an individual or of
a nation ?
3. What other circumstances besides "ability to pay"
produces different rates of interest in different countries ?
4. Why is it inaccurate to assert that credit is capital ?
5. Explain the nature of the service which credit renders
to the production of wealth.
6. How do banks promote the productive employment
of wealth ?
7. How do joint-stock companies promote the productive
employment of wealth ?
8. Shew that the existence of banks and joint-stock
companies depends upon credit.
9. What are bills of exchange, and in what way do they
facilitate the exchange of wealth ?
10. What is meant by discounting a bill ?
11. Explain the manner in which a bill performs the
functions of money.
12. What is endorsing a bill ?
13. What effect does credit, in the form of bills of
exchange, produce upon prices ?
14. Why does credit tend to raise the prices of com-
modities ?
15. What would be the consequence did bills of ex-
change or some similar instruments of credit cease to be
used?
16. What is a bank note?
17. Wherein does a bank note differ from a bill of
exchange ?
18. Why have Bank of England notes the same pur-
chasing power as gold ?
19. How do bank notes influence prices ?
20. What are cheques, and how do they provide a
substitute for money ?
21. What is the Clearing House?
CHAP. II QUESTIONS ON CHAPTER II 231
22. State the annual value of the cheques exchanged in
the London Clearing House.
23. What are book credits, and how do they obviate the
exchange of coin ?
24. How does credit increase the purchasing power of
individuals ?
25. What effect has this increased purchasing power on
prices ?
26. On the price of what class of commodities does credit
produce the greatest effect ?
27. What is the cause of commercial panics?
28. What effect do they produce on credit ?
29. What was the object of the Bank Charter Act ?
30. What are the provisions of the Act ?
31. What is the real effect of the Act ?
32. How often and on what occasions has the Bank
Charter Act been suspended ?
33. What has been the effect of the suspension of the
Act?
34. Name the great service guaranteed by the Act.
35. What is meant by a convertible and an inconvertible
paper currency?
36. What are the dangers connected with an issue of
inconvertible notes ?
37. Describe the operations of the New York Gold Ring
and of the Cotton Ring of 1903-4.
38. Explain the manner in which credit where legitimately
employed tends to prevent fluctuations in general prices.
39. How is a direct economy involved in the use of paper
money ?
40. Describe the position of London as the banking centre
of the world.
1. Does a man who forges a bank note add to the wealth
of the country ?
2. Am I wicked for having ^1000 at my banker's and not
using it ?
3. Would a banker make himself poorer if he burnt one of
his own ^1000 notes?
232 ON FOREIGN COMMERCE, ETC. SECT, iv
4. At the State Bank of Russia there is every winter, after
the peasants have paid their taxes, a great bonfire made of
the soiled and greasy paper roubles. Is this a waste of the
wealth of the country ?
5. Suppose that through scientific discoveries or any other
cause, England could be made capable of supplying every-
thing which her population required, what would be the
effect on the position of " bills on London " as international
instruments of credit ?
CHAPTER III. On Taxation.
The Necessity of Taxation. The legitimate functions of
Government are generally admitted to be national defence,
the protection of life and property, and the maintenance of
the equal freedom of all. These functions cannot be per-
formed without incurring a considerable expense. To meet
this expense taxation is necessary ; great interest has always
been felt in the questions, how taxes should be levied and on
what classes they should fall. It has of late years been
rightly considered that every one who benefits by the pro-
tection which such institutions as the army and navy and the
constabulary afford, should contribute to defray the expense
which their maintenance necessarily incurs. In feudal times
this principle was not recognised. There is no doubt that
one of the immediate causes of the French Revolution was
the immunity from taxation enjoyed by the French nobles
and clergy. The whole weight of taxation was thus thrust
on the poorer classes, who were not allowed any voice in the
management of the national finances. At the present time
the principles of justice are not so grossly violated ; no class
is allowed to enjoy immunity from taxation, but rates and
taxes are now levied from all classes indiscriminately ; no
exemption from taxation is permitted to any one on the
ground that he does not approve of the object to which the
money raised by taxation is devoted. For instance, a part
of the national revenue of this country is expended in pro-
viding secret service money, and in paying large salaries and
CHAP, in ON TAXATION 233
pensions to those who possess sinecure offices. However
strongly individuals may object to this expenditure of
public money, they are obliged to contribute as much to
the revenue as if they most warmly approved it. There
is practically no injustice in this ; at least so far as regards
those persons who possess the privilege of parliamentary
representation.
Adam Smith's Four Canons of Taxation. In Adam
Smith's Wealth of Nations he laid down four canons of tax-
ation, the due observance of which 'secures minimum hard-
ship to the taxpayer and maximum revenue to the State.
These four canons are too long to be here transcribed in
full. The following is a summary of them :
ist, Every subject ought to contribute to the revenue a
sum proportionate to the income which he enjoys under the
protection of the State.
2nd, Taxes ought to be certain, not arbitrary. The time
of payment, the manner of payment, the quantity to be
paid, ought to be clear and plain to the contributor and to
every other person.
3rd, Every tax ought to be levied at the time and in the
manner in which it is most convenient for the contributor to
pay it.
4th, Every tax ought to be so contributed as both to take
out and keep out of the pockets of the people as little as
possible over and above what it brings into the public
treasury of the State.
The application of the First Canon. The first of these
canons cannot be observed in respect to each individual tax.
It would be impossible to adjust each tax in proportion to
the means of the taxpayer, or his ability to pay. For
instance, a family of six persons who had only just sufficient
income to live on, would probably consume more tea than
a wealthy family of half the size. The poorer family there-
fore pays much more duty on tea in proportion to its income
than the wealthy family. It is obviously impossible for any
Government to provide against cases of this sort. If it
were attempted, thousands of Government officials would
have to be employed in the inspection and investigation of
234 ON FOREIGN COMMERCE, ETC. SECT, iv
special cases, and probably the whole amount raised by the
tax would be consumed in paying the salaries of these
officials. Thus in attempting to carry out Adam Smith's
first canon, the Government would be led into a flagrant
violation of his fourth canon. The equality of taxation is
best preserved, not by attention to one particular tax, but
by endeavouring to make the aggregate amount of taxation
paid by different classes of persons proportionate to the
incomes they enjoy. Thus in the case just noticed, though
the poor family pays more duty on tea in proportion to its
income than the rich family, it would pay less as income-tax,
and less in duty on all articles of luxury, such as wine and
spirits. In this way a rough kind of equality is preserved.
The application of the Second Canon. Adam Smith's
second rule, that taxes ought to be certain and not arbitrary,
is of very great importance. When traders are uncertain
how much duty they will have to pay on the commodities in
which they deal, an air of uncertainty and speculation is
thrown over commercial transactions ; men depend more on
their luck than on their sagacity and prudence, and trade
becomes a gigantic system of gambling. The violation of
this rule is the great disadvantage of ad valorem duties on
imported commodities in comparison with duties of a fixed
money value.
The Third Canon. The third rule is obviously necessary
to ensure the minimum of hardship to the tax-payer. If
taxes are levied at a time which is unnecessarily inconvenient
to the tax-payer, an injury is inflicted on him without any
compensating benefit to the community at large. All taxes
on commodities are really paid by the consumer, because
they form part of cost of production. The consumer there-
fore pays the tax at a time when it is convenient to him to
do so, viz. when he makes the purchase : if it were an incon-
venient time for him to pay the tax he could abstain from
purchasing the commodity. Taxes on commodities are,
however, in the first place paid by the seller. Thus if a man
buys a pound of tea, a part of the price is the duty which is
levied by the State on this commodity. The retail trader
has already paid the duty when he purchased the tea. If
CHAP, in ON TAXATION 235
he had had to pay for it in ready money, it might have been
an extremely inconvenient time for him to pay the tax, but
he probably effected the purchase with a bill of exchange for
three or six months ; at the end of this time he will have sold
the tea to his customers, and thus have obtained the means
to redeem his bill. " A tax on the rent of land, or of houses,
payable at the same time at which such rents are usually
paid, is levied at a time when it is most likely to be con-
venient for the contributor to pay ; or when he is most likely
to have wherewithal to pay." (Adam Smith.) The violation
of the second and third canons of taxation was one of the
chief sources of misery to the inhabitants of Bulgaria and
Bosnia as long as they were under the government of Turkey.
Travellers in those provinces frequently saw luxuriant crops
of agricultural produce rotting on the ground because the
cultivators were not allowed to remove them until after the
officer of the farmer of the taxes had made his visit to
assess the amount of taxation to be paid. The amount thus
assessed was uncertain, and the period of the assessment
was often so long deferred as to render the crop almost
worthless.
The Fourth Canon. The utility of Bonding Houses.
The fourth rule is intimately connected with the third. If a
tax is levied at a time when it is inconvenient for the con-
tributor to pay, it is nearly sure to take much more from the
pockets of the tax-payer than it yields to the revenue of the
State. When the inconvenience of paying a particular tax
is obviated by special arrangement, the discrepancy between
the amount yielded to the State and that taken from the
tax-payer is diminished. Thus if a merchant who imports
taxed commodities does not wish to sell them immediately,
he can place them in a bonding house. As long as they
remain in bond he pays no duty upon them. They can
remain in bond until they^are sold ; the merchant therefore
pays the duty at a most convenient time to himself, viz. at
the time that he sells the commodities and is in receipt of
their price. Let us see what influence is thus produced on
the price of commodities. Suppose a wine-merchant imports
,1000 worth of wine, and that the duty on the wine is ^500.
236 ON FOREIGN COMMERCE, ETC. SECT, iv
He places the wine in a bonding house, where it remains six
months, when it is sold. If the wine-merchant makes a profit
of 20 per cent, per annum on his capital, this wine will be sold
for .1600. This will be composed of the following items :
Original cost of wine ...... ...
10 per cent, six months' profit on wine-
merchant's outlay ...... ... 100
Duty on the wine ......... ... 500
^1600
Now if the wine-merchant had had to pay the duty directly
the wine arrived in the dock, its price, after six months, would
be ^1650 instead of ^1600; because the merchant would have
employed ^500 more capital on which he would expect to
receive interest at the rate of 20 per cent, per annum. The
items of the price of the wine will then be as follows :
Price of wine, including duty ... ... ^1500
Wine merchant's profit of 10 per cent, for
the six months on this outlay ... ... 150
^"1650
The purchaser of the wine would therefore pay in con-
sequence of the duty ,50 more than reaches the revenue of
the State. 1
Protective Taxes on Necessaries violate Adam
Smith's Fourth. Rule. They take out and keep out of the
pockets of the people far more than they yield to the
1 It has been objected to this statement that the State loses by
this transaction all that the consumer gains : that if the duty had
been paid directly the wine was imported, the State would have
had the ^500 six months sooner, and could thus have gained "the
six months' interest on that sum. But this argument assumes that
the State can lay out its money at as high an interest as the private
merchant. We have estimated the wine-merchant's annual profits
to be 20 per cent. The State could not obtain more than 3 per
cent. Half a year's interest on ^500 at 3 per cent, per annum
is j los. Therefore, though the State might gain this amount if
the duty had been paid six months earlier, the consumer would in
consequence have to pay the ^50 extra for his wine, out of which
sum the State would only benefit to the extent of j los. ^42 105-.
would have to be paid in consequence of the tax more than ever
reaches in any shape the revenue of the State.
CHAP, in ON TAXATION 237
revenue of the State. This is one of the very weighty
objections to the proposed revival of protective taxes on food
brought before the country in 1903, the chief items of which
were a duty of 2s. a quarter on foreign imported corn except
maize ; a corresponding tax on flour ; a 5 per cent, duty on
foreign meat, except bacon ; a 5 per cent, duty on foreign dairy
produce, and an average 10 per cent, on all foreign manu-
factures, a preference on all items to be given to the products of
British colonies. These taxes, if adopted, would cause a rise in
price in the United Kingdom of all corn, flour, meat and dairy
produce, whether home, colonial or foreign grown, as long
as we required any of these articles from foreign countries.
Financial experts have calculated that they would bring in
to the revenue a gradually diminishing sum of ,8,000,000
a year, and would provide an annual subsidy for the Colonies
of ,2,500,000 ; but that the total cost to the tax-payers, that
is the general body of consumers throughout the United
Kingdom, in consequence of the increased price of necessaries,
would be at least ,35,000,000, and might be ^50,000,000
per annum. That this is no over-estimate can readily be
believed by those who remember that a tax of \d. a Ib. on
sugar, put on for Revenue purposes, brings in nearly
,7,000,000 annually to the Exchequer. To raise the price
of all meat, flour and dairy produce except maize and bacon,
as well as that of nearly all manufactured articles, may
well cost ,45,000,000 to ,72,000,000 a year.
Taxes on Raw Materials. In accordance with Adam
Smith's fourth rule, taxes on commodities should not be levied
on raw material, but on manufactured goods. If, for instance,
it were considered desirable to put a tax on cotton, the tax
should not be levied on raw cotton, but on the manufactured
material. Cotton in the process of manufacture passes
through the hands of a considerable number of traders.
If the tax is levied on the raw material, each one of these
different traders has to pay the tax, and the interest on the
outlay of him of whom the purchase is made. If A, the
importer, pays ,1000 in duty on cotton, he expects when he
sells it to B to have the ordinary rate of profit, say 10 per
cent., on this outlay. .# therefore pays ,1100 in consequence
238 ON FOREIGN COMMERCE, ETC. SECT, iv
of the duty, and when he sells it to C he expects 10 per cent,
interest on this /iioo; C therefore pays ^1210. Every
time the material changes hands the amount paid in
consequence of the duty increases at compound interest,
until when it reaches the consumer, who really bears the
burden of the tax, the amount added to the price of the
commodity in consequence of the tax may be double the
sum which is received by the State Treasury. In order, there-
fore, to carry out Adam Smith's fourth rule, commodities
ought to be taxed as nearly as possible at the time when
they are purchased for consumption ; for the burden of the
tax being really borne by the consumer, he ought not to be
made to pay the interest on the additional outlay (caused by
the tax) of the numerous merchants through whose hands
a commodity passes in process of manufacture. The pro-
vision in Mr. Gladstone's budget of 1880 to abolish the
malt tax and substitute for it a tax on beer, was quite in
accordance with Adam Smith's fourth canon.
Direct Taxation on Commodities is impracticable.
Some have thought that the interest of the consumer would be
best protected if the taxes on commodities were collected in
the shops where they are sold. For instance, that if a woman
went into a shop to buy a pound of tea, the shopkeeper
should say the price of the tea is 2s. and the tax is 6d. But
this plan, in attempting to carry out Adam Smith's fourth
rule, would inevitably violate it more completely than it is
violated by the present system. Armies of Government
officials, whose salaries would probably equal, if not exceed
the whole amount yielded by the tax, would have to be
constantly employed in looking over shopkeepers' books,
and in ascertaining that the right amount of duty had been
handed over by the shopkeepers to the State. Even this great
expenditure would probably be powerless to prevent some of
the shopkeepers evading the yielding up of the duty. To
ensure economical collection a tax should be levied at a
time when the commodity is not dispersed amongst a large
number of retail tradesmen, but when it is amassed in large
quantities in the warehouse of a wholesale merchant. The
means of evading the tax are in this way diminished.
CHAP, in ON TAXATION 239
The cost of collecting Taxes should be as far as
possible reduced. There is no doubt that Adam Smith's
fourth rule might be much more strictly observed if strenuous
efforts were made to reduce the cost of collection of some
of the taxes. The great importance of cost of collection in
judging of the practical desirability of levying any particular
tax is obvious. Almost every year when the provisions of
the Budget are discussed proposals are made in the Press
and elsewhere for levying new taxes on articles of luxury, such
as fans, or photographs. The objection to taxes of this
description is that the amount yielded by them would be
insignificant compared with the cost of collection. A number
of fanciful taxes of this kind existed in Great Britain in
former years ; but they have been for the most part aban-
doned, mainly on account of their cost of collection.
The incidence of Taxation. Direct and Indirect
Taxation. Before proceeding to an explanation of the
nature of special taxes, such as the income-tax and the land-
tax, it will be well to point out what is meant by the incidence
of taxation, and the difference between direct and indirect
taxation. " A direct tax is one which is demanded from the
very persons who, it is intended or desired, should pay it. In-
direct taxes are those which are demanded from one person
in the expectation and intention that he shall indemnify him-
self at the expense of another : such as the excise or customs "
(J. S. Mill's Principles of Pol E., vol. II. p. 404). The inci-
dence of taxation is borne by the person out of whose pocket
the tax really comes. For instance, the incidence of taxes
on commodities is borne by the consumer, because, although
the tax is, in the first place, paid by the manufacturers or
importers, it increases the price of the commodity, and is
finally paid by the consumer. The incidence of poor rates
(as far as agricultural land is concerned) is borne entirely by
landowners, for though the rates are levied on the farmer,
they reduce the rent of the landlord. If the landlord paid
the poor rates the farmer would pay more rent. Though
generally paid by the farmers, the poor rates in reality come
out of the landlords' pockets. The incidence of all assessed
taxes, such as the dog-tax, the tax on carriages, livery
240 ON FOREIGN COMMERCE, ETC. SECT, iv
servants, armorial, bearings, and, in most instances, the
income tax, is upon the person on whom the tax is in the
first place levied. A tax is called indirect when it is
levied on one person, whilst the incidence of the tax is
on another. The incidence of a direct tax is upon the
same person from whom the tax is in the first place
levied. Taxes on commodities are therefore indirect, whilst
assessed taxes, and, generally speaking, the income-tax, are
direct.
The Income-Tax. The English income-tax is an impost of
so much in the pound levied on incomes over ^i 60 per annum.
For instance, if the income-tax is 6d. in the pound, every
one in receipt of an income of ^1000 a year has to contribute
a thousand sixpences or ^25 to the State as income-tax.
When this tax was first established it was considered a
temporary expedient, and it was confidently believed that
the tax would soon be remitted. Although it constantly varies
in amount the tax has never been remitted since 1842, and
after the experience gained in the general election of 1874,
when its remission was proposed in electoral addresses first
by the leader of the Liberal party and then by the leader of
the Conservative party, without either of them subsequently
taking any steps for the practical carrying out of the pro-
posal, it does not appear that there is a general desire in
the country to repeal the income-tax. The question whether
the income-tax should be considered as a permanent or a
temporary impost is of great importance in deciding whether
the tax is economically justifiable. The question whether
the same amount of income-tax should be levied on tem-
porary and on permanent incomes has given rise to much
discussion. It may be shewn that the argument entirely
turns on the point, whether the income tax is permanent and
fixed in amount, or whether it is temporary and variable.
If it is permanent and fixed, the same amount should be
levied from all incomes whether temporary or otherwise. If
the tax is only imposed for a short time, with the view of
remitting it as soon as possible, temporary incomes ought
to be taxed at a lower rate than permanent incomes. Let
us take an instance of the first case, viz. where the income-
CHAP, in ON TAXATION 241
tax is permanent and fixed in amount. Mr. A is in receipt
of an income of .1000 a year arising from landed property ;
Mr. B derives an income of ,1000 from his profession as a
doctor. It is urged by some that it is very hard to tax the
temporary income of Mr. B at the same rate as the permanent
income of Mr. A. It is said that Mr. /?'s income is derived
entirely by his own exertions, and that it will cease at his
death. This plea points out the very reason why both
incomes should be taxed at the same rate. Supposing the
income-tax to be fixed and permanent, the income which
Mr. A derives from his landed property will go on being
taxed for ever ; whereas Mr. It's income, which is derived
from a temporary source, will cease to be taxed when it
ceases to exist, at Mr. Z?'s death. The case may be further
elucidated by another example. Suppose that three people
each have ,20,000 left them. A invests his ,20,000 in
landed property, which brings him in .500 a year ; B pur-
chases an annuity which ensures him ^1500 a year for the
rest of his life ; while C purchases an annuity of ,2500 a
year, to last for 10 years. Now all these incomes are derived
from an exactly equal amount of capital. The one income
is permanent, the second depends on the life of an individual,
and the third will cease at the end of a certain term of years.
Supposing the income-tax to be permanent and fixed, there
is no reason why A's income should be taxed at a higher
rate than It's or C's. If the income-tax is ^d. in the pound
A's income will pay ,6 5-r. a year as income-tax for ever ;
's will pay .18 15^. a year for the rest of his life ; and
C's will pay ,31 5.?. a year for 10 years. The value of
these sums when capitalised is equal ; and if A, /?, and
C wished to pay such a sum down as would exonerate their
incomes from further payment of income-tax, each would
have to pay the same amount. If, however, the income-tax
were only a temporary impost, it would be unjust to tax
temporary and permanent incomes at the same rate. Sup-
pose, for instance, that an income-tax of ^d. in the pound
were imposed for 10 years. In the case above described, C
would in 10 years pay as much income-tax as A would if the
tax were continued for ever. The same inequality, though
R
242 ON FOREIGN COMMERCE, ETC. SECT, iv
in a minor degree, takes place when the income-tax varies
in amount.
If the Income-Tax is permanent in duration and
fixed in amount, temporary and permanent incomes
should be taxed at the same rate. Thus it may be laid
down as a general rule that when the income-tax is perma-
nent and fixed in amount, all incomes, whether temporary or
otherwise, should be taxed at the same rate : if, however,
the income-tax is temporary in its duration, and uncertain
in amount, permanent income's should be taxed at a higher
rate than temporary incomes. In the case of the income-tax
being temporary in its duration, perfect equality could only
be obtained by capitalising all incomes and annually deduct-
ing by means of the income-tax so much per cent, of their
capitalised value. But this arrangement would be found
quite impracticable, for in the case of temporary incomes
endless difficulty and expense would follow an attempt to
capitalise them. Government officials would have to examine
all the receivers of temporary incomes and fix the amount of
the income-tax which they had to pay, in accordance with
their age and the state of their health. For instance, two
half-pay officers of the same age, each receiving ^200 a year,
might have to be taxed at different rates, because the one
being much healthier than the other, would be likely to live
longer, and the capitalised value of his income would there-
fore be greater than that of the other. If therefore an
attempt were made to adjust the income-tax according to
the capitalised value of each income, the expense of collect-
ing the tax would absorb an undue proportion of the sum
which it yields to the Treasury. This is an example of the
assertion previously made, that legislators should strive to
produce a general equality in the gross amount of taxation,
and not endeavour to adjust each particular tax in accordance
with the ability of the contributor to pay.
The Income-Tax presses more heavily on the pos-
sessors of small incomes than on the possessors of
large incomes. The income-tax has been objected to on
the ground that it presses much more severely on the pos-
sessor of a very small income than on the possessor of a
CHAP, in ON TAXATION 243
large income. Thus if the income-tax were 6d. in the pound,
and if it were levied on all incomes, the possessor of an
income of ,100 would have to pay 2. los. a year ; the
possessor of an income of ,10,000 would have to pay ,250
a year. Now it may be urged that ,100 a year is only
barely sufficient to provide the necessaries of life ; especially
if it is assumed that the possessor of such an income has an
average-sized family depending upon him. 2 los. cannot
be deducted from this income without depriving its possessor,
or those depending on him, of sufficient food, clothing, shelter
and warmth to ensure health and the absence of bodily
suffering. To deduct ,2 50 annually from an income of
,10,000 inflicts no hardship on the possessor of this in-
come ; it may only reduce his consumption of luxuries. In
order to provide a remedy for this inequality, it was sug-
gested by Bentham that a certain minimum of income,
sufficient to provide the necessaries of life, should be left
untaxed ; and that this amount should be deducted from all
incomes, the remainder only to be taxed. For instance, if
this minimum were fixed at .100, no income of this amount
and under should be taxed at all ; an income of ,120 should
be taxed only on ,20 ; whilst an income of ;iooo should be
taxed only on ,900. By this means "each would then pay
a certain fixed proportion of his superfluities." At the
present time this scheme has not been carried into practice.
The following modification of it has been adopted : No
income of less than ,160 is taxed, and on incomes not
exceeding ,400 an exemption of 160 is made before they
are assessed for income-tax ; on incomes not exceeding ,500
an exemption of ,150 is made; on incomes not exceeding
,600 the first ,120 is exempt ; on incomes not exceeding
,700 the first jo is exempt. For instance, an income of
,200 is only taxed on .40 ; an income of ,395 is only
taxed on ,235 ; and an income of ,495 is only taxed on
,345. This plan is not so accurately just as Bentham's ;
but it is much simpler in its application, because of the com-
paratively small number of persons affected by the exemption.
In 1893 the exemptions made affected less than half a million
people. Earned income has since 1907 been taxed at a lower
R 2
244 ON FOREIGN COMMERCE, ETC. SECT, iv
rate than unearned income ; an allowance for children can
also be claimed by those whose income is less than ,500 a
year ; 10 being free of tax for every child under 16 years of
age.
The Income-Tax is usually a direct tax ; it is some-
times indirect. At first sight it appears that the income-
tax is always a direct tax, but it may be shewn that there
are cases in which income-tax is an indirect tax. When the
income-tax is paid out of savings which would not otherwise
be productively employed, it is a direct tax, because it is
really borne by the person who pays the tax ; but when the
income-tax is paid out of capital it is an indirect tax, for it
then falls partly on the labourers who would have been
maintained by the capital used to pay the tax. For example,
suppose that a manufacturer has to pay ,1000 a year as
income-tax, and that if this impost were not placed upon
him he would use this sum in employing a larger number of
labourers ; it is evident, in such a case as this, that the tax
falls partly on the labouring classes, and tends to lower the
rate of wages. If, however, the manufacturer pays this
^1000, not out of capital, but by reducing his consumption of
luxuries, then the income-tax is a direct tax, and comes out
of the pocket of the person who pays it. The income-tax is
a severe burden upon industry if it is paid out of capital.
In order to pay for the Crimean War the income-tax for the
years 1854, 1855 and 1856 was is. id., is. ^d. and is. ^d.
respectively ; in order to pay for the South African War the
income-tax was in 1900, 1901 and 1902 is., is. id. and is. $d.
respectively. In 1911 it remained at is. id. When the
income-tax is as high as this it is probably paid in part at
least out of funds that would otherwise have been used as
capital, and in so far as this is the case must be regarded as
an indirect tax.
Some dishonest people have the power to evade pay-
ing the full amount of the Income- Tax. It is urged as
an objection to the income-tax that some dishonest people
have opportunities of avoiding it by declaring their incomes
to be smaller than they really are. The consideration
whether any particular tax affects injuriously the morality of
CHAP, in ON TAXATION 245
the people is one which no statesman is justified in neglecting.
At the same time there is perhaps scarcely sufficient evidence
to prove that the income-tax is the cause of the dishonesty
of the people who evade it. It no doubt affords them an
opportunity of being dishonest, but they would not avail
themselves of the opportunity unless they were disposed to
do so. Under the present conditions of things, it can hardly
therefore be considered a valid objection to the income-tax
that it affords some dishonest people an opportunity of
cheating the Government and the rest of the taxpayers.
Taxes on commodities should be levied on luxuries
rather than on necessaries. Some of the remarks just
made on the subject of the income-tax throw some light on
the consideration of taxes on commodities. It was shewn
that the income-tax ought not to be levied on those incomes
which are sufficient o'nly to procure the necessaries of life.
It was laid down as a rule that each ought to contribute to
the imperial exchequer a certain proportion of his super-
fluities. It therefore appears that taxes on commodities
ought, in accordance with this rule, to be confined to
luxuries, and should not be levied on the necessaries of life.
If it be admitted that those persons ought to be as far as
possible relieved from taxation whose incomes are sufficient
only to provide them with necessaries, it is clear that the
cost of these necessaries ought not to be increased by
taxation. On the other hand, there is no reason why the
luxuries consumed by the poorer classes of the community,
such as beer, spirits and tobacco, should not be taxed. If a
man's income be sufficient to procure luxuries, he ought
not to be entirely relieved from taxation on the ground of
poverty ; he ought to contribute to the State a certain pro-
portion of his superfluities.
Taxes on land fall on the owner of the land, and
not on the cultivator. It may be generally stated that
all taxes which are levied on land, such as the land-tax, the
tithe, and the poor rate, really fall on the owner of the land,
and not on the cultivator. If these charges are in the first
instance paid by the cultivating tenant, he pays so much less
rent. If he ceases to pay the tax his rent is increased. A
246 ON FOREIGN COMMERCE, ETC. SECT, iv
reduction of the poor rate on land, therefore, is no per-
manent benefit to the tenant ; at the first opportunity his
rent will be raised by a sum corresponding to the amount of
taxation of which he has been relieved.
The land-tax is really Rent. The land-tax, whether
small or great in amount, partakes of the nature of a rent
paid by the owner of the land to the State, and it thus recog-
nises, in some degree, the proprietary rights of the State.
In a great part of India the land is owned by the Govern-
ment, and therefore the land-tax is rent, paid direct by the
cultivating tenants to the State. These tenants, instead of
holding under private owners, hold under the State, and the
rent which they pay is called land-tax. The economic per-
fection of this system of tenure may be readily perceived.
It has been shewn that as population increases, the value of
land, owing to no exertions on the part of the owner or
cultivator, increases, on account of the increased value of
agricultural produce. In a system of land-tenure where
land is owned by private individuals, all this additional value
is shared by a few persons who happen to be the owners of
land. In a system of land-tenure where the land is owned
by the State, this additional value is shared by the whole
nation, and may be devoted to the relief of taxation. A
great part of that wealth which is taken out of the pockets
of the people by the increased price of food, is returned to
them in the shape of the larger rents which are paid into
the national exchequer. The land revenue of India amounts
(1911) to about ^21,000,000 annually. The payment of this
large amount is a burden to no one ; if it were not paid to
the State it would be paid to landlords. It is the most
important source of public income. No one is injured by the
payment of this sum ; on the contrary, a much larger amount
of taxation would have to be levied if the land were owned by
private individuals ; for in this case the national revenue
would be diminished by ^21,000,000 annually, and this
deficiency would have to be supplied by increased taxation.
It is clear that the land-tax should never exceed the economic
rent ; i.e. the surplus which remains after defraying all the
expenses of cultivation, including the average rate of profit
CHAP, in ON TAXATION 247
on the capital of the cultivator. It has been shewn that this
surplus is equal to the difference in value between the land
in question and the worst land in cultivation which pays no
rent. If the land-tax exceed the economic rent, the
cultivation of the worst land, which formerly paid no rent,
will cease to be profitable, and it will consequently fall out
of cultivation. The supply of food will be diminished and
prices will rise. The excessive land-tax will lead to in-
creasing the supply of food by means of foreign importations.
When therefore the land-tax exceeds the economic rent, a
double tendency is exerted to throw land out of cultivation,
and consequently the area from which the tax is collected is
decreased.
Mr. Henry George's proposals with regard to Land.
Mr. Henry George, in his book called Progress and Poverty,
advocated that the State should take from the land-
owners of this country in the form of land-tax the whole
annual value of their land, leaving to them only just sufficient
to induce them to collect the rents and transact the business
of stewards or land-agents. It is unnecessary to point out
that although the economic benefits arising from the State
being the owner of the land are undeniable, it would be
spoliation and robbery fo deprive private owners of the value
of their land, which has often been acquired by means of years
of patient toil and thrift, and the productiveness of which is
often almost entirely the result of the application of labour
and capital. It is impossible to believe that the character
of the English people will ever change so much as to induce
them seriously to advocate the wholesale robbery which
Mr. George's scheme involves. He saw in England a favour-
able field for the adoption of his plan because there the land-
owners being few in proportion to the population, they
would have less power of resistance. Apart from the
repugnance with which Mr. George's scheme must be
regarded from the moral point of view, in such a wealthy
country as England the loot would not be worth the tre-
mendous revolution which the seizure of it would involve.
If the rent of all the land in England were to-morrow
to become the property of the entire people, each in-
248 ON FOREIGN COMMERCE, ETC. SECT, iv
dividual's share of the spoil would amount to about is. 6d.
a week. To confiscate the whole of the value of the land
in order to put an extra $d. a day into everybody's pocket
is burning down a house to roast a pig. There are so many
easier, not to say honester, ways of earning or saving ~$d. a
day for six days in the week. Improvements in the export,
carriage and distribution of food, such as fish and meat,
reduction of fares in omnibuses, tramcars and railways,
greater economy in the use of wine, spirits and tobacco,
indicate a few of the ways in which Mr. George's is. 6d. a
week could be provided much more easily than by con-
fiscating the rent of land. The disciples of Mr. Henry
George in Ireland and elsewhere steadily resist all changes
which have the effect of increasing the numbers of those
who own the land. The difficulty of carrying out the scheme
of spoliation would be greatly increased by increasing the
number and consequently the power of the owners of land.
Tithes are a charge on Landed Property. Tithes are
a charge on landed property : they were originally imposed
for the maintenance of religious establishments. As the
name implies, they formerly amounted to one-tenth of
the produce. The appropriation of tithes for religious
purposes was abolished in the time of the Reformation,
and tithes are now very frequently owned by private in-
dividuals who have no share in the cultivation, manage-
ment or possession of the land. The difficulty of assess-
ing the tithe led to the passing, in 1837, of the Tithe
Commutation Act, by which the amount of tithe paid is
regulated according to the average price of corn during
the previous seven years. By this arrangement the tithe
proprietor was excluded from benefiting by the increased
productiveness of land. He would indeed be a sufferer
by any circumstance which might, for example, double the
yield of corn. For such an event would reduce the price
of corn, and would accordingly diminish the amount of
the tithe. The Tithe Commutation Act also tends to
diminish the proportional value of the tithe, for reasons
which were probably unforeseen by those who passed the
Act in 1837. Corn is easily imported from foreign countries.
CHAP, in ON TAXATION 249
An immense quantity has since 1847 been annually imported
into this country. Live stock, milk, butter, etc. cannot be so
easily imported ; therefore the relative value of corn, as
compared with meat and dairy produce, will tend to diminish
as population increases. Hence the tithe, being determined
solely by the average price of corn, will not increase propor-
tionally with the increased value of agricultural produce
considered as a whole.
The Incidence of Poor Rates levied on Dwelling-
houses. Without attempting to describe the social effects
of the poor rates, it is desirable to give a short account of
their incidence and some of their economic consequences.
The poor rates are levied only on real property, such as land,
trade premises and houses. It has already been pointed
out that in agricultural land poor rates are really borne
by the owner of the land. It has been long a disputed
point whether in the case of house property the incidence
of poor rates is on the occupier or the owner. If the
reduction or abolition of the poor rate increased the rent
of houses by an amount exactly corresponding to the sum
which was formerly levied on the same houses as poor
rate, then the whole incidence of the rate is on the land-
lord, because the rate reduces his rent. But it must be
remembered that the poor rate is levied, not only on the
land on which the house is built, but on the house itself.
For instance, a certain house pays g a year ground rent,
and ;6o as house rent. The poor rates levied on -this
house average g annually. The rate is levied at so
much in the pound of the entire rental, and not on the
ground rent only. Now it is evident that the builder of
the house does not bear the rate any more than a grocer
bears the duty on tea. The builder gets the average rate
of profit of his trade ; this profit being composed of the
following elements : the current rate of inrerest, compen-
sation for risk and wages of superintendence. The poor
rate does not come out of his pocket, but it increases the
cost of production, just in the same way as the duty on
wine increases the cost of its production. The total cost
of renting a house is therefore increased by the poor rate,
250 ON FOREIGN COMMERCE, ETC. SECT, iv
and consequently the poor rates fall partly on the occu-
pier of a house. The owner of the land bears the inci-
dence of that part of the poor rate which is calculated on
the ground rent ; the occupier bears the incidence of the
rate levied on the value of the house.
The Incidence of Poor Rates levied on Trade premises.
In the case of trade premises, manufactories, etc., the
poor rates must also be divided into two portions ; that
levied on the land being borne by the owner of the land,
and that levied on the buildings being borne by the con-
sumers of the commodities which are manufactured in
the buildings. Take, for example, the incidence of the
poor rates levied on a cotton mill. Let it be assumed
that they amount to ^150 annually. The cost of pro-
ducing a given quantity of cotton goods is thus increased by
\ 50, and as it has been shewn that the price of com-
modities which can be indefinitely increased is always
ultimately regulated by cost of production, it is evident
that the poor rate increases the price of cotton goods, or, in
other words, the incidence of the rate is on the consumer.
But it may be urged that the rate varies in different localities :
that in one parish the rate levied on certain premises may
be ^100, and in another parish the rate levied on similar
premises may be .300. If these premises are both used to
produce the same commodities, what influence will these
different rates have on the prices of the commodities? It is
a principle of political economy that the price of a commo-
dity is regulated by the cost of producing that portion
whose cost of production is the highest. The price of
vessels is regulated by the cost of producing those vessels
whose cost of production is the highest. If the price
were less, the vessels built under the most disadvantage-
ous circumstances would cease to yield the ordinary rate
of profit to capital and the average rate of wages to
labour. But it must be remembered that at the same
time the manufacturers who are carrying on business under
more favourable circumstances are realising exceptionally
large profits. There is therefore every inducement for
them to increase the supply. If this increased supply takes
CHAP, in QUESTIONS ON CHAPTER III 251
place, or if there is a decrease in the demand, the equalisa-
tion between supply and demand is affected by a lowering
of the price. Under these circumstances the most heavily
burdened part of the ship-building trade ceases to be
profitable and gradually ceases to exist. This describes
what actually took place in 1870 in the London ship-building
trade. The poor rates and other charges were so enor-
mously high in the East-end of London, that when the
exceptional demand for vessels caused by the American civil
war fell off, and the price of vessels consequently declined,
the ship-building trade of London was virtually destroyed :
such vessels as were required being built at Belfast and
on the Tyne and the Clyde. Every ship-building yard that
was closed hastened the closing of the rest in the same
locality ; for by throwing hundreds of artisans out of
employment pauperism was increased and the amount of
the poor rate was necessarily augmented. The burdens
on the depressed industry thus speedily accumulated, and
gradually but surely the ship-building trade declined on the
Thames. The incidence of poor rates in such a case as this
is borne by the capitalists and labourers engaged in the
depressed industry, and the poor rate may be perhaps in such
an instance accused of causing more misery than it alleviates.
It is a most serious national misfortune when the amount of
the poor rate is so great as to maim or destroy a once
prosperous branch of industry. No remedy for this paralys-
ing influence of the poor rate can be provided by the well-
meant efforts of private charity. No permanent benefit will
result from individual exertions or legislative enactments
unless they tend to weaken the causes which produce
pauperism.
QUESTIONS ON CHAPTER III. On Taxation.
1. Why is taxation necessary?
2. Ought any class of persons who avail themselves of
the protection which a State affords to enjoy immunity from
taxation ?
252 ON FOREIGN COMMERCE, ETC. SECT, iv
3. Enumerate Adam Smith's four canons of taxation.
4. In what manner only can the first canon be observed?
5. Why is the non-observance of the second canon
detrimental to trade ?
6. Illustrate the importance of the third canon.
7. Point out the connection between the third and the
fourth canons.
8. Describe the utility of bonding houses.
9. What is the effect of the use of the bonding house on
the price of the commodities lodged therein?
10. In accordance with the fourth canon, ought taxes to
be levied on raw material or on manufactured commodities ?
11. Why does a tax on raw material increase the price
of the manufactured commodity by an amount far exceeding
the revenue yielded to the State ?
12. Why would direct taxation on commodities sold in
shops be impracticable?
13. Which is the most obvious way of carrying out the
fourth canon?
14. What is the difference between direct and indirect
taxation ?
15. What is meant by the incidence of taxation ?
16. What is the income-tax?
17. Ought temporary and permanent incomes to be taxed
at the same rate ?
1 8. Give illustrations shewing that temporary and perma-
nent incomes ought to be taxed at the same rate if the
income-tax is fixed in amount and permanent.
19. Why would it be impracticable to adjust the income-
tax according to the capitalised value of each income ?
20. Why does the income-tax press more severely on the
possessor of a small income than on the possessor of a large
income ?
21. What remedy has been suggested for this inequality?
22. What modification of this plan has been adopted?
23. Is the income-tax invariably a direct tax?
24. When income-tax is paid out of capital, on whom does
the tax chiefly fall ?
25. Is the opportunity of evading the payment of the full
CHAP, in QUESTIONS ON CHAPTER III 253
amount of income-tax, which some people avail themselves
of, a valid objection to the tax ?
26. It has been laid down as an axiom, that each ought
to contribute to the imperial exchequer a certain fixed pro-
portion of his superfluities. What effect would this rule
have in deciding what commodities should be taxed ?
27. Who bears the incidence of all taxes levied on
land?
28. What is the land-tax ?
29. Describe its magnitude in England and in India.
30. What important principle is recognised by the exist-
ence of a land-tax ?
31. Explain the economic perfection of a land-tenure in
which all rents are paid to the State.
32. What would be the consequence of the land-tax
exceeding the economic rent ?
33. In what manner did Mr. Henry George propose that
the State should appropriate the land of England ?
34. What are tithes, what was their original purpose, and
by whom are they now frequently owned ?
35. What are the main provisions of the Tithe Com-
mutation Act ?
36. What effect has this Act had on the amount of the
tithes ?
37. Who bears the incidence of poor rates in the case of
house property ?
38. Prove that the occupier of the house bears part of the
incidence of the poor rate.
39. Who bears the incidence of the poor rate levied on
trade premises ?
40. What is the effect of excessive rates in depressing
industry ?
41. Describe the decline of the ship-building trade on the
Thames.
42. When the burden of the rates is such as to destroy a
branch of industry, on whom does the real burden fall ?
i. It was said that tax-payers were never asked by the
collector whether they approved of this or that application of
254 ON FOREIGN COMMERCE, ETC. SECT, iv
public money ; but do not the taxpayers then control the
national expenditure ? have they not a right to do so ? How
far does the parliamentary suffrage confer this power on the
tax-payers ?
2. Were the taxes on hair-powder and on windows direct
or indirecl ?
3. Mr. Henry George contended that land being a gift of
nature to mankind cannot properly become private property ;
but that the result of human labour can alone with justice
thus be owned by individuals. Apply this theory to
(1) The fen lands of Cambridge which previous to drainage
were useless swamps.
(2) Wild roots and fruits.
(3) A brick-field.
(4) A cart-load of brick earth.
(5) The same earth when converted into bricks.
(6) Gold and silver when found, as sometimes happens, in
valuable nuggets without labour.
(7) The cultivated terraces on Swiss mountains where the
earth has been carried up in baskets by men and women.
INDEX
AGRICULTURAL produce, price of,
76, 78, 80, 108, 115
Arbitration, boards of, 163
Babbage, Mr., on division of
labour, 16
Balance of trade, 207
Bank Charter Act, 221
,, -notes, 215, 216
Banking, London an international
centre of, 228
Banks, Raiffeisen and Schultze-
Delitzsch, 170
,, Raiffeisen, in Ireland, 172
,, usefulness of, 21 1
Barter, 2, 48
Bastiat, M. F., on money, 71
,, ,, on profits, 144
,, ,, on protection, 190
,, ,, on unproductive
consumption, 22
Bentham on the income-tax, 243
Bill-discounting, 214
Bills of exchange, 213
Bi-metallism, 59 68, 100
Birrell, Irish Land Act, 1909, 8, 9
,, ,, ,, losses borne
by the Treasury, 8
Boards of arbitration, 163
Bonding houses, 235
Book credits, 219
Bounties, effect of, 187, 189
Cairnes, on cost of production, 69
,, on the gold discoveries,
98w.
Candlemakers' petition, the, 190
Canons of taxation, Adam Smith,
233
Capital, definition of, 26
,, the result of saving, 33, 37
,, in fulfilling of its functions
must be consumed, 34
Capital, an agent of production, 26
,, circulating and fixed, 34,
a glut of, 38
,, profits of, 85, 144
,, export of, 154, 206
Charitable assistance, effect of,
on wages, 135
Cheques, 217
Clearing house, the, 63, 217
Coinage, standard, 58
,, token, 58
Colonisation, Mr. Wakefield on,
18
Collectivism, 42
Combinations of employers, 162
Commercial panics, 221
Commodities divided into three
classesin respect to their value,69
Competition, effect of, on wages,
121, 136
Consumption, productive and un-
productive, 22
Convertible and inconvertible
paper currency, 224
Co-operation of labour, 17
,, simple and complex,
IB
,, and co-partnership,
165180
,, as practised by M.
Leclaire, 168
,, as practised by M.
Godin, 167
,, at the Bon Marche,
1 66
,, at Hebden Bridge,
177
Co-operative creameries in Ireland,
169
,, credit banks, 170-173
,, credit banks in Ire-
land, 172
,, distribution, 179
2 5 6
INDEX
Co-operative production, 177
,, stores, 178
Co-partnership in France, 1 66
,, in England, 165,173
"Corner," making a, 79, 225, 226
Cost of carriage in foreign com-
merce, 203
,, labour, 83
, , , , does not vary with
wages, 84
,, ,, a function of three
variables, 151
,, production, 69, 83
Cottier and conacre tenure in Ire-
land, 118, 119
Cotton "Ring," the, in New York,
226
Credit, 95, 210
, , effect of, on prices, 95,219,
227
Currency, economy of paper, 227
,, convertible and incon-
vertible paper, 224
in U.S.A.,
224-225
,, in S. Africa, 49^.
,, ,, India, 94
Debtor and Creditor countries, 66,
205
Demand and supply, effect of, on
prices, 71, 88, 194
Demand for commodities not a
demand for labour, 30
Depreciation of silver, 65, 93
Diminishing productiveness, law
of, 149
Direct and indirect taxation, 239
Distribution of wealth, 104
Division of labour, 15, 181
Double standard, a, 58
Education, economic value of, 19,
20, 126, 131
Effectual demand, 73
Emigration, 128
Exchange of wealth, 41
Export of capital, 154, 204
Exports and imports, relation of,
202, 20472.
Farming, large and small, 6
Fiscal proposals brought forward
in 1903, 197, 237
Foreign commerce, 181
Fourier, ion., 46
France and the Latin monetary
union, 60
Free Trade, 3, 13, 13^., 14^., 17,
99, 182
, , , , effect of, on prices, 1 82
,, ,, effect of, on banking,
228
,, ,, effect of, on com-
merce, IOO
Friendly Societies, 160
George's, Mr. H., objections to
statement that wages are paid
out of capital, 28, 1 21
George, Mr. H., on land, 247
Germany, wages in, 14^.
Godin, M., and the Familistere at
Guise, 167
Gold discoveries, effect of, 60, 99,
100, 101
,, estimated amount of in the
world, 99.
,, ring of New York, 225
,, total annual production of,
99-
,, effect of the South African
war on production of, 99;;.
Gresham's Law, 6 1
Hares and Rabbits Act, lo'jn.
Harrison, Mr. Frederic, on Trades'
Unions, 157^.
Hebden Bridge, co-operation at,
177
Importation of food, effect of, on
prices, 78
Incidence of taxation, 239
,, income-tax, 240, 244
,, poor rates, 249
,, taxes on land, 247
Income-tax, the, 240, 242
,, Bentham on exemp-
tions from, 243
INDEX
257
Increase of wages ot women due
to trades' unionism, \yjn.
India, free coinage of silver sus-
pended in, 67
Interest, the rate of, 147
Irish Development Grant Fund,
insufficiency of, 8
Irish Land Acts, 18701909, 7,
118
Jevons, Prof., on money, 53
Joint Stock Companies, 37, 212
Jones, Mr. Ben., on co-operation,
179
10
unpro-
Labour, an agent of production,
,, productive and unp
ductive, 12
,, division of, 15
,, co-operation of, 17
,, circumstances which in-
crease the productive
power of, 15, 19, 20
Labour, cost of, 83, 152
,, division of, 15
,, -saving machinery, ex-
tended use of, 36
the principal element of
cost of production, 83
Land, an agent of production, 5
, , circumstances which increase
the productive power of, 6
,, rent of, 104
Land Act, 1909, 8, 9
,, ,, ,, loss under borne
by Treasury, 8
Land tax, 245
,, ,, in India, 246
,, ,, Mr. Henry George on
the, 247
Large and small farming, 6
Latin monetary union, 60, 62
Leclaire's scheme of co-partner-
ship, 1 68
Legal tender, 58, 215
" Leiter" corner in wheat, 79
Livesey, Sir G., and co-partner-
ship, 173-6
Lock-outs, 162
London the banking centre of the
world, 228
Malthus on population, 126
Margin of cultivation, 107, 108
Marx, K., 42
Mercantile system, 3, 207
Metayers, 117, 118
Mill, J. S., on labour, 1 1
,, ,, on demand for commo-
dities not a demand
for labour, 29, 30
,, on capital, 34
,, ,, on cost of production,
69, 70
,, ,, on normal prices, 72
,, ,, on normal prices of
labour, 151, 152
,, ,, onprofitsinunciviliM'd
countries, 147
,, ,, on law of diminishing
productiveness, 149
,, ,, on advantages of for-
eign commerce, 199
,, ,, on tendency of exports
and imports to
equality, 203
,, ,, on rent of land, 106
,, ,, direct and indirect
taxation, 239
Money, value of, 92
M. Bastiat on, 57
Prof. Jevons on, 53
Prof. Bonamy Price on
52
real nature of, 2
functions of, 51
various substances used
as, 2, 52
Owen, Robert, 46
Panics, commercial, 221
Paper currency, convertible and in-
convertible, 224
,, in U.S.A., 224
,, ,, economy of, 227
Peasant proprietors and peasant
tenants, 7
Political economy defined, I
Poor rates, 249
2 5 8
INDEX
Population, effect of increase of,
on wages, 125
,, effect of increase of,
on price of food,
no
,, Malthus on, 126
,, not a measure of
national prosperity,
114
Price, Prof. Bonamy, on money, i
52
Price, definition of, 49
,, effect of demand and supply '
on, 71, 88
,, of agricultural produce, 76, 1
80, 1 08
, , produce of mines and fish- 1
cries, 81
,, of manufactured commodi-
ties, 81
Prices and wages, connection be-
tween, 131
,, effect of credit on, 95, 219,
227
,, and profits, connection be-
tween, 86, 150
Production, the requisites of, 5
,, cost of, 69
,, of silver, 65, 93
,, of gold, 53, 98,99, 101
Profits of capital, 85, 144
,, and prices, how connected,
86, 150
Profits and wages, how connected,
129
,, composed of three elements,
146
Profit-sharing, 165 173
Protection, 182
,, cost of, to consumer,
184, 236, 237
,, effect of, on wages, 185
,, ,, in America, 200
Protective taxes on necessaries, 236
Rack rent, 116
Raiffeisen credit banks, 170
,, ,, in Ireland,
172
Rate of interest, 147
Rates for relief of the poor, 249
Reciprocity, 197
Rent of land, 104
Ricardo's theory of, 108-112
does not increase the price of
agricultural produce, 115
influence of custom on, 116
under metayer system, 116
cottier and conacre, 118
Retaliation, 197
Ricardo on rent of land, 107 in,
148
,, ,, the standard of com-
fort, 125
" Ring," the Cotton, New York,
226
, , the Gold, New York, 225
Rochdale Pioneers, 179
Schultze-Delitzsch credit banks,
170172
Schuster, Sir F., on banking and
free trade, 228
Shipping, English predominance
in, 201
Silver, increased production of, 65,
93
demonetisation of Ger-
many, 62
Smith, Adam, on division of
labour, 15, 1 6
,, ,, on differences in
wages, 137
,, ,, on taxation, 233
,, ,, on mercantile
system, 3
Socialism, 41
South African War, 48/2., 206
South Metropolitan Gas Works,
co-partnership in, 173
Standard coinage, 58, 94
Standard of comfort, effect of, on
wages, 125
Strikes, 124, 158
Sugar convention, the, 187
Tariff wars, 197, 198
Taxation, 181, 232
Taxation, direct and indirect, 239
INDEX
259
Taxes on raw materials, 237
,, on luxuries, 245
,, on land, 245
,, on necessaries, 236
Taylor, Mr. Sedley, on Profit-
sharing, 165
Tenant right of Ulster, 117
Tithes, 248
Token coins, 58, 94
,, ,, not legal tender ex-
cept for small
amounts, 58
Tolstoi, Count Leo, 44
Trades' unions, 123, 157163, 1 66
,, ,, Mr. F. Harrison
on, 157
Trades' unionism in the profes-
sions, 161
Trades' unionism among em-
ployers, 162
Trade's unionism among women
workers lead to increase of
wages, I37.
Turkish finance, 210
Ulster tenant right, 117
Unemployed, the, and labour-
saving machinery, 36, 123
Unfavourable exchange, 195
U.S.A., decline of shipping in,
201
Mr. D. A. Wells on pro-
tection in, 200
,, gold speculators in, 225
,, paper currency of, 224
Value defined and explained, 47, 69
Value of commodities, 69
, , of money, 92
Wages-fund, the, 28
Wages, real and money, 88
,, of labour, 121, 137
as regulated by competi-
tion, 121
,, influence of, increase of
population on, 125
,, influenced by export of
capital, 152 155
,, influenced by habitual
standard of comfort,
125
,, influenced by increased
efficiency of labour, 130
,, influenced by Protection,
I4., 185
,, connection between prices
and, 131
,, and profits, how con-
nected, 129
Wages, effect of charity on, 135
,, ,, monopoly on, 139
,, why different in different
employments, 137
,, of women, 136
Wakefield,Mr., on colonisation, 18
Wealth, definition of, I
,, production of, 5
,, distribution of, 104
,, exchange of, 41
Wells, Mr. D. A., on protection
in U.S.A., 200
,, on decline of shipping in
U.S.A., 201
Women workers' strike organised
by trade union, 1911, I37-
Women's Trade Union League,
growth of membership, I37.
Women's Trade Union League,
Wyndham, Act, 1903, the, break-
down of, 8
RICHARD CLAY AND SONS, LTD., BRUNSWICK ST., S.E., AND BUNGAY, SUFFOLK.
3G0465
UNIVERSITY OF CALIFORNIA LIBRARY
