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FROM 


THE    QUARTERLY   JOURNAL 
OF  ECONOMICS 


*-'\ 


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THE  JOURNAL  OF  POLITICAL  ECONOMY 


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THB  UNIVEBSITT  OF  CHIGAGO  PRB88 
CHICAGO.  ILLINOIS 


Asfsta 
THB  CAMBBIDOE  UNIVBRSITT  PBESS 

LOVDOir  AND  ■DDTBUBOH 

THB  MABUZEN-KABUSHIKI-KAI8HA 

TOKYO,  OSAKA,  KYOTO 

KARL  W.  HIEBSBMANN 

LXZFZXO 

THB  BAKER  ft  TAYLOR  COMPANY 

VKWTOBK 


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THE  JOURNAL 


OF 


POLITICAL  ECONOMY 


VOLUME  XXII 

JANUARY— DECEMBER  1914 


THE  UNIVERSITY  OF  CHICAGO  PRESS 
CHICAGO,  ILLINOIS 


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,0 

^ 


Published 

January,  Febmary,  March,  April,  May,  June, 

July,  October,  November,  December,  1914 


CompoMd  and  Pffattd  By 

ThcUnirenltrof  ChlcMO  Pien 

Chicago.  lUlaoit.  U.8.A. 


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INDEX 


GENERAL  INDEX 

riMB 
American  Credits,  The  Effect  <^  the  European  War  on 

George  M,  Reynolds  925  * 

Bank  Investmenta,  The  Probable  Effect  of  the  New  Currency  Act  on 

Jacob  H.  HoUander  444 

Banking  and  Currency  Act  of  1913,  The./.  Laurenu  LaugkUn,  I  293,  n  405 

Banking  Reserves  under  the  Federal  Reserve  Act. .  WiUiam  Amasa  ScoU  332 

Bill  of  Exchange,  The  Origin  <^  the AbboU  Paysom  Usher  566 : 

B<md  Investments  by  National  Banks Jacob  H.  HoUander  83 

Canada's  Parcel  Post S.Roy  Wea9er  536 . 

Cattle  Loan  Banks J.  P,  EbersoU  577 

Chicago  Subway  Problem,  The Ralph  E.  Heilman  992 

Collecting  Checks  under  the  Currency  Law George  Woodruff  345 

Commercial  Paper  and  the  Federal  Reserve  Banks. .  .0.  M.  W.  Sprague  436 

Ounmerdal  Paper  Debate,  The Eugene  E,  Agger  661  ' 

Ounmerdal  Paper  Houses,  The  Relation  of  the  New  Currency  Act  to  die 

Work  of Robert  C.  Schqffner  358 

Constitutional  Restrictions  on  Municipal  Debt Horace  Secrisl  365 

Curr^icy  Act  oi  1913,  The  Banking  and./.  Laurence  LaughUn,  I  293,  n  405 

Currency  Policy  and  the  Eun^)ean  War Charles  A.  Conanl  717 

Customs  Administration  under  the  1913  Tariff  Act ./.  Newton  Hoffmann  845 

Daveiqport's  Competitive  Economics Prank  A,  Petter  550  < 

Economic  Significance  of  Interlocking  Directorates  in  Railway  Finance, 

The Prank  Haigh  Dixon  937 

Effect  ol  the  European  War  on  American  Credits,  The 

George  M.  Reynolds  925 
Elasticity  of  Note  Issue  under  the  New  Currency  Law,  Tlie 

P.M.Taylor  453 

Essentials  of  Workmen's  Con^>ensation  Statistics E.  H.  Downey  955 

£ur(^)ean  War,  Currency  Policy  and  the Charles  A.  ConafU  717 

Farmers'  Elevator  Movement,  The Oscar  N.  Refsdl,  1  872,  II  969 

Federal  Reserve  Act,  Banking  Reserves  under William  Amasa  Scott  332 

Federal  Reserve  Banks,  Commercial  Paper  and  the.  ..O.M.  W.  Sprague  436 

Financial  Policy  of  the  Federal  Reserve  Banks,  The  . .  Thomas  Conway,  Jr.  319 

Financing  of  Farms  in  Saskatchewan S.  Roy  Weaver  384 

Fundamental  Princq>les  of  Parcel-Post  Administration  .Daniel  C.  Roper  526 

Government  Deposits  in  the  National  Banks E.  M.  Patterson  79 

Harvard  Bureau  of  Business  Research,  The Arthur  E.  Swanson  896 

v 


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vi  INDEX 

PAGB 

History  of  River  Improvement,  A Isaac  LippincoU    630 

Inheritance  Tax,  Public  CaiHtalization  of  the Akin  S.  Johnson    160 

^  Interlocking  Directorates  in  Railway  Finance,  The  Economic  Significance 

of Prank  Haigh  Dixon    937 

Machinery  in  Sixteenth-Century  English  Industry Julius  W.  PraU    775 

Minimum  Wage,  Some  Aspects  of  the H.A,  Millis    132 

Municipal  Debt,  Constitutional  Restrictions  on Horace  Secrist    365 

Note  Issue  under  the  New  Currency  Law,  The  Elasticity  of 

P.M.Taylor    453 

Origin  of  the  Bill  of  Exchange,  The Abbott  Payson  Usher    566 

Parcel-Post  Administration,  Fundamental  Principles  of  .Daniel  C.  Roper    526 

Parcel  Post,  Canada's S.  Roy  Weaver    536 

Parcel  Post  in  Foreign  Countries,  The Chester  Lloyd  Jones    509 

Probable  Effects  of  the  New  Currency  Act  on  Bank  Investments,  The 

Jacob  H.  Hollander    444 

Public  Capitalization  of  the  Inheritance  Tax Alvin  S.  Johnson    160 

Relation  of  the  New  Currency  Act  to  the  Work  of  Commercial  Paper 

Houses,  The Robert  C.  Schaffner    358 

River  Improv^nent,  A  History  of Isaac  Lippincott    630 

Rural  Organization,  The  Work  of T.N.  Carver    821 

Shall  We  Have  an  Introductory  Course  in  Social  Science?.  .A.  B.  Wolfe    253 

Some  Aspects  of  the  Minimum  Wage H.  A.  Millis    132 

Some  A^)ects  of  the  Waterwa3rs  Question H.G.  Moulton    239 

Tariff  of  1913,  The H.  Parker  Willis,  1 1,  n  105,  m    218 

Taxation  in  New  France:  A  Study  in  Pioneer  Economics.  .5.1^  IFfot^    736 
Tendencies  in  Eomomic  Legislation  in  Wisconsin  . . .  Chester  Lloyd  Jones    756 
^--'Trade  Board  Acts  in  Great  Britain  and  Ireland,  The  Working  of  the 

Constance  Smith    605 
Trade  Unionism  in  the  United  States: 

General  Character  and  Types Robert  P.  Hoxie    201 

The  Interpretation  of  Union  Types Robert  P.  Hoxie    464 

United  Shoe  Machinery  Company,  The Richard  Roe     43 

Washington  Notes 84, 181,  268, 388, 482,  580,  684,  791,  901,  1006 

Adjusting  International  Indebtedness,  1012 

Agricultural  Credit,  The  Rq>ort  on,  268 

Anti-Trust  Act,  The  New,  906 

Anti-Trust  Bills,  Development  of  the  New,  274,  586 

Anti-Trust  Laws,  Compilation  of,  184 

Anti-Trust  Message,  181 

Anti-Trust  Policy,  A  New,  183 

Anti-Trust  Program,  Development  of  the,  89 

Children's  Bureau,  First  Report  of  the,  273 

Closing  the  Exchuiges,  791 

Cotton  Loan  Fund,  The,  loii 

Cotton  Relief  Plan,  905 

Department  of  Labor,  Fiist  Report  of  the,  272 

Emergency  Currency,  792,  793 


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INDEX  vii 

PAOB 

Federal  Reserve  Act: 

New  Banking  Act.  84 

Problems  of  the  New  Banking  Act,  269 
Federal  Reserve  Banks: 

Defining  Commercial  Paper,  1007 

First  Rates  of  Discount,  The,  loio 

Opening  the,  1006 

T^sferring  Reserves,  1006 
Federal  Reser^  Board,  796, 901 
Federal  Reserve  System: 

Choosing  Reserve  Bank  Directors,  684 

Districting  the  United  States,  271 

Efforts  to  Establish  a  Central  Bank,  185 

Entering  the  Reserve  System,  186, 187 

New  Reserve  Districts,  482 

Progress  with  New  Banking  System,  584 
Framing  a  Census  of  Manufactures,  274 
Gold  Fund,  The,  903 
Government  in  Business,  The,  90 
Government  Ownership  in  Alaska,  391 
Income  Tax: 

Af^lying  the,  91 

Number  of  Returns  of,  909 

Yield  of,  696 
Insurance  as  Commerce,  394 
Navigation  Laws,  Changing  the,  794 
Obscuring  the  TaJriff  Issue,  1014 
Railroad  Conditions  in  the  Central  West,  188 
Railroad  Rates: 

Arguments  against  Iffigher,  582 

Aliments  for  Higher,  85 
Railroad  Securities  and  Financial  Conditions,  87 
Railwajr  Capital  Costs,  488 
Recumng  Census  Problem,  The,  691 
Revenue  Measures,  New,  795 
Revenue  Tax,  War,  907 
Rural  Credit  BUI,  490,  580 
Shrevqx>rt  Rate  Decision,  694 
Telegraph  and  Tdq>hoQe  Proq)ects,  392 
Water  Carriers: 

Regulating,  693 

Report  on,  388 
Worid  Crisis,  The,  791 

Waterway  between  Chicago  and  St.  Louis,  A William  A .  SheUon     64 

Waterways  Question,  Some  Aspects  of  the. E,  G,  MoulUm    339 

\^nsconsin.  Tendencies  in  Economic  Legislation  in. .  .Chester  Lloyd  Jones    756 

Work  of  Rural  Organizadcm,  The T.N.  Carver    821 

Working  of  the  Trade  Boards  Act  in  Great  Britain  and  Ireland,  The 

Constance  Smith    605 
...-^Workmen's  Compensation  Statistics,  Essentials  of E.  H.  Downey    955 


AUTHORS'  INDEX 

Agger,  Eugene  E.    The  Commercial  Paper  Debate 661 

Carver,  T.  N.    The  Work  of  Rural  Org^iization 821 

CoNAMT,  Charles  A.    Currency  Policy  and  the  European  War 717 


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viii  INDEX 

FAOB 

Conway,  Thoicas,  Jr.    The  Financial  Policy  of  the  Federal  Reserve 

Banks 319 

Ddcon,  Frank  Haigh.    The  Economic  Significance  of  Interlocking 

Directorates  in  Railway  Finance 937 

Downey,  £.  H.    Essentials  of  Workmen's  Compensation  Statistics 955 

Ebersolb,  J.  F.    Cattle  Loan  Banks 577 

Fetter,  Frank  A.    Davenport's  Competitive  Economics 550 

Heilman,  Ralph  £.    The  Chicago  Subway  Problem 992 

HoETMANN,  I.  Newton.    Customs  Administration  under  the  1913  Tariff 

Act 845 

Hollander,  Jacob  H.    Bond  Investments  by  National  Banks 82 

.    The  Probable  Effects  of  the  New  Currency  Act  on  Bank  Invest-' 

ments 444 

HoxiE,  Robert  F.    Trade  Unionism  in  the  United  States: 

General  Character  and  Types 201 

The  Interpretation  of  Union  Types 464 

Johnson,  Alvin  S.    PubHc  Capitalization  of  the  Inheritance  Tax 160 

Jones,  Chester  Lloyd.    The  Parcel  Post  in  Foreign  Countries 509 

.    Tendencies  in  Economic  Legislation  in  Wisomsin 756 

Laughun,  J.  Laxtrence.    The  Banking  and  Currency  Act  of  1913 

l293,n  405 

Lippincott,  Isaac.    A  History  of  River  Improvement 630 

Mnxis,  H.  A.    Some  Aspects  of  the  Minimiun  Wage 132 

Moulton,  H.  G.    Some  Aspects  of  the  Waterways  Question 239 

Patterson,  E.  M.    Government  Deposits  in  the  National  Banks 79 

Pratt,  Junus  W.    Machinery  in  Sixteenth-Century  English  Industry  775 

Refsell,  Oscar  N.    The  Farmers'  Elevator  Movement I  872,  n  969 

Reynolds,  George  M.    The  Effect  of  the  European  War  on  American 

Credits 925 

Roe,  Richard.    The  United  Shoe  Machinery  Company 43 

Roper,  Daniel  C.    Fundamental  Princq>les  of  Parcel-Post  Adminis- 
tration    526 

SCHATFNER,  ROBERT  C.    The  Relation  of  the  New  Currency  Act  to  the 

Work  of  Commercial  Paper  Houses 358 

Scott,  William  Amasa.    Banking  Reserves  under  the  Federal  Reserve 

Act 332 

Secrist,  Horace.    Constitutional  Restrictions  on  Municipal  Debt 365 

Shelton,  William  A.    A  Waterway  between  Chicago  and  St.  Louis ...  64 
Smith,  Constance.    The  Working  of  the  Trade  Boards  Act  in  Great 

Britain  and  Ireland 605 

Sprague,  O.  M.  W.    Commercial  Paper  and  the  Federal  Reserve  Banks  436 

SwANSON,  Arthur  E.    The  Harvard  Bureau  <^  Business  Research 896 

Taylor,  F.  M.    The  Elasticity  of  Note  Issue  under  the  New  Currency 

Law 453 


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INDEX  ix 

PAOB 

Usher,  Abbott  Pa YSON.    The  Origin  <rf  the  Bill  of  Exchange 566 

Weaver,  S.  Roy.    Canada's  Parcel  Post 536 

.    Fmandng  of  Fanns  m  Saskatchewan 384 

.    Taxation  in  New  France:  A  Study  in  Pioneer  Economics 736 

Willis,  H.  Pareer.    The  Tariflf  of  1913 1  i,  II  105,  m  318 

WoLro,A.B.    Shall  We  Have  an  Introductory  Course  in  Social  Science?  353 

WooDRUiT,  GsoEOB.    Collecting  Checks  under  the  Currency  Law 345 


BOOK  REVIEWS  AND  NOTICES 

Abbot,  Everett  V.    Justice  and  the  Modem  Law 401 

Adams,  Brooks.    The  Theory  <^  Social  Revolutions 194 

Akgell,  Norman.    Arms  and  Industry 714 

Augstin,  Max.    Die  Entwicklung  der  Landwirtschaf  t  in  den  Vereinigten 

Staaten  von  Nordamerika 599 

Bacon-Foster,  Corra.    Patomac  Route  to  the  West 382 

Barjqer,  D.  a.    The  Theory  of  Money 604 

Baudeau,  Nicolas.    Princq>es  de  la  science  morale  et  politique  sur  le 

hixe  et  lois  somptuaires 602 

Beard,  Charles  A.    An  Economic  Interpretation  of  the  Constitution 

of  the  United  States 492 

Bebel,  August.    My  Life 281 

Best,  Harry.    The  Deaf 923 

Blease,  W.  Lyon.    A  Short  History  of  En^ish  Liberalism 704 

BoGART,  Ernest  Ludlow.    Financial  History  of  Ohio 710 

Booth,  Charles.    Industrial  Unrest  and  Trade  Union  Policy 817 

Brissenden,  Paul  F.    The  Launching  of  the  Industrial  Workers  of 

the  World 1027 

Brooks,  Robert  Preston.    The  Agrarian  Revolution  in  Georgia, 

1865-1912 711 

Brown,  William  Garrott.    The  New  Politics 924 

Buck,  Solon  Justus.    The  Granger  Movement 495 

Bunting,  Henry  S.    The  Elementary  Laws  of  Advertising 820 

Cannon,  Ida  M.    Social  Work  in  Hospitals 290 

Carlton,  Frank  Tracy.    The  Industrial  Situation 714 

Clark,  John  Bates.    Social  Justice  without  Socialism 715 

Commons,  John  R.    Labor  and  Administration 285 

Conway,  Thomas,  Jr.,  and  Patterson,  E.  M.    The  Operation  of  the 

New  Bank  Act 811 

Daniels,  John.    In  Freedom's  Birthplace 819 

Davies,  Emel.    The  CoUectivist  State  in  the  Making 1023 

Dehn,  R.  M.  R.    The  German  Cotton  Industry 504 

Deibler,    Frederick   Shipp.    The    Amalgamated    Wood    Workers' 

International  Union  of  America 99 


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X  INDEX 

VAOl 

Du  Bois,  W.  E.  B.    The  Negro  American  Artisan 404 

Dunn,  Samuel  O.    Government  Ownership  of  Railways 396 

Eggleston,  Edwasd.    The  Ultimate  Solution  of  the  American  Negro 

Problem 290 

Elliott,  Howasd.    The  Truth  about  the  Railroads 287 

Emery,  Heney  Ckosby.    Politician,  Party  and  People 506 

EuCKEN,  Walter.    Die  Verbandsbildung  in  der  Seeschiffahrt 1027 

Fairchild,  Henry  Pratt.    Immigration 802 

Fankhauser,  William  C.    A  Financial  History  of  California 1016 

Farnam,  Henry  W.    The  Economic  Utilization  of  History 284 

Fay,  C.  R.    Copartnership  in  Indxistry 712 

First  Annual  Industrial  Directory  of  New  York  State,  191 2 402 

Fischer,  Louis  E.    Economics  of  Interurban  Railways 706 

Fisher,  Irving.    The  Purchasing  Power  of  Money 292 

Gefhart,  W.  F.    Insurance  and  the  State 712 

Geriich,  Fritz.    Geschichte  und  Theorie  des  Kapitalismus 600 

Gibson,  A.  H.    Natural  Sources  of  Energy 714 

GiDE,  Charles,  and  Rist,  Charles.    Histoire  des  doctrines  6conomiques  104 

GiFFEN,  Sir  Robert.    Statistics 279 

Green,  F.  E.    The  Tyranny  of  the  Country  Side 287 

GuYOT,  Yves.    Where  and  Why  Public  Ownership  Has  Failed 592 

Hadley,  Arthur  Twining.    Some  Influences  in  Modem  Philosophic 

Thought 604 

Hagerty,  James  E.    Mercantile  Credit 601 

Hall,  Hubert.    Select  Bibliography  for  English  Mediaeval  Economic 

History 709 

Haney,  Lewis  H.    Business  Organization  and  Combination 276 

Henry,  Robert.    Who  Pa)rs  ? 103 

Hersch,  L.    Le  juif  errant  d'aujourd'hui 94 

HiLLQurr,  Morris,  AND  Ryan,  John  A.   Socialism:  Promise  or  Menace?  1023 

HoBHOUSE,  L.  T.    The  Labour  Movement 200 

Hock,  A.    L'Agriculture  au  Katanga , 104 

HuGHAN,  Jessie  Wallace.    The  Facts  of  Socialism 716 

Industrial  Unrest.    A  Practical  Solution 1028 

Jandus,  William.    Social  Wrongs  and  State  Responsibilities 199 

Japanese  Government  Documents  1867-1889 820 

Jebb,  Richard.    The  Britannic  Question 501 

Johnson,  Stanley  C.    A  History  of  Emigration  from  the  United  King- 
dom to  North  America 920 

Jones,  Robert.    The  Nature  and  First  Principle  of  Taxation 798 

Kaiser,  John  B.    Law,  Legislative  and  Mimicipal  Reference  Libraries  810 

Kales,  Albert  M.    Unpopular  Government  in  the  United  States 1018 

Kautsky,  Karl.    The  High  Cost  of  Living  (translated  by  Austin 

Lewis) 1026 


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INDEX  xi 

PAGE 

K£ii£R,  Hams.    American  Sli9)pmg 597 

Kfj.t.ky,  Florence.    Modem  Industry 922 

Ktmbat.t.,  Dextek  S.    Princ^)les.  of  Industrial  Organization 814 

KntKBBTDE,  F.  B.,  AND  Sterrett,  J.  E.    The  Modem  Trust  Company..  713 

KNOOPy  Douglas.    Outlines  of  Railway  Economics 502 

Labor  Camps  in  Wisconsin 924 

Laidler,  Harry  W.    Boycotts  and  the  Labor  Struggle 715 

Lawson,  W.  R.    British  Railways 800 

Le  Bon,  Gusxave.    The  Psychology  of  Revolution 506 

Levy,  Hermann.    Economic  Liberalism 192 

Lewinski,  Jan  St.    The  Origin  of  Property 289 

LoNGVORD,  J.  H.    The  Evolution  of  New  Japan 820 

LoRiA,  AcHnxE.    The  Economic  Synthesb 699 

LuDWiG,  Ernest.    Consular  Treaty  Rights  and  Conmients  on  the  Most 

Favored  Nation  Clause 603 

Mackmurdo,  a.  H.    Pressing  Questions 286 

Marks,  T.  E.    The  Land  and  the  Conmionwealth 288 

Marshall,  L.  C,  Wright,  C.  W.,  and  Field,  J.  A.    Materials  for  the 

Study  of  Elementary  Economics 277 

MATAR^y  Franz.    Die  Arbdtsmittel:  Maschine,  Apparat,  Weriueug. .  819 

Mathews,  Frederic.    Taxation  and  the  Distribution  of  Wealth 507 

Mead,  Edward  Sherwood.    The  Careful  Investor 603 

Mishnah:  Baba  Meziah,  Order  IV,  Treatise  lU  (translated  by  H.  E. 

Goldin) 104 

MOHEAU.    Recherches  et  considerations  sur  la  population  de  la  France . .  601 

Montgomery,  Louise.  The  American  Girl  in  the  Stockyards  District . .  599 
Moore,  Blaine  Free.    The  Supreme  Court  and  Unconstitutional 

Legislation 283 

Morley,  Edith  J.    Women  Workers  in  Seven  Professions 808 

Newton,  Arthur  Percival.    The  Colonizing  Activities  of  the  English 

Puritans 589 

Osborne,   Algernon  Ashburner.    Speculation  on  the  New  York 

Stock  Exchange 197 

Parce,  Lida.    Economic  Determinism 199 

Parsons,  Elsie  Clews.    The  Old  Fashioned  Woman 289 

Pollock,  Horatio  M.,  and  Morgan,  William  S.     Modem  Cities 291 

Protheroe,  Ernest.    The  Railways  of  the  World 1028 

Questions  of  Public  Policy 402 

Recent  Developments  in  China  (edited  by  George  H.  Blakeslee) 910 

Rew,  R.  H.    An  Agricultural  Faggot 292 

Richmond,  Mary  E.,  and  Hall,  Fred  S.    A  Study  of  Nine  Hundred 

and  Eighty-Five  Widows 404 

Ripley,  William  Z.    Railway  Problems 198 

Ross,  Edward  Alsworih.    The  Old  World  in  the  New 1015 


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adi  INDEX 

PAGE 

RuBiNOW,  I.  M.    Social  Insurance 504 

Sakoloski,  a.  M.    American  Railroad  Economics 595 

Salin,  Edgak.    Die  wirtschaftliche  Entwickluig  von  Alaska 597 

SALZMANNy  L.  F.    English  Industries  of  the  Middle  Ages 708 

ScHLtJTER,  Herman.    Lincoln,  Labor  and  Slavery 713 

ScHULZE,  J.  William.    The  American  Office 604 

Scott,  William  A.    Money 292 

Selden,  G.  C.    Investing  for  Profit 195 

Sheasgreen,  E.  E.    The  Profitable  Wage 1022 

SiMEHOViTCH,  Vladdiir  G.    Marxism  versus  Socialism 190 

Smite,  J.  Russell.    Industrial  and  Commercial  Geography 498 

SoMBAKT,  Werner.    Luxus  und  Kapitalismus 196 

Stowell,  Charles  Jacob.    Studies  in  Trade  Unionism  in  the  Custom 

Tailoring  Trade 291 

Studies  in  Agricultural  Economics  (edited  by  Lewis  H.  Haney) 200 

Taylor,  W.  G.  Langworthy.    The  Credit  System 816 

Todd,  Arthur  James.    The  Primitive  Family  as  an  Educational  Agency  7 13 

Tugan-Baranowsky,  Michael.    Soziale  Theorie  der  Verteilung 193 

Turner,  Edward  Hartley.    The  Repayment  of  Local  and  Other  Loans  913 

Usher,  Roland  G.    Pan-Gennanism 102 

Van  Hise,  Charles  R.    Concentration  and  Control 400 

Veiller,  Lawrence.    A  Model  Housing  Law 919 

VoGT,  P.  L.    A  Rural  Survey  in  Southwestern  Ohio 403 

Wagemann.  Ernst.    Die  Wirtschaftsverfassung  der  Republik  QaSle, . .  1025 

Walling,  William  English.    The  Larger  Aspects  of  Socialism 195 

.    Progressivism  and  After 804 

Webb,  SmNEY,  and  Webb,  Beatrice.    English  Local  Government: 

The  Story  of  the  King's  Highway 92 

Wehberg,  Heinrich.    Die  Bodenreform  im  Lichte  des  humanistischen 

Sozialismus 508 

Wellington,  Raynor  G.    The  Political  and  Sectional  Influence  of  the 

Public  Lands,  1828-1842 923 

Wells,  H.  G.    Social  Forces  in  England  and  America 818 

Whelpley,  James  Davenport.    The  Trade  of  the  World 1024 

WiCEERSHAM,  George  W.    The  Changing  Order 1026 

Williams,  Aneurin.    Co-Partnership  and  Profit-Sharing 403 

Williamson,  James  A.    Maritime  Enterprise  1485-1558 916 

Wills,  Henry  Tarleton.    Scientific  Tariff  Making 198 

Withers,  Hartley.    Money-Changing:   An  Introduction  to  Foreign 

Exchange 399 

Wolff,  Henry  W.    Co-operation  in  Agriculture 103 

WORSFOLD,  W.  Basil.    Reconstruction  of  the  New  Colonies  under  Lord 

Milner 1020 

Young,  £.  Hilton.    Foreign  Companies  and  Other  Corporations 602 


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Volume  XXII 


r  FEB  £3  1914  *) 

Th^^^frnal 

OF 


Number  i 


Political  Economy 

PUBLISHED  BY  THE  UNIVERSITY  OF  CHICAGO 

IN  CO-OPBRATXON  WITH 

THE  WESTERN  ECONOMIC  SOCIETY 


JANUARY   1914 


The  Tariff  of  1913,    I 


The  United  Shoe  Machinery  Company 


H.  Parker  Willis  1 

Richard  Roe        43 


A  Waterway  between  Chicago  and  St  Louis 

William  A.  Sheltan 


Notes 

Govemment  DepotlU  in  the  National  Banks 
Bond  Investments  by  National  Banks 
Washington  Notes: 


£.  M.  Paiienon      79 

Jacob  H.  Hollander      82 

84 


The  New  Banking  Act— Arguments  for  Higher  Railroad  Rates —Railroad 
Securities  and  Financial  Conditions — DeTolopment  of  the  Anti-Trust  Pro- 
gram— ^The  Government  in  Business — Applying  the  Income  Tax 

Book  Reviews  and  Notices 

Webb's  EKelisk  Local  Government:  The  Story  of  the  King*s  Highway  (W.  T.  Jackman),  ga.— 
Hbiscs's  Lejuif  errant  ffaujoiir<Phui:  itttde  sur  V emigration  des  Israelites  de  V Europe  onentale  aux 
EtatS'Unis  de  PAmSrique  du  Nord  (Isaac  A.  Hourwich),  94.— Dsibler's  The  Amalgamated  Wood 
Workers'  IrUematumat  Union  of  America  (Frank  L.  Cariton),OQ.— Usher's  Pan-Germanism  (A.  C 
von  No€),  102. — Wolff's  Co-operation  in  Agriculture,  lot. — Henry's  Who  Pays?  103. — Hock's 
VAgricullure  am  Katanga:  Possibilii4s  el  realilds,  lo^.^Xfishnak:  Baba  Meiiak,  Order  IV,  Treatise 
ill,  104. — GiDB  AND  Rot's  Histoire  des  doctrines  economiqnes,  104. 


64 
79 


92 


THE   UNIVERSITY   OF   CHICAGO   PRESS 
CHICAGO,   ILLINOIS,   U.S.A. 


Agents 

THE  CAMBRIDGE  UNIVERSITY  PRESS,  London  and  Edinbutcm 

KARL  W.  HIRRSEMANN,  Leipzig 

THE  MARUZEN-KABUSHIKI-KAISHA,  Tokyo,  Osaka.  Kyoto 


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The 


Journal  of  Political  Economy 


Ediitdby 
JAMES  ALFRED  HELD  J.  LAURENCE  LAUGHLIN 

ROBERT  FRANKLIN  HOXIE  LEON  CARROLL  MARSHALL 

CHESTER  WHITNEY  WRIGHT 


Advisory  Editors 

(The  Oflloen  ol  the  Western  Econorotc  Society) 

SHAILBR  MATHEWS,  Presidtnt 

GEORGE  E.  VINCENT,  Vtcs-Prendtnt       FRANKLIN  MacVEAGH.  Viet- Preside  fit 

LEON  C  MARSHALL,  Secretary  CHARLES  L.  HXJTCHINSON,  Tremmrer 


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POLITICAL  ECONOMY 


Volume  22  JuflUClYy    19 14  Numbf.r  i 


THE  TARIFF  OF  1913.    I 

On  October  3,  little  more  than  four  years  after  the  Payne- 
Aldrich  bill  became  law,  a  tariff  act,  under  discussion  in  both 
Houses  of  Congress  for  six  months  previously,  was  signed  by  Presi- 
dent Woodrow  Wilson.  The  tariff  of  1913,  now  law,  is  of  pecu- 
liar interest  in  American  economic  history.  For  the  first  time  since 
the  Civil  War,  it  places  the  country  upon  a  footing  of  only  mod- 
«ute  tariff  protection.  It  represents  a  return  to  the  early  and 
historic  policy  of  the  United  States  and  thus  constitutes  a  direct 
and  significant  breach  with  the  industrial  system  slowly  developed 
during  the  half-century  just  ended.  The  last  tariff  revision  pre- 
ceding that  of  1909  was  contained  in  the  Dingley  act  of  1897; 
and  that  in  turn  had  superseded  the  act  of  1894  in  which  an  effort 
had  been  made  to  restore  the  antebellum  low-tariff  policy.  This 
last  effort,  however,  was  not  successful,  and  it  required  only  the 
time  necessary  for  a  change  of  administration  to  force  its  repudia- 
tion. Now,  after  the  lapse  of  a  somewhat  similar  period,  subse- 
quent to  the  revision  of  1909,  the  culmination  of  the  high-tariff 
policy  which  began  with  the  war  has  been  likewise  rejected  by  an 
electorate  which  thus  signified  its  wish  for  a  return  to  the  earlier 
system  of  the  United  States.  A  true  understanding  of  the  act  of 
1913  will  conduce  to  the  proper  comprehension  of  the  next  few 
years  of  American  industrial  development,  and  will  permit  a  cor- 
rect judgment  with  regard  to  the  effect  of  protective  tariffs  upon 
American  trade  and  commerce  in  a  way  that  perhaps  no  other 


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2  JOURNAL  OF  POLITICAL  ECONOMY 

equal  amoimt  of  study  could  do.  It  is  not  only  in  the  direct  work- 
ing of  the  tariff  law  but  in  its  indirect  effects,  perhaps  more  in  the 
latter  than  in  the  fonner,  that  the  relation  of  protective  duties 
to  manufacturing  and  business  is  seen.' 


A  dear  idea  of  the  tariff  act  of  1913  can  be  gained  only  from  a 
comparative  standpoint.  It  is  necessary  to  recognize  the  posi- 
tion in  which  the  coimtry  stood  as  a  result  of  the  last  preceding 
measure  of  the  kind.  The  Payne-Aldrich  law  of  1909  represented, 
as  has  already  been  stated,  the  culmination  of  the  idtra-protective 
policy  inaugurated  during  the  Civil  War,  but  accompanied  by 
a  promise  of  reduction  at  the  dose  of  the  struggle — z,  promise 
later  ignored  while  high  duties  were  continued  imder  the  pressure 
of  debt  Afterward,  when  the  debt  had  been  provided  for,  these 
same  duties  were  maintained  as  a  means  of  sustaining  a  politi- 
cal organization  which  relied  upon  the  contributions  of  special 
interests  for  its  financial  support  and  for  the  means  of  debauching 
the  electorate  and  thereby  keeping  itself  in  authority.  There 
had  been  prior  to  1909  a  period  of  industrial  unrest,  one  of  whose 
forms  was  seen  in  the  demand  for  tariff  legislation  upon  a  revised 
basis  and  with  a  moderate  measure  of  honesty  and  sincerity  as  its 
guiding  prindple.    Boxurbon  politicians  in  Washington,  imable 

» Chronology  oj  the  Tariff  Bill: 
April  7. — ^Introduced  in  House  and  Referred  to  Ways  and  Means  Committee. 
April  7  to  21. — ^Discussed  in  House  Democratic  Caucus. 
April  21. — ^Reintroduced  in  House. 
May  8.— Passed  by  House. 

May  16. — ^Referred  to  Finance  Committee  in  Senate. 
Jime  20. — ^Reported  to  Democratic  Caucus  by  Finance  Committee. 
June  21  to  July  7. — ^Discussed  in  Senate  Democratic  Caucus. 
July  II. — ^Approved  by  Finance  Committee  and  Reported  to  Senate. 
September  6. — Reported  to  Senate  from  Committee  of  the  Whole. 
September  9. — ^Passed  by  Senate. 

S^tember  10  to  27. — ^Discussed  in  Conference  Committee  of  the  Two  Houses. 
September  29. — ^Reported  to  House  from  Conference  Committee. 
October  2. — Senate  Adopted  Report  of  Conference  Committee,  Receded  from  Clarke 

Amendment  and  Rejected  Underwood  Amendment. 
October  3. — ^House  Adopted  Conference  Report 
October  3.— President  Wilson  Signed  the  Bill  9:00  pjc 


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THE  TARIFF  OP  igij  3 

to  perceive  symptoms  of  public  uneasiness  through  the  hazy 
atmosphere  by  which  they  were  surrounded,  regarded  this  agita- 
tion as  the  work  of  scheming  newspaper  writers  and  intriguing 
politicians  of  the  younger  generation  who  wished  to  take  their 
places  and  who  were  only  anxious  to  find  an  issue  upon  which  to 
defeat  them.  Reasoning  in  this  way,  and  deprived  of  perspective 
through  long  association  with  the  tariff  as  a  means  of  political 
spoliation,  they  gained  the  notion  that  an  imitation  of  tariff  revi- 
sion would  serve  the  purpose  of  satisfsdng  the  public.  Sudi  an 
imitation  was  put  forward  in  the  first  draft  of  the  Payne  law. 
Before  the  Payne  law,  however,  had  received  the  sanction  of  the 
Senate  it  had  been  gradually  developed  into  a  distortion  and  ex- 
aggeration of  the  already  existing  system  of  protection,  in  whidi 
every  vicious  element  was  retained  while  every  beneficial  section 
was  modified  into  conformity  with  the  objectionable  elements  in  the 
existing  law,  or  was  wholly  eliminated.  The  level  of  rates  estab- 
lished by  the  Payne-Aldrich  law  was,  figured  upon  any  rational 
basis,  higher  than  that  established  by  its  predecessor.  Surrepti- 
tious protection,  amoimting  to  prohibition  in  many  cases,  was, 
moreover,  brought  about  by  the  introduction  of  cunning  jokers 
devised  for  the  purpose  of  giving  exclusive  profits  to  small  groups 
of  men  or  even  to  individuals.  It  was  not  strange,  therefore,  that, 
in  spite  of  a  general  absolution  issued  to  the  framers  of  the  act  of 
1909  by  President  Taft  (who,  shortly  after  he  had  himself  afl^ed 
his  signature,  described  it  as  the  best  measure  ever  adopted),  the 
public  at  large  persisted  in  regarding  it  as  an  enactment  tending 
to  aggravate  the  evils  already  complained  of  and  to  alleviate 
none  of  the  bad  consequences  or  maladjustments  resulting  from 
excessive  rates.  The  first  distinct  symptoms  of  public  dissatis- 
faction were  made  evident  in  the  congressional  elections  of  1910 
at  which  a  Democratic  majority  in  the  Hoiise  of  Representatives 
was  established.  It  has  been  customary  to  assert,  within  the  j>ast 
few  months,  that  the  presidential  election  of  191 2  in  no  way  turned 
upon  the  tariff.  That  such  is  not  the  case  may  be  gathered  from 
the  fact  that  the  tariff  was  practically  the  only  issue  of  national 
significance  xurgently  before  the  country  at  the  congressional  elec- 
tions already  referred  to,  while  during  the  two  years  1911-12  the 


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4  JOURNAL  OP  POLITICAL  ECONOMY 

principal  work  of  the  Hoxise  of  Representatives  had  consisted  of 
attempts  to  secure  tariff  revision,  and  the  principal  staple  of  dis- 
cussion had  been  the  iniquities  of  the  Payne-Aldrich  tariff  law. 
No  dispassionate  observer  can  question  that  the  tariff  issue  was  the 
main  problem  presented  to  the  electorate,  not  only  in  the  congres- 
sional elections  inunediately  succeeding  the  passage  of  the  law  of 
1909,  but  in  the  subsequent  presidential  election  which  followed 
two  years  later.  Essentially,  therefore,  the  tariff  act  of  1913  is 
to  be  contrasted  with  that  of  1909,  not  merely  from  the  technical 
standpoint  of  revenues  and  rates  of  duty,  but  from  that  of  its 
capacity  and  success  in  meeting  the  actual  tariff  philosophy  of 
the  average  voter  of  the  coimtry.  How  has  the  tariff  of  1913 
fulfilled  the  demands  of  the  public  for  a  more  moderate  biurden  of 
taxation  upon  the  average  man?  How  far  has  it  succeeded  in 
redistributing  the  load  of  protection  in  a  more  equitable  manner  ? 
Will  it  prove  effectual  in  cutting  off  the  special  privileges  and  excep- 
tional protection  which  had  been  extended  to  the  "little  brothers 
of  the  tariff"  who,  through  campaign  contributions,  personal 
influence,  and  even,  it  would  seem,  by  sheer  bribery  and  corruption, 
had  succeeded  in  inserting  sections  and  phrases  intended  to  divert 
a  part  of  the  stream  of  public  and  social  wealth  into  their  own 
coffers  ?  In  answering  these  questions,  it  is  well  to  take  note,  first 
of  all,  of  the  general  character  and  scope  of  the  work  done.  A  de- 
scriptive review  of  the  two  measures  from  a  comparative  standpoint 
will  accomplish  this  purpose. 

n 

It  should  be  observed  first  of  all  that  in  certain  particulars — 
and  these  important  ones — the  act  of  1913  makes  but  little  change 
in  the  provisions  of  its  predecessor.  The  tobacco  and  liquor 
schedides  which  had  been  given  a  material  advance  in  1909  remain, 
to  all  intents  and  purposes,  imtouched.  The  customs  administra- 
tive act,  while  slightly  modified  as  compared  with  that  in  force 
imder  the  measure  of  1909,  remains  in  its  essential  outlines  the  same. 
The  silk  schedule,  although  altered  in  its  method  of  presentation, 
continues  upon  about  as  a  high  basis  as  before,  and  will  afford  as  large 
a  measure  of  protection  as  in  the  past,  with  no  considerable  change 


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THE  TARIFF  OF  1913 


TAK.EI 
OncPAKATivB  STAmaMT  OF  Impokts,  Rxvkmues,  and  AvxRAOi  AD  Valokxm  Rates  bt  Schiduix 
DHon  TBB  Law  of  igog  AMD  (EsnuATXD)  UMDBft  iHK  Nxw  Mkasubz  as  Passed  bt  the  House 

AMD  AS  AKEMDBD  BY  THE  SENATE  FOl  A  FULL  YEAK  AFTEK  AIX  ITS  PROVISXOMS  HaVE  BeEN  IN 

Fuu  Ofeeation 


Imfokts 
umdeeLaw 

OF  IQOQ 

(X9") 


Estxmatbd  Imfoets 


Under 
House  Bill 


Under 
Senate  Bill 


Fkee  Listed 


House 


House  and 
Senate 


Schedule  A 
(Chemicals,  etc) 

Imposts 

Duties 

Avenge  rate  ol  duty  (per  cent) 

Schedule  B 
(Earths  and  Earthenware,  etc) 

Imports 

Duties 

Average  rate  ol  duty  (per  cent) 

Schedule  C 

(Metals,  etc) 

In^Mits. 

Duties 

Avenge  nte  ol  duty  (per  cent) 

Schedule  D 

(Wood,  etc) 

Imports 

Duties 

Average  nte  ol  duty  (per  cent) 

Schedule  £ 

(Sugar,  etc) 

Imports 

Duties 

Avenge  rate  of  duty  (per  cent) 

Schedule  F 
(Tobacco) 

Imports 

Duties 

Avenge  rate  of  duty  (per  cent) 

Schedule  G 
(Agricultural  Products,  etc) 

Imports 

Duties 

Average  nte  of  duty  (per  cent) 

Schedule  H 
(Spirits,  Wines,  etc) 

Imports 

Duties 

Average  rate  ol  duty  (ptf  cent) 


63.877.494 
19. 39 


$  39,489.3SX 

xi.a73.03a 

SO.xa 


$  50,649.306 

17.731 .383 

35  ox 


$  a4.a53.765 
3P4X,8oo 
xa.54 


I  65.9a5.286  $  66,343.320 

xa,48640xx 

x8.8a 


^5.925.786 

18,987387 

X9.70 


•105.743350 

50,95X.X99 

48.30 


$  3X,xx6,oa7 

a5,57x.5oo 

8a.  x8 


$X38/)8a,x6a 

34.037.9a4 

34.64 


$  3o,4ax,978 


I  38,334.985 
9,309,633 
33.50 


I  76,597.a3a 
16,353,475 

31.33 


$  35,030,X73 

898.435 
3.59 


$111,865,735 

40,196,405 

35.93 


$  37379.984 

9/)00,757 
33.38 


$  76,651,333 

14,098,370 

X8.38 


$  85,030,173 
898,495 
3.59 


$xxi365.7a5 

40,196,405 

35.93 


3.435337 


xo8,o8x 


6,567/»33 


x8388,i59 


$    73o8,x88 


$    1,198,483 


$  13,430,737 


$  x8388,X59 


I  30.s95.300 
84.99 


%  30.595,300 

36,001,650* 

84.99 


Schedule  I 
(O>tton  Msmifsftures) 

imposts 

Duties 

Average  nte  of  duty  (p^  cent) 

Schedule  J 
(Flax,  Hemp,  etc) 

Imports 

Duties 

Average  nte  of  duty  (per  cent) 


$  34,688,535 
57,i 
45. 


xx,357,a35 


$  63,964,947 

303x5.330 

33.06 


$X43,623/)8i 

31,442330 

15.03 


$  3X«xx/>66 

18,937,140 

86.43 


$  34.026,500 

10,368,983 

30.47 


$  6X399.0SX 
i6,X76.747 

36.33 


?i«1^ 


$143,766, 
21  *' 

X5.3X 


!• 


1933x363 


$  35.37X,434 


$  8X,9XX/>66 

i8,937.X40 

86.43 


$  34.351.500 

io,o69/>75 

39.40 


$  68,457.371 
9,789.6a6 
X5.67 


t- 


370,741 


$  36,939,783 


*Tbe  rates  in  this  schedule  remaining  the  same  as  under  the  House  bill. and  in  the  law  of  1909,  the 
increase  in  the  estimated  duties  as  also  the  average  ad  valorem  rate  is  due  solely  to  variations  in  the  value 
ol  importations. 


Digitized  by 


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JOURNAL  OP  POUTICAL  ECONOMY 

TABLE  I— CmUmmI 


Impokts 

UMDnLAW 

OF  igo9 
(iQxa) 


ESTXMATBD  ImFOETS 


Under 
House  Bill 


Under 
Senate  Bill 


FUCB  LlSTID  BY — 


Home 


House  and 
Senate 


SCHBDULX  K 

(Wool»etc) 

Inpofts • 

Duties 

Avenge  rate  ol  duty  (per  cent) 

SCHBDUIB  L 

(SOk,  ete.) 

Imports 

Duties 

Average  rate  ol  duty  (per  cent) 

SOBDUU  M 

(Pulp,  Paper,  etc) 

Imports 

Duties 

Average  rate  ol  duty  (per  cent) 

SOBDUU  N 

(Sundries) 

Imports 

Duties 

Average  rate  of  duty  (per  cent) 

Total  importe 

Total  duties 

Average  rate  ol  duty  (per  cent) 


$  48^6x^74 
37i07a,xx6 


SO.  6s 


SX.40 


$x87»57|>506 

S6.S7«W 

30.  XX 


$  96,X90/)00 

xa,774iOOo 
13. a9 


$  s8,o6o,6oo 


%  a4,06o,X4X 
3,o6x,330 
xs.s6 


56,988,179 
Sa.04 


$  96,X90/)00 

12,548.000 
X3.05 


I  s8,OA9,3io 

12,360,465 

44.06 


$  24,736,X4X 
S.X45.955 
X2.72 


$X79.a543o6 

56,39X,386 

3X.46 


)• 


33.309^x5 


I  33.309.4x5 


xx,4s6,84X 


$  xx,4a6,84X 


9,s82,559  $  xo/)oo,2ao 


$827,078,744 

304399.300 

36.86 


8935.986,436 

a57.583.768 

a7.84 


1928,91  X. 675 

247.780.723 

26.67 


!• 


xo3,0O0,3a7 


$  147.367.a38 


in  the  distribution  of  the  duties  among  the  several  items.  At 
many  other  points  in  the  new  act,  the  rates  of  duty  are  as  high  as 
heretofore,  and  at  still  others  they  are  continued  at  a  point  high 
enough  to  be  either  prohibitive  or  sufficiently  protective  to  satisfy 
the  most  exacting  advocate  of  tariff  legislation. 

In  certain  fundamental  schedules,  however,  the  new  act  con- 
stitutes a  striking  innovation,  not  merely  upon  the  act  of  1909, 
but  upon  all  of  its  predecessors  since  the  Civil  War.  For  the  first 
time  the  cotton,  hemp  and  flax,  and  woolen  schedules  are  reduced 
to  a  competitive  footing,  and  for  the  first  time  in  more  than  twenty 
years  sugar  returns  to  a  free  basis.  For  the  first  time,  too.  Congress 
has  had  the  courage  to  remove  some  of  the  pseudo-protection 
granted  to  the  American  farmer  and  to  discontinue  the  dishonest 
pretense  of  offsetting  the  high  rates  which  the  farmer  has  had  to 
pay  in  enhanced  prices  for  clothing  and  implements  by  an  alleged 
protection  of  his  commodities  against  foreign  interference.  In 
the  following  table  is  given  a  comparative  view  of  the  general  rates 
of  duty  imposed  by  the  schedules  of  the  acts  of  1909  and  1913 
respectively,  the  comparisons  being,  as  is  invariably  the  case  with 


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THE  TARIFF  OF  1913 


TABLE  n 

SOBDUU  A 


Old 


Taziffolzgog 


Tariff  of  1913 


Acid»— 

Bocadc 

Gallic 

Lactic 

OnUc 

Ammonia— Sulphate  ol 

Coal  tar  cobn  or  djres 

CoOodion,  and  all  corapoonds  ol  pyraiyiin  . 


Solphnric 

NitiwM.  tpixitt  of. 
due— 


i  cents  per  pottod. 
cents  per  pound. 
3  cents  per  pound, 
a  cents  per  pound. 

Free 

30  per  cent 

45  cents  per  pound. 

8  cents  per  pound, 
so  cents  per  pound. 


Valued  not  above  10  cents  per  pound 

Vahiad  abore  zo  cents  ana  not  above  sz  < 


per  pound. 

mtramarine,  dry .  in  palp,  or  mixed  with  water  , 

Lead:  Acetate  ol— 

White 

Brown,  gray,  or  ycUow 

Potash- 
Bichromate  and  chromate  of 

Nitrate  d,  or  taltpeter,  refined 

Alcoholic  perfumery 


I  cent  per  pound 
6  cents  per  pound 
z|  cents  per  pound 
If  cents  per  pound 

zo  per  cent 

30  per  cent 

zs  per  cent 

4  cents  per  pound 
so  per  cent 


Soap— Fancy. 

toilet,  mduding 

Soda— Bichromate  and  chromate  of, 


and  an  descriptions  of 


95  per  cent 

3  cents  per  pound. . ., 

3  cents  per  pound 

3  cents  per  pound 

si  cents  per  pound. .. 
i  cent  per  pound..... 
60  cents  per  pound  and  50 
percent 


5oper 
zfoei 


cents  per  poimd. 


Z5  per  cent 
Z5  per  cent 

z|  cents  per  pound 
z  cent  per  pound 


z  cent  per  ^ . 
$7.00  per  ton 
40caitsper 
6oper< 

<t0  4oper 
fcentper 


SOBDULB  B 


"ilmm 

Plaster  rock  or 

Pomice  stone— Unmanufactured 
Asphaltttm  and  bitumenr-Cnide,  not  dried  or  ad- 
vanced  

Mica — ^Unmanofactared,  or  xough-trimmed  only. . 

Cylinder,  crown,  and  onnmon  window  glass,  un- 
polished- 

Not  exceeding  zo  by  Z5  inches 

Above  zo  by  z5  inches  and  not  erceeding  z6  by 
34  inches 

Above  z6  by  24  inches  and  not  exceeding  24  by 
30" 


5  cents  per  too  pounds. 

30  cents  per  ton     

i  cent  per  pound 

$z. 50  per  ton.......... 

5  cents  per  pound  and  2 
percent 


z|  cents  per  pound. 
z}  cents  per  pound, 
accents  per  pound. 


5  per  cent 

zo  per  cent 

5  per  cent 

50  cents  per  ton 
Z5  per  cent  and  30  per 
cent 


z  cent  per  pound 
z|  cents  per  pound 


SCHBDUIX  C 


Iron  ore,  inchiding  maiusaniferous  iron  ore,  and  the 
droes  ox  resaaoum  uom  burnt  pyrites 

Ferro-manganese 

Spiegeleisen 

Scrap  iron  and  steel,  waste  or  refuae— Iron,  wrought 
and  cast 

Beams,  girders,  joists,  angles,  channels,  and  build- 
ing forms  and  all  other  structural  shapes  of 
iron  or  sted 

Anchors,  or  parts  of 

Bars  or  rails  for  railways— Steel 

Tinplates— 
Luhter  than  63  pounds  per  zoo  square  feet. . . 

Steel  ingots,  cooed  ingots,  blooms  and  slabs;  die 
bbm  or  blanks;  billets  and  bars  and  tapered 
orbevdedbazs 


Round  iron  or  steel  wire:  Value  4  cents  or  less  per 
pound-" 
Smaller  than  No.  Z3  and  not  smaller  than  No.  z6 

wire  gauge 

Smaller  than  No.  z6  wire  gauge 


Z5  cents  per  ton  . 
$3. 50  per  ton... 
#3.50  per  ton... 

$z. 00  per  ton... 


3/zo  cent  per  pound . . 

z  cent  per  pound 

$3.93  per  ton 

z  3/zo  cents  per  pound . 
z  3/zo  cents  per  pound. 


per 


cent-4  i 
pound. 


z|  cents  per  pound, 
z}  cents  per  pound. 


Free 
Free 
Free 

zo  per  cent 


zo  per  cent 
za  percent 
Free 

Z5  per  cent 
Z5  per  cent 


Free 


Z5  percent 
Z5  percent 


Digitized  by 


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JOURNAL  OP  POLITICAL  ECONOMY 


TABLE  ll—ConUnntd 


Old  ClaasificaUon 


Tariff  of  X900 


Tariff  of  19x3 


Anvils 

Adefl — Valued  at  not  more  than  6  cents  per  pound 

Cast-iron  pipe  of  every  description 

Boiler  tubes 

Cutlery— 

Rasors,  finishcid,  valued  at  leas  than  $x  per  dosen 

Knives,  forks,  or  steeb,  imported  without  handles 
Files*  file  blanks.  rasps-~ 

2\  inches  in  length  and  under 

Over  4I  and  under  7  inches  in  length 

Nails,  tfttkes.  and  tacks— of  iron  or  steel 

Saws— Hand,  back,  and  other  saws 

Aluminum— In  crude  form  (aluminum  scrap),  and 

alloys 

Base  bullion 

Pigs  and  bars  (dross) 

Ferrosilicon 

Watch  movements — 

Having  not  more  than  7  jewels 

Having  more  than  xx  and  not  more  than  i$ 

jewels 

(^■ft^Fnifff  (sine  ore) 

Zinc — In  blocks  or  pigs 

Cash  registen,  linotype  and  all  typesetting  ma- 
.  chines,  machine  tools,  printing  presses,  sewing 
machines,  typewriters,  and  alTsteam  engines 


x|  cents  per  pound.. 

I  cent  per  pound 

I  cent  per  pound 

X  cent  per  pound  up. 


35  per  cent. 
45  percent. 


35  cents  per  dosen  .... 

62)  cents  per  dosen  . . . 

4/xo  cent  per  pound . 

35  percent 


7  cents  per  pound., 
si  cents  per  pound. 


xo  per  cent 
xo  per  cent 
so  per  cent 

35  per  cent 
as  per  cent 

35  percent 

M  per  cent 
ee 
X3  percent 

35  per  cent 
35  per  cent 


$5.00  per  ton. 
70 


Ix. 85  each 

133.40  per  ton 

X I  cents  per  pound. 


30  per  cent. 


X5  per  cent 

30  per  cent 

30  per  cent 
xo  per  cent 
X5  percent 

Free— X5  per  cent 


SOBDUU  D 


Lumber:   Boards^  planks,  deab,  and  other  saw 
lumber,  all  kinds 


Paving  posts,  railroad  ties,  and  telephone  poles  . . 
Osier  or  willows-Prepared  for  basket  makers'  use. 


50   cents   to  $x.95    per 

thousand  feet 

xo  per  cent 

35  per  cent 


Free 

xo  per  cent 

xo  per  cent 


SOBDULB  E 


Sugar, 
Not 


Dutch  standard  in  color: 
Tot  above  No.  x6,  tank  bottoms,  sirups  of  cane 
juice,  mdada,  concentrated  mdada,  concrete 
and  ooDoentrated  molasses,  testing  by  the 
polarisoope — 
Above  No.  x6,  and  all  sugar  that  has  gone 
through  a  process  d  refining 


Saccharine. 


7x  of  X  cent  per  pound 
if  not  over  75  degrees, 
plus  .ooa6  cent  per 
pound  additional  for 
every  additional  de- 
gree. Ultimately  free. 

65  cents  per  pound 


SCHBDULX  G 


Live  animals— An  other,  n.s.pi 

Breadstu£Es  and  farinaceous  substances— 

Bariey 

OaU 

Wheat 

Potatoes 

Fruits- 
Figs 

Grapes  in  barrels  or  other  packages 

Lemons 

Meat  products- 
Bacon  and  hams 

Beef,  mutton,  pork,  lard 

Cocoa,  powdered,  unsweetened 

Salt,  in  bulk 

Starch 

Dextrine 

Sage 


30  per  cent 

30  cents  per  busbd. 
x5  cents  per  bushel. 
35  cents  per  bushel. 


3i  cents  per  pound 

35  cents  per  cubic  foot. . 
i\  cents  per  pound 

4  cents  per  pound 

\\  cents  per  pound 

5  cents  per  pound 

7  cents  per  xoo  pounds. 

X  cent  per  pound 

i\  cents  per  pound 

X  cent  per  pound 


xo  per  cent 

x|  cents  per  bushel 
6  cents  per  bushel 
Free 


a  cents  per  pound 
35  cents  per  cubic  foot 
i  cent  per  pound 

Free 
Free 

8  per  cent 
Free 

t  cent  per  pound 
cent  per  pound 
cent  per  pound 


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THE  TARIFF  OF  1913 

TABLE  n—Camtkmtd 

SOBDULB  I 


Old  OMdficatioB 


Tariff  ol  1909 


Tariff  of  19x3 


Cotton  thread  and  carded  yam: 

Not  colored,  bleached,  dyed,  or  advanced— 

Numbers  up  to  and  jnrhwing  No.  15 

No.  35 

No.  40 

No.  X40 

Colored,  bleached,  (fared,  combed,  or  advanced 
borond  the  ooodHion  ol  sinclca  by  groaping 
or  twisting  two  or  more  linj^  jrama  tofether — 

Numben  up  to  and  inrJwting  No.  so 

No.  a4 

No.  30 

No.  36 

No.  40 

Plain  doth: 

Not  rtTffiding  xoo  threads  to  the  scioare  inch, 
counting  the  warp  and  filling — 
Dyed,  colored,  stained,  painted,  or  printed — 

Valued  at  over  xs  cents  per  square  yard 

Bleached— Valued  at  over  xx  cents  per  square  yard 
Dyed,  colored,  stained,  painted,  or  printed— 

Vanted  at  over  xa)  cents  per  square  yard. . . 
Not  bleached,  dyed,  colored,  stafaied,  painted,  or 
printed— Valued  at  over  xo  cents  per  square 
yard 


Cotton  doth  m  which  other  than  the  ordinaxv  warp 
and  fiUinc  threads  have  been  introduced  in  the 
process  ol  weaving  to  form  a  figure: 

Bleached— 

Kiffyding  50  and  not  nrfeding  xoo  threads  to  the 
square  inch,  counting  the  warp  and  filling — 

Not  bleached,  dyed,  colored,  stained,  painted,  or 
printed — 

Not  nrfffding  6  square  yards  to  the  pound — 
Valued  at  more  than  7  cents  per  square  yaid. . . 

Valued  at  not  more  than  7  cents  per  square  yard 

Bleached— 

Dyed,  colored,  stained,  painted,  or  printed — 
Not  wceeding  6  square  yards  to  the  pound- 
Valued  at  more  than  7  cents  per  square  yard 

Not  exceeding  xoo  threads  to  the  square  inch, 
counting  the  warp  and  filling — 

Not  bleached,  dyed,  colored,  stained,  painted,  or 
printed— Valued  at  over  7  cents  per  square 
yard 


Sleeve 


Plushes,  velvets,  etc. 

Curtains,  etc 

Hose  and  haU-hose.. 

Underwear 


3i  cents  per  pound 

7  cents  per  pound. 

8  cents  per  pound. 
38  cei^  per  pound . 

6  cents  per  pound. 
6  cents  per  pound. 
7|  cents  per  pound 
81  cents  per  pound 
9i  cents  per  pound 


8  cents  per  square  jrard. . 
6i  cents  per  square  yard 

7  cents  per  square  yard. 
5i  cents  per  square  yaid 


s|    cents+3   cents   per 

square  yard 
x|  cents+x  cent  per 

square  yard 


3}  cents  +  2  cents  per 
square  yard 


S\  cents  +  3  cents  per 
square  yard 

30  per  cent 

45  per  cent  up 

so  per  cent 

47i  per  cent  up 

50  per  cent 

70  cents  per  dosen+x5 
per  cent  up 

60  cents  per  dosen+x5 
per  cent  up 


Nos.   x-9  indusive,  s 

percent 
Nos.  X0-X9  inchisive,  7) 

percent 
Nos.  ao-39  indusive,  xo 

percent 
Nos.  40-49  inchisive,  15 

percent 
Nos.  50-59  inclusive, 

X7i  per  cent 
Nos.  60-99  inclusive,  so 

percent 
Nos.  xoo  and  over,  35 

percent 


Cloth  of  Yams— 
Not  over  No.  9,  7)  per 

cent 
Nos.  9-X9,  xo  per  cent 
Nos.  X9-39,  laf  percent 
Nos.  39-49. 17*  percent 
Nos.  49-59>  M  per  cent 
Nos.  59-^0,  S3i  percent 
Nos.  79-99.  35  per  cent 
Exceeding  No.  99. 37) 

percent 

(si  per  cent  added 
when  cloth  bleached* 
dyed,  etc.) 


30  per  cent 
30  per  cent 
30  per  cent 
40  per  cent 
35  percent 

30-50  per  cent 

30  per  cent 


SCHKDUU  J 


Flax 

Ilffnp 

Cables  and  cordage 
Floor  mattings.... 
CarpeU 

Hose 


X  cent  per  pound 

$33.50  per  ton 

3  cents  per  pound 

3i  cents  per  square  yard 

4  cents  per  square  ys[rd+ 

30  per  cent  up 

5  cents  per  pound 


Free 
Free 

4  cent  pa  pound  up 
sioentspersquareyard 
30  per  cent 

7  cents  per  pound 


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lO 


JOURNAL  OP  POUTICAL  ECONOMY 


Old  Chadfication 

Tariff  of  igoo 

Tariff  of  1913 

Unolmim 

8  cents  per  square  yaid+ 

15  per  oeat  up 
70  per  cent 

Embroideries,  etc 

so  to  35  per  oeat 
60  per  cent 

Baniiif 

'6-'xo   cents   per  scioare 
yard 

Free 

HAiidkefcliie& 

55  per  cent 

35  and  40  per  cent 

Schedule  K 


Wool.. 
Tops.. 

Yams. 


Dress  goods 

Oothinff 

Webbings, etc.. . 
Bnisseb  carpets. 


XI.  xaand  7  cents 

St  times  wool  rate+30 

per  cent  up 

s|  times  wool  rate+35 

per  cent  ^sd 

s   times  wool  rate+30 

per  cent  up 

'7  cents  per  square  yard 

up 

4  times  wool  rate+60 

percent 

50  cents  per  pound+60 

percent 


Fne 

8  per  cent 
18  per  cent 
95  and  30  per  cent 
35  per  cent 
35  percent 
35  per  cent 


SCBEDUU  L 


fabrics. 


Spuna 
vSvet 
Handke 

Ribbons,  etc 

Chiffons,  knit  goods,  etc. 


sand^le 
:erchim.. 


^5  cents  per  pound  up 
|x .  50  per  pound  up . . . 

50  per  cent  up 

fo  per  cent 

percent 


IS 


35  per  cent 

50  per  cent 

40  and  50  per  cent 

45  percent 

50  per  cent 


Schedule  M 


Wood  pulp 

Print  paper,  under  si  cents. 
Print  paper,  over  2\  cents.. . 
Copsring  paper 


x-ia  cents  pa  pound. . . 
3-x6  cents  per  pound. . . 

\  cent  per  pound 

5  cents  per  pound+x5 
per  cent  up 


Free 
Free 
xa  per  cent 

30  per  cent 


Schedule  N 


Brushes,  brooms,  etc. 

Coal 

Gunpowder 

Matches 

Pearls 

Gloves 

Paintings 

Pencils 


Umbrellas. 


40  per  cent 

45  cents  per  ton 

a-4  cents  per  pound 

6  cents  per  gross 

90  per  cent 

$1 .  35  per  dosen  up 

X5  percent 

45  cents  per  groas+35  per 
cent  up 

50  per  cent 


X5  per  cent  up 

Free 

Free 

25  per  cent 

ao  per  cent 

$x  per  dozen  up 

X5  per  cent 

35  percent 
35  per  cent 


such  figures,  somewhat  misleading  in  view  of  the  difficulty  of  obtain- 
ing any  average  that  has  a  |;enuine  significance  when  it  covers  a 
great  ^variety  of  non-related  commodities.  The  figures,  however, 
have  their  significance  in  that  they  afford  a  comparative  basis  of 


Digitized  by 


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THE  TARIFF  OF  IQIJ  ii 

judgment  founded  upon  the  same  criteria  that  are  ordinarily 
employed  in  forming  an  estimate  of  the  relative  burden  of  different 
tariffs. 

An  accurate  idea  of  the  true  nature  of  the  changes  really  made 
by  the  new  tariff  cannot,  however,  be  obtained  through  a  study 
of  general  averages,  but  can  be  reached  only  through  comparisons 
of  the  amount  and  form  of  the  duties  levied  upon  representative 
commodities  chosen  with  a  view  to  showing  the  actual  operation 
of  the  schedules.  Such  a  comparison  of  selected  articles  has  been 
made  in  Table  II.' 

ni 

A  true  imderstanding  of  the  effect  of  the  act  of  1913  can,  as  al- 
ready said,  be  secured  only  by  detailed  study  of  its  leading  provi- 
sions; and  a  beginning  may  be  made  with  what  was  perhaps  the  most 
sharply  criticized  and  most  tuisatisfactory  of  the  provisions  of  the 
Pajnae-Aldrich  law — the  wool  and  woolen  schedule.  The  Pajnae- 
Aldrich  law,  indeed,  had  altered  in  three  very  minor  and  wholly 
unessential  particulars  only  the  wool  and  woolen  schedule  of  the 
Dingley  act  of  1897.  Like  the  latter,  the  Payne-Aldrich  act  based 
its  tariff  treatment  of  wool  upon  a  classification  of  the  raw  product 
in  three  groups,  the  duty  running  to  12  cents  per  pound  on  class-i 
wool,  unwashed.  Starting  from  this  fundamental  impost  upon 
the  raw  material,  the  Dingley  and  Pajnae-Aldrich  acts  proceeded 
to  the  imposition  of  tariff  rates  upon  every  later  product  into  which 
the  raw  wool  might  be  developed,  passing  through  the  intermediate 
stages  of  tops,  yams,  knit  goods,  cloths,  carpets,  and  the  like. 
Two  radical  and  fundamental  objections  have  always  been  made  to 
this  schedule:  (i)  it  fixed  the  rates  of  duty  upon  the  derivative 
products  of  wool  too  high  imder  the  existing  conditions  of  manu- 
facture, in  any  event;  and  (2)  it  added  indefensible  and  imjust 
** compensatory  duties"  resulting  in  a  combined  specific  and  ad 

'  Many  items  have  been  omitted  where  the  facts  could  not  be  dearly  stated. 
The  classification  given  in  the  left-hand  column  b,  moreover,  based  in  general  upon 
the  language  used  in  the  old  tariff  (act  of  1909).  In  not  a  few  instances,  this  varies, 
in  detail  from  the  language  used  in  the  new  act.  It  b  necessarily  out  of  the  question 
to  contrast  the  language  of  the  two  acts  in  a  tabular  presentation.  Reference  should 
in  each  case  be  had  therefore  to  the  appropriate  paragraphs  of  the  old  and  new  acts. 
The  list,  however,  accurately  portrays  the  character  of  the  new  tariff. 


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12  JOURNAL  OP  POLITICAL  ECONOMY 

valorem  rate,  the  compensatory  duty  being  nominally  intended 
to  make  up  to  the  manufactiirer  for  the  wool  lost  in  the  process  of 
production  upon  which  he  had  paid  a  tariff  when  imported  in  the 
unwashed  state.  These  compensatory  duties  were  far  larger  than 
was  necessary  to  accomplish  their  object.  It  has  long  been  the 
feeUng  of  tariff  reformers  that  no  genuine  improvement  in  the 
schedide  coidd  be  attained  without  placing  wool  on  a  free  basis. 

The  beginnings  of  the  effort  to  revise  the  wool  schedtde  are 
to  be  foimd  in  the  first  session  of  the  62d  Congress  when  the  Ways 
and  Means  Committee,  then  first  organized  under  Democratic 
control,  attempted  to  hit  upon  a  plan  for  putting  the  schedide  into 
a  shape  that  woidd  eliminate  the  principal  basis  of  complaint. 
This  committee  embodied  its  proposals  in  a  bill  which  related 
solely  to  wool  and  woolens.'  There  had  been  a  good  deal  of  cant 
about  the  necessity  of  revising  the  tariff  "schedide  by  schedide," 
and  the  decision  to  adopt  that  mode  of  dealing  with  this  problem 
was  no  doubt  partly  in  deference  to  the  general  point  of  view  which 
had  thus  been  developed.  The  action  was,  however,  partly  a 
desire  to  test  the  sentiment  of  the  community  in  regard  to  the  tariff 
by  putting  forward  a  sample  of  the  proposed  revision  in  a  form  that 
coidd  be  appreciated  by  the  public  at  large  through  its  freedom 
from  technical  detail  and  complexity.  The  bill  referred  to,  intro- 
duced by  Chairman  Underwood  of  the  Ways  and  Means  Committee, 
and  hence  called  the  Underwood  bill,  did  not,  however,  go  to  the 
extreme  that  had  been  demanded  by  would-be  reformers  of  the 
duty  on  wool  and  woolens.  It  retained  a  tariff  of  20  per  cent  on 
raw  wool,  and,  starting  with  that  as  a  basis,  it  gradually  raised  the 
rates  on  woolen  fabrics  up  to  about  55  per  cent  as  a  maximum. 
In  other  words,  it  allowed  a  margin  of  35  per  cent  protection 
between  the  duty  on  the  crude  wool  and  the  highest  grade  of 
manufactured  articles.  This  bill  was  reported  by  the  Ways  and 
Means  Committee,  was  subjected  to  the  verdict  of  the  Demo- 
cratic caucus  in  the  House  of  Representatives,  was  there  approved, 
and  was  adopted  on  June  20,  191 1.  It  then  went  to  the  Senate 
where  the  rate  on  raw  material  was  raised  to  35  per  cent,  while 
rates  on  manufactured  goods  were  similarly  increased,  although 

'  H.  R.  3820, 62d  Cong.,  zst  Sess.,  Cong,  Record,  p.  2357. 


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THE  TARIFF  OF  1913  13 

the  advance  effected  was  relatively  not  so  great  in  the  finished 
products  as  in  the  raw  material.  In  final  conference,  the  35  per 
cent  rate  was  cut  to  29  per  cent  and  similar  reductions  were  made 
in  the  fabric  duties.  In  this  form  the  measure  went  to  President 
Taft  and  was  by  him  vetoed.  Stripped  of  its  extreme  argument, 
the  veto  message  amoimted  simply  to  a  statement  that  the  pro- 
posed bill  attempted  far  too  great  a  cut  in  rates  throughout  the 
schedule,  and  that  inasmuch  as  an  organization  called  the  ^'Tariff 
Board,"  previously  named  by  the  President,  was  investigating 
the  wool  and  woolens  schedule,  it  woidd  be  imdesirable  to  act  in 
advance  of  the  findings  of  this  board. 

Returning  to  Washington  after  the  sxunmer  intermission,  the 
members  of  the  Ways  and  Means  Committee  foimd  themselves 
confronted  on  January  i,  191 2,  with  a  lengthy  report  on  wool  and 
woolens  which  in  the  meantime  had  been  prepared  imder  the 
auspices  of  the  Tariff  Board  referred  to  by  President  Taft.  With- 
out attempting  at  this  point  to  consider  the  Tariff  Board's  findings 
in  detail,  it  may  briefly  be  stated  that  the  Ways  and  Means  Com- 
mittee, after  examination  of  the  findings  and  report,  reached  the 
conclusion  that  no  argument  had  been  adduced  to  indicate  the 
desirability  of  rates  higher  than  those  which  it  had  itself  reported 
at  the  preceding  session,  and  it  therefore  promptly  reported  back 
to  the  House  of  Representatives  a  bill  identical  in  terms  with 
that  which  had  been  introduced  during  the  preceding  session. 
This  bill  was  passed  by  the  House  of  Representatives  and  later 
by  the  Senate,  being  ultimately  vetoed  on  August  9,  1912.  There 
was  a  general  feeling  that  in  view  of  the  approaching  presidential 
struggle  the  tariff  question  would  be  settled  at  the  polls,  so  that 
nothing  more  woidd  be  needed  in  the  meanwhile,  for  it  was  well 
recognized  that  there  was  no  possibility  of  making  the  bill  law 
until  the  Democratic  party  had  gained  control  of  the  presidency. 
The  discussion  in  the  House  was  however  significant,  in  a  degree 
far  above  that  which  had  occurred  during  the  preceding  session, 
inasmuch  as  the  Republicans  of  the  Ways  and  Means  Committee 
presented  a  bill  of  their  own  as  a  substitute  for  the  proposed 
Underwood  measure.  This  bill  will  be  referred  to  later  in  connec- 
tion with  an  analysis  of  the  new  rates  on  wool  and  woolens  actually 


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14  JOURNAL  OP  POUTICAL  ECONOMY 

made  law  by  the  act  of  1913.  It  suffices  here  to  note  that  the 
measure  was  based  upon  a  rate  of  duty  of  about  18  cents  per 
poimd  on  imwashed  wool.  Estimates  were  made  that  this  was 
equivalent  to  a  possible  reduction  of  about  10  per  cent  in  the 
amoimt  of  the  old  raw  wool  duty.  Assuming  that  the  old  raw  wool 
duty  figured  as  an  equivalent  ad  valorem  of  44  per  cent,  the  Republi- 
can substitute  woxild  probably  have  been  equivalent  to  about  39  or 
40  per  cent  as  against  the  35  per  cent  which  had  been  proposed  by 
the  Senate  dming  the  preceding  session,  the  29  per  cent  finally 
agreed  on  in  conference,  and  the  20  per  cent  proposed  by  the 
House  in  both  its  measures.  The  fabric  rates  of  the  Republican 
substitute  rose  rapidly,  and  while  they  represented  a  distinct  reduc- 
tion of  the  fabulous  and  excessive  protection  accorded  imder  the 
Pajnae-Aldrich  law,  they  probably  would  not  have  affected  in  any 
genuine  way  the  real  amoimt  of  protectioa  accorded  to  domestic 
manxifacturers. 

When  the  time  came  for  the  preparation  of  a  wool  schedide 
likely  to  stand  a  good  chance  of  becoming  law,  as  was  the  case  imme- 
diately after  the  presidential  election  of  1912,  a  serious  test  was 
offered  with  reference  to  the  good  faith  of  the  Democratic  party. 
If  that  party  had  acted  sincerely  during  the  two  preceding  ses- 
sions, it  meant  exactly  what  it  said  in  the  reductions  of  duty 
it  then  proposed.  If  it  was  insincere  and  hypocritical,  it  did  not 
mean  what  it  then  proposed,  and  the  course  to  be  followed  by  it 
now  that  it  had  the  chance  of  enacting  something  into  actual  law 
might  be  altered.  There  were  undoubtedly  a  few  members  of  the 
party  who  desired  to  see  such  a  change  in  the  policy  of  the  organi- 
zation and  who  woidd  gladly  have  lent  themselves  to  a  scheme 
for  putting  the  rates  upon  a  basis  higher  than  that  which  had 
been  contemplated  by  the  original  Underwood  bill.  Chairman 
Underwood  himself,  however,  had  no  intention  of  assenting  to 
any  such  proposal.  He  was  obliged  to  yield  to  public  opinion 
within  the  party  to  the  extent  of  granting  hearings  before  the 
Ways  and  Means  Committee  with  reference  to  the  woolen  schedule 
as  well  as  the  other  schedides  of  the  tariff,  but  it  was  evident 
throughout  that  he  and  his  supporters  on  the  committee  had  already 
made  up  their  minds  on  the  main  issues.     The  hearings  did  indeed 


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THE  TARIFF  OF  IQI3  15 

develop  some  new  and  interesting  facts,  but  these  related  only 
to  the  existence  of  divisions  of  opinion  among  manufacturers  of 
woolens,  and  not  to  the  actual  condition  of  the  industry  or  to  its 
requirements.  The  testimony  showed  that  the  manufacturers 
were  very  desirous  in  most  instances  of  securing  free  raw  materials, 
and  that  they  had  hesitated  to  urge  removal  of  duties  only  because 
they  feared  that  they  might  thereby  break  up  the  "imholy  alli- 
ance" which  had  long  existed  between  themselves  and  the  shep- 
herds, thus  losing  the  support  of  the  latter  and  sacrificing  the 
votes  of  the  senators  from  the  sheep-growing  states.  When, 
however,  it  became  evident  that  no  amoimt  of  manipulation 
would  probably  suffice  to  **hold  the  party  in  line,"  so  that  a  genuine 
revision  of  the  wool  and  woolen  schedule  was  assured,  manufac- 
turers hastened  to  seek  the  remission  of  duties  which  they  had  long 
desired.  The  result,  nevertheless,  woidd  not  have  favored  their 
claims,  had  the  members  of  the  committee  been  left  entirely  to 
themselves.  It  had  been  foimd,  during  the  two  sessions  preceding, 
that  a  very  strong  sheep-growing  interest  existed  in  Texas,  Ohio, 
and  other  regions  now  safely  Democratic,  and  it  was  not  desired 
to  push  the  argument  to  extremes  on  that  account.  President 
Wilson,  however,  had  long  been  of  the  opinion  that  the  absolute 
remission  of  the  duty  on  wool  was  fundamental  to  the  real  reforma- 
tion of  the  wool  and  woolen  schedide.  Before  the  Ways  and 
Means  Committee  had  finally  reached  any  conclusions,  it  was 
called  into  consultation  with  the  Executive,  and  as  a  result  the 
proposed  rate  of  20  per  cent,  or  perhaps  of  15,  on  raw  wool  was 
eliminated,  and  that  article  was  placed  upon  the  free  list.  This 
action  was  taken  very  shortly  before  the  date  set  for  the  reporting 
of  the  tariff  bill  had  arrived,  and  it  was  the  prevailing  view  that, 
for  many  reasons,  no  postponement  of  that  date  would  be  wise. 
Consequently  a  hasty  readjustment  of  the  rates  on  fabrics  and 
intermediate  products  had  to  be  made,  in  order  to  make  due 
allowance  for  the  removal  of  the  tariff  on  raw  wool,  since  this  tariff 
had  been  used  as  a  basis  in  building  up  the  duties  of  the  paragraphs 
relating  to  manufactures.  The  result  was  to  leave  the  schedide  in  a 
rather  disjointed  and  imsatisfactory  state.  While  wool  was  free,  tops, 
yams,  etc.,  remained  at  somewhat  disproportionately  high  levels. 


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JOURNAL  OF  POLITICAL  ECONOMY 


As  has  already  been  seen  the  general  rate  of  duty  established 
by  the  completed  schedide  woidd  work  out  at  about  13  per  cent, 
as  agamst  56  per  cent  under  the  old  law.  This,  however,  includes 
both  free  and  dutiable  imports,  the  actual  rates  on  dutiable  goods 
being  cut  to  no  such  extreme  degree.  Table  III  furnishes  a  brief 
digest  which  affords  an  outline  of  some  chief  items  in  the  schedule, 
equivalent  ad  valorem  rates  being  computed  in  each  instance: 

TABLE  III 


Act  ot  1909 

Act  ot  19x3 

Item 

Rate 

Equivalent 

adValorem 

Percent 

Rate 

Equivalent 

ad  Valorem 

Percent 

Schedule  K—Wool,  and  manufactures  of: 
Raw  wool 

43. 6x 
79.44 
72.09 
93.29 
99.70 
79.56 

8a.  07 

64.6a 

69.38 

69.45 

6a.  OS 

88.53 

60.94 

68.17 

Free 

z8  per  cent 
30  per  cent 
30  per  cent 
3S  per  cent 
35  per  cent 

35  per  cent 

35  per  cent 

35  per  cent 

as  per  cent 

30  per  cent 

ao  per  cent 

ao  per  cent 

ao  per  cent 

Free 

Yams 

z8.oo 

nifinW^t 

30.00 

Flannels  for  underwear 

30.00 

Women's  and  children's  diess  noods 

35.00 

Webbings,  suspenders,  braces,  etc 

Aubusson,  Azminster,  etc.,  carpets 

B rumfit  carpets 

35.00 

so  cents  per  pound 

+60  per  cent. .. 
60  cents  per  square 

3rard+4opercent 
60  cents  per  square 

3rard+40  per  cent 
44  cents  per  square 

3rard+40  per  cent 
40  cents  per  square 

3rard+40  percent 
a8  cents  per  square 

yard+40  percent 
aa  cents  per  square 

yard+4opercent 
aa  cents  per  square 

yard+40  percent 

35.00 
35.00 
35.00 

Tapestry  vdvet  carpets 

as. 00 

Tapestry  Brussds  carpets 

30.00 

TnMf  fnfffnin  carpets 

JO.OO 

Druggets 

ao.oo 

ao.oo 

IV 

In  deaUng  with  the  cotton  schedule  a  different  problem  was 
presented,  both  politically  and  economically.  Politically  there 
had  been  comparatively  little  trouble  with  the  woolen  schedide. 
True,  as  we  have  seen,  the  raw  wool  issue  had  caused  some  moments 
of  anxiety  to  Democrats  who  were  brooding  over  the  question  of 
future  elections  in  Ohio  and  Texas,  but  gloomy  thoughts  of  loss 
of  votes  at  congressional  elections  or  in  presidential  primaries  had 
finally  been  banished  from  the  minds  of  the  leaders,  while  the 
absence  of  woolen  factories  in  the  states  where  Democratic  majori- 
ties were  largest  had  relieved  the  tariff  patriots  of  the  suffering 
and  discomfort  to  which  their  Republican  confreres  from  the  North 


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THE  TARIFF  OF  IQI3  17 

had  been  subjected  four  years  earlier.  The  cotton  problem  was 
quite  different,  however,  there  being  a  large  and  powerful  industrial 
interest  connected  with  cotton  manufacturing  in  the  southern 
states. 

The  cotton  schedide  was  courageously  taken  in  hand  imme- 
diately after  the  woolen  schedide  had  been  disposed  of  in  the  62d 
Congress.  A  bill  making  some  substantial  reductions  in  cotton 
rates  was  reported  by  the  Ways  and  Means  Committee  in  Jime, 
191 1,  after  a  sharp  passage  at  arms  with  the  allied  cotton  manu- 
facturers of  the  North  and  South,  the  duty  of  struggling  with  the 
southern  legislators  in  charge  of  the  tariff  having  been  shrewdly 
committed  to  the  representatives  of  southern  mills  who  formed  a 
"tariff  committee"  for  that  purpose.  As  yet,  it  was  believed  that 
the  tariff  reform  idea  was  merely  germinating  and  the  manu- 
facturers, although  good  Democrats  in  local  and  state  politics, 
believed  that  they  coidd  carry  their  point  by  threatening  the  ter- 
rible results  that  might  happen  in  national  elections.  They  did 
not  scruple  to  apply  this  spur  to  the  Ways  and  Means  Committee, 
but  with  very  little  result.  True  the  cotton  tariff  as  amended  did 
not  attempt  anything  like  the  reductions  that  had  been  included 
in  the  new  woolen  schedule,  but  on  the  other  hand  the  rates  on 
cotton  in  the  old  act  had  never  been  anything  that  could  compare 
with  those  of  the  woolen  schedule.  Whereas  the  rates  of  the  latter 
were  cut  from  fabulous  levels  averaging  in  practice  something 
like  75  per  cent,  to  an  average  of  possibly  not  more  than  45  per 
cent  \mder  the  new  bill,  the  rates  of  the  cotton  schedule  were  cut 
from  an  average  of  about  47  per  cent  to  about  28  per  cent.  It  was 
asserted  on  the  floor  of  Congress  that  in  this  cut  an  effort  had  been 
made  to  protect  the  southern  mills  by  keeping  rates  of  duty  high 
upon  their  product,  while  reducing  them  upon  the  finer  goods 
turned  out  by  New  England  establishments.  A  comparison  of 
the  schedules  does  not  sustain  this  view,  although  it  is  true  that 
the  coarse  cottons  of  the  southern  mills  were  successfully  manu- 
factured in  competition  with  foreign  goods  and  needed  no  pro- 
tection, so  that  any  duty  on  them  was  a  far  greater  safeguard  to 
the  manufacturer  than  a  much  higher  rate  on  the  finer  products 
would  have  been  to  his  New  England  associates.    It  was  charged. 


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i8  JOURNAL  OF  POLITICAL  ECONOMY 

also,  that  the  rates  of  the  tariff  were  so  shaped  m  the  process  of 
shifting  from  a  partly  specific  to  a  completely  ad  valorem  basb 
as  to  enhance,  relatively  speaking,  the  rates  of  duty  on  the  coarse 
goods  aforesaid;  but  this,  too,  so  far  as  it  occurred,  was  manifestly 
not  intended  as  a  sectional  discrimination.  The  cotton  tariff  was 
reasonably  fair,  although  by  no  means  so  courageous  a  reduction 
of  protection  as  was  the  new  woolen  schedule. 

The  cotton  schedule,  as  it  passed  the  House,  was  not  open  to 
much  criticism  in  the  session  of  1910-1 1.  But  when  it  reached  the 
Senate,  it  was  put  into  an  objectionable  condition  by  the  addition 
of  a  so-called  revision  of  the  chemical  schedule,  the  pretense  being 
that  this  revision  of  the  rates  on  chemicals  was  necessary  in  order 
to  give  the  cotton  producer  a  cut  in  his  raw  materials  that  would 
relieve  him  of  costs  in  the  same  degree  that  he  had  been  deprived 
of  earnings.  The  bill  as  thus  amended  and  passed  was  wholly 
indefensible,  owing  to  the  careless  work  done  in  hastily  redrafting 
the  chemical  sections,  so  that  as  it  reached  the  President  it  was  a 
botched-up  piece  of  legislative  patchwork,  rarely  equaled  in  the 
history  of  tariff-juggling.  President  Taft  was  amply  warranted 
in  vetoing  the  bill,  and  this  he  promptly  did. 

With  the  reassembling  of  Congress  in  December,  191 1,  it  was 
determined  to  defer  the  cotton  schedide  imtil  after  other  features 
of  the  tariff  had  been  disposed  of,  particularly  as  President  Taft 
had  assigned  as  a  special  reason  for  his  veto  the  fact  that  the 
Tariff  Board  was  at  the  time  engaged  upon  a  study  of  the  cotton 
situation.  The  renewal  of  any  attempt  to  revise  the  cotton 
schedule  was  therefore  deferred  imtil  the  spring  of  191 2,  when  the 
cotton  report  of  the  Tariff  Board  finally  made  its  appearance. 
This  report  proved  to  be  a  considerable  surprise  to  most  readers. 
In  view  of  the  fact  that  the  wool  and  woolens  report  had  been 
hidebound  and  reactionary,  carefully  avoiding  any  but  incidental 
reference  to  the  tariff  and  la3dng  the  foimdation  for  the  mainte- 
nance of  excessive  rates,  it  had  been  expected  that  the  cotton  report 
woidd  parallel  it.  The  contents  of  the  latter  document  did  not 
fulfil  these  predictions,  inasmuch  as  it  sustained  the  idea  of  much 
greater  reductions  in  the  schedule  than  those  which  had  been 
planned  by  the  Underwood  bill  the  season  previous.    Consistency, 


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THE  TARIFF  OF  1913  19 

however,  as  well  as  the  fact  that  much  of  the  Tariff  Board's  work 
was  evidently  untrustworthy,  even  had  the  fundamental  fallacy 
of  comparative  cost  of  production  been  accepted,  forbade  the  utili- 
zation by  the  House  committee  of  any  of  the  material  thus  sub- 
mitted by  the  Board.  The  original  Underwood  cotton  tariff  bill 
was  consequently  reported  to  the  House  of  Representatives,  and 
was  again  passed  in  exactly  the  same  form  in  which  it  had  originally 
been  introduced.  Action  in  the  Senate  later  proved  to  be  of  little 
use.  inasmuch  as  it  was  well  known  that  President  Taft  would 
veto  the  bill.  Like  the  wool  bill,  however,  this  bill  afforded  the 
basis  for  the  subsequent  action  of  the  House  of  R^resentatives  in 
dealing  with  the  cotton  schedule  in  the  new  tariff,  when  the  time 
came  to  report  the  latter. 

Yet  there  was  a  significant  aspect  of  the  second  passage  of  the 
cotton  tariff  bill  in  the  62d  Congress.  As  has  been  noted,  Republi- 
cans had  offered  a  wool  revision  measure  as  a  substitute  for  the 
plan  put  forward  by  the  Democratic  Ways  and  Means  Committee 
in  connection  with  that  schedide.  This  substitute,  as  already  seen, 
had  established  very  high  rates  and  the  assertion  had  been  made 
that  they  represented  the  proper  inference  to  be  drawn  from  the 
rqwrt  of  the  Tariff  Board  on  the  woolen  schedule.  When  the 
rq>ort  of  the  Tariff  Board  on  cottons  was  issued,  it  was  seen  at 
once  that  consistency  required  the  introduction  of  a  tariff  bill 
modifjdng  the  cotton  schedule,  which  shoidd  be  "in  accordance 
with"  the  findings  of  the  Board.  The  findings  of  the  Board  were 
not  clear  nor  consistent,  with  reference  to  either  the  wool  or  cotton 
schedides,  but  they  were  more  intelligible  in  connection  with  the 
latter  than  with  the  former,  the  chief  difficulty  being  that  the 
investigations  of  the  Board  had  extended  to  only  a  few  of  the  items 
in  the  schedule.  On  these,  as  already  noted,  the  apparent  infer- 
ence to  be  drawn  was  in  favor  of  very  low  rates  of  duties.  Ccm- 
sequently,  the  duty  of  the  Republicans  seemed  to  be  that  of  pre- 
senting a  bill  making  lower  rates  even  than  those  of  the  Underwood 
measure,  but  this  they  were  exceedingly  loath  to  do.  Representa- 
tive Hill  of  Connecticut  finally  obtained  from  his  colleagues  a 
partial  permission  to  draft  a  revision  measure,  but  even  that  was 
subsequently  withdrawn,  and  he  was  obliged  to  proceed  without 


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JOURNAL  OF  POLITICAL  ECONOMY 


the  cordial  co-operation  of  his  colleagues  of  the  old-line  group  of 
Republican  Bourbons  in  the  lower  chamber.  With  the  approval 
of  some  of  the  radicals  of  the  party,  however,  Mr.  Hill  proceeded 
to  shape  a  bill  of  the  kind  referred  to — ^an  eflFort  in  which  he  received 
the  assistance  of  representatives  of  the  TariflF  Board.  The  out- 
come was  a  bill,  establishing  in  many  instances  very  low  rates  of 
duties,  which  was  pronounced  by  his  colleagues  to  be  imavailable 

TABLE  IV 


Item 


Act  or  xqoq 


Rate 


E<n]ivalent 

•d  Valorem 

Pfcr  Cent 


Act  or  10x3 


Rate 


E<n]ivalent 

adValoccm 

Per  Cent 


Schedok  I-— Cotton  manufactures — 
Waterproof  doth  composed  of  cotton  or 
other  vegetable  fiber,  whether  omipoied 
in  part  01  India  rubber  or  otherwise. . 

Nottiiyham  bee  window  curtains,  nets, 
nettings,  etc , 


zo  cents  per  square 
yard+so  per  cent 


Clothing,  ready-made . 
Shirt  collars  and  CU&. 


Fhuhes,  velvets,  etc 

Handkerchiefs 

Stockings,  hose  and  half-hose. 


Men's  and  boys'  knitted  ^^oves . 


SO  percent.....   . 

45  cents  per  dosen 
+Z5  per  cent. 


Underwear  of  every  description 

Cbtton  Uble  damask 

An  other  manufsctures  of  cotton 

Schedule  J — ^Flax,  hemp,  and  jute,  and  mai 
facturesof: 

Flax,  not  hackled  or  dressed 

Hemp,  not  hackled  or  dressed 

Single  jute  yams  not  finer  than  s  lea  or 
number 


50  cents  per 
+40  per  cent 


40  per  cent. 
4S  per  cent. 


Cables  or  cordage  of  hemp,  tarred  or  un- 
tarred 


$93.40  per  ton 

$33.50  per  ton 

z  cent  per  poimd+ 
zo  per  cent. .. 


Hose,  hydraulic  or  flume 

Oikfeths  for  floors 

Handkerchieb  composed  of  flax,  hemp,  etc. 
AO  woven  fabrics,  nAp.f 


9  cents  per  pound 
zs  cents  per  pound 


50  per  cent. 
45  per  cent. 


50.56 

5a.<H 

50.00 

64.QS 
51.15 

~.1J 


75 


40.00 
45.00 


7.2Z 

10.45 


36.90 

Z7.83 

IS.  37 

44.99 
50.00 
45.00 


35  per  cent 

S5>  40  and 
45  per  cent 
30  per  cent 

so  per  cent 
40  per  cent 
30  per  cent 
so  to  so  per 
cent.. 


35  percent 
30  per  cent 
95  per  cent 
30  per  cent 


Free. 
Free. 


Z5  per  cent 

z  cent  per 
pound.... 
7  cent  per 
pound... 
90  per  cent 
35  per  cent 
35  per  cent 


95.00 

35, 40  and 
45 
30.00 

30.00 
40.00 
30.00 

so  to  so 

35.00 
30.00 
95.00 
30.00 


Free 
Free 


15.00 


9.*3 

9.33 
90.00 
35.00 
35.00 


as  a  party  measure,  while  experts  in  the  cotton  trade  regarded 
it,  commercially  speaking,  as  absurd  or  impossible.  The  bill  did 
not  even  receive  the  support  of  many  Republicans  on  the  floor, 
and  was  practically  a  fiasco,  serving  only  to  establish  the  insincerity 
of  the  Republicans  with  reference  to  the  operations  of  the  Tariff 
Board  itself.  In  another  way  the  bill  doubtless  had  an  effect  of 
some  importance,  since  it  tended  to  set  the  pace  for  the  Democrats 


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THE  TARIFF  OP  igi^  21 

in  the  final  tariff  revision  which  was  caHied  through  during  the 
spring  and  summer  of  1913.  Otherwise,  the  work  of  the  62d 
Congress  on  the  cotton  schedule  was  purely  introductory  and  pre^ 
liminary,  as  had  been  the  case  in  regard  to  the  revision  of  the  rates 
of  duty  on  wool  and  woolens. 

While,  as  already  seen,  the  final  average  cut  on  cottons  was 
from  45.60  per  cent  in  the  old  tariff  to  about  30  per  cent  or  less 
in  the  new,  a  fairer  idea  of  the  change  is  obtained  from  represen- 
tative comparisons  in  Table  IV. 


Prior  to  the  final  enactment  of  a  tariff  measure,  preliminary 
efforts  to  secure  a  revision  of  duties  had  been  made  also  with 
respect  to  the  important  metal  schedule,  although  this  schedule 
was  imdertaken  subsequently  to  the  textile  duties.  Not  imtil 
the  opening  of  the  second  session  of  the  62d  Congress  in  December, 
191 2,  was  the  subject  actively  taken  up  by  the  Ways  and  Means 
Committee.  Shortly  before  the  beginning  of  Congress  for  this 
second  session,  some  preparations  had  been  made,  and  at  the 
beginning  of  Janxiary,  1913,  a  bill  greatly  reducing  the  rates  on 
metals  was  reported  from  the  Ways  and  Means  Committee  to  the 
House.  This  bill  was  idtimately  passed  by  the  House  with  com- 
paratively little  discussion,  and  without  any  serious  effort  on  the 
part  of  Republicans  to  substitute  a  plan  of  their  own.  When  the 
bill  reached  the  Senate,  it  received  serious  attention,  progressive 
Republicans  annoimdng  that  they  were  in  general  sympathy  with 
the  ideas  of  the  measure,  although  they  desired  modifications. 
Amendments,  some  of  which  would  have  actually  reduced  the  rates 
still  further,  while  others  would  have  implied  a  moderate  increase 
in  certain  of  the  House  rates,  were  offered  by  Senator  Cimmiins 
of  Iowa  and  by  others  who  either  were  not  committed,  or  were 
opposed,  to  the  ultra-high  tariff  program  of  the  party  managers. 
Practically  none  of  these  suggested  changes  were  accepted,  and  the 
bill  was  finally  adopted  in  the  Senate  in  its  nearly  original  form. 
Unfortimately,  political  tricksters,  who  f€;3,red  that  President  Taf t 
might  make  up  his  mind  to  accept  the  proposed  bill  on  account 
of  the  generally  admitted  need  of  reductions  in  the  iron  and  steel 


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22  JOURNAL  OF  POLITICAL  ECONOMY 

schedide,  had  succeeded  in  forcing  into  the  measure  an  amendment 
calling  for  a  repeal  of  certain  provisions  in  the  reciprocity  law  of 
the  preceding  year.  House  Democrats  were  not  willing  to  assent 
to  this  amendment  and  it  consequently  proved  impossible  to  obtain 
an  agreement  between  the  two  Houses  with  regard  to  this  schedule. 
In  fact,  no  very  serious  effort  to  secure  such  an  agreement  was  made 
for  the  reason  of  political  expediency  already  stated,  so  that  the 
iron  and  steel  revision,  although  having  a  somewhat  different  his- 
tory from  its  predecessors  relating  to  cotton  and  wool,  ultimately 
met  precisely  the  same  fate  which  had  befallen  those  two  bills. 
It,  like  the  others,  simply  served  a  piirpose  in  outlining  the  posi- 
tion of  the  party  responsible  for  it,  and  in  committing  that  party 
to  a  program  from  which  it  could  not  subsequently  retreat  with 
credit,  even  had  it  been  inclined  to  do  so. 

The  work,  however,  had  not  been  entirely  wasted.  When  the 
Underwood  bill  was  presented  to  the  House  in  1913,  it  was  found 
that  this  schedule  departed  in  but  a  few  particulars  from  the  meas- 
ure which  had  been  passed  by  the  House  and  had  been  returned 
from  the  Senate  about  a  year  before.  A  few  changes  here  and  there 
resulted  from  a  feeling  that  enough  had  not  been  done  in  lowering 
the  rates  in  the  project  of  191 2,  or  were  inserted  as  a  concession 
to  critics.  The  total  of  these  alterations  was  probably  less  than 
that  of  the  changes  in  any  of  the  other  schedides  upon  which 
preliminary  action  had  been  forced.  It  was  not  imtil  the  bill 
went  from  the  House  to  the  Senate  that  a  serious  alteration  in  the 
scope  of  the  metal  schedule  occurred. 

In  the  last  analy^,  the  iron  and  steel  schedide,  after  being 
considerably  debated  between  House  and  Senate,  owing  to  the 
innovations  and  changes  made  in  the  upper  chamber,  was  greatly 
reduced  as  compared  with  the  level  of  rates  existing  at  the  time 
tariff  revision  was  undertaken.  Iron  ore,  of  course,  went  to  the 
free  list,  and  the  same  treatment  was  given  to  pig  iron  and  wrought 
and  cast  iron.  The  heavy  products  of  the  furnace,  such  as  slabs, 
blooms,  etc.,  were  made  free,  while  structural  shapes  were  given 
only  10  per  cent,  boiler  and  other  plate  12  per  cent,  and  steel 
bars  8  per  cent.  Steel  rails  were  placed  imreservedly  upon  the 
free  list.    Some  reductions  were  also  made  in  the  sections  of  the 


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THE  TARIFF  OF  1913 


23 


Steel  schedule  dealing  with  manufactured  products  such  as  cutlery 
and  machinery  of  various  classes,  automobiles,  and  other  articles 
involving  a  large  application  of  hiunan  labor  and  the  use  of  highly 
specialized  means  of  production.  Probably  the  least  courageous 
portion  of  the  steel  schedide  was  seen  in  the  sections  referring  to 
metals  other  than  iron  and  steel,  such  as  lead  and  zinc  and  their 
products.  Considerable  rates  of  duty  were  retained  on  these, 
lead  being  left  at  25  per  cent  as  against  2}  cents  per  poimd  imder 
the  Pajme-Aldrich  law,  while  block  zinc  was  placed  at  15  per  cent 
against  1}  cents  per  poimd.  Aluminum  was  cut  to  25  per  cent  as 
against  7  cents  per  poimd  under  the  Payne-Aldrich  act.  But 
with  the  exception  of  some  few  items  in  which  special  interests 
possessing  great  strength  in  Congress  were  successful  in  retaining 
protection,  the  revision  of  the  iron  and  steel  schedule  was  thorough, 
not  to  say  drastic,  the  average  duty  retained  being  probably  about 
19  per  cent  as  against  35  per  cent  in  the  act  of  1909.  The  compari- 
son in  Table  V  will  furnish  a  clearer  idea  of  the  changes. 

TABLE  V 


Item 


Act  or  190Q 


Rate 


adValoccm 
PcrCcDt 


Act  ot  19x3 


Rate 


Eqohrakat 

advaloccm 

Percent 


SchednkC- 
Pig  iron. 
Slabs... 


-Metals  and  mannfartaies  of: 


Besas,  girdeis,  joists,  valued  above  9-zo 
cents  per  pound 


4/xo    cent    per 
pound  


4/10    cent    per 


Antlfiktion  balls,  baO  bearings. 
Tin  plates 


Wire 

Motorcycles 

RasoKS  and  parts  of . 


45  per  cent 

z  3/zo  cents  per 

pound 

40  per  cent 

45  per  cent 


Copper  in  plates,  sheets,  etc. 
Leaaini* 


I  in  sheets,  pipes,  etc. 


al  cents  per  pound 
af  cents  per  pound 


9.03 
17.79 

aj.zS 
4S.OO 

a6.74 
37.64 
4S.OO 
73.36 

zo.Sa 
40.70 


Free. 
Ftee. 


10  per  cent 
3S  per  cent 

Z5  percent 
Z5  percent 
as  per  cent 
3S  and  ss\ 
per  cent/ 
Spercent 
as  per  cent 


Free 
Free 


10.00 
35.00 

15.00 
15.00 
as  00 
/3S.OO 
\55.00 
5.00 
a5.oo 


VI 

In  the  preliminary  efforts  at  tariff  revision,  attention  had  also 
been  paid  to  the  chemical  schedide.  This  schedide  had  been  the 
subject  of  a  fictitious  and  insincere  attempt  at  modification,  when 
dming  the  Senate  debate,  amendments  designed  to  change  the 
rates  on  chemicak  were  attached  to  the  cotton  tariff  bill.    The 


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24  JOURNAL  OF  POLITICAL  ECONOMY 

revision  had  been  so  hastily  and  unsatisfactorily  carried  through 
that  it  had  given  the  President  good  ground  for  a  sharp  veto  mes- 
sage. The  House  of  Representatives  was  probably  led  to  take  up 
the  chemical  schedule  as  a  result  of  the  imsatisfactory  character 
of  the  work  which  had  been  done  in  the  Senate  during  the  preced- 
ing session  and  the  discredit  which  had  consequently  come  to  the 
party  as  a  residt  thereof.  At  all  events  the  chemical  schedule  was 
taken  imder  consideration  in  December  and  January,  191 2-13, 
and  within  a  few  weeks  a  chemical  schedide  revision  bill  was 
reported.  The  method  of  treatment  in  this  bill  differed  in  some 
important  particulars  from  that  adopted  in  the  wool  and  cotton 
measures  and  in  certain  respects  from  that  in  the  iron  and  steel 
schedules  which  had  gone  before.  All  of  these  other  bills  had  been 
framed  without  reference  to  tariff  board  reports  or  "scientific" 
investigation.  In  framing  the  chemical  schedule,  a  different  situa- 
tion was  encoimtered.  Owing  to  the  technical  difficulty  of  the 
subject,  the  structure  of  the  chemical  schedide  had  not  been  changed 
for  about  thirty  years,  practically  nothing  having  been  done  with 
regard  to  its  classifications  since  about  1882.  Republican  tariff 
revisionists  had  simply  varied  the  rates  from  time  to  time  or  moved 
a  few  commodities  back  and  forth  from  one  paragraph  to  another, 
but  they  had  never  made  any  thorough  study  of  the  situation. 
The  fiasco  in  the  Senate  connected  with  the  alleged  revision  of  the 
chemical  schedule  showed  little  more  than  a  horizontal  reduction 
in  existing  rates  without  changes  in  the  descriptions  of  articles. 
This  was  totally  unsuited  to  the  needs  of  the  situation.  Few  indus- 
tries have  made  such  progress,  or  have  undergone  such  exten- 
sive and  drastic  mechanical  changes  in  the  past  thirty  years  as  has 
the  chemical  industry.  The  classifications  of  the  tariff  were  wholly 
out  of  date,  and  many  new  chemical  products,  the  results  of  scien- 
tific discovery  and  invention,  were  either  not  listed  at  all  or  were 
artificially  classified  \mder  obsolete  and  almost  meaningless  cap- 
tions. This  situation  was  speedily  perceived  by  the  sub-committee 
of  the  Ways  and  Means  Committee  to  which  the  subject  was 
intrusted.  At  the  same  time  it  was  learned  that  the  Tariff  Board 
had  allowed  an  introductory  investigation  of  the  chemical  schedule, 
largely  devoted  to  classification  and  based  upon  scientific  principles, 


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THE  TARIFF  OF  igij 


25 


to  be  carried  on  in  a  neglected  and  inadequate  way  for  some  two 
years  preceding.  After  some  negotiation  the  Ways  and  Means 
Conunittee  ultimately  obtained  the  results  of  this  tariff  inquiry 
and  adopted  many  of  the  changes  in  grouping  and  nomenclature 
which  were  suggested  by  it,  although  these  did  not  receive  the 
indorsement  of  the  Tariff  Board  itself  at  any  time.'  The  bill 
ultimately  reported  to  the  House  of  Representatives  and  passed  by 
it  on  February  21,  191 2,  was  however  based  upon  the  reclassifica- 
tion which  had  thus  been  developed.  Nevertheless  it  received  no 
favorable  consideration  in  the  Senate  and  was  finally  dropped  by 

TABLE  VI 


Item 


Act  or  1909 


Rate 


Eonivakikt 

•dValoccm 

Percent 


Act  or  19x3 


Rate 


Emiivaleiit 

ad  Valorem 

Percent 


Schedule  Ar-Chemkab,  oik,  and  paints: 

Boradcadd T77. 

Medical  prepanitiona  not  containing  ako> 

bol,  in  n.s.pi. 

Ahim 

Cream  of  tartar 

Blacking 

Drugs 

Gbie,  valued  between  xo  and  as  cents  per 

P^Pt^ 

OBveofl 

Red  lead 

Borsx,  refined 


acentsper  pound 

5  cents  per  pound 

S5  percent 

i  cent  per  pound 
+XO  per  cent. . 

as  P«  cent...... 

50  cents  per  gallon 

s  I  cents  per  pound 
acentsper  pound 


78.70 

as. 00 
40.5* 
as. 45 

as. 00 
".54 

as. 00 
35. 18 

60.S5 
ax.aa 


I  cent  per 
pound  .. . 
IS  percent 
xs  per  cent 
ai  cents  per 
pound  ... 
xs  percent 

xo  per  cent 

xs  per  cent 
30  cents  per 


as  percent 
f  cent  per 


ax. 43 
xs.oo 
xs.oo 

X7.86 
xs.oo 

xo.oo 

xs.oo 

ax. OS 
as. 00 

x.si 


that  body.  When  the  time  came  for  real  tariflE  action  in  1913, 
the  Ways  and  Means  Committee  revived  the  old  form  of  bill, 
which  had  been  adopted  a  year  earlier,  made  a  few  changes,  and 
incorporated  it  into  the  new  measure.  Little  alteration  was  made 
by  the  Senate  and  the  schedule  was  ultimately  accepted  in  the 
form,  greatly  revised  as  compared  with  the  act  of  1909,  which  had 
been  thus  given  to  it.  Many  of  the  most  interesting  changes  in 
the  chemical  schedule  are  thus  matters  of  classification  and  as 
such  will  need  discussion  in  a  subsequent  article,  where  the  working 
of  the  tariff  is  dealt  with.  At  this  point  it  suffices  to  note  that  the 
average  rate  of  the  new  schedule  was  about  19  per  cent,  or  nearly 

'  Cong,  RBcord,  62d  Congress,  2d  sess.,  p.  2406. 


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26  JOURNAL  OP  POLITICAL  ECONOMY 

the  same  as  under  the  old  law,  while  the  brief  comparison  in  Table 
VI  will  afford  some  idea  of  the  changes  in  detail. 

VII 

One  of  the  most  notable  sections  of  the  new  tariff  law  is  to  be 
foimd  in  Schedule  G  relating  to  agricultural  products  and  provi- 
sions. It  was  in  this  schedule  that  the  greatest  lack  of  sincerity 
and  courage  had  been  expected  owing  to  the  belief  that  the  influ- 
ence of  the  farm  element  woidd  be  strongly  exerted  to  maintain 
protection;  while  on  the  other  hand,  the  inhabitants  of  cities, 
persons  with  fixed  salaries,  and  consumers  generally  were  asking 
for  some  decided  measure  of  relief  from  high  prices  for  foods.  The 
only  preliminary  attention  that  had  been  given  to  the  subject 
was  found  in  the  so-called  Farmers'  Free  List  bill,  adopted  two 
years  before,  in  which  a  list  of  articles  supposed  to  be  largely  xised 
by  farmers  in  the  management  of  their  lands  had  been  relieved  of 
duties.  It  had  been  planned  to  introduce  in  Congress  a  salaried 
man's  free  list  bill,  but  while  there  was  much  talk  of  something 
of  the  sort,  nothing  was  ever  done. 

The  tariff  of  1913,  therefore,  was  the  first  real  effort  to  deal 
with  the  subject  in  a  thorough  manner — indeed  in  any  manner  that 
could  afford  a  gauge  of  the  determination  and  earnestness  of  those 
at  work  on  the  subject.  In  spite  of  very  serious  opposition,  the  final 
bill  contained  some  large  reductions  of  duty.  Meats  were  unre- 
servedly placed  on  the  free  list,  wheat  and  potatoes  being  likewise 
treated,  although  with  the  reservation  that  if  other  coimtries  should 
levy  rates  of  duty  upon  our  products  we  should  feel  free  to  impose 
retaliatory  rates  of  equal  amoimt.  Other  grains  were  either  made 
free  or  were  reduced  to  a  low-tariff  level,  while  fruits  were  given 
a  sharp  cut  and  vegetables  of  various  kinds  placed  upon  a  footing 
of  only  moderate  protection.  If  a  removal  of  tariff  duties  could 
accomplish  the  desired  object  of  lowering  the  cost  of  living,  the 
revision  thus  provided  for  must  certainly  have  attained  the  end 
sought.  The  agricultural  sched\ile,  in  fact,  was  given  about  as 
thorough  treatment  as  was  accorded  to  any  throughout  the  whole 
range  of  the  tariff.  There  yrere,  to  be  sure,  some  who  hoped  that 
the  reductions  would  go  even  farther  than  they  did,  but  they 


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THE  TARIFF  OP  1913 


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could  hardly  argue  for  further  cuts  m  the  face  of  the  specious  and 
apparently  well  founded  contention  that  the  farmer  was  entitled 
to  as  much  protection  as  any  other  member  of  the  community  and 
ought  to  receive  at  least  the  average  rates  that  were  accorded  to 
other  producers  throughout  the  tariff.  Barring  purely  theoretical 
considerations^  and  omitting  from  account  the  fact  that  no  good 
ground  can  ever  be  assigned  for  a  belief  in  duties  upon  food  prod- 
ucts whose  production  is  subject  to  the  law  of  diminishing  returns, 
there  was  not  much  to  say  on  this  point,  and  when  a  general  cut 
had  been  provided  for  upon  a  basis  comparable  with  that  applied 
in  other  schedules  it  was  generally  felt  by  party  men  that  enough 
had  been  done  and  that  more  could  not  reasonably  be  asked  by 
any  except  a  doctrinaire  advocate  of  free  trade.  The  compari- 
sons in  Table  VII,  with  equivalents,  will  show  what  was  done  in 

Schedule  G. 

TABLE  vn 


Act  ov  1900 


Rate 


Eqaivtleot 

ttdValorai 

Percent 


Act  or  1013 


Rate 


Equivalent 

ad  Valorem 

Percent 


Scbednk    G— Agiiciiltacal    ptodncts 


Cattle,  lyearoldor 
Vahied  at  not  moce  than  $14  per 


Valued  at  more  than  $14  per  head 


Valued  at  $150  each  or  lem. 
Valued  at  over  f*oo  each  . . 
Sheep- 
Lot  than  I  year  old 

I  year  old  or  over 


Jtfanqr. . . 


Macaroni,  vermicelli,  etc. 

BjCT.  *'itf«^*«f 

Wheat 

Cheese 


is:. 


Upples,  peaches,  (juinoes,  cheiriea, 
plums,  and  pears,  green  or  ripe  . . 

Figi 

Walnuts,  not  shelled 

Poultry,  live 

Mustard 

Vinegar 


$3.75  per  head.. 
a7i  per  cent 

I30  per  head 

35  per  cent 

{5  cents  per  head. 
1.50  per  head  .. 
30  cents  per  bushel 
i|  cents  per  pound 
a  cents  per  pound 
a«  cents  per  bushel 
0  cents  per  pound 
5  cents  per  dozen 
I4  per  ion 

as  cents  per  bushel 
a|  cents  per  pound 
3  cents  per  pound 
3  cents  per  pound 

10  cents  per  pound 
7i  cents  per  gallon 


«7.S» 
•7.$o 

33. g3 
as. 00 

X8.78 
14. 13 
43  OS 
34- as 
54  OS 
3S.6S 

36.38 
43. ax 

ao.aS 
SI. S3 
AP'SS 

13.  ID 
37.60 
33.03 


Free 

Free 

xo  per  cent 

xo  per  cent 

Free 

Free 

xs  cents  per  bushel 
X  cent  per  pound 
X  cent  per  pound 

Free 

ao  per  cent 

Free 

taper  ton 

xo  cents  p^  bushd 
a  cents  per  pound 
a  cents  per  pound 
xcent  perpound 
6  cents  per  pound 
4  cents  per  gallon 


Free 
Free 

xo.oo 
xo.oo 

F)tee 
Free 
a3.o8 
a3.8x 

K.33 
ee 
ao.oo 
Free 
a6.67 

8.33 
4a. XX 
a8.66 

6.67 
as. 08 
17.30 


In  this  connection  should  likewise  be  noted  the  remarkable 
action  taken  in  practically  wiping  out  the  old  sugar  sched\ile  by 
providing  for  an  immediate  large  reduction  of  duties  and  for 
placing  of  the  article  on  the  free  list  at  the  end  of  three  years. 


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28  JOURNAL  OF  POLITICAL  ECONOMY 

vm 

Schedule  J  dealing  with  hemp  and  flax  was  one  of  the  few  that 
did  not  receive  preliminary  treatment  at  the  hands  of  the  Ways 
and  Means  Committee.  There  has  always  been  less  interest  in 
this  schedule,  taken  as  a  whole,  than  in  cotton  or  woolens,  partly 
because  it  deals  in  a  large  degree  with  luxuries  or  articles  which 
could  not  by  any  possibility  be  considered  as  necessary  items  in 
consumption.  This  remark  does  not  apply  of  cotu-se  to  all  of  the 
items  in  the  schedule,  some  of  them,  such  as  cotton  bagging, 
being  assigned  an  imdue  or  disproportionately  great  importance 
by  southern  members  as  well  as  by  others,  but  in  the  main  it 
correctly  represents  the  general  state  of  things.  Schedule  J,  there- 
fore, was  regarded  as  a  group  of  duties  whose  revision  might  with 
entire  propriety  and  expediency  be  deferred  to  the  future,  and 
this  policy  of  postponement  was  in  practice  adopted,  no  hint  of 
the  treatment  to  be  assigned  it  being  given  imtil  the  complete 
tariff  bill  made  its  appearance  at  the  opening  of  the  special  session 
in  April,  1913.  As  then  reported.  Schedule  J  provided  for  a  very 
material  cut  in  duties,  the  rates  on  raw  flax  and  hemp  which  had 
been  $22.50  per  long  ton  being  removed,  while  more  than  corre- 
sponding reductions  were  made  in  linens  and  other  fabrics  which 
fell  within  the  scope  of  this  provision.  It  is  probable  that  these 
reductions  were  not  so  great  as  might  have  been  made,  had  it 
not  been  for  the  strong  feeling  on  the  part  of  members  of  Congress 
that  a  moderate  rate  of  duty  was  entirely  justifiable  from  a  revenue 
standpoint,  inasmuch  as  the  articles  in  question  could  probably 
be  classed  as  luxuries  and  were  consiuned  by  persons  who  could 
well  afford  to  pay  the  enhanced  prices  due  to  the  imposition  of 
substantial  tariff  duties.  The  flax  and  hemp  schedule,  moreover, 
had  never  been  subjected  to  very  serious  criticism  and  hence  there 
was  a  disposition  to  avoid  drastic  action  regarding  it. 

In  treating  the  silk  schedule  an  even  more  clear-cut  case  for 
the  application  of  democratic  policy  was  presented  than  in  the 
flax  and  hemp  schedule.  Silks  manifestly  are  to  be  classified  as 
luxuries  and  have  so  figured  in  every  tariff  grouping  of  past  years. 
They  have  been  from  the  beginning  of  tariff  taxation  subject  to 
very  considerable  rates  of  duty  imposed  for  revenue  purposes,  with 


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THE  TARIFF  OF  1913 


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only  a  secondary  view  to  encouraging  the  production  in  the  United 
States,  which  has  never  been  so  extensive  as  it  has  been  in  other 
lines  of  textile  manufacture.  It  was  quite  early  decided,  therefore, 
not  to  lower  in  any  very  marked  degree  the  rates  of  the  silk  schedule, 
but  to  let  them  rest  upon  the  old  basis  in  so  far  as  concerned  their 
percentage  relation  to  value.  Under  the  Payne-Aldrich  tariff,  the 
silk  sched\ile  had  figured  at  about  53  per  cent,  and  it  was  deter- 
mined to  keep  this  in  the  new  rates  of  duty  well  up  to  50  per  cent. 
The  principal  change  which  appeared  when  the  bill  was  reported 
was  the  placing  of  the  silk  schedule  upon  an  ad  valorem  basis 
primarily,  the  old  specific  duties  so  pleasing  to  manufacturers 
because  of  the  stable  protection  they  afforded  and  the  minimum  of 
inquisitorial  annoyance  which  grew  out  of  them  being  abandoned 
in  favor  of  ad  valorem  equivalents.  But  these  ad  valorem 
equivalents  were  allowed  to  run  upon  a  practically  uniform  and 
even  basis  throughout  most  of  the  structure  of  the  schedule,  so 
that  at  least  in  intent,  there  was  but  scant  departure  from  the 
ideas  of  the  Payne-Aldrich  measure.  An  effort  on  the  part  of  the 
Senate  to  reconvert  these  rates  to  a  specific  basis,  which  was  earn- 
estly tu-ged  in  the  hearings  before  the  Finance  Committee,  was  met 
in  conference  by  strenuous  resistance  from  the  House,  so  that  in 
the  final  bill  the  ad  valorem  method  of  levy  was  retained.  Some 
representative  items  in. the  silk  schedule  work  out  as  in  Table 

vm. 

TABLE  vm 


ITBM 


AcTor  X900 


Rate 


Eqnivaknt 

^dValonm 

Percent 


Act  of  1913 


Rate 


Eooivak&t 

ad  Valorem 

Percent 


Scfaedok  L— S^  and  silkgooda: 
saflEyam 


.etc. 


Span  silk  or 

Sewmf  lilk,  twisty  uumb,  vm, 

Silk  goods,  n.s.pi.,  woven  in  the  piece 
Han&erchiefi  or  muflkfs,  bemstftched 
Ribbons  (n^-pJ.),  handings 
Artificial  silk  yams 


60  per  cent 
50  per  cent 


37.00 
S5.00 

1.00 
50.00 
41.7s 


8:1 


3S  per  cent 
IS  per  cent 


so  per  cent 
4S  per  cent 
3S  percent 


35.00 
15.00 
50.00 
50.00 
45.00 
35.00 


IX 

Schedule  B  included  within  its  scope  provisions  on  the  two 
important  classes  of  articles — earthenware  and  china  on  the  one 
hand,  and  glass  of  all  kinds  on  the  other.    While  other  and  minor 


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30  JOURNAL  OP  POLITICAL  ECONOMY 

piovisioiis  were  contained  in  the  schedule,  these  were  by  far  the 
most  significant.  On  both  window  and  plate  glass,  rates  had  been 
practically  prohibitive  in  the  past  and  as  a  result  importations  had 
been  impossible,  except  in  a  few  specified  items,  save  on  those 
occasions  when  as  a  result  of  the  operations  of  manufacturing 
combines  prices  had  been  raised  to  an  exorbitant  point  so  that 
importations,  even  under  the  excessive  tariffs,  were  resorted  to  as 
a  means  of  relief.  The  general  drift  of  the  changes  thus  made 
can  be  imderstood  from  the  fact  that  ordinary  window  glass  was 
reduced  from  if  cents  per  poimd  to  |  cents  per  poimd  on  pieces 
not  over  150  square  inches;  while  ordinary  polished  plate  glass 
was  cut  from  22]^  cents  per  square  foot  to  12  cents  on  small  sheets 
not  exceeding  720  square  inches,  with  corresponding  reductions 
on  other  sizes.  These  reductions  were  made  on  the  groimd  that 
the  articles  affected  by  them  were  necessary  items  of  use  and  that 
relief  to  the  consumer  demanded  a  cut  in  the  rates  of  duties  levied 
upon  them.  In  dealing  with  earthenware  and  china  a  different 
point  of  view  was  adhered  to,  the  belief  being  entertained  that  the 
rates  on  these  items  were,  in  the  main,  duties  levied  upon  luxuries 
and  hence  entirely  within  the  scope  of  party  policy.  It  was  con- 
tended that  there  was,  therefore,  ample  justification  for  the  main- 
tenance of  the  duties  at  a  level  very  nearly  as  high  as  that  of  the 
Payne-Aldrich  tariff.  Only  on  earthenware  goods  of  the  lowest 
grades  was  any  considerable  reduction  made,  it  being  argued 
that  on  these  items  at  least  concessions  should  be  made  to  the 
supposed  necessities  of  consumers.  The  general  level  of  the  sched- 
ule in  the  end  was  fixed  at  about  32  per  cent,  as  compared  with 
50  per  cent  imder  the  Payne-Aldrich  law.  Few  changes  were 
made  in  the  Senate,  and  of  these  few  the  majority  were  altered 
again  in  conformity  to  the  House  provision,  when  the  measure 
reached  conference  committee. 

Table  IX  furnishes  a  brief  comparison  of  items  and  gives  a 
clearer  idea  of  the  work  done  on  Schedule  B. 

Some  interesting  changes  were  made  likewise  in  the  paper 
schedule  (M)  as  the  comparisons  in  Table  X  will  show. 

A  few  of  the  principal  changes  in  the  sundries  schedule  (N) 
are  summed  up  in  Table  XI. 


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The  progress  of  the  tariff  bill  through  the  Senate  had  been 
expected  to  give  rise  to  serious  difficulty.  After  the  House  of 
Representatives  had  framed  the  new  schedules  upon  the  principles 
already  outlined  the  bill  was  sent  to  the  upper  chamber  (May  8) 
and  was  there  taken  under  advisement  in  the  Finance  Committee, 


TABLE  IX 


ITKM 


Act  Of  1900 


Bate 


Eaitivalent 

adValorein 

PtoCent 


Act  Of  1913 


Rate 


Eqoivakot 

ad  Valorem 

Percent 


Scfaediik  B— Earthe,  earthenware,  and 

l^aeeware: 
Fire  bckk,  not  glaaed,  wei^hfaif  not 

man  than  lo 

Qoanytilea 

China  day  or  kaoUn. 

Fhiortpar 

Earthenware — 

China,  painted,  etc 

Window  giaei,  not  eweedmg  150 
•qoare  inches   vahwd   at 
than  x|  cents  per  pound. . 

Phte  glaM,  cast,  polished,  above 
7ao  square  inches 


fi.asperton. .. 

AS  percent 

la.soper  ton. .. 
I3  per  ton 

60  per  cent 

as  per  cent 

1 1  cents  per  pound 

aa|  cents  per  square 
foot 


31.07 
4|.oo 
38.51 
X07.94 

60.00 
as. 00 

3S.ia 

78.17 


xo  per  cent 

ao  per  cent 

fi.asperton... 
$1.50  per  ton.., 

5S  percent 

IS  per  cent 

i  cent  per  pound 

la  cents  per  square 
foot 


10.00 
ao.oo 
19. «3 
50.00 

55.00 
15.00 


as.oe 
4«.67 


TABLE  X 


AcTOf  X900 


Rate 


Eauivalent 

adValoffem 

Percent 


Act  or  19x3 


Rate 


Equivalent 

ad  Valorem 

Percent 


Schedule  M— Pulp,  papers,  and  books: 
PxintiuK  paper,  viuued  at  over  ai  cents  per 


Copying  paper,  stereotype  paper,  etc. 
Bags,  envelopes,  etc 


Surface-coated  paper 

Parchment  and  imitation  parchment  papers 


Photpgiapiiic  paper. 
Writing  paper 


5  cents  per  pound 
+30  per  cent. .. 


a  cents  per  pound 
+xo  per  cent. 


15.80 
4*33 

49.9> 
50.00 

47.94 
28.99 
45-13 


xa  per  cent 
30  per  cent 

35  percent 
40  per  cent 

as  per  cent 
as  per  cent 
as  per  cent 


xa.oo 
30.00 

35.00 
40.00 

as. 00 
as. 00 
as. 00 


continuing  in  the  hands  of  that  body  \mtil  J\me  20.  The  character 
of  the  work  done  in  the  Finance  Committee,  the  considerations 
by  which  it  was  controlled,  and  finally  the  character  and  meaning 
of  the  Senate  debate  upon  the  revised  bill  and  the  subsequent 
discussion  in  conference  committee  between  the  two  houses  must 


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32 


JOURNAL  OF  POLITICAL  ECONOMY 


be  deferred  to  a  later  discussion.  At  this  point,  however,  it  is 
desirable  to  indicate  the  changes  through  which  the  measure 
passed  in  the  Finance  Committee,  on  the  floor,  and  in  the  final 
conference.  These  may  best  be  summarized  in  tabular  form  as 
in  Table  XII,  the  table  presented  being  intended  to  show  with 
reference  to  every  article  whose  rate  was  changed,  the  action  of  the 

TABLE  XI 


ITBM 


Act  or  1909 


Rate 


Eooivdent 

adValofcm 

PtoCent 


Act  or  19x5 


Rate 


Eoahralent 

ad  Valorem 

Percent 


cent!  per 


Schednk  N— Sundries: 

Trimmed  hats 

Brooms 

Gompowder    (under   so 

pound) 

Matches,  friction  or  hidfer,  in  boxes 

containing  not  more   than   100 

matoes  per  bos 

Fun  not  on  the  skin 

Haircloth  known  as  hair  seating 

doth 


50  per  cent. 
40  per  cent. 


scents  per  pound 


6cenUpe^» 
so  per  cent . . . 


Indurated  fiber  ware. 


lewdry. 
PrecKMis 


so  cents  per  square 

srard 

35  per  cent 


Manufactures  6t  leather,  n^pi . . 
Manu&cturcs  of  straw  and  grass. 
Manufactures,  of  India  rubber — 

of  cocoa  fiber  or 


Free 

40  per  cent. 
55  per  cent. 
35  percent. 


Pencas.lead. 


6  cents  per  square 

srard 

45  cents  per  gross 
+S5  per  cent. . 


50.00 
40.00 

18.31 


a7.50 
so. 00 


14. 15 

35.00 
75.74 


40.00 
35.00 
35.00 


SI. 41 
3S.88 


45  per  cent 

15  per  cent 

Free 

3  cents  per  gross. 
15  per  cent 

15  cents  per  square 

yard 

S5  per  cent 

60  per  cent 

10  per  cent 

3SPtf  cent 

S5  per  cent 

10  per  cent 

5  cents  per  square 
yard 

S5  per  cent 


45.00 
15.00 

Ftee 


14.5a 
15.00 


Z0.71 
S5.00 
60.00 
10.00 
35.00 
S5.00 
10.00 


I9-S5 
S5.00 


House,  the  final  action  of  the  Senate,  and  the  ultimate  decision 
of  the  conference  committee.  It  is  worth  while  to  remark  in  this 
connection  that  the  work  of  the  conference  committee  as  to  all  of 
these  rates  was  ultimately  accepted  by  both  Houses,  and  that  on 
none  of  them  was  it  necessary  to  revise  or  rescind  the  action  first 
decided  on. 


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THE  TARIFF  OF  Iplj 


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TABLE  Xn 

SCBBDULI  A— CEEMICALS,  OiL8,  AMD  PAIMTS 


Para- 

GKAIB 

AXTICU 

Rats  of  Ditty 

House 
BiU 

Senate 

Conference 
Report 

I 

Gflllic  add 

4  cents  per  pound 

a  cents  per  pound 
zo  cents  per  pound 

4  cents  per  pound 

zo  per  cent 

IS  per  cent 

IS  percent 

spercent 

spercent 

ZS  per  cent 

3S  per  cent 

Free 

7  cents  per  pound 

I  i  cents  per  pound 

IS  cents  per  pound 

scents  per  pound 

6  cents  p^  pound 
i|  cents  per  pound 

za  cents  per  pound 
S  cents  per  pound 

Free 

I 

Oxalic  acid 

I 

Pyrogallic  acid 

I 

403i 

X4 

i 

Tannic  acid  and  tannin 

Alizarin,  natural  or  synthetic,  etc. 

as  percent 

ao  per  cent 

Free 

2$  per  cent 
zs  per  cent 

Calomel,  corrosive  sublimate,  etc. 

Anthracene  and  anthracene  oU . . 

Compounds  of  pyroxlsm : 

Not  polished  or  manufactured 
Polished  or  manufactured .... 

EscUacts  and  decoctions  of— 
NutgaOs  and  Persian  berries. . 

Free 

Free 

\6 
31 

2$  percent 

40  per  cent 

f  cent  per  pound 
f  cent  per  pound 

IS  cents  per  pound 
licenU  per  pound 

zo  per  cent 

as  per  cent 

zo  cents  per  gallon 

ao  cents  per  gallon 

z  cent  per  pound 
»  per  cent 

as  per  cent 
40  per  cent 

I  cent  per  pound 

1  cent  per  pound 

IS  cents  per  pound 

3Z 

Free 

37 

Cmde  chicle                

ao  cents  per  pound 
1  cent  per  pound 
t  cent  per  pound 

IS  percent. ...... 

za  cents  per  gaUon 

aoperr'nt 

IS         ^ 

zo  per  cent 

z  cent  per  pound 
z|  cents  per  pound 

40  p^  cent 

30  per  cent 

zi  cents  per  pound 

37 
40 

Dextrine  made  from  potato  starch 
Licorice  root,  Rround 

li  cents  per  pound 
zo  per  cent 

46 

Alizarin  assistants,  etc 

as  per  cent 

46 

Flaxseed  or  linseed  oil 

46 

(Mive  oil 

ao  cents  per  cp^ll'"* 

S3 
6a 

ir:LL.-*...iri;i--    V!-e.   valued   at   7 
cents  per  pound  or  leas 

IS  per  cent 
zs  p^  cent 

6s 

Chlorate  of  potash 

4  cent  per  pound 
Free 

5H4 

Cjranide  of  potash 

Free 

67 

perfumed  toilet  soaps 

30  per  cent 

ao  per  cent 

Free 

30  per  cent 

67 

ao  p^cent 

fifi 

Cyudde  of  soda 

Free 

ScHBDULB  B— Earths,  Earthinwarb,  and  Glassware 


4Sa| 

Cement,  roman,  Portland,  and 
other 

WUte     non-staining     Portland 
cement 

spercent 

spercent 

2S  cento  p^  ton  . . 
so  cento  per  ton  . . 

30  per  cent 

30  per  cent 

30  per  cent 

IS  per  cent 

IS  per  cent 

40  cento  per   100 

Free 

Free 

76 

10  per  cent 

Free 

10  percent 

537* 

Limestone  ro^  asphalt 

An>haltum  and  bitumen 

Mica  unmanufactured: 
Valued  not  above  1$  cenU  per 
pound t 

Free 

Free 

Free 

7» 

4  cento  per  pound 

as  per  cent 

ao  per  cent 

ao  per  cent 

as  per  cent 

30  per  cent 

4S  per  cent 

30  per  cent 

30  per  cent 

30  per  cent 

as  percent 

as  percent 

3S  per  cent 

as  per  cent 

ao  per  cent 

4  cento  per  pound 

as  per  cent 

as  per  cent 

IS  percent 
ao  per  cent 

30  per  cent 

30  per  cent 

6  cento  per  foot 
8  cento  per  foot 

la  cento  per  foot 

as  per  cent 

as  per  cent 

3S  per  cent 

as  per  cent 

Free 

Vdued  above  zs  cents  and  not 
above  7S  cents 

Valued  aSove   7s   cents  per 
pound 

80 

Stoneware  and  earthenware  cru- 
cibles  

u 

Manufactures  of  carbon.  n.8.p.f . 
Carbons  for  flaming  arc  lamps. . 

Goblets  or  other  glassware,  cast 
or  pressed 

86 

30  per  cent 

6  cento  per  foot. . 

8  cento  per  foot., 
la  cento  per  foot. . 

30  per  cent 

ao  per  cent 

30  per  cent 

30  per  cent 

Free 

90 

Cast  polished  plate  glass  over  | 
indithick  . . . .  ^T. ' 

Do 

Do 

94 
94 

Lenses  of  elass  or  pebble 

Strips  of  glass,  etc 

498 

Opera  anci  field  glasses,  etc 

Surveying  instruments,  etc 

Glass  enamel,  white,  for  watch 
and  dock  dials 

Digitized  by 


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34 


JOURNAL  OF  POLITICAL  ECONOMY 


TABLE  Xn-^ConHmted 
ScHSDULX  C— Metals  and  Manutacturks  oy 


Para- 
graph 

Articlb 

Rate  of  Ditty 

House 
Bill 

Senate 
Amendment 

Conference 
Report 

saa 

Iron    in    pigs,    iron    kentledge 
fpiegeteuen,    wrought    and 
cast  scrap  iron  and  scrap  steel 

Ferromanganese 

8  per  cent 

zs  percent 

8  per  cent 

8  per  cent 

"za  per  cent 

zs  per  cent 

zs  percent 

za  per  cent 

ao  per  cent 

ao  per  cent 

zo  per  cent 

zo  per  cent 

zs  per  cent 

ao  per  cent 

30  per  cent 

ao  per  cent 

30  per  cent 

ao  per  cent 

zs  percent 

4S  per  cent 

4S  per  cent 

40  per  cent 

zs  per  cent 

zs  per  cent 

3S  per  cent 

40  per  cent 

40  per  cent 

za  per  cent 

ao  per  cent 

30  per  cent 

as  per  cent 

as  per  cent 

as  per  cent 

as  per  cent 

zo  per  cent 

as  per  cent 

as  per  cent 

zo  per  cent 

as  per  cent 

as  per  cent 

zo  per  cent 

30  per  cent 

1  cent  p^  pound 
30  per  cent 

Fiee 

Free 

Free 

Free 

zos 

Iron  in  slabe,  bliooms,  etc 

Muck  bars,  bar  iron,  etc 

Structural  shapes  of  iron  or  steel 

Boiler  or  other  plate  iron  or  steel 
sheets  of  iron  or  steel  com- 
mon or  black,  crucible  plate 
steel  and  saw  plates  and 
ske^>  iron  or  steel 

Free 

Free 

Z07 

S  percent 

zo  per  cent 

za  per  cent 

za  per  cent 

zo  per  cent 

zs  percent 

zs  per  cent 

Free 

S  per  cent 
zo  per  cent 

za  per  cent 
za  percent 
zo  per  cent 

zs  percent 
zs  percent 

Free 

Z08 
Z09 

IZZ 

Anchors  and  foiginss 

Hoop,  band,  or  scroll  iron  or  steel 

Iron  or  steel  plates,  stripe,  etc, 

galvanised,  etc 

zzz 
6zsi 

Tin  plates,  coated,  etc 

Steel  ingots,  coned  ingots,  etc, 
made  by  the  Bessemer  or 
shnilar  process 

Steel  bars  and  shapes,  made  by 
the    Bessemer    or    similar 
process 

IZ9 

8  per  cent 

za  percent 

zs  per  cent 

as  percent 

zs  per  cent 

as  percent 

30  per  cent 

as  per  cent 

30  per  cent 

zs  per  cent 

as  per  cent 

S  per  cent 

zo  per  cent 

as  per  cent 

zo  per  cent 

30  per  cent 

8percent 

zs  per  cent 
ao  per  cent 
30  per  cent 
zs  per  cent 
30  per  cent 
zs  percent 
zs  per  cent 

30  per  cent 
30  per  cent 
as  per  cent 
S  per  cent 
zo  per  cent 
30  per  cent 

zo  per  cent 

3S  per  cent 
zo  per  cent 
as  per  cent 
as  per  cent 

as  per  cent 

2S  per  cent 

zza 

SteeT ingots,  etc,  made  by  the 
crucible,  electric  <xe  cementa- 
tion prmress 

"S 

"1 
zz6 

Steel  wool  or  steel  shavings 

Grit,  shot,  and  sand 

Round  iron  or  steel  wire 

Wire  rope 

Woven-wire  doth,  etc 

Manufacttves  of  wire 

zaz 

Automobiles,  vahied  at— 
Less   than  $a,ooo   and   more 
than  $z,ooo 

$z,ooo  or  less 

zaa 

Motor  cyclw 

zas 

MS 

\u 
III 

Z33 

133 

Nuts,  or  nut  blanks,  and  washers 

Bolts  of  iron  or  sted 

Spiral  nut  locks  and  washers — 

Card  dothing,  when  manufac- 
tured— 
With  round  iron  or  untempered 

rouzid  sted  wire 

With   tempered   round   sted 
or  plated  wire,  etc 

Cast  iron  pipe,  etc 

Sprocket  and  machme  chains. . . 
above  ys  cents 

Files,  file  bbmks,  rasps  and  floats 
of  all  cute  and  kinds 

cision  .              

as  per  cent 

as  per  cent 

ao  per  cent 

3S  per  cent 

ao  per  cent 

zs  per  cent 

Z37 

Needks,  etc 

ao  per  cent 

«n* 

Wheds  ^or  railway  purposes 

Ingots,  cogged  ingots,  etc 

Aluminum,  aluminum  scrap,  etc 

Aluminum  in  plates,  etc 

Antimony  ore  and  stibnite,  etc . 

Bronse  powder,  etc 

Bronze  or  Dutch  metal  or  alumi- 
num, in  leaf 

ao  per  cent 
Free 

X4S 
X4S 

148 

a  cents  per  pound 
3i  cents  per  pound 

a  cents  per  pound 
3l  cents  per  pound 

8  cents  per  pound 

4  cents  per   zoo 
leaves 

as  per  cent 

Tinsd  wire,  lame  or  lahn 

Bullion  and  metal  threads 

Lead-bearing  ores 

as  per  cent 
6  per  cent 
as  per  cent 

f  cent  per  pound 
zs  per  cent 

zsa 
zsa 

Z$A 

6  per  cent 

2s  percent 

1  cent  per  pound 
zs  per  cent 

.I3 

Time  detectors 

Digitized  by 


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THE  TARIFF  OF  1913 

TABLE  Xn— CwliiiMirf 


35 


Akticu 

Ratb  or  DuTT 

Paxa- 

GKAPH 

House 
Bin 

Senate 
Amendment 

Conference 
Report 

164 
X69 

7inr.f>eArinff  OTW 

zo  per  cent 

zo  per  cent 

as  per  cent 

za|  per  cent 

15  per  cent 

30  per  cent 

zo  per  cent 
Z5  percent 

20  per  cent 

Zinc  in  btodcs.  etc 

Articles,  in  chief  value  of  ixon, 
steel,  lead,  etc 

Schedule  D— Wood  and  Manutactukes  or 


649 

dally  provided  for 

Wood  comprising  the  sides,  tops, 
and  bottoms  of  fruit  boxes 

and  reimported  fiUed  with 

IS  per  cent 

7l  per  cent 

10  per  cent 

Free 

Free 

174 

Fitt 

Free 

176 

Toothi^cks  of  f^"^«wl  substance 

as  per  cent 

so  per  cent 

Schedule  £— Sugar,  Molasses  and  Mamutacturbs  or 


i8a 
z8a 


Sugar  above  z6  Dutch  standard 
Sugar  refined  and  colored,  etc.. . 
Chewing  gum 


z.  9  cents  per  pound 

a  cents  per  pound 

Z5  percent 


as  per  cent. 


zs  percent 


No 


Schedule  F—Tobacoo  and  MANurAcruRES  or 
Schedule  G— Agricultural  Products  and  Provisions 


6az 

i8q 

daz 
196 


197 
646 
soo 
aoz 

ao8 

4*8 
az4 
az4 
az4 
ais 

az7 
az7 
aaz 
aa3 

MS 


Cattle 

Horses  and  mules,  valued  $aoo 

or  leas  per  head 

Sheep 

Oats 

Oatmeal  and  rolled  oats 

Oat  hulls 

Rice  flour  and  rice  meal,  etc. . . . 

Wheat 

Butter 

Cheese 

Beets 

Eggs 

Frosen  eggs 

Egg  albumen,  frozen  or  Uquid. . 

Dned  blood  when  soluble 

Peas,  green  or  dried,  in  bulk 

Split  peas 

P^  in  cartons,  etc 

Decorative    greenhouse    plants, 
etc 

Flaxseed  or  linseed,  etc 

Seeds,  n.s^.f 

Fish,  in  oil,  except  shellfish. . . 

Zuite  currants 

tons,  limes,  oranges,  grape> 
fruK,  etc.,  in  packages  of  a 
capacity— 

Of  zf^bic  feet  or  leas 

Exreoding  z|  and  not  exceed- 
ing a^  cubic  feet 

v-rt-JmAtng  2^  cublc  foet  aud 
not  excffding  s  cubic  feet . 


zo  per  cent 

fzshead 

zo  per  cent 

zo  cents  per  bushel 
Free 

Free 

I  cent  per  pound 
zo  cents  per  bushd 
3  cents  per  pound 

ao  per  cent 

zo  per  cent 

2  cents  per  dozen 
ai  cents  per  pound 

3  cents  per  pound 
z}  cents  per  pound 

zs  cents  per  bushel 

2S  cents  per  bushel 

i  cent  per  pound 

as  percent 

ao  cents  per  bushel 

zo  per  cent 

as  percent 

a  cents  per  pound 


z8  cents  per  peck 

3S  cents  per  peck 

70  cents  per  peck. 
Free 


Free 

zo  per  cent 

Free 

6  cents  per  bushel 
33  cents  per  hun- 
dred weiisht 

9  cents  per  hun- 
dred weight  .... 
i  cent  per  pound 

Free 

accents  per  pound 
af  cents  per  pound 

_S  per  cent 

Free 

a  cents  per  pound 
z  cent  per  pound 

Free 

zo  cents  per  bushel 

ao  cents  per  bushel 

icent  per  pound 

zs  per  cent 

zs  cents  per  bushel 

S  cents  per  pound 
as  percent 

z  cent  per  pound 


i  cent  per  pound 

I  cent  per  pound 

icent  per  pound 
^  cent  per  pound 


Free 

zo  per  cent 
Free 

6  cents  per  bushel 
30  cents  per   zoo 
pounds 

8  cents  per  zoo 


.  cent  per  pound 
Free 

a}  cents  per  pound 
ao  per  cent 

S  per  cent 
rree 

a  cents  per  pound 

z  cent  per  pound 
Free 

zo  cents  per  bushel 

ao  cents  per  bushel 

I  cent  per  pound 

IS  percent 

ao  cents  per  bushel 

S  cents  per  pound 
as  per  cent 

zft  cents  per  pound 


z8  cents  per  i>eck 

3S  cents  per  peck 

Tocents per  peck 
Free 


Digitized  by 


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36 


JOURNAL  OF  POUTICAL  ECONOMY 

TABLE  Xa-'Omiim$d 


AsncLB 

Satx  Of  Duty 

Paka- 

OKAPH 

House 
BQl 

Senate 
Amendment 

Conference 
Report 

233 

Si 

Extract  of  meat,  n.i.p.{ 

Extract  of  meat  fluid 

Chocolate  and  cocoa,  sweetened, 
valued  over  15  cents  per 
pound,  not  over  ao  cents 
per  pound 

15  cents  per  pound 

7  cents  per  pound 

as  per  cent 

I  cent  per  pound 

8  cents  per  pound 

10  cents  per  pound 
scents  per  pound 

scents  per  pound 

X  cent  per  pound 

and  so  per  cent 

z8  cents  per  pound 

zo  cents  per  pound 
S  cents  per  pound 

2  cents  per  pound 

I  cent  per  pound 

and  so  per  cent 

z8  cento  per  pound 

MO 

trrramA 

940 

Bombay  or  wild  mace 

SCBBDULX  H— SPBira,  WlMBS,  AMD  OlHXE  BSVOAOBS 


253 
S54 


Ginger  ale,  ginger  beer.  etc.  in 
bottles  rontaining  less  than 


BotUesc 


over  <me  quart  filled  iHth 
mineral  waters  and  imita- 
tions thereof 

Bottles  not  over  one  quart .... 

Casks,  barrels,  and  hogsheads 
containing  mineral  waters, 
etc 


z8  cento  per  doaen 


zo  per  cent, 
zo  per  cent. 


5  per  cent. 


zs  cento  per 

30  per  cent. 
Free 

ZS  per  cent. 


za  cento  per  doien 


zo  per  cent 
zo  per  cent 


S  per  cent 


ScHSDULi  I— Cotton  Maxuwactubms 


955 


aS7 


360 
96z 


96z 
s6s 


367 
S70 


Cotton  thread  or  yam — 
Not  bleached,  <&ed.  etc.— 

Firfrding  70  and  not  99. . . 
Bleached,  dyed,  etc— 

Not  errmiing  70 

F.Trrrding  70  and  not  99. . . 

Exceeding  99 

Cotton  doth — 
Not  bleached,  dyed,  etc,  Noa. 


Bleached;  dyed,  etc,  Nos.  79 


to  99 
Handkerchiefs  or  mufflers,  made 

of  cotton,  not  hemmed 
Clothing,  etc.,  when  composed 

of   cotton   in   combination 

with  flax,  etc 
Shirto  collars  and  cu£b  of  cotton 
Stockings,  hose,  and  half  hose: 
Valued  not  more  than  70  cento 

per  dozen 
Valued  more  than  70  cento  and 

not  more  than  |z .so 

Bandings,  bdto.  bindings,  etc. . . 

Neto  and  nettings  made  on  the 

Nottingham  lace  machine 


so  per  cent 

S'so  per  cent .... 

so  per  cent 

15  percent 


ssi  percent. 
35  per  cent. . 
30  per  cent. . 


30  p^  cent. 
35  per  cent. 


40  per  cent. 

so  per  cent. 
35  percent. 

45  percent. 


33|  per  cent 

7i-33|  per  cent. 

35  percent 

37i  percent 


35  percent.. 
37I  per  cent. 
35  per  cent.. 


35  per  cent. 
30  per  cent. 


30  per  cent. 

30  per  cent. 
30  per  cent. 

60  per  cent. . 


39|  per  cent 

7|-33|  per  cent 
35  percent 
37i  per  cent 


35  per  cent 
37i  percent 
35  percent 


30  per  cent 
30  per  cent 


30  per  cent 

40  per  cent 
35  per  cent 

60  per  cent 


ScHXDULX  J— Flax,  Hkmp,  and  Juts,  and  Mahxjwactukes  or 


49a 
492 
493 
499 


Flax,  not  hackled  or  dressed. . 
Flax,  hackled,  known  as  dressed 

Tow  of  flax 

Hemp,  and  tow  oi  hemp 

Hemp,  hackled,  known  as  line 
of  hemp 


i  cent  per  pound 
z|  cento  per  pound 

Izo  per  ton 

ft  cent  per  pound 

z  cent  per  pound 


Free. 
Free. 
Free. 
Free. 

Ftec. 


Free 
Free 
Free 
Free 

Free 


Digitized  by 


Google 


THE  TARIFF  OF  1913 

TABLE  Xn-^CanHmtei 


37 


Paka- 

GKAPH 

Rate  ot  Duty 

House 
Bill 

Senate 
Amendment 

Conference 
Report 

9T6 

»78 

Single  yvna  of  jnte,  not  finer 
tlum  5  lea  or  number 

Same,  finer  tlum  5  lea 

Threads,  twines,  or  cords  made 
from   flax   yam   not   finer 
than  5  lea 

Same,  made  from  yam  fiincT  than 
5  lea 

15  per  cent 

35  per  cent 

35  per  cent 

30  per  cent 

15  per  cent 

35  per  cent 

30  per  cent 

si  cents 

35  per  cent 

35  per  cent 

50  per  cent 

30  p^  cent 

45  per  cent 

35  percent 

35  per  cent 

40  per  cent 

40  per  cent 

30  per  cent 

30  per  cent 

30  per  cent 

35  per  cent 

13  per  cent 

30  per  cent 

35  percent 

3  cents 

X5  per  cent 
3o  per  cent 

3o  per  cent 

35  per  cent 

x3  per  cent 

3o  per  cent 

35  percent 

3|  cents 

379 
a79 

Single  3rama»  made  of  flax,  etc., 
not  finer  than  8  lea 

Same,  finer  than  8  and  not  finer 
than  ^ 

a8o 

GiD  nettings,  etc 

aSi 

Floor  matOngs  (souare  yard). . . 
Carpets,  made  of  flax,  etc 

part  of  nax.  etc 

383 

30  per  cent 

30  per  cent 

40  per  cent 

Free 

30  per  cent 

30  per  cent 
40  per  cent 

Free 

4x6 

Wealing  apparel,  flax,  etc 

Plain  woven  fabrks,not  bleached, 
dyed,  colored,  etc 

^89 
390 

393 
393 

Pile  fabrics,  etc 

Bags  or  sacks,  made  from  plain 
^  woven  fabrics,  etc 

hemp,  or  ramie,  etc 

AH  woven  articles,  etc.,  of  flax, 

hemp,  or  ramie 

Woven  nisared  npholstery  goods, 

etc 

40  per  cent 

xo  per  cent 

30  per  cent 

35  per  cent 

35  per  cent 

40  per  cent 
10  per  cent 
30  per  cent 
35  per  cent 
35  per  cent 

ScHBDULX  K— Wool  and  Manutactukis  of 


^ 

Combed  wool  or  tops 

X5  per  cent 

5  per  cent 

8  per  cent 

Yams  made  wholly  or  in  chief 

value  of  wool 

90  per  cent 

X5  per  cent 

x8  per  cent 

«97 

Goths  in  chief  value,  of  the  hair 

of  the  horse,  or  cattle  n.s.p.f . 

X5  percent 

35  per  cent 

35  per  cent 

318 

Pile  fatbrics  of  wool 

Stockings,  in  chief  value  of  wool. 

35  per  cent 

40  per  cent 

40  per  cent 

n.s.pX 

35  per  cent 

30  per  cent ....... 

30  per  cent 

Stockings,  etc.,  selvedged,  etc. 
composed  wholly  or  in  chief 

value  of  wool,  valued  at— 

Not  more  than  $1 .  30  per  dosen 

35  per  cent 

30  per  cent 

30  per  cent 

More  than  |x .  30  per  doeen .. . 

35  per  cent 

40  per  cent 

40  per  cent 

Press  cloth  composed  of  camd's 

hair  n.s.p.f ... 

35  per  cent 

xo  per  cent 

xo  percent 

298 

Flanneb  composed  wholly  or  in 
chief  value  of  wool,  vahied 

above  50  cents  per  pound. . . 
Op<>nt4^|  %nn  ff^"iilwr  rugs,  l^"<^  car- 

55  per  cent 

35  per  cent 

30  per  cent 

309 

not   exceed   30   cents   per 

tquare  foot 

50  per  cent 

t 

50  per  cent 
15  percent 

314 

Hair  of  the  Angora  goat,  etc. . . . 

Tops,  made  of  the  hair  of  the 

Angora  goat,  etc 

30  per  cent. ; 

ti^:.::::::::::: 

3x5 

35  per  cent 

5  percent 

30  per  cent 

316 

Yams  made  of  the  hair  of  the 

Angora  goat,  etc 

30  per  cent 

35  per  cent 

35  per  cent 

3x7 

Cloth  and  manufactures  of  every 

description  wholly  or  in  chief 

vahie  of  the  hair  of  the  An- 

3x8 

PhisCeir  vehnstef '  etc.','  'of  '  the 

40  per  cent 

35  per  cent 

40  per  cent 

hair  of  the  Angora  goat,  etc. 

SO  per  cent 

40  per  cent 

45  per  cent 

Digitized  by 


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38 


JOURNAL  OF  POLITICAL  ECONOMY 


TABLE  Xn—Contimied 

SCHBDULB  L—SlLKS  AMD  SUK  GOOD8 


Paka- 

ORAFH 

Akticle 

Rate  of  Duty 

House 
Bill 

Senate 
Amendment 

Conference 
Report 

319 

3ao 

331 

Silk  partially  manufactured,  etc. 
Spun  silk  or  schappe  silk  yam. . 
Tnro?m  silk,  etc 

15  percent 

35  per  cent 

Z5  percent 

15  percent 

50  per  cent 

40  per  cent 

40  per  cent 

45  per  cent 

35  per  cent 

30  cents  per  pound 
t37  per  cent 

33  per  cent 

35  per  cent 

tS3  per  cent 

45  per  cent 

45  per  cent 

tss  per  cent 

35  per  cent 

10  cents  per  pound 
35  per  cent 
15  per  cent 
15  per  cent 
50  per  cent 

40  per  cent 

Sevang  sUk,  etc ,  ,    . ,.,.,- 

333 

323 

Velvets,  etc..  of  silk 

HandkeichidEs  and  mufflers  of 

8l1k 

lU 

Ribbons,  bandlncs,  etc,  of  silk. . 
Woven  fabrics  in  the  piece  of 
gilk 

45  per  cent 
45  per  cent 
35  percent 

3*7 

Yams,  etc..  of  imitation  or  arti- 
ficial sAk              ,     , 

Schedule  M — ^Papers  amd  Books 


33a 

Papers  with  surface  coated,  etc . . 
Surface-coated  papers,  n3.p.f . . . 
Plfin  basic  papers,  etc 

35  per  cent 

35  per  cent 

35  per  cent 

15  percent 

15  percent 

35  per  cent 

35  percent 

35  percent 

35  percent 

30  per  cent 

30  per  cent 

13  per  cent 

X3  per  cent 

13  per  cent 

13  percent 

30  per  cent 

30  per  cent 

30  per  cent 

30  per  cent 

30  per  cent 

3o  per  cent 

45  per  cent 

35  per  cent 

50  per  cent 

xs  per  cent 

15  cento  per  pound 
30  cento  per  pound 

15  cento  per  pound 
30  cento  per  pound 

30  cento  per  pound 
35  cento  per  pound 

35  cents  per  pound 
40  cento  per  pound 

7  cento  per  pound 
4  cento  per  pound 
6  cento  per  pound 

13  cento  per  pound 
15  cento  per  pound 

6  cento  per  pound 

8  cento  per  pound 
6  cento  per  pound 

60  cento  per  pound 
30  cento  per  pound 

35  cento  per  pound 

as  per  cent 
40  per  cent 
xs  per  cent 

333 

etc: 
Cigar  labds,  flaps,  and  bands 
printed  entirely  in  bronze — 

Labds  and  flaps 

Bands 

Printed  in  less  than  8  colors, 
not  entirdv  bronze — 

Labds  and  &ps 

Bands 

X5  cento  per  pound 
30  cento  per  pound 

IS  cento  per  pound 

30  cento  per  pound 
35  cento  per  pound 

Printed    in    more    than    8 
colors — 

Labek  and  flaps 

Bands 

Printed  in  whole  or  in  part 
in  metal  leaf — 

Labds  and  flaps 

Bands 

40  cento  per  pound 

Booklets 

^7  cento  per  pound 

Books  for  children's  use 

Fashion  magazines 

Booklets  decorated  by  hand, 
etc 

4  cento  per  pound 
6  cento  per  pound 

10  cento  per  pound 

AU  other  Uthogxaphs: 
Not  over  8A000  of  an  inch 
thick 

15  cento  per  pound 

Over     8/xooo,     not     over 

30/1000 
Less  than  35  square  indies  . 

Over  35  square  inches 

Over  30/xooo  inch  thick. . . 

In  ceramic  colors — 
Not  over  xoo  pounds  per 
thousand  sheets 

7  cento  per  pound 
5  cento  per  pound 

60  cento  per  pound 

337 

All  other 

Views  of  any  landscape  in  the 
UnitedStates,  etc 

15  cento  per  pound 
30  cento  per  pound 

Schedule  N — Sundries 


Ramie  hat  braids: 
Not  bleached  or  dyed. 
Bleached  or  dyed 


IS  percent. 
so  per  cent. 


40  per  cent. 
40  per  cent. 


40  per  cent 
40  per  cent 


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THE  TARIFF  OP  1913 

TABLE  Xn-CMliMMfl 


39 


Paka- 

ORAFB 


Article 


Rate  or  Duty 


House 
Bfll 


Senate 
Amendment 


Conference 
Report 


343 
347 


486 

496f 

SOS* 

3S5 


3S6 
496f 

3S8 

^^ 
3S8 


3S8 

481* 
367 

47X 
369 


369 
370 
37a 
373 

f^ 
378 

388 
390 
300 


39X 


Hats  of  ramie: 

Untrimmed 

Trimmed , 

Bnttons: 
Vegetable  iv<wy — 

36  lines  and  over 

Smaller  tlum  36  lines 

Shell  and  pearl— 

36  lines  and. over , 

Smaller  tlum  36  lines  — 

Agate  and  shoe 

Crude  artificial  abrasives 

Fulminates,  etc 

Gunpowder,  etc 

Matches,  imported  other  than  in 
bcnces  containing  not  over 
100 , 

Blasting  caps 

Furs  and  skins,  undressed 

Furs  dressed  on  the  skin 

Plates  and  mats  of  dog  and 
goatskins , 

Manufactures  of  fur , 

Wealing  apparel  made  of  the 
skms  of  cattle  of  the  bovine 
species,  dog  or  goat 

Artioes  of  wearing  apparel, 
nj.p.f 

Furs  not  on  the  skin,  etc 

Hats,  etc,  of  fur,  etc 

daxien'  and  engravers'  dia- 
monds, not  set 

Diamcmd  <hi8t 

Marine  coral,  uncut  and  un- 
manufactured   

Seal,  sheep,  lamb,  kid,  calf-skins, 
patent  japamied  and  enam- 
eled leaUuer 

Leather  cut  into  forms  for 
articles 

Bags,  etc,  of  leather  fitted  with 
sets 

Men's  Schmaschen  gloves  (per 
doa.) 

Men'sIeatherdoves(perdoz.pairB) 

Harness,  saddleiv,  etc,  n.s.p.f. . . 

Manufactures  of  amber,  catgut^ 
and  whip  gut  or  worm  gut, 
n.s.p.f 

Manufactures  of  india  rubber  or 
gutta  percha  known  as  drug- 
gists' sundries 

Manufactures  of  ivory,  etc 

Masks 

String  for  musical  instruments . . 

Paintugs  in  oil  or  water  colors. . 

PencOs 

Cameras 

Photographic  film  negatives:    . 
Eqweed  but  not  developed . . . 

Exposed  and  developed 

Photographic  film  positives 

Meerschaum,  crude  or  unmanu- 
factured  


35  per  cent 

40  per  cent .... 

40  per  cent 

40  per  cent 

40  per  cent 

40  per  cent .... 

40  per  cent 

10  per  cent 

S  per  cent 

i  and  z  cent  per 
pound 

i  cent  per  thou- 
sand  

75  cents  per  thou 
sand 

10  per  cent 

30  per  cent 

40  per  cent 

40  per  cent 

50  per  cent 

50  per  cent 

zs  per  cent 

40  per  cent 

zo  per  cent 

zo  per  cent 

Free 

Free 

Free 

30  per  cent 

fz.oo 
$2.00 
20  per  cent 

zo  per  cent 

zo  per  cent 

30  per  cent 

30  per  cent 

35  percent 

Z5  percent 

35  percent 

30  per  cent 

so  per  cent 

20  per  cent 

30  per  cent 

Free 


50  per  cent. 
50  per  cent. 


3S  percent, 
so  per  cent. 

2S  per  cent . 
50  per  cent. 

M  per  cent, 
ee 

Free 


Free. 


I  cent  per  thou- 
sand.'  


fz.oo  per  thousand 
Free 


30  per  cent. 

zo  per  cent. 
35  percent. 


zs  per  cent . 

45  per  cent. 
20  per  cent. 
4S  percent. 


Free. 
Free. 


zo  per  cent . 

zo  per  cent, 
zs  percent. 
40  per  cent. 


13.00. 

.00. 

zee.. 


20  per  cent. 


zs  per  cent 

3S  percent 

23  per  cent 

20  per  cent 

35  percent 

36  cents  per  gross. . 
zs  percent 


4  cents  per  linear 
foot 

5  cents  per  linear 
foot 

zi  cents  per  linear 
foot 


50  per  cent 
50  per  cent 


3S  percent 
45  per  cent 

2S  per  cent 
45  percent 
Z5  percent 
Free 
Free 

Free 

I  cent  per  thou- 
sand 

fz.oo  per  thousand 

Free 

30  per  cent 

zo  per  cent 
40  per  cent 


zs  percent 

50  per  cent 
zs  percent 
45  per  cent 

Free 

zo  per  cent 

Free 


Free 

Free 

35  percent 

fz.oo 
f3.so 
Free 

30  per  cent 


zs  percent 
35  per  cent 

35  per  cent 
20  per  cent 
zs  percent 

36  cents  per  gross 
zs  per  cent 

3  cents  per  linear 

foot 
3  cents  per  linear 

foot 
z  cent  per  linear 

loot 


30  per  cent so  per  cent 


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40 


JOURNAL  OF  POUTICAL  ECONOMY 


TABLE  Xn-Condmdti 
Fkeb  List 


Paka 

GRAPH 


A&TICLE 


Rate  or  Dimr 


House 
Bfll 


Senate 
Amendment 


Conference 
Report 


401 
403 

430 


434 
434 

4SO 

453 
S05 

561 
566 

sM 

6isi 

63X 
65a 

6S4 


Beet  and  sugar-cane  machinery. . 

Alcohol,  ethyl,  denatured 

Perchlorate  of  ammonia 

Plain  woven  fabrics,  single  jute 
yam,  not  bleached,  dyed, 
etc 

Blankets,  of  wool  or  cotton, 
valued  at  less  than  40  cents 
per  pound 

Press  cloths  for  oil  milling  pur- 
composed  of  camel's 


25  percent 

$2. 60  per  gallon.. 
IS  percent 


Free. 
Free. 
Free. 


ao  per  cent. 


25  percent. 


Free. 
Free. 


poses, 
nair. . 


Textbooks  used  In  schoob. . . 
Apparatus  used  in  tfiarhing  the 

blind 

Sand-blast  nn^^lim«>f  uid  sludge 


Free 

1$  percent. 


10  per  cent. 
Free 


Free. 


Catgut  for  surgical  use 

Amber  in  chips,  valued  not  nu»e 

than  50  cents  per  pound  . . . 

Lard  compounds  and  substitutes 

Horseshoe  nail  rods 

Needles  for  shoe  machines. 
Palm  nuts  and  palm-nut  kernels 

Perillaofl 

Lubricating  oil,  n.s.pi 

Photographic  and  moving-picture 

Steel  engraved  forms  for  bonds, 
etc 

Terra  alba,  not  made  from  gyp- 
sum or  plaster  rock 

Paper  twine  for  binding  wool 

Pamtings  and  statuary  less  than 
50  years  old 


2$  percent, 
xo  per  cent. 


Free. 
Free. 


$1.00  per  pound. 
15  cents  per  pound 

xo  per  cent , 

2$  per  cent 

X  cent  per  pound 

1$  percent 

Free 


Free 

Free 

Free 

Free 

Free 

Free 

xs  percent. 


ao  per  cent. 

X5  per  cent. 

Free 

25  percent. 

Free 


Free. 
Free. 


50  cents  per  ton. 


25  percent. 


Free 

fa. 60  per  gallon 

Free 


Free 


25  per  cent 


Free 
Free 

Free 

Free 
Free 

Free 
Free 
Free 
Free 
Free 
Free 
X5  per  cent 

Free 

Free 

Free 
Free 

Free 


*  Various  rates  according  to  polariscopic  test. 

t  Specific  rates  are  provided  for  this  article  varying  according  to  condition  from  55  cents  to  I3.00 
per  pound,  which  are  approximately  the  equivalent  of  the  ad  valorem  rate  here  shown. 

X  The  same  duty  shall  be  assessed  as  that  which  applies  to  the  same  or  similar  grades  of  cariwts, 
plus  5  per  cent  ad  valorem. 

t  According  to  material  of  which  made. 

XI 

The  outline  of  the  actual  work  accomplished  by  the  tariff  of 
1913  is  now  complete.  Before  proceeding  to  a  critical  estimate  of 
the  meaning  of  that  work  and  before  attempting  an  analysis  of 
the  debates  on  the  bill  which  shall  place  them  in  a  proper  perspec- 
tive as  related  to  other  tariff  discussion,  it  is  worth  while  to  con- 
sider the  effect  of  the  Underwood-Simmons  act  in  the  aggregate  and 
to  form  as  fair  an  idea  as  possible  of  the  general  purport  of  its 
provisions.  As  has  been  seen,  the  net  effect  of  the  changes  made 
has  been  to  reduce  the  average  level  of  tariff  duties  from  about 


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TEE  TARIFF  OF  igij  41 

37  per  cent  to  about  27  per  cent.  But  this,  as  already  incidentally 
noted,  is  not  by  any  means  the  whole  story,  inasmuch  as  certain 
features  of  the  bill  have  been  left  at  their  old  figures— notably  the 
schedule  relating  to  wines,  liquors  and  tobacco — ^with  a  view  to. 
getting  revenue  from  articles  not  regarded  as  necessary  to  life  in 
any  proper  sense  of  the  word.  If  attention  be  focused  upon  the 
necessary  articles  to  which  the  average  consumer  turns  in  making 
up  his  annual  budget,  it  will  be  found  that  the  general  level  of 
reduction  has  been,  so  far  as  such  matters  can  be  fairly  stated 
in  terms  of  averages,  from  about  32  per  cent  to  about  21  per  cent. 
This  reduction  is  unquestionably  equivalent  to  the  parii^  off  of 
the  surplus  layer  of  protection  which  had  kept  producers  of  the 
necessaries  of  life  invulnerable  to  the  shafts  of  possible  foreign 
competition  when,  favored  by  conditions  which  permitted  such 
action,  they  raised  their  prices  for  the  purpose  of  mulcting  the 
consumer.  It  must  be  conceded  that  this  step  is  nothing  less  than 
a  genuine  revolution  in  the  protective  policy  of  the  United  States. 
It  constitutes  a  direct  breach  with  the  past  and,  more  important 
still,  the  manner  of  doing  it  holds  out  a  clear  promise  for  the 
future;  it  is  equivalent  to  a  pledge  to  the  commxmity  that  surplus 
tariff  duties  shall  be  removed  whenever  conditions  will  permit. 
Moreover,  the  entire  indifference  to  the  special  pleas  of  manufac- 
turers who  wotild  have  wrought  the  new  bill  into  a  shape  correspond- 
ing to  their  own  wishes-  constitutes  a  new  departure  in  legislative 
methods.  The  future  historian  of  the  tariff  will  count  it  of  great 
importance  that  the  radical  reduction  effected  by  the  act  of  1913 
was  made,  but  he  will  count  it  of  far  greater  importance  that  the 
system  of  backstairs  statesmanship,  the  secret  confabs  with 
manufacturers,  the  delivery  of  protective  jokers  in  return  for 
promised  campaign  contributions,  was  terminated,  and  that  the 
tariff  act  was  passed  under  conditions  free  from  any  grave  scandal 
at  least,  and  uncontaminated  by  the  presence  of  serious  suspicion 
as  to  motive.  He  will  hold  it  a  remarkable  advance  in  American 
l^islation  that  the  crooked  and  devious  methods  formerly  pursued 
in  the  upper  chamber  of  Congress  for  the  purpose  of  crippling 
desirable  provisions  originating  in  the  lower  chamber  were  largely 
abandoned,  and  that  if  anything  the  Senate  went  farther  in  its 


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42  JOURNAL  OP  POLITICAL  ECONOMY 

effort  to  place  the  tariff  bill  upon  a  theoretically  just  and  sound 
foundation  than  did  the  House  of  Representatives.  From  the 
standpoint  of  legislative  philosophy,  it  will  doubtless  be  admitted 
that  the  tariff  act  of  1909  carried  within  itself  its  own  seeds  of 
retribution.  The  tide  of  tariff  reform  on  whose  crest  the 
Underwood-Simmons  bill  became  law  could  never  have  attained 
the  height  it  did,  save  for  the  public  indignation  which  demanded 
a  reaction  from  the  dishonest  favoritism,  graft,  and  political 
trickery  of  the  act  of  1909. 

A  new  standard  must,  however,  be  applied  in  judging  the  act 
of  1913.  It  cannot  fairly  be  judged  by  mere  comparison  with  the 
act  of  1909.  It  must  be  tested  in  part  by  its  results,  since  it  is 
enough  of  a  breach  with  the  past  to  produce  actually  traceable 
results.  It  must  also  be  tested  by  the  hold  it  attained  upon  the 
electorate,  and  that  hold  will  be  partly  at  least  dependent  upon 
the  attitude  of  the  public  toward  the  income-tax  law  which  was 
brought  in  as  a  feature  of  the  tariff  measure  to  supplement  the 
curtailed  income  resulting  from  the  cuts  in  duties  that  were  made 
by  the  enactment  itself.  It  is  therefore  necessary  to  gain  a  broader 
viewpoint  of  the  tariff  of  1913  than  that  which  has  to  do  merely 
with  the  rates  of  duty  levied  and  with  the  way  in  which  these  were 
determined.  In  its  ethical  aspects,  in  its  method  of  preparation, 
and  in  its  conceptions,  the  act  is  far  superior  to  the  legislation 
by  which  it  had  been  preceded,  since  its  authors  succeeded  in 
emerging  from  the  poisonous  morass  of  political  dishonesty  in 
which  the  former  acts  were  framed.  But  the  introduction  of  a 
differ^t  concept  of  federal  taxation,  and  the  attempt  to  apply 
this  new  concept  in  practice  places  the  whole  issue  upon  much 
larger  and  entirely  new  ground.  How  the  act  must  and  will  be 
judged,  in  what  way  it  will  affect  the  relations  of  the  federal  govern- 
ment to  the  electorate,  and  the  canons  that  must  be  applied  in 
estimating  its  probable  industrial  consequences  must  be  deferred 
for  later  treatment. 

H.  Parker  Willis 

New  Yokk  City 


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THE  UNITED  SHOE  MACHINERY  COMF ANY. -Concluded 

"Tied"  leases  and  shoe-production-service  have  developed 
naturally  together.  Shoe  machinery  seems  always  to  have  been 
more  conveniently  leased  than  bought  outright.  As  shoe  machinery 
became  more  expensive,  varied,  and  complex,  it  became  more  con- 
venient to  lease  than  to  buy,  and  more  essential  that  the  machines 
composing  the  successive  links  in  the  chain  of  shoe  manufacture 
should  be  in  perfect  mechanical  correlation.  An  arrangement 
of  leases  was  accordingly  developed  that  encouraged  the  shoe  manu- 
facturer to  use  a  series  of  perfectly  correlated  machines  for  the  series 
of  mechanical  operations  in  the  "bottoming"  of  shoes,  and  encotu:- 
aged  the  machinery  manufacturer  to  keep  this  series  of  machines 
in  perfect  operation  in  the  shoe  manufacturer's  factory.  This 
arrangement  of  leases,  on  which  shoe-production-service  entirely 
depended,  in  turn  depended  entirely  on  "tied"  leases. 

vm 

"Tied"  leases  and  shoe-production-service  have  their  counter- 
parts in  many  familiar  industries. 

The  railroad  company  "ties"  its  locomotives,  its  cars,  its  road- 
bed, and  its  station  facilities,  and  offers  them  to  its  passengers  for 
use  in  combination  only.  The  telephone  company  "ties"  its 
instruments,  its  switch-boards,  its  trunk  lines,  and  its  exchanges, 
and  offers  them  as  one  indivisible  service  only.  The  taxicab 
company  "ties"  the  taxicab  and  the  chauffeur,  and  offers  them  for 
hire  as  one  entirety  only. 

So  familiar  are  all  these  "tieing"  arrangements  that  no  one 
ever  thinks  of  "untieing"  them.  The  railroad  company  might, 
of  course,  offer  its  patrons  the  separate  use  of  its  roadbed  without 
its  equipment,  or  its  equipment  without  its  roadbed,  or  its  station 
facilities  without  either  roadbed  or  equipment.  The  telephone 
company  might  lease  its  instruments,  its  switchboards,  its  trunk 
lines,  and  its  exchanges  separately,  and  leave  to  others  the  co-ordina- 
tion of  all  these  appliances  into  a  complete  telephone  service.  The 
taxicab  company  might  let   taxicabs  without   chauffeurs,   and 

43 


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44  JOURNAL  OP  POLITICAL  ECONOMY 

chauffeurs  without  taxicabs.  Such  arrangements  would,  of  course, 
be  physically  possible,  and  a  fair  charge  for  each  separate  item 
might  possibly  be  determined.  But  everyone  knows  that  under 
such  arrangements  all  possibility  of  service  would  disappear. 

Service  is  not  leasing  locomotives  and  cars  and  roadbeds  and 
station  facilities,  nor  renting  telephone  instruments  and  switch- 
boards and  trunk  lines  and  exchanges,  nor  hiring  out  taxicabs  and 
chauffeurs.  Service  is  all  these  and  much  more  besides.  Rail- 
road service  is  the  use  of  the  locomotive,  the  car,  the  roadbed,  and 
the  station  facilities,  and  also  the  assumption  of  complete  responsi- 
bility by  the  railroad  company  for  a  safe  and  reasonably  comfortable 
joximey.  Telephone  service  is  the  use  of  the  instrument,  the  switch- 
board, the  trunk  line,  and  the  exchange  and  also  the  assumption  of 
complete  responsibility  by  the  telephone  company  for  prompt  and 
efficient  transmission  of  speech.  Taxicab  service  is  the  use  of  the 
taxicab  and  the  chauffeur,  and  also  the  assumption  of  complete  re- 
sponsibility by  the  taxicab  company  for  a  satisfactory  trip.  The  use 
of  all  of  the  appliances  of  the  railroad  company,  or  of  the  telephone 
company,  or  of  the  taxicab  company,  is  obviously  more  valuable, 
when  they  are  used  together,  than  their  separate,  uncorrelated  use 
can  ever  possibly  be.  Until  all  the  appliances  for  service  have 
been  integrated,  either  by  the  patron  or  by  someone  for  him,  the 
first  essential  of  satisfactory  service  will  be  lacking. 

Satisfactory  service  must  begin  with  concentration.  Whoever 
would  assume  the  responsibility  for  satisfactory  service  must  first 
assemble  all  the  appliances,  and  then  adjust  them  to  each  other  in 
perfect  correlation,  before  he  can  have  the  absolutely  essential 
conditions  of  satisfactory  service.  Nothing  short  of  complete 
integration,  under  single  concentrated  control,  will  suffice.  Neither 
the  use  of  all  the  company's  appliances,  nor  their  integration  at  the 
trouble  and  expense  of  the  patron,  will  produce  real  service.  The 
assumption  by  the  company  of  complete  responsibility  for  satis- 
factory operation  is  a  larger  element  of  service  than  the  use  of  the 
company's  appliances  separately,  or  the  use  of  all  of  the  company's 
appliances,  or  even  the  use  of  all  of  the  company's  appliances  to- 
gether. Not  until  responsibility  for  satisfactory  operation  has  been 
completely  shifted  from  the  patron  to  the  company  can  service 


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THE  UNITED  SHOE  MACHINERY  COMPANY  45 

be  said  to  begin.  Not  until  all  the  appliances  of  service  have  been 
integrated  and  concentrated  under  the  company's  control  can  the 
company  ever  assume  this  responsibility.  As  the  first  condition 
of  service,  therefore,  perfect  integration  and  concentrated  control 
must  be  accomplished  by  one  sort  or  another  of  "tieing*'  arrange- 
ment. 

These  truths  would  scarcely  deserve  mention  were  they  not  so 
obvious  as  frequently  to  escape  notice.  "Tied"  leases  of  shoe 
machinery  have  been  attacked  in  principle,  and  the  entire  economic 
case  against  the  United  Shoe  Machinery  Company  has  been  rested 
upon  them.  Nevertheless,  in  principle  at  least, "  tied  "  leases  appear 
to  be  an  absolute  economic  necessity  without  which  shoe-produc- 
tion-service would  be  impossible.  Were  the  economic  case  against 
the  United  Shoe  Machinery  Company,  therefore,  to  be  determined 
upon  the  issue  of  whether  or  not "  tied  "  leases  are  sound  in  principle, 
the  economic  experience  of  every  industry  furnishing  service  to  the 
community  would  seem  to  be  decisive  of  the  case. 

IX 

At  the  point  where  government  regulation  begins,  the  analogy  of 
shoe-production-service  to  the  service  furnished  by  public  utility 
corporations  necessarily  breaks  down. 

Railroad  and  telephone  companies  and  taxicab  owners  subsist 
upon  franchises  and  licenses  which  confer  special  privileges,  and 
they  are,  for  that  reason,  properly  subject  to  government  regula- 
tion. But  shoe  machinery,  like  the  steam  engine — to  use  the 
Supreme  Court's  illustration  in  its  discussion  of  shoe  machinery' — 
is  wholly  the  product  of  individual  and  unaided  private  enterprise. 
Shoe-machinery  manufacturers,  therefore,  shoidd  never,  legally 
or  govemmentally,  be  considered  subject  to  governmental  regula- 
tion like  public  utilities,  any  more  than  the  manufacturers  of  steam 
engines  or  other  complicated  mechanical  products. 

With  this  important  qualification,  however,  shoe-production- 
service  is  a  true  economic  and  industrial  utility.  Economically 
and  industrially,  all  utilities  that  furnish  service  to  their  custo- 
mers, whether  public  or  private,  have  many  features  in  common. 

'  UmUd  States  v.  Winslow,  337  U.S.  303,  3x7,  3x8. 


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46  JOURNAL  OP  POUTICAL  ECONOMY 

Efficient  shoe-production-service,  no  less  than  efficient  raih-oad, 
telephone,  and  taxicab  service,  depends,  as  has  already  been 
shown,  upon  concentrated  control  and  responsibility.  Nor  does 
the  resemblance  end  here.  Shoe-production-service,  like  railroad, 
telephone,  and  taxicab  service,  has  been  found  to  be  most  prac- 
ticable when  furnished  to  everybody  upon  substantially  equal 
terms.  Shoe-production-service,  therefore,  more  conspicuously 
than  any  other  form  of  private  utility,  has  demonstrated  that 
equality  of  treatment,  instead  of  being  a  rule  of  legal  and  govern- 
mental creation,  is  the  economic  and  ind\istrial  law  of  every  true 
utility,  whether  public  or  private. 

Equality  of  treatment,  Mr.  Brandeis  declares,  has  always  been 
the  policy  of  the  United  Shoe  Machinery  Company: 

They  started  out  with  certaia  perfectly  admirable  principles  which,  I 
understand,  have  been  adhered  to.  In  the  first  place,  everybody,  big  and 
little,  was  to  be  treated  alike;  there  was  to  be  no  discount  for  quantity;  so 
that  the  small  manufacturer  had  the  same  chance  as  the  large  manufacturer, 
both  in  respect  to  service  and  royalty.  The  company  adopted  a  system  of 
leasing,  which  gave  an  (^portunity  to  the  small  manufacturer  with  little  capital 
to  go  into  the  business;  and  the  company  gave  him  as  good  service  as  the 
larger  manufacturer.' 

Before  the  United  Shoe  Machinery  Company  was  organized, 
this  was  not  the  rule.  Even  the  company's  critics  have  conceded  the 
improvement  which  the  company  in  this  respect  has  brought  about: 

We  were  obliged  to  dicker  and  trade  with  every  different  manufacturer  of 
machinery  all  the  time,  with  the  moral  certainty  that  somebody  who  had  more 
time  and  attention  to  give  to  it  wpuld  get  a  better  bargain  than  we  were  able 

to  obtain Today  thb  is  all  changed We  are  confident  that  we  ' 

are  getting  the  machine  on  as  favorable  terms  as  any  competitor  and  we  are 
enabled  to  employ  our  own  time  and  ability  to  the  legitimate  branches  of  our 
business,  and  we  have  not,  up  to  this  time,  been  obliged  to  pay  as  much  for  this 
privilege  as  we  formerly  paid  for  the  very  much  less  satisfactory  conditions.' 

Shoe  manufacturers  in  general  have  seemed  enthusiastic  over 
the  equality  with  which  the  United  Shoe  Machinery  Company 
treats  all  its  customers: 

>  Senate  Interstate  Commerce  Committee  Hearings,  December  14,  15,  and  16, 
1911,  PartXVI,  p.  1 160. 

*  Charles  H.  Jones,  quoted  in  House  Judiciary  Committee  Hearings,  January  26, 
27,  and  FdHuaiy  19, 1912,  p.  1x0. 


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THE  UNITED  SHOE  MACHINERY  COMPANY  47 

"The  United  Company  have  treated  everybody  exactly  alike," 
said  a  New  York  manufacturer/  "The  company  uses  us  aQ  alike," 
declared  a  Massachusetts  manufacturer.'  "One  thing,  especially, 
which  appeals  to  us,  is  that  all  are  treated  alike,"  said  another 
Massachusetts  manufacturer.^  "The  benefits  we  receive  from  the 
United  Shoe  Machinery  Company,"  declared  a  New  York  manufac- 
turer, "have  enabled  us  to  compete  successfully  with  the  larger 
manufacturers  of  shoes."^  "We  have  no  fatilt  whatever  to  find 
with  them  as  we  concede  that  we  are  on  par  with  everyone  else," 
said  another  New  York  manufacturer.'  "We  positively  know 
that  we  get  the  same  fair  treatment  that  all  our  competitors  get," 
declared  a  Wisconsin  manufacturer.^  "  The  man  with  small  means 
but  with  ability,"  said  a  California  manufacturer,  "has  really  the 
same  opportunity  as  the  man  with  millions.  He  obtains  his 
machinery  on  the  same  basis  as  his  neighbor."^  "The  present 
policy  of  the  company,"  declared  a  Pennsylvania  manufacturer, 
"is  a  decided  benefit  to  the  smaller  manufacturers,  inasmuch  as  it 
places  them  on  an  equality  with  their  larger  competitors,  so  far  as 
the  company's  line  of  machinery  is  concerned,  and  enables  men  of 
small  means  to  engage  in  the  manufacture  of  shoes."* 

'  Letter  of  Heywood  Boot  and  Shoe  Co.,  Worcester,  Mass.,  Boston  News  Bureau, 
November  24,  1911;  House  Judiciary  Committee  Hearings,  February  30,  31,  33,  and 
March  i,  191 2,  pp.  21-30. 

'  Letter  of  Trevett  &  Berry,  Lynn,  Mass.,  Boston  News  Bureau,  November  18, 
X911;  House  Judiciary  Committee  Hearings,  Feb.  20,  31,  33,  March  i,  1913,  pp. 
31-30. 

i  Letter  in  Boston  New  Bureau,  November  30, 1911;  House  Judiciary  Committee 
Hearings,  February  30,  31,  33,  March  i,  1913,  pp.  31-30. 

4  Letter  of  A.  G.  Spalding  &  Bros.,  New  York,  Boston  News  Bureau,  December  6, 
191 1 ;  House  Judiciary  Committee  Hearings,  February  30,  31,  33,  March  i,  1913, 
pp.  31-30. 

s  Letter  of  Meldola  &  Coon,  Rochester,  N.Y.,  Boston  News  Bureau,  December  i, 
191X;  House  Judiciary  Conmiittee  Hearings,  February  30,  31,  33,  March  i,  1913, 
pp.  31-30. 

*  Letter  of  Columbia  Shoe  Manufacturing  Co.,  Sheboygan,  Wis.,  Boston  News 
Bureau,  November  11,  191 1;  House  Judiciary  Committee  Hearings,  February  30,  31, 
33,  March  i,  191 3,  pp.  31-30. 

7  Letter  of  Brennan  Tannery  and  Shoe  Manufacturing  Co.,  Upland,  Cal.,  Boston 
News  Bureau,  December  3,  191 1;  House  Judiciary  Committee  Hearings,  February  30, 
21,  32,  March  i,  191 3,  pp.  31-30. 

*  Letter  of  T.  H.  Eisenhuth,  WiUiamsport,  Pa.,  Boston  News  Bureau,  November 
13,  191 1 ;  House  Judiciary  Committee  Hearings,  February  30,  31,  32,  March  i,  1913, 
pp.  31-30. 


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48  JOURNAL  OP  POLITICAL  ECONOMY 

This  equality  of  service  and  royalty  charge,  to  rich  and  poor 
alike,  which  has  always  characterized  the  United  Shoe  Machinery 
Company  system,  has  repeatedly  been  named  as  the  cause  of  the 
absolutely  open  competition  that  exists  in  the  shoe  manufacturing 
business  throughout  the  United  States.' 

"This  industry,"  says  the  Massachusetts  Commission  on  the 
Cost  of  Living,  "is  one  of  the  few  great  lines  of  industrial  enter- 
prises in  the  United  States  in  which  the  trust  form  of  control  has 
not  made  headway/'* 

X 

"Started  imder  conditions  the  most  favorable  to  serve  the 
public  of  probably  any  in  the  field  of  industry,"  as  Mr.  Brandeis 
says  in  referring  to  the  United  Shoe  Machinery  Company,  "man- 
aged by  the  men  who  had  made  the  greatest  success  of  any  in  the 
shoe-machinery  business  ....  by  the  men  who  were  the  ablest, 
the  hardest  workers,  and  in  a  certain  sense,  the  farthest  seeing  of 
all  those  engaged  in  the  business"^  (among  whom,  it  should  be 
added,  was  Mr.  Brandeis  himself),^  the  United  Shoe  Machinery 
Company  is,  nevertheless,  today,  Mr.  Brandeis'  familiar  illustra- 
tion of  the  "inefficiency  incident  to  monopoly."*  Mr.  Brandeis 
says: 

There  has  been  a  cessation  in  the  shoe  machinery  business — a  cessation  of 
advance.  Europe  has  gone  ahead.  You  will  find  exactly  the  same  thing  in 
shoe  machinery.  Germany  has  gone  ahead  in  invention.  Why?  Because 
of  the  various  competing  demands  on  invention.  There  is  no  room  for  any 
American  inventor  in  these  things.  Not  merely  do  they  control  patents  but 
they  discourage  invention,  because  there  is  no  market  for  the  inventor,  because 
there  is  not  any  chance  for  the  capitalist  to  go  ahead  and  do  things.    He  has 

*  See  House  Judiciary  Committee  Hearings,  January  26,  27,  and  February  19, 
1912,  pp.  112,  115;  February  20,  21,  22,  and  March  i,  1912,  pp.  15,  16,  48;  Senate 
Interstate  Commerce  Committee  Hearings,  January  13,  15,  and  16,  1912,  Part  XXI, 
p.  1859. 

*  Report  of  Massachusetts  Commission  on  the  Cost  of  Liwing,  1910,  p.  156. 

s  Senate  Interstate  Commerce  Committee  Hearings,  December  14,  15,  and  z6, 
191 1,  Part  XVI,  p.  1x60. 

4  Senate  Interstate  Commerce  Committee  Hearings,  January  17,  18,  19,  191 2, 
Part  XXn,  p.  1957. 

<  Semite  Interstate  Commerce  Committee  Hearings,  December  14,  15,  and  16, 
19x1,  Part  XVI,  p.  1x60. 


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THE  UNITED  SHOE  MACHINERY  COMPANY  49 

so  discouraging  an  outlook,  with  this  huge,  powerful  organization,  with  all  the 
money  in  the  business  against  him,  that  the  o^italist  will  put  his  money  some- 
where else,  and  the  inventor  will  either  put  his  brain  somewhere  else,  or  what 
is  most  common  of  all,  he  will  not  utilize  it  at  all  for  the  purposes  for  which  it 
otherwise  would  be  utilized.' 

The  Department  of  Commerce  and  Labor  of  the  United  States 
has  recently  investigated  the  shoe  and  leather  trade  in  Europe, 
and  has  foimd  that  neither  Germany  nor  any  other  comitry  of 
Europe  has  "gone  ahead  in  invention"  of  shoe  machinery. 

Prior  to  18S9,  when  the  American  Goodyear  machines  were  first  introduced 
into  Germany,  the  boot  and  shoe  industry  was  of  comparatively  small  impor- 
tance. At  that  time,  other  shoemaking  machines  of  American  origin  were 
used,  such  as  the  American  heeling  and  finishing  machines  and  the  McElay 
sole-sewing  machine,  but  they  were  not  very  numerous.' 

From  1909  to  1910,  however,  the  quantity  of  machinery  for 
the  shoe  and  leather  industries  imported  into  Germany  from  the 
United  States  increased  from  626,340  pounds  to  691,240  po\mds; 
while  the  quantity  imported  into  Germany  from  the  United  King- 
dom declined  during  the  same  years  from  150,700  poimds  to  144,100 
poimds.*    The  report  continues: 

It  is  difficult  to  state  even  approximately  the  proportion  of  shoemaking 
machinery  supplied  to  German  manufacturers  by  the  German  United  Shoe 
Machinery  Company  (affiliated  with  the  United  Shoe  Machinery  Company, 
of  Boston,  Mass.),  and  competing  shoe-machinery  concerns.  It  is  safe 
to  state,  however,  that  by  far  the  larger  part  of  eqiiiq>ment  is  furnished  by  the 
German  United  Shoe  Machinery  Company.  The  well-known  Maschinen- 
fabrik  "Moenus"  A.  G.,  Frankfort-on-the-Main,  originated  from  the  firm  of 

Webber  &  Miller  founded  in  1862 Being  a  purely  German  concern,  it 

does  a  large  business,  especially  in  the  government's  military  workshops.  It 
o^ies  practically  everything  it  can  of  American  invention  in  shoemaking  ma- 
chinery, and  also  manufactures  copies  of  American  taoning  machinery 

The  Atlas  Werke,  Leipzig,  originally  copied  the  Eppler  welt  machines,  but 
various  difficulties  in  connection  with  the  construction  of  the  machines  were 
experienced;  and  I  understand  the  Eppler  system  has  since  been  dropped,  and 

>  House  Patent  Committee  Hearings,  Part  18,  May  15,  191 2,  p.  10. 

*  "Shoe  and  Leather  Trade  in  Germany,"  Special  Agents  Series  No.  50,  Depart- 
ment of  Commerce  and  Labor,  191 3,  p.  7. 

*  Ibid.,  p.  8. 


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so  JOURNAL  OP  POLITICAL  ECONOMY 

that  copies  of  the  old  Goodyear  welter  and  stitcher  are  now  being  manufactured. 
....  Keats  Maschinen  Gesellschaft,  Frankfort-on-the-Main,  is  probably 
one  of  the  oldest  shoe-machinery  firms,  but,  I  am  told,  it  is  r£4>idly  losing  its 
hold  on  the  business  in  this  coimtry.  Adrian  &  Busch,  Oberursel,  manufacture 
a  welter  and  stitcher  which  finds  some  sale.    They  also  manufacture  copies  of 

a  number  of  American  accessory  machines  for  shoemaking The  cost 

of  the  machinery  manufactured  by  the  firms  mentioned  is  less  than  that  of  the 
same  furnished  by  the  German  United  Shoe  Machinery  Company,  but  the 
relative  efficiency  is  also  correspondingly  less.' 

The  Department  of  Commerce  and  Labor  reported  upon  the 
United  Kingdom: 

None  of  the  competing  firms  produces  the  complete  factory  plant  put  out 
by  the  British  United  Shoe  Machinery  Company,  and  it  is  probable  that  the 
share  of  installed  machinery  now  held  by  these  competing  firms  is  £4>prozi- 
mately  20  per  cent,  leaving  practically  80  per  cent  of  the  equipment  to  be 
furnished  by  the  British  United  Shoe  Machinery  Company.' 

Similar  conditions  were  foimd  in  France: 

The  shoemaking  machinery  installed  in  French  factories  is  largely  supplied 
by  the  United  Shoe  Machinery  Company  of  France,  which  is  affiliated  with  the 
United  Shoe  Machinery  Company  of  Boston.  In  competition  with  this  equip- 
ment are  machines  of  French,  English,  and  German  origin,  which,  combined, 
constitute  about  25  per  cent  of  the  total  equipment.^ 

XI 

Substantially  the  same  conditions  were  found  in  all  the  other 
coimtries  of  Europe. 

In  Denmark: 

Of  the  38  factories  in  the  country  12  are  equipped  entirely  with  American 
machinery In  every  instance  where  it  was  possible  to  obtain  informa- 
tion on  the  subject  it  was  stated  that  American  shoemaking  machines  give 
better  satisfaction  in  all  respects  than  like  machines  of  any  other  country.  In 
factories  in  which  American  machines  have  r^laced  competing  equipment, 
lower  wolfing  cost  has  invariably  resulted  without  reduction  in  wages.^ 

>  "Shoe  and  Leather  Trade  in  Germany,"  Special  Agents  Series  No.  50,  Depart- 
ment of  Commerce  and  Labor,  19 12,  pp.  8-9. 

'  "Shoe  and  Leather  Trade  in  the  United  Kingdom,"  Special  Agents  Series  No. 
49,  Department  of  Commerce  and  Labor,  191 2,  p.  8. 

>  "Shoe  and  Leather  Trade  in  France  and  Switzerland,"  Special  Agents  Series 
No.  57,  Department  of  Commerce  and  Labor,  19x2,  p.  8. 

4  "Shoe  and  Leather  Trade  in  Scandinavia,"  Special  Agents  Series  No.  63,  Depart- 
ment of  Commerce  and  Labor,  19 12,  pp.  7-8. 


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THE  UNITED  SHOE  MACHINERY  COMPANY  $1 

In  Norway: 

There  are  13  shoe  factories  in  Norway  equipped  throiighout  with  American 
machinery  and  17  using  machines  of  other  origin.' 

In  Sweden: 

The  factory  buildings,  in  general,  are  well  constructed  ....  with  the 
machinery  installed  after  the  American  system.  ....  Sweden  has  at  present 
56  boot  and  shoe  factories,  32  of  which  are  equipped  throughout  with  American 
machinery.' 

In  Italy: 

The  industry  developed  gradually  until  about  a  year  ago,  when  the  lease 
system  for  shoe  machinery  was  introduced  by  the  United  Shoe  Machinery 
Con^>any  of  Italy  (affiliated  with  the  United  Shoe  Machinery  Company). 
The  lease  system  resulted  in  this  coimtry,  as  elsewhere,  in  the  installation  of 
machinery  by  many  small  manufacturers  who  were  not  in  a  position  to  do  so 
previously  because  of  lack  of  funds,  while  those  possessing  a  few  machines 
were  enabled  to  complete  the  equipment  of  their  plants 

American  shoemaking  machinery  was  not  introduced  into  Italy  to  a  con- 
siderable extent  until  1906.  It  may  be  safely  stated  that  at  present  90  per 
cent  of  the  entire  equipment  of  Italian  shoe  factories  is  furnished  by  the  United 
Shoe  Machinery  Company  of  Italy.  Competition  is  principally  met  in  ma- 
chines of  German  manufacture,  both  the  Moenus  and  Keats  houses  maintaining 
branches  in  Milan.  One  or  two  Italian  shoe  factories  are  equipped  with 
French  machines,  and  one  with  English  machinery.  Since  the  introduction 
of  the  lease  system  by  the  American  Company,  competing  concerns  have 
constantly  lost  ground,  as  the  trade  of  the  largest  manufacturers,  who  have 
now  adopted  the  American  leased  machines,  was  formerly  in  the  hands  of 
competitors.  The  change  of  equipment  has  proved  very  profitable,  as  it  is  con- 
ceded by  Italian  manufacturers  that  a  shoe  can  be  made  better  and  more 
chei^ly  on  American  machines  than  on  any  other.  The  proportion  of  equip- 
ment furnished  by  competing  companies  is  £4>proximately  as  follows:  English, 
I  per  cent;  French,  3  per  cent;  German,  6  per  cent;  American,  90  per  cent. 

Competing  machines  are  generally  imitations  of  American  equipment. 
The  cost  of  machines  similar  to  those  sold  by  the  American  company  is  lower, 
but  efficiency  corresponds  to  the  price;  for  lines  corresponding  to  leased  Ameri- 
can machines,  the  prices  asked  are  accordingly  higher.  No  competing  Euro- 
pean company  has  yet  put  out  as  full  and  complete  a  line  of  shoemaking 
machinery  as  the  United  Shoe  Machinery  Company.* 

« Ibid.,  p.  II.  *  Ihid.,  p.  15. 

*"Shoc  and  Leather  Trade  in  Italy  and  Austria-Hungary,"  Special  Agents 
Series  No.  70,  D^>artment  of  Commerce,  19 13,  pp.  5,  6. 


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52  JOURNAL  OP  POUTICAL  ECONOMY 

In  Austria-Hungary: 

Ameriqm  machines  make  up  by  far  the  larger  part  of  the  factory  equip- 
ment in  this  coimtry.' 

In  Russia: 

The  quantity  of  boots  and  shoes  manufactured  in  Russia  by  machinery  is 
increasing  rapidly,  and  the  larger  part  is  made  on  American  machines.  The 
use  of  machinery  of  American  origin  began  in  1899  &n<i  o^  the  equipment  now 
installed  in  the  49  factories  about  60  per  cent  is  American,  30  per  cent  German, 
and  10  per  cent  French.* 

In  Belgium: 

The  larger  proportion  of  the  shoemaking  machinery  used  in  Belgium  is 

furnished  by  the  United  Shoe  Machinery  Company Of  the  120  factories 

manufacturing  by  machinery,  55  may  be  called  complete  plants.  Of  these, 
33  use  only  machines  of  the  United  Shoe  Machinery  Company,  12  use  both 
American  and  European  machines,  and  10  iise  only  £urq>ean  machines.  Of 
the  65  manufacturers  who  have  an  incomplete  equipment,  8  use  no  other 
machines  than  those  of  the  United  Shoe  Machinery  Company,  19  use  both 
American  and  European  machines,  and  38  use  only  Eurq>ean  madiines.' 

In  Spain: 
Ninety  per  cent  of  the  machinery  now  in  actual  use  is  American.^ 

European  shoe  manufacturers,  the  United  Shoe  Machinery 
Company  declares,  get  the  United  Shoe  Machinery  Company's 
machines  upon  no  better  terms  than  do  American  manufacturers: 

There  is  no  truth  in  the  statement  that  European  shoe  manufacturers  get 
the  machines  of  the  United  Shoe  Machinery  Company  on  better  terms  than 
American  manufacturers  can  get  them.  The  average  royalty  per  pair  of  shoes 
of  the  same  quality  has  never  been  lower  in  Europe  than  in  the  United  States. 
There  is  no  appreciable  difference  between  the  leases  which  European  and 
American  manufacturers  sign;  yet  the  United  Shoe  Machinery  Company,  pur- 
suing abroad  the  same  business  methods  as  at  home,  has  done  a  greatly  increas- 
ing business  in  open  competition  with  the  so-called  free  machinery  which  its 
critics  here  profess  to  favor.    Eun^>ean  manufacturers  are  constantly  rq>lacing 

'  ''Shoe  and  Leather  Trade  in  Italy  and  AustriarHungary,"  ^;>ecial  Agents  Series 
No.  70,  Department  of  Commerce,  1913,  p.  33. 

'"Shoe  and  Leather  Trade  in  Russia,"  Special  Agents  Series  No.  68,  DqMrt- 
ment  of  Commerce  and  Labor,  1913,  p.  3. 

3  "Shoe  and  Leather  Trade  in  Belgium,  Spain,  and  Egsrpt,"  Special  Agents  Series 
No.  73,  Department  of  Commerce  and  Labor,  19x3,  pp.  $"6. 

*  Tbid,,  p.  14. 


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THE  UNITED  SHOE  MACHINERY  COMPANY  53 

their  free  machinery  with  machinery  obtained  from  the  United  Shoe  Machinery 
Company  under  lease  conditions,  because,  like  American  manufacturers,  they 
know  they  can  thus  get  better  machines,  better  service,  and  better  terms  than 
in  any  other  way." 

XII 

While  still  a  director  of  the  United  Shoe  Machinery  Company 
Mr.  Brandeis  described  its  encouragement  of  invention: 

It  is  absolutely  essential  that  there  should  be  constant  development,  and 
that  we  should  be  able  to  introduce  new  machines  or  to  apply  to  those  outstand- 
ing the  improvements  which  are  made.  And  those  improvements  are  very 
numerous.  For  instance,  the  number  of  patents  which  have  been  used  by  this 
company,  or  which  are  now  pending  and  which  we  expect  to  obtain,  in  these 
nine  years  is  over  1,000.  Now  it  is  said  that  the  inventor  has  no  chance.  It 
is  absolutely  imtrue.  Although  we  have  now  35  men  who  are  working  all  the 
time  on  noUiing  else  except  attempting  to  improve  our  machines,  and  the  con- 
cern has  spent  $1 50,000  a  year  in  attempts  to  improve  its  machines — ^I  mean  not 
in  manufacturing,  but  this  is  an  experimental  expense,  a  patent  expense,  and 
inventor's  e]q>ense — although  that  is  true,  we  have  bought  more  patents  from 
other  inventors  in  these  years  than  we  have  developed  in  our  own  establishment 
with  all  that  expense.  We  have  probably  spent  during  this  period  $1,000,000 
in  improvements  and  inventions  on  this  machinery,  and  yet  we  have  bought 
from  others  more  patents  than  we  have  developed  ourselves.* 

What  the  United  Shoe  Machinery  Company  has  since  done  to 
improve  shoe  machinery  has  been  described  by  its  president: 

During  the  year  [ending  March  i,  191 1]  the  company  brought  in  from  shoe 
factories  over  4,000  of  its  machines  which  were  broken  up  and  thrown  on  the 
scrap  heap  in  order  that  they  might  be  replaced  with  machines  embodying  the 
latest  improvements — an  expense  which  the  company  assumes  under  its  present 
system  of  doing  business  but  which  would  otherwise  have  to  be  borne  by  the 
shoe  manufacturers.^ 

During  the  fiscal  year  of  1912-13,  the  company  placed  on  the  market 
thirty  new  types  of  machines  as  follows:  three  in  the  pulling-over  department; 
one  in  the  lasting  department;  seven  in  the  Goodyear  department;  two  in  the 
heeling  department;  twelve  in  the  general  department;  two  in  the  eyelet 
department;   three  in  the  fitting-room  department.    These  types  are  either 

*  House  Judiciary  Committee  Hearings,  February  30,  31,  33,  March  i,  191 3,  p.  38. 

'House  Judiciary  Committee  Hearings,  January  36,  37,  February  19,  191 3, 
pp.  133-33. 

'House  Judiciary  Committee  Hearings,  January  36,  37,  and  February  19, 
191 3,  p.  193. 


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54  JOURNAL  OP  POUTICAL  ECONOMY 

improvements  of  machines  previously  in  use  or,  as  in  several  instances,  are 
entirely  new  machines.' 

Specific  illustrations  of  the  company^s  enterprise  have  been 
cited  by  the  company's  representatives: 

The  most  con^icuous  illustration  of  thb  phase  of  their  activities  is  thb 
Rex  pulling-over  machine,  which  cost,  taking  into  account  the  money  expended 
upon  it  by  the  original  owner,  and  money  expended  by  this  con^>any,  $i  ,000,000 
before  it  could  be  placed  upon  the  market,  and  it  is  now  leasing  it  at  three- 
eighths  of  a  cent  a  pair There  were  four  machines  in  connection  with 

that:  first,  the  Rex  pulling-over  machine;  second,  the  Rex  toe-shellacking 
machine;  third,  the  Rex  assembling  machine;  and  fourth,  the  Rex  upper- 
finish  machine Nobody  knew  whether  it  would  ever  work  and  produce 

results  until  the  last  dollar  was  expended,  and  the  whole  $1,000,000  was  at  the 

hazard  of  a  successful  result The  expenditures  by  this  company  to 

develop  other  necessary  machines,  that  have  cost  from  $150,000  to  $175,000 
and  to  $200,000,  have  been  solely  for  the  purpose  ....  of  producing  increased 
efficiency,  and  adding  ultimately  to  the  retiun  that  the  company  would  receive 
for  the  300  machines  that  it  is  either  selling  or  leasing  to  manufacturers,  at 
the  same  time  necessarily  producing  an  efficient  result  to  the  factories  and  to 
the  wage-earners  in  the  industry,  and  also  at  the  same  time  producing  results 
to  the  consumer.' 

What  these  improvements  signify  in  shoe  manufacture  has  been 
explained  ,by  practical  shoe  manufacturers: 

We  have  had  a  machine  put  in  quite  recently  that  they  have  been  working 
on  about  11  years.  This  is  a  pulling-over  machine.  We  pay  three-eighths  of 
a  cent  a  pair  ro3ralty  on  it,  and  it  saves  us  2  cents  a  pair  in  lasting  our  shoes. 
Now,  I  can  have  any  of  these  machines  I  want.  I  can  have  the  lasting  machine 
and  not  have  the  welter,  or  I  can  have  the  welter  and  not  have  the  lasting  ma- 
chine if  I  want  it,  or  I  can  have  the  nailer  and  not  have  the  welter  if  I  want  it. 
I  can  have  every  one  or  all  or  none  of  them  just  as  I  prefer.^ 

We  put  in  about  three  months  ago  what  is  called  a  ^'puller-over  machine.'' 
It  b  a  very  complicated  machine  for  doing  what  seems  to  be  a  very  simple 
operation.  The  pulling-over  means  the  placing  of  the  upper,  which  b  the 
leather  part  of  the  shoe,  over  the  last  and  having  thb  machine  pull  thb  upper 
over  the  last  in  the  proper  place  and  position  on  the  last  as  it  should  be  when 
the  shoe  b  completed,  and  driving  a  few  tacks  in  just  to  hold  it  prq)aratory  to 

'  Report  of  the  President  to  the  Annual  Meeting,  1913,  p.  7. 

*  House  Judidary  Committee  Hearings,  February  ao,  21,  23,  and  March  z,  1912, 
pp.  158-59. 

>  House  Judiciary  Committee  Hearings,  February  20,  21,  22,  and  March  i,  191 2, 
p.  79. 


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THE  UNITED  SHOE  MACHINERY  COMPANY  55 

lasting  it;  and  the  lasting  consists  of  putting  through  another  machine  where 
it  is  tacked  down  all  around  securely  prq)aratory  to  sewing  on  the  sole  or  welt- 
ing, if  it  is  the  case  of  a  welt  shoe.  This  puller-over  machine  b  a  machine  that 
has  been  evolved  and  has  been  for  several  years  being  made  to  the  point  where 
it  would  do  the  work.    That  work  was  formerly  done  by  hand. 

The  machine  had  not  been  out  very  long  until  they  made  an  improvement 
on  it,  as  they  have  done  with  lots  of  their  machines.  Their  policy  always  has 
been — and  there  has  been  no  question  about  it,  they  have  never  deviated  from 
it,  it  has  been  upon  their  own  initiative,  and  has  not  been  from  any  solicitation 
on  our  part — ^that  we  could  have  a  new  machine  whenever  we  desired  it.  We 
would  simply  makt  application  for  it,  and  they  would  furnish  us  with  a  new 
machine.  They  send  the  new  machine  to  us,  and  we  send  back  the  old  ma- 
chine. We  pay  the  freight  on  both  the  machines,  and  that  is  all  the  cost  there 
is  to  us  for  the  improved  machine.  Then  when  the  machine  arrives  and  we 
get  ready  to  have  it  set  up  ....  we  wire  into  Chicago  for  a  man,  and  he  comes 
the  next  morning  ....  and  sets  the  machine  up  and  gets  it  in  nmning  order, 
teaches  an  operator  to  run  it,  and  stays  there  until  he  has  taught  him.' 

To  the  charge  that  it  has  retarded  invention,  the  company  has 
replied: 

The  United  Shoe  Machinery  Company  has  spent  all  the  way  from  $250,000 
to  $750,000  in  experiment  and  development  of  new  machines  every  year  since 
it  was  formed.  It  has  made  workable  over  100  different  new  machines,  some 
of  which  perform  operations  formerly  performed  by  hand  and  all  of  which  are 
far  better  than  those  formerly  in  use.  Taken  in  connection  with  reduction  m 
ro3ralties,  shoe  manufacturers  by  their  use  effect  a  saving  of  nearly  9  cents  m 
the  cost  of  making  a  pair  of  Goodyear  welt  shoes,  or  nearly  double  the  ro3ralty 
now  paid.  A  greater  number  of  practical  patents  in  shoe  machinery  have  been 
made  effective  in  the  past  12  years  than  in  any  other  period  of  equal  length 
since  shoe-making  b^gan.  One  machine  alone  cost  the  company  years  of  time 
and  over  $1,000,000  in  money  before  it  would  work.  It  would  not  be  in  the 
shoe  factories  of  Massachusetts  today  if  it  had  been  left  to  an  individual  inven- 
tor to  nudce  it  go.' 

xni 

On  February  25,  191 1,  under  the  provisions  of  the  Canadian 
Combines  Investigation  Act,  an  investigation  board  was  appointed 
to  report  upon  the  United  Shoe  Machinery  Company  of  Canada. 
To  test  the  validity  of  the  act,  an  appeal  was  taken  from  the  order 

'  Senate  Interstate  Commerce  Committee  Hearings,  January  13,  15,  z6,  191 2, 
pp.  1854-55. 

*  House  Judiciary  Committee  Hearings,  February  20,  21,  22,  and  March  i,  1912, 
p.  27. 


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$6  JOURNAL  OF  POLITICAL  ECONOMY 

of  appointment,  but  eventually  the  appeal  was  dismissed  by  the 
Coiu-t  of  King's  Bench,  Appeal  side.' 

Meanwhile,  in  September,  191 1,  the  Department  of  Justice  of 
the  United  States  procured  two  indictments  in  the  District  of 
Massachusetts  against  the  officers  of  the  United  Shoe  Machinery 
Company  for  violation  of  the  Sherman  anti-trust  act.*  Demurrers 
to  these  indictments  were  filed  in  behalf  of  the  defendants.  In 
December,  191 1,  while  these  criminal  proceedings  were  pending, 
the  department  filed  a  bill  of  complaint  in  the  same  district  against 
the  United  Shoe  Machinery  Company,  praying  for  the  dissolution 
of  the  company  as  a  combination  in  restraint  of  trade  and  a 
monopoly  in  violation  of  the  Sherman  anti-trust  act.* 

On  March  2,  1912,  the  District  Court  quashed  the  indictments, 
except  for  a  single  coxmt  in  one  indictment.  Judge  Putnam,  giving 
the  opinion  of  the  Court,  said: 

The  history  of  the  law  [i.e.,  the  Sherman  anti-trust  act]  ....  is  in  a  con- 
tinuous state  of  development,  and  will  undoubtedly  so  remain  for  an  indefinite 
period.  This  makes  it  practically  so  indefinite,  both  imder  the  statute  in  ques- 
tion and  aside  from  it,  that  criminal  prosecutions  like  this  at  bar  impose  great 
hardship,  by  terrorizing  very  considerable  portions  of  the  community  who  have 
acted  honestly,  through  the  possible  peril  of  enormous  fines,  and  terms  of 
imprisonment  even  for  very  many  years.  Under  the  circumstances,  we  are 
unable  to  understand  why  the  Department  of  Justice  directs,  and  the  President 
permits,  criminal  proceedings  like  this  until,  in  the  particular  case,  the  practical 
application  of  the  statute  has  been  settled  by  civil  proceedings,  in  view  espe- 
cially of  the  fact  that  the  flexible  methods  of  bills  in  equity  are  capable  of 
exploiting  all  doubtful  questions  much  more  thoroughly,  and  with  more  just 
results,  than  criminal  proceedings 

This  combination,  then  formed  [i.e.,  the  organization  of  the  United  Shoe 
Machinery  Company  on  February  7,  1899],  was  purely  an  economic  arrange- 
ment, not  in  violation  of  any  rule  in  restraint  of  trade  at  common  law,  or  which 
has  been  announced  by  the  Supreme  Court,  as  is  shown  by  an  examination  of 
all  the  cases  decided  by  that  tribunal. 

It  seems  to  be  impossible  to  deny  that  the  combination  of  varioiis  elements 
of  machinery,  all  relating  to  the  same  art  and  the  same  school  of  manufactures, 

'  Canada  GauUe,  October  26, 191 2,  p.  1319. 

>  United  StaUs  v.  Winslow,  el  al.,  U.S.  D.C.  District  of  Massachusetts,  February, 
191 1  term. 

»  United  States  v.  United  Shoe  Machinery  Company,  et  al.,  U.S.  CO.  District  of 
Massachusetts. 


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THE  UNITED  SHOE  MACHINERY  COUP  ANY  57 

for  the  purpose  of  constructing  economically  and  systematically,  and  of 
furnishing  any  customer  the  whole,  or  any  part,  of  an  entire  system,  is  in  strict 
and  normal  compliance  with  modem  progress  to  limit  the  manufacture  and 
supply  to  certain  details,  as,  for  example,  steam  gauges,  wheels  for  railroad  cars, 
or  axles  for  steam  locomotives,  without  furnishing  anything  else,  although » 
by  so  doing,  the  manufacturer  of  details  becomes  able  to  command  the  entire 
market.  It  is  absolutely  normal,  and  in  accordance  with  the  rightfid  demand 
of  the  market,  for  any  dealer  to  supply  mere  detaib  or  an  entire  system  of 

machinery,  according  as  his  customers  may  desire 

The  leases  referred  to  here  are  the  same  as  those  approved  in  the  appeal 
of  United  Shoe  Machinery  Company  v.  Brunei^  (1909)  App.  Cas.  330,  where  the 
Privy  Council  decided  that  the  whole  combination  exhibited  here,  including 
leases,  was  valid.  Notwithstanding  the  decisions  of  the  Privy  Council  are 
not  authoritative,  even  in  England,  like  those  of  the  King's  Bench,  yet  the 
members  of  the  Judicial  Committee  who  sat  on  this  appeal  were  Lords  Mac- 
Naughton,  Atkinson,  Collins,  and  Gorell,  making  an  exceedingly  strong  court, 
hardly  to  be  surpassed  in  England.    Therefore  we  woidd  be  free  to  follow  it 

if  the  background  was  the  same  here  as  there.    But  it  is  not We  can 

easily  see  that  the  result  of  the  trial  of  the  issues  of  fact  might  remove  the 
apparent  illegality  arising  from  these  leases;  but  the  case  is  not  so  clear  that 
we  can  sustain  the  demurrer  with  reference  to  the  first  count  of  indictment 
114.  Therefore  on  the  demurrer  we  hold  the  second  count  of  indictment  114 
invalid,  ind  the  first  coimt  thereof  valid,  unless  on  a  trial  it  appears  that  the 
leases  we  refer  to  are  found  to  add  no  obnoxious  feature.' 

On  October  18, 1912,  two  of  the  members  of  the  Canadian  Inves- 
tigation Board  reported  that  "the  United  Shoe  Machinery  Com- 
pany of  Canada  is  a  combine  and  ....  competition  in  the 
manufacture,  production,  purchase,  sale,  and  supply  of  shoe 
machinery  in  Canada  has  been  and  is  unduly  restricted  and  pre- 
vented."^ The  third  member  of  the  commission  dissented  from 
his  colleagues  on  the  groxmd  that  competition  had  not  been  elimi- 
nated and  that  "no  attempt  has  been  made  to  increase  the  royalties 
or  otherwise  act  oppressively,  but  on  the  contrary  every  effort  has 
been  made  to  constantly  improve  the  machinery,  to  assist  new 
manufacturers  in  starting  business,  and  to  satisfy  its  customers 
generally."^ 

On  February  3,  1913,  the  Supreme  Court  of  the  United  States 

*  United  States  v.  Winslaw,  et  al,,  195  Fed.  578,  584,  592,  594. 

*  Canada  Gazette,  October  26,  19 12,  p.  1323. 

*  Ibid.y  pp.  1323,  1324. 


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S8  J  OURNAL  OF  POUTICAL  ECONOMY 

unanimously  affirmed  the  decision  of  the  District  Court  upon  the 
demiirrers  to  the  indictments  above  mentioned.'  The  opinion  of 
the  Supreme  Court  accompanying  this  decision  has  ahready  been 
quoted. 

In  February,  1913,  the  Department  of  Justice  of  the  United 
States  filed  a  bill  of  complaint  in  the  District  of  New  Jersey  to 
abrogate  a  contract  made  by  the  United  Shoe  Machinery  Company 
and  the  Keighley  Company  on  the  ground  that  the  contract  was  in 
violation  of  the  Sherman  anti-trust  act'  This  was  a  contract 
settling  certain  patent  infringement  suits  and  authorizing  the 
United  Shoe  Machinery  Company  to  manufacture  and  lease  the 
Keighley  inseam  trinmier  upon  a  commission  basis. 

XIV 

The  United  Shoe  Machinery  Company's  business  has  already 
shown  the  effect  of  these  legal  proceedings. 
The  president  of  the  company  has  declared: 

The  total  number  of  machines  turned  out  at  the  factory  has  not  increased 
in  the  proportion  of  former  years,  because  the  company  has  suspended  the 
system  by  which  it  formerly  gave  eveiy  shoe  manufacturer  the  option  of  either 
buying  outri^^t  machines  in  its  general  department  or  leasing  them  at  a  nominal 
rental,  the  condition  of  lease  being  that  the  machine  be  used  only  on  shoes  which 
had  been  operated  on  by  certain  other  of  the  company's  machines.  This 
method  of  leasing,  as  was  stated  in  the  annual  report  last  year,  has  been  dis- 
continued on  account  of  the  contention  in  the  government  suits  against  the 
company  that  it  was  in  violation  of  the  Sherman  law.  Shoe  manufacturers, 
therefore,  no  longer  have  the  option  of  leasing  the  general-department  machines 
but  have  to  buy  them  outright,  or  go  without  them  altogether;  and  conse- 
quently many  shoe  manufacturers  of  limited  capital  have  gone  without  them 
rather  than  make  the  investment  required  for  their  purchase,  while  others 
who  have  been  planning  to  go  into  the  shoe  manufacturing  business  have 

abandoned  the  idea  rather  than  tie  up  their  money  in  machinery Under 

present  conditions  we  can  no  longer  equip  small  factories  with  new  and  up- 
to-date  machines  of  the  general  dq>artment  from  which  no  adequate  direct 
pecuniary  return  is  to  be  expected,  but,  thanks  to  a  machinery  equipment  in 
most  factories  which  up  to  the  present  time  has  enabled  them  to  keep  abreast 

« United  States  v.  Winshw,  227  U.S.  202. 

*  United  States  v.  United  Shoe  Machinery  Company,  et  al,,  U.S.  D.C.  District  of 
New  Jersey. 


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THE  UNITED  SHOE  MACHINERY  COMPANY  59 

of  the  demands  of  trade,  the  output  of  shoes  has  steadily  increased  and  the 
revenue  of  the  company  has  increased  accordingly.  That  more  shoe  manu- 
facturers have  not  been  put  to  great  expense  or  serious  inconvenience  as  yet 
as  a  result  of  this  change  is  due  to  the  fact  that  for  many  years  the  company, 
with  a  view  to  increasing  the  effectiveness  of  its  principal  leased  machines,  has 
siq)plied  from  its  general  department  a  constantly  increasing  niunber  of  mis- 
cdlaneous  machines  for  the  use  of  which  the  manufacturers  have  not  been 
required  to  make  any  material  investment;  ^and  their  factories  are  at  present 
so  thoroughly  equipped  that  they  have  not  yet  found  it  necessary  to  rq>lace 
worn-out  machines  or  add  substantially  to  their  equq>ment  in  machinery  of 
this  character.' 

Before  these  legal  proceedings  were  begun  against  the  United 
Shoe  Machinery  Company,  the  company  had  begun  to  put  in 
operation  a  plan  of  distributing  among  its  lessees  of  Goodyear 
welt-sewing,  outsole-stitching,  and  turn-sewing  machines  conmion 
stock  of  the  corporation  purchased  in  the  open  market  from  a  fund 
created  by  setting  aside  a  percentage  of  the  amounts  received  from 
such  lessees  during  the  period  of  three  years  beginning  January  i, 
1910.  The  number  of  lessees  among  whom  this  stock  was  dis- 
tributed was  about  1,100,  and  32,975  shares  of  stock  were  pur- 
chased for  distribution  at  an  average  price  per  share  of  $52.53. 
On  December  31,  1912,  however,  the  company  annoxmced  the 
discontinuance  of  the  plan: 

This  decision  b  due  to  the  proceedings,  both  civil  and  criminal,  instituted 
by  the  Department  of  Justice,  and  by  the  attempts  of  other  persons  to  secure 
legislation,  declaring  illegal  those  methods  of  doing  its  business  by  which  the 
company  ha?  been  able  to  furnish  its  lessees  with  the  best  machines,  as  well  as 
many  new  machines,  at  a  constantly  diminishing  expense  to  the  lessees,  and  at 
the  same  time  with  such  security  to  the  company  that  its  leased  machines  shall 
be  used  only  under  proper  conditions  and  in  connection  with  machines  which 
will  efficiently  and  continuously  co-operate  with  them  to  the  advantage  of  both 
the  company  and  its  lessees,  and  to  an  extent  which  will  insure  to  the  company 
a  proper  return  on  its  investment.  It  must  be  plain  that,  until  the  company 
can  be  definitely  assured  that  its  settled  system  of  doing  business,  which  it 
believes  has  been  not  only  to  the  mutual  benefit  of  the  company  and  its  lessees, 
but  of  equal  advantage  to  the  consuming  public  and  to  shoe  operatives,  is  not 
to  be  disrupted  and  prevented,  the  company  is  imable  further  to  develop  its 
established  policy  and  to  extend  the  benefits  thereof  to  its  lessees.' 

'  Report  of  the  President  to  the  Annual  Meeting,  1913,  pp.  6-7. 
'Ihid.,  pp.  9-10. 


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6o  JOURNAL  OF  POLITICAL  ECONOMY 

The  company  has  abready  begun  to  modify  its  Canadian  leases 
in  obedience  to  the  findings  of  the  Canadian  Investigation  Board/ 

XV 

Many  shoe  manufacturers  have  expressed  their  apprehension 
of  the  outcome  of  these  legal  proceedings  against  the  United 
Shoe  Machinery  Company.  A  Massachusetts  manufacturer  has 
declared:  "We  cannot  see  where  this  disintegration  of  the  com- 
pany will  benefit  us  any."*  A  Pennsylvania  manufacturer  has 
stated:  "I  very  much  question  whether  the  standard  of  service 
would  be  maintained  if  the  United  Shoe  Machinery  Company 
were  to  be  dissolved."^  A  Massachusetts  manufacturer  has 
declared:  "We  fully  believe  that  if  the  dissolution  of  the  United 
Shoe  Machinery  Company  be  completed,  or  if  the  principle  of 
leasing  machines  be  abandoned,  shoe  manufacturers  of  the  United 
States  would  be  greatly  handicapped,  as  compared  with  the  present 
system  they  are  now  operating  under. "^  Another  Massachusetts 
manufacturer  has  stated:  "We  believe  that  the  disintegration  of 
the  United  Shoe  Machinery  Company,  if  attempted,  would  be 
hazardous  to  the  shoe  manufacturers,  and  the  results  so  uncertain 
that  such  measures  ought  to  be  discouraged.  "* 

The  effect  upon  the  retail  price  of  shoes  has  been  discussed  by 
several  manufacturers.  A  Wisconsin  manufacturer  has  stated: 
"If  the  company  were  disintegrated  the  price  of  shoes  at  retail 
would  without  question  cost  more."*    An  Ohio  manufacturer  has 

<  Report  of  the  President  to  the  Annual  Meeting,  1913,  p.  13. 

*  Letter  of  Eagle  Shoe  Manufacturing  Co.,  Lynn,  Mass.,  Boston  News  Bureau 
December  i,  1911;  House  Judiciary  Committee  Hearings,  February  10,  21,  22,  and 
March  i,  1912,  pp.  21-30. 

)  Letter  of  T.  H.  Eisenhuth  Co.,  Williamsport,  Pa.,  Boston  News  Bureau,  Novem- 
ber 13, 191 1 ;  House  Judiciary  Committee  Hearings,  Februaiy  20,  21,  22,  and  March 

I,  1912,  pp.  21-30. 

4  Letter  of  Pratt  Shoe  Co.,  Natick,  Mass.,  Boston  News  Bureau,  November  18, 
Z911;  House  Judiciary  Committee  Hearings,  February  20,  21,  22,  and  March  i,  191 2, 
pp.  21-30. 

s  Letter  of  Arthur  A.  Williams  Shoe  Co.,  Holliston,  Mass.,  Boston  News  Bureau, 
December  i,  1911;  House  Judiciary  Committee  Hearings,  February  20,  21,  22,  and 
March  i,  191 2,  pp.  21-30. 

•  Letter  of  Columbia  Shoe  Co.,  Sheboygan,  Wis.,  Boston  News  Bureau,  November 

II,  1911;  House  Judiciary  Committee  Hearings,  February  20,  21,  22,  and  March  i, 
1 91 2,  pp.  21-30. 


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THE  UNITED  SHOE  MACHINERY  COMPANY  6i 

declared:  "We  believe  that  disintegration  of  the  company  wotild 
be  followed  by  increased  cost  of  machinery  to  the  manufacturer, 
and,  of  necessity,  prices  of  shoes  at  retail  would  have  to  be 
raised."' 

Small  shoe  manufacturers  have  apparently  been  the  most 
apprehensive:  A  Massachusetts  manufacturer  has  declared:  "We 
believe  that  the  disintegration  of  this  company  would  be  a  very 
serious  blow  to  the  smaller  manufacturer  like  us,  doing  a  business  of 
$100,000  to  $150,000  a  year."^  A  Pennsylvania  manufacturer  has 
stated:  "Should  the  courts  find  the  United  Shoe  Machinery  Com- 
pany has  been  doing  business  contrary  to  law,  and  disintegrate  the 
company,  it  would  not,  in  the  writer's  opinion,  be  a  matter  of  more 
than  ten  years  before  the  shoe  manufacturing  business  would  be 
in  the  hands  of  a  few  (say,  ten  or  a  dozen  concerns),  as  these  con- 
cerns, some  with  a  capital  of  $20,000,000,  or  more,  could  and  would 
buy  all  or  any  machines  that  would  advance  their  interests.  The 
small  or  middle-sized  shoe  manufacturing  concerns,  by  reason  of 
not  being  able  to  finance  their  machinery  account,  would  be  forced 
to  dose  up;  fully  60  per  cent  of  the  shoe  manufacturing  concerns 
would  be  in  this  class.  The  larger  concerns,  having  less  competi- 
tion and  more  demand,  would  advance  prices  on  all  kinds  of  foot- 
wear. There  would  be  practically  no  limit  in  the  advance  of  price 
because  of  their  complete  control  of  the  situation."*  A  Massa- 
chusetts manufacturer  has  declared:  "As  for  myself,  I  believe  that 
the  United  Shoe  Machinery  Company  is  the  only  branch  of  the 
shoe  industry  left  that  protects  the  small  manufacturer,  and  that 
the  same  elements  that  are  trying  to  dissolve  this  company  are  the 

'  Letter  of  Wolfe  Bros.  Shoe  Co.,  Columbus,  Ohio,  Boston  News  Bureau^  November 
18,  191 1 ;  House  Judiciary  Committee  Hearings,  February  20,  21,  22,  and  March  i, 
191 2,  pp.  21-30;  to  the  same  effect  see  also  the  letter  of  Estabrook-Anderson  Shoe  Co., 
Nashua,  N.H.,  Boston  News  Bureau^  December  6,  191 1;  letter  of  Emerson  Shoe  Co., 
Rockland,  Mass.,  Boston  News  Bureau,  November  16,  191 1;  House  Judiciary  Com- 
mittee Hearings,  February  20,  21,  22,  and  March  i,  1912,  pp.  21-30. 

'  Letter  of  Trevett  &  Berry,  Ljrnn,  Mass.,  Boston  News  Bureau,  November  18, 
1911;  House  Judiciary  Conmiittee  Hearings,  February  20,  21,  22,  and  March  i,  191 2, 
pp.  21-30. 

>  Letter  of  Callahan  &  Meyers,  Allentown,  Pa.,  Boston  News  Bureau,  November 
14,  191 1 ;  House  Judiciary  Committee  Hearings,  February  20,  21,  22,  and  March  i, 
191 2,  pp.  21-30. 


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62  JOURNAL  OP  POUTICAL  ECONOMY 

ones  that  have  caused  the  change  in  terms  of  leather,  which  is  in 
the  favor  of  the  large  manufacturer,  and  if  they  could  have  suc- 
ceeded in  getting  their  royalties  lower  than  the  small  manufacturer 
this  never  would  have  been  put  before  the  federal  government.  My 
belief  is  that  the  same  elements  are  trying  their  best  to  get  the  shoe 
business  as  near  a  trust  as  possible,  and  if  they  shoidd  succeed  in 
disintegrating  the  company  the  small  manufacturers  have  lost 
their  best  friend  in  the  shoe  business,  and  if  we  do  not  have  the 
small  manufacturers  where  will  we  get  the  large  manufacturers 
later?"'  These  views,  apparently,  have  been  shared  by  many 
other  shoe  manufacturers.* 

Whether  the  company's  "tied''  leases  exceed  its  patent  rights, 
whether  the  company  has  violated  the  Sherman  anti-trust  act, 
and  how  shoe  manufacturers  can  continue  to  obtain  efficient  and 
satisfactory  shoe  production  service  if  the  company  shoidd  be 
disintegrated;  or  whether  full  judicial  examination  of  the  company's 
affairs  will  eventually  confirm  the  impression  which  the  United 
States  Supreme  Court  derived  from  the  indictment  in  the  criminal 
proceeding,  that  "on  the  face  of  it,  the  combination  was  simply  an 
effort  after  greater  efficiency,"^  are  a  few  of  the  questions  which  are 
raised  in  these  legal  proceedings.    Pending  all  this  litigation,  the 

'  Letter  of  Luke  W.  Reynolds,  Brockton,  Mass.,  Boston  News  Bureauy  November 
X3,  191 1 ;  House  Judiciary  Committee  Hearings,  February  20,  21,  22,  and  March  i, 
191 2,  pp.  21-30. 

*  See  Senate  Interstate  Commerce  Conmiittee  Hearings,  January  13, 15, 16, 191 2, 
Part  XXI,  i^.  1857-59;  Congressional  Record,  May  12, 191 1,  p.  1166;  House  Judiciary 
Committee  Hearings,  February  20,  21, 22,  and  March  i,  191 2,  pp.  4-12, 35-43, 64, 104, 
121, 122;  to  the  same  effect  see  also  letter  of  Lounsbury  &  Soule  Co.,  Stamford,  Conn., 
Boston  News  Bureau,  November  21,  191 1;  letter  of  Hodsdon  Manufacturing  Co., 
Portland,  Me.,  ibid.,  December  i,  191 1;  letter  of  Dizon-Bartlett  Co.,  Baltimore,  Md., 
ibid.,  November  17,  191 1;  letter  of  Brennan  Tannery  and  Shoe  Manufacturing  Co., 
Upland,  Cal.,  ibid.,  December  2, 191 1;  letter  of  Charles  D.  Griffith  Co.,  Denver,  Colo., 
ibid.,  November  13,  191 1;  letter  of  Blum  Shoe  Manufacturing  Co.,  Dansville,  N.Y., 
ibid.,  November  20,  191 1;  letter  of  J.  F.  Cloutman  &  Co.,  Farmington,  N.H.,  ibid,, 
November  20,  191 1;  letter  of  Heywood  Boot  and  Shoe  Co.,  Worcester,  Mass.,  ibid., 
November  24,  191 1;  House  Judiciary  Committee  Hearings,  February  20,  21,  32,  and 
March  i,  191 2,  pp.  21-30. 

*  Uniied  States  v.  Winslow,  227  U.S.  202,  217. 


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THE  UNITED  SHOE  MACHINERY  COMPANY  63 

discussion  of  these  questions  nust  necessarily  be  deferred.  Enough 
has  been  said,  however,  to  show  that  the  determination  of  these 
questions  will  be  a  matter  of  the  highest  significance  in  the  econom- 
ics of  industrial  organization.' 

RiCHAKD  Roe 

'  The  opportunity  afforded  by  the  United  Shoe  Madiinery  Company  to  small, 
new,  and  struggling  manufacturing  concerns,  the  growth  and  prosperity  of  the  shoe 
manufacturing  industry  smce  the  organization  of  the  company,  the  widespread  satis- 
faction with  the  compan/s  methods  expressed  by  shoe  manufacturers  in  the  Boston 
News  Bureau's  canvass  above  mentioned,  and  the  bearing  upon  this  situation  of  the 
proceedings  now  pending  against  the  company  are  discussed  in  "The  Conservation  of 
Business  Opportunity,"  a  paper  read  by  Gilbert  H.  Montague  bdore  the  Western 
Economic  Society  at  Chicago,  March  2,  1912,  published  in  the  Jamnal  of  PolUical 
Economy,  XX,  6  (June,  1912),  pp.  613,  621-26. 


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A   WATERWAY   BETWEEN   CHICAGO   AND    ST.   LOUIS 
A  STUDY  IN  FREIGHT  RATES 

The  construction  of  a  waterway  between  the  Great  Lakes  and 
the  Giilf  of  Mexico  has  been  advocated  with  vigor  by  various 
organizations  within  the  last  half-dozen  years,  and  considerable 
public  attention  has  been  given  to  the  several  schemes  proposed. 
The  problems  of  construction,  and  to  some  extent  those  of  traffic 
development,  have  been  set  forth  by  special  boards  of  engineers 
and  commissions.'  The  writer  has  presented  a  study  of  the  freight 
rates  and  freight  traffic  by  rail  and  by  water  on  and  parallel  to  the 
proposed  route  to  the  readers  of  the  Journal  of  Political  Economy, 
in  the  June,  July,  and  October  niunbers  of  1912.^  In  that  study  a 
comparison  of  rail  with  boat  rates  on  the  route  south  of  Peoria, 
Illinois,  was  made;  but  no  comparison  of  rates  between  Chicago 
and  points  on  the  route  was  possible  because  there  were  no  boat 
rates  published,  although  there  was  an  open  water  route  between 
Chicago  and  the  Gulf  of  a  minimiun  depth  of  4^  feet.  That  route 
is  still  open,  and  no  boat  rates  are  yet  published  between  Chicago 
and  points  on  it;^  hence  no  comparison  of  boat  with  rail  rates 
between  Chicago  and  points  on  the  route  can  be  made  even  now, 
but  a  comparison  of  rail  rates  parallel  to  the  upper  part  of  the 
route  with  rail  rates  along  the  lower  Mississippi  River  does  seem 
pertinent  at  this  time. 

Prior  to  the  appearance  of  the  articles  mentioned  above,  a 
special  board  of  government  engineers  reported  in  favor  of  a  water- 
way of  a  minimum  depth  of  only  eight  feet  between  Chicago  and 
St.  Louis.    Excerpts  from  this  report  are  given  below: 

•  •  •  •  If  the  waterway  is  to  be  used  by  vessels  capable  of  navigating  the 
ocean  and  the  Great  Lakes,  it  should  be  given  a  depth  sufficient  for  the  eco- 

'  The  Illinois  Waterway  Report,  1909,  Internal  Improvement  Commission  of 
Illinois;  H.  Doc.  263,  59th  Cong.,  ist  sess.;  H.  Doc.  50,  6ist  Cong.,  ist  sess.;  and 
H.  Doc.  1374,  6ist  Cong.,  3d  session. 

*  Also  reprinted  under  title  of  The  Lakes-to-the-Gulf  Deep  Waterway. 

>  There  are  rates  for  lighterage  and  towage  on  the  Chicago  River  and  the  Sanitary 
and  Ship  CanaL 

64 


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A  WATERWAY  BETWEEN  CHICAGO  AND  ST.  LOUIS        65 

nomic  carriers  above  described,  and  this,  in  the  opinion  of  the  Board,  should 
be  not  less  than  24  feet;  but  if  it  is  to  be  constructed  for  vessels  adapted  to 
river  traffic,  economic  navigation  does  not  require  its  depth  to  exceed  9  feet. 
The  depth  of  14  feet,  so  strenuously  insisted  upon  by  certain  advocates  of  the 
waterway,  is  greater  than  necessary  for  river  navigation,  and  entirely  insuffi- 
cient for  either  lake  or  ocean  vesseb.  The  only  canals  of  14  feet  depth  of 
which  the  Board  has  knowledge  are  the  Canadian  canab  along  the  St.  Lawrence 
River  and  the  Welland  Canal  connecting  Lakes  Erie  and  Ontario,  which  were 
constructed  in  the  infancy  of  lake  navigation.  Little  use  is  now  made  of  them 
for  tran^>ortation  to  and  from  Chicago.  This  depth  has  not  been  adopted  by 
any  other  nation,  nor  retained  by  Canada  in  recent  projects. 

Considered  as  a  business  investment,  a  waterway  of  even  moderate  depth 
from  Chicago  to  the  Gulf  is  still  more  or  less  experimental.  There  is  already 
maintained  under  existing  projects  a  channel  of  9  feet  depth  from  New  Orleans 
to  Cairo,  and  of  8  feet  from  Cairo  to  St.  Loms,  and  of  at  least  4^  feet  from 
St.  Louis  to  Chicago  via  the  Illinois  and  Michigan  Canal As  a  chan- 
nel of  8  feet  depth  is  now  maintained  from  Cairo  to  St.  Louis,  and  can  be 
extended  from  St.  Louis  to  Utica  at  relatively  small  cost,  busmess  caution 
dictates  that  a  waterway  of  this  depth  be  obtained  and  tested  before  entering 
upon  enormously  expensive  projects  of  questionable  utility.' 

Recently  there  appears  to  be  a  consensus  of  opinion  among 
waterway  advocates,  and  probably  a  majority  of  the  members  of 
Congress,  that  at  least  the  first  work  on  the  proposed  Lakes-to-the- 
Gulf  Waterway  shoiild  be  the  construction  of  an  eight-foot  channel 
between  Lockpyort,  Illinois,  and  St.  Louis,  Missouri.*  No  attempt 
to  construct  a  14-,  20-,  or  24-foot  channel  on  the  lower  part  of  the 
route  seems  likely  to  be  made  in  the  immediate  future.  If  events 
do  take  the  course  that  now  seems  likely,  the  upper  part  of  the 
route  (between  Chicago  and  St.  Loiiis)  should  receive  special  atten- 
tion; and  for  this  reason  a  comparison  of  rail  rates  parallel  to  the 
lower  part  of  the  route  with  rail  rates  along  the  upper  part  of  the 
route  is  set  forth  in  this  brief  article.  The  rail  rates  parallel  to  the 
lower  part  of  the  route  are  water-forced  rates  Are  they  lower  than 
the  present  rail  rates  parallel  to  the  upper  part  of  the  route  ?  If 
not,  is  it  probable  that  the  proposed  waterway  of  the  upper  j)art 
of  the  route  will  force  a  reduction  in  the  parallel  rail  rates  ?  The 
comparison  is  first  made,  and  then  its  significance  is  discussed. 

'  H.  Doc.  i374i  6i8t  Cong.,  3d  sess.,  pp.  6-7. 

*  The  present  delay  in  the  construction  work  seems  to  be  due  to  the  difficulty  of 
an  agreement  between  the  national  government  and  the  state  of  Illinois. 


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66 


JOURNAL  OF  POUTICAL  ECONOMY 


The  route  of  the  proposed  waterway  between  Chicago  and 
St.  Louis  is  within  the  state  of  Illinois/  except  that  j)art  of  it  lying 
between  Grafton,  Illinois,  and  St.  Louis,  Missouri.  The  Illinois 
distance  rates  govern  freight  traflBc  by  rail  over  the  entire  route. 
Hence  a  comparison  of  rail  rates  parallel  to  the  proposed  waterway 
with  rail  rates  on  the  Mississippi  below  St.  Louis  is  a  comparison 
of  the  Illinois  distance  rates  with  specific  rates  parallel  to  the  lower 
Mississippi  River. 

The  Public  Service  Commission  of  Illinois  prescribes  a  freight 
classification  and  both  class  and  commodity  distance  rates.  One 
of  the  difficiilties  in  a  comparison  of  class  rates  in  Illinois  with  those 
parallel  to  the  Mississippi  below  St.  Louis  is  that  the  Illinois  Classi- 
fication applies  in  Illinois  and  the  Southern  Classification  on  the 
lower  Mississippi.  Under  the  Illinois  Classification,  classified 
freight  is  assigned  to  one  of  the  ten  classes  or  to  some  multiple  of 
the  first  class.  The  first-class  rate  is  the  highest  of  the  scale,  and 
each  succeeding  class  rate  is  lower  than  the  preceding.  In  contrast, 
under  the  Southern  Classification  there  are  thirteen  regular  classes; 
and  class  rates  do  not  descend  regularly  throughout  the  scale. 
This  point  is  made  clear  by  the  rate  scales  shown  below.^ 


Fkom  St.  Louu,  lio.,  to 

Ih  Ckmts  pxk  ioo  Pouhds 

CUm 

z 

a 

3 

4 

5 

6 

Mf^mphis,  Tenxi. 

Rate 
Rate 

6s 
90 

SO 
IS 

t\ 

3S 
SO 

30 
40 

2S 
35 

New  OrleaDS.  La 

• 

Fbom  St.  Loud,  Mo.,  to 

In  Ckmts  fee  zoo  Foumds 

Pn 

Bbl. 

A 

B 

C 

D 

£ 

H 

F 

MfJinphift,  TcDn. 

IS 

25 

36 
38 

IS 

2S 

13 
30 

30 
38 

42 
SI 

30 
^5 

New  Orleans,  La 

The  difficiilties  are  not  so  serious,  however,  as  to  prevent  a 
valid  comparison.  The  niunber  of  classes  in  the  southern  scale 
may  for  this  comparison  be  reduced  to  ten,  the  same  nimiber  as 

'  See  Journal  of  PolUical  Economy,  XX,  6  (June,  191 3),  p.  543. 

"  Mississippi  River  Points'  Tariff  No.  6,  issued  by  Agent  M.  P.  Washburn. 


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A  WATERWAY  BETWEEN  CHICAGO  AND  ST.  LOUIS       67 

there  are  in  the  niinois  Classification.  Classes  E  and  F  are  taken 
care  of  in  the  commodity  tables.  Class  F  is  flour  and  Class  £  is 
beer.'  Class  H  is  confined  to  whiskey  and  domestic  wines  and 
brandies  in  barrels  and  in  iron  drums  when  shipped  in  carloads. 
These  commodities  are  assigned  to  the  fourth  class  in  the  Illinois 
Classification,  and  since  this  dass  is  near  the  middle  of  the  scale  it 
may  be  disregarded  without  materially  affecting  the  general  average 
of  the  scale.  By  these  eliminations  a  scale  of  ten  classes,  from  i 
(the  highest)  to  D  (the  lowest)  remains,  and  may  be  compared  with 
the  ten  classes  of  the  Illinois  Classification.  The  descent  from  the 
first  class  to  Class  D  is  not  regular  even  after  the  eliminations,  but 
it  is  possible  to  make  a  comparison  of  the  scales  with  sufficient 
approximation  to  accuracy. 

The  class  rates  applying  from  St.  Louis,  Missouri,  to  the  points 
specified  on  the  Mississippi  are  shown  in  Table  I  in  comparison 
with  the  Illinois  distance  rates  for  the  same  distances.  From  St. 
Louis  to  Cairo,  Illinois,  the  Illinois  distance  rates  are  applied; 
hence  in  this  case,  the  river  competition  has  not  forced  the  class 
rates  lower  than  the  Illinois  distance  rates.  This  means  that 
shippers  between  St.  Louis  and  Cairo  have  no  advantage  over 
shippers  between  any  other  two  points  in  Illinois  that  are  the  same 
distance  apart  as  those  two  cities. 

From  St.  Louis  to  all  points  specified  beyond  the  limits  of 
Illinois,  the  actual  rates  are  higher  than  the  Illinois  distance  rates 
on  every  class.  And  the  specific  rates  are  materially  higher.  From 
St.  Louis  to  Memphis,  for  example,  where  there  is  a  packet  line 
actively  competing  for  the  traffic,  the  specific  class  rates  are  from 
2  to  20  cents  higher  than  the  Illinois  distance  rates.  From  St. 
Louis  to  Helena,  Arkansas,  the  specific  rates  are  from  9  to  44  cents 
higher  than  the  Illinois  distance  rates,  from  St.  Louis  to  Greenville, 
Mississippi,  from  8  to  41  cents,  from  St.  Loxiis  to  Vicksburg,  Mis- 
sissippi, from  6  to  39  cents,  and  from  St.  Louis  to  New  Orleans, 
from  6  to  34  cents.  Moreover,  the  points  used  for  comparison  are 
the  large  towns  at  which  water  competition  is  strongest.  The 
rates  £rom  St.  Louis  to  points  intermediate  to  those  specified  are 
usually  materially  higher  than  those  given.    The  specific  rates 

'  Flour  rates  are  compared  in  Table  II  and  beer  rates  in  Table  m. 


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68 


JOURNAL  OF  POLITICAL  ECONOMY 


given  are  the  lowest  water-forced  rates  in  the  Mississippi  Valley, 
and  even  they  are  much  higher  than  the  Illinois  distance  rates. 
In  some  instances  the  Illinois  distance  rates  are  less  than  half  the 

TABLE  I 

Class  Rates  on  Freight  Southwaxd  from  St.  Louis,  Missouri.,  Compared 

WITH  Illinois  Distance  Rates 

Class  rates  in  cents  per  loo  pounds 


From  St.  Louis,  lio.,  to 


(t 


lot 


♦Cairo,  LI. 


Specific. . . . 
Illinois. . . . , 
Differential. 


152 
152 


fFulton,  Ky 

{Memphis,  Tenn. . 

{Helena,  Ark 

{OreenviUe,  Miss. 
tVicksburg,  Miss.. 
{Natchez,  Miss  . . . 
{Baton  Rouge,  La . 
{New  Orleans,  La. 


Specific. . . . 

Illinois 

Differential. 


201 
201 


fSpedfic. . . . 

{Illinois 

'^Differential. 

{Specific 
Illinois 
Differential. 


305 
30s 


338 


Specific 

Illinois 

Differential. 


4SS 
455 


Specific .... 

niinois 

Differential. 


8525 
525 


Specific.  . . 

Illinois 

Differential . 


546 
546 


Specific 

Illinois 

Differential. 

Illinois 

Differential. 


671 
671 


701 
701 


8 
8 
o 

17 
9 
8 

12 

10 

2 

20 
10 
10 

20 

12 

8 

20 
13 

7 

20 

13 

7 

20 

14 

6 

20 

14 
6 


♦  Illinois  Centra]  R.R.  Tariff,  I.C.C.  No.  A-772a- 

t  Ulinois  Central  R.R.  Tariff,  I.C.C.  No.  4776. 

%  Agent  M.  P.  Washburn's  Tariff,  I.C.C.  No.  86. 

S  The  Illinois  Distance  Table  does  not  extend  beyond  soo  miles,  bat  to  complete  the  comparison  to 
New  Orieans  the  rates  for  the  longer  distances  were  computed  on  the  same  basis  as  for  distances  under 
500  miles. 

**  Classes  of  the  Southern  Clasufication. 

\  Classes  of  the  lllinob  Classification. 


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A  WATERWAY  BETWEEN  CHICAGO  AND  ST.  LOUIS       69 

specific  rates.  This  is  true,  for  example,  of  the  third-,  fourth-,  fifth-, 
eighth-,  and  ninth-class  rates  from  St.  Louis  to  Helena,  Arkansas. 
The  class  rates,  then,  are  materially  higher  parallel  to  the  lower 
Mississippi  River  than  in  Illinois  for  the  same  distances. 

In  comparing  conmiodity  rates  there  are  only  two  important 
difficulties,  namely:  (i)  comparison  of  the  entire  list  of  conmiodities 
is  not  usually  advisable,  and  proper  selection  is  not  always  easy; 
and  (2)  the  minimum  carload  weights  must  be  taken  into  con- 
sideration. In  the  comparison  that  is  here  made,  the  first  difficiilty 
has  been  largely  overcome.  The  Illinois  commission  prescribes 
rates  for  the  nine  commodities  shown  in  Table  II,  and  all  other 
conmiodities  are  governed  by  class  rates  when  shipped  within  the 
state.  The  second  difficiilty  has  been  met  by  stating  the  minimum 
carload  weights  in  the  headings  and  footnotes  of  the  tables. 

The  comparison  of  the  commodity  rates  prescribed  by  the  Illi- 
nois conunission  with  the  rates  on  the  same  conmiodities  from  St. 
Louis  to  points  specified  is  made  in  Table  II.  The  points  selected 
on  the  lower  Mississippi  are  the  same  as  those  shown  in  Table  I. 
In  only  four  cases  are  the  Mississippi  Valley  rates  lower  than  the 
Illinois  rates.  Of  coiurse,  the  Illinois  rates  are  commodity  rates  in 
evay  case,  while  the  Mississippi  Valley  rates  are  conmiodity  rates 
in  more  than  half  the  comparisons  but  are  class  rates  in  other  cases. 
Commodity  rates  are  tabulated  where  such  rates  are  in  effect,  and 
the  class  rates  that  apply  on  those  commodities  are  incorporated  in 
the  table  where  no  conmiodity  rates  are  published.'  Here  again 
we  find  material  differentials  between  the  Illinois  rates  and  those 
in  the  Mississippi  Valley,  and  in  only  foxu:  of  the  eighty-one  com- 
parisons are  the  Illinois  rates  higher.  Furthermore,  the  sum  of 
these  four  differentials  is  only  six  cents,  while  in  one  of  the  other 
77  cases  alone  the  differential  is  22  cents. 

There  is,  however,  one  factor  in  the  comparisons  of  Table  U 
that  makes  that  table  not  entirely  conclusive  evidence  that  com- 
modity rates  parallel  to  the  lower  Mississippi  are  higher  than  in 
Illinois.    That  table  contains  a  comparison  of  all  Illinois  commodity 

'The  rates  applicable  in  July,  1913,  were  tabulated.  They  were  obtained 
through  the  courtesy  of  Mr.  D.  W.  Longstreet,  freight  traffic  manager  of  the  Illinois 
Central  Railroad. 


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TABLE  n 

CoMMODiry  Rates  in  Illinois  Compassd  with  Similar  Rates  Southwaxd  tsom 

St.  LouiSy  Missonsi. — ^Minimum  Cakload  Weight  24,000  Pounds 

Except  Whese  Otherwise  SPEariBD 

Rates  in  cents  per  100  pounds 


From  St.  Louis,  lia, 
to 


I 


Cairo,  HI. 


Fulton,  Ky 

Memphis,  Tenn. . . 

Helena,  Ark 

Greenville,  Miss. . 
Vicksburg,  Miss. . 

Natchez,  Miss 

Baton  Rouge,  La. 
New  Orleans,  La. . 


Sjoedfic. . . . 

Illinois 

Differential. 

Specific. . 

Illinois 

Differential. 


152 
152 


201 
201 


Specific 

Illinois 

Differential. 

if 

(Differential. 


30s 
305 


338 
338 


Specific 

Illinois 

Differential. 


455 
455 


Snedfic 

Illinois 

Differential. 


525 
525 


Specific 

Illinois 

Differential. 


546 
546 


Specific. . . . 

Illinois 

Differential. 


671 
671 


Specific. . . . 

Illinois 

Differential. 


701 
701 


9 
9 
o 

17 

II 

6 

11" 
12 

tti 

I|i8 

12 

6 

II18 
14 

4 

II18 
14 

4 

II18 

15 

3 

II18 

16 

2 

I|i8 
16 


16 

10 

6 

llio 
II 

tti 

II 
3 

II16 
12 

4 

||i6 

13 

3 

||i6 

13 

3 

II16 

14 

2 

||i6 

14 
2 


7 
8 

tti 

13 
10 

3 

815 
II 

4 

S20 

12 

8 

§20 
13 

7 

(20 

13 

7 

§20 

13 

7 

(20 

14 
6 

$20 
15 

5 


§17 

.7 

10 

§17 

7 

10 

§17 
8 
9 

§17 
8 
9 

§17 
9 
8 

§17 

9 
8 


12 

12 

o 

t« 

14 

7 

t" 
16 

5 

Us 

17 
8 

t38 
19 
19 

t42 
20 
22 

t42 
21 
21 

42 
23 
19 

42 
24 
18 


II 

II 

o 

tH 

12 
12 

ti7 

15 

2 

t2I 

t3i 
17 
14 

t3i 
18 

13 

t3i 
19 
12 

t3i 

20 
II 

t3t 

22 
9 


10 

10 
o 

24 

12 
12 

22 

14 

8 

30 
14 
16 

30 
15 
15 

30 
16 
14 

30 
16 
14 

30 
17 
13 

30 
18 


9 
9 
o 

§tl 

10 

I 

S8 

II 

tt3 

S16 

II 

5 

§16 
12 

4 

§16 
12 

4 

S16 
12 

4 

S16 

13 

3 

§16 
13 
3 


4 
4 
o 

13 
5 
8 

iri2 
7 
5 

iri7 

8 
9 

1fi7 
8 

9 

1fi7 
9 
8 

iri7 

I 

1fi7 
9 
8 

1fi7 

10 

7 


*  As  described  In  Illinois  Classification,  Supplement  No.  aj,  page  105.    Carioad  minimum  ao,ooo 
pounds,  except  that  on  apples  and  pean  the  minimum  is  S4/xx>  pounds. 

t  Rate  published  per  car  with  no  minimum,  reduced  to  cents  per  hundred  on  basb  of  94/>oo  pounds. 

%  Minimum  carload  weight  30,000  pounds. 

i  Minimum  carload  weight  30,000  pounds. 

II  Minimum  carioad  weight  36,000  to  90,000  pounds. 

T  Minimum  carload  weight  40,000  pounds. 
**  Minimum  carload  weight  is  the  capacity  of  the  car. 
tt  The  specific  rates  are  lower  in  these  four  cases. 


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A  WATERWAY  BETWEEN  CHICAGO  AND  ST.  LOUIS       71 

rates  with  some  Mississippi  Valley  commodity  rates  and  some  class 
rates.  Since  commodity  rates  are  usually  lower  than  class  rates 
there  is  a  possibility  of  error.  In  fact,  there  is  lack  of  balance  in 
the  comparison,  which  should  be  corrected.  Table  III  was  pre- 
pared for  the  purpose  of  such  correction.  In  this  table  a  compari- 
son of  the  rates  of  nine  commodities  that  move  in  largest  amoimts 
parallel  to  the  lower  Mississippi'  is  made  with  the  Illinois  rates  on  the 
same  cbmmodities.  In  Table  III  the  Illinois  rates  are  class  rates, 
and  the  Mississippi  Valley  rates  are  commodity  rates  in  most  cases. 
We  have,  therefore,  a  correction  for  Table  11  in  Table  III.  But 
even  in  Table  III,  the  differentials  are  preponderantly  in  favor  of 
the  Illinois  rates.  That  is,  even  class  rates  in  Illinois  are  usually 
lower  than  rates  for  the  commodities  that  move  in  largest  amoimts 
on  commodity  rates  parallel  to  the  lower  Mississippi.  Tables  I- 
III  show  quite  conclusively  that  freight  rates  in  Illinois  are  already 
lower  than  those  from  St.  Louis  to  the  most  important  competitive 
points  on  the  lower  Mississippi.  But  it  seems  well  to  compare  the 
Illinois  rates  with  the  rates  between  New  Orleans  and  other  points 
as  far  north  as  Memphis,  Tennessee,  to  ascertain  whether  rates  are 
lower  there  than  in  Illinois. 

On  the  Mississippi  between  St.  Louis  and  Cairo  there  is  main- 
tained a  minimum,  mean,  low-water  depth  of  eight  feet;  between 
Cairo  and  the  mouth  of  the  Red  River,  of  nine  feet;  and  south  of 
the  junction  of  the  Red  River,  of  thirty  feet.  May  not  the  rates 
be  lower  parallel  to  the  deeper  section  of  the  river  ?  To  answer  the 
question  Table  IV  is  presented.  Here  the  rates  on  classes  between 
New  Orleans  and  certain  points  north  of  New  Orleans  to,  and 
including.  Baton  Rouge,  Louisiana,  are  compared  with  the  Illinois 
class  rates.  This  section  of  the  river  is  not  less  than  thirty  feet  in 
depth,  and  there  is  a  boat  landing  at  every  point  specified.  Yet  in 
fifty  comparisons  there  are  only  seven  differentials  in  favor  of  the 
Mississippi  Valley  rates.  It  is  true  that  the  Western  Classification 
applies  on  the  route;  but  this  does  not  invalidate  the  general  com- 
parison, because  the  Western  Classification  is  very  similar  to  the 
Illinois  Classification. 

'The  writer  tabulated  the  commodities  moving  from  St.  Louis  to  the  points 
specified  for  the  calendar  year  1909,  and  the  commodities  listed  in  Table  III  are  from 
the  list  of  commodities  moving  in  largest  amounts  excluding  commodities  shown  in 
Table  U. 


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A  comparison  of  the  class  rates  from  New  Orleans  to  certain 
points  north  of  Baton  Rouge  with  the  Illinois  rates  is  made  in 

TABLE  in 

Commodity  Rates   Soothwasd  from  St.   Louis,   Missouxi,  Compased  with 

SdolAk  Rates  in  Illinois — ^Minimum  Carload  Weight  24,000 

Pounds,  Except  on  Hay  and  Beer,  20,000  Pounds 

Rates  in  cents  per  100  pounds 


From  St.  Louis,  Mo., 
to 


Cairo,  lU 

Fulton,  Ky 

Memphis,  Tenn 

Helena,  Ark 

Greenville,  Miss. . 
Vicksburg,  Miss. . . 

Natchez,  Miss 

Baton  Rouge,  La. . 
New  Orleans,  La.. 


Specific 

Illinois 

Differential. 

Specific 

Illinois 

Differential. 


Specific. . . . 

lUinois 

Dififerential. 

Specific 

Illinois 

Dififerential. 


Specific 

Illinois 

Dififerential. 

Specific 

Illinois 

Dififerential. 


Specific 

Illinois 

Dififerential. 

Suedfic 

Illinois 

Dififerential. 


Specific 

lUinob 

Differential. 


152 
152 


201 
201 


305 
305 


338 
338 


455 
455 


525 
525 


546 
546 


671 
671 


701 
701 


8 
8 
o 

12 
9 
3 

10 
o 

tis 

10 

5 

ti5 
12 

3 

ti5 
13 

2 

ti5 

13 

2 

ti5 
14 

I 

ti5 
14 

I 


18 

18 

o 

t37 

20 

t28 

23 

5 

t48 
23 
25 

t48 
26 
22 

t48 
27 
21 

t48 
27 
21 

t48 
28 
20 

t48 
29 
19 


13 
14 

tti 

35 
16 

19 

21 

18 

3 

26 

19 

7 

33 
20 

13 

33 
21 
12 

33 
22 
II 

33 
23 
10 

33 

24 

9 


8 
8 
o 

17 
9 
8 

ti2 

II 

I 

t20 

12 

8 

t20 
13 

7 

t20 
14 

6 

t20 
15 

5 

t20 
16 

4 

t20 
16 

4 


14 
14 

o 

26 
16 

10 

16 
18 

tt2 

21 

19 

2 

21 
20 

I 

21 

21 

O 

21 

22 

ttl 

21 

23 

tt2 

21 

24 

tt3 


14 

14 

O 

28 
16 
12 

^12 

18 

tt6 

1fi6 
19 

7 

1fi6 
20 

tt4 

1fi6 

21 

5 

1fi6 

22 

tt6 

1fi6 

23 

tt7 

1fi6 

24 

tt8 


8 
8 
o 

tt3 
9 

4 

}9 

II 

tt» 
tl4 

12 

2 

ti4 

13 

I 

ti4 

14 

o 

ti4 

ft? 

ti4 
16 

tt2 

tl2 
16 

tt4 


8 
8 
o 

$12 

9 
3 

Sio 

10 

o 

10 

5 

515 
12 

3 

515 
13 

2 

515 

13 

2 

515 

14 

I 

515 
14 

I 


14 
14 

o 

t24 

15 

9 

25 

17 

8 

35 
18 

17 

35 
20 

15 

35 
21 

14 

35 
21 

14 

35 
22 

13 

35 
23 
12 


*  SawmiUs,  boQen,  and  other  machineiy  taking  sixth-class  rates, 
t  Minimum  carload  weight,  ao^ooo  pounds. 
X  Minimum  carload  weight,  40,000  pounds. 
I  Minimum  carioad  weight,  30,000  pounds. 
t  Blinimum  carload  weight,  35.000  pounds, 
ft  Specific  rates  are  lower  in  these  fourteen  c 


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A  WATERWAY  BETWEEN  CHICAGO  AND  ST.  LOUIS       73 

Table  V.  The  first  point  specified  (Roxie,  Mississippi)  is  not  a 
Mississippi  River  point,  and  was  selected  to  show  that  at  the  non- 
river  points  still  higher  rates  apply  than  at  the  river  points.  Of 
the  sixty  comparisons  made  only  nine  differentials  appear  in  favor 
of  the  Mississippi  Valley  rates,  and  in  most  cases  these  are  small. 
These  Mississif^i  Valley  rates  were  made  low  to  obtain  the  traffic 

TABLE  IV 

Class  Rates  between  New  Orleans  and  Baton  Rouge,  Louisiana,  and  Other 

Points  Compared  with  Illinois  Class  Rates  for  Similar  Distances 

Rates  in  cents  per  100  pounds 


Behreea  New  OtIeaiiB,  La^  and 


^ 


*La  Place,  La. 


Lutdier,  La. 


Bumside,  La 

St.  Gabriel,  La. .. 
Baton  Rouge,  La. 


Specific 

Illinois. . . . 
Differential 

'Snecific 

Illinois .... 
Differential 

Specific 

Illinois 

Differential 

f  Specific. 
^Illinois. . . . 
[Differential 

fSjDedfic. . 

•{Illinois 

[Differential 


25 
18 

7 

25 
2 

25 
26 

t  I 

25 

27 
t  2 

25 

29 

t  4 


23 
16 

7 

23 
18 

5 

23 

21 

2 

23 

23 

o 

23 

24 
ti 


20 

13 

7 

20 

15 

5 

20 

18 

2 

20 

I 

20 

20 

o 


t? 

8 
10 

t2 

8 

II 

t3 


*  nHDoiB  Centnl  R.R.  Tari£F,  I.CC.  No.  4186. 
t  Specific  imtes  are  lower  in  these  seven  cases. 
X  Classes  of  the  Western  Classification. 
I  Classes  of  the  Illinois  Classification. 

between  New  Orleans  on  the  one  hand  and  Memphis  and  other 
points  on  the  other.  Yet  they  are  materially  higher  than  the 
Illinois  rates. 

Since  the  rail  rates  parallel  to  the  Mississippi  are  higher  than 
the  present  rail  rates  in  Illinois,  as  shown  above,  and  since  the 
Illinois  rates  apply  as  maximum  rates  via  all  short  lines'  in  the 

*The  term  "short  Hne"  is  here  used  to  indicate  the  shortest  railway  route 
between  any  two  points.  The  longer  routes  must  meet  the  rates  made  by  the  short 
lines,  and  the  circuitous  carriers,  therefore,  make  rates  that  are  less  than  for  the 
actual  distance. 


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state,  the  rates  parallel  to  the  proposed  eight-foot  channel  are  lower 
than  the  competition  of  the  boats  on  the  lower  Mississif^i  have 
forced  the  rates  parallel  to  that  section  of  the  route.  WiUi  these 
conditions  known,  three  questions  are  still  unanswered:  Will  the 
boats  on  the  new  channel  be  able  (i)  to  force  a  reduction  in  the 
parallel  rail  rates,  or  (2)  to  carry  freight  more  advantageously  for 

TABLE  V 

Class  Rates  bbtwbbn  New  Orleans  and  Points  North  of  Baton  Rouge, 

Compared  with  Illinois  Class  Rates  for  Similar  Distances 

Class  rates  in  cents  per  100  pounds 


From  New  Orieut,  La.,  to 


(t 


%ozie,  Miss 

tNatches,  Miss. . . 
fVicksburg,  Miss. 
fGreenviile,  Miss. 

fHelena,  .\rk 

fMemphiSyXenn. 


{Specific 
Illinois 
Differential. 


(Specific 
Illinois 
Differential. 

[Specific 

Illinois 

[Differential. 

Specific 

Illinois 

Differential. 

fSojedfic 

Illinois 

[Differential. 

Specific 

Illinois 

Differential. 


169 


214 

214 


236 
236 


319 
319 


407 
407 


396 
396 


68 
37 
31 

45 
40 

5 

45 

41 

4 

45 

45 

o 

45 

48 

t  3 

45 

48 

t3 


58 
30 
28 

40 

32 
8 

40 
33 

7 

40 

37 

3 

40 

40 

o 

40 

40 

o 


48 
23 
25 

32 

25 

7 

32 

26 

6 

32 

29 

3 

32 

32 

o 

32 

32 

o 


30 

14 
16 

17 
15 

2 

17 
16 

I 

17 

17 

o 

17 

X   2 


20     17 
2o|    19 
%   2 


23 
13 
10 

12 

x\ 

12 

14 
t   2 

12 

16 

t4 

12 
18 

t6 

12 
18 

t6 


20 
8 

12 

12 
9 

3 

12 
9 
3 

12 
10 

2 

12 

II 

I 

12 
II 

I 


•  Ytxoo  ft  MisuMippi  VftUey  R.R.  Tariff,  LC.C.  No.  38x8. 
t  Ytxoo  ft  ¥iMi98ippi  VftUey  R.R.  Tariff,  LC.C.  No.  3585. 
X  Specific  rates  are  lower  io  these  nine  cases. 

the  shippers  than  the  railways  do,  and  (3)  will  both  of  these  advan- 
tages be  worth  the  cost  of  constructing  the  channel  ?  A  complete 
answer  is  not  attempted  in  this  short  article.  The  writer  has 
treated  the  subject  of  the  Lakes-to-the-Gulf  Waterway  elsewhere. 
The  chief  purpose  of  the  present  paper  is  to  present,  for  the  con- 
sideration of  those  studying  the  subject  as  a  whole,  a  comparison 
of  the  rates.    A  few  comments  on  the  nature  of  the  proposed  eight- 


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A  WATERWAY  BETWEEN  CHICAGO  AND  ST.  LOUIS        75 

foot  channel  in  comparison  with  the  Mississippi  River  below  St. 
Louis,  however,  are  here  offered. 

The  proposed  channel  of  a  minimuTn  depth  of  eight  feet  between 
Chicago  and  St.  Louis  is  made  up  of  the  Chicago  River  from  Lake 
Michigan  to  the  connection  with  the  Chicago  Sanitary  and  Ship 
Canal,  over  which  there  are  some  twenty-seven  dty  and  railroad 
bridges;  of  the  Sanitary  and  Ship  Canal,  which  is  spanned  by  fifteen 
bridges;  of  the  Des  Plaines,  the  Illinois,  and  the  Mississippi  rivers, 
which  are  also  spanned  by  several  bridges.  As  proposed,  there  are 
also  several  locks  on  the  routes.  With  a  narrow  canal  forming  a 
considerable  portion  of  the  route,  and  with  some  fifty  bridges  and 
several  locks  as  obstructions,  the  proposed  eight-foot  channel  could 
not  be  as  efficient  as  the  lower  Mississippi  with  its  broad  channel 
and  few  bridges.  That  is,  freight  could  not  be  transported  for  as 
low  cost  on  this  obstructed  canal,  where  a  speed  of  from  three  to 
five  miles  would  be  the  average,  as  on  the  broad  Mississippi,  where 
a  speed  of  from  ten  to  fifteen  miles  is  easily  made. 

The  writer  has  shown  elsewhere*  that  although  there  is  a  large 
freight  traffic  moving  between  St.  Louis  and  Memphis,  St.  Louis 
and  New  Orleans,  and  Memphis  and  New  Orleans,  there  is  no  sig- 
nificant amoimt  of  freight  carried  between  any  of  these  cities  by 
boat.  There  is  not  eyen  a  packet  line  in  operation  between 
Memphis  and  New  Orleans,  and  the  line  that  operates  between 
St.  Louis  and  Memphis  depends  on  way-freight  for  traffic.  That 
is,  the  freight  is  either  sent  out  from  St.  Louis  and  Memphis  to  the 
way-landings  or  is  collected  at  those  non-rail  points  and  carried  to 
St.  Louis  or  Memphis.  If  the  boats  on  the  lower  Mississippi 
neither  carry  any  significant  amoimt  of  the  competitive  freight  nor 
compel  the  parallel  railways  to  make  as  low  rates  as  are  now  in 
effect  throughout  the  entire  state  of  Illinois,  how  can  the  proposed 
route  between  Chibago  and  St.  Louis  be  of  material  service  even 
to  the  privileged  shippers  on  the  banks  of  the  route  ?  Of  course  it 
might  be  aptly  rejoined  that  the  traffic  conditions  are  very  different 
in  the  lower  Mississippi  Valley  from  those  in  Illinois,  that  the 
density  of  freight  traffic  is  much  greater  in  Illinois,  and  that  for 
this  reason  the  boats  could  carry  freight  cheaper  in  Illinois  than 

« Journal  of  Political  Economy^  XX,  6  Quly,  1912),  pp.  S4I-73- 


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76  JOURNAL  OP  POUTICAL  ECONOMY 

on  the  lower  Mississippi.  In  reply  it  may  be  said  that  there  is  a 
large  traffic  moving  between  St.  Louis  and  Memphis — enough  to 
load  boats  to  their  full  capacity — ^but  the  boats  cannot  attract  the 
freight.  Considering  the  material  difference  in  the  rates  in  the  two 
sections  and  the  low  efficiency  of  the  proposed  route,  moreover,  the 
writer  believes  that  the  construction  of  this  canal  will  be  an  eco- 
nomic waste,  as  that  of  so  many  others  has  been  since  the  present 
status  of  railways  has  been  attained. 

Now  that  we  have  finished  our  study  of  the  proposed  channel 
between  Chicago  and  St.  Louis,  some  application  of  the  conclu- 
sions arrived  at  in  this  case  may  be  made  to  the  general  topic  of 
the  advisability  of  constructing  waterways  instead  of  railways. 
The  problem  is  world-wide.  An  economist  of  China  recently 
made  inquiry  of  the  writer  as  to  how  far  the  conclusions  set  forth 
in  The  LakeS'to-the-GidJ  Deep  Waterway  could  be  generalized.  He 
desired  to  know  whether  a  network  of  canals  or  a  S3rstem  of 
national  railways  shoidd  be  constructed  by  the  young  Chinese 
Republic.  The  traffic  conditions  in  China  are,  of  course,  so  funda- 
mentally different  from  those  in  the  Mississippi  Valley  that  no 
comparison  will  be  attempted  here.  But  it  is  certain  that  China 
will  not  repeat  the  history  of  the  nations  that  have  brought  rail- 
way development  to  its  present  status.  The  best  types  of  railways 
may  be  constructed  by  that  nation  (since  it  is  a  densely  populated 
coimtry  with  great  natural  resoiurces);  and  within  a  decade  or 
two,  traffic  shoidd  be  carried  as  cheaply  by  rail  in  China  as  it  is 
now  in  the  Mississippi  Valley. 

To  many  who  have  studied  the  statistics  of  traffic  on  the  Rhine, 
the  contrast  with  traffic  on  the  Mississippi  is  a  puzzle.  Even  here 
the  conditions  are  not  entirely  comparable,  and  without  a  study 
of  both  traffic  movement  and  rates,  few  generalizations  can  be 
safely  made.  The  writer  believes,  however,  that  the  crux  of  the 
whole  matter  lies  in  the  fact  that  German  railway  freight  rates 
are  more  than  12  mills  per  ton-mile,  while  the  rates  parallel  to  the 
Mississippi  are  approximately  only  6  mills.'    The  railways  were 

*  The  charges  per  ton  per  mfle,  by  rail  between  points  on  the  Missis8q>pi,  are 
presented  in  The  Lakes-to-^ulf  Deep  Wakrways^  pp.  52-53.  Even  if  the  express  be 
separated  from  the  freight  of  German  railway  traffic,  the  ton-mile  charge  would 
still  be  something  more  than  10  mills. 


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A  WATERWAY  BETWEEN  CHICAGO  AND  ST.  LOUIS        77 

not  built  with  a  view  to  competiag  for  the  Rhine  traffic,  however, 
and  the  terminal  facilities  are  excellent  on  the  Rhine.  The  German 
railways  were  constructed  as  feeders  to  the  Rhine  in  many  cases 
instead  of  as  competitors.  These  are  important  advantages  in 
transportation  on  the  Rhine  over  transportation  on  the  Mississippi. 
Yet  it  is  the  conviction  of  the  writer  that  the  difference  in  rates 
is  more  fundamental  than  any  other  factor  that  causes  traffic  to 
continue  on  the  Rhine  while  it  dwindles  on  the  Mississippi. 

The  conclusions  drawn  from  the  proposed  channel  between 
Chicago  and  St.  Louis  may  be  applied  safely  to  other  projects  in 
the  United  States  where  the  same  grade  of  railway  service  exists 
and  the  same  railway  rates  are  implied  as  in  Illinois.  Three  pro- 
jects in  the  territory  of  the  Central  Freight  Association'  have 
received  considerable  attention.  Here  the  Central  Freight  Asso- 
ciation scale  of  distance  rates  applies,  and  these  rates  are  even 
lower  than  the  Illinois  distance  rates.  The  railways,  moreover, 
are  as  efficient  throughout  this  territory  as  in  Illinois.  Beca\ise 
of  these  conditions,  it  is  safe  to  say  that  boat  traffic  on  the  pro- 
posed canals  would  be  neither  more  easy  to  develop  nor  more 
advantageous  to  the  shippers  than  in  the  case  of  the  proposed 
channel  between  Chicago  and  St.  Louis.  One  of  the  projects  is  to 
connect  Chicago  with  Detroit.  The  canal  would  pass  through 
a  highly  developed  industrial  district  near  Chicago  at  an  enormous 
cost,  and  through  a  rich  agricultural  section  throughout  the  larger 
part  of  the  route.  It  is  the  opinion  of  the  writer  that  little  local 
traffic  could  be  developed  along  the  route  because  of  rail  competi- 
tion, and  that  the  through  traffic  would  continue  to  pass  through 
the  Great  Lakes  at  a  higher  speed,  a  lower  risk,  and  in  larger 
cargoes. 

A  canal  of  large  dimensions  has  been  projected  between  Pitts- 
burgh, Pa.,  and  Lake  Erie.  Af^roximatdy  the  same  rail  rates 
apply  as  between  Chicago  and  Detroit.  The  proposed  route 
passes  through  a  highly  developed  indiistrial  and  a  rich  agri- 
cultural region.  It  would  be  necessary  to  construct  numerous  road 
and  railway  bridges  across  the  channel  either  of  sufficient  clearance 
to  allow  the  freighters  to  pass  or  equipped  with  machinery  for 

>  This  temtoiy  lies  roughly  west  of  Buffalo  and  Pittsbuigh,  north  of  the  Ohio 
River,  and  east  of  the  Miasissii^  River  and  Lake  Michigan. 


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78  JOURNAL  OF  POUTICAL  ECONOMY 

being  raised.  A  lai^ge  channel  with  a  requirement  for  a  high  clear- 
ance would  be  a  wasteful  obstruction  to  transportation.  In  a 
highly  developed  indiistrial  r^on  served  by  a  thick  railway  net 
of  steam  and  electric  lines,  this  obstruction  is  also  a  detriment  to 
indiistrial  development,  and  an  additional  expense  in  the  con- 
struction of  electric  or  steam  railways,  as  well  as  a  hindrance  to 
transportation  or  even  locomotion  from  bank  to  bank.  A  canal 
between  the  Ohio  River  and  Lake  Erie  has  also  been  proposed. 
The  same  low  rates  and  obstructive  disadvantages  are  to  be  con- 
sidered in  connection  with  this  project  as  in  the  case  of  the  Pitts- 
biurgh-Lake  Erie  route.  There  is,  however,  less  traffic  moving 
between  the  Ohio  River  and  Lake  Erie  than  between  Pittsburgh 
and  that  lake. 

The  three  proposed  canals  mentioned  above  lie  in  territory  so 
very  similar  in  traffic  conditions  to  that  of  the  proposed  waterway 
between  Chicago  and  St.  Lotiis  that  the  writer  is  convinced  that 
the  construction  of  any  of  them  could  be  nothing  but  a  blunder. 
Lideed,  wherever  the  freight  rates  are  so  low  and  the  railway  ser- 
vice is  so  efficient  as  in  Central  Freight  Association  territory  and 
in  Illinois,  it  would  be  a  waste  of  fxmds  to  construct  canals  of  con- 
siderable length  or  even  to  spend  large  sums  in  improving  river 
channels.  The  improvement  of  mouths  of  rivers  forming  connec- 
tions with  the  sea  for  ocean  vessels  would,  of  course,  be  an  exception 
to  this  statement.  It  is  good  transportation  policy,  perhaps,  to 
improve  the  Columbia  River  below  Portland,  Oregon,  or  the  Mis- 
sissippi below  New  Orleans.  But  the  expenditure  of  a  large  amoimt 
of  funds  on  the  Columbia  River  above  Portland  or  on  the  Mis- 
sissippi above  New  Orleans  for  navigation  purposes,  the  writer  is 
convinced,  would  not  be  in  the  interest  of  public  welfare.  The 
reason  for  this  conviction  is  a  belief  that  rail  transportation,  with 
few  important  exceptions,  is  now  cheaper,  by  and  large,  tha^ 
transportation  by  canals  and  rivers. 

William  A.  Shelton 

Cambxidoe,  Mass. 


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NOTES 


CX)VERNMENT  DEPOSITS  IN  THE  NATIONAL  BANKS 

The  plans  of  Secretary  McAdoo  for  depositing  government  money 
among  the  banks  to  aid  crop-moving  have  attracted  much  attention 
and  aroused  a  great  deal  of  criticism,  both  favorable  and  unfavorable. 
Among  other  conmients  has  been  the  insistence  that  the  movement 
was  a  discrimination  against  the  New  York  banks  and  one  of  many 
indications  of  the  administration's  deep-seated  hostility  toward  the 
bankers  in  the  metropolis. 

Be  that  as  it  may,  an  examination  of  the  facts  r^arding  government 
deposits  in  national  banks  is  of  interest.  During  the  last  fifteen  years 
a  twofold  change  has  been  taking  place.  The  first  of  these  is  in  the 
total  amoimt  of  the  deposits  in  all  national  banks,  and  the  second  is  in 
the  proportion  held  in  New  York  City  as  compared  with  the  rest  of  the 
country.  The  reports  made  to  the  comptroller  of  the  currency  five 
times  each  year  by  the  national  banks  furnish  the  best  source  of  informa- 
tion, as  comparisons  of  the  amounts  deposited  in  each  part  of  the  country 
are  possible. 

During  the  year  1899  the  deposits  of  the  government  in  the  national 
banks  ranged  from  $70,481,000  on  June  30  to  $81,340,000  on  April  4. 
In  1913  the  largest  amount  on  deposit  was  $84,322,000  on  October  21, 
the  last  date  of  call,  and  the  smallest  was  $39,360,000  on  February  4. 
Table  I  gives  the  largest  and  smallest  amounts  in  each  year  from  1909 
to  1913  as  shown  by  the  statements  made  to  the  comptroller.  The 
amounts  do  not,  of  course,  necessarily  indicate  the  maximimi  and 
minimum  during  each  twelve  months,  as  these  calls  are  issued  only  five 
times  per  year. 

This  fifteen-year  period  has  witnessed  two  upward  movements  in 
the  amoimt  of  these  deposits.  The  first  was  during  the  time  when 
Secretary  of  the  Treasury  Leslie  M.  Shaw  endeavored  to  influence  the 
supply  of  money  and  credit  through  his  management  of  government 
funds.  By  transferring  money  directly  from  the  Treasury  to  the  banks, 
by  depositing  government  money  as  an  aid  to  crop-moving,  and  in  other 
ways  he  increased  the  amounts  due  from  the  banks  to  the  Treasury. 
The  second  marked  upward  movement  began  in  1906.  It  was  at  the 
outset  to  be  attributed  to  the  action  of  Secretary  Shaw,  but  the  amoimts 

79 


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JOURNAL  OP  POLITICAL  ECONOMY 


were  greatly  increased  by  his  successor,  Mr.  Cortelyou,  as  an  aid  to  the 
banks  in  the  fall  of  1907.  After  1908  the  United  States  deposits  with 
the  banks  fell  rapidly  to  the  low  mark  of  $33,594,000  in  191 2.  During 
1913,  the  item  has  been  rising,  the  amount  for  each  date  being  $39,360,000 
on  February  4,  $39,886,000  on  April  4,  $43,118,000  on  Jime  4,  $51,486,- 
000  on  August  9,  and  $84,322,000  on  October  21. 

It  may  not  be  correct  to  characterize  the  movement  for  the  entire 
period  as  downward  but  it  is  true  that  the  amount  of  United  States 
deposits,  with  the  exception  of  the  quotation  for  October  21, 1913,  is  now 
much  less  than  in  1909.  Diuing  1913  there  has  been  a  movement 
upward,  apparently  due  to  the  deposit  of  money  to  aid  in  the  moving  of 
crops. 

TABLE  I 
United  Statxs  Dsposrrs  wtth  All  National  Banks:  High  and  Low  Amounts 

FOR  Each  Year 


YftAK 


High 


Date 


IiOW 


AmooDt 


Date 


1899 
1900 
1901 
1902 

1903 
1904 

19OS 
1906 
1907 
1908 
1909 
1910 
1911. 
191 2. 
I913 


$  81^0,000 
103,781,000 
104,167,000 
138^64,000 

iS3»276»«>o 

i5S»399,«>o 

97^17,000 

129,193,000 

223,117,000 

221437,000 

88,039,000 

42,048,000 

37,166,000 

47,876,000 

84,322,000 


Apr.  s 
Feb.  13 
Dec.  10 
Nov.  2$ 
Nov.  17 
Tan.  22 
Jan.  XI 
Nov.  12 
Dec  3 
Feb.  14 
Feb.  5 
June  30 
Tunc  7 
June  14 
Oct.   21 


$  70481,000 

87,596,000 

88,709,000 

105,940,000 

139,385,000 

100,965,000 

51,600,000 

52,207,000 

140,801,000 

111,802,000 

35,226,000 

34,267,000 

34413,000 

33,594,000 

39,360,000 


June  30 

y^:\ 

Feb.  25 
June  9 
Sept.  6 
Nov.  9 
Jan.  29 
Mar.  22 
Nov.  27 
Sept.  I 
Mar.  29 
Mar.  7 
Nov.  26 
Feb.    4 


The  second  change  is  in  the  proportion  of  these  deposits  held  by 
the  New  York  banks.  On  February  4,  1899,  the  banks  as  a  whole  held 
$81, 120^000  of  United  States  deposits;  of  this  sum  the  banks  of  New 
York  held  $34,099,000,  or  42  per  cent.  At  the  date  of  the  last  call  there 
was  a  total  of  $84,322,000  of  United  States  deposits,  of  which  the  New 
York  banks  held  $2,226,000,  or  less  than  3  per  cent.  The  proportion 
held  in  New  York  declined  from  42  per  cent  to  3  per  cent,  while  that 
held  by  the  other  banks  of  the  country  increased  from  58  per  cent  to 
97  per  cent.  The  relative  amoimts  at  the  date  of  each  call  of  the  comp- 
troller are  shown  in  Table  n. 


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NOTES 


8i 


This  table  shows  a  persistent  and  consistent  policy  on  the  part  of 
the  Treasury  Department.  Not  only  have  the  amounts  on  deposit 
with  the  banks  been  declining  but  the  proportion  allotted  to  the 
banks  of  New  York  has  imdergone  a  very  pronounced  change.    The 

TABLE  n 

Relative  Amounts  of  Untted  States  Deposits  Held  by  New  York  National 
Banks  and  by  All  Other  National  Banks  op  the  United  States 


YSAS 

Pkkcxhtagb 

Ybak 

Pkecxmtagb 

YSAK 

New 
York 
Banks 

AU  other 
Banks 

New 
York 
Banks 

Another 
Banks 

New 
York 
Banks 

AU 
Other 
Banks 

i399 

1900 

1901 

1902 

1903 

42 
42 

36 

38 
38 
37 
37 
36 

36 
36 
35 
35 
34 

34 
34 
33 
33 
30 

29 

27 
27 
27 
25 

55 
58 
66 

64 
64 

62 
62 

i^ 

63 
64 

64 
64 

65 

66 

66 
66 
67 
67 
70 

71 
73 
73 
73 
75 

1904 

1905 

1906 

1907 

1908 

24 
38 
22 
22 
22 

22 
21 
18 

15 
16 

15 
18 
18 
10 
II 

11 
10 
18 
19 

34 

28 

19 

7 

9 

7 

76 
62 

75 
78 

78 
78 

2? 
85 
84 

85 
82 
82 
90 
89 

89 
90 
82 
81 

66 

72 
81 
93 
91 
93 

1909 

1910 

1911 

1912 

1913 

4 
6 

5 
7 
7 

6 
6 
8 
6 
6 

6 
5 

4 
4 
4 

4 
3 
3 
3 

4 

5 
7 
6 

5 
3 

96 
94 
95 
93 
93 

94 
94 
92 

94 
94 

94 
95 

96 
96 

96 
97 
97 
97 
96 

95 
93 
94 
95 
97 

law  allows  the  secretary  of  t£e  Treasury  to  use  his  discretion  in  the 
designation  of  national  banks  as  depositaries,  and  year  after  year  these 
officials  have  gradually  been  distributing  more  of  the  funds  in  other 
parts  of  the  coimtry. 

Fifteen  years  ago  New  York  had  nearly  one-half  of  the  total  amount. 
This  rapidly  declined,  the  only  marked  reaction  occurring  in  1907,  when 


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82  JOURNAL  OP  POUTICAL  ECONOMY 

relief  was  given  by  the  government  to  the  New  York  market.  In  1909 
the  percentage  with  New  York  banks  fell  to  4  per  cent'  of  the  total, 
and  since  then  it  has  ranged  from  3  per  cent  to  8  per  cent.  New  York's 
share  was  lowest  in  191 2,  when  it  was  3  per  cent  and  4  per  cent.  This 
year  it  has  ranged  from  3  per  cent  to  7  per  cent,  the  last  report  showing 
3  per  cent. 

E.  M.  Patterson 
UNivEKsmr  OF  Pennsylvania 


BOND  INVESTMENTS  BY  NATIONAL  BANKS 

The  note  on  "Bond  Investments  by  National  Banks"  by  Mr. 
John  V.  Hogan  in  the  November  Journal  of  Political  Economy  directs 
attention  to  an  important  development  in  American  banking  practice. 
The  particular  exhibits  which  Mr.  Hogan  employs  to  show  the  rapid 
increase  in  the  security  holdings  of  the  national  banks  are,  however, 
defective. 

Mr.  Hogan  states  that  between  September  i,  1909,  and  June  14, 
1912,  the  following  changes  occurred  with  respect  to  the  national  banks: 

1.  Aggregate  capital  stock  increased  10.06  per  cent. 

2.  Aggregate  individual  deposits  increased  17.59  per  cent. 

3.  Loans  and  discoimts  increased  17.76  per  cent. 

4.  Holdings  of  securities  other  than  United  States  bonds  increased 
41.63  percent. 

5.  Holdings  of  securities  other  than  United  States,  state,  or  muni- 
cipal bonds  increased  48. 57  per  cent. 

6.  The  proportion  of  state,  municipal,  and  railroad  bonds  to  total 
security  holdings  decreased  from  65^  per  cent  in  1909  to  49^  per  cent  in 
1912. 

7.  The  capital  stock  of  all  national  banks  on  Jime  14,  191 2,  was 
$1,046,012,500. 

8.  The  ratio  of  securities  other  than  United  States,  state,  or  muni- 
cipal bonds  to  capital  stock  increased  from  64  per  cent  in  1909  to  87  per 
cent  in  191 2. 

As  a  matter  of  fact,  the  changes  which  took  place  in  the  period  indi- 
cated show  no  such  disproportionate  increase  in  security  holdings, 
being  as  follows: 

I.  The  aggregate  capital  stock  at  the  two  dates  was: 

September  1, 1909 $  944>642,o67.oo 

June  14,  19" i>033,S7o,67S.oo 

showing  an  increase  of  9.41  per  cent. 


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NOTES  83 

2.  Aggregate  individual  deposits  at  the  two  dates  were: 

September  i,  IQ09 $S»«>9>893>079-  79 

June  14, 1912 5>325^i,x63.36 

showing  an  increase  of  16. 27  per  cent. 

3.  Loans  and  discounts  at  the  two  dates  were: 

September  i,  1909 $5,128,882,351. 18 

June  14, 19" 5,953,904,431.85 

showing  an  increase  of  16.08  per  cent. 

4.  Holdings  of  securities  other  than  United  States  bonds  at  the  two 
dates  were: 

September  x,  1909 $  916,380,300.00 

June  14, 1912 1,077,783,001.00 

showing  an  increase  of  17 .  61  per  cent. 

5.  Holdings  of  securities  other  than  United  States,  state,  or  muni- 
cipal bonds  at  the  two  dates  were: 

September  i,  1909 $   760,569,010.00 

June  14, 1912 898,460,997.00 

showing  an  increase  of  18. 13  per  cent. 

6.  On  September  i,  1909,  the  banks  held: 

State,  county,  and  municipal  bonds $   155,811,290.00 

Railroad  bonds 342,525,224.00 

Total $  498,336,514.00 

forming  54.4  per  cent  of  their  total  security  holdings. 

7.  The  capital  stock  of  all  national  banks  on  June  14,  1912,  was 
*i,033,S7o,675.oo. 

8.  The  ratio  of  securities  other  than  United  States,  state,  or  mimi- 
dpal  bonds  to  capital  stock  increased  from  80 . 5  per  cent  in  1909  to  86 . 9 
per  cent  in  1912. 

It  might  be  worth  while  noting  that  the  period  from  1909  to  191 2,  as 

I  have  elsewhere  shown,'  was  marked  by  comparatively  slow  increase 

in  the  relative  importance  of  security  holdings.    Indeed  from  1909  to 

1910,  and  from  191 1  to  191 2,  there  was  a  decline  in  the  importance  of 

such  holdings  relative  to  banking  resources,  and  although  the  increase 

from  1910  to  191 1  was  marked,  the  net  change  for  the  three  years  was 

moderate. 

Jacob  H.  Hollander 
Johns  Hofuns  University  * 

>  "The  Security  Holdings  of  National  Banks,"  in  American  Economic  Review,  De» 
cember,  1913. 


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84  JOURNAL  OP  POLITICAL  ECONOMY 

WASHINGTON  NOTES 

THE  NEW  BANKING  ACT 

The  passage  of  the  banking  and  currency  bill  by  the  Senate  on 
December  .19  brings  the  dose  of  the  process  of  preparation  and 
congressional  controversy  which  has  now  lasted  a  good  deal  more  than 
a  year;  while,  of  course,  the  movement  of  which  it  was  the  outgrowth  is 
the  product  of  nearly  twenty  years  of  continuous  effort.  The  final 
episode  of  the  contest  for  currency  l^slation  was  reached  on  December 
2,  when  a  senatorial  caucus  completed  its  consideration  of  the  bill  as 
reported  by  the  Senate  Committee  on  Banking  and  Currency  a  few  days 
previously  (November  22).  When  reported  from  the  committee  in 
question,  the  bUl  was  accompanied  by  Senate  Report  No.  133  (63d  Cong., 
ist  sess.)  and  by  minority  views  embod3dng  a  rival  bill.  During  the 
latter  part  of  the  struggle  in  the  Senate  Banking  Committee,  it  proved 
so  far  out  of  the  question  to  obtain  the  assent  of  the  majority  to  any 
distinct  series  of  proposals  that  the  committee  divided  into  two  sections, 
one  including  six  Democrats,  the  other,  one  Democrat  and  five  Repub- 
licans, the  former  group  being  referred  to  by  coiutesy  as  the  "majority." 
In  reporting  a  modified  draft  of  the  House  bill,  the  so-called  majority 
3delded  to  the  strong  representations  of  the  administration  by  striking 
out  most  of  the  provisions  calling  for  wide  departures  from  the  terms  of 
the  House  measure  that  had  been  inserted  during  the  earlier  stages  of 
discussion.  In  its  ultimate  form,  the  majority  draft,  however,  made 
the  following  significant  innovations  upon  the  House  bill: 

1.  Alteration  of  the  conditions  under  which  federal  reserve  banks 
are  to  be  organized,  by  providing  for  a  new  class  of  stock  to  be  sold  to  the 
public,  or  in  default  of  public  subscription  to  be  allotted  to  the  United 
States  if  not  taken  up  by  existing  banks. 

2.  Limitation  of  the  nimiber  of  reserve  banks  to  be  established  to 
not  less  than  eight  nor  more  than  twelve,  as  against  the  "at  least  twelve" 
provision  of  the  House  measure. 

3.  Broadening  of  the  powers  of  the  Federal  Reserve  Board  by  assign- 
ing it  various  new  functions  of  a  secondary  character,  and  at  the  same 
time  removing  some  restrictions  upon  its  action  in  ordering  rediscoimts 
by  one  reserve  bank  in  favor  of  another,  which  had  been  inserted  during 
the  time  the  bill  was  in  the  House  Banking  Committee. 

4.  Provision  that  federal  reserve  notes  and  other  bank  notes  may  be 
permitted  by  the  Reserve  Board  to  be  used  as  reserves  by  banks. 

5.  Provision  for  compulsory  purchase  of  $25,000,000  of  2  per  cent 
bonds  by  federal  reserve  banks  each  year,  such  bonds  to  be  used  by  the 


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NOTES  8$ 

reserve  banks  at  their  option  to  protect  the  bank  notes,  identical  with 
existing  national  bank  notes,  which  are  to  be  taken  out  by  them.  Such 
bonds  would,  however,  be  purchased  only  at  the  request  of  existing 
holders  (national  banks)  and  would  be  used  as  a  basis  for  circulation 
only  if  the  federal  reserve  banks  desired.  If  a  request  were  made  by  the 
latter,  the  bonds  might  be  fimded  into  3  per  cent  seciuities  without  the 
circulation  privilege. 

6.  Alteration  of  the  rediscount  sections  so  as  to  broaden  the  redis- 
count powers  and  to  permit,  in  addition,  the  use  of  domestic  acceptances 
by  member  banks. 

7.  Elimination  of  the  savings-bank  provisions  of  the  House  bill. 

8.  Reduction  of  the  amoimt  of  reserves  to  be  required  of  national 
banks  to  15  and  12  per  cent  respectively  for  reserve  dty  and  country 
banks,  as  against  18  and  12  in  the  House  bill.  At  the  same  time  the 
period  within  which  the  reserves  are  to  be  paid  in  is  somewhat  length- 
ened and  the  conditions  lightened. 

9.  Reduction  of  the  required  contribution  of  capitalization  from  20 
per  cent  of  the  existing  o^ital  of  member  banks  to  6  per  cent  of  their 
capital  and  surplus,  one-half  to  be  paid  in  within  a  specified  time. 

Of  these  pmnts  the  Senate  succeeded  in  conference  committee  in 
maintaining  Nos.  i,  2,  3,  5,  7,  and  9  in  modified  forms,  while  Nos.  4  and 
6  wore  rejected  at  the  instance  of  the  House,  and  a  compromise  was 
effected  in  regard  to  No.  8.  Most  of  the  points  upon  which  concessions 
were  made  represented  the  views  of  the  House  leaders,  as  to  which 
they  had  been  unsuccessful  in  getting  affirmative  action  in  the  lower 
chamber. 

The  debate  in  the  Senate  has  followed  familiar  lines  and  has  not 
contributed  much  to  the  amelioration  of  the  terms  of  the  bill,  or  to  the 
better  diffusion  of  sound  ideas  on  money  and  banking. 

ARGUMENTS  FOR  HIGHER  RAILROAD  RATES 

Discussion  of  the  proposed  increase  of  5  per  cent  in  the  rates  of  rail- 
roads in  eastern  classification  territory  has  now  been  fairly  started  at 
hearings  before  the  Interstate  Conmierce  Conmiission.  Only  the  side 
of  the  railroads  has  thus  far  been  presented.  They  have  succeeded  in 
making  an  extremely  dear  showing  with  reference  to  revenue  conditions, 
demonstrating  the  difficult  situation  in  which  they  are  placed  both  by 
the  constant  growth  of  demands  of  labor,  largely  assented  to  during  the 
past  year  as  a  result  of  arbitration  proceedings,  and  by  the  demands  of 
the  public  for  better  facilities,  greater  safety  of  operation^  and  larger 


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86  JOURNAL  OP  POUTICAL  ECONOMY 

crews  on  trains.  The  plan  for  the  further  conduct  of  the  hearings  pro- 
vides for  the  completion  of  the  railroads'  case  and  then  for  the  pre- 
sentation of  the  shippers'  arguments  with  a  rejoinder  by  the  roads. 
Already  a  very  serious  difference  of  opinion  among  shippers  has  become 
evident,  some  groups  of  shippers  being  positive  in  their  opposition  to  an 
advance  in  rates,  while  others  are  inclined  to  continue  their  support  of 
the  railroads'  position.  It  seems  evident,  however,  from  what  has 
already  been  done,  that  the  contest  will  finally  settle  down  to  an  analysis 
of  railroad  revenue  and  its  adequacy  to  maintain  existing  obligations 
and  dividends.  In  this  connection,  the  railroads  have  made  a  con- 
vincing showing,  pointing  out  particularly  that  expenses  have  increased 
so  much  faster  than  revenues  that  the  net  operating  income  of  eastern 
railroads  for  1913  was  $16,311,000  less  than  it  was  in  1910,  notwith- 
standing the  fact  that  more  than  $650,000,000  of  new  money  had  been 
put  into  the  properties  in  that  time.  In  general  the  roads  in  their  pre- 
liminary briefs  have  made  the  following  points: 

1.  The  revenue  received  from  the  operation  of  these  railroad 
systems  had  attained  the  simi  of  $1,205,155,435  in  1910.  The 
increase  in  1911  was  some  $14,000,000;  1912  maintained  this  gain  and 
added  to  it  $38,000,000.  In  1913  this  revenue  had  grown  to  $19386,073,- 
429.  This  showed  an  increase  in  revenue  of  $181,000,000  for  the  three 
years  1910-13. 

The  largest  item  of  this  revenue  was,  of  course,  that  derived  from 
carrying  freight.  This  was,  in  1910,  $860,403,390.  Passenger  fares 
collected  amounted  to  a  little  less  than  one-third  of  this  simi,  or  $260,- 
234,927.  The  increased  receipts  from  freight  charges,  in  1912  and  1913, 
over  each  preceding  year  were,  successively,  $30,000,000  and  $105,000,- 
000,  while  the  receipts  of  191 1  showed  a  decrease  from  1910  of  $3,000,000; 
in  the  same  years  the  passenger  department  receipts  increased  $14,000,- 
000,  $5,000,000,  and  $14,000,000.  Thus  passenger  and  freight  receipts 
were,  in  the  year  1913,  $165,000,000  in  excess  of  what  they  had  been  in 
1910. 

2.  With  reference  to  the  use  of  the  money  the  roads  have  pointed  out 
that  there  are  three  items  which  make  up  between  90  and  95  per  cent  of 
the  expense  of  operation  of  a  railway,  these  being  in  order  of  magnitude, 
transportation,  maintenance  of  equipment,  and  maintenance  of  way. 
The  forty-nine  roads  in  question  spent  $410,734,001  for  transportation 
charges  in  1910.  Their  maintenance  of  equipment  consumed  $195,726,- 
105,  while  maintenance  of  track,  bridges,  and  the  like  demanded  an 
expenditure  of  $145,273,235.    As  the  total  expense  for  running  the  rail- 


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NOTES  87 

ways  in  1910  was  $800,662,522  it  is  urged  that  the  three  items  mentioned 
accotmted  for  more  than  $750,000,000,  or  about  fifteen-sixteenths,  of  the 
money  paid  out.  The  amoimts  increased  steadily  from  year  to  year 
during  1911-13,  imtil  in  1913  the  increase  over  the  year  1910  amotmted 
to  $92,000,000  in  transportation  charges,  $51,000,000  in  maintenance  of 
equipment  charges,  and  $35,000,000  in  maintenance  of  way  charges. 

3.  The  railroads  paid  out  in  taxes  for  the  successive  years  1910-13 
$43,140,475;  $451898,383;  $51,055,738,  and  $53,946,004.  Thus  the 
percentage  of  increase  in  taxes  in  1913  over  1910  was  23.6  per  cent. 

4.  As  a  result,  the  operating  income  showed  a  loss  in  three  years 
of  about  $16,000,000,  notwithstanding  an  increase  in  annual  receipts 
of  more  than  $180,000,000.  Stated  in  terms  of  miles,  the  cash  received 
was  greater  in  1913  than  1910  by  $2,819  P^r  mile  or  13.7  per  cent,  yet 
the  increase  in  expenses  more  than  balanced  this  increase  and  resulted 
in  a  decrease  in  operating  income  of  $312,  or  5  per  cent  per  mile. 

The  substance  of  the  roads'  case  is  practically  summed  up  in  the 
foregoing  digest  and  has  undoubtedly  produced  a  strong  impression 
both  in  Congress  and  upon  the  minds  of  the  Interstate  Commerce  Com- 
mission members  and  of  rate  experts  in  their  employ.  Added  to  the 
financial  showing  just  made,  there  has  been  a  very  convincing  argument 
with  respect  to  the  difficulty  of  getting  capital  at  reasonable  rates  under 
existing  conditions,  and  the  consequent  diffiadty  of  funding  indebted- 
ness into  long-term  obligations. 

RAILROAD  SECURITIES  AND  FINANCIAL  CONDITIONS 

The  developments  in  the  case  of  the  railroads  before  the  Interstate 
Commerce  Commission  have  brbught  to  light  conditions  in  the  banking 
system  which  have  been  known  to  close  students  but  have  not  been 
generally  recognized.  The  banks  of  the  country  have  for  some  years  past 
heeA  obliged  to  finance  the  current  needs  of  the  railroads  by  short  loans, 
because  of  the  inability  of  the  latter  organizations  to  borrow  from  the 
general  public.  The  public  itself  has  been  unwilling  to  take  up  long- 
term  bonds  because  of  its  fear  that  the  railways,  xmder  existing  condi- 
tions, might  not  be  able  to  meet  their  obligations  readily.  It  has  been 
willing  to  take  a  certain  amount  of  short-term  notes  running  one,  two, 
and  three  years,  but  these  notes  have  had  to  be  constantly  renewed,  and 
during  the  year  1914  an  unexpectedly  large  amount  of  them  will  require 
refimding,  an  operation  that  will  necessitate  rather  extensive  financial 
readjustments.    Many  of  the  notes  have  been  carried  by  banks  and 


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88  JOURNAL  OP  POLITICAL  ECONOMY 

trust  companies  and  constitute  a  considerable  part  of  their  assets.  In 
not  a  few  instances,  institutions  which  took  over  such  securities  have 
found  themselves  obliged  to  continue  carrying  them,  owing  to  imex- 
pected  inability  to  sell  to  investors.  The  consequence  of  this  condition 
has  been  to  render  a  large  part  of  the  banks'  funds  non-liquid,  and  ulti- 
mate liquidation  appears  to  depend  upon  action  placing  the  railroads 
in  such  a  position  as  to  render  possible  the  restoration  of  confidence  on 
the  part  of  investors  as  a  body.  Of  late  the  lack  of  such  confidence  in 
the  United  States  has  been  aggravated  by  the  action  of  European  holders 
of  the  short-term  securities  referred  to  in  sending  to  the  United  States 
large  blocks  of  the  notes  issued  by  American  railways.  This  they  have 
done,  partly  because  they  distrusted  the  business  outlook  in  this  country 
and  partly  because  they  found  that  an  easy  way  to  avoid  shipments  of 
gold  which  they  were  unwilling  to  make  in  consequence  of  the  strained 
banking  situation  due  to  the  waste  of  capital  which  has  resulted  from  the 
constant  warfare  in  Southeastern  Europe  during  the  past  year.  The  fact 
that  the  banks  are  burdened  with  railroad  securities  in  such  a  way  has 
greatly  intensified  the  pressure  that  is  being  brought  to  bear  upon  the  gov- 
ernment in  behalf  of  an  advance  in  rates.  Additional  urgency  is  lent  by 
the  depression  of  business  in  the  steel  industry,  due  to  the  inability  of  the 
roads,  with  their  present  revenues,  to  make  new  contracts  for  rails  and 
equipment.  On  the  other  hand,  those  who  regard  the  rate  increase  as 
desirable  find  themselves  in  an  embarrassing  dilemma,  because  of  the 
apparent  power  of  railroad  employees'  organizations  to  exact  from  the 
roads  a  constantly  increasing  measure  of  their  earnings  in  the  form  of 
higher  wages.  Such  increases  granted  during  the  past  year,  in  fact, 
constitute  one  of  the  immediate  causes  of  the  difficulties  under  which 
the  roads  are  now  suffering.  There  is  no  assurance  whatever  that  if  the 
desired  advances  were  to  be  granted,  the  roads  would  long  be  able  to 
retain  them,  and  to  use  the  funds  thus  obtained  for  the  purpose  of  pro- 
viding better  equipment  or  of  disposing  more  satisfactorily  of  their 
maturing  obligations.  That  the  Interstate  Conmierce  Conmiission  will 
practically  be  driven  to  a  general  survey  of  the  railroad  situation  in  many 
aspects  that  are  broader  than  the  immediate  financial  condition  of  the 
lines  themselves  is  evident,  inasmuch  as  their  indirect  relations  with 
labor  and  with  banking  institutions  are  so  important  a  factor  in  the  prob- 
lem now  to  be  solved.  The  complexity  of  the  situation  foreshadows  a 
much  greater  delay  in  reaching  a  decision  regarding  the  proposed  rate 
^vances  than  had  been  expected. 


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NOTES  89 

DEVELOPMENT  OF  THE  ANTI-TRUST  PROGRAM 

The  first  official  statement  of  the  anti-trust  policy  of  the  Wilson 
administration  is  afforded  by  the  report  of  Secretary  Redfield  of  the 
Department  of  Commerce  {Report  of  the  Department  of  Commerce  for 
igij)  made  public  December  15.  In  this  report  Mr.  Redfield 
furnishes  an  outline  of  proposed  methods  of  investigation  and  pro- 
posed types  of  legislation  which  he  believes  to  be  desirable  with 
respect  to  the  control  of  corporate  effort.  Whatever  fa  actually  done 
by  the  Wilson  adminfatration  during  the  coming  year,  or  later,  toward 
the  restriction  of  corporations,  the  plans  with  which  a  beginning  fa  made, 
as  now  set  forth  in  the  report  of  the  Secretary  of  Commerce,  will  have 
dfatinct  significance  as  showing  the  point  of  view  from  which  a  start  was 
taken.  Secretary  Redfield's  outline  of  suggestions  includes  first  of  all 
an  inquiry  into  the  condition  and  efficiency  of  industrial  combinations. 
On  thfa  point  he  says  that  "there  fa  a  growing  question  in  the  minds  of 
experienced  and  thoughtful  men  as  to  whether  the  trust  form  of  organ- 
ization is  industrially  efficient  and  whether  bigness  of  bulk  is  always 

necessary  to  production  at  the  lowest  cost It  fa  significant  that 

some  of  the  great  trusts  have  ceased  to  exist,  that  others  pay  but  mod- 
erate dividends,  if  any,  on  their  securities  and  that  side  by  side  with  the 
most  mighty  and  supposedly  the  most  efficient  of  them  have  grown  up 
independent  organizations  quite  as  successful  and  perhaps  earning  even 
more  upon  their  capital  than  their  powerful  competitors.  Furthermore, 
it  fa  imdoubtedly  true  that  many  of  the  most  profitable  businesses  of  the 
country  are  those  of  moderate  size,  and  that  this  fa  so  even  in  lines 

where  large  concerns  exist  of  apparently  less  earning  capacity 

The  purpose  of  the  Bureau  of  Corporations  fa  to  study  patiently  into  the 
hfatorical  facts,  financial  facts  ....  and  the  like."  A  second  element 
in  the  program  recommended  by  the  Department  fa  the  ascertainment 
of  the  conditions  under  which  retail  prices  are  actually  fixed  in  order  to 
determine  "whether  giving  the  privilege  of  fixing  prices  to  a  manu- 
facturer tends  toward  monopoly  or  does  not  so  tend."  Third,  it  fa 
desired  to  have  an  extensive  inquiry  into  the  cost  of  production  of  various 
kinds  of  commodities,  apparently  with  a  view  of  making  dear  whether  or 
not  the  costs  thus  ascertained  are  lower  or  higher  in  so-called  "trust" 
plants  than  they  are  elsewhere.  Meanwhile  it  is  announced  that  actual 
investigations  of  trade  agreements  are  imder  way  in  order  to  determine 
what  agreements,  if  any,  are  actually  in  restraint  of  trade  and  what 
ones,  if  any,  are  likely  to  be  of  assfatance  to  competition  and  hence 


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90  JOURNAL  OP  POLITICAL  ECONOMY 

properly  to  be  exempted  from  the  operation  of  the  Sherman  act.  This 
is  apparently  a  concealed  suggestion  that  labor  organizations  may  well 
be  given  the  kind  of  exemption  referred  to.  Finally,  it  is  stated  that  an 
inquiry  has  been  imdertaken  with  reference  to  the  actual  status  of  agree- 
ments governing  the  resale  price  of  various  articles  as  they  pass  from 
producer  and  manufacturer  to  jobber  and  retailer.  Secretary  Redfield's 
suggestions  afford  merely  the  backgroimd  upon  which  the  new  anti- 
trust policy  of  the  administration  is  to  be  sketched  in  during  the  next 
few  months,  but  it  gives  the  clue  to  the  general  line  of  reasoning  that 
will  govern  in  formulating  this  policy  and  seems  to  foreshadow  a  good 
deal  of  delay  in  carrying  it  out. 

THE  GOVERNMENT  IN  BUSINESS 

The  fact  that  the  government  of  the  United  States  is  now  fully  and 
extensively  engaged  in  the  operation  of  a  large  business  enterprise  is 
not  generally  realized,  but  it  is  made  dear  in  the  statements  of  the 
Post-Office  Department  with  reference  to  the  management  of  the  parcel- 
post  service.  That  report  (Report  of  the  Postmaster-Generalj  1913) 
shows  that  within  the  past  year  the  Department  has  practically  entered 
upon  an  enormous  undertaking,  doing  work  and  supplying  demands 
which  in  part  were  formerly  provided  for  by  the  express  companies  and 
in  part  .were  not  provided  for  at  all,  much  of  the  business  having  come 
into  existence  as  a  result  of  the  offer  of  the  service.  Approximately 
300,000,000  parcels  were  handled  during  the  first  six  months  of  the 
operation  of  the  system  after  January  i,  1913.  Subsequent  reports  are 
showing  an  even  greater  relative  growth  in  the  amount  of  business  done. 
In  consequence  of  this  great  development,  the  weight  limit  as  to  parcels 
was  increased  from  11  to  20  pounds  on  August  15, 1913,  and  is  now  to  be 
increased  to  50  pounds  within  the  first  and  second  zones  of  operation; 
at  the  same  time  the  rates  are  to  be  cut  in  all  zones  except  the  first  and 
second  (where  cuts  had  already  taken  place  when  the  first  increase  in 
size  was  made),  and  in  the  seventh  and  eighth  in  which  reductions  are 
not  believed  to  be  warranted,  inasmuch  as  these  zones  represent  long- 
distance traffic.  The  effect  of  the  apparent  success  of  the  parcel-post 
service — a  success  thus  far  due  in  some  measure  to  the  fact  that  Con- 
gress has  made  no  adequate  provision  for  paying  the  railroads  for  the 
additional  transportation  labor  imposed  upon  them — ^has  been  the  very 
great  advancement  of  a  movement  for  government  ownership  of  tele- 
graphs and  telephones,  already  under  way  prior  to  the  time  that  the 


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NOTES  91 

parcel  post  was  inaugurated.  The  movement  toward  government 
ownership  is  now  directly  supported  by  the  Postmaster-General,  repre- 
senting the  Wilson  administration,  inasmuch  as  he  states  that:  ''The 
monopolistic  nature  of  the  telegraph  business  makes  it  of  vital  impor- 
tance to  the  people  that  it  be  conducted  by  imselfish  interests,  and  this  can 
be  accomplished  only  through  government  ownership."  He  further 
announces  for  the  first  time  the  results  of  an  investigation  designed  to 
"exhibit  the  natiure  of  the  problem  involved  in  securing  government 
ownership  and  control  of  existing  facilities."  Thus,  beside  taking  a  long 
step  into  the  actual  field  of  industrial  enterprise,  the  way  has  been  paved 
for  the  acquisition  of  another  large  group  of  businesses  and  for  their  opera- 
tion under  government  management.  The  further  advance  of  this 
policy  within  the  boundaries  of  private  enterprise,  probably  directed 
next  to  the  railroad  business,  b  thus  made  an  almost  certain  element  in 
national  policy  during  the  next  few  years. 

APPLYING  THE  INCOHE  TAX 

An  interesting  contribution  to  the  history  of  the  administration  of 
the  tariff  law  of  October  3, 1913,  and  to  the  general  literature  of  income- 
tax  application  has  been  afforded  by  a  series  of  regulations  for  the  appli- 
cation of  the  tax  under  a  variety  of  different  conditions.  The  bulk  of 
these  are  foimd  in  Treasury  decisions  1890, 1891, 1892, 1893, 1894, 1897, 
1901,  1902,  1903,  1904,  1905,  1906,  1907,  1908,  1909,  1910,  1911,  1912, 
1914,  191 5,  series  of  1913,  and  a  special  compilation  issued  by  the  Com- 
missioner of  Internal  Revenue  on  October  25,  and  preceding  in  point  of 
time  the  other  regulations  already  referred  to.  It  is  to  the  regulations, 
quite  as  much  as  to  the  law,  that  the  student  of  income-tax  history  in  the 
United  States  will  turn  in  the  future,  particularly  when  analyzing  the 
effects  of  the  provision  for  "collection  at  the  source,"  included,  after  so 
much  futile  discussion  during  the  past  summer,  in  the  tariff  act  itself. 


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English  Local  GavemmetU:  The  Story  of  the  King^s  Highway.  By 
Sidney  and  Beatrice  Webb.  London  and  New  York: 
Longmans,  Green  &  Co.,  1913.  Pp.  x+279.  $2 .  50  net. 
This  is  another  volume  of  these  authors'  series  of  studies  in  English 
Local  Government,  of  which  there  have  ahready  been  issued  The  Parish 
and  the  County  and  The  Manor  and  the  Borough;  but  while  the  two 
earlier  publications  dealt  with  the  structture  of  local  government,  this 
is  an  accoimt  of  the  application  of  local  government  to  the  administra- 
tion of  the  roads  of  the  kingdom.  A  short  initial  chapter  is  devoted 
to  the  period  before  the  sixteenth  centmy ,  concerning  which  the  authors 
have  made  no  special  research,  but  utilize  the  best  material  that  has 
been  published  up  to  this  time.  This  has  been  included  in  order  to 
round  out  the  story.  Beginning  with  the  Tudor  time  and  carrying  the 
research  down  to  the  present  day,  the  work  has  been  done  in  a  thorough 
and  painstaking  way.  From  the  time  of  the  first  great  highway  act 
of  isss  down  to  that  of  1909,  the  various  changes  in  the  s)rstem  of 
administration  are  traced  with  sufficient-  detail  to  show  the  outstanding 
f eatiu*es  of  the  various  epochs.  This  is  not  an  economic  study,  although 
economic  conditions  are  reflected  by  implication  from  other  facts; 
it  is  rather  a  study  of  the  systems  of  maintenance  and  management 
which  appeared  in  the  evolution  of  road  administration,  and  in  which 
we  see  the  various  stages  of  local  government,  from  the  Court  Leet  to 
the  Coimty  Coimdl.  Much  attention  is  naturally  given  to  the  legisla- 
tion during  these  last  four  centuries,  since  this  is  the  basis  of  any  adequate 
consideration  of  the  government  and  regulation  of  the  highways  and 
their  traffic;  but  the  statutory  material  is  not  given  in  the  language  of 
the  parliamentary  committee  but  in  the  familiar  phraseology  of  everyday 
speech,  so  that  it  thereby  assumes  a  vital  interest. 

The  method  of  repairing  roads  by  statute  labor,  which  began  in 
1555  and  required  all  the  parishioners  to  put  in  a  certain  number  of 
days'  work  each  year  upon  the  highways,  continued  for  about  three 
hundred  years;  and  the  period  down  to  the  end  of  the  eighteenth  centiuy, 
with  its  vast  amount  of  legislation  evidently  based  upon  an  assumption 

92 


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BOOK  REVIEWS  AND  NOTICES  93 

that  the  traffic  should  be  made  to  accord  with  the  nature  of  the  roads, 
gave  place  to  the  period  when  the  road  engineers,  like  Telford  and 
Macadam,  acting  on  the  contrary  assumption,  began  to  construct  roads 
that  were  suitable  for  the  traffic  that  was  to  be  carried.  Synchronous 
with  these  three  centiuies,  the  parochial  road  administration,  the  use 
of  the  presentment  and  indictment,  the  maintenance  of  bridges,  and  the 
turnpike  system  are  lucidly  and  discriminatingly  treated.  The  forced 
statute  labor  and  the  tiunpike  tolls  of  this  period  gave  way,  after  the 
first  third  of  the  nineteenth  century,  to  a  system  of  compulsorily  levied 
rates,  and  along  with  this  change  all  the  roads  of  a  district  were  placed 
imder  the  control  of  the  general  local  governing  authority  of  that  district, 
which  employed  permanent  professional  salaried  officials  to  look  after 
the  work.  This  evolution  was  the  work  of  the  last  century.  On  the 
last  two  pages  of  the  book  we  have  the  only  suggestions  made  for  a 
constructive  program  of  highway  organization. 

The  reviewer  has  very  minutely  examined,  during  years  of  research, 
the  ground  which  is  here  covered  by  the  authors;  and  he  has  been  unable 
to  find  any  substantial  errors  as  to  fact.  The  thorough  comprehension 
of  the  subject  enables  them  to  marshal  proof  upon  proof  where  this  is 
necessary,  and  to  enter  into  great  detail  regarding  important  matters. 
The  constant  presentation  through  quotations,  always  well  chosen,  of 
the  contemporary  viewpoint,  enables  one  the  more  faithfully  to  recon- 
struct the  actual  conditions  of  the  time,  and  gives  a  historic  interest 
that  is  indubitable.  The  notes  and  references  at  the  end  of  each  chapter 
furnish  abundant  bibliographical  material. 

In  contrast  with  its  excellences,  the  few  defects  of  the  book  are  almost 
unworthy  of  mention.  The  statement  that  the  great  majority  of  roads 
in  America  are  not  bounded  by  fences  (p.  6)  is  not  true.  Among  the 
references  for  p.  115  (p.  147),  Act  15  Car.  II.  c.  i  was  renewed  by  Acts 
16  and  17  Car.  II.  c.  10  and  4  W.  and  M.  c.  9,  not  by  26  Car.  11.  and 
4  and  s  W.  and  M.,  as  stated  by  the  authors.  It  was  surely  a  typo- 
graphical error  that  put  the  word  "containing"  (p.  116)  instead  of 
"continuing."  The  use  of  the  word  "worser"  (p.  165)  instead  of 
"worse"  or  "poorer,"  and  the  incomplete  sentence  beginning,  "Both 
master  and  men  .  .  .  ."  (p.  138)  may  also  be  explained  as  due  to 
mistakes  of  printing. 

W.  T.  Jackman 
Ukivemity  of  Vewcont 


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94  JOURNAL  OP  POLITICAL  ECONOMY 

Le  juif  errant  d^aujourd^kuu  ilude  sur  P  (migration  des  Isra&ites  de 
VEurope  orientate  aux  Etats-Unis  de  VAmirique  du  Nord.  Par 
L.  Hersch.    Paris:  Giard  et  Brifire,  1913.  Pp.  331.  6  fr. 

The  study  by  Dr.  Hersch  is  a  valuable  and  original  contribution  to 
the  literature  on  immigration  to  the  United  States.  By  a  masteriul 
analysis  of  the  annual  reports  of  the  United  States  Bureau  of  Inmiigra- 
tion,  compared  with  available  statistics  from  Russian,  Austrian,  Hxm- 
garian,  Roimianian,  and  other  official  and  unofficial  sources,  the  author 
has  traced  with  scientific  accuracy  the  causes  of  the  great  exodus  of  the 
Jews  from  Russia,  Austria,  and  Roumania,  and  the  characteristics  of  the 
population  groups  drawn  into  the  movement. 

It  is  cxistomary  to  range  the  Jews  among  the  '' immigrants  from 
southern  and  eastern  Europe."  Notwithstanding  the  widespread  preju- 
dice of  American  writers  against  these  immigrants,  students  of  immigra- 
tion statistics  could  not  help  noting  the  many  striking  diflFerences  between 
the  Jewish  and  other  immigrants  from  the  countries  of  southern  and 
eastern  Europe.  Dr.  Hersch  has  made  a  special  study  of  these  differ- 
ences and  has  reached  the  conclusion  that  the  Jewish  inmiigrants  from 
Russia  and  Austria  closely  resemble  in  their  characteristics  the  type  of 
inmiigrant  from  northern  and  westiem  Europe. 

United  States  immigration  statistics  contain  no  classification  by  race 
prior  to  1899.  But  the  statistics  for  the  twelve-year  period,  1899-1910, 
comprising  as  they  do  more  than  a  million  Jewish  inmiigrants  and  relating 
to  the  period  of  the  greatest  migration  movement  in  the  history  of  the 
world,  may  doubtless  be  accepted  as  representative  of  the  general  char- 
acter of  Jewish  immigration. 

The  Jews,  next  to  the  Irish,  are  the  most  permanent  element  of  the 
present-day  inmiigration,  exceeding  in  this  respect  all  other  races.  The 
available  statistics  of  returning  immigrants  do  not  go  farther  back  than 
1908.  The  year  1908  was  a£fected  by  an  industrial  crisb;  1909  was 
an  average  year,  and  1910  witnessed  a  great  increase  of  immigration. 
The  average  ratio  of  retiuning  to  incoming  immigrants  for  those  three 
years  among  the  Jews  was  8  per  cent  and  among  the  Irish  7  per  cent, 
whereas  among  the  other  races  this  ratio  varied  as  follows  (p.  59) : 

Old  Immioration  Nbw  Immiokation 

Per  cent  Per  cent 

Scotch 9           Finns 18 

English  and  Welsh 12           Lithuanians 14 

Dutch II           Poles 30 

Germans 20           Russians 41 

Scandinavians 15           Ruthenians 12 

Bohemians 11           Magyars 64 

Roumanians 27 


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These  figures  show  a  clear  distinction  between  the  Jewish  immigrants 
and  those  of  other  races  coming  from  Russia,  Austria-Hungary,  and 
Roumania,  viz.:  that  while  among  some  of  the  latter  races  the  propor- 
tion of  temporary  inmiigrants  is  as  high  as  one-fourth,  one-third,  and 
even  two-thirds  of  their  total  nimiber,  more  than  nine-tenths  of  the 
Jewish  immigrants  come  to  the  United  States  to  stay. 

Comparative  statistics  of  the  sex  and  age  distribution  of  immigrants 
extend  over  the  whole  twelve-year  period  for  which  the  classification  by 
race  is  available.  The  figures  demonstrate  that  Jewish  inmiigration  is 
of  the  family  type,  par  excellence.  The  Jews  and  the  Bohemians  exhibit 
the  highest  proportion  of  females  among  all  immigrant  races,  except  the 
Irish,  among  whom  the  nimiber  of  females  exceeds  that  of  the  males,  as 
can  be  seen  from  the  following  table  showing  proportion  of  women 
immigrants  to  total  immigrants  (p.  60): 

Per  ctBt  Per  ctnt 

Jews 43  Germans 41 

Bohemians 43  Dutch 34 

Engli^  and  Welsh 38  Scandinavians 38 

Scotch 36 

Thus  there  are  proportionately  more  women  among  the  Jewish  inmii- 
grants than  among  the  principal  races  of  the  ''old  inmugration."  Among 
the  immigrants  of  those  races  whicli  live  side  by  side  with  the  Jews  in 
eastern  and  southern  Europe  the  percentage  of  women  is  much  lower 
than  among  the  Jewish  immigrants,  viz.: 

Percent  P^oent 

Poles 31  Ruthenians 26 

Lithuanians 29  Magyars 28 

Russians 15  Roumanians 9 

The  Jewish  inunigrants,  furthermore,  bring  over  with  them  more 
children,  in  proportion,  than  any  other  race.  One-fourth  of  all  Jewish 
inmiigrants  are  children  under  14  years  of  age  (p.  72),  whereas  among 
other  races  the  percentages  vary  as  follows: 

Old  Immzgbation  New  Immioeation 

Per  cent  Per  cent 

Dutch 21  Finns 15 

Germans 17  Magyars 9 

Bohemians 20  Poles 9 

English  and  Welsh 15  Lithuanians 8 

Scotch IS  Russians 7 

Irish 5  Ruthenians 4 

Scandinavians 9  Roumanians 2 


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96  JOURNAL  OP  POLITICAL  ECONOMY 

Another  index  of  the  comparative  prevalence  of  the  family  type 
among  the  immigrants  of  various  races  is  furnished  by  the  ratio  of 
married  women  to  married  men.  Of  course,  the  female  immigrants  for 
a  given  year  include  wives  going  to  join  their  husbands  who  preceded 
them,  while  the  married  men  include  those  who  have  left  their  families 
behind.  Nevertheless  the  prevailing  t)^e  of  immigrants  among  the 
several  races  is  clearly  reflected  in  the  varying  ratio  of  married  women  to 
married  men.  Disregarding  the  very  small  number  of  the  French 
immigrants,  most  of  whom  are  Canadians,  we  find  the  Jews  at  the  head 
of  the  list,  their  number  of  married  women  being  80  per  cent  of  the 
number  of  married  men,  while  other  races  follow  as  shown  below  (p.  84) : 

Old  ImaoBATiON  New  IkiaoRATioir 

Per  cent  Per  cent 

English  and  Welsh 79  Finns 37 

Irish 70  Lithuanians 38 

Scotch 67  Poles 24 

Dutch 69  Russians 14 

Germans 65  Ruthenians 13 

Scandinavians 52  Magyars 33 

Bohemians 63  Roumanians 10 

The  prevalence  of  the  family  type  among  the  Jewish  inmiigrants 
finds  expression  in  the  relative  numbers  of  breadwinners  and  dependents 
among  them:  according  to  the  proportion  of  dependents  (described  in 
the  annual  reports  of  the  commissioner  general  of  immigration  as  "per- 
sons without  occupation,  mostly  women  and  children"),  the  Jewish 
immigrants  stood  at  the  head  of  all  races,  with  dependents  nxunbering 
45  per  cent  of  the  total  nimiber  of  immigrants  (p.  102).  Other  races 
exhibited  the  following  percentages: 

Oio  ImaosAnoN  New  Immiokation 

Per  cent  Per  c«it 

Dutch 43  Finns 19 

Germans 39  Magyars 23 

English  and  Welsh 38  Poles 21 

Scotch 35  Lithuanians 19 

Irish 14  Russians 16 

Scandinavians 19  Ruthenians 13 

Bohemians 40  Roumanians 9 

Coming  to  the  occupational  classification  of  the  Jewish  immigrants 
we  find  among  them  a  h^her  proportion  of  skilled  mechanics  than  among 
any  other  race,  viz.:  two-thirds  (67  per  cent)  of  all  breadwinners,  as 
against  58  per  cent  among  the  Scotch,  49  per  cent  among  the  English^ 


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BOOK  REVIEWS  AND  NOTICES  97 

and  one- third  among  the  Germans  (p.  31).  The  majority  of  gentile 
immigrants  from  southern  and  eastern  Europe,  on  the  contrary,  are 
imskilled  laborers. 

Having  described  the  character  of  the  Jewish  immigration,  the 
author  proceeds  to  analyze  its  causes.  The  persecution  of  the  Jews  in 
Russia  is  clearly  reflected  in  the  comparative  statistics  of  Jewish  and 
gentile  inmiigration  to  the  United  States  from  Russia  and  Austria- 
Hungary.  The  proportion  of  Jews  among  the  inmiigrants  from  the 
Jewish  "pale  of  settlement"  in  the  Russian  Empire  is  four  times  as  high 
as  their  proportion  to  the  total  population  of  the  same  section  (p.  42). 
The  author  thus  sunmiarizes  the  results  of  his  statistical  analysis: 

(i)  The  ratio  of  Jewi^  emigration  nowhere  attains  such  an  abnormal 
height  as  in  Russia.  (2)  It  is  still  high  enough  in  Austria,  but  in  that  country 
it  is  45  per  cent  lower  than  in  Russia  and  presents  nothing  truly  exceptional. 
(3)  In  Hungary  and  the  Balkan  States,  except  Roimiania,  the  rate  of  emigra- 
tion is  materially  lower  among  the  Jews  than  among  the  surrounding  popula- 
tion,   [p.  55.] 

On  the  other  hand,  the  ratio  of  returning  to  incoming  immigrants 
among  the  Russian  Jews  is  much  lower  than  among  the  Austrian  Jews 
with  the  result  that  the  rate  of  net  emigration  of  the  Russian  Jews  is 
twice  as  high  as  that  of  the  Austrian  Jews  (p.  62). 

The  annual  fluctuations  of  the  figures  of  Jewish  inunigration  from 
Russia  point  in  the  same  direction.  In  the  year  ended  June  30,  1905, 
during  the  Russo-Japanese  War,  the  proportion  of  males  among  the 
Jewish  immigrants  rose  to  63  per  cent,  the  average  for  the  period  1899- 
1910  being  57  per  cent.  It  is  a  well-known  fact  that  many  Jews  who 
were  enrolled  in  the  reserve  army  left  Russia  in  order  to  escape  active 
service  in  the  war.  During  the  next  fiscal  year,  1908,  which  was  marked 
by  the  massacre  of  the  Jews,  after  the  revolutionary  October  da)rs  of  1905, 
the  number  of  male  inmiigrants  slightly  declined,  while  the  niunber  of 
female  immigrants  increased  by  more  than  one-half ,  the  proportion  of 
female  immigrants  to  total  immigrants  rising  in  one  year  from  37  to  48. 
"The  Jewish  immigrant,  in  those  dark  hours,  was  afraid  to  leave  his  wife, 
his  children,  his  mother,  and  his  sisters  exposed  to  the  danger  of  death 
and  dishonor"  (p.  69).  The  percentage  of  children  for  the  same  reasons 
reached  its  maximum  in  1906,  viz.,  28.5,  while  the  percentage  for  the 
preceding  year  was  only  22,  and  the  average  for  the  twelve-year  period, 
25  (p.  74).  The  proportion  of  breadwinners  during  the  Japanese  war 
(fiscal  years  1904  and  1905)  rose  to  64  per  cent,  while  the  average  for 
the  twelve-year  period  was  only  55  per  cent.    On  the  other  hand,  while 


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98  JOURNAL  OP  POLITICAL  ECONOMY 

the  number  of  breadwinners  declined  from  83,000  in  1905  to  77,000  in 
1908,  the  number  of  dependents  rose  from  47,000  to  77,000,  their  pro- 
portion increasing  from  36  per  cent  to  55  per  cent  (p.  105).  This  was 
the  direct  effect  of  the  massacres  of  1905. 

Another  effect  of  political  conditions  in  Russia  is  seen  in  the  fact  that 
the  ratio  of  professional  people  to  all  breadwinners  is  much  higher  among 
Jewish  immigrants  than  among  other  immigrants  from  the  same  cotm- 
tries;  it  is  six  times  as  high  among  the  Jews  as  among  the  Poles  and 
Roimianians,  and  fifteen  times  as  high  as  among  the  Lithuanians  (p.  1 1 1). 
The  proportion  of  professional  persons  among  the  Jewish  inmiigrants  is 
the  same  as  among  the  Irish,  notwithstanding  the  fact  that  the  former  are 
handicapped  in  most  cases  by  ignorance  of  the  English  language.  But 
they  are  driven  to  emigration  by  legal  disabilities  curtailing  their  oppor- 
tunities in  their  native  countries.  It  is  also  true  that  the  repressive 
measures  directed  by  the  Russian  government  against  strikes  and  labor 
organizations  during  the  first  decade  of  the  present  century  have  driven 
many  Jewish  mechanics  to  emigrate  to  the  United  States. 

Along  with  political  and  religious  causes,  there  are  also  deep-seated 
economic  causes  which  account  for  the  modem  emigration  movement 
among  the  Jews.  It  is  generally  thought  that  the  Jew  is  not  a  farmer. 
In  a  sense  this  is  true,  very  few  Jews  deriving  their  livelihood  from  agri- 
culture. It  is  a  fact,  however,  that  until  a  very  recent  date  nearly  every 
Jewish  family  in  the  small  towns  raised  its  own  vegetables  and  poultry, 
and  kept  a  cow  or  a  goat  which  supplied  the  household  with  milk,  butter, 
and  cheese.  The  growth  of  small  towns  into  cities  put  an  end  to  the  rule 
of  natural  economy  and  forced  the  Jewish  mechanic  or  trader  to  rely  solely 
upon  his  money  earnings.  Here,  however,  the  Jew  was  confronted  with 
nxunerous  legal  restrictions.  A  large  proportion  of  the  Russian  Jews  in 
former  times  were  engaged  as  middlemen  between  the  peasants  and  the 
general  consuming  public.  The  laws  of  1882  which  drove  the  Jews  from 
the  rural  settlements  curtailed  their  activities  as  middlemen.  The 
impoverishment  of  the  Russian  peasantry  during  the  past  fifty  years 
contributed  to  the  same  result;  when  the  peasant  has  little  to  sell  and 
hb  purchasing  power  is  reduced  to  the  minimum  of  subsistence,  the 
Jewish  tradesmen  in  the  small  towns  find  no  customers.  The  decline  of 
trade  in  the  small  Jewish  towns  has  driven  their  inhabitants  to  the 
larger  dties.  The  Jews  being  restricted  in  the  choice  of  their  domicile  to 
one  section  of  the  empire,  the  point  of  saturation  was  reached  at  length 
and  they  were  forced  to  seek  relief  in  emigration  to  the  United  States. 

The  development  of  the  factory  system  has  displaced  the  Jewish 


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BOOK  REVIEWS  AND  NOTICES  99 

craftsmen  in  certain  industries,  notably  in  Poland.  The  skilled  Jewish 
mechanics  were  displaced  by  unskilled  Polish  peasants.  Industrial  com- 
petition has  developed  into  race  antagonism:  Polish  operatives  resist  the 
admission  of  Jewish  workers  to  the  factories.  Again  emigration  offers 
the  only  relief  to  the  Jewish  mechanic  displaced  by  the  machine. 

The  economic  causes  of  Jewish  immigration  determine,  according  to 
the  author,  not  only  its  sex  and  age  composition,  but  also  the  proportion 
of  returning  to  incoming  immigrants :  the  bulk  of  the  gentile  immigrants 
from  southern  and  eastern  Europe  being  peasants,  many  of  them  natur- 
ally gravitate  to  their  homesteads;  emigration  to  the  United  States  is 
with  them  only  a  means  to  raise  some  money  for  the  improvement  of 
their  home  farms.  Regarding  their  sojourn  in  the  United  States  as 
merely  a  temporary  absence  from  home,  they  naturally  leave  their 
families  at  home.  The  Jewish  emigrant,  on  the  contrary,  being  a  wage- 
earner  or  a  tradesman,  carries  his  earning  capacity  with  him  and  can 
have  no  object  in  returning  to  his  home  coimtry — Whence  the  more  per- 
manent character  of  Jewish  inunigration. 

While  it  cannot  be  denied  that  the  immigration  of  Russian  Jews, 
like  that  of  other  races,  is  the  product  of  economic  factors,  it  seems  that 
Dr.  Hersch  insufficiently  emphasizes  the  political  aspect  of  these  factors. 
It  is  a  fact,  noted  by  the  author  himself,  that  in  recent  years  the  migra- 
tion of  Russian  peasants  from  European  Russia  to  the  vacant  govern- 
ment lands  in  Siberia  has  reached  nearly  a  million  per  year.  These  new 
settlements  would  offer  an  ample  field  for  the  surplus  of  Jewish  mechanics 
and  traders  now  crowded  together  in  the  pale  of  Jewish  settlement.  It 
is  the  law  of  the  empire  that  bars  them  from  migrating  eastward  and 
directs  their  movement  westward,  to  the  United  States. 

The  author  has  pursued  a  purely  theoretical  aim:  to  find  an  answer 
to  the  questions  engaging  the  attention  of  European  students  of  Jewish 
emigration.  His  work,  however,  has  a  great  practical  value  for  the 
American  student  and  statesman  interested  in  the  subject  of  inmiigration. 
It  is  to  be  hoped  that  the  book  will  be  made  accessible  to  the  American 
public  in  an  English  translation. 

Isaac  A.  Hourwich 

New  York  City  

The  Amalgamated  Wood  Workers^  ItUernational  Union  of  America,    By 
FsEDERiCK  Smpp  Deibler.    Bulletin  of  the  University  of  Wiscon- 
sin, 1912.    Pp.  211.    40  cents. 
This  doctoral  dissertation  is  an  intensive  study  in  social  mechanics. 

''In  this  study  an  endeavor  has  been  made  to  trace  the  history  of  a  trade 


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lOO  JOURNAL  OP  POLITICAL  ECONOMY 

union,  and  to  show,  in  so  far  as  it  is  possible,  the  connection  between  the 
problems  of  organized  labor  and  the  evolution  of  the  industry  itself." 
The  proper  avenue  of  approach  was  chosen.  There  was  selected  for 
investigation  a  labor  organization  that  has  developed  in  an  industry 
fundamentally  affected  by  far-reaching  changes  in  industrial  methods, 
whose  different  organizations  have  in  consequence  been  goaded  into  an 
unusually  long  and  disastrous  series  of  jurisdictional  disputes.  Dr. 
Deibler  has  written  a  careful  and  exhaustive  discussion  which  will  be 
read  by  only  a  few.  The  trenchant  criticisms  of  Professor  Patten  in  his 
address  as  president  of  the  American  Economic  Association  may  not 
inaptly  be  applied  to  Professor  Deibler^s  work.  Nevertheless,  a  valuable 
service  has  been  rendered  to  students  of  labor  problems. 

The  evolution  of  the  woodworking  industry  and  the  early  organiza- 
tions among  woodworkers  are  discussed  in  the  introductory  portion  of  the 
monograph.  The  second  part  considers  the  formation,  structure,  and 
policies  of  the  Amalgamated  Wood  Workers*  Union.  The  most  sig- 
nificant chapter  relates  to  the  jurisdictional  difficulties  in  the  wood- 
working industry. 

Originally,  there  were  two  distinct  groups  of  woodworkers  engaged 
in  the  remanufacture  of  lumber — ^house  carpenters  and  cabinet-makers. 
The  latter  were  employed  in  factories  or  workshops  and  did  a  sort  of 
work  which  was  somewhat  finer  and  more  highly  skilled  than  the  house 
carpenters.  These  two  groups  of  workers  did  not  enter  into  competition 
with  each  other  or  have  any  jiuisdictional  disputes  with  each  other  until 
after  the  introduction  of  the  revolving  planer  in  the  forties.  After  that 
period,  some  of  the  work  of  the  old  house  carpenter  was  gradually 
absorbed  by  factories — the  making  of  sash,  blinds,  doors,  etc.  Presently 
a  new  group  of  woodworkers  appeared — the  machine  woodworkers. 
The  work  which  the  house  carpenter  of  the  first  half  of  the  nineteenth 
century  did  at  the  place  where  the  house  was  constructed  is  now  in  no 
small  measure  performed  in  factories  with  the  aid  of  various  woodworking 
machines.  The  carpenter  of  today  is  chiefly  an  assembler  of  machine- 
made  products. 

The  cabinet-  or  furniture-makers  first  felt  the  competition  of  this  new 
type  of  woodworkers.  The  carpenters  did  not  take  interest  in  the 
machine  woodworkers  until  after  1885.  Then  they  began  to  realize  that 
certain  forms  of  the  traditional  work  of  the  house  carpenter  were  slipping 
from  their  grasp.  The  logical  line  of  cleavage  in  the  woodworking 
industry  is  drawn  at  the  door  of  the  factory.  The  problem  of  the  organ- 
ized carpenters  differs  materially  from  that  of  the  machine  woodworkers. 


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In  the  case  of  the  former,  competition  between  different  localities  is  of 
little  importance  and  wage  scales  may  differ  in  different  localities.  With 
the  machine  woodworkers,  on  the  contrary,  it  is  necessary  to  equalize  so 
far  as  possible  the  wage  rates  paid  by  competing  firms.  Nevertheless, 
the  carpenters  held  that  whatever  forms  of  work  had  been  theirs  before 
the  coming  of  the  machines  should  still  be  placed  under  their  jurisdiction. 
They  refused  to  "  allow  a  dual  form  of  organization  to  exist "  in  this  trade. 
The  carpenters  began  to  organize  the  machine  workers. 

In  1889,  the  jurisdictional  struggle  between  the  carpenters  and  the 
furniture  workers,  both  affiliated  with  the  American  Federation  of  Labor, 
reached  the  convention  of  that  body.  A  year  later  a  new  union  of 
machine  woodworkers  was  organized  and,  after  some  opposition  on  the 
part  of  the  carpenters,  it  was  admitted  to  the  American  Federation  of 
Labor.  In  189$,  the  furniture  workers  and  the  machine  woodworkers 
imited  to  form  the  Amalgamated  Union.  Year  after  year,  since  189$, 
in  the  convention  of  the  American  Federation  of  Labor,  the  difficulties 
between  the  Amalgamated  Union  and  the  carpenters  have  been  consid- 
ered. The  rulings  were  usually  favorable  to  the  former;  but  the  car- 
penters steadfastly  refused  to  relinquish  their  hold  upon  the  factory 
workers.  And,  as  the  years  passed,  the  carpenters  increased  in  numbers 
and  influence  while  the  Amalgamated  Union  declined.  Since  Dr.  Dei- 
bler's  work  was  completed,  the  American  Federation  of  Labor  has 
reversed  its  policy.  The  Amalgamated  Union  was  ordered  to  amal- 
gamate with  the  carpenters. 

This  bitter  struggle  between  two  rival  unions  "has  created  a  division 
in  the  organized  forces  in  the  industry,  and  has  resulted  in  discrediting 

the  movement  in  the  eyes  of  employers There  has  been  an 

enormous  waste  of  energy  that  should  have  been  devoted  to  the  improve- 
ment of  the  working  conditions  of  the  men  who  have  had  to  support  the 
financial  burden  of  the  fight.  The  course  of  the  carpenters  must  be 
condemned  for  arbitrarily  taking  a  stand,  and  fighting  for  this  until  the 
bitter  end." 

From  the  standpoint  of  the  reviewer  it  seems  that,  on  the  part  of  the 
carpenters,  this  jurisdictional  contest  was  an  effort  to  gain  control  of  the 
machines  which  were  invading  their  trade.  Unlike  the  linotype  or  the 
molding  machine,  the  woodworking  machines  did  not  perform  their  work 
where  the  carpenters  did  theirs,  and  the  machines  were  often  owned  and 
operated  by  employers  other  than  those  who  hired  the  carpenters. 
Since  the  fumitture  workers  and  the  machine  woodworkers  were  organ- 
ized, the  struggle  became  primarily  a  jurisdictional  dispute  between  them 


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102  JOURNAL  OP  POLITICAL  ECONOMY 

and  the  carpenters  rather  than  a  contest  between  employers  and  the 
unions.  This  long  dispute  between  two  affiliated  unions  is  an  excellent 
example  of  the  vacillating,  never-cross-the-bridge-until-you-reach-it 
policy  in  jiuisdictional  struggles  which  has  ever  characterized  the 
American  Federation  of  Labor — temporize,  reconmiend,  and  finally 
gracefully  bow  to  the  most  powerful  national  union.  It  likewise  gives  an 
interesting  sidelight  upon  the  strength  of  the  American  Federation  of 
Labor. 

Frank  L.  Carlton 
Albion  College 


Pan-Germanism.  By  Roland  G.  Usher.  Boston:  Houghton 
Mifflin  Co.,  1913.    8vo,  pp.  vii+313.    $1.75  net. 

Pan-Germanism  is,  in  the  author's  own  words,  a  defensive  move- 
ment for  Germany's  self-preservation  and  also  an  offensive  movement 
directed  against  England.  Its  aim  is  to  create  a  mighty  empire,  by  con- 
structing a  great  confederation  of  states  including  Germany,  Austria, 
Himgary,  the  Balkan  States,  and  Tiurkey,  and  by  depriving  England 
of  her  possessions  in  the  Mediterranean  and  in  Asia.  The  author  outlines 
the  chances  for  and  against  such  a  scheme,  and  is  inclined  to  question 
its  success. 

Pan-Germanism  is  a  popular  phrase  in  English-speaking  coimtries 
and,  without  doubt,  theories  like  Usher's  are  seemingly  justified  by 
certain  articles  in  minor  German  newspapers  and  by  the  tone  of  certain 
pamphlets  largely  written  or  inspired  by  retired  colonels  and  generals 
who  picked  up  the  pen  after  age  and  infirmity  had  forced  them  to 
unbuckle  the  sword.  Lately  a  leading  article  of  the  Berliner  TageblaU 
defined  German  imperialism  as  the  conquest  of  the  world's  markets  by 
German  goods.  This  statement  shows  Germany's  aims  in  a  very 
different  light;  and  if  we  look  at  the  work  of  responsible  German  states- 
men since  the  Franco-German  war,  we  cannot  fail  to  see  that  Germany 
has  not  moved  in  the  direction  of  territorial  aggrandizement  but  has 
decidedly  preferred  commercial  expansion.  Her  true  intentions  are 
not  voiced  by  men  like  General  von  Bemhardi  or  the  sensation-monger 
Maximilian  Harden,  but  by  the  editorials  of  such  leading  newspapers 
as  the  Berliner  TageblaU,  Frankfurter  Zeitung,  Kdlnische  Zeitung,  and 
others.  It  would  be  very  difficult  to  support  Usher's  theory  from  such 
soiurces. 

Pan-Germanism  and  pan-Slavism,  like  pan-Islamism,  pan-African- 


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BOOK  REVIEWS  AND  NOTICES  103 

ism,  and  other  pan-isms,  belong  to  the  indispensable  outfits  of  some 
newspaper  editors,  but  the  historians  have  had  very  few  occasions  to 
use  thenL 

A.  C.  VON  Not 
Univebsfty  of  Chicago 


Co-operation  in  Agriculture.  By  Henry  W.  Wolff.  London:  P.  S. 
King  &  Son,  1913.    8vo,  pp.  ix+378.    6s. 

In  this  work  Mr.  Wolfif  does  in  the  field  of  co-operative  agriculture  what  he 
has  done  in  co-operative  banking.  His  puiix>se  is  "  to  give  a  general  outline  of 
what  has  been  accomplished  with  the  addition  of  such  suggestions  for  the 
adoption  of  co-operative  methods  as  occasion  may  seem  to  call  for."  The 
chapter  on  General  Principles  will  furnish  a  very  good  working  guide  for  the 
establishing  of  co-operative  societies.  The  writer's  large  experience  in  organ- 
izing such  societies  makes  him  an  authority. 

The  chapters  dealing  with  co-<^)erative  di^x>sal  of  mUk  products,  eggs  and 
poultry,  grain,  live  stock,  and  other  produce,  co-operative  insurance,  co- 
operative credit,  the  common  use  of  machinery,  and  co-operation  in  land 
temure  are  ezceediAgly  full  of  data  concerning  the  actual  working  of  co-operative 
societies.  The  discussion  deals  with  European  conditions  and  perhaps  cannot 
be  adopted  in  America;  but  Sir  Horace  Plunkett's  success  in  Ireland  was  due 
in  a  large  measure  to  his  willingness  to  learn  from  Danish  and  Dutch  experi- 
ences. The  experiences  and  facts  gathered  by  Mr.  Wolff  from  his  close  asso- 
ciation with  the  problems  make  a  valuable  and  timely  addition  to  the  literature 
on  co-operative  agriculture. 

It  is  to  be  regretted  that  the  presentation  b  not  up  to  the  standard  of  the 
subject-matter,  and  more  particularly  so  because  of  the  class  most  interested  in 
the  subject.  The  book  is  well  worth  careful  study  by  those  concerned  in  the 
problem  of  co-operation  in  agriculture  but  will  not  attract  the  general  reader. 


Who  Pays?    By  Robert  Henry.     London:  George  Allen  &  Co.,  Ltd., 

1912.    i2mo,  pp.  vii-l-72.    $1 .00  net. 

This  book  attempts  to  show  the  real  incidence  of  British  income,  customs, 
license,  estate,  and  other  taxes.  The  conclusion  reached  is  that  all  are  shifted 
to  the  consumer.  A  tax  on  incomes  ''works  a  hardship  on  those  who  supply 
the  luxuries  of  the  rich"  and  the  laborer  is  the  first  to  suffer  by  its  increase  and 
the  last  to  benefit  by  its  abatement.  A  lev3ring  of  property  rates  adds  to  the 
cost  of  production,  as  they  are  paid  out  of  profits  and  wages,  and  even  license 
taxes  increase  supply  cost  and  fall  upon  the  consumer. 

The  author  advises,  wherever  possible,  that  England  increase  her  import 
duties  and  relieve  home  industries  of  such  fetters  as  rates,  liability  insurance, 
licenses,  etc.    This,  he  maintains,  is  possible  when  foreign  producers  cannot 


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104  JOURNAL  OP  POLITICAL  ECONOMY 

diarge  higher  prices  for  their  goods  because  of  potential  competition  from  pro- 
ducers in  England.  Customs  duties  are  alwa3rs  shifted  to  the  buyer  of  the 
taxed  article.  The  argument  is  illustrated  and  supported  by  diagrams  of 
supply  and  exchange  of  commodities,  and  sources  of  taxes. 

The  author  is  possibly  slightly  biased  in  favor  of  the  large-income  class  and 
his  reasoning  is  at  times  erroneous  or  fanciful.  The  book  can  hardly  be  said  to 
contribute  anything  new  to  economic  thought. 


UAgricidture    au    Katanga:    PossihiUUs    ei    rialiUs,    Par  A.  Hock. 

Brussels:  Misch  et  Thron,  191 2.     i2mo,  pp.  305. 

This  book,  published  under  the  auspices  of  Instituts  Solvay,  as  Part  II  of 
Mission  dans  le  JTotofiga,  describes  the  agricultural  conditions  of  Katanga,  a 
province  in  the  southeastern  part  of  Belgian  Congo.  The  volume  is  an  inter- 
esting study  for  prospective  colonists  and  also  for  those  who  wish  to  become 
acquainted  with  the  activities  of  Belgium  in  the  exploitation  and  development 
of  its  African  colonies.  The  soil  and  climate  of  this  colony  are  declared  to  be 
favorable,  but  inefficient  native  labor  and  lack  of  tran^>ortation  facilities  have 
proved  such  a  serious  handicap  that  thus  far  only  a  small  b^inning  has  been 
made.  However,  the  country  is  full  of  possibilities  once  the  work  preliminary 
to  real  development  has  been  finished*  Numerous  illustrations  and  a  map  add 
to  the  interest  of  the  study. 

Mishnah:  Baba  Meziak,  Order  IV,  Treatise  HI.  Translated  and 
annotated  by  Hyman  E.  Goldin.  New  York:  G.  P.  Putnam's 
Sons,  1913.    8vo,  pp.  viii-|-2os.    $1 .  50. 

The  author  of  this  book,  who  is  a  member  of  the  New  York  bar,  seeks  to 
acquaint  the  reader  with  the  f tmdamental  principles  of  Jewish  juri^rudence  as 
laid  down  in  the  Mishnah,  His  interpretation  of  these  princ^)les  in  terms  of 
our  common-law  language  b  an  interesting  effort,  and  is  of  great  value  to  all 
students  of  the  origin  and  devek^ment  of  law.  The  author  hopes  to  continue 
this  work  by  translating  all  treatises  of  the  Mishnah  that  deal  mainly  with 
juri^rudence.  

Histoire  des  doctrines  iconomiques.  Par  Chakles  Gide  et  Charles 
RiST.  2d  ed.  Paris:  Larose  et  Tenin,  1913.  8vo,  r).  xvi-l-786. 
Fr.  12.50. 

The  second  edition  of  this  history  of  economic  thought  is  not  altered  greatly 
from  the  fir^t  publication  of  four  years  ago.  The  revision  has  sought  to  bring 
the  book  down  to  date  and  to  make  some  changes  which  criticisms  of  the  earlier 
work  have  suggested.  The  chapters  dealing  with  Malthus,  List,  the  Christian 
Socialists,  and  the  Hedonists  have  been  most  con^icuously  altered. 


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Indttstrial  Insurance  in  the  United  States 

By   CHARLES    RICHMOND    HENDERSON 

rIS  book,  rerised  and  enlarged  for  the  English-speaking  public,  has  already  been  published 
in  a  German  series.  The  introduction  contains  a  summary  of  the  European  laws  on  working- 
men's  intnranoe  against  accident,  sickness,  invalidism,  sind  old  age,  with  suiistics  to  igii. 
The  text  describes  the  Tarious  forms  of  social  insurance  known  m  the  United  States  and  Canada; 
local  dvbs  and  associations,  fraternal  societies,  trade  union  benefit  funds,  schemes  of  large  6rms, 
cofpocationi,  and  railways.  One  chkpter  is  directed  to  labor  legislation  and  anothot  to.  employee's 
liability  laws.  Illustrations  of  the  morement  are  given  in  chapters  on  municipal  pensMMi  piana  for 
polleemen, firemen,  and  teachers;  also  the  military  pensions  of  the  federal  government  and  sontliem 
states.  The  appendix  supplies  bibliography,  forms  used  by  firms  and  corporatiMia,  text  of  bills,  < 
and  laws  on  the  subject.  44ii  P^g^-  S9o,  chih,  ptdipaid  %2.iq 


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41 2  ST.  PAUL  STRUT     ROCHISTKR,  N.Y. 
NewYoriK        Cliicago       Washinffton        SanFranciaco 


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OF 


Political  Economy 

PUBLISHED  BY  THE  UNIVERSITY  OF  CHICAGO 

IN  OO-OPBRATfON  WITH 

THE  WESTERN  ECONOMIC  SOCIETY 


FEBRUARY  1914 


The  Tariff  of  1913.    U  H.  Parker  Willis      105 

Some  Aspects  of  the  Minimum  Wage  H.  A.  Millis      132 

Public  Capitalization  of  die  Inheritance  Tax 

Aloin  S.  Johnson      160 

Notes  181 

Waslmigtoii  Notes: 

The  Aati-Tnist  Mestege — ^A  New  Anti-Tnist  Policy— Compilation  of 
Anti-Tnist  Laws— Efforts  to  Establish  a  Central  Bank— Entering  the 
Reserve  System — City  and  Country  Banks — ^Railroad  Conifitions  in  the 
Cential  West 

Book  Reviews  and  Notices  190 

Sooebovitch's  Marxism  v€r5us  Socialism  (John  Graham  Brooks^  tgo. — ^Levy's  EcoMmic 
LUmalism  (D.  A.  MacGibbon),  iq2.— Tugan-Basanowsky's  Soxiaie  Theorie  der  Verteilutig 
<M.  lippitt  Larkin),  193. — Adams'  The  Theory  of  Social  Revolutions,  194. — Selden's  Investing 
for  Pro^t  195. — ^Walling's  The  Larger  Aspects  of  Socialism,  105. — SbifBART's  Luxus  und 
Kafit(ilism»s^  196. — Osborne's  Spentlation  on  the  New  York  Slock  Exchange,  197. — Ripley's 
Rath»9y  Problems^  198.— Wills's  Scienti/U  Tarif  Making,  198.— Jandus*  Social  Wrongs  and 
State  Responsibilities,  199. — ^Farce's  Economic  Determinism^  199. — ^Hamey's  Studies  in  Agri^ 
cmilural  Scomowucs,  20o.-~Hobhous£'s  The  Labour  Movement,  200. 


THE    UNIVERSITY   OF   CHICAGO    PRESS 
CHICAGO,    ILLINOIS,   U.S.A. 


Agents 

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KARL  W.  HIERSE>fANN,  LKireic 

THE  MARUZEN-KABUSHIKI-KAISHA.  Tokyo,  Oiaka.  Kyoto 


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JAMES  ALFRED  FTELH  J.  LAURENCE  LAUGHLIlf 

ROBER7  FRANMJk  HOXIE  LEON  CARROLL  MARSHALl. 

CHESTER  WHirNBT  WRIGHT 

AehHsary  EdUors 

iTnB  OfnOBfB  of  the  Vtrcttcm  EoononMC  Society^ 

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LEON  C  MARSHALL^  Sicrtimry  CHARLES  U  HOTCHIlf SON,  Trtmtmr^r 


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THE  JOURNAL 

OF 

POLITICAL  ECONOMY 


voLUMx  22  FcbruuTy  19 14  numbbr  2 


THE  TARIFF  OF  1913.    n 

Granting  that  the  tariff  of  1913  represents,  as  has  already  been 
shown  in  the  preceding  discussion,  a  material  reduction  in  the  level 
of  rates  existing  for  the  past  half-century,  and  conceding  further 
that  this  reduction  has  been  made  in  pursuance  of  a  political  pledge, 
which  was  f oUoWed  by  a  popular  mandate  approving  the  promise 
in  general  form,  we  must  still  meet  the  question  whether  or  not 
the  reductions  effected  have  been  of  a  kind  and  character  suited 
to  the  needs  of  the  industrial  situation.  Practically  every  observer 
of  legislation  and  business,  whether  a  believer  in  free  trade  or  in 
protection  as  a  theory,  would  admit  that,  when  once  a  definite 
position  had  been  taken  on  the  tariff,  and  when  once  economic 
conditions  had  become  adjusted  thereto,  it  was  neither  necessary 
nor  wise  to  break  so  sharply  with  the  past  as  to  damage  industry, 
if  equally  good  ultimate  results  might  be  effected  without  serious 
suffering  by  somewhat  postponing  final  action  or  by  taking  the 
steps  toward  the  final  goal  gradually  and  conservatively.  It  is 
not  enough,  therefore,  in  judging  a  tariff  act  to  show  that  it  has 
brought  about  a  reduction  in  rates,  even  if  it  be  admitted  that  such 
a  reduction  was  the  primary  object  held  in  view.  Neither  is  it 
sufiident  to  show  that  the  reduction  has  been  evenly  applied  or 
that  it  has  been  honestly  and  sincerely  planned  and  carried  out. 
The  question  of  efficiency  will  remain,  and  it  will  always  be  fair 
to  inquire  whether  a  given  change  in  tariff  legislation  has  been 

los 


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io6  JOURNAL  OP  POUTICAL  ECONOMY 

carefully  and  prudently  worked  out,  in  such  a  way  as  to  get  the 
maximum  of  beneficial  rate  reduction  with  the  minimum  of  business 
disturbance.    These  questions  may  now  be  considered. 


Perhaps  the  most  general  and  fundamental  alteration  made  in 
the  course  of  the  tariff  revision  of  1913  is  seen  in  the  use  of  ad 
valorem  duties  in  place  of  the  familiar  specific  or  combined  specific 
and  ad  valorem  duties  whose  use  has  been  characteristic  of  the 
legislation  of  the  past  few  years.  It  was  a  fundamental  proposition 
with  the  Republican  legislators  who  framed  the  tariff  acts  of  1897 
and  1909  that  ad  valorem  rates  were  inequitable  in  the  vast  major- 
ity of  cases,  because  as  prices  declined  the  amount  of  tariff  levied 
also  declined,  and  declined,  therefore,  at  a  moment  when  the 
assumed  need  for  protection  was  greatest.  For  example,  a  com- 
modity selling  at  $1.50  per  unit  subject  to  a  tariff  of  10  per 
cent  would  pay  15  cents  per  imit.  A  reduction  of  one-third  in  the 
foreign  price  would  make  the  article  sell  at  $1 .00,  while  the  tariff 
would  simultaneously  drop  to  10  cents  per  imit.  Such  a  state  of 
things  was  counter  to  the  theory  of  protection,  in  that,  as  foreign 
prices  fell,  the  competitive  power  of  foreign  owners  and  manufac- 
turers was  increased  while  as  foreign  prices  rose  this  competitive 
power  was  supposed  to  be  curtailed,  a  stable  level  of  domestic 
prices  being  assumed.  Hence  arose  the  use  of  specific  duties, 
levied  at  a  fixed  rate  per  unit  of  weight  in  order  that  changes  in 
price  might  not  be  accompanied  by  corresponding  cuts  in  protec- 
tion. In  the  tariff  of  1909  are  found  several  main  systems  of  levy- 
ing duties  which  may  be  enumerated  as  follows: 

1.  Simple  ad  valorem  duties,  levied  at  a  fixed  percentage  of 
valuation. 

2.  Simple  specific  duties,  levied  at  a  fixed  charge  per  imit  of 
weight. 

3.  Combined  specific  and  ad  valorem  duties,  levied  at  a  fixed 
charge  per  imit  of  weight,  plus  an  ad  valorem  charge  based  on 
value. 

4.  Composite  specific  and  ad  valorem  duties  in  which  the 
specific  rate  charged  per  unit  of  weight  or  size  varied  according 


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THE  TARIFF  OF  IQIJ  107 

to  different  grades  of  value.  Thus  cloth  might  pay,  say,  50  cents 
per  yard  when  valued  at  not  more  than  $2 .  00,  and  $1 .  00  per  yard 
when  valued  at  $2.00  to  $4.00  per  yard.  The  object  of  these 
duties  was  to  provide  a  different  grade  of  protection  for  the  differ- 
ent grades  of  product  according  to  the  supposed  industrial  needs 
of  manufacturers. 

Of  these  classes  of  duties,  the  plain  ad  valorem  rates,  as  just 
seen,  were  least  popular  with  the  tariff-makers,  while  the  other 
three  classes  were  employed  according  to  political  necessities  and 
to  what  their  users  probably  supposed  to  be  economic  conditions. 
The  effect  of  the  plain  specific  duties  was  sufficiently  manifest  and 
their  application  could  be  weU  justified  in  certain  classes  of  cases, 
among  them  the  following: 

a)  Cases  where  the  value  of  goods  was  practically  not  capable 
of  ascertainment  by  any  inexpensive  or  available  process. 

b)  Cases  where  the  impacking  of  the  goods  in  order  to  get 
samples  for  purposes  of  valuation  would  result  in  great  damage 
or  loss,  not  offset  by  any  advantage  resulting  from  the  use  of 
ad  valorem. 

c)  Cases  where  it  was  desired  to  obtain  a  steady,  easily  com- 
putable revenue  from  a  specified  source,  based  upon  a  commodity 
whose  importations  and  exportations  varied  but  little. 

As  for  the  combined  specific  and  ad  valorem  duties,  there  was 
probably  a  measure  of  justification  for  their  use  in  certain  instances. 
Still  more  rarely  the  composite  duties  may  have  served  a  useful 
purpose. 

It  cannot  be  questioned,  however,  that  one  of  the  greatest 
abuses  of  past  tariffs  has  been  found  in  the  fact  that  such  tariffs 
were  largely  bottomed  upon  these  combined  and  composite  duties. 
These  classes  of  rates  practically  could  not  be  traced  in  their  effect 
on  given  articles  by  anyone  except  an  expert  of  high  technical 
skQl,  while  their  use  had  been  allowed  to  run  to  such  excess  as  to 
give  rise  to  "jokers,"  irregularities,  unfairnesses,  and  special  favors, 
many  of  which,  doubtless,  were  not  intended  by  the  men  who  were 
primarily  responsible  for  them  but  which,  in  not  a  few  instances, 
resulted  in  the  levy  of  actuaUy  prohibitory  duties  upon  certain 
classes  of  articles,  or  in  the  establishment  of  rates  which  were 


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lo8  JOURNAL  OP  POLITICAL  ECONOMY 

highly  discriminatory  as  regards  individiials^  nations,  and  classes 
of  goods. 

That  these  evils  were  inherent,  more  or  less,  in  the  system  of 
rates  established  mider  the  acts  of  1897  and  1909,  and  that  they 
had,  moreover,  been  allowed  to  nm  to  very  great  excess  in  the 
course  of  the  development  of  the  tariff  system,  cannot  be  questioned. 
As  a  matter  of  fact,  few  save  those  inmiediately  responsible  for  the 
rates  thus  subject  to  criticism  have  ever  questioned  the  criticism. 
The  evil  was  great,  perhaps  fundamental,  and  tariff  revisionists 
were  correct  in  feeling  that  it  must  be  remedied.  The  method  of 
remedying  it  applied  in  the  new  measure  was,  in  brief,  that  of  elimi- 
nating the  combined  and  composite  duties,  but  few  examples  of 
either  class  being  found  in  the  tariff  of  1913.  In  far  the  greater 
number  of  cases  under  the  new  law,  the  method  of  levy  employed 
is  that  of  "straight"  specific  or  "straight'*  ad  valorem  collection; 
and,  as  between  these  last  two  methods,  the  predominating  plan 
adopted  has  been  that  of  the  plain  ad  valorem  duty.  A  modi- 
fication of  the  simple  ad  valorem  rate,  employed  in  the  textile 
schedules,  notably  in  that  dealing  with  cotton,  has  been  to  change 
the  ad  valorem  rate  according  to  the  degree  of  complexity  of  the 
manufacture,  but  even  such  a  deviation  from  the  use  of  simple 
ad  valorem  duties  has  not  been  widely  resorted  to.  The  use  of 
specific  duties,  perhaps  best  illustrated  in  the  chemical  schedule, 
has  been  adopted  chiefly  in  those  cases  where  such  duties  could 
be  levied  to  much  greater  advantage  from  the  revenue  standpoint 
than  could  the  ad  valorem  duties.  The  duty  on  chloroform  may 
be  taken  as  an  example.  That  article  cannot  be  tested  for  value 
without  a  rather  elaborate  chemical  analjrsis,  and,  such  being  the 
case,  the  importations  of  the  drug  were  likely  to  be  confined  almost 
entirely  to  the  very  highest  and  most  concentrated  grades,  if  an 
ad  valorem  rate  were  to  be  applied;  these  grades  would,  of  course, 
have  been  declared  for  taxation  at  far  lower  valuations  than  they 
should  have  borne,  such  valuations  corresponding  to  the  true  values 
of  the  lower  grades  of  the  article  which  could  only  with  difficulty  be 
distinguished  from  the  more  expensive.  It  was,  therefore,  probably 
right  to  relieve  chloroform  of  ad  valorem  treatment,  and  to  impose 
on  it  a  specific  duty  corresponding  with  the  volume  of  the  drug 


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THE  TARIFF  OF  IQI3  109 

imported.  In  the  main^  however,  it  was  early  decided  that  the 
ad  valorem  duty  based  upon  careful  customs  examination,  with 
valuation  properly  safeguarded,  should  be  the  prevailing  type  of 
duty  throughout  the  tariff,  and  this  determination  was  adhered  to 
even  under  some  conditions  which,  in  the  judgment  of  well-qualified 
men,  might  reasonably  have  raised  doubts  of  its  validity.  It  is 
probable  that  in  future  years  it  will  be  f otmd  that  one  of  the  most 
serious  problems  offered  in  the  satisfactory  application  of  the  law 
of  1913  has  been  the  commercial  developments  connected  with  the 
use  of  ad  valorem  duties;  and  it  would  seem  that  one  of  the  points 
at  which  severe  criticism  will  be  directed  against  the  act  by  those 
hostile  to  it  will  be  the  application  of  such  rates.  The  question  is 
one  that  can  be  passed  upon  more  satisfactorily  in  connection  with 
the  several  schedules,  as  their  provisions  are  subjected  to  analysis. 
In  general,  however,  it  must  be  conceded  that  the  transition  from 
the  old  to  the  new  system  of  duties  was  an  immense  victory  for 
simplicity  and  honesty  in  the  application  of  the  law,  and  that 
probably  no  other  change  so  greatly  tended  to  place  the  new  rates 
upon  a  comprehensible  and  straightforward  basis  as  did  this. 
Whether  in  certain  instances  the  freer  use  of  specific  duties  might 
not  have  been  warranted  or  even  demanded  may  be  a  fair  question, 
but  it  is  certain  that  the  abolition  of  the  combined  and  composite 
rates  was  in  the  highest  degree  praiseworthy. 

n 

A  review  of  the  individual  schedules  of  the  tariff  of  1913  shows 
that  several  distinctly  different  classes  of  work  were  done  in  the  prep- 
aration of  the  new  act.  In  some  instances  duties  were  improved 
through  the  reclassification  of  commodities,  in  others  merely 
through  reduction,  in  still  others  through  an  alteration  in  the 
kinds  of  duties  levied,  and  in  many  instances  by  transfer  of  com- 
modities to  the  free  list.  Of  complete  reclassification,  the  best 
example  is  furnished  in  Schedule  A  dealing  with  chemicals,  oils, 
drugs,  and  paints.  The  genesis  of  this  schedule  has  already  been 
considered  in  a  previous  article.  Probably  in  no  part  of  the 
tariff  was  the  reorganization  of  the  old  duties  so  complete  as  in 
Schedule  A,  and  probably  in  none  was  there  so  small  a  net 


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no  JOURNAL  OP  POLITICAL  ECONOMY 

reduction  with  so  great  a  concomitant  actual  relief  from  oppressive 
taxation.  During  the  past  thirty  years,  roughly  since  the  adop- 
tion of  the  unsatisfactory  tariff  of  1882,  the  chemical  schedule 
has  suffered  little  change.  It  has  been  passed  on  from  Congress 
to  Congress,  the  alterations  in  its  terms  being  of  the  slightest, 
while  the  most  important  innovations  were  found  in  transfers 
to  the  free  list  or  back  again,  as  revenue  or  political  exigency 
demanded.  In  consequence,  the  chemical  schedule  had  become, 
when  the  revision  of  1913  was  undertaken,  hopelessly  obsolete. 
Many  of  the  products  named  in  it  had  long  ago  been  superseded 
by  others,  or  the  designations  were  susceptible  of  being  stretched 
to  cover  many  conunodities  never  meant  to  be  included.  It  was 
a  hopeless  jumble  of  out-of-date  terms  and  inapplicable  methods 
of  classification  and  of  levying  duties.  In  the  new  schedule  as 
now  law,  we  find  an  enumeration  of  products  made  by  capable 
technical  chemists  and  based  upon  actual  practice  and  usage  in 
the  trade.  This  in  itself  is  an  immense  advantage  from  the  stand- 
point of  proper  distribution  of  taxation.  Very  high  credit,  there- 
fore, must  be  assigned  to  the  revisers  of  the  tariff  for  the  courage 
of  their  convictions  which  enabled  them  to  discard  the  out-of-date 
and  practically  worthless  descriptions  of  commodities  employed 
in  the  existing  law  by  which  they  were  confronted,  and  to  substi- 
tute the  modem  terminology,  while  at  the  same  time  altering 
duties  to  correspond  with  the  readjusted  groupings.  Second  to 
this  broad  reclassification,  the  most  important  feature  of  the 
revised  chemical  schedule  is  its  treatment  of  the  free  list.  Many 
articles  have  been  transferred  to  that  list,  while  not  a  few  have 
been  shifted  from  the  free  to  the  dutiable  schedules.  These  changes 
were  made  with  a  distinct  purpose  in  mind.  It  was  desired  to 
readjust  the  chemical  schedule  in  such  a  way  that,  first  of  all, 
the  obsolete  duties  should  be  abolished  upon  certain  heavy  prod- 
ucts which  not  only  never  were,  but  never  would  be,  imported, 
under  ordinary  conditions.  Secondly,  it  was  desired  to  lower 
the  rates  on  certain  widely  consumed  commodities  whose  special 
use  practically  made  them  necessities  and  so  established  a  prima 
fade  case  in  favor  of  low  duties  or  none  at  all.  Medicines  afford 
an  example  of  such  items.    In  the  same  way,  it  was  desired  to 


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TEE  TARIFF  OF  jgjj  iii 

bring  about  a  lowering  of  rates  upon  articles  which  had  a  distinct 
food  vahie,  and  which,  therefore,  were  to  be  regarded  as  elements 
in  the  cost  of  living.  Oils  furnish  an  illustration  of  this  group  of 
items.  Conversely,  it  was  desired  to  raise  duties  upon  all  those 
articles  which  were  imported  into  the  United  States  subject  to 
patent  protection.  In  the  case  of  many  of  the  more  recent  chemi- 
cal products,  highly  protected  by  patents  at  home  and  abroad, 
it  was  recognized  that  a  reduction  in  duties  would  not  lower  prices 
to  the  consumer  inasmuch  as  they  were  already  fixed  at  the  maxi- 
mum revenue-producing  point  under  the  economic  law  of  monopoly 
price.  In  the  case  of  still  others,  it  was  beUeved  that  no  manu- 
facture was  probable  in  the  United  States  since  conditions  of  pro- 
duction were  far  superior  abroad — either  because  of  the  foreigners' 
possession  of  chemical  secrets,  the  result  of  research,  or  because 
the  products  were  of  such  a  nature  that  they  were  unlikely  to  be 
imitated  here  successfully.  Hence  in  these  cases  an  increase  in 
rates  of  duty  was  likewise  thought  expedient.  As  a  limit  to  these 
changes  involving  advance  in  tariffs,  was  set  the  possible  line  at 
which  a  reflex  effect  upon  prices  might  be  produced.  It  was 
understood  that  many  of  these  articles  were  in  the  nature  of 
materiab  of  production,  since  they  were  used  by  domestic  manu- 
facturers of  textiles  and  of  other  products.  Therefore,  it  was 
believed  that  there  might  be  a  danger  in  an  increase  of  duty  beyond 
a  very  easily  reached  level,  inasmuch  as  such  advance  in  duty 
and,  perhaps,  consequently  in  price,  might  result  in  raising  the 
expenses  of  other  producers  who  were  engaged  in  manufacturing 
goods  upon  which  the  tariff,  through  reductions  made  in  subsequent 
schedules,  was  about  to  be  cut.  Hence  was  developed  a  disposi- 
tion to  make  all  such  advances  in  a  tentative  way  and  to  limit 
them  to  what  was  considered  a  distinctly  reasonable  figure.  On 
the  whole,  it  will  undoubtedly  be  the  judgment  of  careful  students 
of  the  chemical  schedule  that  changes  made  along  the  lines  already 
indicated  were  well  warranted,  and  that  technically  the  schedule 
was  an  immense  and  very  welcome  advance  over  the  corresponding 
schedule  of  the  Payne-Aldrich  law. 

Another  of  the  groups  of  duties  in  the  act  of  1913,  closely  allied 
to  the  chemical  rates,  to  which  very  special  attention  will  probably 


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112  JOURNAL  OF  POLITICAL  ECONOMY 

be  paid  by  future  students,  is  found  in  Schedule  B,  which  deals 
with  glass,  earthenware,  pottery,  and  allied  products.  For  years 
past,  there  has  been  an  ahnost  constant  attempt  to  secure  a  reduc- 
tion of  the  plate-  and  window-glass  rates  of  the  tariff  law,  in  view 
of  the  well-recognized  circumstance  that  these  rates  were  abso- 
lutely abnormal  and  offered  a  dangerous  spur  to  monopoly.  That 
such  was  the  case  experience  had  repeatedly  shown.  Combina- 
tions in  the  window-glass  trade,  the  practical  existence  of  a  plate- 
glass  trust,  wide  variations  in  prices  coinciding  with  activity  in 
the  building  trades,  and  other  phenomena  of  a  similar  sort,  pointed 
to  a  manipulated  market  and  called  loudly  for  such  check  as  might 
be  afforded  by  a  reduction  of  rates.  The  act  endeavored  to  sup- 
ply such  a  corrective.  Nothing  had  been  attempted  by  way  of 
preliminary  legislation,  but  when  the  final  revision  was  begun 
very  careful  attention  was  devoted  to  plate  and  window  glass  and 
pottery.  The  outcome,  however,  was  different  in  the  two  cases. 
With  reference  to  plate  and  window  glass,  a  general  cut  was  made. 
This  cut  varied  in  amount  but,  as  seen  in  a  former  article,  it 
amounted  on  some  sections  of  the  plate-glass  schedide  to  as  much 
as  one-half  of  the  rates  of  duty.  In  respect  to  pottery  and  earthen- 
ware, moderate  cuts  were  made,  as  already  seen,  but  in  the  higher 
classes  of  goods  already  dutiable  at  rates  of  50  per  cent  or  more, 
it  was  determined  not  to  make  much  change.  This  conclusion 
was  arrived  at  because  of  the  belief  that  the  articles  in  question — 
fine  china,  vases,  and  specialties — ^were  luxuries  in  the  best  sense 
of  the  word  and  were. not,  therefore,  entitled  to  share  much  in 
the  reductions  so  long  as  revenue  was  needed  by  the  government. 
On  the  other  hand,  very  vigorous  pleas  were  made  by  pottery 
manufacturers  for  the  purpose  of  showing  that  their  costs  were 
not  such  as  would  permit  any  further  stimulus  to  importations. 
The  pottery  schedule  is  one  regarding  which  it  has  never  been  felt 
that  reliable  or  complete  data  were  available.  Apparently  there 
will  be  fair  ground  for  a  suspension  of  judgment  with  reference 
to  the  action  of  the  committee  on  that  subject  until  such  time  as 
further  information  concerning  the  methods  and  status  of  the 
industry  are  at  hand.  Investigations  designed  to  develop  the 
facts  of  the  matter  are  already  being  prosecuted  by  the  govem- 


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THE  TARIFF  OF  IQI3  113 

ment.  With  respect  to  plate  and  window  glass  the  conclusion 
already  reached  by  students  of  the  situation,  as  heretofore  indi- 
catedy  has  been  that  the  older  duties  were  far  too  high  and  that, 
in  consequence,  the  reduction  was  urgently  called  for.  That  it 
has  not  gone  too  far  and  that  the  duties  retained  are  amply  suffi- 
cient for  the  adequate  protection  of  domestic  interests,  in  so  far 
as  they  are  entitled  to  such  protection,  is  evidently  the  prevailing 
view  among  non-partisan  members  of  the  trade  as  well  as  among 
careful  students  of  the  situation  under  the  tariff. 

m 

A  very  special  problem,  widely  different  from  that  presented 
by  the  chemical  schedule,  was  offered  in  the  textile  sections  of  the 
new  measure.  These  probably  constituted  the  portion  of  the 
tariff  most  sharply  debated  in  the  past  and  most  directly  liable 
to  criticism  and  objection.  The  wool  schedule  has  heretofore 
been  described  by  ''stand-pat"  advocates  of  high  tariffs  as  the 
''citadel  of  protection" — a  hackneyed  expression  sufficiently  indi- 
cating, despite  its  threadbare  condition,  the  attitude  of  the  ultra- 
high-duty  advocates  in  Congress.  As  for  cottons,  while  the  average 
level  of  rates  applying  to  them  had  never  been  very  high  as  com- 
pared with  the  woolen  rates,  the  schedule  contained  many  "jokers" 
and  special  favors  granted  in  return  for  handsome  campaign  con- 
tributions or  for  political  "influence,"  so  that  revision  of  the  rates 
inevitably  caused  discomfort  to  many  carefully  safeguarded  inter- 
ests. In  clearing  the  ground  for  the  revision,  it  was  first  of  all 
necessary  to  decide  upon  the  tjqie  of  duties  to  be  applied,  and 
here,  as  in  the  case  of  the  chemical  schedule,  it  was  resolved  to 
sweep  away  without  hesitation  the  old  combined  and  composite 
rates  and  to  substitute  for  them  in  the  main  a  simple  and  straight- 
forward ad  valorem  system.  It  was  agreed  to  apply  this  ad  valorem 
system  imiformly  throughout  the  cotton,  woolen,  hemp  and  flax, 
and  silk  schedules.  Thereby  an  immense  alteration  in  the  whole 
type  and  working  of  the  rates  of  duty  was  produced,  the  change 
being  in  itself  enough  to  transform  the  system  of  collecting  the 
tariff  upon  textiles.  This  determination  was  adhered  to  through- 
out the  revision,  notwithstanding  some  desperate  efforts  while  the 


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114  JOURNAL  OF  POLITICAL  ECONOMY 

bill  was  in  the  Senate  to  secure  a  restoration  of  specific  duties  in 
the  silk  schedule — an  effort  finally  successful  in  the  upper  Chamber 
but  successful  there  only  in  vain,  inasmuch  as  it  was  promptly 
discarded  by  the  conference  committee,  which  restored  the  ad 
valorem  system  of  the  House  measure. 

As  for  the  rates  themselves,  the  most  striking  and  complete 
reorganization  of  duties — the  one,  moreover,  by  which  the  tariff 
revision  of  1913  will  ultimately  be  most  closely  judged — ^is  found 
in  the  wool  schedule.  Raw  wool,  which  the  Ways  and  Means 
Committee  in  previous  Congresses  had  left  at  a  20  per  cent  ad 
valorem  rate,  was  made  unreservedly  free  after  December  i,  1913, 
it  being  concluded  by  the  tariff  revisers  that  only  on  a  basis  of 
free  raw  wool  could  real  improvement  be  bottomed.  In  this 
particular,  the  conclusion  arrived  at  was  unquestionably  correct. 
Free  raw  wool  had  been  regarded  as  a  sine  qua  non  by  every  care- 
fid  writer  and  thinker  on  the  tariff  for  many  years  past,  and  this 
point  of  view  had  been  amply  and  fully  upheld  even  by  the  showing 
made  in  the  biased  and  partisan  report  of  the  Tariff  Board  dealing 
with  wool  and  manufactures  thereof,  published  during  the  adminis- 
tration of  President  Taft.  In  that  report  it  had  been  clearly 
indicated  that  the  great  bulk  of  the  wool  of  the  United  States  needed 
no  protection  whatever,  since  it  was  produced  as  a  by-product  of 
the  mutton  industry;  while  it  was  also  conclusively  shown  that 
the  merino  wool  industry  of  the  Ohio  region  and  of  the  western 
ranches  was  already  doomed  to  extinction,  even  with  practical 
prohibition  of  wool  imports,  owing  to  peculiar  conditions  and 
uneconomic  methods,  and  that  it  could  be  saved  only  through 
a  complete  regeneration  of  the  methods  of  sheep  farming.  It  will 
undoubtedly  be  concluded  by  careful  students  of  the  tariff  that  in 
no  respect  was  the  act  of  1913  more  nearly  sound,  and  that  in  none 
perhaps  was  it  more  courageous  and  straightforward  than  in  its 
total  abolition  of  the  duties  upon  raw  wool — an  action  long  desired 
by  honest  manufacturers  who  saw  in  the  duties  on  wool  not  only 
an  insuperable  handicap  to  the  domestic  producer  but  also  a 
guaranty  that  the  average  consumer  would  be  able  to  obtain  for 
himself  only  poor  materials,  shoddy,  and  wool  substitutes  of  one 
kind  or  another.    By  removing  the  duties  on  raw  wool,  Congress 


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THE  TARIFF  OF  1913  115 

at  one  stroke  of  the  pen  did  what  it  could  to  emancipate  the  public 
from  its  slavery  to  the  fraudulent  vagaries  of  alleged  "woolen" 
manufacturers. 

With  the  disappearance  of  the  duty  on  wool,  moreover,  it 
became  at  once  possible  to  improve  to  an  enormous  degree  the 
rates  upon  the  derived  products  of  wool.  No  longer  was  there 
any  excuse  for  the  crafty  "compensatory"  duties  based  upon  the 
old  fiction  that  four  pounds  of  raw  wool  were  required  to  manu- 
facture a  poimd  of  cloth  and  that  a  corresponding  increase  in 
rates  must  be  allowed.  With  the  raw-wool  duties  removed,  the 
only  problem  remaining  was  that  of  adjusting  the  ad  valorem 
rates  upon  derived  products  to  the  relative  degrees  of  complexity 
in  manufacture.  Tops,  the  next  product  beyond  the  raw  wool, 
were  given  a  duty  of  7J  per  cent,  yams  a  duty  of  10  per  cent,  and 
so  on  up  to  the  highest  grade  of  cloths,  which  under  the  revised 
schedule  as  it  emerged  from  conference  bore  a  rate  of  35  per  cent. 
It  cannot  be  said  that  this  was  "free  trade"  or  anything  approxi- 
mating to  it.  Nor  is  it  necessary  to  go  into  detaUed  and  abstruse 
figures  as  to  "cost  of  production"  to  determine  whether  the  reduc- 
tion thus  made  was  wise  or  not.  The  schedide  as  it  finally  emerged 
from  Congress  presents  but  a  single  simple  question  to  the  average 
man:  Was  it  his  wish  to  maintain  in  the  United  States  a  cloth- 
making  industry  so  inefficient  that  it  could  not  produce  goods, 
even  when  protected  to  the  extent  of  35  per  cent  ad  valorem,  raw 
materials  being  on  a  free  basis  ?  This  does  not  of  course  touch  the 
question  whether  or  not  as  a  matter  of  fact  every  wool  manufac- 
turer in  this  country  can  sustain  himself  with  only  this  amount  of 
protection.  At  the  present  writing  about  one-half  of  the  looms 
in  the  woolen  industry  are  idle,  and  while  this  is  not  due  in  all 
cases  to  the  tariff,  either  directly  or  indirectly,  it  is  probable  that 
many  such  looms  are  idle  either  as  a  result  of  direct  foreign  competi- 
tion or  in  consequence  of  fears  of  their  owners  as  to  potential 
competition  and  a  desire  to  wait  imtil  conditions  are  more  clearly 
evident.  The  Tariff  Board's  report  on  wool  manufacture,  if  it 
furnished  no  other  information,  was  eloquent  in  its  showing  of 
ancient  and  poor  machinery  in  the  woolen  industry  and  in  its 
demonstration  of  the  use  of  obsolete  methods  and  costly  modes  of 


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ii6  JOURNAL  OP  POLITICAL  ECONOMY 

production,  rendered  possible  only  by  the  exaggerated  rates  of  duty 
in  past  years.  In  the  last  analysis,  therefore,  the  issue  is  not 
whether  any  factories  will  or  will  not  be  closed  under  the  new 
regime.  Some  will  either  close  or  be  conducted  at  a  much  narrower 
margin  of  profit  than  heretofore — so  much  may  be  taken  for 
granted.  The  real  question  was  whether,  in  order  to  enable  the 
proprietors  of  obsolete  machinery  to  continue  paying  dividends 
upon  their  imsatisfactory  plants,  the  consimier  of  doth  could  be 
expected  to  pay  a  duty  in  excess  of  35  per  cent  ad  valorem.  That 
he  could  not  reasonably  be  expected  to  do  so  wiU  be  the  opinion  of 
many  tariff  students  and,  undoubtedly,  of  the  consimier  himself. 
Technically  the  wool  schedule  presents  the  interesting  question 
whether  or  not  the  rates  levied  upon  woolen  products  at  their 
various  stages  of  advancement  were  properly  adjusted  to  one 
another.  A  survey  of  the  rates  as  finally  fixed  seems  to  indicate 
that  the  adjustment  was  as  nearly  as  possible  in  accordance  with 
the  evidence.  It  did  not  differ  materially  from  the  relative  levels 
of  adjustment  suggested  by  the  report  of  the  Tariff  Board,  and  the 
Tariff  Board  had  reported  only  what  was  generally  known  in  the 
trade,  and  by  everyone  who  chose  to  inform  himself  concerning 
the  relative  labor  and  capital  involved  in  the  production  of  tops, 
yams,  and  the  various  grades  of  cloth.  At  one  point,  however, 
the  woolen  schedule  deserves  and  wiU  receive  adverse  criticism. 
The  old  schedule  of  the  Payne  law  had  levied  certain  rates  of  duty 
upon  goat  hair  as  well  as  upon  sheep's  wool.  In  the  revision  it 
might  reasonably  have  been  expected  that  since  one  was  to  be 
placed  upon  the  free  list  the  other  would  likewise  be.  Instead  of 
this  uniformity  of  treatment,  however,  mohair,  the  product  of 
the  goat,  was  given  a  duty  of  20  per  cent  ad  valorem  with  derived 
products  at  duties  fixed  to  correspond  to  this  basic  rate.  This 
was  a  concession  to  the  Texas  and  general  southwestern  interests 
totally  imwarranted  by  the  facts  and  justifiable  only  upon  the 
plea  of  political  necessity.  The  product  of  the  goat,  protected 
to  the  extent  of  20  per  cent  more  than  wool  on  the  ground  that  it 
was  a  "luxury,"  should  have  been  given  no  such  preference,  and 
the  retention  of  the  "mohair  schedule"  among  the  woolen  duties 
can  afford  only  occasion  for  regret  to  the  sincere  friends  of  tariff 


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THE  TARIFF  OF  igi^  117 

reform^  while  it  furnishes  a  basis  for  scoffing  to  those  who  dis- 
believed in  the  sincerity  of  the  reductions  attempted  or  introduced. 

On  the  whole,  the  judicious  student  must  conclude  that  the 
woolen  schedule  as  a  total  represents  a  fair  and,  in  the  main, 
well-adjusted  statement  of  duties,  not  too  low  for  any  reasonable 
piupose  of  protection,  yet  sufficiently  low  to  afford  enormous  relief 
from  the  fearful  abuses  of  the  old  schedide.  He  will  realize  that 
the  change  thus  suddenly  made  from  an  atmosphere  of  almost 
tropical  warmth  in  which  the  obsolete  and  feeble  woolen  "plant" 
was  enabled  to  flourish  luxuriantly,  to  the  very  much  tempered 
atmosphere  furnished  by  a  35  per  cent  duty,  wiU  unquestionably 
result  in  the  elimination  of  some  establishments  not  capable  of 
entering  the  struggle  for  survival  upon  equal  terms,  and  wiU  at 
the  same  time  compel  others  to  adapt  themselves  to  the  new 
environment  by  introducing  better  machinery  and  more  effective 
methods  of  production. 

The  cotton  schedule,  like  that  relating  to  wool,  was  remodeled 
upon  a  purely  ad  valorem  basis.  In  the  cotton  schedide,  however, 
the  problem  was  very  much  simpler  owing  to  the  fact  that  the 
raw  material  of  the  industry  had  never  borne  a  duty,  while  the 
higher  products  of  the  loom  had  not  been  subjected  to  the  exces- 
sive protection  resulting  from  compensatory  rates  levied  under 
the  composite  system.  The  schedule,  however,  had  its  own 
problems.  It  was  now  desired  to  introduce  a  system  of  levy 
which  would  be  based  upon  plain  and  simple  methods,  and  to  that 
end  it  was  sought  to  adjust  the  rates  charged  upon  yams  so  as  to 
correspond  in  general  with  the  rates  charged  upon  cloths  made 
from  those  yams,  while  it  was  resolved  to  eliminate  from  the 
tariff  the  methods  of  "counting  threads"  which  had  been  used 
under  the  Payne  law  for  the  purpose  of  determining  the  grade  of 
the  cloth.  In  general,  the  conclusion  was  arrived  at  that  the 
cloth  duties  should  observe  the  same  general  conditions  prescribed 
for  the  establishment  of  rates  upon  the  yams,  and  that  no  distinc- 
tion should  be  drawn  between  cloths  made  of  a  different  nimiber  of 
threads.  Most  of  the  old  special-privilege  provisions,  whereby 
cloths  woven  on  a  jacquard  loom,  lappets,  and  mercerized  or  other 
goods  were  given  additional  protection  when  they  needed  none^ 


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Ii8  JOURNAL  OP  POLITICAL  ECONOMY 

were  swept  completely  away.  In  judging  of  the  cotton  schedule 
it  is  worth  while  to  take  special  account  of  certain  pleas  filed  by 
manufacturers  of  cotton  goods.  Manufacturers  very  early  saw 
that  they  would  have  but  a  poor  case  were  they  to  demand  the  con- 
tinuance of  high  rates  upon  goods  which  they  were  already 
exporting  to  foreign  countries  in  successful  competition  with  the 
manufacturers  of  those  countries. 

In  brief,  the  history  of  the  schedule  had  been  somewhat  as 
follows:  Under  the  Payne-Aldrich  law  and  its  predecessors,  rates 
of  duty  had  been  based  upon  a  combined  specific  and  ad  valorem 
system.  Goods  were  assigned  to  the  different  grades  by  an 
examination  of  the  method  of  weaving  employed  in  manufacturing 
them.  When  this  had  been  done,  the  actual  duties  were  imposed 
on  an  ad  valorem  basis  varying  according  to  the  stage  of  advance- 
ment in  manufacture.  When  actual  collections  took  place,  it 
was  then  necessary  to  levy  the  duties  upon  goods  which  had  pre- 
viously been  passed  upon  by  appraisers  working  imder  complex 
rules  which  enabled  them  to  exercise  large  judgment  with  respect 
to  the  class  to  which  they  assigned  goods  for  taxation.  Inasmuch 
as  such  assignments  were  expected,  under  a  protectionist  r6gime, 
to  be  made  to  high  classes,  and  inasmuch  as  protectionist  manu- 
facturers, for  many  years  supremely  dominant  at  the  Treasury 
Department,  exerted  their  influence  in  the  direction  of  assignments 
to  the  highest  possible  classification,  the  net  result  was  to  make 
the  goods  invariably  pay  the  maximum  possible  rates  of  duty. 
In  the  administration  of  the  schedule  there  was  constant  friction 
with  respect  to  classifications  and  constant  hardship  on  account 
of  the  continually  rising  valuations;  and,  so  far  as  legislation  was 
concerned,  there  was  constant  manipulation  of  the  schedule 
throughout  the  whole  course  of  a  tariff  bill,  so  as  to  introduce 
higher  classifications  through  the  medium  of  seemingly  innocent 
phrases  in  the  body  of  the  act.  The  tariff  reformers  of  1913  rightly 
appreciated  that  much  of  the  evil  of  the  schedule  lay  not  in  the 
high  rates  of  duties,  but  in  the  way  in  which  the  duties  were 
imposed.  In  the  preliminary  measures  which  had  been  adopted 
by  Congress,  but  to  no  purpose  because  of  presidential  vetoes, 
it  had  been  sought  to  assess  duties  upon  a  new  basis  in  which  the 


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THE  TARIFF  OF  IQI3  119 

thread  or  constituent  material  of  which  the  cloth  was  made  up 
should  bear  rates  ascending  in  amoimt  as  the  fineness  of  the  thread 
increased,  while  doth  made  of  such  thread  was  to  pay  a  rate  of 
duty  based  upon  the  tariff  on  the  thread  of  which  it  was  composed. 
In  a  few  special  classes  of  cases,  such  as  handkerchiefs  and  goods 
made  of  cotton  and  rubber,  ad  valorem  rates  bearing  no  relation- 
ship to  the  general  scale  of  duties  had  been  fixed,  inasmuch  as  these 
special  products  of  labor  and  capital  coidd  not  easily  be  ranked  in  a 
definite  relationship  to  the  other  products  enimierated  in  the  series 
of  duties  which  constituted  the  bidk  of  the  schedide.  As  thus 
developed  upon  an  exceedingly  simple  basis,  with  but  little  refer- 
ence to  the  so-called  "fancy"  cottons,  the  early  bill  had  been  pro- 
ductive of  enormous  criticism  from  cotton  manufacturers  who 
voiced  the  familiar  predictions  of  panic,  disaster,  business  depres- 
sion, and  many  others  of  like  nature.  During  the  time  that  the 
first  Underwood  cotton  tariff  biU  was  under  discussion,  as  has  been 
elsewhere  seen,  manufacturers  worked  with  great  shrewdness  to  ma- 
nipulate the  rates  in  such  a  way  as  to  insure  some  preservation 
of  the  older  type  of  duty.  This  was  of  no  avail.  Mr.  Under- 
wood and  his  colleagues  paid  no  attention  whatever  to  the  argu- 
ments placed  before  them  by  a  committee  of  manufacturers  which 
had  been  cleverly  made  up  of  influential  constituents  of  southern 
Congressmen.  When  the  actual  task  of  shaping  the  cotton  schedule 
of  the  final  bill  was  begun,  the  attacks  by  manufacturers  were 
redoubled,  although  this  time  in  a  different  form.  Manufactur- 
ing interests  asked  for  several  distinct  changes  of  which  the  follow- 
ing were  the  chief: 

1.  A  distinct  difference  between  the  rate  on  doth  and  that 
on  the  thread  of  which  it  was  made. 

2.  Application  of  special  higher  rates  of  duty  to  fancy  cottons 
of  spedal  t3q)es  such  as  jacquard  goods,  lappets,  and  others  of 
similar  description. 

3.  Marked  advance  in  rates  on  finer  cottons  of  all  classes. 

Of  these  demands  that  which  was  probably  urged  with  the 
greatest  persistency  and  intensity  was  the  demand  for  a  decided 
increase  in  the  rates  on  finer  goods.  Manufacturing  interests 
finally  saw  that  they  could  not  expect  to  secure  recognition  for 


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I20  JOURNAL  OF  POLITICAL  ECONOMY 

the  extreme  claims  which  they  had  put  forward  and  they  con- 
sequently b^gan  to  call  with  greater  insistence  for  a  relatively 
reasonable  program.  In  a  brief  embodying  a  proposed  schedule 
of  duties  which  was  put  forward  by  the  moderate  party  among 
cotton  manufacturers,  it  was  suggested  that  about  7}  per  cent  of 
the  total  output  of  American  cottons  consisted  of  the  finer  goods 
in  which  competition  with  foreign  countries  was  said  to  be  more 
severe  and  which  consequently  required  greater  protection.  On  this 
relatively  small  proportion  of  the  output  it  was  asked  that  there 
should  be  a  material  advance  in  the  level  of  the  duties,  and  it  was, 
partly  at  least,  admitted  that  the  remainder  of  the  schedule,  which 
applied  to  more  than  90  per  cent  of  the  goods,  could  take  care  of 
itself  on  the  basis  proposed  by  the  conmiittee.  Even  to  these 
demands  the  House  conunittee  paid  little  heed,  and  although  some 
adjustments  were  made  in  the  Senate  for  the  purpose  of  obtaining 
a  relationship  of  duties  that  would  be  more  satisfactory  to  pro- 
ducers, they  were  not  very  serious  or  severe.  The  question  is 
thus  raised  whether  the  action  finally  taken  was  satisfactory  and 
retained  sufficient  protection,  or  whether  it  was  open  to  criticism 
and  if  so,  how  far.  Two  canons  of  criticism  suggest  themselves — 
apart  from  the  ex  parte  statements  of  the  manufacturers — the 
report  of  the  Tariff  Board  with  reference  to  the  cotton  schedule, 
rendered  in  191 2,  and  the  course  of  trade  since  the  enactment  of 
the  law.  With  reference  to  the  first  criterion,  it  may  fairly  be 
said  that  the  proportion  of  the  Board's  report  which  most 
nearly  bore  upon  the  question  of  rates  of  duties  was  its  com- 
parison of  home  and  foreign  prices  for  cloths,  wholesale,  retail, 
and  at  jobbing  establishments.  If  these  figures  as  given  by 
the  Tariff  Board  were  correct,  there  was  never  any  necessity 
for  more  than  a  purely  nominal  rate  of  duty,  5  or  10  per  cent, 
upon  the  commoner  classes  of  cotton  goods.  On  the  finer  products 
of  the  loom,  there  may  have  been  reason  to  ask  a  slightly  higher 
tariff,  judging  from  the  views  of  the  Board  itself.  But  from  any 
reasonable  interpretation  of  the  Tariff  Board's  analyses  of  prices 
it  must  be  inferred  that  the  rates  of  duty  fixed  in  the  House  cotton 
schedule  of  the  tariff  were  not  only  sufficient  but  far  more  than 
sufficient  to  protect  home  industry  against  any  degree  of  competi- 


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THE  TARIFF  OF  IQ13  121 

tion  likely  to  be  experienced.  A  like  conclusion  must  be  drawn 
from  the  exceedingly  meager  data  obtained  by  the  TariflF  Board 
with  respect  to  ''cost  of  production"  in  English  mills  as  compared 
with  American.  The  other  criterion  suggested — the  course  of 
importations  since  the  enactment  of  the  tariflF— must  be  admitted 
to  be  as  yet  very  imperfect,  inasmuch  as  so  short  a  time  has  elapsed 
subsequent  to  the  date  when  the  new  rates  took  eflfect.  It  is 
certain  at  least  that  no  "inrush  of  goods"  has  occurred.  On  the 
contrary,  importations  of  cottons  into  the  United  States  have  been 
decidedly  less  since  the  tariff  was  enacted  than  they  were  during 
the  corresponding  period  before  its  enactment — ^for  what  reason 
no  attempt  will  here  be  made  to  say.  American  labor  in  the 
cotton  industry  has  been  fully  employed  at  good  wages,  and  cotton 
manufacturers  have  in  their  more  liberal  moments  since  the  enact- 
ment of  the  law  admitted  that  they  could  not  see  any  reason  to 
believe  that  very  serious  changes  had  been  produced  by  the  legis- 
lation. Such  is  in  fact  the  case.  The  duties  are  undoubtedly 
amply  high,  tested  by  almost  any  standard.  That  at  times  of 
depression  abroad  when  a  surplus  of  goods  must  be  disposed  of, 
or  at  those  times  in  the  domestic  market  when  trade  agreements 
have  succeeded  in  forcing  up  prices,  the  Underwood  tariff  will 
admit  to  the  United  States  much  larger  quantities  of  foreign 
cottons  than  heretofore  is  probably  true.  There  is  nothing  in 
the  cotton  schedule  to  warrant  its  being  termed  a  "free-trade 
proposal,"  but  on  the  contrary  the  duties  it  levies  are  fully  high 
enough  for  all  reasonable  objects. 

We  may  test  the  silk  schedule  as  we  did  the  cotton  rates  by  the 
effect  it  is  producing  in  altering  the  volimie  of  importations,  or 
we  may  test  it  in  its  supposed  effect  upon  the  employment  of  labor. 
No  formal  official  investigation  has  ever  been  made  of  the  silk 
industry  by  the  federal  government,  so  that  the  data  with  reference 
to  cost  of  production — ^limited  as  they  are — ^which  were  put  for- 
ward for  the  cotton  and  woolen  schedules  by  the  Tariff  Board 
are  not  paralleled  with  reference  to  silks.  Moreover,  with  regard 
to  silks,  it  is  apparent  that  no  such  severe  test  can  in  any  case  be 
had  as  with  the  woolen  and  cotton  rates.  There  was  but  little 
change  in  the  general  level  of  the  silk  duties,  those  imder  the  Payne- 


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122  JOURNAL  OP  POLITICAL  ECONOMY 

Aldrich  tariff  being  equivalent  in  practice  to  about  52  per  cent 
while  those  actually  fixed  in  the  new  law  are  equivalent  to  about 
48  per  cent.  The  striking  change  wrought  by  the  act  of  1913 
in  the  tariff  law  is  found  in  the  changing  of  the  rates  from  a  specific 
to  an  ad  valorem  basis.  This  change  was  fiercely  contested  by 
manufacturers  who  urged  that  it  would  be  exceedingly  injmious 
both  to  them  and  to  the  revenue  of  the  Treasury  because  of  the 
undervaluations  and  evasions  that  would  almost  certainly  occur. 
None  such,  so  far  as  known,  have  up  to  date  taken  place,  but  the 
administration  of  the  measure  has  proceeded  upon  very  much  the 
same  lines  as  in  the  past.  There  has  been  an  increase  in  the 
importation  of  a  few  classes  of  goods,  such  as  pongees,  which  had 
previously  been  almost  excluded  by  reason  of  the  discrimination 
to  which  they  were  subjected  under  the  older  form  of  the  tariff. 
But  this  has  not  been  a  characteristic  condition.  Altogether  the 
silk  situation  has  continued  upon  lines  similar  to  those  prevailing 
before  the  adoption  of  the  new  act,  save  for  the  greater  ease  and 
practicability  of  the  ad  valorem  duties  as  compared  with  the 
specific  rates  by  which  they  were  preceded. 

IV 

Much  of  the  discussion  of  the  tariff  while  the  bill  was  in  the 
House,  and  again  while  it  was  in  the  Senate,  centered  around  its 
probable  effect  upon  the  cost  of  living  and  thus  was  directed  to  the 
two  schedules  which  pre-eminently  dealt  with  food-stuffs,  the  agri- 
cultural and  the  sugar  schedules.  In  both  very  decided  changes  have 
been  made.  The  agricultural  schedule  as  a  whole  was  subjected 
to  two  distinct  methods  of  treatment — rates  of  duty  were  cut  quite 
generally  throughout  and  at  the  same  time  many  products  were 
transferred  bodily  to  the  free  list.  In  the  latter  group  were  animals, 
meats,  and  various  kinds  of  grain.  The  rates  on  other  classes  of 
grain  or  grain  products  were  sharply  reduced,  and  still  other  items 
were  more  moderately  cut.  In  the  latter  subclass  were  California 
fruits.  As  for  sugar,  provision  was  made  for  a  reduction  of  25  per 
cent  of  the  existing  tariff  beginning  with  March,  1914,  with  ultimate 
extinction  of  the  duties  at  the  end  of  three  years.  It  is  thus  seen 
that  a  very  wide  breach  with  the  past  was  created  in  connection 


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THE  TARIFF  OF  igi^  123 

with  the  agricultural  and  sugar  rates.  This  was  a  change  fraught 
with  important  political  as  well  as  economic  consequences.  The 
cuts  on  most  items  were  very  substantial  and,  while  stopping 
short  of  absolute  free  trade  in  aU  except  a  few  fundamental  food 
commodities,  must  be  regarded  as  fulfilling  the  promises  of  the 
party  in  control  of  the  government.  The  reductions  have,  however, 
thus  far  produced  but  little  effect  upon  prices.  Certain  kinds 
of  imported  products  of  a  special  type  have  fallen  in  price;  certain 
others,  previously  advancing  at  a  rapid  rate,  have  ceased  their 
marked  movement  upward.  New  sources  of  supply  have  been 
opened,  as  is  seen  by  Uie  increase  in  importations  of  grain  and  meat 
from  Argentina  and  from  Canada,  of  potatoes  from  Europe,  and 
of  fundamental  though  less  necessary  items  of  daily  consimiption 
from  many  other  quarters.  Sugar,  of  course,  has  not  yet  been 
affected  by  the  changes;  but,  when  they  become  operative,  there 
will  be  little  reason  to  doubt  their  efficacy.  They  will  unques- 
tionably give  to  the  consmner  the  bulk  of  the  cut  in  tariff  duties 
provided  for,  and  ultimately  the  whole  amount  of  the  tariff,  when 
complete  free  trade  siq>ervenes.  It  may  be  reasonably  questioned 
whether  the  ultimate  removal  of  duties  on  sugar  will  be  as  helpful 
to  the  consumer  as  would  have  been  a  further  cut  in  the  duties 
on  other  products,  designed  to  lighten  the  public's  tariff  burden 
by  an  amoimt  equal  to  the  revenue  derived  from  sugar.  It  may 
also  fairly  be  questioned  whether  the  Treasury  coidd,  from  the 
fiscal  standpoint,  obtam  an  amount  of  income  equal  to  that  which 
was  produced  by  the  sugar  tariff  as  easily  as  it  has  been  obtained 
from  that  source  in  the  past.  In  fact,  the  student  of  tariff  contro- 
versy will  probably  reach  the  conclusion  that  of  the  mistakes  of 
judgment  committed  in  framing  the  tariff  of  1913  the  entire  removal 
of  the  rates  on  sugar  probably  represents,  all  things  considered,  the 
most  serious.  In  palliation  of  it,  it  may  be  said  that  the  sugar 
interests  had  for  many  years  been  oppressive  and  corrupt,  that  the 
duties  on  sugar  had  been  therefore  the  source  of  much  xmmitigated 
evil,  and  that  the  elimination  of  them  was  imdoubtedly  in  line  with 
the  announced  policy  of  the  Democratic  party.  On  the  assumption 
that  the  income  tax,  of  which  special  study  will  be  made  at  a  later 
point,  was  desired  not  merely  as  a  means  of  getting  revenue  but 


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124  JOURNAL  OF  POLITICAL  ECONOMY 

of  redressing  an  unfair  distribution  of  taxation,  the  removal  of 
the  sugar  duties  may  be  defended.  The  change  can  scarcely  be 
sustained  upon  any  other  ground. 

While  there  is  thus  little  reason  to  believe  that  the  changes 
made  in  the  agricultural  schedule  will  bring  about  direct  reductions 
in  prices  of  consiunable  commodities,  there  is  a  good  deal  of  reason 
for  supposing  that  what  is  equivalent  to  the  same  thing — a  larger 
supply  and  better  access  to  sources  of  production — ^will  be  obtained, 
and  that,  in  consequence  thereof,  there  will  be  avoided  the  advances 
in  price  which  might  otherwise  have  occurred  owing  to  progressive 
growth  of  demand  due  to  increasing  population,  or  to  the  p\ishing 
of  the  margin  of  cultivation  farther  and  farther  away  from  the 
point  of  profitableness.  The  heavy  imports  of  food-stuffs  from 
such  coimtries  as  Argentina,  which  began  ahnost  as  soon  as  the 
law  had  passed  and  which  have  continued  in  growing  volimie  up 
to  the  present  moment,  give  good  evidence  of  this  prospect.  In  a 
real  sense,  therefore,  the  agricultural  schedule  is  fulfilling  the 
promises  of  the  tariff-makers,  inasmuch  as  it  affords  opportunity 
for  a  broadening  of  the  domestic  sources  of  supply  which  would 
have  been  quite  out  of  the  question  had  tariff  rates  continued  as 
high  as  they  were  under  the  old  adjustment  of  duties.  Precisely 
how  far  this  benefit  may  be  expected  to  extend  can  hardly  be  stated, 
partly  because  enough  experience  has  not  yet  been  had,  and  partly 
because  comparisons  must  always  be  instituted  with  what,  it  may 
be  conjectured,  would  have  occurred  imder  the  Payne-Aldrich  bill 
and  its  predecessors. 

Along  with  the  duties  affecting  food-stuffs  may  be  grouped 
others  that  to  many  minds  wiU  seem  hardly  similar  or  analogous 
but  which  resemble  them  in  direct  influence  upon  costs  of  living — 
those  dealing  with  the  important  basic  materials  of  manufacture, 
the  best  example  of  which  is  perhaps  afforded  by  metals  and 
manufactures  thereof.  In  a  former  article,  the  treatment  of 
the  iron  and  steel  schedule  has  been  reviewed  at  some  length,  and 
it  was  there  shown  that  a  very  considerable  reduction  (amounting 
to  fully  one-third  of  the  old  rates)  had  been  effected.  As  was 
also  seen,  this  revision  of  the  schedule  had  placed  not  a  few  of  the 
more  important  and  more  bulky  products  upon  the  free  list.    It 


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THE  TARIFF  OF  IQ13  125 

may  fairly  be  inferred  from  this  fact  that  the  cost  of  living,  in  so 
far  as  affected  by  cost  of  constructing  buildings  and  of  manufac- 
turing all  other  articles  dependent  upon  the  use  of  metals,  would 
have  been  reduced.  Although,  as  in  the  case  of  some  of  the  other 
schedules,  only  a  small  increase  in  any  class  of  articles  imported 
under  the  duties  of  the  iron  and  steel  schedule  has  occurred,  it 
remains  true  that  such  importations,  or  the  threat  of  them,  have 
already  been  enough  to  bring  about  much  closer  figuring  and  some 
price  concessions.  There  is  a  good  deal  of  groimd  for  believing 
that  these  changes  could  not  have  been  had  without  the  prospect 
of  foreign  competition  under  the  new  rates.  To  be  perfectly 
fair,  it  should  be  frankly  stated  that  existing  depression  in  the 
iron  and  steel  trade  is  by  many  currently  assigned  as  the  basis  of 
the  changes  in  prices,  and  this  is  at  least  approximately  true. 
The  fact  remains,  however,  that,  as  iron  and  steel  experts  freely 
admit,  the  effect  of  the  tariff  will  inevitably  be  seen  in  the  way 
indicated,  and  that  the  current  alterations  in  prices  would  probably 
not  have  been  brought  about  as  quickly  or  as  definitely  but  for  the 
alterations  in  duties.  The  fact  that  an  international  combination 
among  steel-producers  sustains  the  price  of  a  nimiber  of  the  impor- 
tant basic  steel  products  of  course  tends  to  deprive  tariff  changes 
of  the  effects  they  woidd  otherwise  have  upon  the  charge  made  for 
such  products.  While  the  data  made  available  during  the  past 
few  years  by  the  Bureau  of  Corporations  show  that  the  steel 
industry  of  the  United  States,  when  efficiently  conducted,  is  amply 
able  to  defend  itself  against  foreign  competition  even  upon  a 
pure  free-trade  basis,  and  fully  sustain  the  general  action  of  Con- 
gress with  regard  to  this  schedule,  there  are  factors  and  elements 
in  the  portion  of  the  measure  referred  to  which  are  of  somewhat 
questionable  accuracy  in  their  adjustment  to  other  parts  of  the 
schedule.  These,  however,  are  distinctly  in  the  minority.  As 
a  whole  the  iron  and  steel  schedule  must  be  regarded  as  having 
been  skilfully  and  successfully  revised.  The  only  serious  excep- 
tion to  be  taken  to  this  general  statement  is  found  in  the  rates  on 
lead,  zinc,  and  some  other  metals  where  special  interests  succeeded 
in  influencing  Congress  through  political  considerations  to  retain 
a  protection  that  was  in  no  sense  necessary.    The  maintenance 


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126  JOURNAL  OP  POLITICAL  ECONOMY 

of  the^  duties  at  what  was  certainly  an  unnecessarily  high  figure, 
instead  of  their  entire  removal  or,  at  all  events,  their  reduction 
to  a  rational  level,  constitutes  a  sound  and  even  severe  criticism 
upon  the  schedule  in  question. 

V 

There  are  certain  other  features  of  the  tariff  act  of  1913  which 
call  for  special  consideration  apart  from  the  mere  detail  of  the  duties 
themselves.  Indeed,  it  is  likely  that  from  some  points  of  view 
the  tariff  of  1913  will  be  considered  of  greater  importance  in  its 
method  of  dealing  with  these  extraneous  or  incidental  matters 
than  in  its  relation  to  the  dutiable  schedules  themselves.  Chief 
among  such  additional  features  must  be  placed  (i)  the  income  tax 
section  of  the  bill,  (2)  the  customs  administrative  sections,  and  (3) 
the  provisions  contained  in  the  bill  with  reference  to  foreign  trade 
relations.  Of  these,  incomparably  the  most  important  is  the 
income  tax,  but  this  is  of  itself  a  large  independent  subject  which 
must  be  reserved  for  subsequent  treatment  in  a  special  article. 
Attention  may,  therefore,  be  confined  for  the  present  to  the  pro- 
visions of  the  tariff  in  regard  to  foreign  trade  relations,  and  the 
changes  in  the  customs  administrative  law.  The  tariff  was,  how- 
ever, of  far-reaching  significance  in  a  negative  way  in  its  effect 
on  foreign  relations.  Under  the  Payne-Aldrich  law,  a  so-called 
maximum  schedule,  25  per  cent  ad  valorem  higher  than  the  regular 
rates,  had  been  prescribed  for  application  to  the  goods  of  those 
coimtries  which  did  not  give  us  favorable  tariff  treatment.  This 
had  proved  almost  inoperative,  and  the  attempt  to  enforce  it  had 
subjected  the  administration  to  the  necessity  of  various  undig- 
nified means  of  beating  about  the  bush.  Notably  in  our  relations 
with  Canada  and  France  it  had  been  necessary  to  put  our  national 
pride  in  our  pockets,  and  practically  to  admit  that  it  was  impossible 
to  have  our  cake  and  eat  it  too.  In  repealing  the  maximum  tariff 
and  in  substituting  nothing  for  it  the  revisers  of  the  tariff  act, 
therefore,  took  an  important  forward  step.  They  eliminated  the 
tariff  threat  which  had  been  characteristic  imder  the  Payne  law 
while  they  in  nowise  impaired  the  conditions  surrounding  our  trade 
relations  with  foreign  countries.    There  were,  however,  some  mem- 


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THE  TARIFF  OF  igi3  127 

bers  of  Congress  who  desired  to  furnish  a  means  of  retaliation  in 
the  event  that  a  president  should  find  himself  hampered  by  the 
hostility  of  foreign  nations  in  commercial  matters.  It  was  there- 
fore proposed  in  the  Senate  to  insert  a  list  of  commodities  upon 
which  the  President  might  at  his  discretion  establish  higher  rates 
of  duty  for  the  purpose  of  retaliation,  thereby  penalizing  importa- 
tions from  countries  which  were  in  the  habit  of  shipping  those 
goods  to  us,  in  all  cases  where  such  countries  did  not  extend  ecpiit- 
able  treatment  to  the  products  of  the  United  States.  This  proved 
unacceptable  to  representatives  of  the  House  and  was  consequently 
eliminated  in  conference  committee,  but  there  was  retained  a 
clause  providing  for  the  negotiation  of  reciprocity  treaties  which 
may  yet  prove  of  importance.  In  the  House,  however,  there  had 
been  inserted  a  clause  providing  for  a  rebate  of  5  per  cent  upon  all 
goods  imported  in  American  vessels,  this  being  intended  to  assist 
in  the  "rehabilitation  of  the  American  merchant  marine."  The 
5  per  cent  rebate  thus  established  was  carefully  examined  in  the 
Senate  committee,  and  was  found  to  be  out  of  harmony  with  oiu* 
commercial  treaties  (in  that  we  refused  foreign  nations  as  good 
treatment  as  we  accorded  to  our  own  ships),  wherever  a  treaty 
embodying  the  so-called  ''most  favored  nation  dause"  was  in  force. 
In  fact  such  treaties  existed  with  nearly  all  nations,  except  France, 
so  that  we  should  have  placed  ourselves  in  the  position  of  discrimi- 
nating against  practically  every  country  with  which  we  were 
doing  business.  The  Senate  accordingly  eliminated  this  pr6vi- 
sion  but  it  was  restored  in  conference  committee,  qualified  by  the 
statement  that  the  rebate  should  apply  only  under  conditions 
that  did  not  run  counter  to  our  treaty  relations  with  foreign 
countries.  On  this  basb  the  rebate  provision  was  as  unworkable 
practically  as  it  was  unwise  theoretically.  Had  it  been  applied 
uniformly  to  goods  from  all  countries  it  would  have  amoimted  to 
a  horizontal  reduction  of  5  per  cent  in  the  average  level  of  the  tariff. 
Had  it  applied  to  most  countries,  and  been  withheld  only  in  the 
case  of  a  few,  it  would  have  constituted  an  intolerable  discrimina- 
tion against  those  few.  Seeing  the  impracticability  of  the  whole 
scheme,  the  Treasury  has  almost  necessarily  suspended  its  opera- 
tion, but  the  effect  has  of  course  been  to  leave  behind  a  large  crop 


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128  JOURNAL  OP  POLITICAL  ECONOMY 

of  lawsuits  against  the  government  which  will  now  have  to  be 
settled  through  the  courts;  and  which,  if  decided  in  favor  of  the 
claimants,  will  inevitably  result  in  millions  of  dollars  of  rebates 
of  duties.  Meanwhile,  the  clause  in  question  remains  an  open 
issue  and  a  productive  source  of  irritation  and  annoyance.  Too 
much  can  hardly  be  said  of  the  unwisdom  shown  in  incorporating 
it.  But  the  general  improvement  in  foreign  trade  conditions  under 
the  tariff  due  to  the  repeal  of  the  maximum  schedule  of  the  Payne- 
Aldrich  law  is  so  great  as  largely  to  offset  the  soimd  basis  for  criti- 
cism afforded  by  the  introduction  of  the  rebate  clause. 

As  the  rebate  provision  remained  almost  the  only  outcome 
of  an  ambitious  program  of  retaliation  and  negotiation,  so  the 
final  form  assigned  to  the  customs  administrative  act  was  the  out- 
come of  a  lengthy  discussion  of  proper  procediure  in  disposing  of 
the  question  of  customs  administration.  Prior  to  the  date  when 
the  Ways  and  Means  Committee  reported  a  bill  in  the  spring  of 
1913,  two  commissions  had  been  at  work  imder  the  direction  of 
Secretary  MacVeagh  of  the  Treasury  Department,  for  the  purpose 
of  examining  into  the  situation  of  the  customs  service.  One  of 
these  commissions  reported  on  desirable  changes  in  method  of 
administration,  the  other  on  desirable  innovations  in  the  organiza- 
tion of  the  service.  The  Ways  and  Means  Committee  added  to 
its  bill,  in  the  form  of  amendments  to  the  existing  customs  adminis-' 
trative  act,  many  of  the  suggestions  made  by  these  two  commissions. 
In  the  Senate  most  of  the  changes  thus  made  were,  as  a  result  of 
the  keen  criticism  of  importers  who  did  not  desire  to  see  the  adminis- 
trative act  strengthened,  stricken  out;  but,  in  order  that  the 
Senate  might  not  be  charged  with  having  unduly  yielded,  a  pro- 
vision for  a  commission  of  investigation  to  report  after  a  few 
months  of  work  was  inserted.  This  provision  was  later  rejected 
during  the  conference  on  the  bill,  and  simultaneously  a  few  of  the 
House  amendments  to  the  customs  administrative  act  were  restored. 
Among  these,  one  important  example  is  afforded  by  the  clause 
forbidding  brokers  and  attorneys  to  charge  contingent  fees  in 
customs  cases,  it  being  believed  that  such  contingent  fees  were 
a  soxirce  of  evil.  Another  example  is  seen  in  the  establishment  of 
a  protest  fee,  designed  to  reduce  the  nimiber  of  appeals  from  ded- 


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THE  TARIFF  OF  igi3  129 

sions  of  the  appraising  authorities.  Both  changes  were  intended 
to  act  as  a  check  upon  the  rapacity  of  speculative  customs  brokers 
and  attorneys  co-operating  with  importers  of  the  lower  grades 
to  mulct  the  government  of  as  much  revenue  as  possible  through 
the  wide  application  of  over-favorable  interpretations  of  various 
tariff  provisions.  At  present,  both  points  are  still  the  subject  of 
litigation  opened  immediately  after  the  passage  of  the  act  in  the 
effort  to  secure  a  reversal  of  the  action  taken  by  Congress.  But 
however  such  litigation  may  turn  out,  it  will  undoubtedly  be  con- 
cluded that  a  service  has  been  rendered  to  the  movement  for 
sound  management  of  the  customs  laws  by  inserting  the  pro- 
visions, particularly  as  it  is  fair  to  expect  that  a  hostile  decision 
by  the  courts  will  be  the  occasion  for  a  re-enactment  designed  to 
give  effect  to  the  manifest  wishes  of  Congress. 

Other  changes  of  procedure,  some  of  them  of  not  a  little  inter- 
est and  importance,  have  been  included  in  the  remodeling  of  the 
customs  administrative  laws.  Without  attempting  at  this  point 
a  technical  study  they  may  be  generally  approved,  and  it  may 
fairly  be  said  that  the  act  as  thus  revised  is  a  better  measure  than 
that  which  preceded  it.  It  is  not,  however,  an  adequate  or  thor- 
ough revision  and  should  not  be  allowed  to  remain  long  on  the 
books  in  its  present  form.  Experience  has  shown  that  the  system 
of  administration  provided  by  it  is  unsatisfactory  and  that  it  lacks 
severity  at  some  points  while  proving  unduly  inquisitorial  at 
others.  It  retains  concessions  to  selfish  interests  eager  to  profit 
by  technicalities  which  enable'  them  to  extort  money  from  the 
Treasury.  These  concessions  have  in  many  instances  survived 
from  the  former  regime  when  they  were,  occasionally  at  least, 
inserted  with  the  intent  to  afford  loopholes  for  the  recovery  of 
claims.  More  extensive  and  more  scientific  study  of  the  customs 
administrative  act,  and  a  more  thorough  and  courageous  revision 
of  it  woidd  have  been  desirable  had  time  and  other  conditions 
permitted  during  the  course  of  the  tariff  struggle  of  1913.  The 
failxire  thus  to  reorganize  the  measure  can  only  defer  remedial 
measures  to  a  future  date  when  they  must  certainly  be  imdertaken. 

The  fiscal  results  of  the  act  of  1913  will  undoubtedly  be  one  of 
the  tests  by  which  it  will  be  most  directly  judged.    As  a  revenue- 


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I30  JOURNAL  OP  POLITICAL  ECONOMY 

earner  the  tariff  has  assumed  an  ahnost  indispensable  place  in  the 
federal  scheme  of  taxation.  Without  it,  the  government  could 
not  expect  to  meet  as  easily  as  it  now  does  the  tremendous  btirdens 
imposed  upon  it  by  reason  of  the  extravagance  of  Congress  and  the 
cries  of  local  interests  demanding  "pork-barrel"  appropriations. 
Predictions  as  to  this  income-producing  power  are  necessarily 
untrustworthy.  No  one  can  forecast  the  exact  effect  of  a  change 
in  duties,  still  less  the  combined  effect  of  hundreds  of  such  changes. 
The  estimates  compiled  for  the  use  of  Congress  are  in  almost 
all  cases  based  upon  the  assumption  that  the  amount  of  the  imports 
of  goods  will  be  the  same  \mder  the  new  tariff  as  imder  the  old. 
If  that  assumption  should  be  correct  the  revision  of  the  duties 
would  be  stripped  of  the  wider  meaning  ordinarily  attributed  to 
it.  In  fact  no  such  assumption  can  fairly  be  accepted.  Changes 
in  duties,  if  they  amount  to  anjrthing,  will  at  least  tend  to  stimu- 
late or  to  retard  importations,  although  none  save  bigoted  protec- 
tionists will  take  the  view  that  they  are  the  prirnary  influence 
affecting  international  currents  of  trade.  A  few  broad  generaliza- 
tions can,  however,  be  made.  Assuming  a  fairly  stable,  or  only 
moderately  increased,  volume  of  importations,  the  new  tariff 
will  doubtless  result  in  a  decreased  income,  this  decrease,  however, 
coming  in  a  very  large  measure  from  a  relatively  small  nimiber  of 
items.  Sugar,  for  example,  when  completely  free  will  probably 
cut  nearly  $50,000,000  annually  from  the  government  receipts, 
and  the  transfer  of  wool  to  the  free  list  will  eliminate  about  $15,- 
000,000.  Besides  the  prospective  loss  of  the  sugar  duties  and 
the  more  inmiediate  loss  of  those  on  wool,  it  may  be  estimated 
that  the  transfers  to  the  free  list  will  cut  off  $14,000,000  of  revenue, 
while  transfers  from  the  free  to  the  dutiable  schedules  will  bring 
in  perhaps  $5,000,000,  the  difference — some  $9,000,000 — ^repre- 
senting a  net  loss  practically  certain  to  be  incurred. 

This  belief  is  borne  out  by  the  incomplete  results  of  the  three 
months  since  the  adoption  of  the  new  tariff.  The  Treasury  was 
at  the  end  of  January  about  $20,000,000  behind,  this  amount  repre- 
senting, certainly  in  part,  a  shortage  of  revenue  at  least  technically 
due  to  the  tariff  changes.    Whether  it  and  subsequent  shortages 


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THE  TARIFF  OF  IQ13  131 

will  be  made  up  by  the  later  returns  to  be  obtained  from  the 
income  tax  is  a  question  still  to  be  settled. 

When  all  has  been  said,  and  when  every  criticism  has  been 
registered,  the  fact  will  remain  that  the  tariff  reduction  of  1913 
was  not  only  (i)  real,  but  (2)  sincere;  (3)  courageous  in  striking 
at  intrenched  interests  which  no  longer  needed  protection  for  any 
purpose  save  the  safeguarding  of  profits;  (4)  sound  in  essential 
principle;  (5)  likely  to  be  effective  in  preventing  imdue  advances 
of  price;  and  (6)  within  the  limits  of  ascertained  facts  and  data 
with  reference  to  the  competitive  power  of  various  industries. 
While  conceding  all  these  points,  the  imbiased  observer  will  admit 
with  equal  freedom  that  the  new  tariff  contains  (i)  some  mistakes 
of  judgment,  among  them  the  absolute  removal  of  duties  on  sugar; 
(2)  some  errors  of  tactics  and  technique,  as  seen  in  the  customs 
administrative  act,  and  the  associated  provisions  to  which  excep- 
tion has  already  been  taken;  (3)  some  concessions  to  local  political 
considerations,  as  in  the  case  of  the  retained  metal  duties  and  the 
tariff  on  goat  hair,  already  referred  to;  and  undoubtedly  (4)  some 
extreme  applications  of  the  ad  valorem  principle.  Taken  all  in 
all,  however,  the  measure  is  fair,  workmanlike,  and  sound.  It 
constitutes  an  immense  advance  over  preceding  legislation  and 
reflects  great  credit  upon  its  framers  and  promoters  because  of 
their  single-mindedness,  honesty,  and  skilful  performance  of  duty* 

H.  Parker  Willis 
New  Yosk  City 


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SOME  ASPECTS  OF  THE  MINIMUM  WAGE 

The  principle  of  the  minimum  wage  has  been  accepted  by  at 
least  nine  of  our  state  legislatures  and  provision  made  for  the  regula- 
tion of  the  wages  of  women  and  minors  employed.  Massachusetts 
led  the  way  by  adopting  an  emasculated  measiire  in  191 2.  Wis- 
consin, Minnesota,  Washington,  Oregon,  California,  Colorado, 
Nebraska,  and  Utah  have  followed  in  1913 — ^all  of  these  adopting 
laws  for  the  authoritative  fixation  and  enforcement  of  miTiiTmim 
standards.  Though  they  have  acted  adversely  or  adjourned  with- 
out action,  the  legislatures  of  several  other  states — ^among  them 
Illinois,  New  York,  Pennsylvania,  Ohio,  Kansas,  Missouri,  and 
Tennessee — ^have  had  similar  measures  imder  consideration.  The 
minimum-wage  movement  is  making  great  headway,  and,  xmless 
checked  by  the  coiurts  or  foimd  imdesirable  in  practice,  seems 
destined  to  become  fairly  general  in  the  United  States. 

No  doubt  the  increasing  cost  of  living  has  had  not  a  little  to  do 
in  commending  this  new  branch  of  labor  legislation  to  public  favor. 
The  rise  of  prices  has  brought  great  sacrifice  to  all,  who  have  slowly 
changing  incomes.  Yet,  in  the  last  analysis,  the  minimum-wage 
movement  is  but  one  evidence  of  a  qmckened  public  conscience 
which  is  begetting  progressive  legislation  along  diverse  lines.  New 
standards  are  being  set  for  corporate  business,  for  promoters' 
activities,  for  the  use  of  natural  resoiurces,  as  well  as  for  working 
conditions  in  mine,  factory,  and  store.  Though  labor  legislation 
has  lagged  behind  oiu:  working  ideals,  two  decades  have  witnessed 
the  enactment  of  far-reaching  measiures  for  the  conservation  of 
childhood  in  almost  every  state  of  industrial  consequence.  Though 
only  a  few  states  have  established  the  eight-hour  day  with  rigid 
regulations  designed  to  conserve  the  interests  of  women  and  youths 
gainfully  employed,  almost  three-foiurths  of  the  state  legislatxires 
have  legislated  less  radically  upon  this  subject  and  thus  set  stand- 
ards of  some  kind.  A  few  years  have  witnessed  a  remarkable  sub- 
stitution of  compensation  or  insurance  for  the  method  of  suit  for 
damages  under  the  law  of  employers'  liability  for  injuries  sustained 
in  the  course  of  duty.    More  than  a  beginning  has  been  made  in 

132 


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SOME  ASPECTS  OF  THE  MINIMUM  WAGE  133 

the  sanitation  of  workshops,  and  at  least  a  beginning  has  been  made 
in  the  prevention  of  industrial  accidents  and  occupational  disease. 
All  of  these  branches  of  labor  legislation  have  as  their  object  the 
conservation  of  human  life,  health,  and  efficiency,  and  the  safe- 
guarding of  a  modicum  of  opportimity.  And  now  the  regulation 
of  wages  is  advanced  as  the  next  logical  step  in  this  program  of 
human  conservation.  It  is  urged  as  the  keystone  of  the  arch  in 
labor  legislation. 

The  demand  for  better  wage  standards  for  women  and  minors 
in  this  coimtry  is  not  new.  It  took  on  definite  form  some  twenty 
years  ago  when  the  Consumers'  League  was  organized.  That 
organization,  with  its  national  and  local  bodies,  attempted  to  secure 
desirable  standards  of  wages,  hoiurs,  sanitation,  and  child  labor  by 
arousing  public  opinion  and  causing  piurchasers  to  buy  goods  pro- 
duced under  desirable  conditions  from  dealers  who  observed  high 
standards  in  the  treatment  of  their  employees.  This  method  of 
attack,  however,  was  not  entirely  successful.  While  it  had  the 
greatest  educational  value,  more  than  fifteen  years  of  experience 
proved  that,  even  with  the  greatest  effort  carefully  expended,  an 
adeqiiate  appeal  could  not  be  made  to  the  great  body  of  pxirchasers 
and  that  those  employers  who  handicapped  themselves  by  observ- 
ing high  standards  were  frequently  imdermined  by  other  employ- 
ers who  were  less  scrupulous.  The  Consumers'  League  was  finally 
forced  to  the  conclusion  that  the  attack  upon  imdesirable  conditions 
must  be  made  through  positive  law,  general  and  inclusive  in  its 
application  and  authoritative  in  its  demands.  Accordingly  in  1908 
the  application  through  law  of  the  principle  of  the  minimum  wage 
^ras  made  a  part  of  its  Ten  Years'  Program.'  It  has  been  largely 
by  organized  effort  imder  the  leadership  of  the  Consumers'  League 
and  the  Women's  Trade-Union  League  that  the  minimum  wage  has 
been  kept  before  the  public  and  that  the  movement  has  taken  on  its 
present  proportions  in  this  coimtry. 

The  problem  being  attacked  by  this  wage  legislation  is  a  serioiis 
one.    It  is  true  that,  as  compared  with  the  wages  of  Great  Britain 

<A  convenient  summary  of  the  experience  of  the  Consmners'  League  will  be 
found  in  an  article  by  Mrs.  Florence  Kelley,  "Minimum  Wage  Boards,"  in  the  Ameri- 
can Journal  of  Sociology,  XVII,  303-14, 


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134  JOURNAL  OF  POLITICAL  ECONOMY 

and  the  countries  of  Continental  Europe,  our  level  of  wages  is  high. 
It  is  a  well-established  fact  that  they  are  considerably  higher  here 
than  in  Great  Britain,  and  still  higher  than  in  France,  Gennany, 
and  the  other  industrial  countries  of  Europe.  Nor  is  the  difference 
in  the  cost  of  decent  living  so  great  as  has  been  generally  supposed. 
The  general  body  of  laborers  in  the  United  States  occupies  a  superior 
position.  Yet,  it  must  be  admitted  that  there  are  hundreds  of 
thousands  of  women  in  the  United  States  engaged  in  the  "home 
trades,"  factories,  and  stores,  who  are  not  earning  a  living  wage. 

In  recent  years  the  United  States  Bureau  of  Labor,  tiie  Immi- 
gration Commission,  the  Massachusetts  Minimum  Wage  Commis- 
sion, the  Social  Survey  Committee  of  the  Consumers'  League  of 
Oregon,  some  of  the  state  bureaus  of  labor,  and  several  social 
workers  have  presented  in  usable  fonn  a  mass  of  acceptable  data 
relating  to  the  earnings  and  Uving  conditions  of  women  workers.' 
In  dties  like  Chicago,  New  York,  and  Boston,  it  is  generally  agreed 
that  with  economy  a  single  woman  cannot  live  decently  and  main- 
tain her  efficiency  on  less  than  $8  per  week.  Yet  the  federal 
Bureau  of  Labor  found  from  the  pajnrolls  that  of  the  women  and 
girls  employed  in  eight  department  stores  in  the  city  of  Chicago, 
6.2  per  cent  earned  less  than  $4,  23.3  per  cent  less  than  $6,  and 
53.4  per  cent  less  than  $8  per  week.^  From  its  investigation  of 
women  and  girls  employed  in  stores  in  New  York,  Chicago,  Phila- 
delphia, St  Louis,  Boston,  Minneapolis,  and  St  Paid — seven  cities 
in  all — the  Bxureau  foimd  that  of  those  living  with  their  families, 
34.6  per  cent  earned  less  than  $6,  and  68.7  per  cent  less  than  $8 

'  Much  valuable  data  bearing  upon  these  subjects  may  be  obtained  from  the  pub- 
lications in  the  following  list:  United  States  Bureau  of  Labor,  Repori  on  Condition 
of  Woman  and  Child  Wage-Earners  in  the  United  States  (in  19  voliunes),  6ist  Cong., 
ad  sess.,  Senate  Doc.  645,  especially  Vols,  n  and  V;  United  States  Immigration  Com- 
mission, Reports,  6ist  Cong.,  2d  sess.,  Senate  Doc.  633,  especially  those  on  the  textile 
trades;  Massachusetts,  Report  of  the  Commission  on  Minimum  Wage  Boards,  191 2; 
Oregon,  Consumers'  League,  Social  Survey,  1913;  Streightoff,  Distribution  of  Incomes 
in  the  United  States;  Streightoff,  The  Standard  of  Living;  Butler,  Women  and  the 
Trades;  Byington,  Homestead:  Households  of  a  Mill  Town;  Chapin,  The  Standard  of 
Living  among  Workingmen's  Families  in  New  York  City;  More,  Wage-Earners' 
Budgets, 

'  Bureau  of  Labor,  Report  on  Condition  of  Woman  and  Child  Wage-Earners  in  tii€ 
United  States,  V,  107. 


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SOME  ASPECTS  OP  THE  MINIMUM  WAGE  135 

per  week.  Of  those  "adrift''  (i.e.,  not  living  at  home),  ahnost  one- 
fifth  (19.3  per  cent)  earned  less  than  $6,  and  ahnost  three-fifths 
(58.6  per  cent)  less  than  $8  per  week.' 

Thus  with  reference  to  needs,  the  level  of  wage^  of  women  and 
girls  employed  in  stores  is  low.  Yet  even  below  this  low  level,  the 
investigations  show,  are  women's  wages  in  factories,  where  the 
employees  cannot  be  said  to  be  attracted  by  social  opportimities  and 
the  desire  to  be  well  dressed.^  Taking  the  earnings  of  a  representa- 
tive number  of  women  and  girls  (sixteen  years  of  age  and  over) 
engaged  in  the  manufacture  of  men's  clothing  in  New  York, 
Rochester,  Philadelphia,  Baltimore,  and  Chicago,  where  this  indus- 
try is  extensively  localized,  it  was  shown  that  49  in  eveiy  100  earned 
less  than  $6  per  week.*  In  Chicago  they  averaged  $7. 15  per  week, 
in  Rochester  $6.93,  in  New  York  $5.74,  in  Philadelphia  $6.00,  in 
Baltimore  $4 .  82.'  Taking  70  factories  contributing  37 . 4  per  cent  of 
the  output  of  men's  clothing  in  Chicago,  it  was  found  that  1 1 . 8  per 
cent  of  the  women  workers  eighteen  years  of  age  or  over  earned  less 
than  $4  per  week,  33  per  cent  less  than  $6,  and  56.3  per  cent  less  than 
$8.^  The  annual  earnings  of  a  representative  but  smaller  number 
(sixteen  years  of  age  and  over),  studied  in  detail,  averaged  $375 .  10 
in  Chicago,  $306.82  in  Rochester,  $277.86  in  Philadelphia,  and 
$291 .66  in  Baltimore.^ 

Still  using  the  investigations  of  the  Bureau  of  Labor,  and  pass- 
ing on  from  the  earnings  of  women  employed  in  stores  and  f actoriles, 
to  those  of  women  engaged  as  "home  workers" — finishing  clothing 
and  doing  other  "sweated"  work — ^we  find  a  still  lower  level.  A 
carefid  investigation  of  the  clothing  trade  showed  for  a  representa- 
tive nimiber  of  "home  finishers"  average  full-time  weekly  earn- 
ings of  $4 .  52  in  Rochester,  $3 .  76  in  Philadelphia,  $3 .  34  in  Chicago, 
$3.14  in  Baltimore,  and  $3.06  in  New  York.'  These  wages  are 
more  or  less  typical  of  the  whole  range  of  the  home  trades. 

« /Wi.,  p.  23. 

*  See,  e.g.,  Bureau  of  Labor,  Report  of  Condition  on  Woman  and  Child  Wage- 
Earners,  V,  chap,  ii;  and  Illinois,  Bureau  of  Labor  Statistics,  Reports  for  1906  and 
1908. 

*  Bureau  of  Labor,  Report  on  Condition  of  Woman  and  Child  Wage-Earners  in  tii4 
United  States,  II,  129. 

^Ibid,,p,  161.  *  Ibid,,  p.  172.  ^  Ibid.,  p.  227. 

» Ibid,,  pp.  586-87.  ^Ibid.,  p.  172. 


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136  JOURNAL  OP  POUTICAL  ECONOMY 

Employing  a  different  source  of  information^  the  Massachusetts 
Minimimi  Wage  Commission  in  1910  foimd  that  earning  less  than 
$6  per  week  were  65 . 2  per  cent  of  the  women  over  eighteen  years 
of  age  in  the  candy  factories,  29.5  per  cent  of  those  in  the  retail 
stores,  40.7  per  cent  of  those  in  the  laimdries,  and  37.9  per  cent 
of  those  in  the  cotton  factories  covered  by  its  investigation.  For 
those  earning  less  than  $8  per  week  the  percentages  become  93 .  i 
in  candy  factories,  60.4  in  retail  stores,  75.  i  in  laundries,  and  66.8 
in  cotton  factories/ 

These  figures  are  not  exceptional  as  regards  women's  wages  in 
the  industries  in  which  most  of  those  gainfiilly  occupied  find  employ- 
ment. That  they  are  fairly  typical  might  be  shown  by  data  drawn 
from  other  sources  than  those  used.  In  view,  then,  of  all  the  data 
at  hand,  it  can  no  longer  be  disputed  that  a  very  large  percentage 
of  women  earn  less  from  their  labor  than  is  required  to  ^'maintain 
them  in  reasonable  comfort,  reasonable  well-being,  decency,  and 
moral  well-being" — a  living  wage  as  defined  in  terms  of  the  new 
Wisconsin  statute. 

Another  fact  no  longer  to  be  disputed  is  that  women's  wages 
cannot  be  regarded  in  most  cases  as  "pin  money."  A  very  con- 
siderable percentage  of  women  workers  are  not  living  with  their 
families.  The  Bxireau  of  Labor  foimd  the  percentage  to  be  about 
16;  in  Massachusetts  it  rose  as  high  as  30.  Again,  many  women 
are  the  heads  of  families  and  constitute  their  main  support  More- 
over, it  was  found  by  the  agents  of  the  Bureau  of  Labor  that  78. 7 
per  cent  of  the  girls  at  work  in  stores  in  Chicago  turned  over  all  of 
their  earnings  to  their  families,  and  that  all  but  3.9  per  cent  con- 
tributed at  least  a  part  of  their  earnings  to  the  family  fund.  Of 
those  employed  in  factories,  81.3  per  cent  paid  over  their  entire 
earnings,  and  only  1.5  per  cent  were  not  under  the  necessity  of 
contributing  to  the  support  of  their  families."  The  data  drawn 
from  New  York  and  other  cities  correspond  fairly  well  to  these,  and 
give  a  statistical  measurement  of  the  well-established  fact  that  the 
peamiary  needs  of  the  girls  and  women  at  home  are  in  the  majority 

<  Massachusetts,  Report  oj  the  Commission  on  Minimum  Wage  Boards,  p.  10. 
'  Bureau  of  Labor,  Report  on  Condition  of  Woman  and  Child  Wage-Earners,  II, 
pp.  25, 105. 


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SOME  ASPECTS  OF  THE  MINIMUM  WAGE  137 

of  cases  not  less  than  are  the  needs  of  those  who  are  "  adrift."  The 
low  wages  of  women  are  not  to  be  dismissed  lightly  as  "pin  money." 
The  Massachusetts  Wage  Commission  was  right  when  it  said:  ''In 
the  opinion  of  the  Commission,  the  number  who  are  working  in 
order  simply  to  add  to  their  comforts  or  luxuries  is  insignificant." 
There  "are  a  large  mmiber  of  women  who  must  maintain  them- 
selves, ....  many  of  these  are  called  on  to  contribute  also  to  the 
support  of  others  ....  [and]  ....  there  is  a  large  army  of 
women  upon  whose  assistance  the  welfare  of  their  family  groups 
depends  in  part."' 

How,  then,  it  may  be  asked,  is  the  deficit  from  low  wages  met  ? 
By  prostitution  in  aid  of  wages?  Yes — ^in  some  cases,  but  such 
cases  are  relatively  few.  It  may  be  remarked,  parenthetically,  that 
if  any  considerable  percentage  of  women  employed  lose  their  virtue 
— and  the  evidence  is  to  the  contrary — ^it  is  to  be  explained  chiefly 
by  the  environment  and  the  effort  to  secure  favor  and  not  by  the 
rate  at  which  they  are  paid.  Virtue  is  protected  in  poverty  almost 
as  generally  as  in  riches.  How,  then,  is  the  deficit  usually  met? 
Frequently  it  is  made  good  by  charity,  public  or  private.  The 
Massachusetts  Commission  found  that  22.1  per  cent  of  all  candy 
workers  and  27.8  per  cent  of  those  "adrift"  were  in  receipt  of 
charitable  assistance.  Of  those  earning  less  than  $6  per  week,  one- 
fourth  (24.1  per  cent)  of  the  entire  nimiber,  and  one-half  (50  per 
cent)  of  those  "  adrift "  received  aid  in  the  form  of  charity.  Of  those 
employed  in  stores,  12.7  per  cent,  and  of  those  employed  in  laim- 
dries,  15.6  per  cent  were  in  receipt  of  charity,  here  again  the  larger 
number  being  foimd  among  those  earning  less  than  $6  per  week.^ 
Nor  is  this  all  of  the  bill  met  by  charity.  Who  knows  what  part 
of  those  supported  entirely  in  this  manner  have  been  imdermined 
by  inadequate  living  ?  The  bill  must  be  paid  in  some  way.  If  it  is 
not  met  by  either  of  the  ways  suggested  or  by  family  assistance,  it 
must  be  paid  in  the  kind  of  living  which  spells,  in  the  long  run  if  not 
in  the  short  run,  the  deterioration  of  health  and  efficiency  and  the 
sacrifice  of  opportimities  for  more  than  a  wretched  existence.  The 
agents  of  the  Bureau  of  Labor  found  that  the  average,  not  the 

'  Massachusetts,  Report  of  Commission  on  Minimum  Wage  Boards ^  p.  17. 
■  Ihid,,  w>.  323-26. 


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138  JOURNAL  OP  POLITICAL  ECONOMY 

minimum,  outlay  of  factory  women  "adrift"  in  Chicago  without 
family  protection,  for  food,  shelter,  heat,  light,  and  laimdry,  was 
$3.40  per  week — or  less  than  fifty  cents  per  day.  The  average 
cost  of  food,  shelter,  heat,  light,  and  laundry  for  women  employed 
in  stores  and  "adrift"  was  $4.77  per  week — or  sixty-eight  cents 
per  day.'  Now  allow  for  the  fact  that  these  expenditures  are  aver- 
ages and  that  approximately  one-lialf  fall  below  the  sums  given,  in 
some  cases  far  below,  then  translate  them  into  living  conditions,  as 
the  Bureau  of  Labor  does,'  and  the  substantial  basis  is  found  for  the 
demand  for  a  minimum  living  wage  as  defined  in  the  l^islative 
measxures  enacted  or  imder  consideration. 

Measures,  however,  should  be  based  upon  an  analysis  of  causes, 
and  the  minimum-wage  measures  should  meet  this  test.  What, 
then,  are  the  causes  of  the  low  wages  paid  such  large  percentages 
of  women  at  work?  In  some  cases  low  wages  are  explained  by 
youth  and  inexperience.  Naturally  the  pay  of  beginners  is  low. 
Unfortunately  it  has  been  impossible  to  eliminate  these  entirely  in 
this  presentation  of  the  problem  by  citing  wage  statistics  for  adults 
only.  It  must  be  said,  however,  that  when  wage  data  are  compiled 
on  the  basb  of  length  of  service  in  the  industry,  they  show  that 
youth  and  inexperience  are  by  no  means  the  only  important  cause 
of  low  wages.*  A  second  cause  is  foimd,  of  course,  in  what  may  be 
called  general "  under-efficiency."  But  after  due  allowance  is  made 
for  this — and  is  not  much  of  it  due  to  imder-payment  ? — ^it  is  found 
that  many  who  are  neither  young  and  inexperienced  nor  noticeably 
lacking  in  efficiency  earn  small  sums  because  of  a  low  level  of  wages 
in  certain  establishments  or  in  an  entire  trade.  A  third  and  an 
important  cause  of  low  wages  is  found  in  exploitation  by  individual 
employers  or  by  the  force  of  circumstances  in  industry. 

One  of  the  most  striking  facts  brought  out  in  all  the  investiga- 
tions of  trade  and  industry  is  that  there  is  no  well-defined  level  of 
women's  wages  in  a  given  branch  of  employment.    There  is  no 

'  Biireau  of  Labor,  Report  on  CondUion  of  Woman  and  Child  Wage-Earners  in  the 
United  States,  V,  chap.  v. 

*  Ibid.,  U,  chaps,  iv-z. 

'  See,  e.g.,  Biireau  of  Labor,  Report  on  Woman  and  Child  Wage-Earners  in  ih€ 
United  States,  U,  41-47,  and  V,  150-72. 


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SOME  ASPECTS  OF  THE  MINIMUM  WAGE  139 

Standard.  The  scales  differ  greatly  from  one  establishment  to 
another  either  because  of  mismanagement  and  antiqiiated  methods 
which  do  not  permit  some  of  the  employers  to  pay  more  and  make 
a  profit,  or  because  the  employers  exploit  their  laborers  for  an 
imusual  gain.  In  either  case,  wages  may  be  piished  down  because 
of  the  absence  or  weakness  of  imions,  the  inmiobility  and  ignorance 
of  the  women,  and  the  fact  that  there  is  an  easy  entrance  to,  but  a 
congested  exit  from,  the  imskilled  labor  supply  in  which  they  find 
a  place.  In  the  candy  industry  of  Massachusetts,  for  instance, 
''with  its  41  per  cent  of  adult  women  receiving  less  than  $5  per 
week,  a  comparison  of  wage  rates  in  different  establishments  shows 
that  the  lowest  wages  are  confined  to  four  (of  eight)  factories,  in  one 
of  which,  indeed,  53 .3  per  cent  of  the  employees  received  less  than 
$5,  while  the  other  seven  factories  paid  not  one  single  employee  of 
eighteen  or  over  so  low  a  wage."  Nor  was  the  flagrant  case  one  of 
an  establishment  producing  a  low-priced  product  or  making  use  of 
a  notoriously  inefficient  labor  force.  "Similar  differences  between 
establishments  were  foimd  in  the  stores  and  laundries"  of  Massa- 
chusetts, which  means  that  inefficient  management  or  antiqxiated 
methods  or  unusual  profits  obtained  in  some  cases — any  one  of 
them  at  the  expense  of  the  employees.  Elsewhere  the  situation  is 
the  same.' 

These  inequalities  of  wages  in  the  same  industries  and  occupa- 
tions are  merely  evidence  of  the  fact,  acknowledged  by  many  em- 
ployers, that  the  rate  of  wages  to  a  large  degree  depends  upon  the 
personal  equation  of  the  employers  and  upon  the  helplessness  of 
their  employees,  and  not  to  a  very  exact  degree  upon  the  cost  of 
labor  in  relation  to  the  cost  of  production.  Yet,  in  some  industries, 
as  in  home  work  in  the  clothing  trade,  the  force  of  competition  is 
such  and  so  great  that  there  is  a  tendency  for  wages  to  approach 
the  standard  set  by  the  less  scrupulous  employers,  with  the  result 
that  the  indxistry  as  a  whole  becomes  "sweated." 

Thus,  the  low  wages  of  women  are  not,  as  many  would  have  us 
believe,  chiefly  a  matter  of  low  efficiency.    To  a  very  considerable 

'For  variations  in  wages  by  establishments,  see  especially  Massachusetts, 
Report  of  Commission  on  Minimum  Wage  Boards ,  and  niinois,  Bureau  of  Labor  Statis- 
tics, Report  for  1908,  on  women  employed  in  department  stores. 


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I40  JOURNAL  OF  POLITICAL  ECONOMY 

extent  they  are  due  to  exploitation.  To  a  very  considerable  extent, 
also,  they  are  due  to  the  cutting  of  wages  by  employers  in  an  effort 
to  remain  in  business  with  poor  business  management  and  anti- 
quated methods.  Inefficiency  is  not  found  in  the  labor  force  alone. 
In  many  cases  it  is  made  good  in  the  management  at  the  expense  of 
the  employees.  To  some  extent  the  low  wages  are  due  to  the  fact 
that  competition  has  operated  in  such  a  way  as  to  reduce  whole 
industries  to  the  position  of  ''sweated  trades." 

The  minimiun  wage  legislation  is  designed  to  meet  the  problem 
thtis  presented.  It  is  not  in  its  essence  a  demand  that  the  young 
and  inexperienced  and  the  ''under-efficient"  shall  be  paid  the  same 
wages  as  the  experienced  and  the  efficient.  It  is  designed  to  stand- 
ardize and  to  rid  the  trades  of  their  capricious  differences  and  to 
raise  the  level  of  wages  where  the  plane  of  competition  in  the  entire 
trade  is  low.  While  recognizing  exceptional  cases  to  some  extent, 
by  an  exercise  of  the  police  power  of  the  state  it  would  generally 
make  sufficient  wages  a  first  charge  upon  industry. 

Now,  just  what  is  meant  by  a  "living  wage,"  and  how  is  it  to 
be  established  ?  Let  the  legislative  measures  answer  as  definitely 
as  they  will.' 

Though  the  legislation  enacted  and  that  in  prospect  differs  some- 
what from  state  to  state,  the  Minnesota  statute,  approved  April  26 
of  last  year,*  may  be  employed  to  convey  the  most  nearly  accurate 
idea  of  what  is  involved  in  this  new  branch  of  labor  law,  where 
minimum  wages  for  women  or  for  women  and  minors  are  authori- 
tatively fixed.  The  Minnesota  statute  has  created  a  wage  com- 
mission of  three,  which  may  at  its  discretion  and  whose  duty  it  shall 
be  upon  proper  request  to  investigate  conditions  in  any  occupation 
where  women  and  minors  are  employed.  If,  after  investigation, 
this  commission  is  of  the  opinion  that  the  wages  of  one-sixth 
or  more  of  the  women  and  minors  employed  in  an  occupation  are 
not  "sufficient  to  maintain  the  worker  in  health  and  supply  him 
with  the  necessary  comforts  and  conditions  of  reasonable  Ufe" — a 

'  This  paper  was  completed  in  October;  hence  the  regulations  in4x>sed  through  a 
few  determinations  now  in  effect  have  not  been  brought  to  bear  upon  this  and  other 
questions  raised. 

'  Giap.  547,  General  Laws  of  1913. 


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SOME  ASPECTS  OP  THE  MINIMUM  WAGE  141 

"living  wage" — it  shall  proceed  forthwith  to  establish  as  a  legal 
mmimiiTn  a  wage  "sufficient  for  living"  for  women  and  minors  of 
"ordinary  ability"  and,  also,  for  "learners"  and  "apprentices." 
The  legal  minimum  may  be  uniform  for  a  trade  or  occupation 
throughout  the  state  or  may  vary  from  one  locality  to  another.  In 
doing  this  work,  the  commission  may  employ  in  each  case  an 
advisory  board,  such  board  to  consist  of  three  sets  of  representa- 
tives. The  workers  and  the  employers  are  to  be  represented 
eqxially  by  from  three  to  ten  each,  and  the  public  by  a  number  not 
exceeding  that  for  each  of  the  other  two  groups.  At  least  one- 
fifth  of  the  members  of  the  board  shall  be  women,  and,  so  far  as 
practicable,  the  employers  and  employees  shall  elect  their  own 
representatives.  The  board  thus  constituted  is  by  majority  vote 
to  make  a  reconmiendation  after  investigation,  to  the  wage  com- 
mission. When  the  commission  of  its  own  initiative  draws  up  a 
tentative  order,  or  when  it  receives  a  recommendation  from  an 
advisory  board,  a  public  hearing  is  held.  The  proposed  rates  are 
reviewed  and  amended  and  approved,  or  referred  back  to  the  same 
advisory  board  or  to  a  new  one  for  further  consideration.  When, 
after  investigation  and  a  public  hearing,  a  standard  or  standards 
are  finally  decided  upon,  an  order  is  made  establishing  such  stand- 
ards as  the  lawful  minima,  and  this  order  is  mailed  to  employers  in 
the  trade  to  be  posted  by  them  in  their  establishments.  Later, 
upon  its  own  initiative  or  upon  the  petition  of  interested  employees 
or  employers,  the  commission  may  reconsider  and  modify  its  order, 
or  continue  it  in  effect  without  change.  In  order  that  the  physically 
defective  may  not  be  imduly  handicapped  in  securing  employment, 
provision  is  made  whereby  they  may  obtain  permits  to  work  at 
fixed  special  (time)  wages,  but  in  no  event  may  these  workers 
exceed  one-tenth  of  the  whole  ntmiber  employed  in  any  establish- 
ment. The  penalty  for  paying  less  than  the  general  or  the  special 
minima,  as  the  case  may  be,  or  for  violating  any  provision  of  the 
statute,  is  a  fine  of  not  less  than  $10  or  more  than  $50,  or  imprison- 
ment for  not  less  than  ten  or  more  than  sixty  days.  No  contract 
to  accept  less  than  the  legal  rate  is  binding,  and  those  who  are  paid 
less  than  the  legal  rate  may  recover  the  difference,  together  with 
coiirt  costs  and  attorney's  fees. 


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142  JOURNAL  OP  POLITICAL  ECONOMY 

These  are  the  essential  provisions  of  the  Minnesota  statute. 
Several  variations  in  the  measures  adopted  or  considered  in  the 
other  states  should  be  dted.  By  far  the  most  important  of  all  is 
that  imder  the  Massachusetts  and  Nebraska  laws  and  the  defeated 
Illinois  bill,  the  observance  of  standards  set  by  the  wage  conunis- 
sion  would  be  enforced  only  by  the  pressure  of  public  opinion 
brought  to  bear  upon  employers  who  refused  to  accept  the  same — 
such  employers  being  advertised  in  the  public  press.'  This  is  not 
a  completely  authoritative  system,  for  the  acceptance  of  the  rates 
established  is  not  compulsory.  The  Utah  statute  and  the  very 
properly  defeated  Kansas  bill  present  another  type.  In  Utah,  uni- 
form minimum  rates  for  the  state  for  women,  learners,  and  minors 
have  been  established,  without  investigation  and  without  the  inter- 
vention of  a  state  commission  or  of  wages  boards.  The  specific 
standards  are  imposed  by  the  legislature.  In  some  states  the 
''living  wage"  is  defined,  not  as  that  which  shall  be  '' sufficient  to 
maintain  the  worker  in  health  and  supply  him  with  the  necessary 
comforts  and  conditions  of  reasonable  life,"  as  in  Minnesota,  but 
as  that  which  will  safeguard  "health  and  morals" — a  distinctly 
lower  standard.  In  most  cases  the  provision  relative  to  the  grant- 
ing of  special  permits  is  more  liberal  than  in  Minnesota  where  they 
may  be  granted  to  the  physically  defective  alone.  Finally,  in 
Massachusetts  and  Nebraska  when  the  claim  is  made  that  a  stand- 
ard set  would  imperil  the  industry  and  profits,  the  courts  must 
review  the  standard  and  may  set  it  aside.  In  this  statute  the 
principle  is  compromised  and  an  immediate  living  wage  may  be 
made  secondary  to  profit  or  business  success.  Under  the  other 
statutes  adopted  the  application  of  the  living  wage  principle  is 
made  mandatory  in  the  regulated  trades. 

Thus,  speaking  generally,  the  minimum-wage  laws  would  make 
a  "living  wage"  a  first  charge  upon  the  industries  brought  \mder 
regulation,  special  cases  excepted.  They  contemplate  the  imposi- 
tion of  a  standard  rate  or  of  standard  rates  like  those  established  by 
collective  agreements  between  employers  and  labor  imions,  except 
that  in  this  particular  case  the  minimum  established  for  adults  is 

>  For  the  main  provisions  of  the  minimum-wage  laws  adopted  by  Massachusetts  and 
the  other  states,  see  the  tabular  analysis  presented  in  the  appendix,  infra,  pp.  156-59. 


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SOME  ASPECTS  OF  THE  MINIMUM  WAGE  143 

based  upon  the  necessary  cost  of  living  of  the  individual  of  a  kind 
that  will  safeguard  health  and  morals.  For  the  young  and  inex- 
perienced, for  learners  and  apprentices,  suitable  standards  shall  be 
imposed.  The  expectation  usually  is  that  this  will  be  done  so  far 
as  possible  by  a  method  not  far  removed  from  collective  bargaining, 
the  three  parties  to  the  matter — employers,  employees,  and  the 
public — ^beiag  represented. 

Though  the  first  of  our  American  minimum-wage  laws  are  just 
now  going  into  effect,  the  world  has  had  seventeen  years'  experience 
in  such  regulation.  It  began  in  Australia  in  the  state  of  Victoria 
in  1896,  and  has  since  become  fairly  general  as  regards  both  men 
and  women  in  most  of  the  other  states  of  that  coxmtry.  In  many 
cases,  it  may  be  remarked,  its  more  general  application  was  made 
at  the  request  of  employers.  A  few  years  ago  the  Victorian  system 
was  applied  to  four  badly  sweated  British  trades  in  which  many 
women  were  employed,  and  last  year,  in  modified  form,  it  was 
applied  to  the  British  coal  trade  in  order  to  bring  about  industrial 
peace.  In  view  of  foreign  experience  and  general  considerations, 
what  are  likely  to  be  the  results  of  oiu:  legislation  ?  What  will  it 
accomplish?  What  new  problems  will  the  attempt  to  solve  the 
problem  of  low  wages  probably  raise  ?  Is  it  wise  legislation  so  far 
as  it  goes  ?  If  so,  are  additional  measures  called  for  to  supplement 
it  ?  If  not,  where  shall  we  look  for  a  solution  of  the  serious  problem 
of  low  wages  ? 

The  first  result  to  be  expected  is  that  the  formation  of  wages 
boards  will  bring  about  a  certain  amoimt  of  organization  of  the 
employees  in  the  trades  regulated;  most  of  them  have  been  with- 
out effective  organization,  partly  because  of  the  difficulties  involved 
in  organizing  such  workers  as  are  employed  in  these  trades,  partly 
because  of  the  hostility  employers  have  generally  shown  toward  the 
organization  of  their  employees.  In  Great  Britain  this  has  been  the 
result;  it  may  be  expected  here,  where  wages  boards  are  used  in 
establishing  a  minimum  wage.  This  organization  will  be  accom- 
panied by  something  not  far  removed  from  collective  bargaining, 
which  should  introduce  a  great  deal  of  elasticity,  whatever  the  law 
may  be.  It  shoidd  go  far  to  prevent  such  drastic  action  as  would 
react  quickly  upon  the  interested  parties.    Yet  it  is  not  improbable 


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144  JOURNAL  OF  POLITICAL  ECONOMY 

that  some  drastic  action  will  be  taken,  for  the  character  of  the 
regulation  will  reflect  the  personnel  of  the  commissioners. 

The  second  and  perhaps  the  most  important  result  will  be  that 
wages  will  be  standardized  to  an  extent,  and  exploitation  by  unscru- 
pulous employers  will  be  checked.  The  employers  who  pay  good 
wages  will  be  protected  against  the  imdercutting  of  those  who  are 
less  scrupulous  or  less  competent. 

A  third  result  will  be  a  leveling  up  of  wages  in  the  regulated 
trades.  Where  piece  rates  are  pdd  and  these  are  not  sufficient  to 
permit  the  great  majority  of  adults  to  earn  a  living  wage — ^as  is 
generally  the  case  in  "home  work" — these  will  be  increased,  per- 
haps radically  in  the  "sweated  trades."  The  number  who  are 
employed  on  a  time  basis  and  earn  less  than  a  living  wage  will  be 
reduced.  Thus  the  average  of  wages  paid  women  workers  will  be 
increased  \mless  those  who  would  otherwise  be  paid  more  than  the 
minimum  are  compelled  to  accept  lower  wages. 

A  fourth  result  will  probably  be  that  some  of  those  who  are  now 
earning  more  than  a  living  wage  on  a  time  basis  will  have  their 
wages  reduced.  The  union  rate  has  had  that  effect;  some  of  those 
of  more  than  average  efficiency  have  been  sacrificed  to  an  extent. 
The  regulation  of  wages  in  the  Australian  states,  also,  is  usually 
reported  to  have  had  this  incidental  effect.  Employers  will  be 
compelled  to  make  some  readjustments  and  will  no  doubt  level 
wages  down  in  some  of  those  cases  where  they  can.  But,  state- 
ments frequently  made  to  the  contrary  notwithstanding,  wages  will 
not  be  leveled  down  \mtil  they  become  \miform  for  all  employees 
regardless  of  differences  in  efficiency.  Such  is  not  the  object  of 
this  regulation  and  such  has  not  been  the  result  elsewhere.  The 
minimum  time-wage  does  not  become  a  \miform  wage  paid  to  all. 
In  Victoria,  for  example,  where  wages  are  sometimes  said  to  have 
been  made  \miform,  we  find  in  1908  that  of  48  women  in  a  shoe 
factory,  10  received  more  than  the  minimum  established  by  the 
wage  board.'  In  one  clothing  factory,  146  women  were  paid  the 
minimum  of  205.  a  week,  44  more  than  that  sum.  In  another 
clothing  factory,  28  per  cent,  and  in  a  dressmaking  factory,  38  per 

<  Aves,  Report  on  the  Wages  Boards  and  Industrial  ConciHaHon  Acts  of  Australia 
and  New  Zealand,  1908,  pp.  48^50. 


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SOME  ASPECTS  OP  THE  MINIMUM  WAGE  145 

cent  received  more  than  the  minimiiTn  established.  These  are 
typical  cases.  Payment  above  the  minimum  rate  does  occur. 
Indeed,  the  most  recent  American  investigator  of  the  system  denies 
that  there  has  been  any  leveling  down  whatever.'  In  the  case  of 
piece  wages,  of  course,  any  leveling  down  is  practically  out  of  the 
question.  All  are  enabled  to  earn  more  at  the  higher  rates  if  the 
rates  are  increased. 

As  a  fifth  result,  various  petty  abuses  by  the  less  scrupidous 
employers  will  be  checked,  such  as  exacting  payment  for  this,  that, 
and  the  other  thing — drinking  water  in  the  mills  at  Lawrence, 
Massachusetts,  for  example — and  the  imposition  of  arbitrary  and 
exorbitant  fines.  The  methods  of  the  better  employers  will  be 
imposed  to  a  considerable  extent  upon  others. 

As  a  sixth  result,  business  will  be  injured  at  certain  points. 
Home  work  will  be  curtailed,  for  its  chief  advantage  is  found  in  the 
fact  that  the  labor  supply  is  obtained  for  less  than  is  paid  in  fac- 
tories and  shops.  Likewise,  those  employers  whose  business  is 
poorly  managed  or  whose  methods  are  antiquated  will  suffer  loss 
unless  they  can  overcome  the  handicaps  imder  which  they  labor. 
The  net  result  will  be  that  the  more  ^dent  firms  and  the  more 
efficient  forms  of  organization  will  gain  at  the  expense  of  the  less 
efficient  when  the  subsidy  of  cheap  labor  is  denied  the  latter. 
Though  this  will  work  a  certain  amoimt  of  hardship,  it  is  improper 
to  subsidize  inefficient  management  and  antiquated  methods  at  the 
expense  of  the  health  and  efficiency  of  the  employees. 

As  a  seventh  residt,  this  legislation,  being  confined  to  certain 
states,  may  be  expected  to  depress  the  industries  of  the  regulated  ' 
localities  and  build  up  those  of  other  locaUties  where  such  regula- 
tion does  not  obtain,  in  so  far  as  competition  is  effective  beyond 
state  boxmdaries.  Such  has  been  the  effect  of  the  regulation  of  the 
hours  of  labor  and  of  child-labor  legislation.  These  regulations  have 
placed  a  premium  on  the  location  of  factories  in  those  places  where 
the  labor  of  women  and  children  could  be  had  on  the  most  profitable 
terms.  But  any  such  change  in  the  location  of  establishments 
will  be  limited  to  those  engaged  in  highly  competitive  interstate 

>  Hammond,  in  Annals  of  the  Ammcan  Academy  of  Political  and  Social  Science, 
July,  1913,  pp.  13  ff. 


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146  JOURNAL  OP  POLITICAL  ECONOMY 

industries.  Laundries,  stores,  and  factories  supplying  a  local  need 
will  of  course  not  migrate  beyond  the  jurisdiction  of  a  minimum- 
wage  law.  And  in  the  case  of  textile  factories,  box  factories,  and 
the  like,  any  tendency  to  migrate  will  be  checked  by  the  fact 
that  wages  are  only  one  element,  and  frequently  a  small  element, 
in  cost.  On  the  whole,  the  setback  of  the  regulated  localities  will 
not  be  noteworthy  xmless  the  regulation  of  wages  is  very  radical. 

To  a  certain  extent  prices  will  be  increased  and  the  cost  of  living 
will  rise.  Frequently  when  labor  has  been  organized  and  has 
secured  higher  wages  and  better  labor  conditions  through  the  pres- 
sure of  the  strike  and  the  boycott,  consumers  have  had  to  pay  more 
for  the  laborers'  services  and  products.  Organization  of  labor  in 
the  building  trades  has  been  responsible  in  no  small  degree  for  the 
rise  in  rents,  and  in  the  laimdry  trade  for  the  increase  in  prices  for 
laundry  work.  Where  competition  is  local,  the  consumer  must  pay 
a  price  sufficient  to  cover  expenses  and  yield  an  adequate  profit. 
Profits  can  be  reduced  somewhat  in  aid  of  wages,  but  not  greatly 
nor  for  long.  Moreover,  in  some  cases  an  increase  in  wages  is  likely 
to  be  used  to  bring  about  an  increase  in  prices  out  of  proportion  to 
the  increased  cost  of  doing  business,  for,  after  all,  the  rate  of  profit 
for  a  time  in  certain  trades  depends  upon  how  much  the  traffic  will 
bear,  and  an  improvement  in  working  conditions  may  be  used  to 
cause  the  traffic  to  bear  more.  Yet,  while  the  consumer  will  in 
some  instances  have  to  pay  more  than  he  now  does  in  order  to 
make  possible  the  payment  of  living  wages,  two  observations  must 
be  added.  In  the  first  place,  when  competition  does  not  turn  upon 
the  possibility  of  cutting  wages,  the  employer's  attention  is  likely 
to  be  centered  upon  ways  to  improve  his  equipment  and  methods 
and  to  increase  the  efficiency  of  his  working  force.  In  many  cases 
it  is  likely  that  it  will  be  found  possible  to  pay  higher  wages  with- 
out increasing  prices  to  the  consumer  and  without  reducing  profits. 
The  other  observation  is  that  the  public  has  no  claim  to  products 
and  services  at  prices  not  sufficient  to  keep  the  average  worker  in  a 
fair  state  of  health  and  efficiency.  Consimaers  should  not  be  sub- 
sidized to  the  sacrifice  of  those  who,  through  their  employers,  serve 
them.  Especially  is  this  so  in  those  cases  where  the  consumers  are 
materially  better  off  than  the  laborers. 


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SOME  ASPECTS  OP  THE  MINIMUM  WAGE  147 

As  a  ninth  effect,  some  of  those  who  work  will  be  displaced  and 
will  be  iinemployable  at  the  standard  rates  set.'  The  employer  will 
not,  for  any  great  length  of  time,  continue  to  employ  persons  who 
are  not  worth  to  him  the  price  he  must  pay.  In  so  far  as  permits 
are  not  granted  to  persons  of  less  than  the  average  efficiency  to 
work  for  less  than  the  usual  wage,  there  will  be  a  tendency  to  weed 
them  out  of  the  working  force,  in  some  cases  substituting  men  for 
them,  and  in  others  making  use  of  mechanical  devices — as  in  hand- 
ling cash  in  stores,  now  made  the  less  expensive  method.  Any 
such  displacing  effect  is  likely  to  be  very  greatly  exaggerated,  how- 
ever. Australian  experience  confirms  this  view.  The  tendency  to 
displace  should  be  checked  by  a  number  of  coimteracting  influences. 
Any  downward  leveling  of  the  wages  of  those  who  receive  more 
than  a  living  wage  will  make  it  possible  for  the  employer  to  pay 
living  wages  to  those  who  have  had  less.  To  a  certain  extent  the 
readjustment  is  likely  to  be  made  by  lumping  the  efficient  and  the 
"imder-effident,"  where  time-wages  are  paid.  The  second  of  these 
checks  is  foimd  in  the  fact  that  when  employment  depends  upon 
efficiency  and  not  upon  willingness  to  accept  starvation  wages, 
many  will  show  more  efficiency  and  be  worth  more.  They  will 
exert  themselves  to  keep  their  positions.  Moreover,  the  health  and 
vigor  of  those  who  are  paid  least  now  will  be  improved  when  they 
earn  more.  It  is  not  unlikely,  also,  that  further  effort  will  be  made 
by  employers  than  is  now  witnessed — and  there  is  not  a  little  of  it — 
by  instruction,  efficiency  management,  and  what  not,  to  increase 
the  efficiency  of  the  working  force.  And,  finally,  most  of  the  work 
must  still  be  done  by  the  classes  whose  wages  are  regulated  so  that 
a  readjustment  of  prices  will  take  place  sufficient  to  make  the 
majority  worth  the  while  to  employers  at  the  wages  set.  As  a 
result  of  these  checks  and  the  granting  of  permits  to  work  at  lower 
q[)ecial  rates  to  some  of  those  whose  efficiency  has  been  xmdermined, 
the  net  effect  is  likely  to  be  little  more  than  that  a  clearer  line 
will  be  drawn  between  those  who  are  more  and  those  who  are  less 
efficient,  and  that  more  of  the  imemployment  will  be  concentrated 

'  For  the  early  displacement  under  the  wages  board  system  in  Victoria,  see  Aves, 
Report  on  the  Wages  Boards  and  Industrial  Conciliation  Acts  of  Australia  and  New 
Zealand,  pp.  59-61. 


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;48  JOURNAL  OF  POUTICAL  ECONOMY 

upon  the  latter  and  upon  the  "home  workers"  whose  employment 
is  likely  to  be  considerably  curtailed  when  low  wages  cannot  be 
paid.  The  problem  of  the  imemployables  thus  created  is  a  serious 
one.  It  is  especially  serious  in  the  case  of  "home  workers/'  the 
great  majority  of  whom  are  defective  or  else  charged  with  the  care 
of  yoxmg  children  or  with  household  duties,  so  that  they  cannot 
leave  the  home  to  work  elsewhere  for  any  considerable  length  of 
time.  Most  of  them  cannot  fit  into  the  industries  conducted  along 
what  we  have  come  to  regard  as  normal  lines.' 

In  the  tenth  place,  the  regulation  of  the  wages  of  women  and 
minors  will  protect  male  adults  to  some  extent  against  the  dis- 
astrous effects  of  the  xmderbidding  by  these  classes.  It  will  tend 
to  remove  the  premium  which  has  been  placed  upon  the  labor  of 
women  and  youths  because  of  the  low  wages  they  accept. 

An  eleventh  result  should  be  that  the  number  of  strikes  in  the 
textile  and  the  garment  trades  will  be  diminished  and  the  advance 
of  such  revolutionary  organizations  as  the  Industrial  Workers  of 
the  World  checked.  In  Victoria  and  the  other  Australian  states 
where  wages  and  the  conditions  of  work  are  determined  by  wages 
boards,  strikes  have  been  of  less  frequent  occurrence  than  before, 
because  the  machinery  for  the  determination  of  what  is  fair  is  at 
hand  and  the  pressure  of  public  opinion  to  make  use  of  it  is  strong. 
Moreover,  the  method  of  arriving  at  a  fair  wage  may  of  itself  teach 
the  workers  that  after  all  there  is  not  the  absolute  separation  of 
interests  which  the  oppressed  at  present  are  likely  to  assume  to 
exist.  Any  reduction  of  the  number  of  strikes,  when  adequate 
machinery  is  devised  for  solving  difficulties,  will  be  a  decided  gain 
to  employees,  employers,  and  tiie  public  which  is  frequently  taxed 
to  make  good  losses  which  have  been  incurred  and  to  provide  the 
necessary  police  force  to  maintain  law  and  order.    That  the  check- 

'  Thus,  of  674  women  engaged  in  home  work,  investigated  by  the  agents  of  the 
Bureau  of  Labor,  590  were  married  and  556  of  these  were  living  with  their  husbands. 
Only  about  5  per  cent  of  the  entire  number  were  single.  Of  the  590  married  women, 
451  had  yoimg  children  to  care  for,  and  almost  one-half  of  them  had  children  under 
three  years  of  age.  The  annual  earnings  of  the  husbands  in  the  above  cases  averaged 
but  $291.  See  Biureau  of  Labor,  Report  on  Condition  of  Woman  and  Ckild  Wage- 
Earners  in  the  United  States,  II,  chap.  v. 


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SOME  ASPECTS  OP  THE  MINIMUM  WAGE  149 

ing  of  any  revolutionary  feeling,  by  striking  at  fundamental  causes, 
is  of  importance  will  be  generally  accepted  without  question. 

And,  finally,  a  difficult  administrative  problem  in  the  enforce- 
ment of  wage  standards  will  certainly  develop.  The  setting  of 
standards  for  the  hours  of  labor,  sanitary  conditions,  and  child  labor 
has  brought  with  it  acute  problems  of  this  kind.  To  meet  them, 
legislation  has  become  more  and  more  rigid  in  its  details  designed 
to  secure  enforcement,  and  the  inspection  service  has  had  to  be 
strengthened.  And  yet,  it  cannot  be  said  that  we  have  been  more 
than  indifferently  successful  in  those  states  which  have  made  the 
greatest  advance  in  the  matter.  In  so  far  as  home  work  is  cur- 
tailed by  the  application  of  the  minimum-wage  principle,  the 
enforcement  of  child-labor  and  sanitary  regulations  wfll  be  rendered 
less  difficult.  But  to  secure  the  enforcement  of  a  wage  standard  itself 
will  be  a  problem.  Those  who  fear  loss  of  employment  will  fre- 
quently bargain  with  their  employers  to  accept  less  than  the  stand- 
ard set,  and  the  ease  with  which  books  may  be  falsified  and  the 
impossibility  of  detecting  violation  except  from  an  examination  of 
the  books  or  upon  complaint  of  the  parties  paid  less  than  the 
required  sum  will  frequently  cause  the  less  scrupulous  employers 
to  incur  the  risk  of  being  penalized  for  an  infraction  of  the  law. 
Such  has  been  the  experience  of  Victoria.  Moreover,  the  provisions 
of  the  law  in  some  cases  will  no  doubt  be  evaded  by  substituting 
the  method  of  sale  of  materials  and  purchase  of  finished  products 
for  the  wage  relation  assumed  in  the  statutes.  And,  finally,  the 
principle  involved  in  the  law  will  be  violated  where  those  who  do 
not  secure  employment  set  up  a  miserable  handicraft  industry  on 
their  own  accoimt.  While  sweating  in  the  old  form  was  stamped 
out  in  Victoria,  some  of  those  who  were  sweated  before  wages  were 
regulated  have  led  a  still  more  miserable  existence  as  manufac- 
turers and  vendors  on  their  own  accoimt. 

In  the  opinion  of  the  writer  the  imposition  of  wage  standards 
without  the  intervention  of  wages  boards,  as  has  been  done  in  Utah 
and  as  was  planned  in  Kansas,  is  worse  than  of  doubtfid  value. 
Without  such  wages  boards  and  the  incidental  organization  to 
which  they  may  give  rise,  evasion  will  probably  become  widespread 


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ISO  JOURNAL  OF  POLITICAL  ECONOMY 

and  the  law  break  down.  But  where,  on  the  other  hand,  use  is 
made  of  wages  boards,  where  the  standards  set  are  made  to  fit  more 
nearly  the  needs  of  the  situation,  and  the  labor  force  is  incidentally 
organized  more  or  less  successfully,  then  a  part  of  the  necessary 
machinery  to  secure  enforcement  will  be  set  up.  The  non- 
observance  of  standards  is  in  such  cases  likely  to  come  to  the 
knowledge  of  the  leaders  among  the  workers,  and  the  penalty  of 
the  law  is  more  likely  to  be  visited  upon  offending  employers  against 
whom  complaints  are  lodged  with  the  proper  authorities.  The 
wages-board  system,  it  seems  to  the  writer,  is  indispensable  to  the 
successful  application  of  the  minimum-wage  principle.  And,  even 
with  it,  the  problem  of  enforcement  is  likely  to  be  more  difficult 
than  that  we  have  experienced  in  connection  with  other  branches 
of  labor  legislation. 

These  are,  I  think,  the  effects  which  may  be  expected  to  flow 
more  or  less  immediately  from  the  regulation  of  wages  of  women 
and  youths  imder  the  minimum-wage  laws  being  enacted.  Of 
course  far-reaching  and  disastrous  results  would  follow  upon  very 
radical  regulation.  In  the  system  itself,  however,  I  see  nothing  of 
necessity  revolutionary,  little  which  would  run  coimter  to  the  work- 
ing of  economic  laws  operating  imder  normal  conditions,  and  very 
little  which  might  discourage  the  expansion  and  limit  the  net  results 
of  our  industry.  I  see  no  reason  to  think  it  will  discourage  efficiency ; 
rather  will  it  emphasize  efficiency  on  the  part  of  employers  and 
employees.  I  see  nothing  which  will  necessarily  curtaU  materially 
earned  profits  or  the  return  to  capital,  so  that  industrial  enterprise 
and  the  formation  and  investment  of  capital  need  not  be  dis- 
couraged. 

If  the  conviction  expressed  with  reference  to 'the  problem  of 
enforcing  the  observance  of  standards  is  well  foimded,  the  success 
of  minimum-wage  legislation  will  depend  largely  on  how  the  prin- 
ciple is  applied.  If  properly  applied,  it  will  reduce  industrial 
friction,  check  a  non-constructive  radicalism,  diminish  exploitation, 
tend  to  standardize  wages  where  desirable  standards  are  not  set  by 
the  free  play  of  economic  forces,  and  work  to  rid  us  of  those  indus- 
tries, forms  of  organization,  and  establishments  which  can  only 
maintain  themselves  by  imdermining  the  health  and  efficiency  of 


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SOME  ASPECTS  OF  THE  MINIMUM  WAGE  151 

the  average  woman  worker  employed  in  them.  Yet  it  should  be 
evident  from  the  analysb  made  that  such  regulation  is  not  an  entire 
solution  of  the  problem  of  low  earnings.  The  living  wage  for 
women  and  minors  is  an  individual  living  wage — not  a  guaranty  of 
income  sufficient  to  maintain  the  widow  with  children  who  need 
opportunity  and  care  as  well  as  support.  It  is  designed  to  establish 
standards;  it  is  not  a  guaranty  of  employment  to  those  who  are 
noticeably  deficient  in  ability  and  industry.  The  higher  the  stand- 
ard set,  other  things  remaining  the  same,  the  greater  die  friction  and 
loss  incident  to  readjustment,  and  the  greater  the  number  of  the 
imemployable.  The  minimum  wage,  if  accepted,  should  be  merely 
a  part  of  a  program  of  social  prevention  and  care.' 

To  the  minimum  wage  shoidd  be  added  a  carefully  safeguarded 
system  of  mothers'  pensions  in  order  to  have  a  closer  approach  to 
a  solution  of  the  problem  of  inadequate  earnings.  And,  better 
still,  the  need  for  mothers'  pensions  must  be  eliminated  so  far  as 
possible  by  the  prevention  of  industrial  accidents  and  occupational 
diseases,  and  by  the  provision  of  insurance  based  upon  the  needs 
of  the  family  group  where  the  campaign  of  prevention  does  not 
succeed.  There  must  be  instituted  also  such  means  as  labor 
exchanges  to  fit  those  who  are  displaced  into  the  proper  niches  in 
so  far  as  they  can  be  provided  with  employment  on  acceptable 
terms.  And  to  these  must  be  added  measures  designed  to  increase 
the  efficiency  of  those  among  the  imemployable  who  are  not  hope- 
less cases.  For  those  who  are  hopelessly  inefficient  and  are  weeded 
out  by  the  standards  set,  and  for  others  who  may  be  for  the  time 
unemployed,  provision  in  suitable  form  must  be  made.  Most  of 
those  who  will  be  imemployable  are  not  self-supporting  now;  they 
should  not  be;  with  the  regulation  of  wages  it  is  simply  a  question 
of  the  best  form  for  philanthropy  to^take. 

At  the  outset  it  was  stated  that  the  movement  for  a  minimum 
wage  seems  likely  to  become  general  \mless  checked  by  the  courts.* 
Whether  a  check  will  be  applied  by  the  courts  remains  to  be  seen, 

'  With  reference  to  this,  see  Seager,  in  Annals  of  American  Academy  of  Political 
and  Social  Science,  July,  1913,  pp.  1-12. 

*  For  discussion  of  the  l^;al  aspects  of  the  minimum  wage,  see  Massachusetts, 
Report  of  Commission  on  Minimum  Wage  Boards,  pp.23-24,  and  Hoicombe,  "The 
Legal  Minimum  Wage  in  the  United  States,"  American  Economic  Review,  II,  19-37. 


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IS2  JOURNAL  OF  POLITICAL  ECONOMY 

for  no  case  has  as  yet  been  adjudicated.  One  question  which  will 
be  raised  is  whether  or  not  permitting  a  wages  commission  to  fix 
minimum  wages  is  not  an  xmconstitutional  delegation  of  legislative 
power.  With  reference  to  this,  it  wo\ild  seem  that  the  laws  enacted 
have  been  so  framed  that  they  will  probably  succeed  in  meeting  the 
test.  They  lay  down  the  principle  to  be  applied  and  make  \mlaw- 
ful  the  payment  of  less  than  a  minimmn  as  defined,  and  leave  it  to 
a  commission  to  decide  what  rates  are  necessary  to  meet  the  require- 
ment thus  fixed  upon  by  the  legislative  branch  of  the  government. 
In  other  branches  of  regulation,  as  for  example,  in  the  fixing  of 
railroad  rates,  conmiissions  have  exercised  this  function  of  deter- 
mining the  specific  conditions  which  shoidd  be  imposed  in  order  to 
make  the  requirements  of  the  law  effective.  The  wages  commis- 
sions provided  for  will  have  no  more  legislative  power  than  that 
now  exercised  by  other  commissions  with  the  approval  of  the  courts. 
The  fundamental  question  which  will  arise  is,  however,  whether 
this  regulation  is  a  proper  exercise  of  the  police  power,  or  whether  it 
is  not  an  improper  infringement  of  the  right  of  free  contract  and  does 
not  amoimt  to  taking  property  without  due  process  of  law.  ^th 
reference  to  this,  it  is  said,  there  is  no  logical  distinction  to  be  made 
between  exacting  standards  with  regard  to  wages  and  exacting 
standards  with  regard  to  the  hours  of  work  for  women,  sanitation, 
and  the  like,  which,  within  limits,  has  been  held  by  the  courts  to  be  a 
valid  exercise  of  the  police  power  in  the  protection  of  health,  morals, 
and  sodal  welfare.  Stripped  of  all  unessentials,  the  question  as  to 
whether  or  not  any  given  regulation  of  labor  conditions  is  a  valid 
exercise  of  the  police  power  depends  largely  upon  the  opinion  of  the 
trial  court  as  to  the  desirability  of  regulation  to  meet  the  problem 
attacked.  Just  so  will  it  be  with  the  regulation  of  wages.  No  new 
principle  is  involved.  The  outcome  will  depend  largely  on  how  well 
the  problem  and  theorder  are  presented  to  the  court  and  how  well  the 
given  case  is  defended — ^just  as  shorter  hours  for  women  have  been 
held  to  be  valid  only  when  carefully  presented.  That  law  is  most 
likely  to  be  sanctioned  by  the  courts  which  makes  use  of  wages 
boards  and  requires  a  imanimity  of  opinion  on  the  part  of  at  least  two 
of  the  three  sets  of  representatives  before  action  is  taken.  Standards 
thus  set  with  a  mass  of  evidence  carefully  compiled  as  a  basis  for 


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SOME  ASPECTS  OF  THE  MINIMUM  WAGE 


153 


their  imposition  should  receive  most  careful  consideration  by  the 
courts.  Standards  otherwise  set  are  much  more  likely  to  meet  with 
court  veto.  But  in  cases  involving  the  regulation  of  wages,  the 
defenders  of  the  law  will  probably  labor  imder  some  handicaps  thus 
far  not  experienced.  The  first  will  be  that  the  relation  between 
wages  and  health,  efiStdency,  and  morals,  while  perhaps  none  the 
less  real  than  the  relation  between  these  and  the  hours  of  labor  and 
sanitary  conditions,  is  more  difficult  to  establish  and  less  immediate. 
The  second  will  be  foimd  in  the  fact  that  personal  habits  and  needs 
differ  and  a  given  vmifonn  standard  in  wages  will  not  fit  all  indi- 
viduals so  closely  as  do  standards  in  the  other  branches  of  labor 
legislation.  A  third  will  be  that  the  court  may  question  whether 
or  not  it  is  to  be  taken  for  granted  that  women  should  be  normally 
self-supporting,  when  in  a  great  majority  of  cases  they  are  members 
of  a  family  group  with  a  common  fund.  A  fourth  will  be  that  some 
are  placed  imder  a  handicap  and  practically  denied  employment  by 
the  regulation  of  wages,  as  adidt  laborers  are  not,  except  in  extreme 
cases,  by  other  kinds  of  labor  legislation. 

In  concluding  this  discussion  of  the  minimum  wage,  it  may  be 
noted  that  its  more  advanced  advocates  plead  for  its  application  to 
adult  males.'    It  is  being  applied  to  men  as  well  as  to  women  in  the 

'  The  following  table,  compiled  from  the  reports  of  the  United  States  Immigration 
Commission,  shows  the  average  eamingH  of  the  heads  of  families  employed  in  the 
industries  specified,  and  the  average  of  family  income  drawn  from  various  sources: 


Indnrtiy 


Number  of 
Hooaeholdt 


Avenge  AnnuAl 

MaleHeftdtof 
Families 


AYenge  Awmal 
Famior  I 


Irooandsted 

Slawghtrriag  and  meat  packing 

Bititminous  ooal  tnfalni^ 

(^aat  manofactoze 

Manu&icture  of  woolen  and  wocstedt . . . 
Mannfactoie  and  dyeing  of  tilk  goods. . . 

lianufactuxe  of  cotton  goods 

lianufactuxe  of  dothing 

Mannfactnre  of  boots  and  shoes 

Manufacture  of  furniture 

Manufacture  of  coUars,  cufb,  and  shirts . 

Manufacture  of  leather,  etc 

Manufacture  of  gloves 

Oil  refining. 

Sugar  refining 


440 
tU 

906 
710 

? 

363 
a6s 
595 
X94 


448 
470 
S30 

i 

650 

669 

549 


$568 
781 
577 

635 
791 

765 

il? 

671 

u 

66x 


A  very  excellent  presentation  of  American  wage  statistics  will  be  found  in  chap, 
vi  of  Streightoff's  The  DistrHnaion  of  Incomes  in  the  United  States,  <' Columbia  Uni- 
versity Studies  in  History,  Economics,  and  Public  Law/'  Vol.  LII,  No.  2. 


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IS4  JOURNAL  OF  POUTICAL  ECONOMY 

Austxalian  states,  and  to  miners  of  coal  and  to  both  men  and  women 
in  certain  sweated  trades  in  Great  Britain.  It  is  argued  that  the 
need  for  a  minimum  wage  for  men  is  greater  than  for  women,  inas- 
much as  men  are  normally  the  heads  of  families  and  are  charged 
with  the  support  of  the  other  members.  The  theory  of  our  laws  is 
that  normdly  the  husband  and  father  should  be  charged  with  the 
support  of  his  family.  Investigation  has  shown,  however,  that 
many  men  do  not  earn  enough  to  support  their  families  in  decency 
(see  footnote  on  p.  153).  With  reference  to  the  application  of  the 
principle  of  the  minimum  wage  to  men,  however,  two  things  may 
be  said.  Whatever  the  opinion  of  the  courts  may  be  as  to  the 
propriety  of  regulating  the  wages  of  women  and  minors,  it  is 
unlikely  that  they  would  approve  of  a  statute  regulating  the  wages 
of  men.  The  two  sexes  do  not  stand  upon  the  same  plane  in  the 
exercise  of  the  police  power.  The  courts  have  permitted  the  general 
regulation  of  the  hours  of  women  gainfully  occupied.  They  have 
denied  the  right  to  regulate  the  hours  of  men  in  private  employ- 
ment, except  in  extreme  cases,  as  in  mines.'  An  effort  to  regulate 
the  wages  of  men  is  likely  to  defeat  the  effort  to  regulate  those  of 
women. 

Nor,  in  the  opinion  of  the  writer,  is  the  regulation  of  the  wages 
of  men  so  essential.  They  have  more  competitive  ability,  are  more 
capable  of  organization  to  conserve  their  interests,  are  more  mobile, 
and  have  more  avenues  of  employment  open  to  them.  There  is  a 
problem  of  low  earnings  among  men,  of  course,  but  important  causes 
of  low  wages  among  them,  other  than  "imder-efficiency,"  are  the 
large  volume  of  low-standard  immigration,  the  neglected  immi- 
grants who  swell  the  supply  of  unskilled  labor,  and  the  competition 
on  unequal  terms  of  woman  and  child  laborers.  The  better  solu- 
tion of  the  problem  of  low  wages  of  men  would  appear  to  lie  in 
attacking  these  important  causes — "under-effidency  **  by  industrial 
education  which  promises  vastly  more  for  men  than  for  women; 
the  large  supply  of  imskilled  labor  by  restricting  the  volmne  of 
immigration,  by  the  adoption  of  an  internal  immigration  policy 

'  The  position  of  the  courts  is  well  presented  in  Clark,  The  Law  of  ike  Employment 
of  Lobar, 


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SOME  ASPECTS  OP  THE  MINIMUM  WAGE  155 

which  will  raise  the  standard  of  the  immigrant  and  bring  about  a 
competition  on  more  nearly  equal  terms,  and  by  securing  a  better 
distribution  of  the  labor  supply;  the  problem  of  the  competition 
of  woman  and  child  laborers  by  applying  to  these  classes  in  the 
best  manner  the  principle  of  the  minimum  wage. 

H.  A.  Mnxis 
UMivsssrry  of  Kansas 


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APPENDIX 
MINIMUM-WAGE  LAWS  IN  THE  UNITED  STATES 


Apfucatioh  to 

State 

Toms  of  Labor 
Contract 

Class  of  Employees 

Occupatfcma 

Standards  as  Pkhmbp 

Califonik 
(Chap.  3^4*  Laws  of 
X913). 

Waxes,  hours,  and  condi- 
tfons  of  labor  prejudi- 
dai  to  health,  morab, 
or  welfare  of  the  work- 
ers. 

Women  and  minors  (un- 
deri8). 

All  occupations,  tradea, 
or  Industriesin  which 
women  and  minors  are 
employed. 

(z)  Not  'Mess  than  a  wage  adequate  to  sup- 
ply to  such  women  and  minors  the  neces- 
sary cost  of  proper  Uidng  and  to  maintain 
the  health  and  wdW^snch  women  and 
minors";  (a)  magimnm  hours  consistent 
with  health  and  wd&ue,  provided  they 
shall  not  exceed  the  magimnm  fixed  by 

Colocwlo 
(Chap,  xxo,  Lawa  of 
19x3). 

Wages. 

Women  and  minors  (un- 
der z8). 

Mercantile,  mannfactur- 
faig,  laundry,  hotel,  res- 
taurant, telephone,  or 
telegraph  busfaiess. 

«*Suitabfe'*wageslnviewof  coat  of  living 
aiMl  fiifi^JJ  condition  of  the  budnos 
and  the  probabk  effect  thereon  of  any 
increase  of  the  minimum  wage. 

Maanchowtta 
(Chap.   706,    Acts  of 
xpxa   aa  amendfcl   by 
chapa.    673   »nd   330. 
Laws  of  19x3). 

Wages. 

Women,  leamen,  appren- 
tices, and  minors  (un- 
der x8). 

AH  occupations  in  which 
women  are  employed 
and  In  which  Commis- 
sion has  reason  to  be- 
lieve that  wages  paid  a 
substantial  number  are 
inadequate. 

cortofii^andto^Ltafaithewofffc» 
in  health,"  and  suitaUe  wages  for  minors. 

Mfameaota 
(Chap.  547.  Gaoecal 
Laws  of  X9X3)> 

Wages. 

Women      and      minors 
(malea  under  ai  and 
females  under  x8). 

AH  occupations  where  the 
wages  of  one-slzth  or 

living  wage. 

**Wagea  suflkfent  to  maintain  the  worker 
inbealth  and  supply  him  with  the  neces- 
sary comforta  and  conditioos  of  reasoo- 
ablelife." 

(Chap,  azz.  Laws  of 
19x3}. 

Wages. 

Women,  learners  and  ap- 
prentkes,  and  minors 

All  occupations  in  which 
women  are  emirioyed 
and  in  which  the  wages 
paid  a  substantial  num- 

Wages  "suitable"  for  femak  employsea  of 
ordhiary  abflity  in  vfew  of  their  needs, 
the  financial  condition  of  theoocnpatioa, 
and  the  probaUe  dfect  tbeieon  ol  any 
increase  in  the  minimum  paid,  and  "suit- 
abfe"  wages  for  leamefs  and  apprentices 
and  minors. 

Ongoo 
(Chap.  6a.  Laws  of 
X913). 

Wages,  hours,  and    In- 
sanitary   conditions 
having  a  pcmidous  ef- 
fect. 

Women  and  minors. 

All  occupationa  where  the 
wages  and  conditions 
of  "any   consideiable 
number"  are  found  to 
be  unaatlsfactoiy. 

Such  wages  ss  wHl  cover  the  nccessanr  coat 
of  Irdng  of  women  of  average  abiUty, 
standard  hours  of  labor,  but  not  longer 
than  those  fixed  by  law,  feir  aanitazy  con- 
ditions, and  auitaUe  wages  for  appren- 
ticea,etc 

Utah 
(Chap.  63*  Laws  of 
19x3). 

Wages. 

Females    only-^women, 

(for  peniod  otnot  more 
than  a  year),  and  mi- 
nors (under  x8). 

All  occupations. 

Minors,  7S  cento  per  day;  adult  fearnexs 
and  apprentices,  90  cento  per  day;  others, 
Sz.asperday. 

Waihiogton 
(Chap.  Z74t  Laws  of 
X9X3). 

Wagn  and  conditions  of 

deri8). 

All  industries  or  occupa- 
tions. 

"Such  standards  of  wages  for  women  and 
minors  employed  .  .  .  .  aa  shall  be  held 
hereunder  to  be  reasonaUe  and  not  detri- 
mental to  health  and  morals,  and  which 
shall  be  suflkient  for  the  decent  mainte- 
nance of  women." 

WiKOOSfal 

(Chap.  7X2>  Laws  of 
X9X3)* 

Wages. 

Women  and  ndnors  (un- 
der x6). 

All  occupations. 

"ShaU  mean  compensation  for  labor  paid 

sufficient  to  enabfe  the  employee 

receiving  it  to  maintain  himself  or  bnadf 

her  welfare." 

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APPENDIX 
MINIMUM-WAGE  LAWS  IN  THE  UNITED  STATES 


Staxdasds  Fixed  bt— 


CONVntKNCI  SVfTBM 


Employment 


Composition  of  Boud 


Duties  of  Boftid 


Repotted  by"" 


IntoUinl  Wdfsie  Commission 
of  five  appointed  by  the  gov- 
ernor. At  ksst  one  member 
shan  beawoman. 


If,  after  investigation,  the 
Commission  finds  condi- 
tions unsatisfactory,  it  may 
call  a  conference. 


Equal  number  of  representa- 
tives of  employers  and  em- 
plojrees  in  occupation,  trade 
or  industry  m  question, 
with  a  member  of  the  Com< 
mission  as  chairman. 


Shall  report  to  the  Commis- 
sion (i)  estimates  of  mini- 
mum wages,  (a)  msximum 
hours,  (3)  standards  for 
conditions  required  under 
theUw. 


Majority; 


State  Wace  Board  of  three  ap- 
the  governor,  one  a 

ive  of  labor,  an- 

an  employer.    One  shall 
bea 


Public  hearinn  to  be  held  if 
inded,  but  no  oonfer- 
board  provided  for. 


MmimuM  Wage  Commission  of 
three  appointed  by  governor. 


If  the  Commission  fbds  wages 
inademiste  in  any  occupa- 
tionTit  skaU  establish  a 
board. 


Not  fewer  than  six  representa 
tives  of  employers,  an  equal 
number  01  representatives 
of  female  employees,  and 
not  to  exceed  one-half  the 
number  for  each  of  these  as 


Shan  report  to  Commission 
suitable  wages  lox  women, 
learners,  apprentices,  and 
minors  after  considering 
their  needs,  the  ^w^^Kfiu 
condition  of  the  occupation, 
and  probable  effect  thereon 
of  any  incresse  in  the  mini- 
mum paid,  together  with 
names  of  empl^rers  paying 
less  than  the  wage  so  deter- 


Two-thirds  majority. 


MmiwiMm  Wage  Commission  of 
f^ypf  the  commisskmer  of 
labor  aad  two  others  appointed 
by  the  governor;  one  to  be  an 
employer  of  women,  another  a 


The  Commission  at  its  discr»> 
tion  may  estaUish  an  ad- 
visory board  in  any  occupa- 
tion. 


Equal  number  oi  representa 
tives — from  three  to  ten— 
of  employers  and  employees 
and  one  or  more — ^but  not 
to  exceed  one-third  of 
the  total  number— disinter- 
ested perMws  to  represent 
the  public. 


Shall  reoMnmend  an  estimate 
of  minimum  wages  suffi- 
cient for  women  and  minors 
of  ordinary  ability,  and  for 
learners  and  apprentices. 


Majority    of  .  entire 


I  Wage  Commission  of 
vemor  and  three 

r  him.    These  to 

^.  the  deputy  oommis- 
r  of  labor  and  the  profes- 
sor of  political  science  at  the 
State  I^niversity.    One  to  be 


If  Commission,  after  investi- 
gation, finds  wages  of  a  sub- 
stantial number  inade- 
quate, it  skall  establish  a 
wages  board. 


The  three  appointed  members 
of  the  Commission,  not  less 
than  three  employers,  and 
an  equal  number  of  repre- 
sentatives of  the  female  em- 
ployees. 


Shall  report  to  Commission 
suitable  wages  after  consid- 
ering the  needs  of  the  em- 
ployees, the  finanrisl  condi- 
tion of  the  occupation,  and 
the  probable  effect  thereon 
of  any  incresse  in  the  mini- 
mum paid,  together  with 
the  names  01  employers 
who  pay  less  than  the  mini- 
mum wages  recommended. 


Two-thirds  majority. 


CommiMionThe 


Industrial  Welfare   

of  three  appobted  by  the  gov- 
ernor, one  representing  the  em- 
ployees, one  the  employees, 
and  the  other  the  pubUcT 


_.  Commission  may  estab- 
lish conferences  in  trades 
where  unsatisfactory  condi- 
tions are  found. 


Equal  number  of  representa- 
tives—not rxrcieding  three 
—of  employers  and  em- 
plosrees^  and  not  more  than 
three  disinterested  persons 
as  rq>resentatives  of  the 
public. 


May  prescribe  standards  of 
bouis  of  labor,  sanitary  con- 
ditions and  wages,  and  re- 
port its  recommeo*  ' 
to  the  Commission. 


Majority. 


Wscea  prescribed  by  statute. 


Aalndastrial  Welfsre  Commis- 
sioncffive — the  Commissioner 
of  Labor  and  four  others  ap- 
pointed I7  the  governor.  Per- 
sons who  within  five  years  have 
been  members  of  a  manu&tc- 
turers'  or  employers'  assoda- 
taon  or  of  a  labor  union  are  not 
eligible  lor  appointment. 


If,  after  investication,  the 
Commission  finds  wages  and 
conditions  unsatisfactory  in 
anv  occupation,  trade,  or 
industry,  it  skall  call  a  con- 
ference. 


Equal  number  <d  refxesenta- 
tives  of  emi^oyers  and  em- 
{^(^ees.  one  or  more  disin- 
terested persons  as  repre- 
sentatives of  the  public — 
but  not  exceeding  the  num- 
ber of  representatives  of 
each  of  the  other  parties— 
with  a  member  of  the  Com- 
mjasion  as  chairman. 


To  recommend  to  the  Com- 
mission "an  estimate  of  the 
minimum  wage  adequate 
....  to  supiuy  the  neces- 
sarv  cost  of  living,  and 
maintain  the  workers  in 
healthy  and  standards  of 
conditions  of  labor  de- 
manded for  the  health  and 
morals  of  the  emfdoyees." 


Majority. 


Industrial  Cotnmissinn  of  three 
appomted  by  the  governor. 


If,   after  investigation,   the 
Commission  fi»'^#  t^njt  the 
paid  are  less  than  a 
wage,  it  shall  appoint 
wage  board. 


Selected  so  as  fairly  to  repre- To 
sent  emploversj^emplorees. 


sssist  in  investications 
and  determinations  "^of  the 
Coi 


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APPENDIX 
MINIMUM-WAGE  LAWS  IN  THE  UNITED  STATES 


9XAZB 


Hbaunos,  Etc. 


Review  amd  Appeal 


PBRMm  TO  Slow  Womis,  Etc. 


Cdifonia 
(Chap.  3M*  Laws  of 
X913;. 


Commission  to  hold  hoarinn  at 
time  and  place  spedfieo,  at 
least  fourteen  da3^'  notice  be- 
inggiven.  Has  power  to  sub- 
poena witnesses,  administer 
oaths,  etc. 


Mandatoiy  order  effective  after  six^  days. 
Published,  mailed  to  county  reooroen  and 
labor  commJasioner,  and  by  him  sent,  so 
far  as  practicable,  to  employers  affected. 
Review  in  Superior  Court  of  three  coun- 
ties upon  comidaint  filed  within  twenty 
da^.  May  be  set  aside  because  (i )  com- 
mission exceeded  powers,  or  (3)  deter- 
mination procured  tqr  fraud. 


Commission  "may  issue  to  a  woman  physi- 
cally defective  by  a«e  or  otherwise  a 
special  license  authonsinff  the  employ- 
ment of  such  licensee,  for  a  period  ci  tax 
numths  [license  renewaUel,  for  a  wace  kaa 
than  such  legal  minimum  wace,  awl  the 
Commission  shaD  fix  a  qwdal  witirimym 
wage  for  such  person." 


Cokfado 
(Chap.    1x0,  Laws  of 


Board,  after  asredng  upon 
wage  determination,  to  give 
th^  days'  notice  of  hearing 
by  publication  and  to  maO  a 
copy  "to  the  person,  aasoda- 
tion,  or  corporation  in  the  bus- 
"  Haspowertosubpoena 
;,  call  for  books,  etc 


Order  effective  after  sixty  days.  To  be 
puMished  in  the  county  <a  counties  in 
which  the  business  is  located  and  mailed 
"to  the  person,  association,  or  corpora- 
tion engaged  in  said  business."  Appeal 
to  Dismct  Court  on  ground  that  <»der 
is  unlawful  or  unreasonable.  Evidence 
limited  to  that  presented  to  the  Board. 


Where  time  wages  only  are  ordered,  the 
Board  may  issue  to  a  woman  pfaysacally 
defective  a  permit  to  work  for  a  lower 
wage,  provided,  it  is  nol  kaa  than  the 
special  mfaiiqum  fixed  in  the  case. 


(Chap.  706,  Acts  ci 
zpzs  as  amrmded  by 
chaps.  ^67S  and  330j 
Laws  of  X913). 


If  any  recommendation  by  wages 
board  approved,  Commlaelon 
shall  hold  hearing  after  giving 
not  less  than  fourteen  days' 
notice  to  employers  affected. 


Wap  decree  by  Commission  shall  be  pub- 
lished in  at  least  four  newspapers  in  each 
county  of  state.  If  any  employer  files 
sworn  statement  that  compliance  with  de- 
cree would  endanger  prosperity  of  the 
business^  its  operation  stayed  until  re- 
view, ti  the  court  finds  that  compliance 
with  such  decree  would  likely  endanger 
writy  of  business,  "an  older  shaD 
from  said  court  revoking  the  same.^ 


Oimmission  may  issue  a  permittoapfaorsi- 
cally  defective  woman  to  work  for  less 
than  the  legal  minimum  rate,  provided, 
that  it  is  not  leas  than  the  spedal  mini- 
mum wage  fixed  for  that  penon. 


(Chap./47.  Oi 
Laws  01  xm). 


^7,  Geaeral 


Shan  hold  hearings.    Has  power 
to      " 


Order  to  be  effective  after  thirty  days.  To 
be  mailed  in  so  far  aspracticable  to  each 
emi^oyer  affected.  Upon  request  of  ap- 
proximatdy  one-f ourtn  of  employers  <x 
empkqrees  in  an  occupation,  (Commission 
must  reconsider  rates. 


Where  time  wage  ordered,  ConmisBioo  nay 
issue  to  a  woman  pfaysicslly  defective  a 
permit  to  work  for  a  lower  specified  wace. 
The  number  of  such  persons  not  to  c 
one-tenth  of  the  whole  nnmlN 
in  any  establishment. 


Nebnska 

(Chsp.   sii, 
10x3). 


Laws  of 


U  any 


wages    board 


of  _ 

is  approved, 
an  bold  hear- 
ing afttf  not  less  than  thirty 
durs'  notke  to  the  employea 
affected 


Within  thirty  days  of  entering  decree.  Com- 
mission to  puMish  material  parts  of  its 
findings,  together  with  the  names  of  em- 
ploytn  paybg  less  than  the  minimum 
wage  d^ermined  upon  and  the  tniwimwm 
wage  paid  by  each  such  employer.  If 
any  employer  files  sworn  statement  that 
compHanre  with  decree  would  endanger 
perity  of  the  busbess  its  operation 
Ibe^ayeduntflreview.  If  the  court 
finds  that  compliance  with  auch  decree 
would  likely  endanger  the  proaperitar  of 
the  business,  "an  wder  shall  issue  nom 
said  court  revoking  the  same." 


Where  time  wages  only  are  ordered,  Com- 

kay  issue  a  permit  to  a  pfaysi- 

I  to  work  for  leas 


mission  may  1 

calty  defective  u,...»..  ^  ..^.  .^  .... 
than  the  legal  mfahnnm,  provided,  that 
it  is  not  less  than  the  spedal  1  ' 
fixed  in  the  case. 


prosperit] 
shaUbesl 


Orenn 
(Chap.  68»  Laws  of 
xgxaf. 


May  hold  hearings.  Has  power 
to  subpoena  witnesses,  ad- 
minister oaths,  etc. 


Order  effective  after  sixty  days.  To  be 
mailed,  in  so  far  as  practicable,  to  („ 
ployers  affected,  and  to  be  posted  by 
than.  Orders  reviewed  by  court  of 
Multnomah  county  only,  and  the  Com- 
missian's  findings  as  to  tacts  finaL 


Where  a  minimum  time  wage  is  fixed,  the 
Commission  may  issue  to  a  woman  i«apa>- 
caily  defective,  or  crippled  bv  age  or 
otherwise,  a  license  to  work  for  a  pre- 
scribed lower  wage. 


Utah 
(Quip,  6$,  Laws  of 
x»xs). 


None  provided  for. 


Washhigton 
(Chsp.  X74.  Laws  of 
19x3). 


Ommisaion  to  hold  hearinos. 
Has  power  to  subpoena  wit- 
nesses, administer  oaths,  etc 


Mandatory  order  issued  by  Ommisaion  ef  • 
fective  after  sixtv  days.  To  be  mailed  in 
so  far  as  pracucable  to  employers  af- 
fected. (Commissions*  findings  final  as 
regards  facta.  Appeal  on  questions  of 
law  to  any  superior  court. 


Commisaion  may  issue  to  a  woman  pfagrai- 
call^  defective  or  crippled  by  age  or 
otheswise,  or  to  an  apprentice  In  soch 
....  occupation  as  usually  requirea  to 
be  learned  by  apprentioea,  a  spedal  li- 
cense to  work  for  a  lower  prescribed  wage. 


WisoQorin 
(Chsp.  7xa,  Laws  of 
X0X3). 


Commission  to  hold  hearings 
Haa  power  to  subpoena  wit- 
nesses, administfr  oaths,  etc 


Commiaaion'a  findinga  aa  regards  facts  final 
Review  upon  appeal  to  Superior  Court  of 
Dane  CCounty.  Appeal  only  on  ground 
that  Commission  has  exceeded  its  author- 
ity or  that  action  was  obtained  by  fraud. 


"The  Industrial  Ckmmiissioo  shall  make 
rules  and  regulations  whereby  any  female 
or  minor  unable  to  earn  the  livmg  wage 
....  shall  be  granted  a  license  to  work 
for  a  wage  ....  commensorate  with  hia 
orheraUlity."  The  license  shall  apedfy 
the  wage. 


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APPENDIX 
MINIMUM-WAGE  LAWS  IN  THE  UNITED  STATES 


Entobcshxnt 

Oteemace 

Books  and  Records 

Prosecution 

Penalty 

Recovery 

PROVmONB 

llaadattny. 

Employer  shall  "keep  a 
record  of  the  names, 
ages,  and  residence  ad- 
dresses of  all  women 
and  ndnors  empkyed." 

Complaint  of  underpay- 
ment may  be  registered 
by  any  person,  "and 
the  OMoimission  shall 
investigate  the  matter 
and  Wlb  aU  proceed- 
ings necessary  to  en- 
force the  pasrment  of  a 
wa^  not  less  than  the 
liviDg  wage." 

Paying  less  than  »iiiniT*i*i'n 
wage  fixed,  a  misdemea- 
nor, punishable  by  fine  of 
not  less  than  $50,  or  by 
imprisonment  for  not  less 
than  thirty  days,  or  by 
both  such  fine  and  im- 
priscmment. 

Employee  paid  less  than 

recover  in  a  civil  action 

gether  with  costs  of  suit, 
an  agreement  to  accept 
less  notwithstanding. 

Annual  apmopriation  of 
$iS,oop  to  catty  out 
provisions  of  the  act. 
Biennial  reports  to  be 
made. 

MMdatoty. 

None  prescribed. 

Justices    of    the    peace 
have  jurisdiction  with- 
in    their     respective 
counties  of  all  o£fenses 
arising  under  this  act. 

Vidations  of  act  or  order 

able  by  fine  not  to  exceed 
$100,  or    by  imprison- 
ment not  to  exceed  three 
months,  or  by  both  such 
fine  and  imprisonment. 

tfkt^n  the  tninimMin  wage 

applicable    may  recover 

together  with  costs  and 
attorney's  fees,  an  agree- 
ment to  accept  less  not- 
withstanding. 

Appropriation  of  $5/>oo 

Report  to  November 
30,  Z9X4>  to  be  made. 

Employer  to  keq>  regis- 
ter of  names,  aies,  and 
addresses  of  all  women 
and  minors  employed. 

Commission   from  time 
to  time  to  determine 
whether  employers  are 
obeying  its  decrees. 

If  decrees  not  complied  with 
names  of  offending  em- 
ployers to  be  published  in 

in  each  county  of  the 
state. 

Annual  reports  to  be 
made  to  the  Gcneiml 
Court 

HaadatoiT. 

EmplQ3f;er  to  keep  reg^ 
ter  of  names  and  ad- 
dresses and  wages  d 
women  and  minors  em- 
ployed; also  hoars  em- 
ployed per  day  or  week. 

provisions  of  the  act 
and  its  orders. 

Violations  of  act  or  order  a 
misdemeanor,  punishable 
by  fine  of  from  $xo  to  $50 
or  by  imprisonment  for 
from  ten  to  sixty  days. 

the  baknce,  with  costs 
and  attorney's  fees,  an 
agreement  to  accept  less 
notwithstanding. 

Annual  appropriatkNi  of 

provinons  of  act.  B^ 
ennial  leports  to  be 
made. 

Employer  to  keep  regis- 
ter of  names  and  ad- 
dresses of  women  and 
minors  employed. 

Commission   from  time 
to  time  to  detep»i"f 
whether  employers  are 
obeying  its  deoees. 

Names  of  employers  not 
obeying  decrees  to  be 
published. 

Biennial  iMorts  to  be 
made  to  the  gcfvemor. 

Maadfttoiy. 

and  ndnors  employed. 

able  by  fine  of  from  $25 
to  $100,  or  by  imprison- 
ment for  from  ten  days  to 
three  months,  or  by  both 
such  fine  and  imprison- 
ment. 

Employee    receiving    less 

pUcable  may  recover  in 
dyil  suit  balance  due, 

nejp's  fees,  an  agreement 
to  accept  less  notwith- 
standing. 

Annual  appropriation  of 
$3,500  to  carry  out 
pvovUons  of  the  act. 
Biennial  reports  to  be. 
be  made. 

ICaadatDiy. 

act,  but  violations  to 
be  prosecuted  by  offi- 
cers as  in  other  mis- 
demeanor cases. 

Pairing  less  than  wage  pre- 
soibcd  in  the  Uw  a  mis- 
demeanor. 

MmiiMimy. 

Empkqrer  to  keep  a  rec- 
ord of  all  women  and 
mmois   emptoyed   by 
him. 

CommisBion  to  investi- 
gate complaints  and  to 
I>rooeed  in  behalf  of  the 
workers. 

Violation  of  any  order  or  of 
any  provision  of  this  act 

able  by  fine  of  from  $25 
to  $100. 

Employee    receiving    less 
than  wage  fixed  may  re- 

baknce  due,  with  costs 
and  attorney's  fees,  an 
agreement  to  accept  less 
notwithstanding. 

Annual  appropriation  of 
$5^000  to  cany  out  pro- 
vWons  of  the  act. 
Biennial  reports  to  be 
made. 

M^iWltl4<Ji^. 

Employer  shall  keq>  a 
record  of  the  names 
and  addresses  of  all 
women  and  mincws  em- 
pknred  by  hhn»  and 
socn  other  records  as 
the  CommisBion  may 
require. 

Commission  to  investi- 
g»iXf}   complaints    ff"*^ 
'Hake  all  proceedings 
necessary    to    enforce 
the  payment  of  a  wage 
not  less  than  the  living 
wage." 

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PUBLIC  CAPITALIZATION  OF  THE  INHERITANCE  TAX 

The  whole  capital  of  a  nation  is  turned  over  once  in  ev6ry  thirty- 
five  years  by  the  hand  of  death.  In  thirty-five  years,  by  the 
grace  of  the  all-powerfid  democracy  and  by  its  adherence  to 
ancient  custom,  the  whole  wealth  of  the  United  States,  tangible 
and  intangible,  worth  at  least  one  hundred  and  thirty  billions,  will 
pass  from  the  powerful  hands  of  those  who  now  hold  most  of  it 
to  the  weak  hands  of  those  whom  the  democracy  loves  tittle  and 
fears  not  at  all.  The  stupendous  weight  of  $i3o,cx)o,cx)o,cx)o  is 
resting  upon  a  foimdation  of  ancient  custom,  and  in  this  age  the 
most  ancient  of  customs  are  disintegrating.  It  is  cheap  to  prophesy 
that  year  by  year  an  increasing  share  of  this  vast  simi  will  find  its 
way  into  the  coffers  of  the  state. 

Public  appropriation  of  masterless  estates  may  proceed  slowly 
so  long  as  the  fiscal  requirements  are  sxiffidently  provided  through 
forms  of  taxation  to  which  the  public  has  long  since  adjusted  the 
mode  of  its  daily  life.  But  there  are  new  burdens  to  be  assimied, 
and  tremendous  ones,  just  over  the  present  horizon  of  the  state. 
Pensions  for  the  superannuated  and  disabled,  relief  for  the  sick, 
reformation  of  the  outcast,  subsidies  for  indigent  motherhood, 
conservation  of  child  life  and  of  the  himian  resources  we  now  neg- 
lect through  parsimony  in  educational  effort  are  among  the  burdens 
which  the  state  will  in  the  end  be  forced  to  assume.  Whether  we 
approve  or  disapprove  of  the  state  assumption  of  responsibilities 
of  this  nature,  as  dispassionate  observers  of  historical  tendencies, 
we  are  compelled  to  admit  that  in  every  modem  state  the  party  of 
"social  reform *'  is  making  rapid  headway.  There  is  in  the  exist- 
ing social  constitution  no  opposing  force  powerful  enough  to  pre- 
vent the  ultimate  realization  of  part,  if  not  of  the  whole,  of  the 
program  of  the  social  reformers.  With  the  new  fiscal  burdens  that 
will  have  to  be  assimied,  new  sources  of  revenue  must  be  found,  or 
old  sources  must  be  made  more  fruitful.  It  is  a  realization  of  this 
situation  that  fixes  the  eye  of  the  democracy  upon  the  vast  mass  of 
wealth  passing  each  year  from  the  able  hands  of  its  accmnulators 

i6o 


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PUBLIC  CAPITALIZATION  OP  THE  INHERITANCE  TAX    i6i 

to  the  hands  of  all  but  passive  heirs.  What  profit  shall  the  democ- 
racy fix  for  itself  on  death's  turnover  ? 

The  theory  of  inheritance,  in  consequence  of  the  acquisition 
of  political  power  by  the  middle  class,  imderwent  a  subtle,  but 
significant,  change.  Under  the  conditions  of  an  aristocratic 
society  the  privileges  of  inheritance  carried  with  them  the  obliga- 
tion to  exercise  certain  functions  of  political  and  social  importance. 
Propinquity  or  remoteness  of  relationship  of  decedent  and  heir 
had  no  bearing  upon  the  political  and  social  fimctions  supported 
by  an  estate.  If,  then,  the  sovereign  placed  a  burden  upon  inherit- 
ances, it  fell,  as  a  rule,  upon  all  alike.  Under  the  conditions  of  a 
mercantile  or  middle-class  society,  inheritance  is  a  privilege  shorn 
of  obligations.  No  recognized  social  or  political  fimctions  devolve 
upon  an  heir  on  his  succession  to  an  estate.  Fulfilment  of  the 
decedent's  wishes,  expressed,  implied,  or  imputed,  becomes  the 
sole  recognized  justification  of  inheritance.  Accordingly  the  way 
lies  open  to  a  differentiation  of  burdens  between  heirs  of  differing 
degrees  of  propinquity.  With  the  progress  of  commercialization 
state  after  state  has  accepted  the  principle  of  the  differentiated 
collateral  inheritance  tax,  until,  at  the  present  time,  there  is  scarcely 
a  coimtry  of  any  consequence  that  does  not  employ  it,  either  in 
its  national  or  in  its  local  financial  system. 

Not  less  interesting  than  the  steady  advance  of  the  collateral 
inheritance  tax  from  one  jurisdiction  to  another  is  the  gradual 
transformation  in  structure  that  the  tax  is  undergoing.  A  study 
of  comparative  rates  of  inheritance  taxation  leads  frequently  to 
bafSing  results.  Many  of  the  characteristics  of  a  particular  rate 
system  must  be  referred  to  imitation  of  foreign  laws,  often  evolved 
at  an  earlier  time  and  under  widely  different  conditions.  We  are 
able,  nevertheless,  to  discern  in  the  field  of  collateral  inheritance 
taxation  certain  broad  historical  tendencies  which  have  a  bearing 
upon  our  inquiry.  With  the  evolution  of  the  tax,  heirs  remote 
in  kinship  come  to  be  assimilated  to  strangers  in  blood,  and  the 
boimds  within  which  the  burden  of  the  tax  is  relatively  light  tend 
to  be  drawn  more  narrowly.'    In  view  of  the  fact  that  large  estates 

'  The  foUowjjig  table  gives  specimen  rates  for  seven  Anglo-Saxon  jurisdictions  and 
three  jurisdicticms  of  Continental  Europe.    The  former,  one  may  argue  on  general 


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l62 


JOURNAL^OP  POUTICAL  ECONOMY 


frequently  fail  of  direct  heirs,  these  tendencies  are  manifestly  in 
the  direction  of  increased  efficiency  of  the  tax  as  a  source  of  revenue. 
Of  far  greater  potential  efficiency  than  the  principle  of  differ- 
entiation of  taxes  according  to  kinship  is  the  principle  of  progression, 
or  differentiation  according  to  magnitude,  either  of  estate,  as  in 
Great  Britain,' or  of  inheritance  or  legacy,  as  in  most  other  coimtries. 
The  progressive  principle  tends  to  restrict  the  burden  of  the  tax 
to  a  small  minority  of  the  population;  in  a  purely  democratic 
state,  therefore,  it  must  almost  inevitably  gain  acceptance.  A 
century  ago,  the  progressive  principle  could  prevail  only  in  demo- 
cratic Switzerland.  The  growing  political  power  of  the  property- 
less  classes  in  other  states  has  been  attended  by  a  parallel  extension 
of  the  field  of  the  progressive  inheritance  tax.  All  the  important 
European  coimtries,  except  Russia  and  Austria-Hungary,  and  a 
majority  of  our  own  states,  now  employ  the  progressive  principle. 

grounds,  are  much  the  more  strongly  influenced  by  tradition,  the  latter  by  contem- 
porary logic  The  former,  with  the  exception  of  Kansas  Qtself  not  without  obvious 
significance),  show  a  fairly  orderly  progression  from  direct  heirs  to  remote  heirs.  The 
latter  show  a  tendency  to  assimilate  heirs  as  remote  as  first  cousins  to  the  class  of 
strangers,  and  to  make  a  wide  distinction  between  direct  heirs  and  heirs  even  so  near 
in  blood  as  brothers  and  sisters. 


Amoumtof 
imhemixa21cb 


Wgra 


Soo 


Brother 


First 
Cousin 


Stranger 


New  York 
Califomia. 
minois. . . 
Kansas... 
Massachui 

WisocHBsin 

Great  Britain . . 

France 

Italy 


laoojooo 


£  40,000 
M.  z,ooO|00o 
Fr.  1,000,000 
z  ^000^000  lire 


Percent 
1.69 
9.50 

3 

4 

a 

3.50 

4.  so 

o 

I.60 


Percent 
1.60 
3-75 
3 

10 
5 

3. 75 
7.50 

zo 

za 

10 


Percent 
6 

7.50 
4 
Z9.SO 

5 

7 
9.50 

90 


Percent 
6 

Z3.50 
zo 

Z3.50 
5 

Z3.50 
14  SO 

Z8.50 
33 


The  rates  for  American  states  are  taken  from  Lee,  Higgmson  &  Co.,  InherUance 
Taxes  of  All  the  States,  191 1;  the  rates  for  European  countries  are  from  West,  The 
Inheritanu  Tax,  2d  ed.,  1908.  The  percentages  for  Great  Britain  are  arrived  at  by 
combining  estate  duties  with  legacy  duties.  The  percentages  for  New  York  are 
obtained  by  reducing  complex  rates,  involving  abatements,  to  simple  percentages  of 
the  whole  inheritance. 

'  The  employment  of  the  graduated  estate  duty  is  obviously  a  natural  conse- 
quence of  the  principle  of  primogeniture. 


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PUBLIC  CAPITALIZATION  OP  THE  INHERITANCE  TAX     163 

Its  efficiency  for  the  present  is  greatly  reduced  by  the  fact  that  it  is 
somewhat  illogically'  ingrafted  upon  the  principle  of  differen- 
tiation of  tax  rates  according  to  kinship.  There  can,  however,  be 
no  doubt  that  the  progressive  inheritance  tax  finds  general  favor 
in  the  modem  state  and  will  increase  its  efficiency  at  need. 

For  the  public  appropriation  of  inheritances  we  have,  then,  the 
requisite  instruments  ready  to  our  hands.  We  have  well-tried 
principles  of  financial  legislation,  we  have  a  social  situation  favor- 
able to  their  application.  Last,  and  perhaps  least,  we  have 
plausible  ethical  arguments  for  the  tax,  to  suit  the  varying  taste. 
The  inheritance  tax  will  preserve  the  individual  heir  from  the 
demoralizing  influence  of  great  riches,  according  to  Mr.  Carnegie. 
According  to  Mr.  Roosevelt,  it  will  preserve  society  from  the  cor- 
rupting influence  of  hereditary  wealth.  The  inheritance  tax  will 
place  the  state  in  its  legitimate  position  of  coheir,  according  to 
Bluntschli.  It  is  essential  to  the  realization  of  the  faculty  prin- 
ciple in  taxation,  according  to  Professor  Seligman.  All  these  argu- 
ments are  effective,  each  in  its  own  way,  in  dispelling  whatever 
remains  of  the  traditional  feeling  that  what  a  man  has  acquired, 
under  the  law,  he  has  a  right  to  transmit  unimpaired  to  his  heirs. 

To  Adam  Smith  and  his  immediate  successors  the  inheritance 
tax  presented  one  serious  defect:  it  is  an  imthrifty  tax,  falling  not 
upon  "revenue,"  but  upon  capital,  and  hence  tends  to  deplete 
the  national  stock  of  parent  wealth.  If  this  view  of  the  matter 
is  valid,  the  progress  of  inheritance  taxation  as  a  source  of  ordinary 
revenue  cannot  be  regarded  as  an  xmmixed  good.  Admitting,  as 
we  must,  that  the  maintenance  of  the  national  capital  stock  is  not 
in  itself  the  highest  end  of  social  policy,  and  that  we  must  at  times 
accept  capital  depletion  as  the  legitimate  cost  of  a  higher  good,  we 
are  yet  not  justified  in  overlooking  the  fact  that  the  dissipation 
of  accumulated  capital  is  a  sodal  cost  which  should  be  reduced  to 

'  It  seems  piobable  that  the  sodo-psychological  principle  underlying  the  collateral 
inheritance  tax  b  of  a  character  analogous  with  that  which  underlay  escheat,  while 
the  principle  underlying  progressive  taxation  b  equalitarianism.  There  is  no  logic  in 
progressive  escheat,  as  exemplified  in  the  laws  of  some  of  our  states,  which  confine  the 
progressive  principle  to  collateral  inheritance  alone.  Nor  b  there  any  logic  in  differ- 
entiated fnualHiiriapi^w"« 


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i64  JOURNAL  OP  POLITICAL  ECONOMY 

a  minimum,  so  far  as  this  is  possible.  This  point,  I  assimie,  scarcely 
requires  argument,  as  the  social-economic  value  of  thrift  is  one  of 
the  best-established  values  of  economic  theory.  Our  approval 
of  the  thrifty  savings  bank  depositor  rests  not  wholly  upon  admir- 
ation for  his  personal  qualities;  nor  upon  the  assurance  his  conduct 
gives  us  that  he  will  never  burden  our  poor  rates.  It  rests  in  large 
part  upon  our  belief  that  his  small  contribution  swells  our  financial 
power,  helps  to  equip  us  with  the  buildings,  materials,  and  imple- 
ments needed  in  production.  Our  disapproval  of  the  man  of 
fortune  who  transforms  his  capital  into  a  life-anniiity,  to  insure 
himself  against  the  chance  of  leaving  any  part  of  it  unspent,  has 
no  valid  groimd  except  our  abhorrence  of  the  destruction  of  accumu- 
lated capital.  One  of  our  most  effective  apologies  for  existing 
inequalities  in  the  distribution  of  wealth  rests  upon  the  fact  that 
income  widely  diffused  is  easily  absorbed  by  current  expenditure, 
while  income  that  is  highly  concentrated,  even  in  wasteful  hands, 
almost  inevitably  gives  rise  to  accumulations.  Critics  of  the 
socialistic  plan  of  sodal  reorganization  never  fail  to  point  out  the 
difficulties  that  a  socialistic  state  would  encounter  in  finding  a  sat- 
isfactory substitute  for  private  interest  in  the  function  of  main- 
taining and  developing  the  social  capital  fund.  In  our  zeal  for 
the  establishment  of  a  system  of  taxation  which  we  approve  on 
general  social  grounds,  we  may  attempt  to  minimize  the  importance 
of  maintaining  capital  intact.'  It  would  appear  to  be  more  in 
keeping  with  sound  economic  principle  to  admit  that  if  the  inherit- 
ance tax  is  necessarily  an  imthrifty  tax,  it  should  be  applied  with 
great  moderation.  Current  political  tendencies,  however,  offer  us 
no  assurance  that  the  inheritance  taxes  of  the  future  will  be  char- 
acterized by  moderation. 

There  are  conditions,  as  Mill  pointed  out,  under  which  the 
charge  of  imthrift  will  not  stand  against  the  inheritance  tax.  If 
the  proceeds  of  the  tax  are  employed  for  the  purpose  of  pajdng 
off  the  public  debt,  the  effect  of  the  tax  is  merely  to  transfer  capital 
from  one  body  of  citizens  to  another.*    If  the  inheritance  tax 

« As  does  West,  op,  cU,,  p.  210. 

*  Dr.  Max  West,  op,  cU.,  pp.  49  and  53,  dtes  two  instances  of  inheritance  taxes 
levied  with  the  special  purpose  of  paying  off  public  debt. 


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PUBLIC  CAPITALIZATION  OP  THE  INHERITANCE  TAX     165 

revenues  are  used  to  defray  expenditures  that  woiild  otherwise 
have  to  be  met  by  public  borrowing,  the  eflfect  is  the  same.* 
Doubtless  there  are  many  instances  in  which  inheritance  taxes  can 
be  shown  to  present  this  comparatively  thrifty  character.  Never- 
theless no  student  of  financial  history  would  care  to  assert  that 
inheritance  taxes  are  commonly  put  to  such  uses.  They  are  levied, 
as  a  rule,  in  lieu  of  other  forms  of  taxation,  or  in  support  of  services 
that  woiild  not  otherwise  be  imdertaken.  There  is  no  reason  for 
supposing  that  the  public  debts  of  European  countries  would 
increase  more  rapidly  without  the  inheritance  tax;  nor  is  there 
reason  for  supposing  that  the  enactment  of  an  inheritance  tax  law 
in  the  United  States  woiild  result  in  the  more  rapid  extinction  of 
our  debt.  The  modem  state  is  quite  able  to  live  up  to  its  ordinary 
revenues. 

If  a  state  levies  an  inheritance  tax,  the  burden  of  other  forms 
of  taxation  may  of  course  be  lightened.  Ordinary  taxpayers, 
finding  their  incomes  virtually  increased,  will  be  in  a  position  to 
increase  their  savings.  Thus  the  dissipation  of  accimiidated 
capital  that  may  be  occasioned  by  the  tax  will  be  offset,  it  is  often 
argued,  by  new  accimiulations.  This  argument  overlooks  the  fact 
that  very  large  classes  of  society  are  of  a  low  order  of  thrift,  and 
that  remission  of  the  taxes  that  fall  upon  them  woiild  result  not 
in  increased  saving,  but  in  increased  consumption.  How  large  an 
accumulation  woidd  be  occasioned  by  the  remission  of  ten  million 
doHars  of  taxes  upon  tobacco  or  alcoholic  beverages  or  coffee  or 
sugar?  Certainly  not  ten  millions;  probably  not  one  million, 
A  remission  of  an  equal  amount  of  taxes  falling  upon  large  incomes 
exclusively  would  doubtless  produce  a  larger  accimiiilation.  But 
it  is  not  in  the  nature  of  the  political  tendencies  which  are  forcing 
the  enactment  of  inheritance-tax  laws  to  employ  them  as  a  means 
for  reducing  the  burden  upon  large  incomes.  If  any  taxes  are  to 
be  remitted  as  a  consequence  of  inheritance  taxation,  these  will 
doubtl^s  be  the  taxes  of  wide  incidence,  the  remission  of  which 
will  exert  scarcely  a  perceptible  influence  upon  accumulation. 

>  The  federal  inheritance  tax  of  the  Spanish  War  period  may  be  regarded  as  of 
this  character.  We  raised  what  we  could  by  taxation,  and  borrowed  to  meet  excess 
of  expenditure.    But  for  the  inheritance  tax  we  should  have  borrowed  more. 


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i66  JOURNAL  OP  POLITICAL  ECONOMY 

We  are  therefore  jiistifled  in  assuming  that  the  sums  raised  by 
inheritance  taxation  practically  represent  a  net  reduction  in  our 
fimd  of  accum\ilated  capital. 

With  rates  of  inheritance  taxation  so  light  as  they  are  in  most 
of  our  states,  the  tendency  of  such  taxes  to  trench  upon  acciunu- 
lated  capital  may  be  almost  negligible.  In  the  United  States 
inheritance  taxation  is  in  an  incipient  stage;  it  cannot  be  expected 
to  produce  marked  effects  of  any  kind.  It  is  worth  while,  however, 
to  consider  how  we  shall  stand  when  oiu:  legislation  has  overtaken 
that  of  Great  Britain — a  coimtry  which  still  lays  claim  to  exemplary 
moderation  in  most  fiscal  matters.  The  United  EJngdom  now 
collects  in  inheritance  taxes  about  £25,000,000.  The  population 
of  the  United  Kingdom  is  about  half  that  of  the  United  States; 
the  wealth  of  the  former  nation  is  probably  not  more  than  60  per 
cent  of  that  of  the  latter.  Probably  a  somewhat  larger  proportion 
of  the  wealth  of  the  United  States  is  represented  by  small  estates 
that  woiild  benefit  largely  by  exemptions  and  minimum  rates.  On 
the  other  hand,  we  have  probably  a  larger  proportion  of  our  total 
wealth  in  very  large  estates  which  woiild  bear  maximum  rates. 
We  cannot  therefore  be  far  wrong  in  assuming  that  inheritance 
taxes  levied  at  British  rates  would  yield  $200,000,000.  Would 
this  be  a  negligible  deduction  from  our  funded  capital?  The 
average  annual  addition  to  our  savings-bank  deposits,  for  the  last 
decade,  does  not  exceed  $150,000,000.  The  combined  activities 
of  our  ten  million  savings-bank  depositors  woiild  fall  far  short  of 
making  good  the  loss  in  capital  fimds  that  a  fairly  moderate  inherit* 
ance  tax  would  occasion. 

It  may  be  said  that  such  a  comparison  does  not  assist  us  in 
gaining  a  properly  proportioned  view  of  the  problem  as  a  whole; 
that  we  should  compare  the  amoimt  of  the  tax,  not  with  the  yield 
of  any  one  soiurce  of  acaunidation,  however  significant  in  itself, 
but  with  the  entire  annual  increment  in  the  national  wealth.  Such 
a  comparison,  it  may  be  thought,  will  show  that  we  have  no  reason 
for  concern  over  the  possibility  of  capital  depletion. 

According  to  census  estimates— none  too  reliable,  it  is  true — 
the  wealth  of  the  coimtry  increased  from  $42,000,000,000  in  1880 


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PUBLIC  CAPITALIZATION  OP  THE  INHERITANCE  TAX    167 

to  $88,000,000,000  in  1900,  or  nearly  no  per  cent.  If  we  assume 
that  the  wealth  of  the  United  States  in  1910  was  $125,000,000,000, 
the  increase  for  the  decade  amounted  to  42  per  cent  It  is  probable, 
however,  that  the  figure  $125,000,000,000  is  too  low;  quite  possibly 
our  wealth  is  still  increasing  at  the  rate  of  5  per  cent  per  annum. 
Only  3  per  cent  of  our  wealth  passes  throxxgh  the  probate  courts 
each  year.  Suppose  now  that  we  levy  an  inheritance  tax  equal 
in  weight  to  that  of  the  United  EJngdom;  it  woiild  absorb  only 
about  6  per  cent  of  all  inheritance.  And  this  amoimts  to  hardly 
more  than  3^  per  cent  of  our  annual  increase  in  wealth. 

But  the  annual  increase  in  wealth  is  not  a  true  measure  of  the 
annual  accum\ilation  from  income.  Much  of  the  annual  increase 
consists  merely  in  the  revaluation  of  lands,  mines,  movable  goods, 
even  intangible  privileges.  If  our  wealth  increases  six  billions  this 
year,  how  much  of  the  increase  is  due  to  the  thrift  which  diverts 
purchasing  power  from  current  consumption,  and  employs  it  to 
provide  new  materials  and  instruments  of  production?  One- 
third?  For  my  part,  I  should  not  dare  to  credit  thrift  with  a 
larger  contribution. 

The  inheritance  tax  rests  upon  the  entire  mass  of  wealth, 
including  that  which  originates  in  imeamed  increment  as  well  as 
that  which  originates  in  saving.  But  the  state  does  not  take  from 
a  given  inheritance,  proportionate  shares  of  the  lands,  reproducible 
goods,  franchises,  and  other  privileges  that  compose  it.  The  public 
authority  demands  money,  and  this  is  drawn,  in  one  way  or  another, 
from  liquid  capital.  The  whole  of  the  inheritance  tax,  then,  is 
paid  out  of  the  firnd  of  fluid,  mobile  capital  which  is  the  sole  finan- 
cial basis  of  the  goods  which  conserve  or  increase  our  productive 
equipment — the  fimd  of  which  it  may  properly  be  said  that  it 
originates  in  saving.  Accordingly,  an  inheritance  tax  which 
should  absorb  3^  per  cent  of  the  aggregate  annual  increase  in  wealth 
would  dissipate  far  more  than  3^  per  cent  of  the  annual  increase 
in  the  fluid  fund  of  productive  capital.  If  I  am  right  in  my  esti- 
mate that  increase  in  the  latter  fimd  does  not  exceed  one-third  of 
the  increase  in  national  wealth,  a  6  per  cent  inheritance  tax  woiild 
consume  10$  per  cent  of  our  current  annual  acamiulations  from 
income.    The  capital-destroying  power  of  a  tax  rate  which  we  may 


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i68  JOURNAL  OP  POLITICAL  ECONOMY 

at  any  time  borrow  from  our  British  kinsmen  is,  then,  far  from  being 
negligible. 

There  is,  moreover,  no  valid  reason  for  supposing  that  the 
British  inheritance  tax  has  reached  the  climax  of  its  development; 
nor  that,  when  once  we  set  about  it,  we  shall  regard  ourselves  as 
limited  by  British  precedent.  The  British  law  of  1907  was  not 
accepted  very  gracefully,  to  be  sure,  by  the  classes  upon  whom  the 
burden  of  the  new  taxes  rests.  Nevertheless,  it  is  difficult  to  see 
why  practically  all  the  rates  coxild  not  be  made  much  heavier;  most 
of  them  might  be  doubled  without  serious  hardship  to  anyone. 
Now,  to  levy  inheritance  taxes  in  the  United  States  at  rates  100 
per  cent  above  those  of  the  present  British  taxes — something  we 
may  quite  conceivably  do  before  many  years  have  passed — ^would 
be  to  absorb  over  20  per  cent  of  our  national  increase  in  acciunula- 
tions  from  income,  even  if  our  present  rate  of  increase  can  be  main- 
tained indefinitely. 

It  would,  however,  be  hazardous  to  assimie  that  accmnulation 
in  the  United  States  can  continue  indefinitely  at  the  present  rate. 
Our  large  savings  from  income  may  be  explained,  in  part  at  least, 
by  economic  conditions  which  are  manifestly  transitory.  Our 
working  class,  recently  transplanted  from  a  less  fertile  economic 
field,  secure  incomes  in  excess  of  their  accustomed  needs,  and 
accordingly  have  a  surplus  for  accmnulation.  Our  men  of  wealth, 
newly  enriched,  have  not,  as  a  class,  acquired  the  art  of  luxurious 
consumption.  Their  incomes  outrun  their  expenditures,  and 
the  surplus  acciunulates  without  active  effort  on  their  part.  New 
opportunities  presented  by  nature  or  created  by  society  have 
always  been  available  and  have  served  as  an  additional  stimulus 
to  thrift.  One  cannot  gain  title  to  a  homestead,  one  cannot  seize 
and  exploit  coal  lands  or  street-railway  franchises,  without  the  con- 
trol of  funds  accumiilated  from  income.  Rarely,  in  a  r2q>idly 
developing  economic  state,  is  it  possible  for  an  entrepreneur  to 
draw  from  pre-existing  fimds  all  the  capital  requisite  to  a  full 
exploitation  of  his  opportunities.  He  must  supplement  the  fimds 
which  he  already  owns  and  those  which  he  can  borrow  with  fimds 
saved  from  his  current  income,  if  he  is  unwilling  to  forego  many 
chances  of  great  profit.  "Unearned  increment"  thus  serves  as 
a  premium  upon  thrift. 


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PUBLIC  CAPITAUZATION  OP  THE  INHERITANCE  TAX     169 

As  our  economic  conditions  become  more  settled  the  imeamed 
increment  loses  much  of  its  potency  as  a  stimulus  to  thrift.  Fur- 
thermore, our  laborers  are  raising  their  standards  of  living  and 
our  capitalists  are  learning  the  ways  of  a  society  which  knows  how 
to  spend  its  income.  How  soon  the  rate  of  acciunulation  will 
begin  to  decline,  and  how  rapid  the  decline  will  be,  we  need  not 
attempt  to  predict.  For  our  present  purpose  it  is  sufficient  to 
point  out  that  a  tax  rate  which  would  today  absorb  20  per  cent  of 
our  annual  accumulations  woiild  absorb  a  much  larger  percentage 
of  the  annual  accumiilations  of,  say,  1964. 

Granted,  then,  that  the  evil  of  imthrifty  inheritance  taxes  is 
negligible  at  the  present  time,  when  the  taxes  are  light  and  the  rate 
of  accumulation  is  high.  Such  taxes,  nevertheless,  are  destined 
to  become  heavier  and  the  rate  of  accumulation  is  destined  to 
become  less.  The  evil,  obviously,  is  one  which  has  the  capacity 
of  growing  into  importance. 

If  the  inheritance  tax  is  indeed  affected  with  the  vice  of  unthrifty 
and  if  the  defect  may  lead  to  such  serious  consequences  as  have 
been  indicated,  it  might  be  thought  to  be  the  part  of  wisdom  to 
abandon  the  tax  altogether,  or  to  restrict  it  to  so  narrow  a  range 
that  its  power  of  destroying  acciunulated  capital  woidd  be  ne^- 
gible.  To  propose  such  a  restriction  of  the  tax,  however,  would 
be  idle,  in  view  of  the  powerful  social  and  political  forces  to  which 
its  development  responds.  Economists  may  urge  the  necessity 
of  capital  conservation,  but  the  democracy  will  be  slow  to  recog- 
nize such  necessity,  so  long  as  the  alternative  to  a  policy  of  public 
dissipation  of  capital  is  the  perpetuation  of  vast  private  estates. 
Must  we  accept  this  alternative  ?  There  seems  to  be  no  good  reason 
why  we  should.  There  is  nothing  in  the  nature  of  the  state  which 
requires  it  to  assimie  the  r61e  of  a  prodigal  heir  who  squanders  his 
inheritance  upon  current  needs  instead  of  administering  it  pru- 
dently with  a  view  to  its  future  increase.  The  state  can  adopt  the 
same  policy  which  every  prudent  person  recommends  to  the  private 
heir.  It  can  treat  capital  acquired  through  inheritance  as  a  fund 
to  be  maintained  intact.  Let  the  state  set  apart,  as  a  permanent 
investment  fund,  the  proceeds  of  all  inheritance  taxes,  and  depletion 
of  the  national  capital  will  at  once  cease. 


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lyo  JOURNAL  OF  POLITICAL  ECONOMY 

So  obvious  a  solution  of  the  difficulty  must  of  course  have  pre- 
sented itself  to  almost  every  student  of  public  finance.  It  does  not, 
however,  appear  in  the  textbooks;  nor  in  other  literature  easily 
accessible  to  the  general  student  of  taxation.'  For  this  omission 
I  woiild  assign  two  reasons:  first,  income  from  a  capital  is  not 
commonly  regarded  as  an  appropriate  form  of  public  revenue; 
and  second,  the  state  is  not  regarded  as  an  appropriate  agency  for 
the  investment  and  administration  of  capital  funds. 

A  proposed  policy  of  securing  a  public  revenue  from  an  invested 
capital  would  be  attacked  by  exponents  of  traditional  liberalism 
on  grounds  both  fiscal  and  political.  Such  a  revenue,  they  would 
urge,  is  speoilative  and  imcertain;  if  of  considerable  magnitude, 
it  would  tend  to  liberate  the  executive  from  the  control  now  exer- 
cised by  the  representatives  of  the  people  through  their  power  of 
granting  or  withholding  supplies.  The  fiscal  objection,  evidently, 
would  once  have  been  valid;  it  is  now  obsolete.  One  hundred 
years  ago  there  were  relatively  few  capital  investments  which  pre- 
sented the  characteristics  of  security  and  regularity  of  revenue. 
The  public  obligations  of  even  the  richest  state  were  less  securely 
based  upon  national  finandal  power  than  are  those  of  the  weakest 
of  the  great  powers  of  today.  British  obligations  of  1812  were 
inferior  to  Italian  or  Japanese  obligations  of  191 2.  Soimd  mimid- 
pal  and  private  corporation  paper  hardly  existed  one  himdred  years 
ago.  Today  there  exists  a  vast  volimie  of  sound  paper,  public  and 
private.  Any  state  with  funds  to  invest  would  be  able  to  possess 
itself  of  a  perfectly  stable  revenue. 

The  political  objection  to  a  revenue  of  this  nature  may  also 

be    pronoimced    obsolete.    Future    executives    will,    no    doubt, 

'  I  have  searched  diligently  for  it,  but  without  success.  The  nearest  approach 
to  it  I  have  found  is  Professor  Adams'  suggestion  that  inheritance  taxes,  being  "income 
of  property/'  should  not  form  a  part  of  the  revenues  employed  to  meet  ordinary 
eKpenditures,  but  shoidd  be  set  apart  for  special  purposes,  such  as  education,  and 
especially  higher  education  (Science  of  Finance,  p.  550).  Accepting  Professor  Adams' 
classification  of  expenditures  for  higher  education  as  "developmental,"  we  may  look 
upon  the  application  of  the  inheritance  tax  to  such  uses  as  an  exchange  of  material 
for  immaterial  productive  powers.  Professor  Adams,  to  be  sure,  gives  no  such  reason 
for  his  proposal,  and  it  probably  is  based  upon  no  such  recondite  principle  as  the 
foregoing,  but  upon  the  practical  principle  of  liberating  the  state  university  from  the 
biennial  anxieties  attending  the  passage  through  the  legislature  of  the  appropriation 
bills. 


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PUBLIC  CAPITALIZATION  OF  THE  INHERITANCE  TAX     171 

encroach  at  times  upon  the  powers  of  the  legislature,  and  manip- 
ulation of  the  appropriations  will  continue  to  be  an  effective  mode 
of  legislative  resistance.  But  no  futiure  legislature,  engaged  in  a 
constitutional  struggle,  will  attempt  to  starve  the  whole  public 
service  in  order  to  bring  the  executive  to  its  terms.  Such  a  pro- 
ceeding woiild  be  possible  only  with  that  best  of  governments 
which  governs  least;  with  a  government  administering  chiefly 
traditional  services  the  omission  of  which  would  occasion  no  per- 
manent social  injury,  such  as  a  royal  dvil  list  in  a  democratic  state; 
a  standing  army  in  a  country  protected  by  geography  from  all 
serious  attack;  a  navy  for  the  protection  of  an  ocean  shipping  that 
does  not  exist;  foreign  embassies  of  a  country  which  does  not 
endow  its  ambassadors  with  the  minutest  discretionary  powei^. 
The  modem  state,  with  its  wide  range  of  functions  requiring  con- 
tinuous exercise,  can  safely  charge  some  of  them  upon  a  funded 
income.  The  service  of  education  is  a  case  in  point.  No  one 
would  deny  that  a  reasonable  degree  of  independence  from  legis- 
lative whim  would  improve  the  service.  If  the  state  university 
enjoys  any  advantage  over  the  endowed  university,  this  advantage 
certainly  does  not  consist  in  the  fact  that  a  quarrel  between  the 
executive  and  the  legislature  may  at  any  time  deprive  the  state 
imiversity  of  means  to  carry  on  its  work. 

More  serious  objections  can  be  urged  against  the  emplo3anent 
of  the  state  as  an  agency  of  investment.  It  may  be  argued  that 
the  state  is  not  likely  to  make  investments  wisely,  that  its  entry 
into  the  market  for  investments  would  prejudice  the  interests  of 
the  private  investor,  and  that  a  state  with  large  funds  to  invest 
woiild  be  in  possession  of  new  and  dangerous  powers. 

There  can  be  no  doubt  that  in  the  past  public  management  of 
productive  property  has  often  been  extremely  wasteful.  The 
federal  government,  in  its  administration  of  its  vast  landed  estate, 
followed  no  principles  remotely  resembling  those  followed  by  a 
prudent  private  investor.  State  administration  of  the  property 
represented  by  the  school  lands  commands  scarcely  more  admir- 
ation. But  land,  and  especially  imdeveloped  land,  is  one  of  the 
most  difficult  of  properties  to  administer.  Private  interest  and 
initiative  are  needed  here,  if  anywhere,  in  our  economic  system. 


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172  JOURNAL  OF  POLITICAL  ECONOMY 

The  record  of  state  administration  of  moneyed  funds,  on  the  other 
hand,  is  by  no  means  uniformly  discreditable.  The  school  fimds 
of  the  various  states  are,  at  the  present  time,  fairly  well  managed. 
No  serious  criticism  is  brought  against  the  administration  of  fimds 
by  the  governmental  savings  banks  of  European  countries,  nor 
against  the  quasi-governmental  administration  of  insurance  funds 
in  the  coimtries  which  have  adopted  the  plan  of  working-men's 
insurance.  An  examination  of  the  financial  statements  of  endowed 
universities  in  America'  will  indicate  that  their  funds  are,  as  a  rule, 
administered  with  due  regard  to  both  security  and  productiveness. 
The  truth  seems  to  be  that  it  requires  no  superhimian  shrewdness 
to  invest  funds  safely,  even  in  vast  amoimts,  so  long  as  exceptional 
returns  are  not  demanded.  We  have  already  succeeded  in  develop- 
ing a  tradition  of  management  in  our  federal  treasury  department 
which  assures  us  that  our  temporary  surplus  funds  will  be  managed 
as  well  as  the  law  permits — at  times  somewhat  better.  The 
administration  of  vast  permanent  funds  would  naturally  make  it 
necessary  that  we  should  secure  for  the  service  of  the  state  a  body 
of  officials  of  so\md  financial  training.  This  should  not  prove 
impossible  in  a  country  like  the  United  States,  where  financial 
ability  is  far  from  a  monopoly  of  the  few. 

The  policy  which  is  here  defended  would  involve  the  investment 
by  the  state  of  hundreds  of  millions  annually.  The  state,  it  may 
be  urged,  would  thus  become  a  formidable  competitor  of  the  pri- 
vate investor  who  seeks  to  place  his  funds  in  safe  securities.  This 
would  indeed  be  a  serious  matter  if  the  voliune  of  such  securities 
were  small  and  incapable  of  expansion.  Modem  financial  insti- 
tutions, however,  have  provided  us  with  a  vast  volmne  of  securities 
of  imquestionable  soundness.  The  supply  of  such  securities  can, 
moreover,  be  increased  almost  at  will  through  the  devices  of  prefer- 
ence differentiation  of  the  income  claims  resting  upon  a  given 
property,  by  the  diffusion  of  risks,  and  by  the  more  thoroughgoing 
application  of  insurance  principles.  A  sufficiently  large  part  of 
our  $130,000,000,000  of  wealth  can  be  thrown  into  the  form  of  safe 

'  These  are,  to  be  sure,  private  institutions,  but  since  they  are  no  more  under  the 
dominance  of  the  private  economic  motive  than  the  municipalities  their  experience 
is  in  point. 


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PUBUC  CAPITALIZATION  OF  THE  INHERITANCE  TAX     173 

investments  to  meet  all  probable  requirements,  public  and  private. 
But  let  it  be  granted  that,  on  account  of  public  competition  for 
investments,  the  private  investor  desiring  a  given  return  would  be 
forced  to  enter  a  field  of  somewhat  higher  risk  than  at  present; 
that  he  would  be  compelled  to  exercise  his  skill  and  judgment  to 
escape  chances  of  loss.  Is  not  the  necessity  for  the  exerdse  of  such 
qualities,  after  all,  the  principal  social-economic  justification  for 
the  private  enjoyment  of  income  from  capital  ? 

A  public  investment  policy,  however  extensive,  would  encoimter 
no  insuperable  economic  obstacles.  If  there  are  valid  objections 
to  such  a  policy,  they  must  rest  upon  grounds  of  a  sodal  and  politi- 
cal character.  It  is  not  to  be  denied  that  grave  objections  of  this 
order  do  present  themselves  the  moment  one  gives  thought  to  the 
subject.  Were  a  state  to  build  up  an  invested  capital  it  would  be 
in  possession  of  a  financial  power  of  its  own  to  oppose  to  that  of 
private  finance.  In  its  investment  policy  it  might  pursue  ends 
other  than  those  of  financial  gain,  and  so  work  important  changes 
in  the  social  structure.  With  the  relatively  small  volume  of  sur- 
plus funds  under  his  direct  control,  the  secretary  of  the  treasury 
has  already  become  a  power  of  no  inconsiderable  magnitude  in  oiu: 
financial  markets.  Suppose  that  a  federal  bureau  were  vested 
with  the  control  of  funds  running  into  the  billions;  what  mischief 
could  it  not  wreak  in  Wall  Street!  The  public  savings-bank  funds 
of  Belgium  and  the  working-men's  insurance  funds  of  Germany 
are  at  present  used  in  part  to  encourage  the  building  of  cottages  for 
working-men.  Had  we  an  investment  fund  of  colossal  proportions, 
what  an  objective  for  the  strategy  of  militant  agrarianism!  A 
state  investment  policy  is  manifestly  not  one  to  be  lightly  accepted, 
even  if  fiscally  practicable  and  economically  soimd. 

Concentrated  financial  power,  let  us  admit,  is  real  power.  Its 
proper  employment  is  a  potent  instrumentality  of  social  progress; 
its  improper  use  is  socially  and  politically  disastrous.  There  can 
be  no  guaranty  that  public  financial  power  would  never  be  abused. 
We  have,  at  present,  a  high  degree  of  concentration  of  financial 
power  in  private  hands.  If  it  were  possible  to  prove  that  such 
concentration  is  never  subject  to  abuse,  the  case  against  public 
acquisition  of  finandal  power  would  be  a  strong  one. 


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174  JOURNAL  OP  POLITICAL  ECONOMY 

Those  who  assert  that  private  financial  agencies  can  never  abuse 
their  powers  rest  their  argument  upon  two  assumptions:  that  the 
competition  between  different  financial  groups  is  sufficiently  active 
to  render  those  who  are  in  need  of  funds  independent  of  any  single 
group;  and  that  privately  controlled  funds  flow  automatically  to 
the  fields  offering  the  highest  returns  compatible  with  safety. 
Were  these  assumptions  valid,  we  should  be  justified  in  holding 
that  private  financial  power  is  essentially  mechanical,  governed  by 
impersonal  economic  forces;  that  the  great  financier,  in  spite  of 
his  apparent  position  of  personal  power,  is  a  mere  agency  of  forces 
beyond  his  control,  an  agency  devoid  of  all  discretionary  power. 
But  neither  assumption  is  wholly  valid.  The  great  financial  houses 
do  not,  as  a  fact,  compete  actively  for  the  privilege  of  imderwriting 
a  great  public  or  private  loan.  The  conduct  of  the  agents  of  bond- 
ing houses  in  bidding  for  the  loans  of  small  municipalities  and  local 
corporations  is  frequently  indicative  of  the  existence  of  the  "gentle- 
men's agreement."  The  monopoly  of  financial  power  is  never 
absolute,  it  is  true;  there  still  remain  multitudinous  minor  sources 
of  investment  f  imds  that  may  be  drawn  upon  when  the  great  finan- 
ciers withhold  supplies.  A  government  which  finds  it  difficult  to 
deal  with  the  financiers  may  float  a  popular  loan.  A  local  corpor- 
ation may  solicit  funds  among  its  patrons  and  employees.  None 
the  less,  it  is  pretty  generally  recognized  that  it  is  better  to  have 
the  financiers  with  you  than  against  you.  And  this  is  the  recog- 
nition of  a  power  not  wholly  held  in  restraint  by  competition. 

Nor  is  the  second  assumption,  that  the  flow  of  private  funds 
is  directed  solely  with  a  view  to  securing  thie  maximum  economic 
gain,  to  be  accepted  as  of  unquestionable  validity.  Let  us  imagine 
that  a  single  financial  group  controls  the  greater  part  of  the  flow 
of  free  capital  to  a  section  of  the  country  which  is  still  in  the  devel- 
oping stage,  and  hence  dependent  upon  foreign  funds.  Is  it  to  be 
supposed  that  the  flow  of  fimds  will  be  distributed  impartially  to 
all  who  are  in  need  of  them  and  can  give  appropriate  guaranties  ? 
Or  are  we  at  liberty  to  suppose  that  certain  local  captains  of  indus- 
try will  find  special  favor,  and  that  competing  captains  will  be 
forced  to  content  themselves  with  what  funds  they  can  secure  from 
less  powerful  lenders  ?    Must  we  suppose  that  the  private  dispen- 


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PUBUC  CAPITAUZATION  OF  THE  INHERITANCE  TAX     175 

sers  of  capital  funds  will  provide  them  as  readily  for  the  policy  of 
productive  public  underts^kings,  which  they  may  happen  to  detest, 
as  for  the  approved  policy  of  unproductive  improvements  ?  •  There 
are  able  financial  writers  who  will  assert  that  no  legal  proof  of  dis- 
crimination in  the  dispensing  of  domestic  investment  funds  can 
be  adduced.  Very  well,  I  confine  myself  to  instances  presented 
in  hypothetical  form.  Let  it  be  noted,  however,  that  the  same 
financial  writers  to  whom  I  refer  are  the  last  to  deny  political  and 
social  potency  to  the  "dollar  diplomacy."  They  would  be  the  last 
to  assert  that  nothing  beyond  the  desire  for  a  soimd  investment 
induced  our  financiers  to  seek  the  privilege  of  refunding  the  Hon- 
duras debt,  and  of  participating  in  the  Chinese  loan.  On  the  con- 
trary, these  activities,  it  is  universally  agreed,  present  a  character 
of  broad  statesmanship.  Let  us  grant  that  financial  statesmanship 
has  hitherto  been  confined  to  the  field  of  foreign  affairs.  There 
appears  to  be  no  natural  reason  why  it  should  not,  in  future,  con- 
cern itself  with  domestic  affairs  as  well. 

Financial  power,  we  may  repeat,  is  a  real  power  in  the  political 
and  social  fields.  It  may  be  directed  against  the  state  as  such,  but 
I  know  of  no  reason  for  believing  that  it  is  often  employed  in  this 
way.  It  may  be  directed  against  partiailar  private  interests  in 
the  state.  Such  employment  of  private  financial  power  is  probably 
not  uncommon;  possibly  it  is  of  no  concern  to  the  state.'  A  con- 
siderable financial  power,  lodged  in  the  state,  might  reduce  the 
possibility  of  iniquitous  financial  discrimination  against  individ- 
uals. It  woidd  certainly  liberate  the  government  itself  from  an 
improper  dependence  upon  private  interests.  With  an  abundant 
supply  of  public  investment  funds  at  hand,  no  city  desiring  to 
municipalize  its  public  service  industries  woidd  find  its  projects 
subject  to  a  private  veto.  Doubtless  an  unseen  third  chamber^ 
the  bondholders,  has  often  proven  a  socially  expedient  branch  of 

'  To  employ  a  somewhat  treacherous  analogy,  the  private  military  power  of  the 
feudal  lord  was  seldom  directed  against  the  king.  It  was  frequently  directed  against 
other  feudal  lords — a  matter  not  regarded  as  of  special  concern  to  the  king.  In  the 
end,  however,  it  became  expedient  for  the  king  to  assume  the  r61e,  first  of  paramount,, 
later  of  exclusive,  military  power.  Not  to  press  the  analogy  too  far,  it  is  conceivable 
that  the  time  may  come  when  the  state,  to  maintain  its  portion  as  the  predominant 
influence  within  its  own  boundaries,  will  be  compelled  to  assume  the  r61e  of  an  impor- 
tant, if  not  paramount,  financial  power. 


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176  JOURNAL  OF  POUTICAL  ECONOMY 

government.  But  no  political  scientist  is  ready  to  give  it  a  per- 
manent place  in  his  system.  The  adoption  of  a  policy  of  national- 
ization of  railways  in  the  United  States  would  give  a  permanent 
place  in  our  government  to  such  a  third  chamber,  unless  the  public 
possessed  funds  of  its  own  wherewith  to  finance  the  venture. 

It  remains  to  consider  whether  the  state,  in  the  pursuit  of 
non-economic  ends,  would  be  likely  to  follow  a  policy  of  unpro- 
ductive placing  of  funds.  There  is  a  widely  current  doctrine  that 
the  state,  because  it  is  eternal,  or  because  it  is  not  a  business  con- 
cern, does  not  need  to  seek  a  profit.  If  this  means  simply  that  the 
state  may  often  be  content  with  an  immaterial  return  in  social 
utility  which  would  not  serve  as  an  adequate  reward  for  private 
enterprise,  no  objection  to  the  doctrine  need  be  raised.  But  it  is 
often  interpreted  in  a  literal  sense.  Provided  the  state  possessed 
a  surplus  revenue,  many  persons  woidd  see  no  reason  why  it  should 
not  build  roads  and  canals  the  returns  from  which,  material  and 
immaterial,  so  far  as  calculable,  would  never  exceed  maintenance 
charges.  The  only  explanation  for  the  prevalence  of  such  a 
doctrine  must  be  that  many  persons  are  imable  to  realize  that  pro- 
ductive funds  are  necessarily  limited  in  amount  and  should  there- 
fore be  placed  only  where  they  may  be  expected  to  be.  normally 
remunerative.  Any  other  policy  is  sheer  waste,  whether  public  or 
private.  Now,  no  one  woidd  advocate  the  placing  of  a  permanent 
investment  fund  in  the  control  of  the  state  if  the  inevitable  result 
woidd  be  merely  to  extend  the  range  of  profitless  economy. 

There  is,  however,  a  simple  means  of  insuring  a  reasonable 
regard  for  profit  in  the  investment  of  public  funds.  Charge  upon 
the  return  from  such  fimds  governmental  services  that  are  con- 
tinuous, that  make  a  powerful  appeal  to  the  ordinary  citizen,  and 
the  beneficiaries  of  which  are  widely  dispersed  through  the  popu- 
lation. Such  a  service  we  ahready  have  in  popular  education.  Still 
better,  from  the  point  of  view  of  controlling  a  public  investment 
policy,  are  those  services  which  will  arise  when,  like  other  civilized 
nations,  we  shall  assume  the  responsibility  of  social  insurance. 
The  general  public  would  show  little  tolerance  of  an  uneconomical 
administration  of  capital  funds  the  revenues  from  which  were  set 
apart  for  the  support  of  the  aged  and  the  disabled,  the  widowed 
mothers  of  yoimg  children  and  other  natural  dependents  of  society. 


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PUBLIC  CAPITAUZATION  OF  THE  INHERITANCE  TAX     177 

The  endowed  hospital  of  today,  though  a  philanthropic  institution, 
makes  no  pretense  of  philanthropy  in  its  investment  policy.  The 
fact  that  the  beneficiaries  of  the  hospital  endowment  funds  are 
among  the  most  needy  of  mankind  is  a  sufficient  protection  to 
trustees  against  the  temptation  to  sacrifice  on  sentimental  grounds 
either  security  or  productiveness  of  investments.  Mention  has 
already  been  made  of  the  fact  that  in  Europe  public  or  quasi-public 
funds  are  employed  to  assist  in  the  provision  of  working-men's 
houses.  The  conditions  under  which  loans  are  made  to  working- 
men  are  not,  however,  philanthropically  mild.  In  security  such 
investments  compare  favorably  with  investments  in  public  obli- 
gations; in  productiveness  they  are  superior.  A  public  authority, 
intrusted  with  the  administration  of  funds,  would  no  doubt  endeavor 
to  strengthen  its  political  position  by  employing  them  in  such  a 
way  as  to  secure  incidental  social  gains.  With  conditions  of 
security  and  productiveness  equal,  it  might  prefer  farm  and  build- 
ing loans  to  railway  or  industrial  loans.  It  is  not  clear,  however, 
that  such  preferential  treatment  of  the  entrepreneur  of  small  means 
would  be  undesirable.  It  might  correct  the  tendency  of  private 
finandal  powers  to  favor  the  large  enterprise. 

The  public  capitalization  of  the  inheritance  tax  would  tend 
to  conserve  the  national  stock  of  productive  wealth.  It  is  a  policy 
that  would  encounter  no  insuperable  administrative  difficulties; 
it  would  not  seriously  prejudice  the  interests  of  the  private  in- 
vestor. Politically  and  socially  such  a  policy,  if  it  has  potentiali- 
ties for  evil,  would  appear  to  have  far  greater  potentialities  for 
good.  None  the  less,  the  proposal  of  such  a  policy  will  by  some 
economists  be  regarded  as  revolutionary. 

There  is  manifestly  nothing  revolutionary  in  principle  in  a 
capital  fund  owned  and  managed  by  the  state  for  the  benefit  of 
a  particular  public  service.  Instances  of  such  funds  have  already 
been  dted.  Public  and  semi-public  endowment  funds  now  in 
existence  in  this  country  amount,  in  the  aggregate,  to  an  imposing 
sum.  We  are  living  in  an  epoch  in  which  the  funded  endowment 
is  employed  with  growing  frequency.  There  is  an  increasing  reluc- 
tance on  the  part  of  private  donors  to  contribute  funds  merely  for 
current  expenditures;  there  is  an  increasing  tendency  on  the  part 


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178  JOURNAL  OF  POUTICAL  ECONOMY 

of  public  and  semi-public  institutions  to  transform  extraordinary 
current  receipts  into  permanent  endowment.  Not  on  principle, 
then,  can  a  plan  of  the  permanent  endowment  of  a  public  service 
be  treated  as  revolutionary.  If  there  is  anything  revolutionary  in 
the  plan,  it  must  consist  solely  in  the  magnitude  of  the  operations 
that  it  would  entail. 

In  an  earlier  paragraph  it  was  estimated  that  inheritance  taxes 
levied  at  rates  equivalent  to  those  of  Great  Britain  would  yield 
$200,000,000  a  year.  This  estimate  was  based  upon  a  rough  com- 
parison of  the  population  and  wealth  of  the  two  countries.  If  we 
assume  that  the  wealth  of  the  United  States  is  $130,000,000,000,  the 
amoimt  passing  through  the  probate  courts  each  year  will  be 
somewhat  less  than  $4,000,000,000/  It  would  require  only  an 
average  rate  of  5  per  cent  to  produce  a  revenue  of  $200,000,000. 
Of  the  $4,000,000,000  of  annual  inheritances  $2,000,000,000,  let 
us  say,  will  fall  in  estates  of  $50,000*  or  less,  and  could  bear  only  a 
low  rate.  An  average  rate  of  2  per  cent  on  this  $2,000,000,000 
would  yield  $40,000,000.  Of  the  remaining  $2,000,000,000,  three- 
fourths  would  fall  in  estates  of  $50,000  to  $1,000,000,  and  could 
safely  bear  an  average  burden  of  7J  per  cent,  which  would  jrield 
$112,500,000.  The  remaining  $500,000,000,  in  estates  of  $1,000,- 
000  and  over,  could  pay  an  average  rate  of  15  per  cent,  and  woidd 
yield  $45,000,000.  On  this  basis  we  should  have  an  aggregate 
revenue  of  $197,500,000.  Making  all  due  allowance  for  error  in 
rough  estimates  such  as  we  are  forced  to  rely  upon,  it  still  appears 
clear  that  the  yield  of  an  inheritance  tax  levied  at  the  fairly  moder- 
ate British  rates  could  not  be  far  from  $200,000,000.  Two  hundred 
millions  would  be  a  considerable  simi  to  invest  each  year;  and  the 
accumulations  of  a  quarter  of  a  century  would  amount  to  the  huge 
sum  of  five  billions,  even  if  the  national  wealth  remained  stationary 

'  Statistidans  are  not  agreed  as  to  the  proper  coefficient  to  be  employed  in  cal- 
culating the  total  wealth  of  a  nation  from  the  annual  transfer  of  wealth  on  account  of 
death.  The  coefficients  actually  employed  vary  from  32  to  37.  In  calculating  from 
the  current  estimate  of  total  wealth  the  amount  of  annual  inheritances  I  have  used 
the  coefficient  ^  as  one  which  would  give  conservative  results. 

•  Spahr,  The  Present  DisUribution  of  WeaUk  in  the  United  States,  p.  69,  estimates 
that  one-half  the  wealth  of  the  United  States  is  held  in  estates  of  $50,000  and  over. 
This  estimate,  which  may  have  been  deemed  radical  when  it  was  made,  twenty  years 
ago,  would  today  be  considered  moderate. 


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PUBUC  CAPITAUZATION  OF  THE  INHERITANCE  TAX     179 

in  amount.  If  the  wealth  of  the  country  doubles  in  the  next 
twenty-five  years,  as  it  probably  will,  we  have  to  increase  that 
amount  to  seven  and  one-half  billions,  if  we  wish  to  form  a  true 
estimate  of  the  results  of  twenty-five  years  of  acomiulation  of 
the  tax. 

These  accumulations  appear  large  and  unwieldy  when  con- 
sidered in  themselves.  When  we  view  them  in  their  proper  rela- 
tion to  the  capacity  of  our  economic  system  to  absorb  new  funds, 
however,  their  appeal  to  our  apprehensions  loses  most  of  its  force. 
The  present  annual  increase  in  the  indebtedness  of  the  states, 
municipalities,  and  other  minor  civil  divisions  can  scarcely  be  less 
than  $100,000,000,  and,  with  the  growing  popularity  of  the  policy 
of  public  ownership,  we  must  expect  to  see  this  indebtedness  in- 
crease at  a  still  more  rapid  rate  in  the  future.  It  is  freely  prophe- 
sied by  economists  of  high  repute  that  the  United  States  will,  in 
the  end,  nationalize  its  railways.  Were  we  to  levy  inheritance 
taxes  at  the  heaviest  rates  that  are  practicable,  and  set  aside  the 
entire  proceeds  of  the  tax  for  this  purpose,  it  would  require  half 
a  century  to  substitute  public  for  private  ownership  of  the  bonds 
that  would  have  to  be  issued  in  the  process  of  buying  out  private 
interests  in  the  field  of  transportation.  There  is  no  reason  for  con- 
fining public  investment  to  public  and  semi-public  enterprises; 
but  even  if  we  were  to  do  so,  we  should  never  be  embarrassed  by 
any  tendency  of  the  supply  of  funds  to  outrun  the  demand. 

Nor  is  there  the  least  reason  for  fearing  that  the  fimd  would 
attain  such  magnitude  as  to  produce  embarrassment  in  the  dispo- 
sition of  the  income  from  it.  Assume  that  at  the  end  of  twenty-five 
years  the  accmnulated  fund  would  amoimt  to  seven  and  one-half 
billions;  that  sum  at  3  per  cent  woidd  yield  a  revenue  of  $225,000,- 
000 — a  very  respectable  contribution  to  the  relief  of  old  age  and 
disability,  perhaps,  but  certainly  not  in  excess  of  the  needs  of  that 
one  service.  The  fund  woidd  doubtless  increase  more  rapidly 
than  the  needs  of  that  particular  service;  but  long  before  it  could 
reach  such  proportions  as  to  provide  income  in  excess  of  all  social 
service  requirements,  the  yield  of  the  tax  would  probably  have 
begun  to  decline  on  account  of  the  disappearance  of  many  of  the 
inequalities  in  the  distribution  of  wealth  which  characterize  the 
present  economic  order. 


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i8o  JOURNAL  OF  POUTICAL  ECONOMY 

Defenders  of  an  economic  system  based  upon  the  principle  of 
private  property  must  admit  that  at  two  points  their  position 
is  decidedly  weak:  the  private  enjoyment  of  fmided  income,  and 
the  private  burden  upon  the  worker  of  mischances  against  -vdiich 
it  is  impossible  for  him  to  mzkt  provision.  The  private  recipient 
of  an  absolutely  secure  funded  income  is  freed  from  the  necessity 
of  exercising  the  skill  and  foresight  which  serve,  in  general,  as  an 
ethical  basis  for  the  defense  of  private  property.  The  active 
manager  of  an  industrial  capital  finds  his  position  morally  weak* 
ened  by  the  fact  that  his  property  income  is  assimilated,  in  the 
social  consciousness,  to  that  of  the  functionless  '^remittance  man/' 
However  much  we  may  approve  of  the  policy  of  throwing  upon 
each  able-bodied  man  the  responsibility  for  finding  means  of  self- 
support,  we  must  admit  that  himdreds  of  thousands  of  our  working- 
men  are  exposed  to  chances  against  which  they  can  sfiake  no 
adequate  provision.  For  hundreds  of  thousands  of  our  city  workers, 
the  only  escape  from  an  indigent  old  age  is  premature  death.  For 
hundreds  of  thousands  of  families,  the  death  of  the  chief  bread- 
winner means  the  maiming  of  children's  lives  almost  past  recovery. 
A  system  which  permits  such  evils  is  surely  not  free  from  moral 
weakness.  Now,  the  general  tendency  of  the  policy  which  I  pro- 
pose is  to  divert  to  the  state  part  of  the  funded  income  of  society 
from  the  private  recipients  in  whose  hands  it  subserves  no  useful 
purpose,  and  to  charge  upon  it  precisely  those  burdens  by  which 
the  weak  are  now  crushed.  Not  by  the  rough  method  of  expro- 
priation, however,  but  by  a  method  which  is  legal  as  well  as  ethical, 
and  which  entails  no  sacrifice  of  the  future  to  present  gain.  The 
public  capitalization  of  inheritance  taxes  would  result  in  an  accimiu- 
lation  of  funds  which  would  be  gradual,  and  it  would  hence  leave 
opportimity  for  the  development  of  efEident  means  of  administra* 
tion.  Under  this  plan  public  accmnulations  would  constantly 
increase;  but  their  increase  could  never  become  so  great  as  to 
restrict  the  field  of  private  property  unless  private  acctmiulations 
should  come  to  a  standstill  and  opportimities  for  private  exploita- 
tion should  fail. 

Alvin  S.  Johnson 

Cornell  University 


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NOTES 
WASHINGTON  NOTES 

THE  ANTI-TRUST  MESSAGE 

President  Wilson,  in  a  message  read  to  Congress  on  January  20,  has 
definitely  outlined  the  anti-trust  program  of  the  administration.  The 
document  is  of  the  first  importance  because  it  virtually  indicates  the 
line  that  is  to  be  drawn  between  the  various  measures  that  have  been 
competing  for  attention  in  Congress,  indicating  those  that  will  and  those 
that  will  not  be  favorably  regarded.  This  message  may  be  taken  to 
represent  practically  what  has  been  determined  on,  and  what  will 
undoubtedly  become  law  during  the  next  few  months.  As  thus  mapped 
out,  the  legislation  to  be  demanded  will  include: 

1.  Prohibition  of  interlocking  directorates. 

2.  Government  supervision  of  the  issues  of  railroad  securities,  such 
supervision  to  be  carried  on  by  the  Interstate  Conmierce  Commission. 

3.  Definition  of  what  acts  are  to  be  included  as  ^^  restraints  of 
trade"  under  the  Sherman  anti-trust  law. 

4.  Establishment  of  a  ''trade  commission"  to  work  out  and  apply 
the  administration  of  the  measures  devised  for  the  restraint  of  com- 
binations. 

5.  Establishment  of  individual  penalties  to  be  visited  upon  those 
who  are  responsible  for  restraints  of  trade  imder  the  Sherman  act,  and 
under  such  supplementary  legislation  as  may  be  adopted. 

6.  Prohibition  of  holding-companies,  with  possible  limitation  of 
voting  power  on  shares  held  by  individuals  in  a  variety  of  corporations. 

7.  Establishment  of  the  legal  right  of  individuals  to  bring  suits  for 
collection  of  damages  from  industrial  combinations  found  to  be  such 
through^e  medium  of  suits  instituted  by  the  government. 

Of  this  large  program  practically  every  item  has  already  been  elabo- 
rately discussed  and  is  represented  by  several  bills  pending  in  Congress. 
On  the  whole  the  program  is  nearer  than  any  other  to  what  has  ordinarily 
been  referred  to  as  the  ''Brandeis-La  FoUette"  program,  embodied  in 
bills  said  to  have  been  drafted  by  Louis  D.  Brandeis  of  Boston  and  intro- 
duced by  Senator  La  FoUette.  The  proposal  to  define  restraints  of 
trade,  the  prohibition  of  holding-companies,  and  the  creation  of  a  basis 
for  individual  suits  were  clearly  included  in  that  plan.    The  interlocking 

181 


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i82  JOURNAL  OP  POLITICAL  ECONOMY 

directorate  proposal  is  a  plan  that  has  been  before  Congress  for  a  number 
of  years,  but  was  most  strongly  urged  at  the  time  of  the  Untermyer 
"money  trust  investigation"  about  a  year  ago.  The  supervision  of  rail- 
road securities  through  the  Interstate  Commerce  Commission  is  a  sug- 
gestion that  has  been  urged  in  times  past  by  many  di£ferent  groups  in 
Congress  and  was  rather  strongly  presented  to  the  legislative  body  by 
President  Taf t,  first  in  an  extreme  form  at  the  opening  of  his  adminis- 
tration, and  later  in  a  modified  shape  after  recommendations  had  been 
made  by  the  so-called  "  Railway  Securities  Conunission  "  of  which  Presi- 
dent Hadley  of  Yale  University  was  the  head.  The  proposal  to  penalize 
individuals  who  are  guilty  of  bringing  about  restraints  of  trade  is  also  a 
familiar  scheme  which  has  been  prominently  urged  by  a  good  many  of 
the  southern  and  southwestern  members  of  the  House  of  Representatives 
who  are  known  for  their  hostility  to  industrial  combinations.  Perhaps 
the  latest  exponent  of  this  type  of  legislation  is  Representative  Henry  of 
Texas,  the  chairman  of  the  House  rules  conunittee,  who  some  time  ago 
introduced  a  modification  of  the  anti-trust  law  intended  to  meet  the 
anti-trust  situation  by  enforcing  prison  penalties  for  violations  of  the  law. 
Although  the  message  in  general  is  framed  in  extremely  soothing  terms, 
it  will  thus  be  seen  that  there  is  included  in  it  some  portion  of  nearly 
every  anti-trust  measure,  however  radical,  and  whatever  its  source, 
that  has  figured  prominently  of  late  years.  In  no  case  does  the  recom- 
mendation made  go  to  the  extreme  limit  of  the  plan  from  which  it  was 
drawn.  Thus,  for  example,  the  older  suggestions  for  a  trade  commission 
contemplated  a  body  vested  with  power  to  fix  prices  of  goods  which 
moved  in  interstate  trade.  Nothing  of  the  kind  is  now  recommended 
by  the  President.  In  like  manner  nearly  all  of  the  other  elements  have 
been  softened  and  smoothed  in  his  program.  Interlocking  directorates 
are  not  to  terminate  for  some  time  to  come — for  two  years  or  a  longer 
period ;  the  right  of  individuab  to  sue  for  damages  is  much  more  restricted 
than  was  prescribed  by  the  early  La  Follette  bills;  and  the  plan  for 
defining  restraints  of  trade,  so  far  as  it  is  worked  out,  is  by  no  means  so 
far-reaching  as  the  measure  from  which  it  has  been  borrowed.  Because 
of  these  extensive  and  careful  modifications,  the  message  has  not  aroused 
the  anxiety  in  the  business  world  that  would  otherwise,  almost  neces- 
sarily, have  been  exhibited  as  a  result  of  it. 

The  so-called  "keynote"  of  the  message  is  probably  foimd  in  the 
following  paragraph:  "When  serious  contest  ends,  when  men  imite 
in  opinion  and  purpose,  those  who  are  to  change  their  ways  of  business 
joining  with  those  who  ask  for  the  change,  it  is  possible  to  effect  it  in 


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NOTES  183 

the  way  in  which  prudent  and  thoughtful  and  patriotic  men  would  wish 
to  see  it  brought  about,  with  as  few,  as  slight,  as  easy,  and  simple  business 
readjustments  as  possible  in  the  circumstances,  nothing  essential  dis- 
turbed, nothing  torn  up  by  the  roots,  no  parts  rent  asunder  which  can 
be  left  in  wholesome  combination.  Fortunately,  no  measures  of  sweep- 
ing or  novel  change  are  necessary.  It  will  be  understood  that  our  object 
is  not  to  imsettle  business  or  anywhere  seriously  to  break  its  established 
courses  athwart.  On  the  contrary,  we  desire  the  laws  we  are  about  to 
pass  to  be  the  bulwarks  and  safeguards  of  industry  against  the  forces 
that  have  disturbed  it.  What  we  have  to  do  can  be  done  in  a  new  spirit, 
in  thoughtful  moderation,  without  revolution  of  any  imtoward  kind. 
We  are  all  agreed  that  'private  monopoly  is  indefensible  and  intolerable,' 
and  our  programme  is  founded  upon  that  conviction.  It  will  be  a  com- 
prehensive, but  not  a  radical  or  imacceptable  programme.'' 

A  NEW  ANTI-TRUST  POLICY 

President  Wilson  has  succeeded  in  developing  a  distinctly  new  phase 
of  the  subject  of  trust  control  by  securing  from  industrial  managers 
assent  to  his  plans  for  dissolution  or  reorganization,  in  a  sufficient 
number  of  cases  to  constitute  a  precedent.  The  same  methods  had 
been  tried  during  the  Taft  administration  and  earlier,  and  in  certain 
instances  corporations  had  thought  it  better  to  assent  to  the  terms 
laid  down  by  the  government  than  to  attempt  to  resbt  the  public 
authorities  in'  suits  at  law.  These  instances,  however,  were  not  very 
numerous,  and  in  most  cases  involved  concerns  which  had  been  obvi- 
ously and  flagrantly  acting  without  reference  to  the  anti-trust  law,  so 
that  their  action  was  really  no  more  than  the  admission  that  they  had 
a  poor  defense.  The  settlements  that  are  now  being  obtained,  of  which 
the  readjustment  of  the  American  Telephone  and  Telegraph  Co.  and 
the  dissolution  of  the  New  Haven  Railway  are  examples,  afford  a  much 
more  striking  instance  of  this  kind  of  mediation  with  a  view  to  the 
establishment  of  the  principles  of  the  Sherman  law  upon  a  definite  basis. 
In  each  of  these  cases,  the  basis  of  adjustment  is  that  of  a  gradual  separa- 
tion between  the  parent-corporation  which  originally  embarked  upon 
an  effort  to  monopolize  a  particular  kind  of  business,  and  the  concerns 
which  have  gradually  been  absorbed  in  the  process  of  carrying  out 
this  program  of  monopoly.  Thus  in  the  New  Haven  case  the  ultimate 
settlement  will  imply  disposal  of  the  New  England  trolley  systems  and 
the  placing  of  the  steamship  lines  owned  by  the  railway  upon  an  inde- 
pendent basis.    The  same  plan  has  been  quite  fully  worked  out  in  the 


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i84  JOURNAL  OF  POUTICAL  ECONOMY 

case  of  the  American  Telephone  and  Tel^aph  Co.,  where  to  the  provi- 
sion for  s^r^ation  is  added  provision  for  permitting  other  concerns 
to  use  the  lines  of  the  company  at  a  specified  rate  fixed  alike  to  all  who 
make  use  of  the  privilege  thus  afforded  them.  The  principles  of  adjust- 
ment in  these  cases  are  to  be  regarded  as  constituting  a  distinct  advance 
over  those  which  were  developed  in  connection  with  the  separation  of  the 
Union  Pacific  and  Southern  Pacific  railways  which  was  finally  consum- 
mated less  than  a  year  ago,  where  the  process  of  breaking  i^  the  mon- 
opoly consisted  largely  in  a  separation  of  stock  ownership.  The  new 
arrangements  in  the  case  of  the  companies  just  mentioned,  as  well  as 
in  other  instances  of  a  similar  sort,  are  intended  to  add  real  elements 
of  restored  competition  as  well  as  the  idea  of  regulation  (where  a  practi- 
cal monopoly  in  part  exists)  of  the  charge  for  service  and  of  the  condi- 
tions of  use  both  by  the  public  and  by  competitors.  On  the  other  hand, 
the  breakdown  of  negotiations  between  the  Department  of  Justice 
and  the  American  Sugar  Refining  Co.  and  other  concerns  which  have 
been  under  attack  shows  that  there  are  very  distinct  limits  to  what  can 
be  done  in  the  direction  in  which  the  authorities  of  the  Department 
of  Justice  have  been  working  during  the  past  few  months.  In  general,  it 
would  seem  that  the  results  of  the  findings  of  the  Supreme  Court  in 
the  Standard  Oil  and  Tobacco  cases  and  in  some  of  the  more  recent 
but  less  notable  decisions  involving  the  matters  of  industrial  combina- 
tions are  just  beginning  to  be  realized,  and  that  corporations  of  a  certain 
class,  under  the  advice  of  their  coxmsel,  are  showing  a  disposition  to  ac- 
commodate themselves  to  the  changed  state  of  affairs  produced  by  these 
verdicts.  This,  however,  still  leaves  open  a  very  large  field  within 
which  much  work  will  have  to  be  done  in  order  to  bring  about  definite 
results. 

COMPILATION  OF  ANTI-TRUST  LAWS 

Preparatory  to  the  opening  of  the  anti-trust  discussion,  a  new  com- 
pilation of  laws  on  trusts  and  monopolies  domestic  and  foreign,  with 
authorities,  has  been  prepared  and  published  as  a  public  document 
by  the  Judiciary  Conmiittee  of  the  House  of  Representatives,  as  a  com- 
mittee document.  In  this  compilation  are  given,  in  addition  to  the 
Sherman  anti-trust  law,  selections  from  the  acts  of  August  15,  1894; 
February  12,  1913;  February  4,  1887  (Interstate  Commerce  act); 
February  11,  1903;  March  7,  1906;  March  21,  1906;  act  of  June  25, 
1910;  and,  finally,  the  judicial  code  of  January  i,  1912.  Various  other 
fragmentary  provisions  bearing  upon  the  whole  subject  have  been  drawn 
together  from  a  nimiber  of  sources  found  in  various  acts  extending 


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NOTES  i8s 

through  a  series  of  years.  Recourse  is  then  had  to  the  state  statutes, 
and  the  laws  of  practically  every  American  state  are  drawn  upon  for 
constitutional  provisions;  legislation,  and  court  decisions  affecting 
questions  of  monopoly  and  combination.  Among  foreign  countries, 
Australia,  Canada,  Great  Britam,  Japan,  and  several  others  supply 
examples  of  restrictive  statutes  which  are  dted  verbatim  with  explana- 
tions to  show  their  bearing.  The  document  also  gives  a  complete  com- 
pilation of  the  cases  decided  imder  the  Sherman  law  or  relating  thereto, 
with  references  to  case  books  and  the  like.  A  special  group  of  cases 
deals  with  price-fixing  and  resale  contracts  which  constitute  a  subject 
of  collateral  interest  not  directly  belonging  to  the  control  of  industrial 
combinations  as  such.  This  dbcument  is  probably  the  most  complete, 
compilation  of  the  kind  that  has  thus  far  been  made  available. 

EFFORTS  TO  ESTABLISH  A  CENTRAL  BANK 

The  actual  signing  of  the  federal  reserve  act  on  December  23,  1913, 
makes  the  so-called  currency  bill  a  law  (Public  Act  No.  43,  63d  Con- 
gress, ist  sess.)  and  terminates  for  the  time  being  the  controversy  as 
to  banking  atid  currency  legislation.  Since  the  adoption  of  the  law, 
the  reserve  bank  organization  conmiittee,  created  by  the  measure  itself 
with  Secretary  of  the  Treasury  McAdoo  in  charge,  has  held  hearings 
at  New  York  on  January  5,  6,  and  7,  at  Boston  on  January  9  and  10, 
and  at  Washington  on  January  14,  15,  and  16,  and  has  annoimced 
hearings  to  occupy  a  month  at  twelve  other  important  cities,  for  the 
purpose  of  taking  testimony  with  regard  to  the  best  plan  to  be  followed 
in  districting  the  entire  coimtry  in  accordance  with  the  provisions 
made  in  the  federal  reserve  act  itself.  In  its  final  form  the  act  calls  for 
not  fewer  than  eight  nor  more  than  twelve  institutions,  and  the  apparent 
trend  of  the  hearings  up  to  this  time  has  seemed  to  be  toward  the  higher 
number,  or,  at  all  events,  toward  some  nimiber  intermediate  between 
that  and  the  lower  nimiber.  The  striking  feature  of  the  testimony 
thus  far  developed  has  been  seen  in  the  effort  of  some  New  York  banks 
to  obtain  for  New  York  the  creation  of  a  very  large  reserve  bank  includ- 
ing the  bulk  of  the  eastern  portion  of  the  coimtry,  and  dominating  the 
banking  situation  of  the  whole  coimtry  by  reason  of  its  conunanding 
size  and  tremendous  capitalization.  The  demand  for  such  an  institu- 
tion was  boldly  made  during  the  hearings  in  New  York,  it  being  sug- 
gested that  the  territory  assigned  to  the  institution  in  question  should 
include  everything  north  of  the  Potomac  River  and  east  of  the  Great 
Lakes  or,  preferably,  everything  as  far  west  as  the  Mississippi.    Some 


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other  bankers  suggested  that  the  territory  to  be  assigned  to  this  bank 
should  be  a  long  narrow  coast  strip  taking  in  the  whole  of  the  Eastern 
states — ^that  is  to  say,  all  territory  east  of  the  Alleghany  Mountains- 
Alternative  to  these  suggestions  were  plans  for  the  creation  of  a  reserve 
bank  at  Boston,  another  at  Atlanta,  Georgia,  and  one  at  Washington, 
with  possibly  an  institution  at  Philadelphia  as  well.  While  there  was 
nothing  in  the  statements  made  by  the  reserve  bank  organization  com- 
mittee at  its  sessions  in  New  York,  Boston,  or  elsewhere,  to  indicate  that 
it  intended  to  give  favorable  consideration  to  any  of  the  plans  laid  before 
it,  there  was  a  manifest  recognition  of  the  fact  that  the  reserve  act 
undoubtedly  calls  for  the  establishment  in  good  faith  of  at  least  eight 
institutions  substantially  similar  in  size  and  resources,  or  as  nearly 
so  as  the  conditions  of  the  coimtry  will  permit,  in  order  that  the  prin- 
ciple of  local  segr^ation  of  reserves,  and  the  application  of  such  reserves 
to  the  purposes  of  the  several  conmiunities  furnishing  them  to  the 
reserve  banks  of  their  districts  may  be  carried  out.  Enough  work  has 
been  done  to  make  it  plain  that  the  organization  conmiittee  will  have 
before  it  a  somewhat  delicate  task  in  laying  off  the  various  districts, 
inasmuch  as  it  will  be  practically  necessary  to  avoid  trespassing  upon 
local  pride  so  far  as  possible  in  dividing  the  coimtry  between  sections 
that  are  dominated  by  rival  cities.  While,  therefore,  it  is  perceived  that 
there  will  be  no  serious  difficulty  in  placing  the  reserve  banks  in  con- 
venient locations,  and  while  this  work  could  be  done  without  very  much 
detailed  investigation,  it  is  also  evident  that  to  place  two  rival  cities 
in  the  same  district,  making  one  of  them  the  seat  of  a  federal  reserve 
bank  and  assigning  to  the  other  only  a  branch  office  at  most,  would 
cause  a  good  deal  of  prejudice  and  distiirbance.  Efforts  to  settle  such 
difficulties  will  probably  be  the  task  that  will  give  rise  to  greatest  fric- 
tion and  annoyance  during  the  process  of  mapping  out  the  territory 
of  the  United  States  for  the  purpose  of  creating  the  banks  in  question. 

ENTERING  THE  RESERVE  SYSTEM 

Secretary  of  the  Treasury  McAdoo's  first  steps  for  actually  putting 
the  reserve  act  into  operation  have  brought  out  a  number  of  points 
of  considerable  interest  besides  indicating  some  weaknesses  in  the 
act  itself.  Immediately  upon  the  passage  of  the  law  telegraphic  and 
other  informal  applications  for  admission  to  the  new  reserve  system 
began  to  pour  into  the  Treasury  Department,  but  it  was  at  once  seen 
that  some  formal  mode  of  carrying  out  the  intent  of  the  statute  must 
be  developed.    It  was  determined  to  send  to  each  bank  a  formal  letter 


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NOTES  187 

of  notification  of  the  passage  of  the  law,  accompanied  by  a  copy  of  the 
act  itself  with  request  for  decision  as  to  membership  in  the  new  system. 
This  at  once  raised  the  question  whether  action  by  stockholders  was 
necessary  in  order  to  dedde  whether  a  given  bank  should  apply  for 
membership  or  not.  The  reserve  bank  organization  committee  decided 
this  question  in  the  n^iative,  holding  that  an  affirmative  vote  of  the  board 
of  directors  was  sufficient.  In  spite  of  this  conclusion,  however,  many 
banks  have  not  contented  themselves  with  directoral  action,  but  have 
preferred  to  submit  the  matter  to  a  stockholders'  vote.  This  has  been 
the  case  particularly  in  the  larger  cities,  and  accounts  for  the  fact  that 
the  banks  in  some  cases  haye  been  slow  to  enter  the  system,  it  being 
thought  wise  to  hold  special  meetings  of  stockholders  in  numerous 
instances — a  decision  which  usually  required  about  thirty  days'  delay 
following  the  notification  that  such  a  meeting  was  to  be  held.  It  would 
have  been  well  had  the  act  specifically  laid  down  the  details  of  the 
process  by  which  banks  should  signify  their  intention  of  becoming 
members  in  the  reserve  system,  thereby  doing  away  with  all  possibility 
of  controversy.  It  is  not,  however,  deemed  probable  that  legal  diffi- 
culties will  be  raised  with  reference  to  the  validity  of  the  directors' 
meetings  at  which  a  decision  to  enter  the  reserve  system  is  arrived  at, 
as  expert  opinion  is  to  the  effect  that  bank  directorates  are  vested  with 
sufficient  power  to  decide  the  question  of  membership  in  the  reserve 
system. 

CITY  AND  COUNTRY  BANKS 

Up  to  the  middle  of  January  about  fifteen  hundred  banks  had 
formally  applied  for  membership  in  the  federal  reserve  system.  Of 
these  only  a  small  proportion  were  state  banks.  Most  of  the  larger 
national  banks  of  the  country  have  already  indicated  a  disposition  to 
become  stockholders  in  federal  reserve  banks.  While  a  considerable 
number  of  country  banks  have  also  made  application,  the  proportion 
is  much  smaller.  Few  state  banks  outside  of  the  larger  cities  have 
filed  applications.  .  This  is  in  accordance  with  the  expectations  expressed 
during  the  time  the  bill  was  under  debate.  It  is  the  larger  banks  of 
the  cities  which  are  most  familiar  with  the  terms  of  the  law  and  with  its 
significance;  while  it  is  this  dass  of  banks  that  in  the  past  has  gained 
experience  of  the  benefits  of  joint  action  and  co-operation,  under  the 
clearing-house  system.  Just  how  far  country  banks  will  enter  the 
system  now  proposed  to  them  will  doubtless  depend  in  some  measure 
upon  the  action  finally  taken  by  a  few  of  the  larger  institutions  which 
have  developed  far-reaching  S3rstems  of  correspondent  banks,  and  which 


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i88  JOURNAL  OF  POUTICAL  ECONOMY 

have  not  thus  far  indicated  their  intention  with  respect  to  membership. 
Conspicuous  among  such  banks  is  the  National  City  Bank  of  New  York, 
an  institution  possessing  larger  resources  than  any  other  in  the  United 
States.  Not  a  few  country  banks  which  will  ultimately  join  the  system 
are  delaying  action  \mtil  toward  the  end  of  the  period  within  which 
their  applications  must  be  filed  for  the  purpose  of  ascertaining  the  lines 
upon  which  the  country  will  be  divided  into  districts.  Errors  in  carrying 
out  this  process  may  drive  some  of  the  banks  into  the  state  banking 
systems.  There  is  also  a  quite  general  desire  to  know  if  possible  some- 
thing of  the  personnel  of  the  new  federal  reserve  board  before  a  definite 
decision  is  reached  and  the  banks  commit  themselves  to  membership. 
It  will  probably  not  be  possible  until  the  last  day  of  the  period  set  for 
filing  applications  to  form  even  an  approximate  estimate  of  the  complete 
membership  of  the  reserve  system. 

RAILROAD  CONDITIONS  IN  THE  CENTRAL  WEST 

In  further  pursuance  of  the  presentation  of  the  needs  of  railways 
as  the  basis  for  the  current  5  per  cent  rate  advance,  fresh  information 
has  been  compiled  with  regard  to  the  lines  in  the  central  west,  which 
have  been  classified  into  three  groups  fpr  the  piupose  of  making  a  show- 
ing which  shall  have  special  application  to  Central  Freight  Association 
territory.  In  connection  with  these  data  filed  with  the  Interstate 
Commerce  Commission  the  briefs  of  the  roads  summarize  the  main 
facts  as  follows: 

The  lines  of  Group  i  increased  their  mileage,  1913  over  1910,  as 
follows:  first  main  track — owned,  684  miles,  operated,  828;  all  tracks — 
owned,  3,320  miles,  operated  3,568.  They  increased  their  property 
investment  $225,503,220. 

Operating  revenue,  1913  over  1910,  increased  $71,398,933;  operat- 
ing expenses  and  taxes  increased  $84,934,336;  operating  revenue, 
after  deducting  operating  expenses  and  taxes,  decreased  $i3,S3S>403; 
or,  after  deducting  operating  expenses,  taxes,  and  rentals,  decreased 
$15,133,257;  or,  after  deducting  operating  expenses,  taxes,  rentals, 
and  hire  of  equipment,  decreased  $15,491,764.  The  decrease  in  net 
corporate  income  was  $23,207,414. 

The  increase  in  operating  revenue,  $71,398,933,  measures  an  addi- 
tional service  rendered  the  public — ^namely,  an  increase,  1913  over  1910, 
in  tons  carried  one  mile,  of  approximately  ten  billion,  or  16.43  P^^  cent; 
and  an  increase  in  passengers  carried  one  mile,  of  four  hundred  million, 
or  7.32  percent. 


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NOTES  189 

Notwithstanding  the  much  laxger  volume  of  business  enjoyed  in 
1913  over  1910,  the  power  of  the  carriers  to  earn  a  return  on  their 
property  declined  substantially. 

Group  3  embraces  28  companies  which  operate  19,416  miles,  or 
54. 1  per  cent  of  the  entire  mileage  of  the  territory.  It  includes  all  the 
mileage  in  the  territory  except  that  of  the  "four  main  trunk-line  connec- 
tions," the  "coal  and  ore  roads,"  the  "forty-six  short  roads,"  and  the 
"excluded  mileage"  (the  B.  &  O.,  the  Erie,  C.B.  &  Q.,  etc.),  and  embraces 
all  the  mileage  which  serves  generaUy  the  people  of  the  territory,  and 
whose  prosperity  is  dependent  upon  the  territory.  Obviously,  the  rea- 
sonable needs  of  the  lines  embraced  in  Group  3 — 54.  i  per  cent  of  the 
entire  mileage  of  the  territory,  to  say  nothing  of  the  forty-six  short 
roads — ^must  control  in  determining  the  reasonableness  of  rates  in  the 
territory,  if  the  people  in  that  section  are  to  have  adequate  transporta- 
tion facilities  and  prosper  measurably  with  other  sections  of  the  country. 

After  swelling  the  volume  of  business  by  increased  traffic  and  increas- 
ing the  property  investment  approximately  one  hundred  miUion  dollars, 
Group  3  had  remaining  in  1913,  after  deducting  operating  expenses  and 
taxes,  above  ten  miUion  dollars  less  money  than  in  1910.  Dividends 
paid  by  the  lines  in  this  group  decreased,  in  1913  as  compared  with 
1910,  $5,943,035.  In  191 1  four  companies  reduced  their  dividends,  in 
191 2  five  companies  reduced  their  dividends,  and  in  1913  six  companies 
reduced  their  dividends.  Only  nine  companies  out  of  the  twenty-eight 
in  Group  3  paid  dividends  in  1913. 


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BOOK   REVIEWS  AND   NOTICES 


Marxism    versus    Socialism.    By    VLADDim    G.    Simkhovitch. 
New  York:    Henry  Holt  &  Co.,  1913.    8vo,  pp.  xvi+298. 

$1.50- 

It  is  an  admirable  public  service  to  put  the  body  of  this  criticism, 
which  first  appeared  in  the  Political  Science  Quarterly ^  into  the  present 
volume.  Nowhere  better  than  in  its  thirteen  chapters  will  one  find  a 
conscientious  and  effective  criticism  of  the  Marx  tradition. 

Older  orthodox  economists  had  their  own  way  of  sla3dng  Marx, 
but  the  execution  was  so  little  final  that  it  had  always  to  be  renewed. 
It  was  not  until  criticism  passed  from  the  enemy  to  the  socialist  fellow- 
ship itself,  that  the  legend  of  infallibility  which  gathered  about  this 
remarkable  man  began  to  weaken.  The  men  trained  to  economics 
among  the  Fabians  were  raising  havoc  with  the  '^ theory  of  value'' 
nearly  twenty-five  years  ago.  Bernstein  followed,  as  did  Sorel  in  his 
DicomposiHon  du  Marxism^  to  complete  the  work.  Yet  in  many  ways 
Simkhovitch's  service  is  more  complete  and  more  satisfactory.  He 
leaves  us  from  the  start  in  no  doubt  about  his  position.  He  pays  his 
tribute  to  the  "economic  interpretation  of  history"  as  "a  great  advance 
in  historical  methodology  and  social  philosophy" — as  a  theory,  even, 
"perhaps  the  most  robust  ever  advanced."  Yet  this  chief  contribu- 
tion he  sets  down  as  "the  crudest  and  most  unfinished  doctrine  in  the 
field  of  social  philosophy."  His  ground  for  this  stricture  is  that  the 
theory  throws  light  on  the  changes  in  things  rather  than  on  things  them- 
selves; that  while  it  helps  us  about  the  record  of  the  past,  it  is  helpless 
in  dealing  with  coming  events. 

It  is,  however,  the  real  distinction  of  this  volume  that  its  author 
has  done  a  work  of  incomparable  thoroughness  on  the  literary  material 
necessary  to  competent  judgment.  B^inning  with  popular  misunder* 
standings  about  the  theory  of  value,  together  with  an  outline  of  socialism 
as  presented  by  Marx,  he  takes  up  the  economic  interpretation  of  history, 
reserving  the  theory  of  value  for  the  close  of  the  volume  (chap.  xii). 

Between  these  is  given  a  concise  and  trenchant  discussion  of  Marx's 
attitude  toward  "concentration"  in  industry  and  agriculture,  the  dis- 
appearance of  the  middle  class,  increasing  misery,  status  of  the  wage- 
earner,  the  dass  struggle,  crises,  and  the  cataclysm.  All  that  is  best 
in  the  syndicalist  criticism  by  George  Sorel  confirms  the  author's  main 

190 


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BOOK  REVIEWS  AND  NOTICES  191 

thesis.  The  deductions  from  the  "economic  interpretation"  furnish 
all  the  fuel  for  their  s)mdicalist  fire.  The  analjrsis  in  this  volume  is 
much  more  penetrating.  It  does  not,  like  able  Socialists  (as  David  and 
Schdnlank),  gaily  throw  overboard  the  theory  of  "increasing  misery," 
as  if  this  were  doing  slight  wrong  to  the  master.  Simkhovitch  shows 
how  disturbing  this  abandonment  is  to  the  very  structure  of  Marx's 
s)^tem.    The  passage  is  worth  quoting  (p.  127): 

And  yet  the  true-blue  Marxists  are  unwilling  to  drc^  this  theory.  They 
realize  that  in  dropping  it  they  are  drc^ping  Marxism,  but  they  do  not  realize 
that  in  interpreting  it  away  they  are  interpreting  Marxism  away.  The  whole 
construction  of  Marx's  Capital  leads  up  to  the  doctrine  of  increasing  misery. 
In  rejectiDg  this  theory,  one  rejects  also  Marx's  theory  of  population,  his  theory 
of  wages,  his  theory  of  accumulation  of  capital.  And  if  what  is  left  be  Marxism, 
it  is  Marxism  with  Marx  left  out  Not  only  is  his  theory  shattered,  but  what 
rational  foundation  is  there  left  for  his  vision  and  hope,  his  goal  and  inspira- 
tion—the  breakdown  of  capitalism  and  the  social  revolution?  These  con- 
cq>tions  of  Marx  as  well  as  his  idea  of  the  general  crisis  are  based  upon  the 
progressively  increasing  misery  of  the  working  class. 

Very  wisely  the  author  allows  Marx  (see  chap,  xii)  to  show  his  own 
inconsistency,  as  in  the  incurable  antagonism  between  the  law  of  value 
and  the  theory  of  wages;  and  again,  the  unhappy  dilemma  involved  in 
the  Marx  dialectics  (p.  251)  should  be  given: 

....  Granted  that  there  is  nothing  fixed,  nothing  constant  but  the 
constancy  of  change.  Marx  assumes  this;  yet  he  is  constantly  operating 
with  logical  concepts,  which  are  in  their  very  nature  unchangeable,  inflexible, 
permanent,  and  consti^xt.  If  a  is  a,  it  cannot  be  a+c  or  a—c.  Yet  in  the 
historical  process  that  presupposes  constant  change,  a  cannot  remain  the  same 
a  as  it  was  at  the  start.  To  make  this  concrete:  Marx  is  dealing  with  classes, 
tendencies,  etc.  But  from  his  own  viewpoint  his  classes  cannot  help  changing 
in  character.  The  same  thing  is  true  about  all  his  concepts,  whether  they  are 
"crisis,"  "capitalism,"  "concentration,"  or  "revolution."  Yet  while  the 
historical  process  is  battering,  changing,  or  even  destro3ang  the  inner  content 
of  all  these  concepts,  the  Marxian  socialist  operates  with  them  as  with  absolute 
and  unchanging  entities  and  works  out  "scientifically,"  by  negation  of  the 
negation,  our  distant  future! 

It  adds  greatly  to  the  usefulness  of  the  volume  that  the  long  and 
frequent  citations  which  appeared  in  German  in  the  Quarterly  articles 
are  here  translated. 

It  is  not  alone  the  heretics  like  Bernstein  who  do  service  for  the  text 
but,  even  more  effectively,  those  of  the  faithful  like  Kautsky  and  Frau 
Luxemburg. 

John  Graham  Brooks 

Cambsidqs,  Mass. 


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192  JOURNAL  OF  POUTICAL  ECONOMY 

Economic  Liberalism.  By  Hermann  Levy.  London:  Macmillan, 
1913.  8vo,  pp.  ix+124.  $1 .  25  net. 
This  book  is  a  translation  of  the  author's  Die  Grundlagen  des  dkono- 
mischen  Liberalismus  furst  published  twelve  years  ago.  In  the  English 
edition,  however,  it  has  been  revised  and  brought  down  to  date.  The 
German  title  more  acciu-ately  describes  its  nature  for  it  is  really  a  study 
of  the  origin  and  growth  of  the  individualistic  attitude  in  England  in 
so  far  as  that  attitude  relates  to  industry  and  commerce.  Indeed, 
whoever  is  led  by  the  title  to  expect  a  thorough-paced  discussion  of  the 
principles  which  today  animate  the  English  Lib»*al  party  is  doomed  to 
disappointment.  Mr.  Levy  concentrates  his  attention  upon  an  "older 
Liberalism''  to  which  modem  social  reforms  are  "fundamentally  abhor- 
rent"— a  Liberalism  that  is  most  nearly  realized  in  "  the  general  economic 
tendency  of  the  Conservative  program,  otnitting  the  debatable  point 
of  tariff  reform." 

Mr.  Levy  finds  the  fimdamentals  of  this  Liberalism  in  a  belief  in 
the  greatest  possible  development  of  the  individual,  in  equality  before 
the  law,  and  in  the  toleration  of  the  opinion  of  others.  He  holds  that 
these  principles  arose  as  part  of  the  anti-authoritarian  attitude  victori- 
ous in  the  Puritan  revolution.  In  other  words,  economic  Liberalism 
is  largely  a  legacy  of  Puritan  experience  and  ideals,  on  the  one  hand  a 
reaction  against  the  meddlings  of  the  established  church  in  commerce, 
on  the  other  a  necessary  correlate  of  the  theological  doctrine  of  the 
value  of  the  individual  soul. 

The  author  is  not  at  his  best  in  this  study;  even  within  the  limits 
chosen  the  subject  receives  scarcely  satisfactory  treatment.  The 
development  is  obscured  with  over-detail;  there  is  lack  of  broad,  lucid 
exposition;  and  there  is  altogether  too  much  reliance  placed  upon 
secondary  sources  of  information.    There  is  no  index. 

The  reviewer  disagrees  with  the  learned  author's  assumption  that 
economic  Liberalism  is  a  dosed  system.  Mr.  Levy  makes  this  assump- 
tion when  he  declares  that  modem  social  legislation  is  abhorrent  to  the 
principles  of  Liberalism.  In  setting  up  this  contention  he  falls  into  the 
same  pit  into  which  he  consigns  the  members  of  the  Manchester  school 
who  appear  as  proponents  of  a  "special  Liberalism,"  a  "fleeting  con- 
ception" with  a  "somewhat  Utopian  ring."  Very  naturally,  in  keeping 
with  these  views,  his  "economic  Liberalism"  finds  an  appropriate 
mortuary  in  the  present  English  Conservative  party.  The  reviewer 
prefers  to  follow  L.  T.  Hobhouse  in  his  conclusion  that  "The  heart  of 
Liberalism  is  the  understanding  that  progress  is  not  a  matter  of  mechani- 


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BOOK  REVIEWS  AND  NOTICES  193 

cal  contrivance"  (Liberalism,  p.  137),  or  of  fixed  creed,  or  case-hardened 
dogma.  Mr.  Levy's  faUure  to  base  his  study  on  this  latter  position, 
in  the  reviewer's  opinion,  keeps  his  book  out  of  the  line  of  battle. 

D.  A.  MacGibbon 

Bkamdon  CoLI£GE 


Soziale  Theorie  der  Verteilung.  By  Michael  Tugan-Bakanowsky. 
Berlin:  J\ilius  Springer,  1913.    8vo,  pp.  82.    M.  2.  80. 

The  writer,  the  leading  Russian  economist  of  today^  apparently 
seeks  to  present  in  this  little  book  an  outline  for  a  social  theory  of  distribu- 
tion. The  claim  is  made  that  economics  proper  has  failed  to,  and,  more- 
over, cannot,  adequately  explain  distribution.  The  author's  argument 
in  support  of  this  contention  is  that  modem  economic  literature  seems 
to  agree  on  the  solution  of  the  value  problem,  while  there  is  a  marked 
difference  of  opinion  in  regard  to  distribution,  which,  he  believes,  could 
not  be  so,  were  rates  of  wages  and  interest  mere  cases  of  application  of 
value.  The  wage-earner  cannot,  in  the  opinion  of  the  writer,  withdraw 
his  merchandise,  or  cease  offering  it,  when  the  market  is  low,  as  is 
the  case  with  sellers  of  other  articles.  The  two  prevailing  economic 
doctrines,  the  Marxian  and  the  Austrian,  fail  in  their  attempts  to  explain 
profits.  Furthermore,  economics  cannot  fit  into  its  laws  increases  of 
wages  caused  by  the  activities  of  labor  unions,  nor  the  political  and  social 
advantages  which  influence  incomes  of  economic  groups  as,  for  instance, 
in  the  case  of  the  English  landowners.  From  the  above-stated  reasons, 
the  author  draws  two  fundamental  conclusions:  First,  the  distributive 
process  is  not  a  value  process;  the  application  of  a  value  doctrine, 
however  sound,  will  not  solve  the  problem  of  distribution.  Second,  a 
true  theory  of  distribution  must  be  social  in  its  nature,  comprising  both 
the  social  and  economic  forces  at  work. 

Unfortxmately,  the  writer  does  not  here  discuss  his  positive  social 
theory  in  detail.  Nor  does  he  attempt  to  anticipate  the  argument  with 
which  economists  are  likely  to  meet  his  attack,  namely,  that  all  social 
forces  at  work  are  being  taken  care  of  by  pure  economics,  which  regards 
them  as  indirect  influences,  modif3dng  only  the  conditions  to  which 
economic  laws  are  to  be  applied.  Thus,  it  is  admitted,  for  instance,  that 
unions  influence  the  wage  rate,  but  it  is  claimed  that  this  influence  is 
not  direct;  it  works  by  affecting  the  supply  or  creating  a  monopoly 
situation^  which,  of  course,  is  a  "legitimate"  condition  from  the  view- 
point of  pure  economics. 


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194  JOURNAL  OP  POLITICAL  ECONOMY 

Yet,  the  reviewer  heartily  recommends  this  compact  little  book 

to  all  students  interested  in  economic  theory.    Aside  from  the  main 

thesis,  the  book  contains  a  first-class  anal3rsis  of  the  Marxian  and 

Austrian  theories  of  distribution.    Moreover,  this  study  written  in 

German  paves  a  way  to  familiarity  with  the  foremost  economist  of 

Russia. 

M.  LiPPiTT  Larkin 
Umivessitt  of  CmCAGO 


The  Theory  of  Social  Revolutions.  By  Brooks  Adams.  New  York: 
Macmillan,  1913.    8vo,  pp.  vii+240.    |i .  25  net. 

The  title  of  the  book  is  rather  misleading.  Fortunately,  the  material  that 
b  actually  given  and  the  lucid  presentation  recompense  the  reader  for  whatever 
disappointment  he  may  fed  because  of  an  unhappily  selected  title. 

The  bulk  of  the  book  is  a  very  careful  discussion  of  the  present-day  political 
situation  in  the  United  States,  appraising  it  with  respect  to  the  broad  social 
undercurrents  of  our  life  and  not  in  terms  of  the  petty  differences  between  the 
various  political  factions.  After  a  chapter  on  the  ''Limitations  of  the  Judicial 
Function"  comes  one  on  "American  Legislation."  These  are  followed  by  a 
brief  historical  review  of  the  evolution  of  our  political  forms  and  institutions. 
Many  well-selected  historical  events  are  recalled  to  prove  what  may  be  called 
Mr.  Adams'  theory  of  social  revolutions — ^the  necessity  of  changes  in  the 
administrative  type  and  forms  as  soon  as  changes  in  the  social  environment 
take  place. 

Throughout  the  pages  one  can  detect  the  writer's  aversion  to  our  older 
political  parties  and  a  great  sympathy  with  the  progressive  movement.  When 
he  attempts  to  apply  his  theory  of  social  revolutions  to  our  affairs,  he  dearly 
states  that  the  administrative  type  representing  individualistic  capitalism  must 
give  way  to  the  type  representing  governmental  regulation  and  social  democ- 
racy.  On  the  whole,  the  book  might  be  termed  an  attempt  to  furnish  the 
Progressive  party  with  a  distinct  social  philosophy.  Needless  to  say,  therefore, 
it  is  both  timdy  and  hdpful. 

Yet  the  chief  merit  of  the  book  lies  somewhere  else — it  is  to  be  found  in  the 
multitude  of  very  suggestive  remarks  of  a  sodological  nature.  The  light 
attitude  of  our  capitalism  toward  law,  the  extreme  legalism  of  our  courts,  the 
analysis  of  Tammany's  success  in  New  York,  the  idea  that  the  expenses  of  a 
government  are  proportionate  to  the  progress  of  centralization,  the  view  that 
politicians  of  a  stand-pat  party,  honest  as  they  may  be,  are  bound  to  be  socially 
harmful — ^the  book  is  crowded  with  such  general  but  suggestive  ideas.  Some  of 
them  may  prove  false  but  they  surdy  challenge  criticism  and  stimulate  thought. 

In  condusion,  attention  should  be  called  to  the  calm,  judidal  spirit  of  the 
author.  One  feels  as  if  in  the  presence  of  a  venerable,  wise  man  lovin^^y 
instructing  the  youth  on  the  possible  opportunities  and  perils  in  their  lives  to 


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BOOK  REVIEWS  AND  NOTICES  195 

omie.    Mr.  Brooks  Adams  is  certainly  a  lover  of  his  country,  and  his  copatriots 
should  give  him  a  hearing. 

Investing  for  Profit,  By  G.  C.  Selden.  New  York:  The  Magazine 
of  Wall  Street,  1913.    i2mo,  pp.  170.    $1  .cx>. 

How  can  the  "investor"  burdened  with  idle  funds,  but  ignorant  of  finandal 
or  statistical  methods,  not  only  safely  invest  his  money,  but  at  the  same  time 
secure  profits  in  addition  to  the  normal  interest  rate?  Mr.  Selden  in  this 
little  book  reconciles  to  his  own  satisfaction  the  hitherto  incompatible  prind* 
pies  of  safety  of  investment  and  an  abnormally  hi^  return  on  that  invest- 
ment. The  author  expounds  the  "underlying  principles''  and  promises  the 
"investor  that  if  he  uses  plain  conunon-sense  in  apf^3dng  them  to  the  concrete 
cases,  he  cannot  fail  of  success." 

What  is  the  keynote  of  Mr.  Selden's  book?  Buy  stocks  when  they  are 
dieap  and  sell  them  when  they  are  dear.  But  how  is  the  investor  to  know 
when  the  bottom  of  the  market  has  been  reached?  Answer:  By  reading  the 
New  York  bank  statement. 

The  author's  chapter  on  the  New  York  bank  statement  is  of  especial  in^)or- 
tance  because  the  opinions  there  presented  are  at  variance  with  those  now 
entertained  by  the  New  York  bankers  themselves.  The  fundamental  ques- 
tion is  the  rdation  between  the  loans  and  deposits  of  the  New  York  banks. 
The  author's  analysis  of  this  relationship  is  readily  oonq>rehensible  to  the  lay 
mind.  The  bank  loans  its  dqx)sits.  Further,  when  a  bank  exhausts  the  de- 
posits brought  to  it  by  business  men,  it  lends  its  capital,  surplus,  and  circula- 
ting notes. 

The  author  also  finds  that  the  conclusions  reached  by  statistical  studies 
have  little  or  no  value  in  foretelling  future  prices.  He  e]q)lains  why  such 
mental  gynmastics  have  no  utilitarian  justification  (p.  104):  "Half  a  dozen 
of  them  [statisticians]  are  now  making  public  the  results  of  their  studies  and 
it  unfortimatdy  happens  that  they  are  very  rardy  found  to  agree.  As  all 
are  pursuing  similar  methods,  this  tends  to  cast  a  doubt  on  the  accuracy  of 
their  results'."  The  author's  own  chart  showing  the  fluctuations  of  deposits 
down  to  the  present  time  is  free  from  the  complexities  of  the  statistical 
method  that  annoy  and  confuse  the  ordinary  reader.  After  pondering  over 
the  significance  of  these  sdected  facts,  the  writer  condudes  that  the  fund  of 
excess  deposits  for  stock-market  purposes  is  the  best  index  to  the  broad  move- 
ments of  the  market;  his  final  advice  to  the  "investor"  is  that  "the  time  to 
buy  is  when  excess  deposits  begin  to  pile  up  rapidly  and  that  the  time  to  sell 
is  when  these  excess  deposits  are  exhausted"  (p.  135). 


The  Larger  Aspects  of  Socialism.    By  William  English  Walling. 

New  York:  Macmillan,  1913.    8vo,  pp.  xxi-l-403.    $1.50. 

Mr.  Walling  undertakes  in  this  book  to  indicate  the  response  of  Socialism 
to  the  pragmatic  tests.    The  larger  aspects  of  Socialism— its  attitude  toward 


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196  JOURNAL  OF  POLITICAL  ECONOMY 

science,  history,  morality,  religion,  education,  and  sex  e]q>erience— he  finds  to 
correspond  pretty  fully  to  the  '^pragmatic  sanction."  And  it  is  Dewey  in  chief 
and  fundamentally  that  he  regards  as  the  spokesman  of  the  pragmatic  view. 

One  who  has  been  reared  in  the  faith  of  a  conflict  between  Socialism  and 
individualism  will  have  to  look  elsewhere  than  in  Walling's  pages  for  assurance 
of  his  faith.  Not  only  is  the  Sabbath  made  for  man,  but  it  is  man  that  makes 
the  Sabbath,  and  must  make  it,  and  all  the  rest  of  the  universe  as  well.  Ful- 
ness of  life  for  the  separate  individual — ^this  is  the  touchstone  of  validity  for  all 
our  rulerships,  and  S3rstems,  and  ideals.  This  principle  the  author  declares  to 
be  fundamental  with  all  true  pragmatists  and  with  all  true  Socialists.  He 
brings  a  crowd  of  witnesses,  some  of  them  strangers  in  the  Socialist  camp  as  we 
have  commonly  thought — Stimer  and  Nietzsche  for  example;  but  he  holds 
that  in  this  principle  we  are  brethren  all.  A  considerable  portion  of  the  book 
is  between  quotation  marks,  and  one  may  well  be  glad  of  this  without  any 
deprecation  of  Walling's  own  material.  The  question  that  keeps  rising  quietly 
but  persistently  as  one  considers  the  witness  of  these  image-breakers  and  others 
in  their  train  is  whether  after  all  they  go  much  beyond  a  radical  and  emphatic 
hedonism.  "I  love  men  too,"  says  Stimer,  "but  I  love  them  because  love 
makes  me  happy.    I  know  no  conunand  of  love." 

It  might  be  wished  that  Walling  had  paused  long  enough — ^for  one  gets  the 
impression  that  he  has  written  somewhat  in  haste — to  connect  up  his  two 
"isms"  a  little  more  clearly  and  definitely  in  certain  parts  of  the  book.  There 
are  obscurities  of  statement  here  and  there,  evidently  the  fruit  of  carelessness, 
and  occasionally  a  somewhat  irritating  superiority  to  syntax.  But  these  things 
are  by  the  way.  The  book  is  a  good  book,  proper  for  the  man  or  woman  who 
is  neither  a  scholar,  and  so  perhaps  above  the  need  of  it,  nor  a  college  Freshman, 
and  so  not  quite  up  to  the  strength  of  it.  It  ought  to  be  a  bringer  of  light  to 
the  non-Socialist  who  wants  to  know,  and  even  more  to  many  a  Socialist  who 
knows,  not  wisely  but  too  well. 


Luxus  und  Kapitalismus.  By  Werner  Sombart.  Munich  and  Leipsic : 
Duncker  u.  Humblot,  1913.  8vo.  pp.  viii+220.  M.  6. 
Luxus  und  KapiUMsmus,  a  by-product  of  the  author's  larger  work  on  Der 
Modeme  Kapitalismus^  is  an  attempt  to  substantiate  an  extremely  plausible 
theory  (plausible,  at  least,  as  he  puts  it)  for  the  origin  of  modem  capitalistic  in- 
dustry. It  is  difficult  in  a  few  words  to  trace  the  logic  which  he  carefully  de- 
velops, step  by  step.  In  brief,  he  argues  that  with  the  new  life  of  the  Renaissance 
a  secularization  of  the  whole  outlook  of  society  came  about.  Man's  view  was  no 
longer  turned  wholly  toward  the  life  to  come.  At  the  same  time  there  occurred 
in  Europe  a  great  increase  in  wealth,  the  result  of  the  growing  trade  of  the 
world.  This  found  its  way  into  court  life,  and  court  society,  expanding  under 
its  new  concept  of  life  as  appreciation  (Genuss),  made  large  new  demands  upon 
it.    This  demand  was  for  the  unnecessary  things,  for  luxuries.    Thus  there 


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BOOK  REVIEWS  AND  NOTICES  197 

were  new  standards  of  what  was  desirable  in  food  (Esshtxtis)  which  included 
many  exotic  products,  and  also  demands  for  sumptuous  linen,  china,  and  silver. 
The  same  kind  of  higher  standards  began  to  prevail  in  r^ard  to  dwellings, 
dothing,  etc.  Out  of  these  increased  demands  grew  various  industries  as  well 
as  largely  augmented  trade.  Certain  of  these  industries  Sombart  calls  purely 
"industries  due  to  luxury."  Among  them  the  manufacture  of  silks,  laces, 
porcelain.  "Mixed  industries"  include  the  products  of  wool,  linen,  and 
leather,  and  the  building  trades. 

It  is  no  doubt  true  that  increasing  luxury  had  its  efifect  on  the  development 
of  these  industries.  On  the  other  hand,  the  author  does  not  in  any  wise  make 
it  plain  that  it  was  the  only  cause,  or  indeed,  always  a  cause.  His  exposition 
remains  extremely  imconvindng  because  it  is  such  a  partial,  fragmentary 
e]q>lanation  of  the  causes  of  this  growing  luxury,  though  the  phenomenon  itself 
is  clearly  traced.  Taken  by  itself  the  study  is  an  original  piece  of  work  founded 
on  a  great  deal  of  investigation  into  source  material,  but  as  an  explanation  of 
such  complex  phenomena  as  luxury  and  capitalistic  industry  it  seems  hardly 
adequate. 


Speculation  on  the  New  York  Stock  Exchange.  By  Algernon  Ashburner 
Osborne.  "Columbia  University  Studies,"  Vol.  LVI,  No.  I. 
New  York:  Longmans,  Green  &  Co.,  1913.  8vo,  pp.  172.  $1.00. 
The  student  who  is  prone  to  adopt  for  his  own  the  a  priori  conclusions  of 
many  textbook  writers  in  the  field  of  economics  would  do  well  to  read  this 
monograph.  Mr.  Osborne  has  made  a  careful  analysis  of  the  operations  of 
the  New  York  Stock  Exchange  for  the  period  of  thirty-one  months  preceding 
the  panic  of  1907 — an  epoch  that  in  the  magnitude  of  its  transactions  has 
never  been  approached  in  a  similar  length  of  time  before  or  since.  The  author 
attacks  his  problem  with  a  knowledge  of  the  danger  of  preconceived  notions 
and  he  makes  every  effort  to  avoid  following  the  paths  trodden  by  preceding 
"investigators"  of  the  Stock  Exchange.  He  concludes  that  the  New  York 
Stock  Exchange  does  not  automatically  perform  and  in  practice  has  quite 
failed  to  perform  the  two  economic  functions  that  are  commonly  ascribed  to 
it,  namely,  (i)  the  directing  of  the  flow  of  investment,  and  (2)  the  discounting 
of  future  events  by  the  course  of  prices.  Although  perhaps  disconcerting  to 
some  staid  economists,  this  conclusion  is  at  least  worthy  of  serious  attention 
and  impartial  consideration.  The  author  points  out  that  the  stock  exchange 
can  exert  little  influence  either  for  good  or  for  ill  on  the  course  of  trading,  and 
that  it  certainly  does  not  guide  the  investment  demand,  since  the  flat  rate  of 
commission  paid  to  brokers  affords  little  profit  to  them  on  such  orders,  and 
hence  gives  no  incentive  for  the  encouragement  of  investment  buyers  by  the 
operators  themsdves.  There  is  no  force  on  the  stock  exchange  itself  or  in 
the  self-interest  of  the  brokers  that  can  restrain  the  tendencies  toward  over- 
trading in  securities. 


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198  JOURNAL  OF  POLITICAL  ECONOMY 

Railway  Problems.  Edited  by  William  Z.  Ripley.  Revised  edition. 
Boston:  Ginn  &  Co.,  1913.    8vo,  pp.  xxxiv+830.    $2.50. 

This  collection  of  reprints  is  based  on  the  admirable  edition  publi^ed  in 
1907.  The  editor  has  thoroughly  recast  the  original  work  in  response  to  two 
demands.  The  first  is  created  by  the  swift  progress  of  legislative  and  economic 
events  which  has  rendered  the  old  collection  obsolete;  the  second  arises  from 
the  rapid  development  of  the  various  branches  of  railway  economics.  Some 
chapters  which  formerly  had  a  place  in  a  general  volume  have  been  transferred 
to  special  treatises  in  particular  fields;  others,  like  Taussig's  classic  theory  of 
rates,  are  now  embodied  in  the  editor's  Railroads:  Rates  and  Regulation, 

To  take  the  place  of  these  omissions  the  editor  introduces  in  this  edition  the 
account  of  early  American  conditions  from  Pearson's  American  Railroad 
Builder,  which  he  deems  of  such  importance  as  to  warrant  its  appearance  in  a 
form  that  is  readily  accessible  to  the  student;  some  recent  decisive  opinions  of 
the  Interstate  Commerce  Commission;  and  Theodore  Brent's  article  on  the 
intricacies  of  rate-making.  The  latest  l^;al  developments  are  set  forth  in 
Stuart  Daggett's  article  on  the  Union  Paofic-Southem  Pacific  Merger  disso- 
lution, Alton  D.  Adams'  study  of  ''Reasonable  Rates,"  and  Francis  J.  Swayze's 
discussion  of  the  ''Regulation  of  Railway  Rates."  Smalley's  account  of  the 
doctrine  of  judicial  review,  and  B.  H.  Meyer's  chapter  on  the  Northern  Secur- 
ities Company  are  retained  from  the  earlier  edition. 

In  view  of  the  growing  popularity  of  the  case-book  method  in  various 
coU^e  courses  in  economics,  this  revised  edition  is  assured  of  a  favorable 
reception  by  students  and  teachers  of  transportation  problems. 


Scientific  TariJ  Making.  By  Henry  Tarleton  Wells.  New  York: 
Blanchard  Press,  1913.    8vo,  pp.  332.    $1  .cx>. 

The  subtitle  of  the  book  is  "A  History  of  the  Movement  to  Create  a  Tariff 
Commission,"  and  this  e]q)lains  the  real  subject  of  the  volume.  Anyone 
desirous  of  learning  about  the  recent  camfiaign  of  the  National  Tariff  Commis- 
sion Association  for  the  establishment  of  a  permanent  tariff  commission  can 
find  plenty  of  material  in  its  origLnal  and  imdigested  form  together  with  the 
con^>lete  proceedings  of  the  convention  of  the  assodatioii,  held  at  Washington, 
D.C.,  January,  1911.  Unfortimatdy  little  attempt  has  been  made  carefully  to 
organize,  analyze,  and  stunmarize  the  material,  and  the  difficulty  of  using  it  has 
been  further  increased  by  the  failure  to  include  either  an  index  or  a  table  of 
contents. 

The  arguments  here  advanced  in  favor  of  the  permanent  tariff  commission 
are  the  usual  ones.  The  present  method  of  fixing  the  tariff  through  congres- 
sional committees,  the  members  of  which  are,  for  the  most  part,  either  inexperi- 
enced in  the  matter  or  ignorant  of  the  subject,  produces  "inequalities"  which 
are  "unnecessary,  unjust,  and  harmful."    This  "crude"  and  "unscientific" 


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BOOK  REVIEWS  AND  NOTICES  199 

method  should  be  replaced  by  the  modem  scientific  method  of  procedure 
through  ''a  permanent  technical  bureau  of  tariff  research,  to  collect,  analyze, 
and  report  industrial  and  commercial  data,  domestic  and  foreign,  for  the  use 
and  guidance  of  Congress  and  the  executive  departments"  (p.  58). 


Social  Wrongs  and  State  ResponsibUUies.  By  William  Jandus.  Cleve- 
land: Horace  Carr,  1913.  i2mo,  pp.  vi+143.  $1.50. 
In  this  little  volume  the  author  has  attempted  to  set  aside  the  generally 
accepted  current  economic  theories  and  in  their  stead  to  place  the  "law  of 
solvent  functions  and  the  economic  equation."  By  the  law  of  solvent  functions 
is  meant  "the  supeisolvency  of  commercial  values  and  that  such  a  law  depends 
upon  the  liquefaction  of  an  asset  conq>rehensive  enough  to  hold  the  values  of 
commerce   supersolvent"— presumably   the  state  ownership  of  land.    His 

E 
economic  equation  is  R^p-    That  is,  one  unit  oi  productive  potential  E, 

exerted  vtpcfa  one  unit  of  resistance  R,  will  yield  one  unit  of  product  P.  He 
states  that  "the  economic  equation  is  exactly  paralleled  by  Ohm's  law  of 
electricity." 

The  world  is  insolvent  and  out  of  its  insolvency  arises  capital,  credit,  and 
interest  Tlie  capitalistic  class  is  the  predatory  class,  the  parasites  of  society. 
Actual  insolvency  is  prevented  by  the  creation  of  credit  which  redounds  to  the 
benefit  of  the  capitalistic  class.  Without  this  credit,  created  by  the  capitalists 
for  their  own  ^>ecial  benefit,  society  would  immediately  become  bankrupt. 

While  many  unquestioned  social  evils  are  pointed  out  by  the  author,  his 
analysis  of  the  causes  of  these  social  evils  is  as  far  from  convincing  as  his  method 
of  solution  would  be  impracticable  and  inadequate. 


Economic  Determinism.  By  Lida  Parce.  Chicago:  Charles  H.  Kerr 
&  Co.,  1913.    i2mo,  pp.  155.    $1  .cx>. 

It  is  rather  difficult  to  describe  the  subject-matter  of  this  little  book.  In  a 
sense  it  embraces  within  its  covers  three  distinct  studies:  a  brief  history  of  the 
nations  of  the  world  from  the  economic  standpoint,  a  review  of  woman's  position 
in  society  throughout  history,  and  a  defense  of  economic  determinism. 

At  the  best,  145  short  pages  of  large  print  is  too  small  a  space  for  the  task. 
As  it  is,  the  book  is  naive,  dilettante  chatter  on  the  above-mentioned  subjects. 
Its  only  justification  should  be  sought  in  the  possible  help  to  beginners  in  history 
in  the  way  of  reacting  against  elementary  official  histories  which  confine  them- 
selves to  wars  and  lives  of  rulers.  But  even  in  this  respect  the  book  can 
hardly  be  recommended.  It  is  so  general  and  vague,  imparts  so  little  definite 
information,  the  facts  are  so  mixed  up  with  the  writer's  own  loose  interpreta- 
tions, it  is  written  in  such  a  partisan  spirit,  that  the  few  hoiurs  one  has  to  spend 


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in  going  through  the  book  are  likely  to  be  a  waste — surely  so  is  the  dollar  one 
has  to  pay  for  it. 

The  publishers  have  among  their  ten-cent  pamphlets  works  containing 
more  material  and  a  better  e]q)lanation  of  what  economic  determinism  really  is. 


Studies  in  Agricidtural  Economics.  Edited  by  Professor  Lewis  H. 
Haney.  Bulletin  298  of  the  University  of  Texas.  Austin:  Uni- 
versity of  Texas,  1913.    pp.  132. 

The  bulletin  is  a  collection  of  "undergraduate  studies  in  agricultural 
economics,"  as  the  editor  himself  puts  it,  the  work  being  done  under  the 
auspices  of  the  "Texas  Applied  Economics  Club."  A  good  deal  of  space 
has  been  devoted  to  the  discussion  of  agriculttiral  cooperation,  and  espedally 
to  the  Danish  and  German  co-operative  methods  in  credit,  production,  and 
marketing,  and  the  question  as  to  the  possibility  of  their  adaptation,  with  some 
modifications,  to  American  conditions.  The  next  important  topic  is  the 
problem  of  agricultural  labor  which  is  as  acute  in  Texas  as  in  any  other  part 
of  the  United  States.  The  establishment  of  state  bureaus  of  employment 
has  been  suggested  to  supply  the  seasonal  demand  for  labor,  while  agricultural 
education  might  put  a  st(^  to  the  rural  exodus.  Another  important  point 
brought  out  is  the  relative  decrease  of  the  Negro  peculation  from  24.7  per 
cent  of  the  entire  population  of  the  state  in  1880  to  17.7  per  cent  in  1910. 
The  increasing  demand,  during  this  period,  for  the  kind  of  labor  which  Negroes 
had  generally  performed  was  met  by  the  rapid  influx  of  Mexican  labor. 


The  Labour  Movement,    By  L.  T.  Hobhouse.    3d  ed.   New  York: 
Macmillan,  1912.    8vo,  pp.  159.    |i  .00  net. 

Mr.  Hobhouse  is  a  mild  radical  in  labor  matters.  In  this  little  book,  he 
discusses  the  various  tendencies  in  the  labor  movement,  chiefly  of  England, 
and  attempts  to  show  that  "all  ways  lead  to  Rome,"  the  writer's  particular  Rome 
being  an  industrial  democracy.  With  the  exception  of  a  rather  able  account  of 
the  co-operative  movement  in  England,  the  book  offers  very  little  new  in  the 
way  of  either  material  or  methods  of  approach.  An  effort  is  made  to  prove 
to  the  various  groups  within  the  labor  ranks  that,  after  all,  their  differences  are 
not  as  grave  as  the  partisan  leaders  assert  them  to  be.  The  Labour  Movement  is 
a  good  book  for  those  who  would  begin  their  acquaintance  with  radicalism;  its 
easy  style,  undogmatic  and  clear  exposition  make  it  pleasant  reading. 


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Volume  XXII  ^  '  '„ut '  > .  -  Number  3 


^fttHSii^t: 


Political  Economy 

PUBLISHED  BY  THE  UNIVERSITY  OP  CHICAGO 

IN  CO-OPBRATION  WITH 

THE  WESTERN  ECONOMIC  SOCIETY 


MARCH  1914 


Trade  Unionism  in  the  United  States.    General  Character 

and  Types  Robert  F.  Hoxie      201 

The  Tariff  of  1913.     Ill  H.  Parker  Willis      218 

Some  Aspects  of  the  Waterways  Question 

H.  a  Moulton      239 

Shall  We  Have  an  Introductory  Course  in  Social  Science? 

A.  B.  Wolfe      253 

Notes  268 

Washington  Notes: 

The  Report  on  Agricultural  Credit — Problems  of  the  New  Banking  Act — 
'a>istricting^  the  United  Sutes— The  First  Report  of  the  Department  of 
Labor — First  Report  of  the  Children's  Bureau — Derelopment  of  the  New 
Anti-trust  Bills — Framing  a  Census  of  Manufactures 

Book  Reviews  and  Notices  -  276 

Hamxy's  Business  Organhatum  amd  Combination  (AUyn  A.  Youn<),  376.~-Mai8Rall,  Wkiort, 
AMD  Field's  Materials  far  the  Study  of  Elementary  Economics  (Waiter  E.  Clark},  a77.--GiFr»H's 
Statistics  (Warren  M.  Persons),  270.— Bebbl's  My  Life  (Haxis  Gronow),  281.— Bacon-Fostxr's 
Potomac  Route  to  the  West  (B.  Walter  King),  282.— Moore's  The  Supreme  Court  and  Unconsti- 
Mional  Legislation,  283. — Fawcam's  The  Economic  Utilisation  of  History,  284. — CoiOfONS'  Labor 
and  Administration,  285.— Mackmurdo's  Pressing  Questions,  286.— Elliott's  The  Truth  about 
the  Railroads,  287.— Green's  The  Tyranny  of  the  Cow$try  Side,  287.— Marks's  The  Land  and  the 
Commonwealth,  288.— Parsons'  The  Old  Fashioned  Woman,  289.— Lewinski's  The  Origin  of 
Property,  289. — Egcleston's  The  Ultimate  Solution  of  the  American  Negro  Problem,  290. — 
Cannon's  Social  Work  in  Hospitals,  290. — Stowxll's  Studies  in  Trade  Unionism  in  the  Custom 
Tailoring  Trade,  291. — ^Pollock  and  Morgan's  Modem  Cities,  291. — ^ReVs  An  Agricultural 
Faggot,  29a. — Scott's  Money,  292. — Fisher's  The  Purchasing  Power  of  Money,  292. 


THE   UNIVERSITY   OF   CHICAGO   PRESS 
CHICAGO,    ILLINOIS,   U.S.A. 


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THE  CAMBRIDGE  UNIVERSIIT .PRESS.  London  and  Edinburgh 

KARL  W.  HIERSEMANN,  Leipzig 

THE  MARUZEN-KABUSHIKI-KAISHA,  Tokyo.  Osaka,  Kyoto 


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Edited  hy 
JAMES  ALFRED  FIELD  J.  LAURENCE  LAUGHLIN 

ROBERT  FRANKLIN  HOXIE  LEON  CARROLL  MARSHALL 

CHESTER  WHITNEY  WRIGHT 


Advisory  Editors 

(The  Officers  of  the  Western  Economic  Society) 

SHAILER  MATHEWS,  Pretidtni 

GEORGE  E.  VINCENT,  Vice-Prtudtnt       FRANKUN  MacVEAGH,  Vice-Pnu'dtnt 

LEON  C.  MARSHALL,  Secrttary  CHARLES  L.  HUTCHINSON^  Trtasurtr 


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THE  JOURNAL 


OF 


POLITICAL  ECONOMY 


Volume  23  MUTCH    IQI4  Number  3 


TRADE  UNIONISM  IN  THE  UNITED  STATES 
GENERAL  CHARACTER  AND  TYPES 

From  the  popidar  viewpoint,  trade  unionism  is  a  simple,  definite 
phenomenon  upon  which  it  is  easy  and  safe  to  pass  positive  and 
sweeping  judgments.  Ahnost  everyone,  in  fact,  who  is  at  all 
interested  in  economic  or  sodal  affairs  is  inclined  to  assume  that 
he  knows  just  about  what  unionism  is  and  just  what  ought  to  be 
done  about  it.  The  man  in  the  street,  the  lawyer,  the  economist, 
the  social  worker,  the  teacher,  the  preacher,  each  has  his  positive 
concept  and  his  positive  scheme  for  union  control  or  regeneration. 

Thus  the  student  honestly  seeking  the  truth  about  unionism  is 
faced  at  the  outset  with  a  mass  of  absolute  but  contradictory  inter- 
pretations. He  is  told  that  unionism  is  a  narrow  group  organiza- 
tion designed  to  benefit  certain  favored  workmen  at  the  expense  of 
all  others;  that  it  is  an  artificial  monopoly  of  labor,  an  impossible 
attempt  to  raise  wages  by  iinnatural  and  therefore  socially  inimical 
means;  that  it  is  the  creation  of  selfish  and  imscrupidous  leaders 
primarily  for  their  personal  gain  and  aggrandizement,  a  thing 
foisted  upon  unwilling  workers  and  designed  to  disrupt  the  natural 
harmony  of  interests  between  employers  and  employees;  that  it  is 
a  mere  business  device  for  regulating  wages  and  conditions  of 
employment  by  means  of  collective  bargaining;  that  it  is  a  great 
revolutionary  movement  aiming  ultimately  to  overthrow  capitalism 
and  our  whole  legal  and  moral  code;  that  it  is  a  imiversal  expression 


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202  JOURNAL  OF  POLITICAL  ECONOMY 

of  working-class  idealism  whose  pxirpose  is  to  bring  to  all  the  toilers 
hope,  dignity,  enlightenment,  and  a  reasonable  standard  of  living; 
that  it  is,  in  short,  selfish  and  altruistic,  monopolistic  and  inclusive, 
artificial  and  natural,  autocratic  and  democratic,  violent  and  law- 
abiding,  revolutionary  and  conservative,  narrowly  economic  and 
broadly  social. 

And  with  each  of  these  positive  interpretations  the  student  is 
commanded  to  subscribe  to  an  equally  positive  and  final  solution 
of  the  union  problem.  He  is  informed  that  unionism  will  cease 
to  be  dangerous  when  it  is  boldly  proceeded  against  as  a  trust; 
that  the  problem  will  be  solved  when  once  we  have  guaranties  of 
industrial  peace  in  the  shape  of  xmiversal  arbitration  schemes,  vol- 
tmtary  or  compulsory;  that  unionism  in  any  form  is  a  menace  to 
social  welfare  and  must,  therefore,  be  destroyed  by  legal  enactment 
and  counter  organization;  that  the  trouble  with  imionism  is  moral 
and  the  obvious  remedy  lies,  therefore,  in  moral  suasion  and  the 
preaching  of  social  obligation;  that  unionism  is  an  expression  of 
crass  ignorance,  and  hence  is  to  be  quietly  disregarded  while 
schemes  are  formidated  and  put  into  operation  for  the  welfare  of 
society  as  a  whole;  that  the  real  problem  is  one  of  encouragement 
and  support  since  unionism  stands  for  all  that  is  best  in  human 
conditions  and  relationships. 

The  mutual  contradictoriness  of  these  popular  interpretations 
and  remedies  is  sufficient  evidence  to  warrant  the  rejection  of  any 
and  all  of  them  pending  the  most  imbiased  and  thorough,  scientific 
investigation  of  the  facts.  It  must  stamp  them,  either  as  pure 
fabrications  of  the  imagination  or  at  best  as  partial  truths,  the 
outcome  of  narrow  observation  distorted  by  conscious  or  imcon- 
sdous  preconceptions  derived  from  tradition,  interest,  or  special 
environment  To  accept  them  as  final  truths,  therefore,  is  to  block 
the  way  to  a  real  comprehension  of  unionism  and  the  union  prob- 
lem. For  such  acceptance  must  mean  the  coloring  of  the  facts 
and  the  warping  of  the  judgment,  however  sincere  and  pains- 
taking the  student  may  be.  The  first  step,  therefore,  toward  a 
scientific  understanding  of  trade  unionism  and  the  problems  which 
it  presents  to  us  is  to  rid  oiurselves  of  the  pop\ilar  attitude  toward 


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TRADE  UNIONISM  IN  THE  UNITED  STATES  203 

it  and  to  root  out  of  our  minds  so  far  as  possible  these  popular 
conceptions  of  it.    We  must  start  by  wiping  the  slate  clean. 

The  very  existence  of  these  numerous  contradictory  interpre- 
tations, nevertheless,  carries  with  it  a  pregnant  suggestion  for 
the  student,  namely,  that  trade  unionism  may  be  after  all,  not  a 
simple,  consistent  entity,  but  a  complex  of  the  utmost  diversity, 
both  structurally  and  functionally.  And,  indeed,  the  most  obvious 
facts  of  union  status  and  history  seem  to  warrant  this  conclusion, 
at  least  as  a  working  hypothesis. 

There  are  in  the  United  States  today  himdreds  of  omion  organiza- 
tions, each  practically  independent  or  sovereign  and  each  with  its 
own  and  often  peculiar  aims,  policies,  demands,  methods,  attitudes, 
and  internal  regulations.  Nor  is  there  any  visible  or  tangible  bond 
that  unites  these  organizations  into  a  single  whole,  however  tenuous. 
Groups  there  are  indeed  with  overstructures  and  declared  common 
aims  and  methods.  But  group  combats  group  with  the  bitterness 
that  can  arise  only  out  of  the  widest  diversity  of  ideals  and  methods. 

A  slight  acquaintance  with  the  history  of  organized  labor  shows 
that  this  situation  is  not  imique  and  at  the  same  time  furnishes  the 
apparent  clues  to  its  explanation.  It  reveals  the  fact  that  xmionism 
has  not  a  single  genesis,  but  that  it  has  made  its  appearance,  time 
after  time,  independently,  wherever  in  the  modem  industrial  era 
a  group  of  workers,  large  or  small,  has  developed  a  strong  internal 
consciousness  of  common  interests.  It  shows,  moreover,  that  each 
imion  and  each  imion  group  has  imdergone  a  constant  process  of 
change  or  development,  fimctionally  and  structurally,  responding 
apparently  to  the  group  psychology  and  therefore  to  the  changing 
conditions,  needs,  and  problems,  of  its  membership.  In  short,  it 
reveals  trade  unionism  as  above  all  else  essentially  an  opportunistic, 
a  pragmatic  phenomenon. 

For  if  the  history  of  unionism  seems  to  admit  of  any  positive 
generalizations  they  are  that  unionists  have  been  prone  to  act  first 
and  to  formidate  theories  afterward,  and  that  they  have  acted 
habitually  to  meet  the  problems  thrust  upon  them  by  inmiediate 
drciunstances.  Everywhere  they  have  done  the  thing  which  imder 
the  particular  drciunstances  has  seemed  most  likely  to  produce 


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204  JOURNAL  OP  POUTICAL  ECONOMY 

results  immediately  desired.  Modes  of  action  which  have  failed 
when  measured  by  this  standard  have  been  rejected  and  other  means 
sought.  Methods  that  have  worked  have  been  preserved  and  ex- 
tended, the  standards  of  judgment  being  always  most  largely  the 
needs  and  experiences  of  the  group  concerned.  So  that  prevailingly, 
whatever  theory  tmionists  have  possessed  has  been  in  the  nature 
of  group  generalization  slowly  developed  on  the  basis  of  concrete 
experience.' 

In  making  these  statements  it  is  not  intended  to  imply  that 
general  economic,  political,  and  social  theories  have  not  played 
a  part  in  the  genesis  of  unions  or  in  the  molding  of  their  function 
and  structure.  Nor  is  it  intended  to  deny  that  some  tmions 
have  been  formed  and  dominated  by  individuals  and  small  groups 
of  leaders.  Idealism  has  frequently  been  a  genetic  and  formative 
force  in  union  history,  and  the  autocrat  has  played  an  important 
rdle  in  union  affairs.  But  apparently  history  warrants  the  general 
statements  that  imions,  and  especially  tmions  that  have  lived  and 
worked,  have  arisen  mainly  in  direct  response  to  the  immediate 
needs  and  problems  of  specific  working  groups,  and  that  they  have 
developed  characteristically  by  the  trial-and-error  method. 

Thus  the  scope  and  character  of  union  ideals  and  methods  have 
been  as  broad  and  diverse  as  the  conscious  common  needs  and  con- 
ditions of  the  groups  of  workers  entering  into  organization.  Some 
unions  have  confined  themselves  to  attempts  to  deal  directly  with 
their  immediate  employers  and  their  immediate  conditions  of  work 
and  pay;  others  have  emphasized  mutual  aid  and  education;  still 
others  have  enlarged  their  field  of  thought  and  action  to  include 
all  employers  and  all  conditions — economic,  legal,  and  social.  In 
other  words,  the  union  program,  taking  it  with  all  its  mutations 
and  contradictions,  comprehends  nothing  less  than  all  the  various 
economic,  political,  ethical,  and  sodal  viewpoints  and  modes  of 
action  of  a  vast  and  heterogeneous  complex  of  working  class  groups 
molded  by  diverse  environments  and  actuated  by  diverse  motives; 
it  expresses  nothing  less  than  the  ideals,  aspirations,  hopes,  and 
fears,  modes  of  thinking  and  action  of  all  these  working  groups.    In 

'  In  all  this,  unionism  is  not  unique,  but  has  obeyed  the  general  law  of  psychological 
development. 


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TRADE  UNIONISM  IN  THE  UNITED  STATES  205 

short,  if  we  can  think  of  unionism  as  such  it  must  be  as  one  of 
the  most  complex,  heterogeneous,  and  protean  of  modem  social 
phenomena. 

But  can  we  thus  think  of  it  ?  If  all  that  has  been  said  be  true, 
are  we  not  forced  to  this  pregnant  conclusion  as  to  the  basic  hypothe- 
sis of  our  study — ^namely:  That  there  is  no  such  thing  as  trade 
imionism  in  the  sense  either  of  an  abstract  unity,  or  of  a  concrete, 
organic,  and  consistent  whole  which  can  be  crowded  within  the  con- 
fines of  a  narrow  definition  or  judged  sweepingly  as  good  or  bad, 
right  or  wrong,  socially  helpful  or  harmful  ?  If,  then,  we  dispense 
with  narrow  preconceptions  and  face  things  as  they  actually  are 
and  are  becoming,  it  is  impossible  to  say  that  imionism  as  such  is 
artificial  or  natural,  revolutionary  or  conservative,  violent  or  law- 
abiding,  monopolistic  or  inclusive,  boss-ridden  or  democratic, 
opposed  to  industrial  progress  or  favorable  to  efficiency,  a  spon- 
taneous outgrowth  of  legitimate  needs  or  the  product  and  tool  of 
selfish  and  designing  individuals.  In  short,  there  is  tmionism  and 
imionism,  but  looking  at  matters  concretely  and  realistically  there 
is  no  single  thing  that  can  be  taken  as  imionism  per  se. 

It  follows  as  a  corollary  that  the  union  problem  is  neither 
simple  nor  unitary.  It  is  not  a  mere  question  of  wages  and  hours, 
of  shop  conditions  and  the  narrow  economic  rights  of  employer 
and  employee,  and  it  cannot  be  solved  by  a  mere  resort  to  economic 
theory.  On  the  contrary  it  is  a  complex  of  economic,  legal,  ethical, 
and  social  problems  which  can  be  imderstood  and  met  only  by  know- 
ing the  facts  and  the  genesis  of  the  viewpoint  of  organized  labor  in 
all  its  reach,  diversity,  contradictoriness,  and  shifting  character, 
and  by  considering  this  viewpoint  in  relation  to  developing  social 
conditions  and  social  standards. 

The  study  of  imionism,  therefore,  if  it  is  to  be  fruitful,  that  is  if 
it  is  to  assist  in  the  solution  of  our  economic  and  social  problems, 
must  be  realistic  and  scientific.  Unionism  is  what  it  is  and  not 
what  any  advocate  or  opponent  woidd  have  it  to  be.  It  is  a  matter 
of  fact  in  the  same  sense  that  institutions,  animal  and  plant  species, 
or  any  other  organic  manifestations  are  matters  of  fact.  There  is 
no  normal  or  abnormal  unionism;  no  tmiQnism  that  is  artificial  as 
distinguished  from  that  which  is  natural.    In  short,  there  is  no 


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2o6  JOURNAL  OP  POLITICAL  ECONOMY 

fixed  union  norm  by  which  any  concrete  case  is  to  be  tested;  for 
all  unionism  is,  and  is  becoming,  by  virtue  of  sufficient  causation. 
The  problems  which  it  raises,  therefore,  like  all  other  problems  of  a 
scientific  nature,  are  to  be  solved,  if  at  all,  not  through  passion  and 
prejudice  and  formulations  of  what  ought  to  be,  but  through  an 
intimate  knowledge  of  the  facts  as  they  exist  and  a  study  of  causes. 
It  is  for  the  student  then  to  put  aside  his  preconceptions  and  feelings, 
to  get  close  to  the  realities,  and  to  be  willing  to  follow  the  truth  to 
whatever  donclusions  it  may  lead.  Calmly  and  dispassionately 
we  must  seek  to  know  imionism  as  it  actually  appears  in  all  its 
phases  and  to  search  for  its  imderlying  causes.  Only  after  we  have 
studied  it  and  its  problems  thus,  in  the  spirit  of  the  biologist  or  of 
the  student  of  social  psychology  and  social  institutions,  shall  we  be 
in  a  position  to  say  positively  what  imionism  really  is  and  what,  if 
anything,  should  and  can  be  done  about  it.  It  is  in  this  spirit  that 
the  following  tentative  analysis  is  presented.' 

The  master  key  to  the  real  character  of  unionism  and  omion 
problems  is  to  be  foimd  apparently  in  the  existence  of  distinct 
union  types.  Though  unionism  itself  is  so  pragmatic  and  therefore 
so  protean  as  to  warrant  the  rejection  of  all  attempts  to  characterize 
and  judge  it  as  a  whole,  it  has  seemingly  developed  along  certain 
fairly  distinct  general  lines  giving  rise  thus  to  types  sufficiently  defi- 
nite to  allow  of  legitimate  generalization  in  regard  to  them.  It 
appears  possible  to  distinguish  such  types  both  as  to  function  and 
structure.  Structural  types  have,  indeed,  been  recognized  quite  gen- 
erally by  students.  Examination  of  the  history  and  present  status 
of  omionism  in  the  United  States  appears  to  reveal  four  such  types, 
each  objectified  in  a  variety  of  concrete  omits;  while  somewhat  akin 
to  these  distinct  types  may  be  distinguished  other  forms  which  may 
perhaps  be  regarded  as  modes  of  transition  from  one  to  another. 

Naming  the  structural  types  in  what  hypothetically  may  per- 
haps be  considered  their  natural  sequence  of  development,  we  find 

*  This  and  succeeding  papers  on  Unionism  in  the  United  States  are  intended  to 
be  a  practical  application  of  the  viewpoint  and  method  of  study  outlined  in  two  papers 
previously  published  by  the  writer  in  the  Journal  of  Political  Economy,  viz., "  Historical 
Method  V.  Historical  Narrative,"  XIV,  9,  November,  1906;  "The  Trade-Union  Point 
of  View,"  XV,  6,  June,  1907. 


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TRADE  UNIONISM  IN  THE  UNITED  STATES  207 

first  what  is  ordinarily  called  the  craft  union.^  This  is  an  organiza- 
tion of  wage-workers  engaged  in  a  single  occupation,  as,  for  example, 
in  glass-botUe  blowing;  horseshoeing,  locomotive  engineering.  The 
occupation  may  be  limited  strictly  to  one  simple  task  or  may  in- 
clude a  number  of  closely  allied  tasks  or  crafts.  The  strict  test  of 
a  craft  union  seems  to  be  that  each  member  of  the  organization 
performs  or  may  perform  all  the  tasks  included  in  the  occupation. 
Usually  a  craft  imion  covers  but  a  fraction  of  the  work  of  a  given 
industry.  The  craft  organization  has  developed  two  principal 
imits,  or  appears  in  two  main  forms:  the  local  craft  union,  which 
usually  tmites  the  members  of  the  craft  or  occupation  working  in 
a  particular  locality — a  town,  a  dty,  or  a  section  of  a  dty;  the 
national  or  international  craft  union,  which  \mites  into  one  organiza- 
tion the  local  imits  of  a  single  craft  or  occupation  throughout  the 
coimtry  or  neighboring  coimtries.^ 

Sea>ndly,  tJiere  appears  what  may  be  termed  the  crafts  or 
trades  union.  This  organization  is  a  federation  of  unions  in  differ- 
ent crafts  or  industries.  It  has  developed  three  principal  forms  or 
units:  the  local  trades  union,  or  cUy  federation;  the  state  federation; 
and  the  national  or  international  federation,^  which  omite,  through 

'The  terms  ''craft  union''  and  ''trade  union"  are  often  used  interchangeably. 
The  writer  prefers  to  make  "trade  union"  the  general  inclusive  term  covering  aU  types 
of  unionism,  structural  and  functional.    This  is  the  popular  usage. 

*  Examination  of  union  constitutions  reveals  a  siuprising  amount  of  diversity  and 
much  individual  variation  in  the  matter  of  structural  imits.  Some  organizations,  for 
example,  have  sublocals,  as  in  the  case  of  the  shop  club  of  the  printers  and  the  pit 
committee  of  the  miners.  There  may  be  also  units  intermediate  between  the  local 
and  the  international,  such  as  district  councils,  state  divisions,  etc.  There  are,  more- 
over, such  things  as  auxiliary  organizations.  It  is  not  intended  here  to  deal  with  this 
matter  in  detail  but  simply  to  name  the  most  usual  and  perhaps  the  most  generally 
important  units  connected  with  the  different  structural  t3rpes. 

3  These  trades  imions  appear  under  many  different  titles.  For  example,  the 
dty  federations  are  known  in  different  localities  as  Trades  Councils,  Trades  Assemblies, 
Trades  and  Labor  Councils,  Trades  and  Labor  Assemblies,  Trades  and  Labor  Unions, 
Central  Trades  Coimdls,  Central  Labor  Unions,  Central  Labor  Cotmdls,  Central 
Federated  Unions,  Central  Trades  and  Labor  Assemblies,  Central  Trades  and  Labor 
Councils,  Central  Associated  Trades  Councils,  Labor  Coimdls,  Joint  Labor  Councils, 
United  Trades  and  Labor  Assemblies,  United  Trades  and  Labor  Councils,  Federations 
of  Labor,  Central  Federations  of  Labor,  etc  The  state  federations  also  go  locally 
under  different  titles,  and  in  the  United  States  and  Canada  there  is  more  than  one 
national  trades  imion,  for  example,  the  Women's  Trade  Union  League,  and  the  Cana- 
dian Trades  and  Labor  Assembly. 


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2o8  JOURNAL  OP  POLITICAL  ECONOMY 

delegate  organizations,  respectively  the  tinions  of  a  locality,  a 
state,  or  a  larger  territorial  area.'  Examples  are  the  Chicago 
Federation  of  Labor,  the  Illinois  Federation  of  Labor,  and  the 
American  Federation  of  Labor.  The  essential  characteristic  of 
the  trades  xmion  is  that  the  constituent  organizations  retain  their 
individual  independence  or  sovereignty. 

Thirdly,  we  may  distinguish  the  industrial  union.  This  type, 
as  the  name  implies,  is  organized  on  the  basis  of  the  industry  rather 
than  the  craft.  That  is  to  say,  it  attempts  to  unite  into  one 
homogeneous  organic  group  all  the  workers,  skilled  and  unskilled, 
engaged  in  turning  out  and  putting  on  the  market  a  given  finished 
product  or  series  of  closely  related  products.  For  example,  this 
type  of  imion  would  unite  all  the  craftsmen  in  the  direct  employ  of 
brewing  concerns,  including,  not  only  actual  brewers,  maltsters, 
bottlers,  and  packers,  bujt  the  engineers,  firemen,  teamsters, 
watchmen,  etc.;  or,  again,  it  would  organize  into  one  imion  all 
the  workmen  in  and  about  a  coal  mine  including  actual  miners, 
miners'  helpers,  shot  firers,  drivers,  spraggers,  trappers,  track- 
men, timbermen,  hoisting  engineers,  check-weighmen,  dumpers, 
etc.  The  actual  connotation  of  this  type  of  \mionism  varies  in 
dififerent  productive  lines  and  with  the  integration  of  productive 
enterprise,  but  the  essential  test  of  industrial  xmionism  seems  to  be 
that  the  industrial  scope  or  area  of  the  workers'  organization  shall 
be  coterminous  with  that  of  the  capitalistic  enterprise  or  series  of 
closely  related  enterprises.  The  main  forms  or  units  of  this 
type  of  unionism  thus  far  developed  are:  the  local  industrial  union, 
a  combination  of  all  the  employees  of  a  single  local  industrial  plant 
or  of  all  the  industrial  enterprises  of  a  like  character  in  a  given 
locality;  the  national  or  international  industrial  union,  a  combina- 
tion of  all  the  workers  in  a  given  industry  throughout  the  nation  or 
the  international  economic  imit;  the  district  industrial  union,  an 
organization  covering  an  area  within  which  productive  and  market 
conditions  are  essentially  similar.    Thus,  for  example,  the  coal- 

'  Trades  unions  of  the  same  order  are  not  always  strictly  or  exclusively  federations 
of  organic  units,  and  unions  of  the  same  order  may  vary  considerably  in  structural 
character.  For  example,  some  trades  imions  admit  individual  members,  and  there  is 
great  variety  in  the  degree  of  centralization  of  authority.  Nowhere  is  the  pragmatic 
character  of  unionism  better  illustrated  than  in  such  structural  variations. 


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TRADE  UNIONISM  IN  THE  UNITED  STATES  209 

mine  workers  are  organized  into  local  xinions  at  the  mines,  into  an 
international  union  including  workers  in  the  mines  of  the  United 
States  and  Canada,  and  into  district  organizations  covering 
adjacent  bituminous  or  anthracite  mines  or  fields.' 

Fourthly,  there  exists  what  is  technically  known  as  the  labor 
union.  This  type  of  imionism  proposes  the  organization  of  all 
workers  regardless  of  craft  or  industrial  divisions  into  homogeneous 
groups  by  localities,  by  districts,  and  throughout  the  nation  or 
largest  possible  international  area.  At  present  the  local  labor 
union  is  the  only  existing  xmit  of  importance  in  the  United  States 
which  realizes  this  ideal  of  organization,  though  attempts  have 
been  made,  notably  in  the  case  of  the  Knights  of  Labor,  to  establish 
and  maintain  labor  omionism  in  all  its  ideal  forms,  local,  districl, 
2Lad  national. 

Besides  these  four  structural  types  of  imionism  there  exist  in 
this  country  at  least  two  varieties  which  can  hardly  be  designated 
as  distinct  types  but  which,  strictly  speaking,  are  apparently 
neither  craft,  trades,  industrial,  nor  labor  unions. 

The  first  of  these  varieties  may  be  called  the  compound  craft 
or  crafts  xmion.  It  is  a  centralized,  homogeneous  organization  of 
the  workers  in  a  number  of  related  crafts.  It  differs  from  the 
craft  imion  in  that  it  includes  workers  who  do  not  engage  in  the 
same  tasks  or  occupations.  But  it  is  not  an  industrial  union  since 
it  may  be  one  of  several  labor  organizations  Twdiose  workers  are 
engaged  in  turning  out  a  given  finished  product  or  are  in  the 
eifiploy  of  a  single  capitalistic  enterprise.  On  the  other  hand,  it 
may  overlap  industrial  divisions.  It  may  be  the  outcome  of  a 
formal  consolidation  of  two  or  more  craft  or  compoimd  craft 
omions,  in  which  case  it  is  usually  known  as  an  amalgamated  craft 
or  crafts  omion.  Examples  of  this  variety  of  omionism  are  to  be 
fotmd  in  the  Amalgamated  Association  of  Iron,  Tin,  and  Steel 
Workers  of  North  America,  the  Amalgamated  Meat  Cutters  and 
Butcher  Workmen  of  North  America,  the  International  Association 

'The  coal-mine  workers  have  also  subdistrict  organizations.  The  subdistrict 
seems  to  be  based  on  a  uniformity  of  industrial  conditions,  e.g.,  thickness  of  veins, 
character  of  roof  and  floor,  etc.,  while  the  district  represents  an  area  within  which 
market  conditions  are  similar.  That  is  to  say  imions  may  have  both  territorial  and 
industrial  divisions  or  units. 


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2IO  JOURNAL  OF  POLITICAL  ECONOMY 

of  Machinists,  the  Amalgamated  Association  of  Street  and  Elec- 
trical Railway  Employees  of  America/  In  fact,  a  large  proportion 
of  the  \mions,  local  and  national,  in  the  United  States  are  today 
compoimd  or  amalgamated  craft  imions,  whether  or  not  so  desig- 
nated by  title.  As  this  variety  of  tmion  has  special  representatives 
in  all  the  intermediate  structural  stages  between  strict  craft  imion- 
ism  and  industrial  unionism  it  woidd  perhaps  not  be  unreasonable 
to  regard  it,  provisionally  at  least,  as  a  mode  of  transition  between 
these  two  distinct  types.  Later  considerations,  however,  must 
determine  the  truth  of  this  assumption  and,  if  true,  the  general 
direction  of  the  developmental  tendency. 

The  second  structural  variety  of  unionism  which  is  difficult  to 
classify  may  in  the  absence  of  any  generally  accepted  designation 
be  termed  the  quasirindiisUrial  federation.  It  is  generally  a  federa- 
tion of  industrially  related  craft  and  compoimd  *  craft  unions, 
appearing  in  local,  district  or  staU,  and  national  units.  Examples 
of  it  are  to  be  seen  in  local  printing  trades  and  local  building  trades 
coimdls,  in  state  btiilding  trades  coimdls  and  system  federations 
of  railway  employees,  and  in  the  Building  Trades,  Metal  Trades, 
and  Railroad  Employees  departments  of  the  American  Federation 

'  The  multi-craft  character  of  this  variety  of  unionism  may  be  illustrated  by  the 
following  constitutional  quotations: 

''The  Amalgamated  Sheet  Metal  Workers'  International  Alliance  claims  juris- 
diction over  the  following  work:  All  metal  roofing,  the  manufacturing,  erection,  and 
finishing  of  metal  cornices,  metal  skylights,  metal  furniture,  metal  lockers,  hollow  metal 
doors  and  trim,  metal  sash  and  frames,  metal  ceilings  and  sidings  0>oth  exterior  and 
interior),  all  sheet  metal  work  in  connection  with  heating  and  ventilating,  furnace  and 
range  work,  metal  jobbing,  assortment  work,  coppersmithing,  and  aU  sheet  metal 
work  made  of  No.  lo  gauge  and  lighter;  providing,  however,  this  gauge  restriction 
shall  not  apply  to  coppersmiths  in  the  working  of  copper,  who  shall  have  jurisdiction 
over  copper  of  any  and  all  gauges"  (Constitution,  191 1,  article  VI,  sec.  a). 

''The  Amalgamated  Association  [Amalgamated  Glass  Workers'  International 
Association  of  America]  shall  consbt  of  an  unlimited  number  of  local  unions  composed 
of  trustworthy  and  industrious  glass  workers,  consisting  of  the  following  branches: 
glass  cutters,  lead  glaziers,  metal  sash  glaziers,  prism  glaziers,  bevelers,  silverers,  scratch 
polishers,  embossers,  engravers,  designers,  glass  painters,  draftsmen,  sand  blast  workers, 
glass  chippers,  glass  mosaic  workers,  setters,  putty  glaziers,  cementers,  benders,  flat 
glass  or  wheel  cutters,  glass  sign  makers,  glass  packers,  plate  glass  workers,  and  aU 
wage  workers  engaged  in  the  production  and  handling  of  glass  not  already  affiliated 
with  a  national  or  international  union  of  glass  workers"  (Constitution,  1905,  sec.  3). 


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TRADE  UNIONISM  IN  THE  UNITED  STATES  21 1 

of  Labor.'  This  variety  of  omionism  is  one  in  which  the  constituent 
craft  or  amalgamated  craft  unions  retain  their  individual  ^ver- 
eignty,  yet  appear  and  act  as  a  single  organization  with  respect  to 
designated  affairs  of  common  interest.  It  resembles  both  the  trades 
union  and  the  industrial  \mion  types,  but  differs  from  each  essen- 
tially. It  is  a  narrower  and  closer  association  than  the  trades  imion 
and  is  vitally  imlike  it  in  the  scope  and  character  of  its  activities. 
On  the  other  hand,  it  lacks  the  organic  homogeneity  and  centraliza- 
tion of  the  industrial  omion.  As  it  is  in  every  case,  roughly  speak- 
ing, an  organization  within  a  particular  industry  and  as  its  aims  and 
activities  approximate — so  far  as  they  go — those  of  the  industrial 
union  type,  it  may  perhaps  be  regarded  also  as  an  intermediate 
phase — a,  mode  of  transition  between  the  craft  and  industrial 
union.  Whether  it  represents  thus  a  continuous  evolutionary 
process  and,  if  so,  what  the  nature  of  the  process  is,  will  appear 
from  later  considerations. 

As  we  have  said,  the  existence  of  distinct  structural  types  and 
varieties  of  unionism  has  been  qtdte  generally  recognized,  and  it 
has  been  noted  further  that  union  function  tends  to  vary  somewhat 
with  the  variation  in  structure.  It  seems  possible,  however,  to 
go  much  further  than  this  in  the  general  functional  analysis  of 
unionism.  A  penetrating  study  of  the  union  situation  past  and 
present  seems,  in  fact,  to  warrant  the  recognition  of  fimctional 
types  qtdte  as  distinct  in  their  essential  characteristics  as  the 
diverse  structural  manifestations.  It  is  true  that  these  functional 
types  do  not  in  practice  represent  exactly  and  exclusively  the 
ideals  and  activities  of  any  particular  omion  organization  or  group. 
That  is  to  say,  no  union  organization  functions  strictly  and  con- 
sistently according  to  type.  Yet  as  representing  fairly  distinct 
alternative  programs  of  union  action  and  as  guides  to  the  essential 
character  and  significance  of  the  diverse  organizations  and  groups 
included  in  the  heterogeneous  union  complex,  these  functional 
types  apparently  do  exist  and  are  of  the  most  vital  concern  to  the 

'  This  variety  shades  into  the  real  industrial  federation,  an  example  of  which  is 
found  in  the  Mining  Department  for  the  American  Federation  of  Labor. 


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212  JOURNAL  OP  POUTICAL  ECONOMY 

student  of  unionism.    There  are  seemingly  four  of  these  distinct 
types,  two  of  which  present  dual  variations. 

The  first  and  perhaps  most  clearly  recognizable  fimctional  type 
may  be  termed  business  unionism.  Business  unionism  appears  most 
characteristically  in  the  programs  of  local  and  national  craft  and 
compoimd  craft  organizations.  It  is  essentially  trade-consdous 
rather  than  class-conscious.  That  is  to  say,  it  expresses  the  view- 
point and  interests  of  the  workers  in  a  craft  or  industry  rather  than 
those  of  the  working  class  as  a  whole.  It  aims  chiefly  at  more  here 
and  now  for  the  organized  workers  of  the  craft  or  industry,  in  terms 
mainly  of  higher  wages,  shorter  hours,  and  better  working  con- 
ditions, regardless  for  the  most  part  of  the  welfare  of  the  workers 
outside  the  particular  organic  group,  and  regardless  in  general  of 
political  and  social  considerations  except  in  so  far  as  these  bear 
directly  upon  its  own  economic  ends.  It  is  conservative  in  the 
sense  that  it  professes  belief  in  natural  rights  and  accepts  as  inevi- 
table, if  not  as  just,  the  existing  capitalistic  organization  and  the 
wage  system  as  well  as  existing  property  rights  and  the  binding 
force  of  contract.  It  regards  unionism  mainly  as  a  bargaining  insti- 
tution and  seeks  its  ends  chiefly  through  collective  bargaining  sup- 
ported by  such  methods  as  experience  from  time  to  time  indicates 
to  be  effective  in  sustaining  and  increasing  its  bargaining  power. 
Thus  it  is  likely  to  be  exclusive,  that  is,  to  limit  its  membership 
by  means  of  the  apprenticeship  system  and  high  initiation  fees  and 
dues,  to  the  more  skilled  workers  in  the  craft  or  industry  or  even  to 
a  portion  of  these;  though  it  may,  where  inmiediate  circumstances 
dictate,  favor  a  broadly  inclusive  policy — ^when,  for  example,  the 
imregulated  competition  of  the  imorganized  and  imskilled  seriously 
threatens  to  sweep  aside  the  trade  barriers  and  break  down  the 
standards  of  wages,  hours,  and  shop  conditions  which  it  has  erected. 
Under  these  ciromistances  it  tends  to  develop  a  broad  altruism  and 
to  seek  the  organization  of  all  the  workers  in  the'  craft  or  industry. 
In  harmony  with  its  business  character  it  tends  to  emphasize 
discipline  within  the  organization  and  is  prone  to  develop  strong 
leadership  and  to  become  somewhat  autocratic  in  government, 
though  government  and  leaders  alike  are  ordinarily  held  pretty 
strictly  accoimtable  to  the  pragmatic  test.    When  they  fail  to 


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TRADE  UNIONISM  IN  THE  UNITED  STATES  213 

"deliver  the  goods"  both  are  likely  to  be  swept  aside  by  a  demo- 
cratic uprismg  of  the  rank  and  file.  In  method,  business  unionism 
IS  prevailingly  temperate  and  economic.  It  favors  volimtary 
arbitration,  deprecates  strikes,  and  avoids  political  action,  but  it 
will  refuse  arbitration  and  resort  to  strikes  and  politics  when  such 
action  seems  best  calculated  to  support  its  bargaining  efforts  and 
increase  its  bargaining  power.  This  type  of  xmionism  is  perhaps 
best  represented  in  the  programs  of  the  railway  brotherhoods, 
though  these  organizations,  as  we  shall  see  later,  present  some  char- 
acteristics of  a  vitally  different  nature. 

The  second  xmion  functional  type  seems  best  designated  by 
the  terms  friendly  or  uplift  unionism.  Uplift  unionism,  as  its 
name  indicates,  is  characteristically  idealistic  in  its  viewpoint. 
It  may  be  trade-conscious,  or  broadly  class-consdous,  and  at  times 
even  claims  to  think  and  act  in  the  interest  of  society  as  a  whole. 
Essentially  it  is  conservative  and  law-abiding.  It  aspires  chiefly 
to  elevate  the  moral,  intellectual,  and  social  life  of  the  worker,  to 
improve  the  conditions  imder  which  he  works,  to  raise  his  material 
standards  of  living,  give  him  a  sense  of  personal  worth  and  dignity, 
secure  for  him  the  leisure  for  culture,  and  insure  him  and  his  family 
against  the  loss  of  a  decent  livelihood  by  reason  of  unemployment, 
accident,  disease,  or  old  age.  Uplift  unionism  varies  greatly  in 
d^ree  of  inclusiveness  and  in  form  of  government,  but  the  tendency 
seems  to  be  toward  the  greatest  practicable  d^ree  of  mutuality  and 
democracy.  In  method,  this  type  of  unionism  emplojrs  collective 
bargaining  but  stresses  mutual  insurance,  and  drifts  easily  into 
political  action  and  the  advocacy  of  co-operative  enterprises,  profit- 
sharing,  and  other  idealistic  plans  for  social  r^eneration.  The 
nearest  approach  in  practice  to  uplift  imionism  is  perhaps  to  be 
foimd  in  Uie  program  of  the  Knights  of  Labor,  though  that  organiza- 
tion has  varied  in  many  respects  from  the  strict  type.' 

*  It  has  been  strongly  uiged  by  a  friendly  critic,  who  is  most  intimately  acquainted 
with  the  organized  labor  movement  in  the  United  States,  that  business  aiKl  uplift 
wnioniwm  are  not  in  reality  distinct  and  independent  types,  but  rather  two  varieties 
of  (me  type  more  comprehensive  than  either.  The  argument  put  forward  is  that  no 
business  union  can  be  found  which  has  not  also  the  uplift  in  mind  and  an  idealistic 
viewpoint.  It  is  suggested  that  this  inclusive  type  might  be  called  bargaining 
miianisfn  or  constructive  business  unionism. 


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214  JOURNAL  OF  POLITICAL  ECONOMY 

As  a  third  distinct  functional  type,  we  have  what  most  appro- 
priately may  be  called  revolutionary  unionism.  Revolutionary 
imionism,  as  the  term  implies,  is  extremely  radical  both  in  view- 
point and  in  action.  It  is  distinctly  class-conscious  rather  than 
trade-conscious.  That  is  to  say,  it  asserts  the  complete  harmony 
of  interests  of  all  wage  workers  as  against  the  representatives  of 
the  employing  class  and  seeks  to  imite  the  former,  skilled  and 
unskilled  together,  into  one  homogeneous  fighting  organization. 
It  repudiates,  or  tends  to  repudiate,  the  existing  institutional 
order  and  especially  individual  ownership  of  productive  means, 
and  the  wage  system.  It  looks  upon  the  prevailing  codes  of  right 
and  rights,  moral  and  legal,  as  in  general  fabrications  of  the  employ- 
ing class  designed  to  secure  the  subjection  and  to  further  the 
exploitation  of  the  workers.  In  government  it  aspires  to  be  demo- 
cratic, striving  to  make  literal  application  of  the  phrase  vox  populi, 
vox  Dei.  In  method,  it  looks  askance  at  collective  bargaining  and 
mutual  insurance  as  making  for  conservatism  and  hampering  the 
free  and  united  action  of  the  workers. 

Of  this  revolutionary  type  of  imionism  there  are  apparently  two 
distinct  varieties.  The  first  finds  its  idtimate  ideal  in  the  social- 
istic state  and  its  ultimate  means  in  invoking  class  political  action. 
For  the  present  it  does  not  entirely  repudiate  collective  bargaining 
or  the  binding  force  of  contract,  but  it  regards  these  as  temporary 
expedients.  It  would  not  now  amalgamate  unionist  and  socialist 
organizations  but  would  have  them  practically  identical  in  mem- 
bership and  entirely  harmonious  in  action.  In  short,  it  looks  upon 
unionism  and  socialism  as  the  two  wings  of  the  working-class  move- 
ment. The  second  variety  of  revolutionary  imionism  repudiates 
altogether  socialism,  political  action,  collective  bargaining,  and 
contract.  Socialism  is  to  it  but  another  form  of  oppression,  political 
action  a  practical  delusion,  collective  bargaining  and  contract 
schemes  of  the  oppressor  for  preventing  the  united  and  immediate 
action  of  the  workers.  It  looks  forward  to  a  society  based  upon  free 
industrial  association,  and  finds  its  legitimate  means  in  agitation 
rather  than  in  methods  which  look  to  immediate  betterment. 
Direct  action  and  sabotage  are  its  accredited  weapons,  and  violence 
its  habitual  resort.    These  varieties  of  the  revolutionary  type  may 


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TRADE  UNIONISM  IN  THE  UNITED  STATES  215 

be  tenned  respectively  socialistic  and  quasi-anarchistic  unionism^ 
The  fonner  is  perhaps  most  nearly  represented  in  the  United  States 
by  the  Western  Federation  of  Miners,  the  latter  by  the  Industrial 
Workers  of  the  World.* 

Finally  in  the  xinion  complex  it  seems  possible  to  distinguish  a 
mode  of  action  sufficiently  definite  in  its  character  and  genesis  to 
warrant  the  designation  predatory  unionism.  This  type,  if  it  be 
truly  such,  cannot  be  set  apart  on  the  basis  of  any  ultimate  social 
ideals  or  theory.  It  may  be  essentially  conservative  or  radical, 
trade-conscious  or  class-conscious.  It  appears  to  aim  solely  at 
immediate  ends,  and  its  methods  are  wholly  pragmatic.  In  short, 
its  distinguishing  characteristic  is  the  ruthless  pursuit  of  the 
thing  in  hand  by  whatever  means  seem  most  appropriate  at  the 
time,  regardless  of  ethical  and  legal  codes  or  the  effect  upon  those 
outside  its  own  membership.  It  may  employ  btisiness,  friendly, 
or  revolutionary  methods.  Generally  its  operations  are  secret  and 
apparently  it  sticks  at  nothing. 

Of  this  assTunedAuiion  type  also  there  appear  to  be  two  varieties. 
The  first  may  be  termed  holdup  unionism.  This  variety  is  usually 
to  be  foimd  in  large  industrial  centers  masquerading  as  business 
unionism.  In  outward  appearance  it  is  conservative;  it  professes  a 
belief  in  harmony  of  interests  between  employer  and  employee; 
it  claims  to  respect  the  force  of  contract;  it  operates  openly 
through  collective  bargaining,  and  professes  regard  for  law  and 
order.  In  reality  it  has  no  abiding  principles  and  no  real  concern 
for  the  rights  or  welfare  of  outsiders.  Prevailingly  it  is  exclusive 
and  monopolistic.    Generally  it  is  boss-ridden  and  corrupt,  the 

'  By  many  it  would  seem  more  appropriate  to  designate  the  second  variety  as 
syndicalist  unionism.  The  name  quasi-^narckisHc  has  been  chosen,  however,  because 
there  appears  to  be  as  yet  little  real  syndicali«n  in  the  United  States,  and  further 
because  quasi-anarckisUc  b  the  more  inclusive  term.  It  leaves  open  the  opportunity 
for  further  subdassification  should  the  conditions  warrant. 

*  In  strict  justice  it  must  be  stated  that  there  are  two  general  organizations  in 
this  country  claiming  to  be  known  as  the  Industrial  Workers  of  the  World.  The 
first,  the  parent  body,  has  its  headquarters  in  Chicago;  the  second,  an  offshoot,  is 
officially  located  in  Detroit.  The  latter  is  a  representative  of  the  first  revolutionary 
variant.  That  is,  it  advocates  political  action  and  supports  one  of  the  Socialist  parties. 
In  ordinary  usage  the  term  I.W.W.  applies  to  the  Chicago  organization,  and  when 
unmodified  is  to  be  so  understood  in  these  pages. 


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2i6  JOURNAL  OF  POLITICAL  ECONOMY 

membership  for  the  most  part  being  content  to  follow  blindly  the 
instructions  of  the  leaders  so  long  as  they  "deliver  the  goods." 
Frequently  it  enters  with  the  employers  of  the  group  into  a  double- 
sided  monopoly  intended  to  eliminate  both  capitalistic  and  labor 
competition  and  to  squeeze  the  consuming  public.  With  the 
favored  employers  it  bargains  not  only  for  the  sale  of  its  labor  but 
for  the  destruction  of  the  business  of  rival  employers  and  the 
exclusion  of  rival  workmen  from  the  craft  or  industry.  On  the 
whole  its  methods  are  a  mixture  of  open  bargaining  coupled  with 
secret  bribery  and  violence.  This  variety  of  imionism  has  been 
exemplified  most  frequently  among  the  building  trades  organizations 
\mder  the  leadership  of  men  like  the  late  notorious  "Skinney" 
Madden. 

The  second  variety  of  predatory  labor  organization  may  be 
called,  for  want  of  a  better  name,  guerilla  unionism.  This  variety 
resembles  the  first  in  the  absence  of  fixed  principles  and  in  the  ruth- 
less pursuit  of  immediate  ends  by  means  of  secret  and  violent 
methods.  It  is  to  be  distinguished  from  hold-up  imionism,  however, 
by  the  fact  that  it  operates  always  directly  against  its  employers, 
never  in  combination  with  them,  and  that  it  cannot  be  bought  off. 
It  is  secret,  violent,  and  ruthless,  seemingly  because  it  despairs 
of  attaining  what  it  considers  to  be  legitimate  ends  by  business, 
uplift,  or  revolutionary  methods.  This  union  variant  has  been 
illustrated  recently  in  the  campaign  of  destruction  carried  on  by  the 
Bridge  and  Structural  Iron  Workers.' 

The  writer  is  aware  that  apparently,  strong  objections  may 
be  urged  against  the  assumption  that  these  diverse  expressions 

'  It  has  been  suggested  that  there  is  still  another  functional  union  type  which 
might  be  called  dependent  unionism.  It  is  well  known  that  there  are  unions  whose 
existence  is  dependent  wholly  or  in  large  part  upon  other  unions  or  upon  the 
employers.  Some  unions,  for  example,  could  not  exist  except  for  their  labels,  which 
secure  a  special  market  among  other  unionists  or  union  sympathizers  for  the  goods 
which  they  turn  out.  Such  unions  are  sometimes  demanded  or  initiated  by  the 
empbyers,  who  see  in  the  label  a  good  commercial  asset.  Again,  there  are  unions 
instigated  and  practically  dominated  by  employers,  oiganized  and  conducted  on 
especially  conservative  lines  with  the  purpose  of  combating  or  disfdadng  independent 
unionism.  We  may  then,  perhaps,  be  justified  in  recognizing  here  a  fifth  functional 
type  with  two  sulxnrdinate  varieties. 


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TRADE  UNIONISM  IN  THE  UNITED  STATES  217 

of  union  viewpoint  and  action  represent  true  functional  types.* 
It  has  been  admitted  that  probably  the  ideals  and  modes  of  action 
of  no  particular  imion  organization  correspond  eicactly  to  any  one 
•  of  these  so-called  types.  It  is  a  fact,  moreover,  that  the  programs  of 
most  xmions  are  imdergoing  a  pretty  constant  process  of  change 
and  sometimes  shift  rapidly.  It  is  true  further  that  the  member- 
ship of  any  union  may  include  representatives  of  all  kinds  of  union- 
ism— ^business,  uplift,  revolutionary,  and  predatory.  It  might 
then  be  argued  that  what  have  been  here  called  types  are  mere 
individual  attitudes,  or,  at  most,  aspects  or  tendencies  of  one  and 
the  same  imion  spedes.  It  will  be  the  purpose  of  succeeding 
papers,  therefore,  to  test  the  reality  of  these  assumed  types  and 
varieties  and  to  interpret  them  causally  by  means  of  a  brief  study 
of  the  genesis  and  development  of  organized  labor  in  the  United 
States.  Incidentally  this  study  should  reveal  also  the  general 
laws  of  imion  development. 

Robert  F.  Hoxie 
University  op  Chicago 

'The  writer  b  also  fully  alive  to  the  fact  that  no  first  attempt  at  functioiial 
analysis  of  unionism  can  be  regarded  as  final  and  will  welcome  any  and  all  criticism 
and  co-operation  that  may  lead  to  greater  accuracy  in  this  respect. 


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THE  TARIFF  OF  1913.    m 

In  what  has  been  said  during  the  former  discussions  of  the 
tariff  of  1913,  reference  has  been  had  ahnost  exclusively  to  the 
provisions  of  the  law  relating  to  duties,  to  customs  administra- 
tion, and  to  clauses  affecting  foreign  trade  relations.  The  tariff 
act  of  1913,  however,  was  not  only  a  measure  for  the  revision  of 
import  rates  and  for  reorganizing  the  conditions  of  importation, 
but  was  also  a  revenue  law  in  the  larger  sense.  As  has  been  inci- 
dentally noted  in  the  former  discussions  already  referred  to,  it  was 
recognized  from  the  beginning  that  very  great  tariff  changes  would 
necessitate  a  recourse  to  new  methods  of  revenue  raising,  or  else 
to  a  severe  cut  in  expenditures.  That  a  cut  could  be  successfully 
and  effectively  attempted  few  believed.  The  overgrown  expansion 
of  the  federal  government,  the  undertaking  of  many  new  functions, 
and  the  constant  hungry  struggle  at  the  patronage  trough  had 
swollen  annual  expenditures  to  a  volume  never  before  dreamed  of. 
To  check  this  tide  of  extravagance,  it  was  seen,  would  necessarily 
be  the  work  of  years;  and  congressional  leaders,  probably  wisely, 
concluded  that  they  would  do  well  to  recognize  the  facts  in  the  case 
and  to  seek  for  the  moment  simply  to  get  from  some  source  the  funds 
needed  to  meet  expenditures  upon  the  existing  basis.  The  way 
had  already  been  pointed  out  by  the  Republican  Congress  which 
passed  the  tariff  act  of  1909.  In  that  Congress,  to  provide  for  the 
ever-growing  outlays  with  which  even  the  tariff  was  not  sufficient 
to  cope,  the  corporation  tax  had  been  proposed  and  enacted,  and 
its  yield  during  the  succeeding  years  had  reached  the  estimated 
level.  It  had  proved  an  easy  means  of  providing  at  least  $30,000,- 
000  on  the  average.  To  expand  this  corporation  tax  so  as  to  include 
individual  income  was  a  natural  and  logical  step.  The  plan  had, 
besides,  the  warrant  of  past  experience;  since,  in  the  tariff  act  of 
1894,  the  notion  of  redressing  the  balance  of  taxation  had  been 
given  scope  through  the  introduction  of  an  income  tax  designed 
to  supplement  the  reduced  yields  of  the  tariff  act  of  that  year,  and 
estimated  to  produce  $40,000,000.    For  both  logical  and  historical 

218 


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THE  TARIFF  OF  jgij  219 

reasons,  therefore,  Democratic  leaders  turned  toward  the  indi- 
vidual income  tax.  That  they  woidd  do  so  had  already  been  indi- 
cated diujng  the  Sixty-second  Congress  when  the  Ways  and  Means 
Committee  had  reported  a  bill  providing  for  an  individual  income 
tax  estimated  to  produce  probably  $60,000,000,  at  the  same  time 
that  they  introduced  and  passed  a  bill  repealing  the  tariff  on  sugar 
and  thereby  sacrificing  an  income  of  between  $50,000,000  and 
$60,000,000.  It  was  resolved  early  in  the  process  of  actually  effect- 
ing tariff  revision,  to  revive  this  income-tax  measure  and,  by 
amplifying  and  adjusting  it,  to  render  it  an  effective  auxiliary  to 
the  revision  of  the  tariff  itself.  This  resolution  was  carried  out, 
and  the  act  of  1913  became  both  a  tariff  and  an  income-tax  law. 
It  thus  constituted  a  very  great  departure  from  ansrthing  practically 
in  force  since  the  Civil  War,  inasmuch  as  the  act  of  1894  had  never 
taken  effect  in  so  far  as  its  income-tax  features  were  concerned; 
while  the  income-tax  idea,  although  logically  an  extension  of  the 
corporation  tax,  constituted,  in  practice,  a  very  great  change  from 
the  provisions  of  that  measure.  We  must,  therefore,  regard  the 
income-tax  legislation  of  1913^  both  from  a  general  theoretical 
standpoint  and  from  the  point  of  view  of  technique.  No  criticism 
based  upon  one  of  these  phases  of  the  situation  which  ignores  the 
other  will  be  adequate,  and  no  estimate  of  the  law  of  1913  can  be 
considered  sufficient  which  does  not  give  large  significance  to  certain 
important  aspects  of  the  income-tax  sections  of  the  measure. 


The  essential  outlines  of  the  income-tax  law  are  simple,  though 
its  administration  and  technique  are  highly  intricate.  The  former 
is  of  larger  interest  to  the  student  of  economics  than  the  latter, 
although  technical  questions  have  their  own  significance.  First 
and  fundamental  study  should,  however,  be  given  to  the  ideas  at 
the  root  of  the  income-tax  provision. 

The  plan  of  the  income  tax  of  1913  calls  for  an  annual  levy  of 
I  per  cent  upon  all  incomes  above  $3,000,  or,  in  the  case  of  married 
men  with  families,  upon  incomes  in  excess  of  $4,000.  When 
incomes  exceed  $20,000  annually  there  is  provision  for  a  graduated 
additional  or  surtax,  this  being  intended  to  strike  at  the  supposedly 


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220  JOURNAL  OP  POLITICAL  ECONOMY 

*' surplus"  power  of  payment  enjoyed  by  men  with  incomes  greater 
than  that  amoxmt.  Provision  is  made  for  the  retention  of  the 
income  tax  of  i  per  cent  levied  upon  the  net  revenues  of  all  cor- 
porations with  net  annual  returns  in  excess  of  $5,000,  so  that  the 
corporation-tax  idea  is  accepted  and  adjusted  to  the  requirements 
of  the  new  legislation.  The  measure  is,  in  other  words,  a  general 
income  tax  applicable  to  both  individuals  and  corporations.  It 
is  more  than  this,  for  it  is  an  eflfort  to  redress  the  supposedly  imeven 
burden  of  taxation  resulting  from  the  use  of  the  tariff  as  a  principal 
means  of  obtaining  revenue.  Further,  it  is  a  progressive  income 
tax  in  addition  to  being  based  upon  a  decidedly  high  exemption 
limit.  Two  questions  with  reference  to  the  basic  idea  of  the  tax 
thus  present  tiiemselves:  (i)  Is  this  income  tax  a  desirable  means 
of  obtaining  revenue  with  which  to  supplement  the  jdeld  of  the 
tariff?  (2)  Is  this  income  tax  a  useful  or  desirable  means  of 
readjusting  the  burden  of  taxation,  and  has  that  means  been  used 
in  such  a  way  as  to  produce  the  desired  results  ? 

During  a  former  discussion'  something  was  said  of  the  income 
tax  in  connection  with  the  abolition  of  the  sugar  tariff.  It  was 
then  pointed  out  that  the  annual  yield  of  the  sugar  duties  may  be 
taken  as  about  $50,000,000  while,  as  will  later  be  seen,  the  esti- 
mated yield  of  the  individual  income  tax  is  not  much  more  than 
that,  the  preliminary  figures  running  only  to  about  $60,000,000 
or  $70,000,000.  If  the  tariff  on  sugar  had  been  retained  it  is  clear 
that  the  income  tax  would  not  have  been  needed.  Certainly  if 
to  the  sugar  tax  there  had  been  added  a  plan  for  the  retention  of 
a  very  limited  number  of  other  duties  there  could  have  been  little 
support  for  belief  that  the  income  tax  was  necessary.  It  was  not, 
then,  any  belief  that  other  sources  of  revenue  had  been  exhausted 
that  led  to  a  resort  to  the  income  tax.  At  no  time  during  the 
discussion  of  the  tariff  of  1913  was  there  even  a  remote  suggestion 
of  reviving  the  highly  productive  inheritance  taxes  of  former  years, 
or  the  stamp  taxes  which  had  produced  such  enormous  revenues 
in  times  past,  and  to  which  there  had  been  but  limited  objection 
on  the  part  of  the  payers.  The  decision  to  take  up  the  income  tax 
was  not  solely  due  to  the  circumstance  that  in  cutting  down  tariff 

>  Journal  ofPMical  Economy,  XXn,  2  (February,  1914))  P- 123. 


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THE  TARIFF  OF  jgi3  221 

rates  heavy  reductions  of  revenue  had  been  made;  on  the  contrary, 
the  income  tax  was  selected  out  of  several  more  fruitful  sources  of 
revenue  as  the  method  for  securing  certain  definite  desired  results. 

In  estimating  the  wisdom  of  this  action,  we  may  consider  in 
their  order  certain  argimients  in  behalf  of  the  adoption  of  income 
taxation  by  the  federal  government  and  certain  objections  to  it. 

As  favoring  the  adoption  of  the  tax,  it  was  urged  that: 

1.  Income  taxation  had  become  a  political  principle  with  the 
Democratic  party.  Its  temporary  adoption  in  1894,  followed  by 
the  subsequent  rejection  of  the  plan  by  the  Supreme  Court,  had 
left  a  situation  which,  from  the  political  standpoint,  called  for  action 
designed  to  restore  the  past  prestige  of  the  party  in  this  matter. 
On  the  other  hand,  the  constant  advocacy  of  the  income  tax  as 
a  means  of  redistributing  the  burdens  of  support  of  the  govern- 
ment had  been  a  fixed  feature  of  so-called  progressive  political 
discussion  and  effort  for  years  past,  and  was  not  confined  to  the 
Democratic  party. 

2.  Income  taxation  has  been  accepted  by  nearly  every  foreign 
government  subject  to  modem  revenue  requirements,  as  a  satis- 
factory means  of  adjusting  the  burdens  of  public  support. 

3.  Income  taxation  had  been  specifically  constitutionalized 
by  the  adoption  of  the  income-tax  amendment  which  had  been 
initiated  during  the  Taft  administration  and  had  been  passing 
through  the  necessary  routine  of  ratification  by  the  states. 

4.  Income  taxation  could  imdoubtedly  be  made  to  jrield  the 
amoimt  of  revenue  needed  now  or  likely  to  be  needed  in  the  future 
by  the  federal  government. 

5.  Income  taxation  properly  applied  would  tend  to  bring 
home  to  the  individual  the  constantiy  growing  character  of  the 
burden  imposed  by  the  federal  government. 

As  against  the  adoption  of  the  income  tax  by  Congress,  the 
following  considerations  prominentiy  suggested  themselves: 

1.  The  income  tax  was  already  employed  by  several  states  and 
was  probably  needed  by  them  as  a  regular  resource. 

2.  With  divided  jurisdiction  (between  the  federal  government 
and  the  states)  there  woidd  inevitably  be  considerable  conflict 
of  legislation,  resulting  in  more  or  less  difficulty  in  the  maintenance 


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222  JOURNAL  OF  POUTICAL  ECONOMY 

of  the  tax  and  its  appropriate  collection.  Double  taxation,  more- 
over, was  likely  to  occur  as  a  result  of  the  contemporaneous  col- 
lection of  both  state  and  federal  income  taxes,  in  spite  of  all  efforts 
to  avoid  this  danger. 

3.  At  this  particular  jimcture,  all  the  revenue  needed  could 
easily  be  obtained  with  a  less  difficult  and  less  annoying  kind  of 
tax. 

4.  The  cost  of  collection  of  the  income  tax  was  certain  to  be 
high  and  the  difficulty  of  gathering  it  very  great,  while  the  conse- 
quent inconvenience  and  unpopularity  were  almost  certain  to  be 
large. 

5.  If  a  very  high  limit  of  exemption  were  to  be  adopted, 
the  income  tax  would  not  be  very  productive  and  probably  could 
not  be  made  so,  while  if  at  any  tune  this  limit  were  to  be  lowered, 
the  result  would  be  a  corresponding  increase  in  the  annoyance  to 
the  individual  payer  of  the  tax  and  in  the  consequent  unpopidarity 
of  the  tax  itself. 

6.  Many  easy  methods  of  getting  revenue  were  within  ready 
reach. 

A  wei^iing  of  these  conflicting  considerations  led  the  framers 
of  the  tarMf  law  to  the  belief  that  they  ought  to  include  the  income 
tax  as  a  part  of  their  general  program.  It  was  most  forcibly 
urged  that  the  party  was  thoroughly  committed  to  it,  that  the 
experience  of  foreign  countries  indicated  the  wisdom  of  its  use,  and 
that  legislation  shoidd  be  shaped  with  a  view  to  the  future  in  the 
long  range  sense  and  not  for  die  sake  of  protecting  purely  tempo- 
rary conditions.  As  for  the  revenue  problem  of  the  states,  it  was 
argued  that  the  government  was  already  committed  to  the  adop- 
tion of  the  income  tax  in  principle  without  regard  to  its  influence 
upon  state  finances  by  reason  of  the  fact  that  the  corporation  tax 
had  been  in  previous  operation  four  years  in  spite  of  the  protests 
of  state  governments;  hence  infringement  upon  state  finances, 
whatever  it  might  be  said  to  be,  was  already  an  established 
fact. 

On  the  whole,  the  student  of  federal  finance  who  looks  at  the 
subject  from  the  larger  standpoint  will  probably  conclude  that 


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THE  TARIFF  OF  jpjj  223 

this  dedsion  was  wise.  The  income  tax  when  properly  admin- 
istered opens  a  pathway  to  unlimited  resources.  It  is  the  avenue 
through  which  the  federal  government  should,  if  it  can,  make  its 
burden  and  its  presence  felt  by  the  average  man.  It  is  the  kind 
of  tax  which  when  properly  constructed  can  be  decreased  or 
increased  with  the  smallest  resultant  disturbance  to  industry. 
With  federal  expenses  growing  and  likely  to  grow  still  more  in  the 
near  future,  it  was  well  to  secure  a  sure  means  of  enlarging  revenues 
in  the  event  of  necessity. 

The  other  phase  of  the  income-tax  question  already  referred 
to  presents  a  quite  different  problem.  In  asking  whether  the 
income  tax  will  prove  a  useful  or  desirable  means  of  readjusting 
the  burden  of  taxation  and  whether  this  given  income  tax  will 
bring  about  the  results  sought,  a  new  set  of  considerations  makes 
its  appearance.  That  the  burden  of  the  old  tariff  and,  to  a  large 
extent,  that  of  the  new  one  as  well,  falls  upon  the  average  man 
through  the  enhancing  of  the  price  of  the  goods  he  buys,  can  hardly 
be  disputed.  Placing  a  tax  upon  the  incomes  of  persons  enjoy- 
ing an  exceptionally  large  amount  of  individual  revenue  undoubt- 
edly furnishes  a  means  for  redressing  in  some  measure  the 
unevenness  with  which  tax  burdens  are  distributed.  Whether 
or  not  in  practice  the  desired  result  will  be  gained  is  a  question 
whose  answer  must  depend  very  largely  upon  the  working-out  of 
the  conditions  under  which  the  tax  in  question  is  shifted  so  as  to 
determine  its  final  incidence.  By  exempting  persons  with  incomes 
up  to  $3,000  undoubtedly  the  main  body  of  the  population  was 
freed  from  the  direct  burden  of  this  phase  of  the  tariff  act.  But, 
as  will  be  seen,  a  considerable  portion  of  this  tax  is  likely  to  be 
shifted.  It  is  at  least  open  to  question  how  far  in  practice  the 
tax  will  actually  result  in  relieving  the  classes  it  was  intended  to 
help,  and  just  how  far  it  will  afford  means  of  shifring  the  burden 
back  again  to  the  same  ultimate  class  of  consumers  who  now  pay 
the  tariff.  That  it  was  in  the  abstract  a  desirable  method  of 
correcting  the  unevenness  of  taxation  now  complained  of,  no  one 
could  reasonably  question.  That  this  particular  income  tax 
woiild  bring  about  that  result  in  practice  was  very  much  less  certain. 


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224  JOURNAL  OF  POLITICAL  ECONOMY 

n 

As  was  noted  in  the  first  paragraphs  of  this  discussion,  the 
income-tax  sections  of  the  tariff  of  1913  were  the  successors  of  a 
measure  tentatively  adopted  by  the  House  of  Representatives  a 
year  earlier  and  known  as  the  excise  income  tax.  This  excise  tax 
was  formulated  prior  to  the  adoption  of  the  federal  constitutional 
amendment  providing  for  an  income  tax,  but  was  intended  as  a 
genuine  income  tax.  It  was  in  fact  the  lineal  predecessor  of  the 
income-tax  sections  of  the  tariff.  A  brief  historical  review  of  its 
terms  will  show,  therefore,  by  what  gradual  stages  the  final 
provisions  were  developed. 

The  excise  income  tax  in  the  form  at  first  adopted  did  not 
answer  the  purpose  which  it  is  desired  to  serve  by  the  present 
legislation,  for  the  following  reasons: 

1.  It  failed  to  make  any  adjustment  with  the  existing  corpora- 
tion tax. 

2.  It  was  based  upon  a  plan  of  legislation  framed  prior  to  the 
adoption  of  the  income-tax  amendment. 

3.  It  was  defective  in  principle  and  detail  at  many  points. 

All  these  difficulties  it  was  felt  should  be  considered  in  framing 
a  new  law  and  it  seemed  necessary  to  begin  (a)  by  repealing  the 
corporation  tax,  on  the  ground  that,  as  an  inclusive  income  tax 
is  to  be  adopted,  it  should  bear  upon  all  income,  not  merely  upon 
that  of  corporations,  and  not  upon  their  income  except  in  the  same 
degree  as  upon  other  incomes;  {b)  by  laying  aside  the  older 
excise  income  tax  in  the  form  in  which  it  was  put  through  the 
House,  and  making  a  completely  fresh  start. 

When  the  ground  had  thus  been  cleared  it  was  planned  to  map 
out  a  general  income-tax  measure  upon  the  principles  now  recog- 
nized in  financial  literature  and  embodied  in  European  income- 
tax  systems,  adjusting  such  tax,  however,  to  the  state  systems  of 
revenue  in  so  far  as  circumstances  would  permit  The  chief  points 
to  be  disposed  of  were  as  follows: 

I.  The  fundamental  necessity  in  income-tax  legislation,  it  was 
believed,  is  to  arrange  wherever  possible  for  the  collection  of  the 
revenues  at  the  source  from  which  they  are  drawn.  The  excise 
income-tax  bill  of  the  preceding  session  did  not  satisfactorily  do 


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THE  TARIFF  OF  jgij  22$ 

this.  It  was  therefore  open  to  serioxis  criticism.  The  excise 
income  tax  called  fimdamentally  for  an  annual  return  to  be  made 
by  the  individual  with  reference  to  his  income,  after  deducting  a 
minimum  of  exemption  and  certain  allowances  for  expenses  and 
offsets.  This  of  course  threw  the  whole  burden  upon  the  accuracy 
with  which  return  was  made  by  the  person  who  was  to  pay  the  tax. 
Experience  unfortunately  shows  that  taxpayers  cannot  be  relied 
upon  to  be  honest  under  such  conditions  and  that  they  ought  not 
to  be  subjected  to  the  strain,  as  the  effect  of  such  strain  is  to 
penalize  the  honest  man  or  the  relatively  honest  man  and  to  aid 
correspondingly  the  man  of  questionable  integrity.  It  was  ad- 
mitted to  be  a  doubtful  question  how  far  the  principle  of  collec- 
tion at  the  source  can  satisfactorily  be  extended  by  the  federal 
government,  but  it  was  seen  that  the  plan  certainly  could  be  carried 
to  a  far  more  advanced  point  than  had  been  done  in  the  excise 
income-tax  bill.  In  that  measure  it  was  applied  to  some  incomes, 
as  seen  in  section  5  of  the  original  bill  whereby  officials  in  the 
employ  of  the  government  were  to  have  the  tax  deducted  from  their 
income  and  whereby  corporations,  etc.,  were  to  make  returns  in 
certain  cases.  This  principle  is  the  only  effective  one  in  connec- 
tion with  income  taxation  and  it  was  felt  that  it  should  be  applied 
as  broadly  and  thoroughly  as  the  Constitution  and  laws  of  the 
federal  government  would  possibly  allow.  There  was  no  weaker 
feature  in  the  excise  income-tax  bill  than  this  very  failure  to  do 
what  was  needed  toward  insuring  the  successful  levying  of  the  tax 
by  making  certain  that  all  doubt  so  far  as  possible  was  eliminated 
with  respect  to  the  accuracy  of  tax  returns.  It  was  thought  that 
the  principle  of  collection  at  the  source  could  be  applied  in  the 
following  classes  of  cases  at  least: 

(a)  All  corporations  doing  an  interstate  business,  interpreting 
the  word  interstate  in  the  broadest  possible  manner. 

(ft)  Other  classes  of  corporations  chartered  under  federal  law, 
e.g.,  national  banks. 

(c)  Other  classes  of  corporations  over  which  the  United  States 
might  in  any  manner  be  deemed  to  have  the  power  of  requiring 
information,  or  which  act  as  agents  for  the  performance  of  govern- 
mental fxmctions. 


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226  JOURNAL  OP  POUTICAL  ECONOMY 

{(i)  Other  classes  of  business^  not  incorporated,  falling  within 
any  of  the  above  groups. 

{e)  Persons  having  to  do  with  the  collections  of  rentals  or 
incomes  arising  from  lands. 

(j)  Persons  having  to  do  with  the  registration  and  enforce- 
ment of  legal  instruments  securing  debts  contracted  on  the  strength 
of  lands. 

It  was  thought  that  if  the  principle  of  collection  at  the  source 
could  be  implied  to  these  and  perhaps  to  other  payers  of  interest, 
dividends,  wages,  and  rents,  the  ground  would  be  very  largely 
covered,  and  the  field  remaining  to  be  dealt  with  solely  throu^ 
individual  returns  would  be  relatively  small. 

Of  course  in  this  connection  the  difficulty  had  to  be  faced  that 
the  persons  who  pay  such  interest,  dividends,  wages,  or  rents 
would  not  know  whether  the  people  to  whom  they  pay  these  incomes 
are  or  are  not  within  the  limit  of  exemption.  For  example,  if  the 
Pennsylvania  Railroad  is  called  on  to  deduct  an  income  tax  from 
the  earnings  of  its  bondholders  before  paying  their  interest,  a 
case  like  this  might  arise:  A  may  own  Pennsylvania  Railroad  bonds 
sufficient  to  entitle  him  to  interest  of,  say,  $6,000,  while  B  may 
have  an  equal  income  from  various  bonds,  of  the  Pennsylvania 
and  of  other  railroads.  In  that  case,  presumably,  the  Pennsylvania 
woidd  deduct  the  tax  on  A's  interest  and  would  not  daduct  it 
on  B's,  while  the  other  roads  would  not  deduct  ansrthing  from  B's 
interest  because  B  did  not  get  from  any  one  road  an  income 
in  excess  of  the  exemption.  This  could  be  met  only  by  pro- 
viding that  the  tax  should  be  collected  in  every  case  and  that  a 
voucher  should  be  supplied  to  the  person  from  whom  the  money 
was  thus  taken,  or  that  when  interest  was  paid  a  record  of  owner- 
ship should  be  required.  Then  this  person  should  be  allowed  to 
collect  back  from  the  government  the  sums  cut  off  from  his  income 
if  such  income  was  dearly  shown  to  be  below  the  exempted  mini- 
mum, or  he  should  be  compelled  to  pay  in  future  if  the  tax  were  not 
deducted  at  the  time  the  interest  was  paid.  This  would  also  call 
for  a  statement  on  the  part  of  the  individual  which  might  or  might 
not  be  true,  since  he  would  have  to  show  that  his  income  was  within 
the  minimum.    Thus  there  might  be  a  field  for  dishonesty  there, 


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THE  TARIFF  OF  jgj^  227 

but  it  would  be  greatly  limited.  The  plan,  it  was  seen,  would  be 
inquisitorial  without  a  doubt,  but  it  was  recognized  that  all  income 
taxes  are  so,  and  the  more  effective  they  are  the  more  inquisitorial 
they  are. 

3.  It  was  desired  that  the  question  of  interference  with  state 
taxes  should  be  very  carefully  saf^uarded.  For  some  years  past 
several  states  have  had  income  taxes,  many  of  them  inefficient,  and 
falling  back  upon  exactly  the  sources  of  revenue  that  were  to  be 
drawn  upon  by  the  proposed  act.  Few  legislators  thought  it  would 
be  a  wise  plan  that  would  allow  the  double  taxation  of  such  incomes. 
In  some  way,  it  was  believed,  the  field  ought  to  be  shared  with  the 
states.  The  best  way  to  do  this  seemed  to  be  to  allow  an  offset 
in  those  states  that  have  income  taxes,  equal  to  the  amount  paid 
in  such  states  upon  those  portions  of  income  which  are  in  excess 
of  the  minimum  exempted  under  federal  law.  A  state  receipt 
would  release  the  taxpayer  from  the  payment  of  the  federal  tax 
to  the  extent  that  the  state  tax  coincided  with  the  federal;  but 
this  allowance  could  be  made  only  in  those  states  that  already  had 
tax  laws  that  duplicate  the  federal  income  tax,  and  the  plan  could 
not  be  so  applied  as  to  allow  the  states  to  pre-empt  this  field  for  all 
future  time.  This,  it  was  thought,  was  a  matter  requiring  to  be 
worked  out  in  a  good  deal  of  detail;  but  in  the  final  form  of  the 
act  provision  was  made  only  for  the  general  deduction  of  state  and 
municipal  taxes  in  computing  income. 

3.  There  was  also  a  strong  feeling  that  the  minimum  of  exemp- 
tion provided  under  the  old  bill  ($5,000)  was  too  high.  A  study 
of  incomes  showed  that  the  number  above  $5,000  is  not  nearly  so 
great  as  many  persons  would  suppose,  and  that  thi^  exemption 
might  well  be  lowered  to,  say,  $4,000.  It  was  urged  that  if  neces- 
sity required  it,  $3,000  would  not  be  unreasonable.  The  whole 
question  of  exemption,  it  was  felt,  needed  to  be  considered  with 
very  great  care  in  order  not  to  impose  the  tax  upon  portions  of 
income  that  are  not  properly  taxable  at  all,  and  at  the  same  time 
to  avoid  exempting  incomes  that  ought  to  pay  the  tax.  An 
insufficient  amoimt  of  study  had  been  given  to  this  subject  in 
nearly  all  efforts  at  federal  income-tax  legislation.  Moreover, 
in  section  2  of  the  old  excise  income-tax  bill,  the  exemptions  or 


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228  JOURNAL  OF  POLITICAL  ECONOMY 

deductions  provided  were  exceedingly  loose,  particularly  with 
respect  to  losses,  while  the  provision  that  the  taxes  paid  to  state 
and  municipal  governments  might  be  deducted  in  computing 
incomes  was  hardly  fair. 

4.  In  so  far  as  the  tax  was  to  be  applicable  to  corporate  incomes, 
it  was  also  desired  that  special  care  should  be  taken  with  its  adjust- 
ment, the  first  question  considered  being  how  far  to  go  in  taxing 
corporations  as  artificial  persons,  if  arrangement  had  already  been 
made  for  taxing  the  individuals  who  composed  or  owned  such 
corporations.  Various  legislators  urged  that  if  it  was  decided 
to  impose  the  tax  not  only  on  individuals  but  on  corporations,  the 
corporation-tax  sections  of  the  existing  law  should  be  revised  with 
great  care  with  a  view  to  taking  advantage  of  the  criticisms  which 
experi^ce  had  developed  and  eliminating  as  much  as  possible  the 
basis  for  them.  A  good  deal  of  the  relative  success  of  the  corpora- 
tion tax  of  1909  had  been  due  to  the  set  of  regulations  worked  out 
by  the  Secretary  of  the  Treasury,  but  it  was  generally  admitted  that 
these  regulations  exceeded  the  Secretary's  authority,  and  that  in 
so  far  as  they  were  good  they  should  be  embodied  in  legislative 
form  and  not  left  to  stand  merely  upon  executive  orders. 

5.  A  suggestion  made  but  never  acted  upon  concerned  the  solu- 
tion of  the  foreseen  and  imforeseen  difficulties  and  problems  inevi- 
table to  the  operation  of  the  tax.  Those  who  favored  the  careful 
application  of  the  law  urged  that  it  would  be  a  good  thing,  shoidd 
it  be  deemed  practicable,  to  create  an  income-tax  conmiission  or 
board  consisting  of  expert  persons  who  should  act  in  an  advisory 
capacity  and  be  paid  a  purely  nominal  salary,  reporting  at  the 
specified  dates  with  reference  to  any  changes  needed  in  the  tech- 
nique of  the  law. 

ni 

Some  attention  may  now  be  given  to  the  form  actually  asstmied 
by  the  income  tax.  No  attempt  will  be  made  or  need  be  made 
to  consider  abstract  questions  affecting  the  desirability  of  progres- 
sive taxation  or  the  abstract  problem  of  an  exemption  minimum 
as  a  logical  feature  of  income  taxation.  These  subjects  have  been 
abimdantly  dealt  with  by  writers  on  income  taxation  who  have 
considered  the  general  aspects  of  the  problem  with  a  fulness  that 


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THE  TARIFF  OF  igij  229 

leaves  little  to  be  required.  Some  specific  questions  affecting  the 
present  income  tax  must,  however,  be  considered. 

First  among  these  is  that  of  the  exemption.  Was  it  wise  to 
adopt  a  high  exemption  limit,  and,  if  so,  were  the  exemptions  of 
$3,000  annual  income  for  unmarried  men  and  women  and  $4,000 
for  a  family  proper  figures  ?  A  survey  of  state  and  foreign  income 
taxes  shows  that  the  rate  of  exemption  provided  in  such  statutes 
is  very  much  lower. 

This  high  exemption  cannot  be  defended  on  the  groimd  that  it 
was  desired  in  that  way  to  avoid  conflicting  with  state  income 
taxes  since  the  act  contains  a  distinct  provision  for  avoiding  double 
taxation  through  the  payment  of  an  income  tax  first  to  the  state 
and  then  to  the  government.  Nor  can  it  be  defended  on  the  ground 
that  $3,000  represents  the  minimum  of  subsistence.  Even  in  the 
present  day  of  the  high  cost  of  living,  he  would  be  a  bold  man  who 
would  contend  that  an  immarried  individual  coidd  not  exist  on 
less  than  $3,000  per  annum  without  impairing  his  efficiency,  that 
being  the  usual  argument  put  forward  for  the  exemption  of  any 
portion  of  income.  Neither  coidd  it  be  claimed  that  $3,000  was 
selected  because  of  a  belief  that  the  cost  of  collection  for  incomes 
below  that  figure  would  increase  in  a  geometrical  ratio.  As  we 
must  admit,  the  form  and  methods  of  the  new  income  tax  are 
of  such  a  nature  that  collection  might  have  been  continued  down 
to  a  very  much  lower  income  level  without  increasing  in  any  appre- 
ciable degree  the  percentage  of  cost,  dollar  for  dollar,  necessary  in 
order  to  get  the  fimds  into  the  Treasury.  It  is,  of  course,  a  well- 
known  and  generally  admitted  fact,  even  in  a  country  so  wholly 
lacking  in  reliable  income  data  as  is  the  United  States,  that  only  a 
comparatively  small  number  of  incomes  relatively  speaking  amoimt 
to  $3,000  or  over.  The  only  thing  that  seems  reasonably  certain 
is  that,  taken  as  a  percentage  of  the  total  nimiber  of  incomes,  the 
ratio  is  very  small.  This  means  that  the  amount  of  revenue  which 
can  be  collected  by  means  of  a  tax  of  i  per  cent  upon  all  incomes  in 
excess  of  $3,000  or  $4,000  as  the  case  may  be,  bearing  in  mind  that 
this  minimimi  sum  is  deducted  from  every  income  before  the  amount 
payable  is  computed,  will  necessarily  be  relatively  small.  From 
these  facts  the  necessary  conclusion  is  that  the  so-called  normal 


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230  JOURNAL  OF  POLITICAL  ECONOMY 

tax  of  i  per  cent  provided  in  the  law  will  not  in  its  working  furnish 
a  very  practical  source  of  support  to  the  Treasury. 

In  like  manner  analysis  may  be  made  of  the  special  income  tax 
or  "additional  income  tax"  provided  for  in  the  act  which  calls  for 
an  extra  i  per  cent  per  annum  upon  the  amoimt  by  which  the  total 
net  income  exceeds  $20,000  and  does  not  exceed  $50,000  and  2  per 
cent  upon  the  amount  by  which  the  total  exceeds  $50,000  and  does 
not  exceed  $75,000  and  so  on  up  to  6  per  cent  upon  the  amount  by 
which  the  total  net  income  exceeds  $500,000.  This  application 
of  the  principle  of  progressive  taxation  is  likely  to  return  but  little 
revenue,  comparatively  speaking.  The  progressiveness  of  the  tax 
does  not  carry  the  maximum  rate  to  so  high  a  point  as  to  render 
probable  a  resort  to  any  elaborate  devices  for  escaping  the  payment 
which  would  not  be  employed  if  only  the  normal  income  tax  of  i  per 
cent  were  levied.  Some  such  devices  no  doubt  will  be  attempted 
but  they  would  be  resorted  to  in  any  case.  While  acquitting  the 
additional  tax  feature  of  the  law  therefore  of  responsibility  for  any 
probable  growth  in  evasions  and  while  fully  conceding  that  the 
machinery  of  collection  is  no  more  unwieldy  or  harsh  in  its  opera- 
tion as  aflfecting  the  higher  incomes  than  it  is  as  affecting  the  lower, 
it  m\ist  be  concluded  that  the  progressive  feature  is  defensible 
only  as  a  means  of  establishing  a  principle  of  taxation.  If  it  was 
intended  as  a  means  of  obtaining  an  extra  return  it  should  have 
been  made  much  heavier;  if  it  was  intended  to  operate  as  a  means 
of  discoiu-aging  men  from  developing  the  higher  incomes  it  did  not 
go  far  enough,  particularly  as  it  stopped  at  $500,000  a  year.  It 
must  therefore  be  regarded  simply  as  a  tentative  experiment  in 
progressive  taxation  made  by  men  not  thoroughly  convinced 
perhaps  of  the  wisdom  of  their  own  action,  a  tax  which  fails  in  any 
event  to  do  much  more  than  to  irritate  those  upon  whom  its  burden 
was  expected  to  fall.  These  persons  woidd  in  any  case  have  been 
a  very  small  group,  if  an  influential  one,  an  intelligent  group  in  the 
main,  able  to  understand  the  significance  of  a  legislative  step  and 
quite  as  likely  to  resent  it  if  it  threw  but  a  small  burden  upon 
them  as  they  would  be  if  the  burden  were  very  much  heavier. 
It  must  therefore  be  regarded  as  unsatisfactory  on  the  fiscal  side 
and  probably  unwise  on  the  political  side.    Like  the  normal  tax, 


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THE  TARIFF  OF  jgjj  231 

and  in  much  greater  degree  than  the  latter,  the  so-called  ^'addi- 
tional tax''  must  be  r^;arded  as  having  been  established  for  the 
primary  purpose  of  vindicating  a  general  principle  which  had 
been  accepted  in  theory  by  those  who  were  engaged  in  framing 
the  law. 

As  a  final  element  in  the  general  criticism  of  the  exemption  and 
additional  tax  provisions  contained  in  the  act  shoidd  also  be  con- 
sidered the  portions  of  the  measure  relating  to  special  deductions 
of  exemptions  to  be  made  for  the  purpose  of  computing  net  income. 
Has  net  income  in  the  law  been  properly  defined  ?  Has  the  defini- 
tion htea  developed  in  such  a  way  as  to  safeguard  the  interests 
of  the  income-tax  payer  and  at  the  same  time  protect  the  Treasury  ? 
The  language  of  the  act  with  reference  to  the  definition  of  income 
is  as  follows: 

the  net  income  of  a  taxable  person  shall  include  gains,  profits  and  income 
derived  from  salaries,  wages  or  compensation  for  personal  service  of  whatever 
kind  and  in  whatever  form  paid,  or  from  professions,  vocations,  businesses, 
trade,  commerce,  or  sales,  or  dealings  in  property,  whether  real  or  personal, 
growing  out  of  the  ownership  or  use  of  or  interest  in  real  or  personal  pn^>erty, 
also  from  interest,  rent,  dividend,  securities,  or  the  transaction  of  any  lawful 
business  carried  on  for  gain  or  profit,  or  gains  or  profits  and  income  derived 
from  any  source  whatever,  including  the  income  but  not  the  value  of  pn^>erty 
acquired  by  gift,  bequests,  devise  or  descent. 

As  exceptions  to  this  definition  or  as  exemptions  from  it,  there 
are  emunerated  the  proceeds  of  life  insurance  paid  to  the  insured 
or  his  beneficiaries,  necessary  expenses  involved  in  carrying  on 
any  business,  interest  on  indebtedness,  all  other  taxes,  losses  dur- 
ing the  year  (when  not  compensated  by  insurance)  debts  due 
ascertained  to  be  worthless,  reasonable  allowance  for  wear  and 
tear,  income  drawn  from  interest  on  state  and  mimidpal  obliga- 
tions as  well  as  from  those  of  the  United  States  and  its  possessions, 
or  (in  the  case  of  individuals)  from  dividends  paid  by  corporations 
which  had  already  paid  the  income  tax. 

This  definition  of  net  income,  and  the  further  limitation  of  its 
meaning  through  the  elimination  of  the  different  classes  of  return 
there  described,  necessarOy  signifies  very  great  difficulty  in  comput- 
ing incomes  upon  an  honest  and  sincere  basis.    The  limitations 


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232  JOURNAL  OP  POLITICAL  ECONOMY 

referred  to  are  largely  those  which  have  been  collected  and 
assembled  from  the  income-tax  laws  of  various  states.  In  those 
state  laws  the  working  of  the  provisions  in  question  has  usually 
been  anything  but  satisfactory.  Unquestionably  the  terms  of  the 
act  in  this  respect  will  leave  very  large  loopholes  of  possible  evasion 
of  the  manifest  intent  of  the  legislation  as  a  whole.  If  such  exemp- 
tions were  to  be  made  it  would  have  been  much  better  to  define  and 
group  them  upon  a  more  scientific  basis,  and  so  to  limit  them  as  to 
reduce  the  probabilities  of  evasion. 

IV 

While  a  discussion  of  the  income  tax  from  a  technical  standpoint 
would  be  of  little  service  imless  it  were  so  protracted  as  to  include 
consideration  of  the  midtitudinous  regulations  relating  to  the 
subject  that  have  already  been  issued  by  the  Bureau  of  Internal 
Revenue,  a  brief  consideration  of  this  aspect  of  the  law  which 
shall  draw  attention  to  its  salient  features  is  necessary.  As  already 
seen  the  income-tax  law  in  contradistinction  to  its  predecessor, 
the  bill  of  the  year  previous  which  had  been  passed  only  in  the 
House,  sought  to  apply  the  idea  of  collection  at  the  source  with  a 
moderate  degree  of  thoroughness  and  inclusiveness.  To  this  end  it 
exacted  in  addition  to  the  usxial  and  necessary  income-tax  return 
called  for  from  all  regular  payers  of  the  tax,  that  is  to  say  from 
all  admitting  or  recognizing  themselves  as  liable  for  the  payment 
of  the  tax  imder  the  act  as  adopted,  a  return  by  all  concerns 
which  were  in  the  habit  of  paying  to  given  employees,  creditors, 
or  others  simis  of  money  in  excess  of  the  permitted  exemption, 
or  simis  that  might  conceivably  amount  to  more  than  such 
exemption.  This  idea  of  collection  at  the  source  evidently  neces- 
sitated the  use  of  all  payers  of  rent,  interest,  or  wages,  as  tax 
collectors  if  in  any  case  they  were  parties  to  the  payment  of  an 
income  that  was  in  excess  of  the  specified  minimum.  Or  as  the 
act  expressed  it: 

All  persons,  firms,  co-partnerships,  compames  ....  in  whatever  capacity 
acting,  including  lessees  or  mortgagors  of  real  or  personal  property,  trustees 
....  having  the  control,  receipt,  custody,  di^>osal  or  pa3rment  of  interest, 
rent,  salaries,  wages  ....  and  income  of  another  person  exceeding  $3,000 


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THE  TARIFF  OF  igij  233 

for  any  taxable  year  ....  are  hereby  authorized  and  required  to  deduct 
....  such  sum  as  will  be  sufficient  to  pay  the  normal  tax  imposed  thereon 
by  this  section  ....  and  they  are  each  hereby  made  personally  liable  for 
such  tax. 

To  apply  this  provision  reqxiired  naturally  a  very  considerable 
amount  of  detail  in  the  act  itself  and  far  more  in  the  form  of  regu- 
lations of  an  administrative  nature.  These  regulations  and  the 
difficulties  and  uncertainties  growing  out  of  them  are  the  chief 
basis  for  discontent  under  the  income  tax  and  the  principal  groimd 
upon  which  criticism  of  the  measure  is  currently  based.  The 
dissatisfaction  has  been  strongly  expressed  by  many  concerns 
which  have  been  compulsorily  obliged  to  act  as  revenue  collectors 
and  which,  in  order  to  carry  on  this  function,  have  found  them- 
selves under  the  necessity  of  expending  a  good  deal  of  money  in 
the  employment  of  clerks  and  employees  of  various  classes.  When 
attention  is  turned  from  this  purely  business  point  of  view  grow- 
ing out  of  the  imwillingness  to  spend  more  money  than  was  actually 
necessary  in  the  fulfihnent  of  the  obligations  thus  imposed  upon 
the  companies,  it  is  seen  that  the  chief  ground  of  complaint  in  the 
larger  sense  must  be  taken  to  be  that  expressed  from  the  stand- 
point of  the  individual  himself.  Such  a  complaint,  embodying 
nearly  all  the  serious  criticisms  of  the  technique  of  the  law  to  date, 
was  put  into  definite  form  by  certain  trust  companies  which  have 
the  duty  of  administering  large  incomes  in  New  York  City  arising 
from  estates  intrusted  to  their  care,  and  was  filed  on  behalf  of  the 
individual  income-tax  payer  early  in  February,  1914,  by  a  com- 
mittee acting  for  the  companies. 

The  protest  was  based  both  on  constitutional  points  and  on 
features  of  the  Form  No.  1,040,  provided  for  individual  returns, 
which  were  held  by  the  companies  to  be  in  conflict  with  the  income- 
tax  law.  Several  points  were  made  against  the  regulations  affect- 
ing the  incomes  of  husband  and  wife,  the  view  of  the  companies 
being  that  a  wife's  income  shoidd  not  be  included  with  that  of  her 
husband,  and  should  not  be  returned  at  all  unless  it  amoimts  to 
$3,000.  The  protest  was  printed  on  paper  of  the  same  size  as 
Form  1,040,  so  that  it  might  be  attached  to  the  return  filed,  and 
institutions  represented  by  the  conmiittee  were  supplied  with 


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234  JOURNAL  OF  POLITICAL  ECONOMY    , 

these  protest  blanks,  for  the  use  of  their  customers.  The  protest 
was  addressed  to  the  Secretary  of  the  Treasury,  the  Commissioner 
of  Internal  Revenue,  and  the  Collector  of  Internal  Revenue  for  the 
district  in  which  the  return  is  filed.    It  said: 

The  undersigned,  who,  under  protest  and  duress,  has  executed  and  verified 
the  annexed  ''Retum  of  Annual  Net  Income  of  Individuals,"  i^)on  Official 
Form  1,040,  as  prescribed  by  the  United  States  Treasury  Department,  protests 
against  being  required  to  make  said  return,  and  against  its  form,  and  against 
the  assessment  of  any  tax  based  thereon,  or  otherwise,  against  the  undersigned 
under,  or  allegedly  imder,  the  provisions  of  Section  II  of  the  Act  of  Congress 
approved  October  3,  1913,  on  the  groimd  that  the  rights  of  the  imdersigned 
under  the  Constitution  ^  laws  of  the  United  States  are  thereby  violated, 
and  specifically,  but  not  exclusively,  on  the  following  grounds  of  protest: 

(i)  That  in  so  far  as  said  Act  ^  the  decisions  of  the  Treasury  Depart- 
ment require  a  deduction  ''at  the  source"  from  income  and  thus  deprive  the 
owner  of  such  income  of  the  use  and  benefit  of  the  moneys  so  deducted,  prior 
to  the  assessment  of  said  tax  against  him,  the  same  are  in  conffict  with  the 
V.  Amendment  to  such  Constitution. 

(2)  That  the  decisions  of  the  Treasury  Department  ^  the  annexed 
form  of  retiun  ^  said  Act,  in  so  far  as  they  contemplate  a  tax  upon  any- 
thing other  than  what  is  included  in  the  word  "incomes,"  as  used  in  the 
XVI.  Amendment  to  the  Constitution  of  the  United  States,  are  contrary  to 
law  and  to  such  Constitution,  because,  in  so  far  as  said  tax  is  a  direct  tax, 
it  is  laid  without  apportionment  among  the  States,  and,  in  so  far  as  it  is  an 
excise  tax,  it  is  arbitrary,  unequal,  not  uniform  throughout  the  United  States, 
not  within  the  taxing  or  other  powers  of  Congress,  and  is  in  conffict  with  the 
V.  Amendment  to  such  Constitution. 

(3)  That  the  decisions  of  the  Treasury  Department  ^  the  annexed 
form  of  return  ^  said  act  are  contrary  to  law  and  said  Constitution  in  so 
far  as  they  require  the  inclusion,  for  the  piupose  of  said  tax,  of  income 

(a) — ^received  prior  to  October  3, 1913,  such  income  having  become  principal 
assets  prior  to  the  passage  of  said  act,  and  Congress  being  therefore  powerless  to 
tax  the  same  without  apportionment  among  the  States; 

(b) — accrued,  in  whole  or  in  part,  prior  to  the  ratification  of  the 
XVI.  Amendment  to  such  Constitution  by  the  Legislatures  of  three-fourths 
of  the  several  States  ^  the  certification  thereof  by  the  Secretary  of  State 
of  the  United  States. 

(4)  That  the  decisions  of  the  Treasury  Department  ^  the  annexed 
forms  of  return  are  contrary  to  law  and  said  act  in  so  far  as  they 

(a) — fail  to  allow  an  exemption  for  the  tax  year  1913  of  $2,500  or  $3,333 .  33, 
as  the  case  may  be,  with  reference  to  the  ''additional"  tax; 

(b) — fail  to  allow,  with  reference  to  the  "additional"  tax,  the  deduction 
from  gross  income  of  "income  derived  from  dividends  on  the  stock  or  from  the 


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TEE  TARIFF  OF  igjj  235 

net  earnings  of  coiporations,  joint-stock  companies,  associations,  or  insurance 
companies  subject  to  like  tax''; 

(c) — ^require  the  inclusion  of  income  received  from  fiduciaries,  derived 
''from  dividends  on  the  stock  or  from  the  net  earnings  of  corporations,  joint- 
stock  companies,  associations,  or  insurance  companies  subject  to  like  tax" 
or  from  ''the  interest  upon  the  obligations  of  a  State  or  any  political  subdivision 
thereof,  and  i^)on  the  obligations  of  the  United  States  or  its  possessions"; 

{d) — ^require  the  inclusion  in  said  return  of  income  derived  from  "interest 
upon  the  obligations  of  a  State  or  any  political  subdivision  thereof,  and  upon 
the  obligations  of  the  United  States  or  its  possessions"; 

(e) — ^require,  with  reference  to  the  "normal"  tax,  a  return  of  income 
"derived  from  dividends  on  the  stock  or  from  the  net  earnings  of  corporations, 
joint-stock  companies,  associations,  or  insurance  companies  subject  to  like 
tax"; 

(J) — require  a  return  of  income  as  "net  income"  without  first  allowing 
for  the  deduction  of  "income  derived  from  dividends  on  the  stock  or  from  the 
net  earnings  of  corporations,  joint-stock  companies,  associations,  or  insurance 
companies  subject  to  like  tax  "  and  consequently  call  for  a  return  by  individuals 
not  having  a  net  income  of  $3,000  for  the  taxable  year; 

(g) — depart  from  the  method  of  computation  prescribed  by  said  act  as 
follows: 

"That  for  the  year  ending  December  31, 1913,  said  tax  shall  be  computed 
on  the  net  income  accruing  from  March  i  to  December  31,  1913,  both  dates 
inclusive,  after  deducting  five-sixths  only  of  the  specific  exemptions  and  deduc- 
tions herein  provided  for"; 

(h) — require  the  inclusion,  among  "income  on  which  tax  has  not  been 
deducted  and  withheld  at  the  source,"  of  income,  the  payment  of  the  tax  upon 
which  has  been  assumed  by  debtors  from  whom  such  income  is  derived,  such 
income  being  paid  in  full  by  the  debtors  to  the  individual  without  exemption 
being  claimed; 

(i) — require  an  individual  having  a  net  income  of  less  than  $3,000  for  the 
tax  year,  March  i  to  December  31,  1913,  to  make  a  return; 

(J) — ^restrict  the  exemption  for  the  tax  year  1913  of  a  husband  and  wife, 
living  together  and  having  separate  incomes,  to  a  total  joint  exemption  of 
$3i333-33  on  their  aggregate  income; 

(k) — ^require  a  joint  or  separate  return  from  a  husband  and  wife,  living 
together  and  having  separate  incomes,  when  neither  one  has  a  separate  income 
in  excess  of  $3,000  for  the  tax  year; 

(Q — require  a  husband  or  a  wife,  having  a  separate  net  income  of  less  than 
$3,000  for  the  tax  year,  March  i  to  December  31,  1913,  to  make  any  return, 
or  to  include  therein  a  return  of  the  separate  income  of  his  wife  or  her  husband, 
as  the  case  may  be; 

(m) — ^require  a  husband  or  a  wife  having  a  separate  income  in  excess  of 
$3,000,  to  include  in  his  or  her  return  a  return  of  the  sq>arate  income  of  his 


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236  JOURNAL  OP  POLITICAL  MCONOMY 

wife  or  her  husband,  as  the  case  may  be,  or  require  the  one  not  having  a 
separate  income  in  excess  of  $3,000  to  make  a  return  of  his  or  her  separate 
income; 

(n) — ^require  or  permit  the  assessment  of  an '' additional''  tax,  based  upon 
the  aggregate  income  of  a  husband  and  wife  living  together  and  having  sq[>arate 
incomes,  when  neither  one  has  a  separate  income  in  excess  of  $20,000. 

This  may  be  regarded  as  a  good  epitome  of  the  objections  to 
the  tax  made  from  the  individual  standpoint  and  based  largely 
on  technical,  legal,  and  fiscal  groimds. 

Apart  from  the  question  of  methods  of  making  return  and  the 
basis  for  complaint  and  criticism  thereby  afforded,  probably  the 
point  at  which  the  most  extensive  serious  criticism  has  been  visited 
upon  the  income  tax  from  a  technical  standpoint  thus  far  is  found 
in  its  provisions  with  respect  to  exemptions.  Many  of  these,  such 
as  those  including  fraternal  beneficiary  societies,  and  others,  were 
of  a  distinctly  political  character;  while  alterations  in  favor  of 
various  special  classes  of  insurance  companies  were  the  result  of 
pressure  which  gained  imwilling  assent  and  compelled  changes 
only  at  certain  points,  the  balance  of  the  enactment  remaining 
practically  unmodified.  That  these  changes  were  not  in  all  cases 
desirable  was  itself  obvious;  it  is  equally  certain,  even  if  less 
evident  on  the  surface  of  things,  that  those  which  might  be  con- 
sidered desirable  became  regrettable  because  they  were  not  incor- 
porated into  the  act  in  such  a  way  as  to  become  integral  parts  of 
it.  They  were,  therefore,  to  be  placed  in  the  same  category  with 
the  general  exemptions,  as  provisions  of  an  injudicious  character 
tending  to  reduce  the  yield  of  the  tax  and  damaging  it  in  the  logical 
aspect  as  a  revenue  measure  without  producing  any  corresponding 
results  of  a  beneficial  nature. 

Without,  therefore,  undertaking  to  make  detailed  analysis  of 
the  conditions  of  imposition  and  collection  of  the  income  tax — ^an 
inquiry  which  in  itself  would  be  far  too  lengthy  and  complex  for 
the  present  purposes,  as  well  as  impossible  pending  the  accumulation 
of  further  experience — ^it  may  be  said  that  the  tax  is  nowhere 
more  faulty  than  in  its  technique,  and  that  while  the  idea  of  col- 
lection at  the  source  m\ist  be  regarded  as  absolutely  indispensable 
to  the  successful  operation  of  the  measure,  the  mechanics  of  the 


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THE  TARIFF  OF  JQ13  237 

process  by  which  this  collection  at  the  soxirce  is  to  be  managed 
are  far  from  satisfactory.  That  as  a  result  of  the  defects  referred 
to,  coupled  with  the  xmavoidable  irritation  growing  out  of  the 
imposition  of  any  such  tax,  more  or  less  litigation  will  almost  cer- 
tainly be  instituted,  and  that  even  without  such  litigation  con- 
siderable friction,  difficulty,  and  evasion  must  be  expected  are 
obvious  facts  which  can  be  ignored  by  no  one.  Undoubtedly  those 
who  drafted  the  legislation  are  fully  alive  to  the  imminence  of 
these  difficulties  today.  Probably  they  were  aware  of  the  prospects, 
even  if  less  keenly  so,  when  they  put  the  measure  forth. 


In  summing  up,  therefore,  a  somewhat  varied  verdict  must  be 
passed  upon  the  income-tax  sections  of  the  tariff  of  1913.  Appar- 
entiy  this  verdict  may  be  expressed  in  substantially  the  following 
terms: 

1.  The  tax  itself  was  unnecessary  except  as  a  means  of  making 
up  the  loss  of  revenue  from  such  items  as  sugar  whose  duties  had 
been  removed  as  a  result  of  the  general  party  opinion  that  they 
were  unpopular  and  worthy  of  condemnation  out  of  proportion 
to  their  actual  burden. 

2.  Assuming  that  the  removal,  however,  was  to  be  effected  and 
that  a  compensating  revenue  was  needed,  it  could  have  been 
obtained  with  far  less  difficulty  and  friction  than  from  the  income 
tax. 

3.  The  use  of  the  income  tax  must  be  regarded  in  part,  there- 
fore, as  a  political  vindication  of  the  party,  in  part  as  the  adoption 
of  a  measure  to  be  employed  in  the  future  for  redressing  the  balance 
of  taxation  and  for  furnishing  a  resource  which  can  be  relied  upon 
to  supply  large  quantities  of  revenue  if  necessary,  while  at  the  same 
time  it  brings  home  to  the  individual  his  responsibility  for  federal 
expenditures. 

4.  In  this  view,  the  income  tax  is  not  only  a  warrantable  but 
a  praiseworthy  feature  of  the  tariff  law  of  1913. 

5.  Nevertheless,  it  is  not  likely  to  be  highly  productive  in  view 
of  tiie  use  of  an  unusually  high  exemption  minimum. 


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238  JOURNAL  OF  POUTICAL  ECONOMY 

6.  Technically  speaking,  the  law,  although  likely  to  be  far 
more  effective  and  successful  than  any  law  modeled  upon  the 
principle  of  self-assessment  can  be,  is  decidedly  defective  in 
technique  and  open  to  criticism,  based  (a)  upon  the  inconvenience 
imnecessarily  visited  upon  corporations  and  individuals,  some  of 
which  has  been  mitigated  by  Treasury  regulations  but  much  of 
which  will  remain  permanently;  (6)  upon  the  inconsistency  and 
lack  of  careful  workmanship  foimd  in  numerous  of  its  provisions; 
as  well  as  (c)  upon  the  admission  of  some  flaws  due  to  possibly 
unavoidable  political  pressure  and  agitation. 

There  seems  to  be  little  doubt  that  the  benefits  of  the  income-tax 
sections  will  be  much  more  slowly  realized  than  those  of  the  other 
portions  of  the  tariff,  and  that  pending  such  realization  the  tax 
itself  WiU  result  in  throwing  upon  the  act  a  very  considerable 
burden  of  xmpopidarity  in  addition  to  that  which  it  would  other- 
wise have  had  to  carry. 

H.  Parker  Willis 

New  York  Cmr 


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SOME  ASPECTS  OF  THE  WATERWAYS  QUESTION 

LfOose  economic  thinking  is  perhaps  more  characteristic  of  the 
literature  of  water  transportation  than  of  the  literature  of  any 
other  field  of  contemporary  discussion.  Whether  in  the  writings 
and  speeches  of  special  interests,  which  hope  to  profit  directly 
by  the  exploitation  of  particular  waterway  projects;  or  in  the 
articles  of  those  who  gain  a  livelihood  by  contributions  to  popular 
magazines;  or  in  the  more  thoughtful  essays  of  reputable  econo- 
mists, examples  in  point  are  surprisingly  numeroiis.  The  entire 
waterway  propaganda,  indeed,  is  shot  through  and  through  with 
almost  every  species  of  fallacious  economic  reasoning.  It  is  not 
the  purpose  of  the  present  article,  however,  to  make  an  exhibit 
of  the  many  cases  that  might  be  cited  in  proof  of  this  statement, 
or  to  enter  into  a  general  discussion  of  the  feasibility  of  water 
transportation.'  But  some  of  this  faulty  reasoning  has  been 
so  persistent,  and  at  the  same  tune  so  prejudicial  to  a  proper 
working-out  of  the  transportation  problem,  that  I  am  venturing 
to  set  forth  here  some  of  the  more  important  aspects  of  the  situa- 
tion, and  to  restate  my  own  conclusions  on  the  points  in  question. 


The  first  argument  relates  to  the  many  advantages  of  water 
transportation  as  compared  with  that  by  rail.  Mere  mention  of  a 
few.of  these  advantages  will  be  sufficient  for  the  pxirpose  of  this  dis- 
cussion. The  points  most  commonly  advanced  are,  perhaps,  the 
following:  enormous  carrying  capacity  of  a  waterway;  the  small 
space  occupied  by  huge  cargoes  stored  in  barges;  little  friction  of 
boats  in  water  as  compared  with  cars  on  steel  rails;  low  haulage 
costs  for  given  distances;  and  small  expense  of  maintenance  of  the 
highway  itself.  Professor  Emory  R.  Johnson  in  his  book  on 
Ocean  and  Inland  Water  Transportation  has  devoted  a  large  por- 
tion of  the  discussion  of  inland  waterways  to  an  analysis  of  the 

>  For  a  full  discussion  of  the  question  the  reader  is  referred  to  Waterways  versus 
Railways,  by  the  author. 

239 


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240  JOURNAL  OF  POLITICAL  ECONOMY 

specific  advantages  possessed  by  water  routes,  and  he  concludes 
by  implication,  if  not  by  precise  statement,  that  with  all  these 
points  in  their  favor  there  is  no  question  as  to  the  feasibility  of 
rehabilitating  our  waterways.'  It  is  a  stock  argument  that  water- 
ways possess  certain  inherently  "natural  advantages"  which  cannot 
be  undone  or  gainsaid;  and  that  in  consequence  any  analysis  which 
arrives  at  a  conclusion  unfavorable  to  water  transportation  must 
necessarily  be  faidty. 

This  view  appears  to  me  to  indicate  an  entire  misconception  of 
the  nature  of  the  problem.  There  may  be  a  dozen  advantages, 
natural  or  artificial,  in  water  transportation,  as  against  a  single  one 
in  the  case  of  railroads;  the  direct  haidage  cost  may  be  but  a 
fraction  by  water  of  what  it  is  by  rail;  the  expense  of  maintenance 
may  be  much  less  for  a  water  than  for  a  rail  route;*  and  yet,  after 
all',  waterways  may  not  be  economically  feasible.  If  the  one 
advantage  outweighs  the  twelve;  if  the  outlays  (costs)  prove  greater 
in  the  aggregate  by  water  than  by  rail,  the  net  advantage  must 
obviously  lie  with  the  railroads.  It  is  only  by  a  comparison  of 
totals,  by  a  balandng  of  advantages  and  disadvantages,  that  we 
can  obtain  an  approximation  which  is  of  practical  value.  This 
statement  appears  so  commonplace  as  to  be  out  of  place  in  a  maga- 
zine of  this  kind;  and  yet  the  principle  has  seldom  been  at  the 
basis  of  waterways  discussions,  in  whatever  quarter.  The  failure 
to  grasp  the  notion  that  a  comparison  of  total  costs  can  alone  give 
an  adequate  basis  for  decision  has  all  along  beclouded  the  question 

>  Professor  T^lliam  J.  Cunningham  appears  to  strike  a  similar  note  in  reviewing 
WaUrways  versus  Railways,  where  he  says:  "There  is  evidence  of  a  tendency,  uncon- 
scious no  doubt,  to  underestimate  the  natural  advantages  of  waterwa3rs  and  to  over- 
estimate the  superiority  of  railways"  (Journal  of  Political  Economy,  XXI,  i  [January, 
1913I,  80).  While  Professor  Cunningham  apparently  agrees  with  the  general  sound- 
ness of  the  conclusions  reached,  the  implication  contained  in  this  reference  to 
"natural  advantages"  indicates  that  tke  reviewer  had  lapsed  into  what  I  consider 
the  common  error  of  testing  the  feadbility  of  waterways  by  reference  to  specific 
advantages  rather  than  by  the  balance  of  advantage  and  disadvantage.  Professor 
Ciumingham  evidently  implies  that  "natural  advantages"  must  render  some  water- 
ways feasible. 

*  This  is  not  to  admit  that  the  waterways  do  possess  these  advantages  to  the 
extent  mentioned.  Indeed,  many  of  the  advantages  claimed  appear  upon  close 
analysis  to  be  mere  assumptions;  they  do  not  stand  the  test  of  careful  analysb,  and 
are  often  tmsupported  in  fact. 


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SOME  ASPECTS  OP  THE  WATERWAYS  QUESTION        241 

of  waterway  feasibility.  The  problem  cannot  properly  be  ap- 
proached from  any  standpoint  but  that  of  total  costs;  and  until 
those  who  shall  determine  the  future  of  our  waterways  accept 
this  principle  there  is  little  chance  that  their  determinations  will 
prove  other  than  unfortunate. 

The  only  explanation  for  this  persistent  reference  to  the  "  natural 
advantages"  of  waterways  appears  to  lie  in  the  tadt  assiunption 
at  the  commencement  of  the  discussion  that  water  transportation  is 
of  undoubted  feasibility,  and  that  all  that  is  necessary  is  to  illus- 
trate by  reference  to  certain  specific  advantages  why  this  is  true. 
This  assumption  of  feasibility  appears,  moreover,  to  be  a  survival 
from  the  days  when  canal  and  river  transportation  was  of  \mques- 
tioned  value.  Conclusions  that  were  sound  as  applied  to  con- 
ditions when  the  stage-coach  was  the  alternative  to  canal  or 
river  transportation,  or  when  railways  were  new  and  \mtested,  have 
been  carried  over  and  made  to  apply  to  conditions  that  are  totally 
different.  I  cannot  here  go  into  the  evidence  for  this  belief. 
It  must  suffice  to  state  that  it  finds  abimdant  support  in  the 
transportation  literature  of  the  principal  countries  of  Europe,  as 
well  as  of  the  United  States. 

II 

The  expression  total  costs  as  used  in  the  preceding  section 
requires  some  amplification.  What  should  be  included  under  the 
term?  I  have  taken  the  stand  in  comparing  waterways  with 
railways  that  total  cost  should  embrace  for  a  government-supported 
waterway  the  following  items:  first,  the  direct  haulage  expenses, 
as  covered  by  the  rate  charged  the  shipper  on  a  toll-free  route;' 
second,  the  cost  of  the  maintenance  and  upkeep  of  the  waterways; 
and,  third,  interest  on  the  capital  invested,  together  with  a  sinking 
fund  for  eventual  amortization  of  the  capital.  I  have  not  included 
a  profit  to  the  government  on  its  investment,  for  a  government  is 
not  necessarily  concerned  with  profit.  On  the  railway  side  of  the 
equation  I  have  assumed  government  railways  for  the  pxirpose  of 

'  In  practice  this  usually  includes  a  profit  to  the  owner  of  the  boat  on  his  invest- 
ment. Governments  seldom  act  as  carriers,  but  turn  this  function  over  to  private 
interests  who  require  a  profit. 


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242  JOURNAL  OP  POUTICAL  ECONOMY 

the  comparison;  and  then  included  precisely  the  same  items  as  in 
the  case  of  waterways.  By  computing  on  this  basis,  the  inclusive 
cost  is  foimd  to  be,  for  any  kind  of  freight,  always  heavier  by 
canal,*  and  almost  always  heavier  by  canalized  river. 

This  manner  of  comparing  transportation  charges  is  evidently 
quite  different  from  the  common  method  of  presenting  tables  of 
rates  for  given  distances  by  rail  and  by  water  as  all  the  evidence 
necessary.  The  water  rates  usually  cover  merely  the  direct  haulage 
cost;  whereas  the  rates  on  private  railways  cover  for  the  traffic  as  a 
whole  all  the  outlays  listed  above  and  an  addition  in  the  way  of 
profit  on  the  enterprise.  The  confusion  of  mind  here  evidently 
lies  in  the  failure  to  distinguish  cost  to  the  shipper  from  cost  to 
society  at  large.  While  it  shoidd  be  obvious  enough  that  no  part 
of  the  social  cost  can  be  eliminated  by  its  mere  transference  from 
the  shipper  to  the  taxpayer,  it  is  nevertheless  true  that  the  wide- 
spread belief  in  the  cheapness  of  water  transportation  involves  the 
unconscious  acceptance  of  this  very  idea.  In  the  early  days  of  canal 
transportation  the  practice  in  every  country  was  for  the  govern- 
ment, or  for  private  individuals,  to  charge  tolls  sufficient  to  cover 
all  the  expenses  of  construction  and  maintenance  of  canals,  as  well 
as  the  direct  expense  of  haiding  given  traffic  for  given  distances. 
But  since  the  development  of  modem  railway  facilities  it  has  been 
necessary,  in  order  to  prevent  the  almost  complete  diversion  of 
traffic  from  the  waterways,  for  the  governments  to  assume  all,  or 
nearly  all,  of  the  fixed  charges  connected  with  water  transportation, 
to  pay  for  building,  equipping,  and  maintaining  the  water  routes, 
and  to  furnish  them  free  of  charge  to  the  owners  of  boats.  When 
they  are  thus  relieved  of  all  save  the  mere  direct  cost  of  operating 
the  boats,  it  is  usually,  though  not  always,  possible  for  the  water 
carriers  to  offer  rates  which  enable  them  to  compete  with  railways 
that  are  entirely  self-supporting.  The  cost  has  in  large  measure 
thus  been  shifted  to  the  taxpayers,  and  although  the  inclusive 
cost  is  usually  much  greater  by  water  than  by  rail,  those  who 
look  only  at  the  rates  charged  the  shippers  still  cling  to  the  idea 
that  waterways  offer  the  cheapest  means  of  transport  known. 

1 1  refer  here  to  the  typical  inland  canal,  and  would  exclude  the  Panama  and  Suez, 
and  such  short  connecting  links  as  the  St.  Mary's  FaUs  Canal. 


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SOME  ASPECTS  OF  THE  WATERWAYS  QUESTION        243 

There  are  one  or  two  objections  which  are  now  and  then  oflFered 
in  connection  with  the  inclusion  of  the  item  of  interest  in  determin- 
ing the  total  costs  of  government  waterways.  The  first  of  these 
embodies  the  popular  idea  that,  somehow  or  other,  if  the  govern- 
ment xmdertakes  a  public  work  of  any  kind,  no  return  whatever  is 
necessary  on  the  capital  invested.  The  answer  to  this,  of  course, 
is  that  the  sum  the  government  has  to  pay  for  the  use  of  the  capital 
it  employe  constitutes  the  obvious  interest  charge  that  must  be 
met. 

Another  objection  advanced  with  more  claim  to  recognition  has 
appeared  in  a  review  of  Waterways  versus  Railways,  by  Professor 
Hess,  who  states  with  reference  to  the  method  employed  in  com- 
puting costs:  "Not  all  are  agreed  that  public  enterprise  and 
private  xmdertakings  should  be  placed  in  the  same  category  in 
the  matter  of  returns  to  capital  or  the  earning  of  interest.  If, 
as  some  believe,  interest  is  a  derivative  of  the  subjective  affinity 
of  individuals  for  value,  Mr.  Moulton's  reasoning  touching  the 
attitude  of  public  policy  toward  waterway  development  is  the- 
oretically fallacious."'  If  I  understand  correctly  the  import  of 
this  statement,  the  writer  is  giving  expression  to  the  doctrine 
that  the  interest  rate  of  individuals  is  different  from  that  of 
society,  which  views  interest  through  the  eyes  of  government. 
Even  if  we  grant  this  doctrine  to  be  theoretically  soxmd,  there 
are  nevertheless  two  practical  answers  to  it,  so  far  as  the  case  in 
hand  is  concerned.  Suppose  the  social  interest  rate  to  be  i  per 
cent,  or  even  zero,  and  the  rate  in  the  competitive  market  to  be 
3  per  cent:  does  this  rule  out  interest  from  the  computation  of  cost 
on  a  government  waterway?  Obviously,  only  in  case  it  can  be 
shown  that  the  government  can  borrow  the  capital  for  the  enter- 
prise for  nothing  or  for  i  per  cent,  that  is,  at  the  social  rate,  instead 
of  the  competitive  market  rate.  This  is  answer  enough.  The 
argument  falls  down,  however,  in  another  way.  I  have  assumed 
government  railways  for  the  purpose  of  comparison  with  govern- 
ment waterways;  and  consequently  if  we  rule  out  interest  in  the 
one  case  we  shall  have  to  rule  it  out  in  the  other;  and  the  com- 
parison would  therefore  not  be  vitiated  in  the  least. 

'  American  Economic  Review,  September,  1913,  p.  655. 


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244  JOURNAL  OF  POLITICAL  ECONOMY 

m 

Another  phase  of  the  problem  that  is  badly  in  need  of  restate- 
ment relates  to  the  so-called  incidental  and  allied  benefits  of  water 
transportation.  When  forced  to  the  wall  in  the  matter  of  com- 
parative costs  by  water  and  by  rail,  the  advocate  of  waterways 
promptly  retires  to  what  he  considers  the  impregnable  position 
afforded  by  the  indirect  and  allied  benefits  of  water  transportation. 
These,  in  his  opinion,  furnish  a  final  refutation  of  the  argument 
of  his  opponent.  For  instance,  while  my  own  conclusions  as  to 
the  comparative  costs  of  rail  and  water  transportation  appear  to 
have  met  with  very  general  acceptance,  there  has  been  much  reluc- 
tance in  certain  quarters  to  receive  the  analysis  as  conclusive 
evidence  against  the  feasibility  of  waterway  development.  Reser- 
vation is  usually  made  in  the  case  of  natural  waterways,  at  least, 
as  distinguished  from  canals!  This  is  because  it  is  believed  that 
I  have  overlooked  the  indirect  and  allied  benefits  of  waterways. 
Let  us  analyze  the  case. 

It  is  necessary  that  we  distinguish  first  between  types  of  indirect 
benefits.  They  may  be  divided  into  two  classes:  transportation 
benefits,  and  non-transportation  or  allied  benefits.  By  the  latter 
is  meant  such  gains  as  would  come  from  the  development  of  water- 
power,  the  prevention  of  the  periodic  wastes  in  consequence  of 
floods,  and  the  reclamation  of  low-lying  riparian  lands.  In  a 
still  broader  way  the  problem  of  river  control  is  boxmd  up  with 
the  whole  program  embraced  by  the  term  conservation  of  natural 
resources.  Waterways,  water-power,  forestry,  irrigation,  reclama- 
tion of  desert  and  flooded  lands  should  go  hand  in  hand  and  be 
apprehended  as  one  comprehensive  problem  for  the  nation  to  solve. 
This  theory  must  be  regarded  as  usually  pertinent  in  connection 
with  river  improvements,  though  seldom  so  in  the  case  of  canals; 
and  I  am  in  hearty  sympathy  with  the  viewpoint,  provided  that 
it  is  not  assumed  that  the  cost  of  the  waterway  improvement  will 
be  covered  in  full  by  the  purely  transportation  gains  which  accrue, 
and  that  the  allied  benefits  will  therefore  be  so  much  net  gain  to 
society.  Unfortunately  this  has  been  the  ahnost  universal  assump- 
tion of  waterway  advocates — an  assxmiption,  again,  which  is  based 
on  the  belief  that  water  transportation  costs  less  than  transportation 


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SOME  ASPECTS  OF  THE  WATERWAYS  QUESTION        245 

by  rail.  But  if  I  am  correct  in  my  investigation  of  the  Mississippi 
River,  for  instance,  showing  that  extensive  improvement  for  trans- 
portation purposes  would  be  economically  wasteful,  it  follows  that 
the  related  aspects  of  the  problem  must  be  viewed  in  a  quite  differ- 
ent light.  It  may  conceivably  be  the  case  that  the  improvement  of 
the  Mississippi  River  can  still  be  proved  warrantable  as  a  part  of  a 
general  conservation  project;  but  to  prove  this  involves  showing 
that  the  gains  on  these  non-transportation  groxmds  wo\ild  in  the 
main  be  sufficient  to  cover  the  expenditures  involved.  If  the 
transportation  side  of  the  problem  thus  becomes  subsidiary,  the 
engineers  must  conduct  their  investigations  in  ways  different  from 
what  was  appropriate  when  transportation  was  the  first  considera- 
tion. To  take  one  case  only,  the  reclamation  of  swamp  lands  and 
the  prevention  of  floods  might  not  require  the  construction  of  a 
fourteen-  or  a  twenty-four-foot  channel,  or  the  erection  of  gigantic 
locks  such  as  many  consider  necessary  for  transportation  purposes. 
Levees  alone,  constructed  at  relatively  small  cost,  might  prove 
entirely  adequate.  Incidentally,  the  river  thus  regulated  would 
afford  some  transportation  facilities.  It  is  possible,  also,  that  a 
comparatively  small  additional  expense  would  result  in  a  consider- 
able increase  of  traffic.  Hence  transportation  should  still  enter 
as  a  factor.  But  in  any  event  it  is  clear  that  the  problem  has  to  be 
quite  differently  conceived  when  transportation  is  not  the  chief 
end  sought,  or  when  the  direct  benefits  of  transportation  are  not 
sufficient  to  warrant  the  project.  There  is  need  of  some  thorough- 
going investigation  that  will  differentiate  these  aspects  of  the 
question. 

The  class  of  indirect  gains  from  waterway  development,  which 
I  have  designated  as  transportation  henejUSj  may  be  summarily 
treated.  The  benefits  here  referred  to  iare  the  familiar  ones  which 
accompany  qidckened  industrial  activity  from  whatever  cause. 
New  factories  spring  up  in  consequence  of  low  freight  rates,  and 
existing  industries  gain  a  new  lease  of  life.  This  means  an  expan- 
sion of  commerce,  larger  business,  increased  profits,  higher  wages, 
and  widely  diffused  industrial  prosperity.  The  point  may  be 
illustrated  by  reference  to  the  discussion  of  inland  waterways  at 
the  meeting  of  the  American  Economic  Association  in  1910.    In 


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246  JOURNAL  OF  POLITICAL  ECONOMY 

answer  to  the  argument  that  Frankfort-on-the-Main  had  sus- 
tained an  economic  loss  by  making  an  expenditure  upon  the 
canalization  of  the  river  Main  and  the  construction  of  a  dty  harbor 
several  times  greater  than  would  have  been  required  to  provide 
railway  facilities  of  equal  capacity/  Professor  Emory  R.  Johnson 
replied  that  this  contention  overlooked  a  very  important  point, 
namely,  that  the  canalization  of  the  river  had  resulted  in  a  very 
great  industrial  development  in  Frankfort,  the  benefits  of  which 
were  more  than  ample  to  cover  the  cost  of  the  enterprise.*  The 
same  argument  has  been  repeatedly  made  by  Professor  Goode  and 
other  writers  with  reference  to  the  general  development  of  trade  in 
Manchester  following  the  opening  of  the  Manchester  Ship  Canal. 
Professor  Johnson  has  it  in  mind  again,  in  his  recent  report  to  the 
government  on  Panama  Canal  trafiSc  and  tolls.  In  discussing  the 
principles  which  should  govern  the  fixing  of  tolls  he  takes  the 
following  position: 

The  commercial  usefulness  of  the  waterway  should  be  given  first  considera- 
tion.   Tolls  may  wisely  be  imposed  to  secure  revenue,  but  the  transit  dues  must 

not  prevent  the  canal  from  fulfilling  its  primary  function The  Canal 

should  be  commercially  self-supporting,  provided  revenue  laige  enou^  to 
enable  the  Canal  to  carry  itself  can  be  secured  without  unwisely  restricting 
traffic.3 

The  restriction  of  traffic  because  of  high  tolls  would,  it  seems, 
obviously  restrict  the  allied  benefits  which  come  with  quickened 
industry.  Reduce  these  tolls  in  part,  and,  regardless  of  who  makes 
up  the  deficit,  business  is  benefited.  It  ought  to  follow  that  no 
tolls  at  all  would  be  better,  or,  to  carry  the  point  to  an  absurdity, 
that  a  bonus  would  be  best  of  all.  It  would  seem  that  by  some 
hocus-pocus  the  social  cost  of  carrying  goods  is  in  this  way  annihi- 
lated. 

These  indirect  benefits  can  arise  only  through  the  medium  of  a 
reduced  cost  of  transportation;  and  if  railway  transportation,  all 
factors  considered,  proves  cheaper  than  water  transportation,  the 
argument  consequently  falls  to  the  grotmd.    In  the  case  of  the 

'  Twenty-third  annual  meeting,  Papers  and  Discussions,  Fourth  Series,  No.  2. 

3  Stated  in  a  personal  conference. 

3  Panama  Canal  Traffic  and  ToUs,  p.  193. 


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SOME  ASPECTS  OF  THE  WATERWAYS  QUESTION        247 

Panama  Canal,  if  suflSdent  traffic  does  not  develop,  in  the  long  run, 
to  permit  the  paying  of  interest  on  the  capital  and  to  provide  a 
sinking  fxmd  for  its  eventual  amortization,  this  will  be  concrete 
evidence  that  the  shippers,  for  reasons  of  economy,  prefer  other 
means  of  transport;  and  it  follows  that  greater  industrial  develop- 
ment would  have  been  secured  by  other  means/  In  the  other 
cases  dted,  computations  made  by  the  writer  appear  to  have  proved 
beyond  question  that  greater  benefits  could  have  been  secured  by 
railway  construction,  than  by  the  course  followed.  A  government 
waterway,  to  be  adjudged  economically  feasible,  must  in  the  end  be 
able  to  pay  for  itself.  There  may  be  drcumstances,  it  is  true,  which 
would  justify  charging  less  than  enough  to  cover  cost,  but  if  the 
waterway  is  unable  to  pay  for  itself  through  the  charging  of  tolls, 
it  might  better  not  have  been  constructed,  so  far  as  commerdal 
interests  are  concerned. 

The  error  into  which  writers  have  fallen  in  this  connection 
appears  to  be  due  in  part  to  a  failure  to  appredate  the  fact  that 
the  gains  which  accrue  to  shippers  are  oflFset  by  losses  to  the  tax- 
payers, who  make  good  the  balance  of  the  cost  involved.  No  part 
of  the  cost  can  be  eliminated  merely  by  dividing  it,  a  part  being 
paid  by  the  shippers  and  a  part  by  the  general  public  in  the 
form  of  taxes.  The  whole  commtmity  can  benefit  only  in  case  the 
indusive  social  cost  is  lessened.  True,  a  given  section  of  the 
country  may  reap  an  advantage  as  the  result  of  a  policy  which 
shifts  a  part  of  the  cost  to  outsiders,  and  many  local  projects 
appear  to  have  been  inspired  by  this  desire  to  profit  at  the  expense 
of  others.  But  economists  and  other  public  writers  in  favor  of 
waterways  have  a  national  or  social  point  of  view — the  community 
as  a  whole  is  to  be  benefited.  In  the  case  of  Frankfort  and  of 
Manchester,  moreover,  the  cost  was  not  to  be  shifted  to  any 
appreciable  extent  to  outsiders.  Manchester  had  no  state  aid  and 
Frankfort  relatively  little.  It  was,  practically  speaking,  merely 
a  question  of  relative  effidency  of  railways,  and  waterways. 

The  fallacy  under  consideration  is  also  in  part  traceable,  again, 

'  The  writer  is  here  expressing  no  opinion  as  to  the  economic  feasibility  of  the 
Panama  Canal  in  fact,  but  only  challenging  a  principle  for  testing  its  ultimate  success 
as  a  commercial  enterprise. 


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248  JOURNAL  OF  POLITICAL  ECONOMY 

to  the  assumption  of  the  fundamental  cheapness  of  water  trans- 
portation. This  attitude,  moreover,  is  an  excellent  illustration  of  the 
tenacity  with  which  people  sometimes  hold  to  conclusions  long  after 
the  conditions  that  gave  them  validity  have  ceased  to  exist.  The 
construction  of  the  Erie  Canal  in  the  early  days  resulted  in  a 
tremendous  cheapening  of  the  cost  of  moving  goods  across  the 
divide,  and  was  of  untold  benefit  to  all  the  region  tributary  to  it; 
but  the  alternative  method  of  transportation  was  then  the  over- 
land wagon  route,  and  not  the  railroad  of  the  present  day.  To 
construct  a  canal  today  ahnost  invariably  means  to  raise  rather 
than  lower  the  cost  of  transportation. 

A  word  should  be  said  here  with  reference  to  the  argument 
so  frequently  advanced  by  waterway  advocates  that  the  potential 
competition  afforded  by  waterways  renders  them  advisable  even 
if  the  actual  competition  does  not.  Granted  that  the  cost  of  water 
transportation  is  greater,  may  not  the  improvement  of  waterways 
still  be  justified  as  a  means  of  compelling  more  favorable  rail 
rates?'  The  theoretical  answer  to  this  argimient  is  that  if  the 
government  has  to  resort  to  direct  competition  with  railroads  in 
order  to  prevent  exorbitant  charges,  it  shoidd  do  so  in  the  most 
economical  manner,  namely,  through  the  construction  of  govern- 
ment railways.  But,  it  is  urged,  while  this  argument  may  be 
practicable  so  far  as  continental  Europe  is  concerned,  where 
government  railways  are  an  accomplished  fact,  it  is  qmte  inappli- 
cable to  the  problem  in  the  United  States  because  of  the  prejudice 
which  exists  against  government  railways.  Government  water- 
ways, on  the  other  hand,  are  looked  upon  with  favor,  and  hence 
potential  water  competition  is  the  only  practical  alternative. 
While  it  is  undoubtedly  true  that  competition  through  government 
railways  is  out  of  the  question  in  the  United  States,  it  does  not 
follow  that  the  only  escape  from  exorbitant  railway  charges  lies 
in  potential  water  competition.  Most  of  us  are  xmwilling  to  admit 
that  the  government  is  xmable  through  the  Interstate  Commerce 
Commission  and  the  courts  to  prevent  exorbitant  freight  rates. 
Why  spend  hxmdreds  of  millions  in  the  construction  of  water- 

'  They  can  obviously  serve  as  potential  competitors  only  in  case  the  indirect 
cost  is  in  the  main  defrayed  by  the  government. 


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SOME  ASPECTS  OP  THE  WATERWAYS  QUESTION        249 

ways  for  potential  competition  when  low  rates  can  be  enforced 
directly  at  a  mere  fraction  of  the  cost  ? 

IV 

There  is  one  final  aspect  of  the  problem  to  be  briefly  developed. 
It  has  to  do  in  part  with  the  problem  of  congestion  of  traffic  on  the 
railroads,  and  in  part  with  a  consideration  of  the  ultimate  need 
of  water  transportation  facilities.  The  argument  that  the  capacity 
of  the  railways  is  greatly  overtaxed  at  certain  times  of  the  year 
and  that  water  routes  have  become  indispensable  to  the  relief  of 
traffic  congestion  has  been  widely  exploited.  It  can  be  readily 
shown,  however,  that  the  argument  is  practically  without  foxmda- 
tion.  This  is  not  because  there  is,  in  point  of  fact,  no  congestion 
of  traffic,  but  because  waterways  are  seldom  the  best  means  of 
alleviating  it. 

In  the  first  place,  it  is  generally  the  case  that  the  use  of  water- 
ways customarily  involves  one  or  more  transshipments  of  cargo, 
from  rail  to  water,  or  vice  versa,  in  the  shipping  centers.  Excep- 
tions to  this  are  foimd  only  where  the  source  and  destination  of 
the  traffic  are  both  inmiediatdy  along  the  water  route.  The  use 
of  railroads,  on  the  other  hand,  never  necessitates  a  transshipment 
of  cargo,  but  merely  the  switching  of  a  car  or  train  from  one  track 
to  another.  Since  the  congestion  exists  mainly  in  the  shipping 
centers,  it  is  evident  that  this  transferring  of  cargo  would  serve 
rather  to  augment  than  to  diminish  the  congestion  within  the 
crowded  area. 

This  argument  of  traffic  congestion  was  a  determining  factor  in 
the  recent  construction  of  canals  in  the  Westphalian  industrial 
region  of  Germany.  The  traffic  had  become  so  dense  there  that, 
in  the  view  of  the  administration,  the  traffic  could  no  longer  possibly 
be  handled  by  the  railroads  alone,  and  canals  to  supplement  the 
railroads  were  absolutely  indispensable.  In  considering  this 
situation  it  should  be  noted,  first,  that  practically  all  the  traffic 
of  the  region  must  travel  over  the  railways  for  at  least  a  part  of  the 
distance  to  market,  even  when  waterways  are  employed.  Coal, 
for  instance,  which  constitutes  the  great  bulk  of  the  waterway 
traffic  of  the  region,  must  all  be  brought  from  the  mines  to  the 


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2SO  JOURNAL  OF  POLITICAL  ECONOMY 

waterways  by  rail  because  it  is  out  of  the  question  to  nm  water 
lines  to  the  very  opening  of  the  mines.  .The  Germans  always  use 
the  railways  as  feeders  to  the  water  routes.  Observe,  then,  that 
if  the  traffic  were  doubled,  let  us  say  in  the  next  ten  years,  it  would 
require  a  doubling  of  the  railway  capacity  between  the  mines  and 
the  waterways.  (This  is  evidently  not  deemed  impossible.)  The 
territory  adjacent  to  the  mines,  however,  is  the  region  of  the  very 
densest  traffic,  because  the  farther  one  goes  from  the  mines  the 
more  the  railway  lines  tend  to  spread  out  rather  than  to  converge. 
It  appears,  therefore,  that  the  waterways  are  designed  to  relieve 
the  congestion  only  where  it  is  needed  least.  The  actual  result  of 
the  policy  is  to  increase  rather  than  to  diminish  the  congestion  of 
the  district.  When  transshipments  to  waterways  are  made,  the 
cars  must  remain  within  the  congested  area  while  being  switched 
and  imloaded;  but  if  the  railroads  alone  were  used  the  cars  would 
pass  beyond  the  borders  of  the  congested  area  without  stopping, 
thus  serving  to  relieve  the  tension.  At  Dortmimd  one  may  see  a 
score  of  trainloads  of  coal  standing  on  the  tracks  waiting  to  be 
imloaded.  Were  they  sent  directly  to  their  destination  the  con- 
gestion of  the  district  would  be  measurably  relieved. 

The  argument  under  consideration  also  carries  with  it  the  xmder- 
lying  assimiption  that  the  traffic  capacity  of  a  canal  is  much  greater 
than  that  of  a  railway  in  proportion  to  the  groimd  space  occupied; 
and  that  in  consequence  as  the  traffic  of  a  region  becomes  very 
dense,  sheer  lack  of  space  compels  Uie  resort  to  canals.  Though 
widely  accepted,  this  assumption  appears  to  be  qmte  without  foim- 
dation  in  fact.  Two  German  writers  have  computed  the  carrying 
capacity  of  an  all-freight  double-track  railway  to  be  much  greater 
than  that  of  a  600-ton  barge  canal;*  while  the  present  writer's 
computations  have  shown  that,  in  proportion  to  the  groimd  space 
occupied,  the  potential  capacity  of  such  a  railroad  is  several  times 
that  of  a  1,000-ton  barge  canal.^  The  assumption  to  the  contrary 
has  been  supported  only  by  the  unequal  comparison  of  the  actual 
tonnage  handled  on  railways  that  are  devoted  partly  to  passenger 
traffic,  on  the  one  hand,  with  the  theoretical  maximum  capacity  of 

'  Rathenau  und  Cauer,  MassengiUerhahnenj  pp.  83-84. 
2  WaXerways  versus  Railways j  pp.  236-40  and  432-34. 


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SOME  ASPECTS  OF  THE  WATERWAYS  QUESTION        251 

canal  locks,  on  the  other — assuming  traffic  to  be  moving  only  in 
one  direction,  and  in  a  practically  continuous  stream. 

In  this  argument  I  have  been  speaking  of  canals  only.  In  the 
case  of  a  river  the  argument  does  not  apply  with  q\iite  the  same 
force.  With  a  river,  the  grotmd  space,  so  to  speak,  is  occupied 
whether  the  river  is  used  or  not.  Its  utilization,  therefore,  means 
the  utilization  of  space  which  could  not  be  used  for  railway  build- 
ing, or  other  purpose.  One  can  argue,  therefore,  that  where  a 
river  lies  in  the  pathway  of  traffic  and  the  railways  have  already 
been  extensively  developed,  the  utilization  of  space  occupied  by 
the  river  becomes  a  matter  of  much  importance.  If,  indeed,  it 
should  become  physically  impossible  to  develop  additional  railway 
canying  capacity,  resort  to  the  water  routes  would  be  obviously 
desirable.  And  even  before  such  a  situation  were  reached  it 
would  doubtless  be  profitable  to  resort  to  the  river  because  of 
the  alternative  use  to  which  the  land  might  be  put.  For  the  sake 
of  its  utilization  in  agriculture  or  for  industrial  purposes,  it  would 
be  better  to  forego  the  use  of  this  land  for  railway  construction 
even  though  the  rail  transportation  were  still  somewhat  cheaper 
in  other  respects  than  that  by  river.  While  this  argument  is 
undoubtedly  sound,  it  is  nevertheless  of  rather  limited  applica- 
tion. The  use  of  a  river  will  not  serve  to  relieve  the  congestion 
of  traffic  where  relief  is  most  required.  The  greater  part  of  the 
freight  that  could  be  carried  on  the  river — ^practically  all  of  the 
coal  and  agricultural  produce,  for  instance — ^has  its  origin  off  the 
river;  and,  in  consequence,  would  still  have  to  be  carried  a  part  of 
the  distance  by  rail.  Only  on  strictly  riparian  traffic  can  a  river 
serve  as  a  relief  to  railway  congestion. 

Taking  a  long  look  forward  to  the  future  may  it  not  be  argued, 
however,  that,  inasmuch  as  a  time  will  eventually  come  when  river 
space  must  be  used  for  transportation  purposes,  we  should  begin  at 
once  to  encourage  river  traffic,  and  not  wait  for  the  compelling  force 
of  necessity  ?  This  is,  in  a  way,  a  species  of  infant  industry  argu- 
ment: support  for  a  time  what  will  one  day  be  able  to  support 
itself;  encourage  and  hasten  the  development  of  what  is  destined 
ultimately  to  prove  profitable;  if  river  transportation  is  properly 
encouraged  the  balance  of  advantage  will  the  sooner  pass  from  the 


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252  JOURNAL  OF  POLITICAL  ECONOMY 

railways  to  it.  Granting  the  theoretical  soundness  of  this  position, 
how  urgent  in  fact  is  the  need  for  river  transportation,  and  how 
imminent  is  the  day  when  it  will  be  economically  feasible?  No 
general  answer  to  this  can  be  given,  for  it  will  obviously  vary  with 
different  rivers,  depending  in  each  case  upon  the  cost  of  the  regula- 
tion works  required  to  make  the  river  navigable.  It  will  depend 
also  in  a  very  emphatic  way  upon  the  rapidity  with  which  railways 
will  come  to  operate  \mder  conditions  of  diminishing  returns.  In 
the  writer's  opinion  the  possibilities  of  reducing  railway  costs  per 
imit  of  traffic  that  come  with  the  development  of  double  and 
quadruple  track  systems  are  so  great  that  the  day  is  far  removed 
when  river  transportation  in  general  will  economically  supersede 
rail  transportation. 

H.   G.  MOULTON 
Umivexsity  of  Chicago 


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SHALL   WE   HAVE   AN    INTRODUCTORY    COURSE    IN 
SOCIAL  SCIENCE?' 

The  belief  that  some  sort  of  general  introductory  course  in  social 
science  should  be  offered  Freshmen  and  Sophomores  before  they 
take  up  the  specific  study  of  economics,  political  science,  or  sociology 
is  apparently  taking  definite  form  in  the  minds  of  a  considerable 
number  of  teachers.  If  the  idea  were  to  be  traced  back  to  any  one 
man  we  sho\ild  probably  hit  upon  Professor  Small  as  the  one  chiefly 
responsible  for  it.  In  the  second  Conference  on  the  Teaching  of 
Economics,  held  in  Chicago  in  191 1,  he  voiced  his  disapproval  of 
the  separatist  spirit  among  social-science  teachers  and  made  the 
constructive  suggestion  that  a  general  introductory  course  be 
worked  out,  with  Schmoller's  Grundriss  der  aUgemeinen  Volkswirih- 
schafislekre  as  a  suggestive  guide.  Recently  Professor  Maurice 
Parmelee  has  proposed  an  introductory  course  based  wholly  on 
anthropology.^  These  suggestions  reflect  the  growing  feeling  on  the 
part  of  some,  at  least,  of  those  professors  and  instructors  who  are 
giving  thought  to  the  educational  efficiency  of  their  departments 
that  more  co-ordination  and  co-operation  are  needed  between  the 
various  social-science  departments;  and  that  we  are  not  doing 
well  by  the  student  if  we  let  him  finish  his  imdergraduate  course 
without  at  least  some  fleeting  look  over  the  fields  of  the  more 
important  social  sciences.  We  cannot  expect  the  student  to  take 
the  elementary  or  general  courses  in  all  the  social  sciences.  The 
logical  result  is  a  demand  for  the  development  of  a  general  survey 
course  to  be  taken  by  the  student,  usually  in  the  Freshman  year, 
before  he  enters  any  course  in  a  specific  sodal-sdence  department. 
Professor  Bogardus,  following  out  the  idea  of  Professor  Small,  gives 
us  an  elaborate  syllabus  for  a  year's  course  of  one  hxmdred  meetings 
covering  about  every  conceivable  field  of  social  knowledge,  with  an 

*  An  Introduction  to  ike  Social  Sciences:  A  Textbook  Outline.  By  £.  S.  Bogardus. 
(University  of  Southern  California  Publications,  Vol.  I,  No.  i.)  Published  by  the 
University,  1913.    Pp.  206. 

« American  Journal  of  Sociology^  September,  1913. 

253 


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254  JOURNAL  OF  POLITICAL  ECONOMY 

equipment  of  specific  reading-references  for  each  meeting,  bibliog- 
raphies for  each  subject  taken  up,  and  suggested  topics  for  special 
study  and  report  by  individual  students.  The  author's  purpose  is 
suflBciently  well  indicated  when  he  tells  us  that  "the  work  of  teach- 
ing in  the  field  of  the  social  sciences  is  handicapped  through  lack 
of  an  adequate  course  of  study  that  will  introduce  the  student  to  the 
general  field  and  at  the  same  time  give  him  a  comprehensive  out- 
look." He  disclaims  the  hope  of  having  provided  the  basis  for 
such  a  "comprehensive"  survey  on  the  first  trial  and  oflFers  the 
syllabus  in  its  present  shape,  that  it  may  be  improved  as  rapidly 
as  possible  through  criticism  from  other  teachers.  He  deserves 
commendation  for  this  attitude,  much  as  we  may  disagree  with  his 
conception  of  the  proper  content  of  the  proposed  introductory 
course;  for  it  stands  to  reason  that  any  plan  for  such  a  course  has 
a  very  hard  row  to  hoe,  that  it  will  be  extremely  difficult  if  not 
impossible  to  get  the  teachers  of  different  social  sciences  to  agree 
on  its  general  content  and  emphasis,  and  that  anything  like  a 
satisfactory  and  usable  syllabus  could  be  worked  out  in  the  end 
only  through  frank  criticism  and  co-operation  on  the  part  of  men 
in  the  various  fields.  In  thus  offering  up  his  own  attempt  for 
searching  criticism  Professor  Bogardus  may  be  performing  a  signal 
service  in  the  cause  of  social-science  teaching. 

The  course  is  designed  for  Freshmen  or  Sophomores,  who  are 
to  take  it  as  a  prerequisite  to  all  other  courses  in  the  social  sciences. 
It  is,  the  author  tells  us,  intended  to  introduce  the  student  to  the 
whole  field  of  social  science,  and  also  to  "serve  as  a  survey  course 
to  those  students  whose  primary  interests  tend  in  other  directions 
and  who  have  time  for  only  one  course  in  the  social-science  field." 
This  must  be  kept  in  mind  in  estimating  the  merits  of  the  proposal. 
The  writer  of  this  paper  has  elsewhere*  expressed  disapproval  of 
such  a  general  survey  course  for  students  who  are  to  take  no 
other  courses  in  social  science,  on  the  groimd  that  it  cannot  help 
tending  toward  an  extremely  unfortunate  superficiality  of  thought 
and  attitude  toward  things  social,  and  must  fail  to  impress  on  the 
student  the  necessity  of  acquiring  the  knowledge  he  must  have 
(if  he  is  to  be  an  imderstanding  citizen)  of  the  deep-seated  and 

'  Journal  of  Political  Economy ,  January,  1913. 


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AN  INTRODUCTORY  COURSE  IN  SOCIAL  SCIENCE       255 

fundamentally  significant  economic  causes  and  forces  operative 
in  society  today.  This  syllabus  simply  intensifies  this  conviction 
in  the  writer's  mind.  Professor  Bogardus  complains  that  the 
economist  ^'is  teaching  that  economics  is  the  ftmdamental  social 
science,  and  that  all  of  the  other  social  sciences  are  based  upon  and 
controlled  by  the  economic  desires  of  man."  This  hint  that  the 
syllabus  is  constructed  to  checkmate  some  of  the  inordinate  claims 
of  the  economists  seems  to  us  admirable  indication  that  the  econo- 
mists, sociologists,  and  political  scientists  need  to  have  some  heart- 
to-heart  talks  to  dispel  some  of  the  misunderstanding  and  suspicion 
that  lurk  between  the  various  camps.  I  know  of  no  economist  who 
is  teaching  what  Mr.  Bogardus  complains  of.  Moreover  the  econo- 
mists are  not  wonying  whether  their  science  is  formally  the  most 
fundamental  or  not.  It  does  not  matter  whether  it  is  or  not.  The 
simple  fact  is,  and  the  keenest  sociologists  and  political  scientists 
recognize  it,  that  today  most  of  the  practical  questions  of  public 
policy,  of  administration  and  legislation,  and  even  of  such  matters 
as  the  stability  of  the  family,  child  welfare,  public  health,  racial 
prejudice,  etc.,  are  so  largely  economic  in  hue  and  in  cause  that  a 
reasonably  thorough  study  of  economics  is  imperative,  and  that  to 
allow  a  man  or  woman  to  leave  college  without  such  study  is  edu- 
cational short-sightedness,  no  matter  how  large  the  student's 
knowledge  of  social  psychology  or  anthropology  or  comparative 
constitutional  history  may  be.  No  course  scattered  over  a  half- 
dozen  fields  of  social  science,  even  though  it  comprise  a  year's 
work,  can  begin  to  make  good  the  lack  of  a  solid  course  in  economics. 
This  is  the  primary  reason  why  I  cannot  feel  cordial  toward  one 
part  of  Professor  Bogardus'  purpose.  We  have  too  many  well- 
meaning  college  graduates,  filled  with  zeal  for  "social  service"  but 
lacking  in  knowledge  of,  or  thought  about,  the  economic  (or  other) 
principles  which  in  the  long  run  determine  whether  their  efforts 
are  fruitless,  detrimental,  or  beneficial.  How  many  "sociologi- 
cally" trained  young  social  workers  and  reformers,  for  instance,  have 
any  conception  of  the  bearing  of  "Malthusianism, "  or  of  diminish- 
ing returns,  upon  the  problems  of  tmemployment,  low  wages,  over- 
crowding, and  disease  ?  If  the  intention  is  to  let  this  introductory 
coiurse  create  the  impression  in  the  mind  of  the  student  that  unless 


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2S6  JOURNAL  OP  POLITICAL  ECONOMY 

he  is  going  to  be  a  specialist  of  some  kind  this  course  will  give  him 
all  he  needs  to  know  about  economics,  government,  sociology,  or 
ethics,  without  going  on  to  specific  courses  in  these  fields,  the  course 
will  do  as  much  harm  as  good.  If,  on  the  other  hand,  it  is  designed 
primarily  to  point  the  Freshman's  interest,  to  get  him  early  to 
recognize  the  desirability  of  serious  study  of  society,  in  economics, 
government,  and  sociology  courses,  the  project  of  developing  an 
introductory  course  is  strongly  to  be  commended.  I  have  long 
had  the  conviction  that  the  Freshman  year,  in  many  colleges  at 
least,  where  the  work  is  largely  prescribed,  is  to  a  large  extent  a 
wasted  year,  and  fairly  devoid  of  genuinely  human  interest  to  the 
student  because  he  is  kept  grinding  away  at  the  same  disciplinary 
and  mechanical  pursuits — Slanguage,  composition,  mathematics, 
outline  history  of  political  changes — ^which  he  had  in  high  school. 
How  often  we  have  heard  Sophomores  comment  with  a  sigh  of 
relief  upon  the  greater  interest  of  their  work  the  moment  they 
could  enter  some  of  the  courses  that  deal  with  the  sodo-ethical 
and  the  economico-ethical  ideas  and  questions  in  which  yoimg  men 
and  women  at  this  age  delight  in  interesting  themselves.  There 
is  at  present  real  need  for  a  Freshman  course  to  create  interest — or 
to  give  expression  to  pent-up  latent  interest — ^and  to  prepare  the 
student  to  some  extent  for  the  content  and  method  of  study  he  will 
be  called  upon  to  meet  and  to  use  when  in  the  Sophomore  year  or 
later  he  takes  up  the  study  of  any  specific  social  science. 

The  test  of  such  a  plan  as  that  outlined  by  Professor  Bogardus 
must  be  one  of  its  educational  economy  and  fitness.  Several  ques- 
tions suggest  themselves.  We  must  judge  the  syllabus  not  only 
as  social  scientists  but  as  teachers.  It  is  mainly  from  the  latter 
point  of  view  that  this  is  written.  Primarily  we  must  judge  not 
only  whether  the  material  is  well  organized  and  well  presented, 
with  adequate  machinery  of  bibliographies,  etc.,  but  beyond  that, 
whether  the  material  is  chosen  with  reference  to  its  fitness  to  the 
Freshman  mind,  and  moreover  whether  it  is  the  material  that 
should  be  presented,  out  of  all  the  indefinite  mass  that  might  be 
chosen.  Those  who  plan  such  a  course — ^if  they  plan  with  reference 
to  the  future  at  all — ^must  recognize  that  they  are  xmdertaking  a 
difficult  and  delicate  task,  and  are  in  a  sense  between  the  devil  and 


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AN  INTRODUCTORY  COURSE  IN  SOCIAL  SCIENCE       257 

the  sea.  On  the  one  hand  they  must  use  all  due  care  not  to  include 
in  the  course  material  better  adapted  to  upperclassmen,  and  above 
all  not  to  construct  the  course  from  the  (relatively)  mature  and 
philosophical  standpoint  of  the  mature  student  or  of  the  teacher 
who  has  devoted  years  of  study  to  these  fields  and  therefore  sees 
relations,  verities,  significances,  where  the  ordinary,  iminitiated 
mind  can  see  none,  or  at  best  must  take  them  on  faith  and 
authority.  The  course  may  present  a  mass  of  matiured  and  sig- 
nificant conclusions  and  generalizations  to  the  underclassman;  he 
may  memorize  them,  he  may  have  at  the  time  a  vivid  interest  in 
them;  but  they  will  glide  out  of  his  mind,  like  water  off  a  duck, 
just  because  they  are  mature  generalizations  and  because  in  the 
nature  of  things  no  introductory  course  can  hope  to  give  the  data 
and  the  thought  processes  upon  which  they  are  based. 

On  the  other  hand  the  course  mxist  not  be  repetition  of  what  the 
student  already  knows,  or  of  specific  content  he  may  have  been 
made  familiar  with  in  high  school.  At  the  present  time  it  is  safe 
to  say  that  the  high  school  has  given  very  little  that  would  be  likely 
in  any  way  to  be  duplicated  by  an  introductory  college  course.  It  is 
the  writer's  belief  and  hope,  however,  that  before  many  years  have 
passed,  even  the  smaller  high  schools  will  be  introducing  courses  in 
social  economy — ^which  may,  by  the  way,  render  imnecessary  any 
introductory  college  course  of  the  kind  here  contemplated.  It  can- 
not be  overemphasized  that  today  no  one  can  plan  intelligently 
for  college  students  who  is  not  thoroughly  alive  to  the  changing 
relations  between  the  college  and  the  high  schools,  and  to  the  vast 
and  rapid  transformation  that  is  taking  place,  and  is  bound  to  take 
place,  in  the  whole  educational  system.  It  is  lacking  in  educational 
perspective  and  in  perception  of  the  universal  value  of  thought- 
ful teaching  in  the  subject-matter  of  the  social  sciences,  to  think 
of  our  pedagogical  problems  as  limited  to  the  foiu:  years  of  under- 
graduate curriculum.  More  and  more  the  high  schools  are  going 
to  give  boys  and  girls  what  they  need,  and  can  profit  by,  as  prepara- 
tion for  citizenship  in  a  democracy,  and  more  and  more  the  place 
of  the  piurely  formal  studies  will  be  limited  and  the  time  for  social 
study  thereby  increased.  The  college  will  have  to  take  the  stu- 
dents as  they  come ;  its  business  will  be  to  carry  them  on  from  where 


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258  JOURNAL  OF  POLITICAL  ECONOMY 

the  high  school  has  left  them.  We  must,  in  other  words,  consider 
the  high  school  and  college  as  a  unit.  If  then  the  high  schools 
develop  the  teaching  of  simple  courses  in  the  social  sciences,  an 
introductory  college  course  may  prove  non-economical  and  out 
of  place.  For  in  that  case  the  Freshman  will  come  prepared  in 
interest,  and  to  some  extent  in  savoir-faire  in  this  field  (so  different 
in  its  methods  from  language,  mathematics,  or  natural  science),  to 
take  up,  on  entering  college,  a  solid  course  in  general  economics  or 
government. 

Judging  the  present  syllabus  in  the  light  of  these  ideas  we  find 
comparatively  little  that  under  present  conditions  would  be  likely 
to  cover  groimd  already  covered  in  high  school.  All  of  some  sec- 
tions, however,  and  parts  of  others  appear  to  be  merely  a  neat 
outlining  of  what  everybody  knows — ^with  a  sprinkling  of  facts  that 
nobody  needs  to  know.  Take  for  example  section  15 — man's 
relation  to  the  faima  and  flora  of  the  world.  Here  it  is  set  forth 
that  animals  are  used  by  man  (a)  as  servants  and  friends,  (i)  as 
food,  {c)  as  sources  of  clothing  (under  which  rubric  comes  the  valu- 
able information  that  the  ''most  valuable  is  the  fur  of  the  North 
Pacific  sea-otter,  a  single  skin  often  bringing  $1,000").  Then  we 
have  a  catalogue  of  the  uses  of  plants,  all  interesting  enough,  but 
to  what  purpose  ?  It  certainly  suggests  to  us  the  outline  for  lessons 
in  nature-study  in  the  grades,  and  we  cannot  fathom  why  a  college 
Freshman  sho\ild  be  re-treated  to  this  sort  of  thing.  Similar  criti- 
cism holds  true  for  sections  4,  21,  22,  39,  etc.,  either  in  whole  or 
in  part.  There  is  aU-too-frequent  ind\ilgence  in  platitudes  graced 
up  in  the  dignity  of  formal  classification — the  sort  of  thing  that  helps 
to  induce  that  exasperating  supercilious  smile  on  the  face  of  the 
natural  scientist  when  sociology  is  called  a  "  science  "  in  his  presence. 

The  shortcomings  of  the  syllabus  in  this  direction,  however, 
are  meager  compared  to  those  discernible  in  another  direction.  It 
seems  to  the  writer  that  Professor  Bogardus  has  entirely  forgotten 
the  psychology  of  the  underclassman.  He  forgets  that  we,  the 
teachers  of  sociological  subjects,  come  to  these  fields  with  an  apper- 
ceptive mass,  an  experience,  a  perspective  (however  imperfect) 
which  we  cannot  ordinarily  expect  the  Freshman  or  Sophomore 
to  have.    To  present  to  Freshmen  who  have  no  background  of  con- 


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AN  INTRODUCTORY  COURSE  IN  SOCIAL  SCIENCE      259 

Crete  study  in  some  social  field  the  array  of  "factors"  and  generali- 
zations which  this  syllabus  presents  seems  a  disregard  of  the  simplest 
principles  of  pedagogy. 

The  syllabus  is  divided  into  twelve  chapters  which,  after  a 
brief  introduction,  outline  twelve  factors  of  social  progress — geo- 
graphical, biological,  hygienic  and  eugenic,  genetic,  economic, 
political  and  legal,  ethical  and  religious,  aesthetic,  intellectual,  and 
"assodational.''  The  sociological  reader  will  see  in  this  the  influ- 
ence of  Ross's  and  of  Small's  classifications  of  the  "social  forces." 
As  an  analytical  classification  and  as  a  presentation  of  many  of 
the  leading  generalizations  in  some  of  these  fields  the  outline 
is  admirable.  Probably  everyone  who  reads  it  will  point  out  here 
and  there  defects — omissions,  mis-emphases,  etc. — ^in  the  chapter 
dealing  with  his  own  social  science.  That  is  a  relatively  imim- 
portant  matter,  although  it  is  important  for  the  reader  and  critic 
to  reduce  his  own  personal  bias  to  the  least  possible  limits.  The 
more  significant  consideration  is  that  a  very  large  portion  of  the 
matter  is  unsmtable  both  in  form  and  substance  to  the  purpose  to 
which  it  is  to  be  put. 

It  is  not  possible  to  point  out  all  the  instances  of  this  too  great 
generality  and  non-adaptation  to  underclassman  experience,  but  a 
few  examples  should  be  noted  in  some  detail.  Take  section  2 — 
the  second  meeting  of  the  course — on  the  "factors  in  the  rise  of  the 
social  sciences."  The  overawed  Freshman  is  introduced  in  rapid 
succession  to  the  industrial  revolution,  Fourier,  Owen,  Ruskin, 
Carlyle,  the  Christian  socialists,  political  economy's  early  emphasis 
upon  wealth-getting,  "socialism  in  its  revolutionary  assaults, 
attempts  to  secure  social  legislation,  evolution  of  transportation, 
segregation  of  classes,  etc.  We  much  doubt  if  all  this  will  mean 
anything  to  the  student  next  day.  Turning  to  the  chapter 
on  the  physical  and  geographical  factors,  we  find  eight  meetings, 
all  devoted  to  a  large  amount  of  generalization,  based  on  the 
mature  study  of  writers  like  Ellen  Semple — generalizations  which 
in  themselves  one  need  find  no  quarrel  with,  but  which  belong  to  a 
course  in  geography,  and  which  can  have  little  real  meaning  by 
themselves,  without  the  data  and  the  author's  reasoning  on  which 
they  are  built  and  with  the  exceedingly  meager  reading  time  the 


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26o  JOURNAL  OF  POLITICAL  ECONOMY 

student  will  have  at  his  disposal  while  the  class  is  covering  this 
part  of  the  outline.    We  find,  for  instance,  on  p.  i8: 

(3)  Plains  are  not  favorable  to  early  development. 

a.  Their  lack  of  contrasting  environments,  their  wide  extent  and  absence 
of  barriers,  put  chains  on  progress. 

b.  Show  a  paucity  of  varied  geogn^hical  conditions  and  of  resulting  con- 
trasts in  the  population. 

c.  Larger  eastern  half  of  Europe  embraced  in  the  plains  of  Russia  and 
Poland  shows  monotony  in  every  aspect  of  human  life. 

d.  Sameness  leaves  its  stamp  on  everything. 

To  be  sure  the  author  plans  to  have  the  students  read  certain 
chapters  in  Semple's  Influences  of  Geographic  Environment^  and 
gamer  examples  to  illustrate  these  generalizations,  and  some  stu- 
dents will  doubtless  do  so.  But  if  as  many  students  take  this 
course  as  the  author  thinks  should  take  it  the  instructor  is  going 
to  run  against  a  very  practical  difficulty.  If  the  reading  is  to  be 
done  in  library  books,  and  that  is  the  only  supposition  possible  in 
view  of  the  large  ntmiber  of  books  to  be  consulted  in  so  many  fields, 
only  a  small  percentage  of  the  class  can  do  the  reading  at  the  proper 
time.  There  is  a  more  fundamental  objection,  however.  There 
is  nothing  to  hang  all  this  erudition  on  except  the  student's  pure 
love  of  "scholarship"  and  his  curiosity — the  two  together  stimulat- 
ing in  him  a  sort  of  collector's  instinct  for  the  gathering  of  "rare 
and  curious"  articles  of  information.  This  is  an  objection,  it  is 
true,  which  some  might  make  to  higher  education  as  a  whole,  at 
least  in  some  of  its  aspects;  but  that  does  not  relieve  us  of  the  duty 
of  connecting  the  work  of  this  coxirse  with  the  student's  awakening 
interests  in  the  real  life  and  the  real  social  problems  round  about 
him  now.  We  need  to  keep  as  far  away  from  useless  and  ill-digested 
academic  erudition  as  we  can:  for  this  should  be  the  spirit  of  the 
sodal-science  teacher  and  student  always — that  we  are  studying 
these  matters  not  out  of  the  pure  thirst  for  knowledge  that  actuated 
the  stoop-shouldered  mediaeval  scholar  or  the  classicist  of  yester- 
year, but  that  we  may  dig  down  as  qmckly  and  surely  as  possible  to 
the  causes  of  oiu:  social  relations,  and  the  real  elements  of  social 
problems,  in  order  that  we  may  actively,  now  (not  sixty  years 
hence)  contribute  to  the  sound  advancement  of  progress.    We 


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AN  INTRODUCTORY  COURSE  IN  SOCIAL  SCIENCE       261 

cannot  afford  to  introduce  the  student  in  any  dilettante  spirit. 
Page  21  gives  us  this: 

(6)  High  altitude^  with  their  long,  severe  winters  stimulate  industries  in  the 
home. 

a.  Almost  eveiywhere  native  mountain  industries  are  in  a  state  of  high 
development. 

b.  Consists  of  carved  wood,  artistic  metal  work  in  silver  and  copper,  the 
famous  Kashmir  shawls,  finest  violin  strings  in  the  world. 

By  what  stretch  of  the  imagination  can  this  be  thought  of  sig- 
nificance to  the  American  student  today  ?  A  far  better  plan  for 
the  presentation  of  the  geographical  factors,  to  the  writer's  notion, 
would  have  been  to  start  with  a  meeting  or  two  on  conservation 
(see  section  10),  a  live  matter  in  which  every  student  can  have 
a  real  and  productive  interest,  and  from  that  pass  to  the  geo- 
graphical influences  that  have  been  and  may  be  operative  in 
American  history  (for  which  Miss  Semple's  earlier  book  woiild 
be  a  better  basis  of  discussion  than  Ratzel's  anthropo-geography). 
We  feel  sure  that  in  two  or  three  meetings  thus  arranged  the 
student  would  get  a  better  suggestion  of  the  real  meaning  of 
geographical  influence  than  he  possibly  can  from  these  eight 
meetings  which  try  to  cover  so  much  ground  and  to  state  so  many 
of  the  final  generalizations  of  geographical  science. 

The  chapter  on  biological  factors  affords  further  illustration  of 
the  same  mistaken  method  and  deficiency  in  pedagogical  insight. 
Section  12  gives  us,  for  instance,  (i)  the  ways  in  which  organisms 
differ  from  inorganic  substances,  (2)  the  different  phases  of  universal 
evolution,  (3)  the  factors  at  work  in  organic  evolution  (i.e.,  multi- 
plication in  geometrical  ratio,  heredity,  struggle  for  existence, 
etc.).  Section  13  continues  the  study  of  heredity  and  bravely 
assails  the  ramparts  of  Mendelism  and  of  biometry,  while  section 
14  goes  on  with  variation,  variability,  and  mutations — ^and  the 
net  result  of  the  three  meetings  will,  we  predict,  be  hopeless  haze 
and  confusion  in  the  student's  ideas.  It  seems  fairly  obvious 
that  in  such  a  course  there  does  not  begin  to  be  time  enough  to 
discuss  such  matters,  and  even  if  there  were  they  are  beyond  the 
understanding  of  Freshmen,  with  the  possible  exception  of  those 
who  have  had  extraordinarily  good  training  in  biology  in  high 


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262  JOURNAL  OP  POLITICAL  ECONOMY 

school.  Far  better  results  would  be  obtained  in  the  way  of  "orien- 
tation'' with  regard  to  the  significance  of  biological  factors  and 
stimulation  to  the  study  of  biology  or  biological  sociology,  if  for 
these  meetings  dealing  with  matters  beyond  the  power  of  the 
student  we  substitute  an  informal  lecture  or  two  on  the  lives, 
the  work,  and  the  influence  of  the  great  evolutionists,  e.g.,  Darwin, 
Huxley,  and  Weismann.  Sections  17  (the  biological  basis  of  the 
sodal  instincts  and  impulses)  and  18  (self-preservation  impulses) 
are  both  far  too  philosophical  for  such  a  course.  Other  overly 
ambitious  sections  are  49  (significance  of  recent  social  movements), 
because  no  one  can  undertake  to  discuss  this  to  Freshmen  intel- 
ligibly in  one  hour,  51,  52,  53  (generalizations  about  the  origin, 
development,  and  fimctions  of  the  state),  56  (sociological  founda- 
tions of  law),  58  (international  law),  and  so  on. 

We  doubt  if  such  subjects  as  "the  anti-sodal  teachings  of 
Mohammedanism,"  "the  earliest  expression  of  the  aesthetic  feel- 
ings," "the  social  power  of  the  imagination  and  the  feelings  as 
e]q)ressed  through  poetry,"  "the  psychological  basis  of  intellectual 
factors  of  progress,"  are  the  best  subjects  to  choose  to  give  to 
Freshmen,  even  were  they  developed  in  the  most  concrete  manner 
possible.  Professor  Bogardus  shows  great  imevenness  in  this  re- 
spect. Many  of  his  subjects  are  admirably  chosen  for  such  a 
course,  and  are  well  and  suggestively  outlined,  as  for  instance  sec- 
tions 10  (conservation),  19  (social  waste  through  bacterial  disease), 
and  20  (overwork  and  fatigue). 

The  author  throughout  uses  two  methods  of  approach,  the 
anthropological  and  the  historical.  The  anthropological  approach 
undoubtedly  has  its  uses  but  we  should  avail  ourselves  of  them 
sparingly,  else  too  much  valuable  time  and  energy  will  be  con- 
sumed in  the  discussion  of  origins  which,  after  all  is  said,  have 
often  only  a  very  remote  bearing  on  the  sodal  relations  of  today. 
No  doubt,  for  instance,  anthropological  study  gives  the  student  a 
desirable  backgroimd  for  an  imderstanding  of  the  ethics  of  sex,  the 
family,  modesty,  marriage,  etc.,  but  on  the  other  hand,  all  the 
montunental  labor  that  has  been  expended  in  trying  to  dedpher 
the  nature  of  the  primitive  family  has  served  not  much  more 
practical  purpose  (beyond  serving  as  an  example  of  the  relativity  of 


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AN  INTRODUCTORY  COURSE  IN  SOCIAL  SCIENCE       263 

morals)  than  the  old  long-drawn-out  controversy  between  the 
advocates  and  the  opponents  of  the  theory  of  commnnal  land 
ownership  among  the  ancient  Germans  has  served  in  solving 
the  problems  of  land  taxation  and  private  ownership  today.  If 
we  have  more  study  in  the  present  tense  we  shall  have  fewer  student 
blue  books  written  in  the  past  tense — ^as  if  all  that  a  student  can 
study  in  college  must  necessarily  relate  to  the  past  or  have  been  said 
or  done  by  someone  dead  at  least  half  a  century!  The  essential 
objection  to  the  anthropological  attack  is  that  it  is  scholastic, 
time-consuming,  and  not  adapted  to  stimulate  live  present  interest 
in  the  real  content  of  the  life  of  today  and  tomorrow.  And  where 
we  are  forced  to  the  conclusion,  as  Professor  Parmelee  is  forced, 
in  his  article  above  noted,  that  the  anthropological  introduction 
needs  an  ethnological  museimi  as  reinforcement,  the  whole  idea 
of  an  introductory  course  based  on  anthropology  becomes  at  once 
absurdly  impractical. 

Much  more  can  be  said  in  favor  of  the  historical  approach. 
But  there  are  ways,  and  ways,  of  using  it.  Where  it  means,  as  with 
Professor  Bogardus  it  often  does,  the  analytical  presentation  of  a 
series  of  ^'epochs"  or  periods  it  is  merely  a  variation  of  the  method 
of  abstract  analysb  and  presentation  of  generalizations  criticized 
above.  (Note,  for  example,  sections  2,  25,  30,  31,  40,  42,  46,  50, 
52,  58,  82,  96.)  Such  history,  we  believe,  benefits  no  one  per- 
manently, and  will  fail  to  satisfy  the  pedagogical  demands  of  the 
history  teachers.  Sometimes  the  historical  method  in  the  author's 
hands  gives  us  banalities,  sometimes  insignificant  generalities. 
Rarely  does  he  succeed  in  making  it  illuminating — the  real  guide  it 
should  be  for  the  student  mind,  from  the  significant  modem  begin- 
nings of  movements  and  tendencies  which  have,  thus  far,  resulted 
in  the  present  conditions  and  problems  which  the  social  science 
student  should  get  at  as  quickly  as  is  consistent  with  the  attainment 
of  that  historical  perspective  necessary  for  even  a  preliminary 
study  of  most  elements  of  social  life.  Unless  we  utilize  history  in 
this  way  we  are  not  using  it  economically  or  effectively.  To  out- 
line the  abstract  epochs  of  American  laboring-class  history  or  of 
transportation  history  in  the  United  States  is  not  necessarily  to 
lead  to  any  imderstanding  of  the  significance  of  the  modem  labor 


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264  JOURNAL  OF  POUTICAL  ECONOMY 

problem  or  the  present-day  unrest  with  regard  to  raOway  rates  and 
governmental  regulation.  Nor  will  telling  the  student  that  the 
first  period  of  international  law  ^'extends  from  the  earliest  times  to 
the  establishment  of  the  universal  dominion  of  Rome/'  that  the 
second  ends  with  the  Reformation,  and  that  the  third  extends 
from  the  Reformation  to  the  present  time  give  the  student  any 
suggestion  of  what  international  law  is  like.  If  it  is  desirable  to 
go  into  the  history  of  international  law,  how  much  more  interesting 
it  would  be  to  spend  the  hour  on  Hugo  Grotius  and  Dejure  belliy 
the  Alabama  claims,  and  the  non-recognition  of  Huerta!  The 
historical  method  in  this  course  should  keep  as  far  away  from 
philosophical  generalization  or  analytical  epoch-marking  as  possible, 
and  rather  run  a  clear,  swift  current  in  the  main  channel  to  the  out- 
come in  modem  relations,  forces,  conditions,  or  problems  to  which 
it  seems  feasible  or  worth  while  to  introduce  the  Freshman  in  a 
preliminary  way.  If  this  view  be  correct,  the  author  would  have 
done  well  to  omit  the  ambitious  matter  on  the  history  of  economic 
theory,  and  the  epochal  analysis  of  labor,  transportation,  theories 
of  state  function,  etc.,  and  substituted  a  sequence  of  meetings 
beginning  with  the  industrial  revolution,  and  passing  to  the  French 
revolution,  the  idea  of  laissez  faire,  Adam  Smith  and  the  Wealth 
of  NationSy  the  development  of  factory  legislation,  the  conditions 
of  early  American  history  which  made  individualism  so  prominent 
in  fact  and  in  theory,  and  so  on  to  the  economic  transformations 
in  industry,  population,  etc.,  which  have  changed  the  problems  of 
government  and  of  politics  and  made  necessary  a  new  point  of 
view.  But  all  this  should  be  presented  in  a  thoroughly  concrete 
way  which  will  appeal  at  once  to  the  student's  imagination,  to  his 
curiosity,  to  his  knowledge  of  American  history,  and  to  his  own 
experience  and  observation.  In  such  a  way  he  can  be  brought  to 
see  the  significance  of  both  history  and  the  social  sciences.  It  is 
not  necessary  "to  go  back  to  the  year  i.''  It  is  essential  to  begin 
at  a  ^gnificant  time  and  to  come  down  through  the  changes  which 
started  at  that  time  and  which  are  significant  in  explaining  the 
historical  evolution  and  causation  of  the  present  state  of  affairs. 
Any  other  use  of  historical  material  borders  on  useless  antiquarian- 
ism.  The  trail  of  German  thoroughness  does  not  always  lead  to  a 
destination  worth  arriving  at. 


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AN  INTFODUCTORY  COURSE  IN  SOCIAL  SCIENCE        265 

The  author  is  not  always  careful  ia  his  statements.  It  is  unfor- 
tunate that  the  student  should  get  his  first  introduction  to  social 
science  in  anything  like  a  careless  or  imcritical  manner.  On  p.  167, 
for  example,  where  he  is  discussing  the  public  schools,  the  author 
says  their  primary  fimction  is  to  teach  a  sense  of  social  responsi- 
bility, and  avers  that  "it  is  anti-social  to  pay  low  wages  and 
the  school  children  should  know  it."  There  is  more  enthusiasm 
than  science  or  sense  in  such  a  statement.  To  take  a  few  other 
instances,  the  first  section  on  child  labor  is  misleading;  the  state- 
ment on  p.  72  that  "factory  work  makes  the  girl  a  wife  and 
mother  incapable  by  knowledge  and  training  of  doing  her  duty  by 
her  children,  her  home,  or  her  hiisband"  seems  rattier  bald  and 
dogmatic;  so  also  the  statements  concerning  the  influence  of  Chris- 
tianity on  the  family  (p.  67),  the  biological  factors  of  eugenics 
(p.  58),  the  socializing  power  of  Christianity  (p.  136). 

Some  fault  might  be  found  with  Mr.  Bogardus'  reading-lists  on 
the  ground  that  they  contain  matter  hardly  suited  to  Freshmen, 
and  with  his  bibliographies  because  of  the  omission  of  important 
titles  and  the  inclusion  of  a  mmiber  of  books  of  very  doubtful  merit. 
At  the  end  of  each  chapter  the  author  gives  a  list  of  ten  or  twelve 
topics  for  investigation — the  student  to  choose.  Here  again  is 
revealed  a  deficient  sense  of  the  economy  of  study  and  teaching. 
We  pick  at  random:  The  relation  of  sociology  to  Christianity; 
A  comparison  of  tropical  peoples  with  temperate  peoples;  The 
biological  history  of  the  race;  History  of  medical  science;  A  com- 
parative study  of  mercantilism  and  laissez  faire  in  relation  to 
social  progress — and  these  are  topics  designed  for  college  Fresh- 
men, normal  school  students,  and  even  high-school  pupils!  For- 
tunately there  are  many  less  ambitious  topics. 

The  chief  difficulty  back  of  Mr.  Bogardus'  work  is  that  he  has 
failed  to  give  due  consideration  to  the  time  element  in  education. 
At  first  thought  an  introductory  coiu-se  may  seem  boimd  to  save 
time  for  the  student  by  sending  him  into  the  specific  social  sciences 
in  a  somewhat  oriented  condition  to  take  up  their  study.  Looked 
at  more  closely,  whether  or  not  the  introductory  course  is  a  real 
time-saver  is  seen  to  depend  on  a  nimiber  of  conditions — the  length 
of  the  course,  its  content,  and  its  effect  on  students'  attitude  toward 


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266  JOURNAL  OP  POLITICAL  ECONOMY 

other  sodal-sdence  courses.  If  it  causes  a  student  to  refrain 
from  taking  economics  or  political  science,  in  the  belief  that  he  has 
gained  from  the  introductory  course  enough  general  knowledge  of 
these  matters  for  one  who  is  not  going  to  be  a  specialist,  then 
the  course  gains  time  at  the  expense  of  educational  eflSiciency — 
and  that  is  a  real  loss  of  time.  As  a  matter  of  fact  it  seems  prob- 
able that  a  very  considerable  ntunber  of  students  would  be  encour- 
aged, by  such  a  course  as  this,  to  leave  college  without  any  serious 
study  of  any  one  field  of  social  science.  And  in  so  far  as  this  is 
the  case,  the  effect  is  deplorable.  For  students  who  can  go  on  to 
other  courses — as  all  college  students  can — ^it  would  seem  that  a 
half-year  should  be  sufficient  by  way  of  general  introduction.  For 
students  in  high  school  or  normal  school  who  for  any  reason  cannot 
take  more  work,  the  general  course  should  probably  cover  a  year — 
but  its  content  should  be  very  different  from  the  one  outlined  in  this 
syllabus.  We  rather  think,  therefore,  that  Mr.  Bogardus  has  fallen 
between  two  stools  in  his  effort  to  be  perfectly  fair  to  all  the  fields 
and  to  include  them  all  in  his  survey.  If  he  could  have  made  his 
syllabus  a  third  shorter,  planned  for  a  half-year  course,  and  written 
in  a  more  critical  spirit,  he  would  have  come  nearer  giving  us  some- 
thing which  would  save  the  student's  time  and  stimulate  new  and 
intelligent  interest. 

It  is  easy  to  give  destructive  criticism  of  other  men's  con- 
structive work,  and  if  this  review  has  been  largely  adverse  in  its 
estimate  of  Mr.  Bogardus'  work  it  has  not  been  due  to  any  lack 
of  appreciation  of  the  fact  that  the  author,  however  mistaken  we 
may  think  his  method,  has  nevertheless  started  a  much-needed 
work  in  putting  together  an  outline  for  an  introductory  course. 
If  on  the  basis  of  searching  criticism  and  classroom  trial  of  the 
present  syllabus  a  more  satisfactory  and  workable  plan  for  a  Fresh- 
man course  in  social  science  can  be  co-operatively  worked  out  the 
credit  for  the  hard  and  thankless  pioneer  work  will  be  largely  due  to 
Professor  Bogardus.  He  has  not  only  seen  the  need,  but  has  pro- 
ceeded at  no  inconsiderable  labor  to  pave  the  way  for  the  fulfilment 
of  that  need. 

Now  lest  we,  while  showing  the  steep  and  thorny  path  to  heaven, 
ourselves  tread  the  primrose  pathway  of  dalliance,  let  us  siunmar- 


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AN  INTRODUCTORY  COURSE  IN  SOCIAL  SCIENCE      267 

ize  briefly  our  own  notions  of  what  the  course  should  and  should 
not  be.  (i)  It  should  not  aim  to  supplant  for  any  student  either 
the  general  course  in  economics  or  that  in  political  science.  (2)  If 
economics  and  political  science  are  reqiured  they  should  continue 
to  be  required.  (3)  The  aim  of  the  course  should  not  be  to  give 
the  student  a  smattering,  superficial  knowledge  in  all  the  fields, 
from  commercial  geography  to  comparative  religion,  but  to  stimu- 
late, suggest,  and,  in  some  degree,  direct  his  interests.  (4)  It  shotdd 
relieve  the  dim-colored  monotony  of  the  Freshman-year  curriculum. 
(5)  It  should  consciously  build  on  whatever  social-science  study  the 
student  may  have  had  in  high  school,  avoiding  duplication,  and  as 
the  high  schools  offer  more  and  more  in  this  field,  the  course  shoidd 
undergo  continuous  alteration.  (6)  It  should  seek  to  introduce  the 
student  to  some  (not  all)  of  the  salient,  pressing,  live  problems  and 
relations  of  the  day;  and  through  the  interest  thus  aroused  lead 
him  to  see  the  necessity  of  serious,  sequential  study  in  the  specific 
social  sciences.  (7)  It  should  not  go  back  to  ^'social  origins" 
except  where,  and  to  the  extent  that,  the  historical  method  of 
approach  is  the  best  and  qmckest  way  of  reaching  some  imderstand- 
ing  of  the  significance  of  the  modem  society  we  wish  to  study.  And 
finally  the  course  must  stand  in  some  effective  relation  to  the  Fresh- 
man's experience,  and  must  not  encourage  the  false  pride  of  sterile 
"scholarship." 

It  follows  that  the  plan  of  such  a  course  must  after  all  be  com- 
paratively elastic,  and  that  much  depends  upon  the  personality  of 
the  teacher.  There  is  little  hope,  it  seems  to  me,  at  present  at 
least,  of  standardizing  an  introductory  course,  even  if  all  teachers 
of  social  science  can  be  got  to  agree  on  the  desirability  of  such  a 
course  at  all.  Nor  do  we  want  artificial  standardization  where 
there  is  no  real  standard  as  yet  as  to  what  is  essential  and  elementary 
in  social  science.  Moreover  we  perhaps  need  to  be  on  our  guard 
against  the  old  academic  notion  that  one  pabulimi  for  all  is  the  only 
true  pedagogical  principle.  Nevertheless  I  am  very  much  inclined 
to  think  that  some  sort  of  introductory  course  for  Freshmen  is  one 
of  the  next  steps  in  advance  in  the  teaching  of  the  social  sciences. 

A.  B.  Wolfe 

Obe&un  Coixeos 


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NOTES 
WASHINGTON  NOTES 

THE  REPORT  ON  AGRICULTURAL  CREDIT 

The  report  of  the  United  States  Commission  on  Agricultural  Credit 
(Senate  Document  No.  380,  Parts  i  and  2,  63d  Cong.,  2d  sess.)  has 
been  presented  to  the  Senate  under  date  of  January  29  and  published. 
The  main  idea  of  the  report  is  that  agricultural  credit  is  naturally  to 
be  divided  into  two  great  classes,  namely,  long-term  or  land-mortgage 
credit,  which  may  be  briefly  defined  as  credit  to  meet  the  capital  require- 
ments of  the  farmer,  and  short-term  or  personal  credit.  In  European 
systems,  the  distinction  between  these  two  classes  of  credit  is  sharply 
drawn,  and  the  requirements  of  the  two  classes  are  met  by  the  organiza- 
tion of  separate  institutions  differing  fundamentally  in  their  plan  of 
operation.  In  defining  the  needs  of  the  American  farmer  in  this  con- 
nection, the  commission  includes  under  the  head  of  long-term  credit 
the  farmer's  call  for  large  sums  of  money  to  be  used  in  aiding  him  to 
pay  the  purchase  price  of  the  farm,  in  improving  the  farm,  erecting  new 
buildings,  draining,  irrigating,  or  clearing,  or  equipping  the  farm  so  as 
to  bring  the  operations  to  the  highest  state  of  efficiency;  while  the  short- 
term  requirements  are  made  to  embrace  those  with  reference  to  the 
financial  needs  of  the  farmer  in  preparing  his  land,  sowing  the  crops, 
and  cultivating  the  same.  By  way  of  providing  for  the  long-term 
requirements  it  is  suggested  that  provision  should  be  made  for  the  issue 
of  well-established  land-mortgage  bonds  which  shall  be  given  a  position 
similar  to  that  accorded  to  state  and  federal  bonds.  Land-mortgage 
banks  would  be  created  under  a  bill,  a  copy  of  which  is  included  in  the 
report.  This  bill  would  permit  the  creation  of  a  bureau  of  farm  land 
banks  in  the  Department  of  the  Treasury  which  should  oversee  the 
organization  of  such  farm  land  banks,  any  one  bank  to  be  organized 
by  any  ten  persons  taking  shares  worth  $25  each  par  value,  capital  in 
any  one  case  not  to  be  less  than  $10,000.  The  fann  land  banks  would 
be  allowed  to  accept  and  pay  interest  on  deposits  to  an  amount  not 
exceeding  50  per  cent  of  capital  and  surplus,  and  to  make  loans  for  not 
more  than  thirty-five  years  secured  by  first  mortgages.  On  the  strength 
of  these  mortgages,  the  banks  would  issue  collateral  trust  bonds  secured 

268 


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NOTES  269 

by  the  first  mortgages  and  bearing  interest  at  a  rate  not  more  than  i  per 
cent  less  than  the  rate  on  the  mortgages  used  as  security.  In  defending 
its  proposal,  the  commission  sa3rs  that  it 

recognizes  that  too  great  ease  in  borrowing  should  not  be  encouraged,  since 
this  might  result  in  an  unreasonable  increase  in  farm  debt.  On  the  other  hand, 
it  should  not  be  forgotten  that  under  the  present  S3r3tem  tenancy  continues 
to  increase  and  farmers  have  outstanding  obligations  easily  exceeding  two 
bilHons  of  dollars  secured  by  mortgages  on  their  farms,  much  of  which  was 
negotiated  under  very  imfavorable  circumstances  and  with  very  high  rates  of 
interest.  It  is  believed  that  under  the  plans  which  have  been  formulated 
herein,  and  which  are  intended  to  be  supplementary  to  the  existing  system, 
tenancy  may  be  decreased,  the  needs  of  farmers  be  taken  care  of,  and  at  the 
same  time  the  outstanding  obligations  may  be  refunded  on  much  more  favor- 
able terms  and  gradually  reduced  by  the  regular  payment  of  small  annual 
instalments  impossible  under  the  genend  sjrstem  now  found  in  this  country. 

The  conmiission  also  reconmiends  and  provides  in  its  bill  for  a  lengthy 
S3rstem  of  repayment  of  loans  by  amortization.  Of  this  it  sa3rs  that  the 
investor  in  the  national  land  bank  bond  will  know  that  every  mortgage 
held  by  the  bank  of  issue  contains  a  mandatory  provision  for  amortiza- 
tion payments  so  that  when  the  land  bank  bond  held  by  him  falls  due, 
the  bank  will  have  received  in  cash  from  the  farmer  the  amount  of  the 
mortgage  held  by  the  bank  to  secure  such  national  land  bank  bonds. 
The  loan  to  the  farmer  will  have  to  be  for  not  less  than  five  years 
"because  the  amortization  principle  cannot  be  very  well  applied  to  a 
loan  for  a  shorter  period." 

PROBLEMS  OF  THE  NEW  BANKING  ACT 

The  Reserve  Bank  Organization  Committee  has  completed  its  tour 
of  the  country  for  the  districting  of  the  United  States  with  a  view  to 
the  establishment  of  federal  reserve  banks  and  is  now  prepared  to 
cconplete  and  announce  its  plans  for  such  districting.  The  districting 
cannot  be  forecast  imtil  such  time  as  the  work  of  analysis  of  the  testi- 
mony has  been  completed,  but  meanwhile  the  tour  of  inquiry  has  pro- 
duced certain  very  important  and  interesting  residts  bearing  upon  the 
problems  to  be  met  with  in  creating  the  reserve  banks.  These  are 
dearly  brought  out  by  the  records  of  the  hearings  in  the  various  cities. 
I.  It  has  been  foimd  that  one  of  the  most  serious  problems  to  be 
dealt  with  will  be  that  of  defining  and  describing  the  rules  to  be  followed 
in  rediscounting  conmierdal  paper.  Under  the  federal  reserve  act, 
the  Federal  Reserve  Board  is  given  the  right  to  describe  and  define 


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270  JOURNAL  OP  POLITICAL  ECONOMY 

this  commercial  paper  in  order  that  there  may  be  a  positive  control  of 
the  business  of  the  federal  reserve  banks.  In  the  course  of  the  hearings, 
much  attention  has  been  devoted  to  inquiries  concerning  the  nature 
of  commercial  paper  employed  in  the  several  districts  visited,  and  the 
possibility  of  altering  in  some  degree  the  methods  in  vogue.  It  has 
been  found  that  a  very  large  percentage  of  the  paper  presented  for  redis- 
count is  so-called  ^'single-name"  paper,  and  that  only  in  a  minority  of 
instances  is  the  traditional  two-name  paper,  protected  by  an  original 
signature  and  the  name  of  an  acceptor,  offered  to  the  banks.  The  ques- 
tion is  thus  presented  in  very  acute  form  whether  or  not  the  Reserve 
Board  will  be  able  at  the  outset  to  demand  the  use  of  actual  conunerdal 
pBpex  by  would-be  borrowers,  and  if  not  what  will  be  the  test  to  be 
applied  in  judging  of  an  '' actual  conunerdal  transaction" — ^it  being  the 
provision  of  the  act  that  paper  shall  be  rediscounted  only  when  it  is 
the  outgrowth  of  such  an  actual  transaction.  The  idea  of  requiring 
two  names,  it  is  now  apparent,  woidd  greatly  reduce  the  field  of  business 
open  to  the  federal  reserve  banks,  and  would  in  like  measure  reduce  the 
amount  of  relief  that  coidd  be  obtained  by  member  banks  that  were 
counting  upon  emplo3ang  the  discount  principle. 

2.  It  has  been  found  that  in  the  process  of  implying  the  reserve  act, 
one  of  the  most  significant  provisions  to  be  taken  account  of  will  be  that 
which  relates  to  the  new  S3rstem  of  clearings  provided  under  the  law. 
The  act  authorizes  every  federal  reserve  bank  to  act  as  a  clearing-house 
for  its  members,  while  it  also  permits  the  Federal  Reserve  Board  to  act 
as  a  clearing-house  for  all  reserve  banks  or  to  designate  some  one  reserve 
bank  to  act  as  a  clearing-house  for  all  of  the  others.  It  is  a{^>arent 
from  the  investigations  just  made  that  even  if  federal  reserve  banks 
become  members  of  the  clearing-houses  located  in  the  cities  in  which 
they  are  placed,  the  latter  institutions  will  be  likely  to  lose  much  of  their 
past  importance  and  significance.  The  organization  of  a  national 
clearing-house  will  obviate  the  necessity  of  shipping  funds  back  and 
forth  between  different  parts  of  the  country  and  will  consequently 
simplify  very  greatly  the  process  of  transmitting  and  offsetting  obliga- 
tions which  has  heretofore  been  an  eiq>ensive  element  in  the  national 
mechanism  of  payment. 

3.  The  hearings  have  disclosed  a  widely  prevalent  erroneous  belief, 
which  has  in  some  measure  been  corrected  by  the  discussions  at  the  va- 
rious places,  that  each  individual  district  would  have  trouble  in  taking 
care  of  its  own  necessities  because  of  ''seasonal"  demands  for  money. 
This  is  a  reminiscence  of  the  existing  banking  system  under  which  such 


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NOTES  271 

seasonal  demands  have  to  be  met  by  borrowing  cash  from  other  institu- 
tions located  elsewhere.  As  the  discussions  at  the  hearings  have  brought 
outy  one  of  the  main  purposes  of  the  new  law  is  that  of  providing  for  the 
furnishing  of  media  of  payment  as  a  direct  outgrowth  of  the  commercial 
transactions  to  which  they  relate  or  which  have  resulted  in  producing 
a  demand  for  such  means  of  payment.  The  point  has  been  made  very 
much  clearer  in  the  course  of  these  hearings  than  ever  heretofore,  that 
commercial  q[)erations  should  ^^  clear  one  another/'  that  is  to  say, 
should  furnish  their  own  means  of  pa3anent. 


"districting"  the  united  states 

Interesting  data  for  use  in  districting  the  country  under  the  new 
act  have  also  been  developed  in  considerable  quantity.  Some  of  the 
principal  points  that  have  been  made  are  as  follows: 

1.  Very  great  variation  in  the  size  of  districts  will  be  necessary 
in  order  to  bring  about  capitalizations  for  the  several  banks  which  will 
roughly  corre^>ond  with  one  another. 

2.  The  attempt  to  create  one  very  large  institution  or  a  small  num- 
ber— say  three  or  four — of  such  institutions  would  be  distinctly  unaccept- 
able to  the  rank  and  file  of  bankers  and  business  men,  whose  request  is 
for  more  rather  than  fewer  districts  and  reserve  banks. 

3.  Almost  necessarily,  in  view  of  the  present  distribution  of  banking 
coital,  the  Atlantic  seaboard  will  be  assigned  a  diq>roportionately 
large  number  of  the  banks,  while  the  Pacific  coast  will  in  all  probability 
be  given  but  one  and  the  Middle  West  a  relatively  small  number. 

4.  Comparatively  small  capitalizations  for  the  several  banks  would 
be  satisfactory  to  the  business  interests  of  the  western  districts,  so  that 
enormously  great  areas  will  not,  as  a  matter  of  fact,  have  to  be  included 
in  order  to  produce  a  greater  capitalization. 

5.  It  will  be  far  more  important  to  have  every  part  of  the  district 
within  easy  reach  of  the  head  office  of  the  reserve  bank  than  it  will  be 
to  increase  the  size  of  the  capitalization  somewhat— this  on  account  of 
the  fact  that  quick  clearing  and  absolute  knowledge  of  credit  conditions 
will  be  the  fundamentals  in  effective  banking,  while  the  capitalization 
is  a  matter  of  relatively  small  moment,  owing  to  the  fact  that  the  real 
strength  of  the  reserve  banks  is  found  in  their  holdings  of  reserve  funds 
and  not  in  their  capitalization. 

6.  The  geographical  areas  to  be  included  in  a  district  must  be  as 
nearly  as  possible  geographical  units  with  good  transportation  facilities. 


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272  JOURNAL  OF  POUTICAL  ECONOMY 

7.  Where  branch  banks  are  established,  it  should  be  only  in  recogni- 
tion of  the  existence  of  a  very  distinct  and  independent  business  section 
having  its  own  trade  customs  and  special  types  of  commercial  paper. 

8.  The  use  of  branch  banks  will,  however,  probably  have  to  be 
resorted  to  even  from  the  start,  in  order  to  meet  the  urgent  demands  of 
individuals  and  communities  desirous  of  having  their  own  paper  passed 
upon  by  local  men  who  are  familiar  with  the  transactions  out  of  which 
it  grows,  and  the  names  of  persons  who  are  concerned  in  producing  it. 

9.  While  national  banks  will,  in  the  great  majority  of  cases,  enter 
the  system,  and  while  some  trust  companies  and  savings  banks  will 
follow  their  example,  the  latter  classes  of  institutions  will  probably  not 
join  the  system  in  large  numbers  for  some  time  to  come,  pending  the 
definite  establishment  of  the  system. 

10.  There  will  be  considerable  diflference  as  between  the  diflferent 
parts  of  the  country  in  the  action  of  such  state  banks  and  trust  companies, 
it  being  likely  that  they  will  be  less  disposed  to  join  the  system  in  those 
cases  where  their  dealings  in  strict  commercial  paper  are  relatively 
small,  than  they  will  in  those  parts  of  the  coimtry  where  their  business 
is  more  nearly  on  a  parity  with  that  of  national  banks. 

THE  FIRST  REPORT  OF  THE  DEPARTMENT  OF  LABOR 

The  first  annual  report  of  the  Department  of  Labor  has  been  sent 
by  Secretary  of  Labor  W.  B.  Wilson  to  the  President  imder  date  of 
December  31,  although  its  appearance  has  been  delayed  until  far  into 
February  (First  Annual  Report  of  the  Secretary  of  Labor).  The  docu- 
ment is  of  large  interest  as  the  first  report  of  a  newly  organized  dq)art- 
ment,  and  also  as  an  indication  of  the  existence  of  a  new  element  in 
national  administration.  Without  doubt,  the  Department  of  Labor 
now  presents  itself  as  a  distinctly  trade-union  organization,  conceiving 
its  own  function  as  that  of  aiding  what  is  called  '^organized  labor." 
This  is  made  evident,  not  only  in  the  general  tone  of  the  report,  but  also 
in  the  actual  language  used.  Moreover,  although  the  department  was 
intrusted  at  the  time  of  its  organization  with  very  important  functions 
of  industrial  mediation,  the  report  shows  that  it  is  in  considerable  danger 
of  breaking  down  in  the  performance  of  these  fimctions.  Only  in  a  few 
of  the  less  important  labor  disputes  of  the  year  has  it  been  able  to  accom- 
plish results,  the  reason  being  that  the  enq>loyers  are  not  willing  to 
intrust  their  affairs  to  the  Department  of  Labor  under  its  present  trade- 
union  t3rpe  of  management,  nor  to  agree  to  be  bound  by  its  decisions  when 


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NOTES  273 

they  believe  that  its  methods  are  not  altogether  fair  and  that  its  point 
of  view  is  biased  in  favor  of  their  opponents.  The  situation  is  a  serious 
matter  because  of  the  fact  that  federal  mediation  in  labor  dilutes  has 
for  a  long  time  past  been  urged  as  a  means  of  escape  from  constant 
industrial  warfare  and  has  at  the  same  time  been  practiced  with  con- 
siderable success  in  railway  controversies  where  some  notable  settlements 
were  accomplished  during  the  last  few  years  of  the  Department  of  Com- 
merce and  Labor.  The  new  report  makes  it  evident  that,  instead  of 
advancing  and  strengthening  the  idea  of  mediation  and  conciliation, 
the  organization  of  a  distinct  Department  of  Labor  has  d^nitely  retarded 
the  growth  and  advancement  of  this  idea.  While  in  part  this  unfor- 
tunate outcome,  as  revealed  by  the  department's  first  annual  report, 
is  due  to  the  present  type  of  management  and  results  from  a  too  eager 
anziety  to  co-operate  with  trade-imions,  there  is  some  groimd  for  fearing 
that,  especially  under  the  influence  of  existing  precedents,  it  will  be 
difficult  to  place  this  branch  of  federal  administration  upon  a  non- 
partisan basis. 

FIRST  REPORT  OF  THE  CHILDREN'S  BUREAU 

In  conjunction  with  the  report  of  the  Department  of  Labor,  should 
be  considered  the  first  annual  report  of  the  Children's  Bureau  which 
began  operation  on  August  23,  191 2,  and  which  now  for  the  first  time 
reports  its  doings  for  a  full  fiscal  year.  The  Children's  Bureau  has 
always  been  sharply  opposed  by  those  who  have  objected  to  unreasonable 
extension  of  federal  activity  in  fields  that  are  distinctly  reserved  to  the 
several  states  and  that  afford  little  or  no  opportunity  for  actual  measures 
of  relief  for  bad  conditions.  The  Children's  Bureau,  according  to  its 
own  report,  is  now  foimd  to  have  been  at  work  almost  exclusively  on 
questions  of  child  labor  and  infant  mortality.  Child  labor  is  an  indus- 
trial condition  over  which,  as  practically  imiversally  admitted,  federal 
legislation  can  exert  no  influence.  Infant  mortality  is  a  statistical 
subject  which  has  long  been  dealt  with  in  the  Census  Bureau  and  for 
which  no  separate  investigative  machinery  is  needed.  The  report  of 
the  Children's  Bureau  thus  furnishes  another  quite  conclusive  indica- 
tion of  the  fact  that  recent  extensions  of  federal  bureaus  and  depart- 
ments are  not  resulting  in  correspondingly  increased  efficiency  but 
rather  the  reverse.  In  so  far  as  useful,  the  Children's  Bureau  appears 
to  be  of  service  primarily  as  a  statistical  organization  in  which  capacity 
it  is  manifestly  quite  unnecessary. 


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274  JOURNAL  OP  POLITICAL  ECONOMY 

DEVELOPMENT  OF  THE  NEW  ANTI-TRUST  BILLS 

The  new  anti-trust  bills  of  the  administration,  after  passing  through 
various  forms,  have  at  length  assimied  distinct  shape  as  four  me^ures 
introduced  by  Mr.  Clayton,  chairman  of  the  Judiciary  Conmiittee  of  the 
House  of  Representatives  (H.R.  121 20,  and  "Numbers  i,  2,  and  3, 
Committee  print  tentative  bill,"  63d  Cong.,  2d  sess.).  These  bills  sedc 
(i)  to  define  the  acts  to  be  r^arded  as  violative  of  the  anti-trust  law, 
(2)  to  grant  relief  to  individuals  who  have  been  injured  by  the  q)era- 
tions  of  trusts  or  by  discriminating  prices,  (3)  to  check  interlocking 
directorates,  and  (4)  to  create  an  interstate  trade  conmiission.  Hearings 
on  the  measures  have  been  undertaken  and  have  continued  steadily 
throughout  the  month  of  February  (Hearings  Judiciary  Conmiittee 
H.R.,  February,  1914).  Inspection  of  the  records  of  the  hearings 
shows  that  little  has  been  added  to  the  information  previously  availaUe 
with  regard  to  the  trust  question.  The  general  business  community 
has  shown  a  strong  disposition  to  avoid  the  hearing-room  and  most  of 
the  discussion  has  been  carried  on  by  lawyers,  recognized  lobbyists, 
so-called  "students"  of  the  trust  question,  and  interlopers  of  one  sort 
or  another.  Apparently  the  business  public  is  partly  indi£ferent  and 
partly  inclined  to  think  that  nothing  it  could  say  would  have  much 
influence.  The  general  drift  of  the  testimony  has  been  in  the  direction 
of  modifying  all  the  biUs,  and  particularly  of  introducing  changes  into 
the  exceedingly  broad  powers  which  were  proposed  for  the  interstate 
trade  conmiission.  By  the  original  bill  providing  for  an  interstate  trade 
commission,  almost  inquisitorial  authority  was  granted  to  this  body 
and  it  would  apparently  have  been  able  to  ascertain  and  publish 
almost  any  class  of  facts  it  chose  with  respect  to  trade  secrets,  personal 
business  affairs,  and  matters  of  purely  private  concern.  On  the  other 
hand,  both  the  administration  and  the  legislators  who  have  been  in 
charge  have  shown  a  very  distinct  disposition  to  modify  them  in  accord- 
ance with  the  criticisms  offered,  whenever  it  has  been  made  plain  that 
these  criticisms  were  well  founded  and  that  the  proposed  measures  would 
cause  difficulty.  The  process  of  modifying  the  biUs  has  been  especially 
significant  because  of  this  apparent  effort  to  shape  legislation  in  accord- 
ance with  the  actually  ascertained  disposition  of  the  public  at  large. 

FRAMING  A  CENSUS  OF  MANUFACTURES 

Preparations  for  the  taking  of  the  intermediate  or  five-year  census 
of  manufactures,  now  regularly  provided  for  as  a  feature  of  Census 
Bureau  work,  have  already  begun,  notwithstanding  the  fact  that  the 


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NOTES  275 

recurring  decennial  census  of  manufaxlures  is  only  barely  completed, 
owing  to  the  delay  incident  to  the  taking  of  the  last  census,  and  that 
its  data  have  not  even  as  yet  been  fully  published.  The  findings  of 
the  special  commission  named  by  Director  Harris  last  autimm  for 
the  purpose  of  reviewing  conditions  in  the  Census  Bureau  have  been 
carried  out  in  the  main,  and  have  resulted  in  absolutely  discarding 
considerable  masses  of  material  which  had  been  accumulated  during 
the  decennial  census  period.  In  the  e£Fort  to  avoid  a  repetition  of  the 
blimders  committed  in  the  decennial  census,  Director  Harris  is  now 
holding  conferences  with  busineiss  representatives,  conmiittees  of  com- 
mercial associations,  and  others  who  are  believed  likely  to  furnish  use- 
ful infoimation.  One  thing  that  is  being  especially  sought  is  a  better 
classification  of  industries  with  a  view  to  the  avoidance  of  the  mis- 
leading groupings  which  have  been  common  in  former  censuses.  It 
is  also  desired  to  eliminate  much  of  the  inaccurate  detail  which  in  other 
years  has  been  collected  as  a  basis  for  the  making  of  campaign  argu- 
ments with  reference  to  the  growth  and  development  of  manufactiuring 
under  protective  tariffs.  Within  a  comparatively  short  time  the  new 
schedules  for  manufactures  which  are  now  in  process  of  formulation 
will  have  been  completed.  If  they  are  simplified  according  to  present 
efforts,  the  compilation  of  the  statistical  results  will  presiunably  be 
quicker,  so  as  to  permit  the  publication  of  the  complete  census  of  manu- 
factiures  by  the  close  of  the  period  established  by  law.  Meanwhile, 
the  opening  of  this  new  undertaking  practically  marks  the  discarding, 
without  any  possibility  of  publication,  of  the  costly  mass  of  completed 
schedules  relating  to  many  subjects  collected  during  the  census  of  1910. 


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BOOK   REVIEWS   AND   NOTICES 


Business  Organization  and  Combination.    By  Lewis  H.  Haney. 

New  York:  Macmillan,  1913.    8vo,  pp.  xiv+483.    $2.00  net. 

Professor  Haney's  new  volume,  coming  soon  after  his  History  of 
Economic  Thoughiy  testifies  to  his  industry  and  versatility.  Taken  by 
itself  it  is  no  inconsiderable  achievement.  It  is  well  organized,  well  con- 
sidered, and  written  in  an  easy,  colloquial  style  which  only  occasionally 
becomes  di£fuse.  Its  title  may  mislead  some:  it  is  not  concerned  with 
the  internal  problems  of  organizing  a  business;  its  point  of  view  is  con- 
sistently that  of  public  policy.  In  short,  it  is  the  most  systematic 
treatise  which  has  yet  appeared  on  what  we  are  accustomed  to  liunp 
together  as  "corporation  and  trust  problems." 

Systematization  is  the  dominant  characteristic  of  the  book.  The 
author's  preface  suggests:  "If  the  book  has  any  merits,  one  of  them 
must  be  its  careful  definition  of  terms  and  its  accurate  classification  of 
forms."  Whether  these  features  of  the  book  will  be  credited  to  it  as 
merits  will  depend  somewhat  upon  the  habit  of  mind  of  the  reader.  The 
present  reviewer  admits  his  own  aversion  to  the  use  of  either  classifica- 
tion or  formal  d^nition  except  where  absolutely  indispensable  to 
clearness  in  exposition.  There  is  no  doubt  that  Professor  Haney  has 
elaborated  his  definitions  and  classifications  with  much  care,  but  many 
of  them  seem  to  lead  nowhere.  In  other  respects,  too,  the  book  is 
"systematic."  It  impresses  one  as  having  been  written  to  fit  a  table  of 
contents.  This  is  not  in  itself  groimd  for  criticizing  a  book  intended 
primarily  as  a  textbook;  but  it  is  only  fair  to  expect  that  a  book  written 
in  this  way  will  contain  a  good  many  perfimctory  pages.  Yet,  although 
there  is  not  much  that  is  new  in  any  large  sense  in  the  book  imder  re- 
view, there  is  a  liberal  measure  of  discriminating  analysis  and  of  care- 
fully balanced  conclusions. 

The  plan  of  the  book  does  not  give  scope  for  more  than  a  cursory 
discussion  of  the  problems  of  monopoly  or  of  the  history  and  present 
status  of  the  laws  against  restraint  of  trade.  Nor  is  much  attention  paid 
to  corporation  finance.  The  section  entitled  "Structure  and  Life  His- 
tory of  a  Typical  Business  Corporation  "  deals  very  largely  with  matters 
incidental  to  launching  or  reorganizing  a  corporation.    The  emphasis  of 

276 


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BOOK  REVIEWS  AND  NOTICES  277 

the  book  is  put,  wisely  enough,  upon  the  problems  relating  to  the  struc- 
ture and  control  of  various  forms  of  business  organization. 

In  Professor  Haney's  discussion  of  remedies  for  existing  evils  he 
distinguishes  more  clearly  than  most  writers  have  distinguished  between 
corporation  problems  and  trust  problems,  properly  so  called.  His  pro- 
posals for  reform  are,  for  the  most  part,  along  lines  which  have  generally 
conmiended  themselves  to  thoughtful  students  in  recent  years,  but  they 
are  worked  out  in  such  detail  (about  fifty  different  suggestions  are  made) 
that  they  cannot  be  considered  within  the  limits  of  a  review. 

The  book  is  not  without  indications  that  it  was  put  through  in  some 
haste.  The  account  of  the  origins  of  corporate  and  joint  stock  under- 
takings lacks  sureness  of  touch;  the  various  references  to  the  ''legal 
entity"  concept  do  not  indicate  an  acquaintance  with  the  more  weighty 
discussions  of  the  legal  nature  of  a  corporation;  and  at  a  few  points  there 
are  positive  slips.  To  haste  only  can  we  attribute  the  table  on  p.  44, 
purporting  to  show  "Statistics  of  the  German  Empire  on  the  Entre- 
preneurial Form  of  Industrial  Management."  The  table  really  gives 
merely  the  nimiber  of  "one-man  shops"  and  of  establishments  where 
help  is  employed.  Professor  Haney  has  mistranslated  the  rubrics  of  the 
Gennan  table  from  which  he  took  his  figures.  But  these  are  minor 
blemishes  on  an  excellent  book. 

Allyn  a.  Young 

Cornell  University 

Materials  for  the  Study  of  Elementary  Economics.  Edited  by  L.  C. 
Marshall,  C.  W.  Wright,  and  J.  A.  Field.  Chicago:  The 
University  of  Chicago  Press,  1913.    Large  8vo,  pp.  xvii+927. 

♦2.75- 

This  newest,  largest,  and  best  collection  of  illustrative  documents  and 
programs,  tables  and  charts,  extracts  from  federal  and  from  state  com- 
mission and  departmental  reports,  selections  from  trade  and  commercial 
newspapers  and  joumak,  and  excerpts  from  the  masters,  old  and  new,  is 
clearly  the  most  important  book  of  the  year  for  students  and  teachers 
of  economics. 

One  must  resort  to  statistics  to  describe  the  work.  It  contains  927 
large  octavo  pages,  which  bear  to  the  reader  no  less  than  267  separate 
illustrative  items,  varying  in  length  from  suggestive  quarter-page  tables 
to  a  thirty-five  page  compilation  from  the  National  Conservation  Com- 
mission. .  Over  two  himdred  tables  and  charts  are  scattered  through  the 
volume. 


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278  JOURNAL  OF  POLITICAL  ECONOMY 

The  selections  have  been  made  with  discrimination.  They  are 
varied,  fresh,  and  often  alluring.  While  laureled  authorities  among  the 
elders,  Adam  Smith,  Ricardo,  J.  S.  Mill,  and  others  are  allotted  brief 
space,  one  senses  that  the  editors  are  modems  of  the  modems  in  their 
live  interests.  Carver  and  Fisher,  Commons  and  Jenks,  Kinley  and 
Taussig,  Hobson  and  B5hm-Bawerk,  such  as  these  give,  throughout  the 
pages,  frequent  and  stimulating  witness  that  there  are  economic  giants 
in  these  days. 

One  senses  further  that,  in  tme  modernity,  the  authors  value  facts 
more  than  authority,  ancient  or  modem;  documents  more  than  opinions. 
An  invigoratingly  generous  space  is  granted  to  specimens  of  actual  cor- 
poration charters  and  bonds  and  stocks,  to  typical  bank  and  clearing- 
house statements,  to  official  reports  of  the  American  Federation  of  Labor 
and  extracts  from  wage-scale  agreements,  to  the  latest  National  Socialist 
platform  and  to  trade-imion  constitutions,  to  tables  of  bond  values  and 
birth-rates  and  the  recent  prices  of  eggs,  to  classifications  of  business 
failures,  of  occupations,  and  of  forms  of  wealth. 

Much  credit,  too,  is  due  the  editors  for  their  painstaking  and  most 
judicious  adaptations  and  compilations.  While  they  accredit  them- 
selves directly  with  but  a  ninth  or  tenth  part  of  the  items  presented,  their 
deft  hands  have  refashioned  to  greater  or  less  extent,  and  always  profit- 
ably for  the  reader,  many  of  the  extracts  accredited  to  others.  This 
feature,  too,  speaks  the  modem  respect  for  facts  and  essentiak.  Instead 
of  lazily  embodying  a  forty-page  article  in  its  entirety — ^platitudes,  pad- 
dings, and  all — the  editors  have  carefully  extracted  perhaps  six  or  eight 
pages  which  carry  to  the  reader  the  essential  thought  of  the  whole  article. 
This  careful  digesting  editorship  alone  made  it  possible  to  cover  so  wide 
a  range  of  topics  in  less  than  a  thousand  pages. 

The  arrangement  followed  is  conveniently  that  of  modem  texts  in 
economics,  adapting  the  volimie  well,  therefore,  for  companion  use  with 
any  good  modem  textbook.  It  opens  with  five  introductory  selections 
telling  man's  relation  to  nature  and  the  story  of  the  industrial  revolution. 
Then  come  in  order  the  following  topical  divisions,  the  numerals  indi- 
cating the  nimiber  of  selections  given  under  each  topic:  '^  Wants  and  the 
Means  of  Their  Satisfaction,"  11;  '^Natural  Resources  as  Economic 
Factors,"  7;  "Human  Beings  as  Economic  Factors,"  17;  "Capital 
Goods,"  10;  "Organization  of  Industry,"  22;  "Examples  of  Modem 
Capitalistic  Organization,"  21;  "Markets  and  Trading,"  7;  "Value," 
24;  "Money  and  Prices,"  22;  "Credit  and  Banking,"  14;  "Inter- 
national Trade  and  Foreign  Exchange,"   10;    "Tariff  Policies,"  7; 


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BOOK  REVIEWS  AND  NOTICES  279 

"Rent,"  8;  "Wages,"  6;  "Labor  Problems,"  25;  "Interest,"  7; 
"Profits,"  14;  "Public  Finance  and  Taxation,"  20;  "Some  Programs 
of  Social  Reform,"  10. 

While  the  topical  headings  are  mainly  those  of  a  theoretical  treatise, 
much  helpful  material  is  given  on  all  the  leading  problems  of  practical 
economics — ^immigration,  railroads,  trusts,  money,  rising  prices,  banking, 
tariff,  wages,  trade  unions,  insurance,  taxation,  and  socialism. 

The  book  is  well  printed  in  clear  type  on  good  paper,  and  substan- 
tially bound.  The  volume  would  be  more  useful  still  if  it  had  an  index, 
which  even  the  carefully  arranged  and  full  table  of  contents  does  not 
make  dispensable.  Perhaps,  too,  most  readers  would  appreciate  brief 
biographical  notes  after  the  names  of  authors  of  selections,  stating,  at 
least,  their  professional  or  business  positions. 

This  volume  is  so  valuable,  both  in  what  it  contains  and  in  what  it 
suggests,  to  all  teachers  and  students  of  economics,  that  their  sincere 
gratitude  is  due  to  this  trio  of  indefatigable  and  discriminating  editors, 
who,  after  years  of  practical  classroom  testing,  revising,  rejecting,  and 
selecting  anew,  have  in  this  volumie  so  acceptably  arranged  this  wealth 
of  illustrative  economic  material  approved  by  their  combined  experienced 
judgments.  They  have  made  a  very  real  contribution  toward  a  more 
scientific,  inductive  study  of  economics  wherever  their  volume  may  go. 

Walter  E.  Clark 
College  of  the  City  of  New  Yoke 


Statistics.  By  the  late  Sir  Robert  Giffen.  Written  about  the 
years  1898-1900.  Edited  with  an  introduction  by  Henry 
HiGGS,  assisted  by  George  Udny  Yule.  London:  Macmil- 
lan,  1913.    8vo,  pp.  xiii+485.    $3.00. 

Giffen's  SkUistics  is  a  handbook  treating  in  popular  fashion  the  vari- 
ous classes  of  statistics,  such  as  area  and  population,  imports  and  exports, 
agricultiural  statistics,  insurance  and  accident,  as  separate  topics.  The 
work  is  non-mathematical  and  non-technical;  it  does  not  deal  with  such 
topics  as  correlation  and  variation  which  have  been  so  largely  developed 
during  the  past  fifteen  years;  the  data  are  mainly  from  the  United 
Kingdom.  The  chief  virtue  of  the  book,  and  one  most  worthy  of  note, 
is  the  clearness  with  which  the  author  points  out  the  pitfalls  of  statistics. 
As  the  editor,  Henry  Higgs,  says  in  the  preface:  '^The  thoroughness 
with  which  he  interrogates  his  figures  and  all  they  stood  for  is  well 


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28o  JOURNAL  OF  POLITICAL  ECONOMY 

revealed  in  the  following  pages,  and  the  acuteness  of  his  reflections,  if 
not  so  easily  emidated,  is  informing,  stimulating,  and  suggestive." 
In  the  introductory  chapter  Giffen  states  it  to  be  his  purpose: 

to  deal  with  statistics  as  more  or  less  popularly  imderstood,  without  aiming  at 
any  exact  definition,  so  as  to  make  the  study  appear  the  more  logical  and 
scientific;  ....  to  describe  the  various  objects  for  which  the  various  branches 
of  statistics  are  intended;  ....  to  give  a  description  of  the  data  in  each 
branch  of  statistics  and  how  they  are  obtained;  and  also  an  account  of  the 
methods  of  computation  and  the  pitfalls  attending  the  compiler  and  the 
student;  ....  and  to  give  an  accoimt,  by  way  of  illustration,  of  some  of  the 
principal  facts  established  in  each  branch  of  statistics,  and  of  the  principal 
controversies  and  questions  which  statistics  have  been  in  fact  employed  to 
discuss. 

The  reviewer  agrees  with  the  author  when  the  latter,  in  considering 
what  topics  are  or  are  not  to  be  included  in  a  census,  concludes  in  favor 
of  the  limited  questionnaire  of  the  United  Kingdom  as  opposed  to  the 
extended  one  of  the  United  States.  "The  main  object  of  a  census," 
sa3rs  Giffen,  "shoidd  be  to  establish  the  nimibers,  sex,  age,  conjugal  con- 
dition, and  place  of  birth  of  the  people.  .  .  .  .  K  other  objects  are  to  be 
investigated,  I  should  be  disposed  to  recommend  that  there  should  be 
a  census  for  that  special  purpose"  (p.  24).  In  regard  to  the  census  of 
manufactures  of  the  United  States,  the  author  may  well  be  dubious  con- 
cerning the  acciuracy  of  such  items  as  "capitalization"  and  "profits" 

(p.  178). 

It  is  interesting  to  note  that  Giffen  holds  that  the  deductions  of 
Malthus  may  be  "in  the  long  run  the  more  important  to  study"  as  "we 
must  not  assume  that  the  special  experience  of  the  last  few  generations 
will  be  ind^nitely  continued"  (p.  42). 

It  would  be  well  if  our  mercantilistic  journalists  coidd  be  made  to 
absorb  the  ideas  presented  in  the  chapter  on  "Imports  and  Exports"  and 
especially  the  idea  that  "we  have  coimtries  at  the  present  time  like 
India  and  the  South  American  countries,  the  United  States,  Australasia, 
and  others,  which  are  beyond  question  in  the  position  of  being  perma- 
nently indebted.  In  such  cases  the  absence  of  an  excess  of  exports 
would  rather  require  to  be  remarked  upon  than  otherwise,  as  showing 
that  for  the  moment  the  countries  in  question  were  not  paying  the 
interest  which  they  owed,  but  were  really  borrowing  again"  (p.  94). 

The  author  holds  that  "to  a  careful  student  there  is  no  better 
barometer  of  the  oscillations  in  business"  than  railway  traffic  (p.  204). 
However,  he  does  not  tell  whether  the  traffic  peak  precedes,  follows,  or 


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BOOK  REVIEWS  AND  NOTICES  281 

coincides  with  the  maxiinuiii  business  activity.  As  a  matter  of  fact, 
maximum  traffic  is  reached  several  months  after  business  b^ins  to 
decline  and  hence  cannot  be  used  as  a  barometer  in  forecasting  conditions 
(see  New  York  Annalist^  January  5,  1914).  Bank  clearings  are  held  by 
him  to  be  good  indices  of  business,  their  main  defect  being  that  clearings 
do  not  include  checks  on  the  bank  in  which  they  are  deposited. 

The  barest  outlines  of  the  subject  of  index  numbers  are  given.  It 
was  undoubtedly  a  slip  of  the  proofreader  that  makes  the  author  say  that 
the  ratio  of  silver  to  gold  "has  become  more  nearly  10  to  i"  (p.  320). 
However,  the  incorrect  statement  that  "the  check  circulation  is  capable 
of  indefinite  increase  at  any  moment"  (p.  316)  must  be  ascribed  to  the 
author. 

Wakren  M.  Persons 

Colorado  College 


My  Life.  By  August  Bebel.  Chicago:  The  University  of  Chi- 
cago Press,  1913.    8vo,  pp.  343.    $2.00  net 

August  Bebel  died  in  the  month  of  August,  1913.  Two  years  before 
his  death  he  had  finished  the  second  volume  of  his  autobiography,  Aus 
tneinem  Leben.  In  the  preface  to  this  he  promised  a  third  volume  if  fate 
gave  him  life  and  the  necessary  strength.  So  far,  however,  there  has 
been  no  indication  of  his  having  found  time  to  picture  the  HeroenzeU  of 
his  party  before  he  was  called  by  death  from  the  leadershq>  of  the 
Socialist  party  of  Germany. 

Aus  meinem  Leben  is  an  account  of  Bebd's  life  up  to  the  year  1878, 
to  the  time  of  the  SaziaUsten  Gesetz.  The  first  volume  gives  a  striking 
picture  of  his  youth,  his  Wanderjakre,  his  interest  in  the  working-man's 
movement,  his  connection  with  Lassalle  and  Liebknecht.  The  catas- 
trophe of  1866  is  vividly  depicted,  and  Bebel's  personal  interest  and 
labor  in  behalf  of  the  trades-imion  movement  is  shown.  In  the  second 
volume  Bebel  presents  a  mass  of  material  relating  to  the  von  Schweitzer 
period;  strikingly  relates  his  ideas  about  the  Franco-Prussian  War; 
and  describes  his  incarceration  in  the  fortress,  his  life  as  a  prisoner, 
his  studies,  and,  in  conclusion,  his  election  to  the  Reichstag.  Through 
both  the  volumes  we  find  the  man  Bebel  on  every  page.  His  personality 
permeates  every  event.  We  feel  the  love  of  the  youth  for  his  parents, 
and  the  fierceness  of  the  agitator;  we  see  the  idealist,  with  his  belief  in 
the  cause,  and  the  tremendous  worker  for  his  fellow-Socialists.  It  is 
Bebd,  the  man,  who  is  writing,  just  as  he  was  talking  to  the  masses. 

The  English  edition  called  My  Life  is  an  altered  version  of  the  German 


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282  JOURNAL  OP  POLITICAL  ECONOMY 

Aus  meinem  Leben.  It  is  not  a  translation  by  any  means.  The  head- 
lines of  the  chapters  are  mostly  the  same,  though  some  are  changed  and 
some  left  out.  The  641  pages  of  the  original  are  condensed  to  336  much 
smaller  pages.  The  maker  of  this  ver^on — ^no  name  is  given — has 
sm^>ly  taken  the  main  thoughts  of  the  original  work  and  given  them  in 
his  own  words.  The  great  events  of  Bebel's  life  are  faithfully  recorded; 
but  there  is  no  exact  accoimt  of  his  life  and  labors,  and  many  of  the 
reprinted  documents  are  missing.  If  the  author  of  the  English  edition 
wished  merely  to  bring  the  fundamental  facts  of  Bebel's  life  before  the 
general  reader  he  has  fulfilled  his  purpose.  But  the  student  of  political, 
economic,  and  social  development  cannot  be  satisfied  with  this  rendering 
of  the  work.    He  must  consult  the  original. 

Hans  Gronow 
Uniyesstty  of  CmcAOo 


Potomac  Route  to  the  West.  By  Mrs.  Corra  Bacon-Foster. 
Washington:  Colxunbia  Historical  Society,  1912.  8vo,  pp. 
viii+267.    $3.00. 

This  book,  which  comprises  a  series  of  papers  read  by  the  author 
before  the  Columbia  Historical  Society,  is  divided  into  three  parts. 
The  first  part  deals  with  the  incorporation  of  the  Ohio  Company  and 
the  establishment  of  the  Nemacolin  Trail  as  the  first  organized  e£Fort 
to  reach  the  country  west  of  the  Alleghany  Moimtains  and  to  control  its 
trade  for  the  Patomac  route.  The  second  part  gives  an  account  of  the 
Patomac  Company  from  the  time  of  its  organization  in  1785  until  it 
was  taken  over  by  the  Chesapeake  &  Ohio  Canal  Company  in  1828, 
and  tells  of  its  efforts  to  make  the  Patomac  Route  the  leading  outlet  to 
the  West.  The  last  division  is  devoted  to  the  letters  of  Colonel  Charles 
Sinmis. 

The  style  of  this  collection  of  ps^rs  is  simple  and  pleasing  with  no 
effort  at  brilliancy.  Writing  of  an  early  period  whose  sources  of  histori- 
cal material  are  meager,  the  author  shows  rare  genius  in  the  body  of 
facts  she  has  collected  and  woven  into  her  narrative.  The  second  part 
is  valuable  for  the  side-lights  it  throws  on  (i)  the  jealousies  existing  in 
the  colonies,  and  later  in  the  states,  over  the  western  territory  and  its 
trade;  (2)  the  difficulties  attending  canal  and  lock  construction  at  a 
time  when  civil  engineering  was  in  its  infancy;  and  (3)  the  public  and 
private  life  of  such  men  as  Washington,  Jefferson,  Randolph,  Franklin, 
and  Morris.  The  last  part  is  illustrative  of  the  difficulties  of  land- 
holding  west  of  the  Alleghany  Mountains  on  accoimt  of  the  conflicting 


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BOOK  REVIEWS  AND  NOTICES  283 

claims  of  the  states.  The  book  is  a  permanent  contribution  to  the  politi- 
cal, industrial,  and  commercial  history  of  o\ir  coimtry,  and  is  a  fitting 
introduction  to  the  westward  movement  which,  precipitated  by  the 
incorporation  of  the  Ohio  Company  in  1748,  never  ceased  until  the  dis- 
appearance of  the  frontier  in  1880. 

B.  Walter  King 
West  Virginia  Univessity 


The  Supreme  Court  and  UnconsiUutianal  Legislation.  By  Blaine 
Free  Moore,  "Colimibia  University  Studies  in  History,  Eco- 
nomics, and  Public  Law,"  Vol.  LIV,  No.  2.  New  York:  Columbia 
University,  1913.    8vo,  pp.  158.    $1.00. 

This  monograph  is  an  exposition  and  criticism  of  the  most  important 
cases  in  which  the  United  States  Supreme  Court  has  exercised  the  power  of 
declaring  laws  unconstitutional.  It  contains  little  that  is  novel,  but  has  put 
in  succinct  form  much  that  has  been  written  of  recent  years  concerning  this 
power  which  the  courts  have  exercised  over  legislation. 

The  author  considers  the  origin  of  this  power,  first  in  the  state  courts  and 
then  in  the  United  States  Supreme  Court,  and  after  a  review  of  the  cases 
in  the  former  he  comes  to  the  conclusion  that  this  unique  ''assumption"  of 
power  by  a  branch  of  government  was  aggressively  and  boldly  claimed  by 
many  state  courts  contemporaneously,  without  the  foimdation  or  excuse  of 
constitutional  grant,  and  without  even  the  attempted  proof  that  the  power 
was  intended  to  be  implied  from  the  constitution  by  the  f ramers.  The  author 
finds  that  the  United  States  Supreme  Court  also  asserted  this  power  without 
even  an  atten^>ted  justification  by  the  quotation  of  state  or  national  precedents, 
and  that  while  the  court  was  somewhat  reluctant  early  in  its  existence  to  inter- 
fere with  state  governments  by  nullifying  acts  of  the  state  legislatures,  it  did 
this  with  little  compimction  at  a  somewhat  later  period.  Today,  the  author 
concludes,  the  coiurt  even  assumes  the  attitude  of  a  superior  disciplining  an 
inferior  when  it  declares  state  legislation  void.  This  has  been  one  of  the  sources 
of  criticism  of  the  court. 

In  analyzing  the  statutes  nullified  by  the  Supreme  Court  the  author  con- 
cludes that  Congress  has  not  been  very  seriously  checked  by  the  Supreme 
Court;  that  so  far  as  the  division  and  co-ordination  of  powers  goes,  very  little 
use  has  been  made  of  this  principle  except  to  protect  the  power  of  the  court 
itself;  that  so  far  as  the  dvil  rights  of  the  individual  are  concerned,  the  court 
has  efficiently  but  not  aggressively  protected  them;  that  in  questions  involving 
important  political  policy  the  court  has  uniformly  and  signally  failed;  and 
finally,  that  in  questions  afiFecting  social-economic  problems  the  court  has 
checked  Congress  in  a  few  well-known  instances,  but  not  generally.  The 
author  concludes  by  briefly  adverting  to  the  two  constitutional  remedies 


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284  JOURNAL  OF  POLITICAL  ECONOMY 

possible  if  the  court  should  be  f oimd  illibeial  in  the  present  crisis  in  social  and 
industrial  conditions,  i.e.,  constitutional  amendment,  and  proper  attention  to 
the  personnel  of  the  coiut  and  public  criticism  of  its  decisions.  His  conclusion 
is  that  neither  of  the  remedies  is  of  much  effect. 

Appended  to  the  volume  is  an  interesting  stmmiary  of  the  cases  in  which 
the  United  States  Supreme  Court  has  held  statutes  imconstitutional,  classified 
chronologically,  by  states  and  according  to  the  clauses  of  the  Constitution 
under  which  they  come.  It  is  worthy  of  note  that  in  but  thirty-three  cases 
have  statutes  of  the  United  States  been  held  tmconstitutional,  but  two  hundred 
twenty-three  state  statutes  were  voided  by  the  Supreme  Court. 


The  Economic  Utilization  of  History,  By  Henry  W.  Farnam.  New 
Haven:  Yale  University  Press,  1913.  i2mo,  pp.  viii+220.  $1.25 
net. 

The  economic  utilization  of  history  signifies  the  application  of  experi- 
mental methods  to  economic  phenomena  with  the  intent  to  discover  general 
economic  laws.  It  differs  from  the  economic  interpretation  of  history  which 
emphasizes  the  historical  element  and  is  often  merely  descriptive,  and  it  is  of 
far  bigger  import  than  single  isolated  experiments  in  social  policy.  Neither 
of  these  other  efforts  seeks  the  determination  of  scientific  laws.  It  is  the 
author's  contention,  however,  that  by  methods  directly  analogous  to  the 
experimental  methods  of  other  sciences  economic  laws  can  be  formulated 
which  may  be  the  bases  for  scientific  action,  particularly  as  relates  to  economic 
pathology. 

It  is  true  that  investigators  cannot  deliberately  institute  economic  experi- 
ments, but  it  is  also  true  that  the  exigencies  of  dynamic  life  are  continually 
forcing  upon  society  every  sort  of  new  procedure.  It  is  the  part  of  the  student 
to  observe  these  trial-and-error  methods,  and  to  furnish  the  machinery  which 
shall  collect  and  anal3rze  all  available  material.  In  its  widest  and  most  prac- 
tical application  as  concerns  the  affairs  of  a  nation  or  of  the  world,  this  theory 
demands  the  fullest  utilization  of  all  educational  activities,  it  necessitates 
co-operation  between  all  social  agencies  and  all  state  agencies— l^slative, 
investigative,  and  administrative;  it  exacts  the  most  minute  details  while 
pr(^>osing  the  hi^^est  aims.  The  author  believes  that  the  United  States,  with 
its  various  states  legislating  independently  and  under  constantly  changing 
conditions,  offers  a  field  of  peculiar  value  for  just  this  sort  of  experimentation. 

Tlie  application  of  laboratory  methods  to  special  phases  of  economic 
activity  is  not  new;  it  is  the  breadth  of  the  amplication  here  outlined  that 
brings  the  stimidating  thought  to  the  reader.  Though  countless  controver- 
sial points  and  diffiodties  suggest  themselves,  nevertheless  the  conception 
embodies  a  practical  idealism  which  presents  a  working  basis  for  social  phi- 
losophy. It  was  with  this  theory  in  mind  that  Professor  Famam  has  viewed 
his  work  with  the  American  Association  for  Labor  Legislation,  the  Connecticut 


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BOOK  REVIEWS  AND  NOTICES  285 

Conference  of  Charities  and  Corrections,  and  other  public  organizations.  The 
latter  chapters  of  the  book,  composed  in  the  main  of  presidential  addresses 
before  these  societies,  are  developments  of  the  idea  in  its  relations  to  contem- 
porary life.  It  is  interesting  to  note  the  actual  achievements  toward  the 
desired  ends  that  have  been  witnessed  in  the  three  or  four  years  since  these 
addresses  were  made.  Tlie  present  trend,  consciously  or  tmconsciously,  is 
undoubtedly  in  the  direction  of  scientific  procedure. 

Professor  Famam  but  sketches  the  outline  of  his  theory;  his  book  is  by  no 
means  an  exhaustive  discussion  of  the  subject  and  may  even  seem  inadequate. 
But  the  principle  established  gives  a  new  value  to  many  of  the  fragmentary, 
groping  efforts  of  society. 


Labor  and  Administration,    By  John  R.  Commons.    New  York:  Mac- 

millan,  1913.    8vo,  pp.  ix+431.    $160. 

The  student  of  labor  problems  is  today  confronted  with  the  fact  that  the 
ideab  of  labor  of  the  past  decade,  whether  embodied  in  laws  or  in  imions,  have 
not  been  rewarded  with  full  attainment.  Labor  laws  have  become  dead  letters 
and  the  ground  gained  by  hard-won  strikes  has  been  lost.  Too  much  confi- 
dence was  placed  in  the  efficacy  of  empty  standards  and  abstract  rights,  aild 
too  little  attention  directed  to  the  problems  of  interpreting  and  enforcing  laws 
whose  power  for  good  depended  largely  upon  the  manner  in  which  they  were 
administered.  The  failure  of  preparatory  legislation  and  newly  organized 
imions  to  secure  permanently  the  gains  attained  during  a  burst  of  enthusiasm 
has  weakened  the  faith  of  some  of  the  ardent  ''friends''  of  labor  in  laws  and 
unions.  There  are  others  who,  with  the  knowledge  of  actual  conditions,  see 
a  field  for  constructive  work  in  the  drafting  and  enforcement  of  laws  and  in 
the  everyday  problems  of  wage-bargaining.  This  is  the  field  which  Mr.  Com- 
mons has  marked  out  for  the  utilitarian  idealist.  It  is  the  unifying  concept 
of  this  collection  of  articles.  ''These  are  the  awakening  questions  of  the  past 
decade  and  the  subject  of  this  book.  Attention  is  being  shifted  from  laws  to 
the  means  of  enforcing  them — ^f rom  strikes  to  unions  that  safeguard  the  gains — 
from  the  rights  of  labor  to  the  protection  of  its  rights." 

The  great  importance  of  investigation  and  research  in  this  new  field  has 
been  recognized  in  Wisconsin,  and  a  vital  connection  between  ideab  and  effi- 
ciency, between  the  theories  of  the  university  and  the  practice  of  the  business 
community,  has  been  established.  The  questions  that  confront  the  leaders  of 
the  school  of  social  efficiency  are  those  of  the  application  of  scientific  principles 
to  materialistic  production  with  a  view  to  the  lasting  improvement  of  the  con- 
dition of  the  working  classes  and  to  a  larger  social  output.  In  this  program 
the  necessity  of  continuous  organization  of  labor  is  emphasized.  The  labor 
policy  of  capitalistic  trusts,  the  pressure  exerted  by  the  efficiency  engineer  to 
lower  the  cost  of  production,  and  the  competition  between  departments  of  the 
same  business  to  increase  efficiency  aU  ignore,  if  they  do  not  repress,  the  human 


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286  JOURNAL  OF  POLITICAL  ECONOMY 

factor  in  production.  A  progressive  organization  of  labor  must  be  maintained 
if  the  individuality  of  the  workman  is  to  be  preserved  and  the  highest  efficiency 
of  government  to  result. 

The  constructive  problem  of  the  utilitarian  idealist  ''is  not  so  much  the 
law  in  its  abstract  rights,  as  administration  and  its  concrete  resultsr— not  so 
much  the  struggle  of  a  class  to  dominate  others,  as  a  working  partnership  of 
classes  in  government  and  industry — ^not  so  much  the  spectacular  wage- 
bargaining  of  strikes,  as  the  continuous  organization  of  c^>ital  and  labor  for 
dealing  justly  with  the  millions  of  little  wage-bargains  that  begin  and  end 
every  day." 

Pressing  Questions.  By  A.  H.  Macemurdo.  London  and  New  York: 
John  Lane  Company,  1913.    i2mo,  pp.  xxi+342.    $1.25  net. 

The  main  questions  here  discussed  are ''  Profit-sharing," ''  Female  Suffrage," 
and  ''Electoral  Reform."  Tlie  book  can  be  neither  wholly  praised  nor  wholly 
condemned.  It  contains  many  good  thoughts,  which  are,  unfortunately, 
pooiiy  discussed.  Our  present  capitalistic  system,  the  author  contends,  is 
bad.  The  evils  of  the  day  are  caused  by  the  facilities  afforded  for  the  making 
of  profit  without  doing  a  day's  work  to  win  it.  Tlie  remedy  is  profit-sharing 
rather  than  a^>artnership.  In  copartnership  the  wage-earner  becomes  an 
investor  with  the  capitalist,  thus  adding  an  additional  force  to  burden  the 
consumer  who  is  the  wage-earner's  comrade.  In  profit-sharing  more  justice 
is  to  be  secured  for  the  wage-earner,  not  by  "altering  the  form  of  control,  but 
by  lifting  the  nature  of  the  Controller  by  proper  insistence  upon  his  duties" 
to  the  men  who  serve  him  and  to  the  coimtry  that  shelters  him. 

As  to  "female  suffrage"  Mr.  Mackmurdo  is  opposed  to  it.  But  his  argu- 
ments against  it  are  not  very  convincing.  In  his  discussion  of  the  "electoral 
reform,"  he  appears  to  be  on  more  familiar  groimd.  He  b  a  Bebhazzar  who 
has  seen  the  handwriting  on  the  wall,  but  needs  no  Daniel  to  interpret  it  for 
him.  He  says  in  discussing  the  present  evils  of  dass  legislation  in  the  House 
of  Commons:  "This  evil  will  be  intensified  in  the  near  future  when  'labour' 
is  the  dominant  power  in  the  House;  and  dominanl  it  must  become  by  the  simple 
operation  of  our  present  electoral  system."  He  decries  the  time  when  the  ind£- 
cient  laborer  will  become  the  ruling  power  of  the  nation;  though  just  why,  he 
does  not  very  luminoiisly  explain.  As  a  remedy  to  our  inefficient  social  system 
he  argues  for  an  equal  representation  of  management  and  labor,  each  voting 
for  his  own  candidates,  the  candidates  to  be  elected  by  indirect  baUot. 

There  is  a  brief  chapter  on  ownership  in  which  ownership  in  the  higher 
sense  is  defined  as  "usage."  Ownership  does  not  reside  in  possession.  It  is 
not  titular.  Naturally,  then,  the  s^peal  b  to  the  nobler  nature  in  man  for 
social  betterment.  Thb  might  commend  itself  to  the  theologian,  but  hardly 
to  the  day  laborer. 


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BOOK  REVIEWS  AND  NOTICES  287 

The  TriOh  about  the  Railroads.  ByHowASDEixioxr.  Boston:  Houghton 

Mifflin  Co.,  1913.    16  mo,  pp.  xxii+260.    $1 .  25. 

This  book  is  not  a  systematic  treatment  of  the  present  status  of  the  rail- 
roads, but  is  for  the  most  part  a  collection  of  addresses,  delivered  at  different 
places  and  even  on  different  topics  though  mainly  in  defense  of  the  railroads. 
Almost  the  same  data  and  arguments,  consequently,  appear  again  and  again. 
There  is  too  much  repetition  and  irrelevancy.  Mr.  Elliott  certainly  goes 
beyond  the  limit  of  his  sphere  when  he  enters  into  the  realm  of  agricultural 
history  and  when  he  dictates  the  S3rstem  of  instruction  for  the  development 
of  good  citizenship. 

The  main  purpose  of  the  author  is  to  educate  the  public  on  the  actual  facts 
about  railroads  and  the  difficulties  they  have  to  labor  under,  and  in  these 
req>ects  he  handles  the  problems  quite  successfully.  He  attempts  to  prove 
statistically  the  cheapness  and  superiority  of  the  railroads  in  the  United  States 
and  shows  that  in  spite  of  the  immense  service  of  the  railroads  in  the  develop- 
ment of  this  country  in  the  past  and  of  their  great  importance  in  the  present, 
they  have  been  hampered  by  the  state  and  federal  regulations.  "The  2-cent 
maximum  fare,"  Mr.  Elliott  contends,  "is  unjust,'*  as  it  does  not  enable  the 
railroads  even  to  realize  the  expense  of  the  passenger  trains,  the  loss  being  24 
cents  per  train  mile  in  1908.  It  is  no  wonder  that  the  average  net  return  from 
railroads  scarcely  exceeds  4^  per  cent.  Under  such  circumstances,  it  has  been 
almost  impossible  for  railroad  companies  to  get  further  capital,  which  is  essen- 
tial for  preventing  the  deterioration  of  the  existing  lines  as  well  as  for  bringing 
out  improvements  along  with  the  growing  social  and  economic  necessities  of 
the  country. 

Mr.  Elliott  bespeaks  fair  treatment  of  the  railroads  at  the  hand  of  both  the 
public  and  the  government.  Railroads  must  have  as  much  freedom  m  the 
management  of  their  own  affairs  as  any  other  legitimate  business,  if  they  are 
expected  to  meet  efficiently  the  growing  needs  of  the  country. 


The  Tyranny  of  the  Country  Side.    By  F.  E.  Green.    London:    T. 
Fisher  Unwin,  1913.    8vo,  pp.  x+261.    $$. 

This  volume  deals  with  the  darker  side  of  rural  England  where  the  condition 
of  the  agricultural  laborer  is  shown  to  be  worse  than  that  of  the  dwellers  in  the 
alums  of  the  great  cities  of  that  kingdom.  The  lack  of  logical  treatment  and  the 
insufficiency  of  the  statistical  data  have  been  compensated  for  by  the  local 
color  and  personal  touch  obtained  by  contact  with  the  actual  life  in  a  dozen 
different  cotmties.  Rural  housing  conditions  are  wretched.  The  cottages  are 
often  dark  and  dilapidated  and  have  a  very  poor  water  supply.  The  weekly 
wages  of  the  peasants  are  as  meager  as  possible.  Though  the  Board  of  Trade 
gave  the  figure  175. 6d.  as  the  average  for  agricultural  labor  in  1907,  the  careful 


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288  JOURNAL  OF  POLITICAL  ECONOMY 

studies  of  three  other  authorities  find  it  to  vary  from  us.  to  145.  in  Oxford- 
shire, Bedfordshire,  Northamptonshire,  and  Gloucestershire.  In  many  cases, 
a  peasant  gets  only  85.  a  week.  In  spite  of  these  low  wages,  he  is  often 
rackrented. 

The  worst  feature  of  all  is  the  loss  of  freedom.  "A  man  must  not  think  for 
himself  in  a  village.  If  he  does,  he  invites  beggary"  (p.  88).  "For  the 
ordinary  cottager  to  complain  to  the  landlord,  agent,  or  sanitary  authority,  is 
to  court  inmiediate  eviction"  (p.  175).  The  English  agricultural  labor  is  "the 
worst  used  and  least  bold  in  Europe." 

There  are  different  laws  and  associations  for  the  elevation  of  the  condition 
of  English  peasants,  such  as  the  Rural  Magna  Charta  of  1894,  Housing  Act, 
Small  Holding  Act,  National  Land  and  Home  League,  etc.,  but  the  poor 
peasant  can  scarcely  take  advantage  of  them.  He  has  not  enough  capital  to 
start  a  farm  under  the  Small  Holding  Act.  If  he  has,  he  can  scarcely  make 
his  application  reach  the  proper  authority  through  the  intricacies  of  official- 
dom. In  the  case  of  failure,  which  is  frequent,  he  is  evicted.  The  very 
thought  of  such  a  fate  naturally  makes  him  timid  and  he  bears  his  miseries 
silently. 


The  Land  and  the  Commonwealth.  By  T.  E.  Marks.  London:  P.  S. 
King  &  Son,  1913.    8vo,  pp.  xxv+314.    $3. 

The  time  is  quite  opportune  for  the  appearance  of  books  on  the  English 
land  system,  and  this  is  only  one  of  the  many  that  have  recently  passed  through 
the  English  press.  Excepting  perhaps  the  Irish  Home  Rule  Bill,  there  is  today 
no  question  of  more  vital  importance  to  the  English  public  than  the  land  reform 
scheme  of  Mr.  Lloyd  George.  Some  of  Mr.  Marks's  suggestions  as  to  the 
reform  are  quite  in  harmony  with  the  intentions  of  the  British  Chancellor 
of  Exchequer.  The  author  handles  the  subject  ably  and  interestingly,  with 
opulence  of  information  and  mastery  of  detail. 

From  an  economic  consideration  of  the  land  system  Mr.  Marks  concludes 
that  the  sport  and  pleasure  of  landlords  are  detrimental  to  the  interests  of  the 
farmers  and  the  prosperity  of  the  nation.  The  immitigated  sufferings  of  agri- 
cultural laborers  and  the  unjust  and  imnecessary  restrictions  on  farmers  are  the 
real  causes  of  rural  depopulation.  The  monopoly  and  oppression  of  private 
landlordship  obstruct  the  social  and  industrial  development  of  rural  and  urban 
people  alike.  The  injustice  of  large  private  estates  and  of  the  present  leasehold 
and  rating  systems,  and  the  disadvantages  of  estates  held  under  settlements, 
trust  indentures,  and  mortgages  are  discussed  in  great  detail.  Almost  all  the 
land  laws  of  the  past  and  some  of  even  recent  dates  have  been  enacted  to  secure 
the  interests  of  landlords;  and  though  the  last  thirty  years  have  seen  numerous 
parliamentary  acts  for  the  protection  of  rural  and  urban  tenants  and  for  the 
betterment  of  their  condition,  inadequate  administration,  mostly  through 
interested  persons,  has  not  brought  full  benefit  to  the  persons  concerned.    The 


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BOOK  REVIEWS  AND  NOTICES  289 

remedy  lies  in  the  establishment  of  Land  Courts  for  the  judicial  fixing  of  rents. 
But  the  real  reform  which  the  author  advocates  consists  in  the  gradual 
acquisition  of  land  by  the  state  at  fair  prices. 


The  Old  Fashioned  Woman.  By  Elsie  Clews  Parsons.  New  York: 
Putnam,  1913.    8vo,  pp.  vii+373.    $1 .  50  net. 

The  author  seeks  in  this  book  to  trace  and  define  the  links  that  bind 
present-day  customs  and  habits  of  thought  in  regard  to  women  with  primitive 
customs  and  habits  of  thought. 

It  may  startle  the  modem  woman  and  her  champions  and  her  opponents 
to  discover  how  like  she  is  to  the  old-fashioned  woman  in  much  that  marks  her 
position  in  society,  and  to  realize  that  many  of  our  most  deeply  ingrained  tra- 
ditions as  well  as  our  most  seemingly  artificial  conventionalities  are  but  sur- 
vivab  of  primitive  notions  which,  modified  in  one  way  or  another,  have  come 
down  through  the  centuries.  The  instinctively  apologetic  attitude  toward 
girl  babies,  the  exaggerated  prominence  of  the  young  girl  as  she  approaches 
marriageable  age,  the  importance  of  the  mother,  but  the  necessity  of  repressing 
her  that  she  may  feminize  neither  men  nor  society,  the  more  exacting  standards 
for  women  than  for  men  in  all  the  properties  of  life,  woman's  subordination  to 
man  in  family,  religious,  social,  political,  and  industrial  relations,  all  these 
social  attitudes  and  customs  may  be  illustrated  from  both  early  and  modern 
life.  The  examples  and  comparisons  in  the  book,  drawn  from  every  age  and 
every  land,  show  the  widest  of  ethnological  study,  and  form  a  real  contribu- 
tion to  one  phase  of  our  knowledge  of  social  origins. 

The  author  may  indeed  be  "forgiven  for  adding  to  the  already  dispro- 
portionate bibliography  on  woman,"  especially  as  she  dares  occasionally  to 
lift  the  veil  of  solemnity  with  which  most  writers  feel  it  necessary  to  enshroud 
the  subject.  It  is  to  be  doubted,  however,  if  even  "this  ethnological  inkling 
of  themselves"  will  serve  to  alter  the  views  of  either  feminist  or  anti-feminist 
or  to  reconcile  their  differences.  The  one  will  emphasize  the  folly  of  habits 
of  thought  bred  in  ancient  days;  the  other  will  feel  that  age-long  and  appar- 
ently instinctive  practice  dignifies  his  creed. 


The  Origin  of  Property.  By  Jan  St.  Lewinski.  London:  Constable 
&  Co.,  Ltd.,  1913.  8vo,  pp.  xi+71.  35.  6d.  net. 
Within  the  compass  of  this  little  book  Mr.  Lewinski  draws  together 
the  results  of  some  very  significant  investigations  into  the  origin  of  private 
property.  No  pretense  is  made  at  fulness  of  detail.  However,  the  copious 
footnotes  indicate  to  the  reader  the  wealth  of  literature  dealing  with  the  devel- 
opment of  the  forms  of  land  holding.  The  references  include  such  standard 
works  as  Sir  Henry  Maine's  Village  Communities  in  the  East  and  West,  Baden- 
Powell's  Land  Tenure  in  India,  £.  de  Laveleye's  De  la  propriitS  et  ses  formes 


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290  JOURNAL  OF  POLITICAL  ECONOMY 

primUives,  and,  among  studies  in  the  Gennan  langtiage,  Dr.  Victor  Utz's  Die 
BesUsoerhdltnisse  der  Tartar enbauem  im  Kreise  Simferopol,  Maurer's  Einleihmg 
zur  Gesckichte  der  Mark-,  Hof-,  Dorf-,  Stadtverfassung,  Tschuprow*s  Die  PM- 
gemeinschafi,  and  Simkhovitch's  Die  Feldgemeinschafl  in  Russland,  The  latest 
distinct  advances,  however,  in  the  knowledge  of  this  subject  are  to  be  found 
in  the  untranslated  studies  of  Russian  village  communities  by  such  Russian 
authors  as  Kachorow^,  Shvetzow,  Shcherbina,  Segal,  Pawlow-Silwanskij, 
Grodekow,  Bolshakow,  Harusin,  Dubienskij,  Efimenko,  Lichkow,  Krol, 
Rumianzew,  and  Kaufman.  Mr.  Kaufman's  work  entitled  Ruskdia 
Obshchina  (The  Russian  Village  Commtmity)  is  considered  of  unusual  merit  by 
Mr.  Lewinski. 

A  review  of  the  data  gathered  in  these  intensive  studies  of  the  widely 
scattered  survivals  of  a  primitive  stage  of  life  leads  the  author  to  the  conclu- 
sion that  the  whole  evolution  of  private  property  is  traceable  to  four  basic 
principles  of  tmiversal  application  and  that  special  racial  differences  have 
been  without  significance. 

The  Ultimate  Solution  of  the  American  Negro  Problem.    By  Edward 

Eggleston.  Boston:  Richard  G.  Badger,  1913.  8vo,  pp.  285. 
$1 .  50  net. 

The  solution  of  the  American  negro  problem  still  puzzles  the  American 
nation.  Theories  like  " the  extermination  of  the  weak  by  the  strong,''  "whole- 
sale deportation  through  the  government,"  ''segregation  like  the  Amerind," 
etc.,  have  been  found  wanting,  and  now  comes  Mr.  Eggleston's  optimistic 
assurance  of  the  ultimate  solution. 

The  first  six  chapters  of  this  book  aim  to  explain  the  n^ro's  origin  and 
descent,  and  the  quality  of  his  mind  and  character.  The  remaining  fourteen 
chapters  deal  with  negro  slavery  in  America,  negro  criminality,  negro  education, 
and  the  natural  solution  of  the  problem.  The  author,  with  optimistic  assurance, 
buOds  his  whole  argument  around  the  mental  inferiority  of  the  negro  race.  He 
points  out  the  negro's  tendency  to  commit  crime,  and  presents  statistics  show- 
ing a  decline  of  7 . 7  per  cent  in  population  since  1890.  He  firmly  believes  that 
disease,  incapacity,  and  white  competition  will  ultimately  eliminate  the  black 
race,  and  that  no  amount  of  white  intervention  in  the  negroes'  behalf  will 
be  effectual. 

The  book  is  written  in  simple  and  dispassionate  style  for  popular  reading. 
It  presents  nothing  really  new  and  its  calm  assiunption  of  the  ultimate  natural 
solution  may  well  be  doubted.  Withal,  it  is  worth  reading  by  those  who  look 
to  other  ways  of  solving  the  problem. 

Social  Work  in  Hospitals.    By  Ida  M.  Cannon.    New  York:  Survey 
Associates,  Inc.,  1913.     i2mo,  pp.  xii+260.    $1.50. 
The  Russell  Sage  Foundation  is  putting  out  this  description  of  a  new  form 

of  social  service  by  one  of  the  pioneers  in  the  movement.    The  work  was  b^;un 


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BOOK  REVIEWS  AND  NOTICES  291 

in  1905  when  the  Massachusetts  General  Ho^ital  instituted  the  first  social 
service  department  of  a  ho^ital  for  the  purpose  of  making  more  effective  its 
medical  work.  It  is  the  object  of  these  dq>artmentSy  through  co-<^)eration 
with  the  public  and  private  social  agencies  of  the  dty  and  through  knowledge 
of  the  purposes  of  medical  treatment  administered  in  the  ho^itab  and  dis- 
pensaries to  which  they  are  attached,  to  make  possible  the  carrying-out  of 
the  physicians'  plans  where  otherwise  financial  disability,  ignorance,  or  care- 
lessness would  prevent  such  results.  As  the  writer  says,  it  is  their  purpose  to 
make  of  those  who  come  to  the  hospitab  physically  dependent,  people  who  will 
be  selfKiq)endent  in  every  respect.  The  record  of  accomplishment  which  she 
gives  is  a  veiy  interesting  one,  as  are  also  the  possibilities  for  future  work. 
There  is  especial  significance  in  her  statement  that  this  work  is  more  satis- 
factory than  much  of  the  general  social  work,  because  the  worker  here  feels 
that  something  is  being  done,  at  least  for  the  physical  ills  of  her  charges,  so 
that  she  is  not*  so  constantly  confronted  with  the  consciousness  of  a  miserable 
situation  which  she  is  absolutely  powerless  to  alleviate.  Yet  this  is  true  in 
only  certain  phases  of  the  work;  in  others,  such  as  cases  of  habitual  alcoholism, 
little  success  has  been  attained. 


Studies  in  Trade  Unionism  in  the  Custom  Tailoring  Trade.  By  Charles 
Jacob  Stowell.  Bloomington,  111.:  The  Joume3anen  Tailors' 
Union  of  America,  1913.    8vo,  pp.  166. 

The  writer  prefaces  this  thesis  with  the  statement  that  it  is  intended  to 
form  the  basis  for  a  more  extended  study  in  the  same  subject.  One  might 
well  wish  him  to  venture  such  an  undertaking  with  the  great  amount  of  infor- 
mation which  is  here  stored  in  its  crude  state.  The  appendices  and  statistics, 
which  begin  on  p.  79,  contain  very  interesting  and  suggestive  data  covering 
practically  the  whole  period  of  organized  labor  in  the  tailoring  trade.  Yet 
comparatively  little  use  has  been  made  of  them  in  the  interpretative  portion 
of  the  study.  On  the  other  hand,  the  whole  first  chapter  is  given  over  to  a 
history  of  the  tailoring  trade  which  deals  largely  with  early  English  conditions 
not  exactly  relevant  to  a  study  of  trade  tmionism.  On  the  whole  the  most 
satisfactory  part  of  the  book  is  the  appendices  where  occasional  interpretative 
notes  give  some  insight  into  the  instructive  possibilities  of  such  a  study. 


Modern  Cities,    By  Horatio  M.  Pollock  and  William  S.  Morgan. 

New  York:  Funk  &  Wagnalls  Co.,  1913.    8vo,  pp.  x+418.    $1 .  50 

net. 

In  this  interesting  and  instructive  volume  the  authors  have  tried  to  give 
us  "the  best  modem  features  and  ideab  of  mtmidpal  life  without  burdening 
the  pages  with  details."  The  discussion  of  the  rapid  growth  and  develop- 
ment of  our  modem  cities  is  followed,  natmrally,  by  consideration  of  the 
problems  that  arise  therefrom,  such  as  dty-planning,  housing,  streets,  and 


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292  JOURNAL  OF  POLITICAL  ECONOMY 

parks.  The  different  forms  of  municipal  government,  and  municipal  home 
rule  are  then  taken  up  along  with  the  work  of  our  public  schools  and  the 
chiurch  in  municipal  life.  The  authors,  having  spent  the  summer  of  1910  in 
Europe  studying  mtmicipal  life  there,  give  many  references  to  the  govern- 
ment and  management  of  Eiiropean  dties.  Especially  is  this  true  in  the 
planning  of  dties,  parks,  streets,  and  industrial  education.  As  a  further  aid 
in  this  direction  the  book  is  well  illustrated.  The  account  is  a  stimulating  one, 
interestingly  written,  and  shotdd  appeal  to  the  general  reader. 


An  Agricultural  Faggot.  By  R.  H.  Rew.  London:  P.  S.  King  &  Son, 
1913.    8vo,  pp.  x+i83.    55. 

The  book  contains  ten  artides  in  ten  different  chapters,  written  at  different 
times  within  the  last  25  years,  and  dealing  with  the  historical  and  economic 
aspects  of  British  agriculture.  Some  of  the  topics  are  not  quite  up  to  date, 
but  still  the  book  is  interesting  reading  to  those  who  are  '^concerned  for  the 
well-being  of  agriculture." 

Earlier  chapters  give  a  brief  sketch  of  British  farming  from  the  time  of 
WUliam  the  Conqueror  to  the  end  of  the  Victorian  period.  A  general  discus- 
sion on  rural  exodus,  market  system,  and  the  importance  and  growth  of  rural 
organization  and  co-operation  is  followed  by  a  chi^ter  based  on  the  author's 
account,  before  the  British  Association  in  191 2,  of  the  relation  between  the 
home-grown  and  imported  food  supplies  of  Great  Britain.  After  showing  the 
importance  of  selling  stock  by  live-weight,  the  book  ends  in  a  comparison  of 
the  English  and  French  systems  of  fanning,  as  practiced  on  either  side  of  the 
EngUsh  Channd. 

Money,  By  William  A.  Scott.  Chicago:  A.  C.  McClurg  &  Co., 
1913.    16  mo,  pp.  124.    $0.50  net. 

In  this  little  book  the  author  attempts  to  state  in  the  simplest  way  pos- 
sible the  essential  functions  of  money,  and  he  briefly  discusses  the  most  im- 
portant questions  arising  from  money  and  its  uses.  The  book  is  intended  for 
the  general  reader  rather  than  the  student  of  money.  Technical  terms  and 
detailed  discussions  are  therefore  avoided.  The  book  shotdd  be  valuable  to 
those  who  do  not  have  the  time  to  devote  to  a  more  complete  study  of  the 
subject. 

The  Purchasing  Power  of  Money.  By  Irving  Fisher.  2d  edition. 
New  York:  Macmillan,  1913.  8vo,  pp.  xxii+so2.  $2.25. 
The  primary  object  of  this  new  edition  of  The  Purchasing  Power  of  Money 
has  been  to  bring  the  material  in  certain  tables  down  to  date  by  the  addition 
of  data  for  1910, 191 1,  and  191 2.  An  appendix  elaborates  the  brief  discussion 
in  the  earlier  book  on  "standardizing  the  dollar"  by  extracts  from  the  author's 
address  before  the  American  Economic  Association  in  December,  191 2. 


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A  History  of  the  Greenbacks 

With  special  itf  erenee  io  the  economic 
conaeqaonces  of  their  iasae 

By  Wesley  Clair  Mitchell 

0fiA^  Df/4trtm^tt(  of  PoUtieal  Economy  at  ike 
University  of  California 

This  admirable  treatise  should  be  in  the  library 
of  every  banker  who  would  understand  the  hi««- 
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the  United  States 

By  Ralph  C.  H.  Catterall 

^/tJU  D*p4irtm€tUi0f  History  at  Cornell  University 
The  interesting  history  of  this  bank,  on  both  its 
eoonomicaiid  political  sides,  is  presented  h^ 
in  complete  d«tail  add  with  absolute  accuracy. 
The  author  had  access  to  the  private  papers  of 
Nicholas  Biddle,  for  a  long  time  president  of 
the  bank,  a  sotiroe  of  information  never  before 
at  the  disposal  of  the  historian.  Numerous 
charts,  tables,  and  thirteen  appendices  add  to 
the  value  of  the  book.  It  is  quite  impossible  to 
understand  why  there  is  not  in  the  United  States 
an  institution  like  the  Bank  of  England,  the  Bank 
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A  Study  in  Eilf^lish  and  American 

Monetary  History 

By  SoPHONiSBA  P.  Breckinridge 

o/ike  Department  of  Political  Science  at  the 
University  of  Chicago 

The  very  general  misconception  about  the  origin 
and  nature  of  legal  tender  on  the  part  of  the 

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Volume  XXII  /  -r-^-'^A  Number  4 


The  Journal 


OF 


Political  Economy 

PUBLISHED  BY  THE  UNIVERSITY  OF  CHICAGO 

IN  CO-OPERATION  WITH 

THE  WESTERN  ECONOMIC  SOCIETY 


APRIL   1914 


The  Banking  and  Currency  Act  of  1913.     I 

/.  Laurence  Laughlin      293 
The  Financial  Policy  of  the  Federal  Reserve  Banks. 

Thomas  Conway,  Jr.      319 
Banking  Reserves  under  the  Federal  Reserve  Act 

IVdliam  Amasa  Scott      332 
Collecting  Checks  under  the  Currency  Law 

George  Woodruff     345 
The  Relation  of  the  New  Currency  Act  to  the  Work  of 

Commercial  Paper  Houses  Robert  C  Schaffner     358 

Constitutional  Restrictions  on  Municipal  Debt 

Horace  Secrist      365 
Notes  384 

Finandng^of  Farms  in  Saskatchewan  5.  Roy  Wtaoer      384 

Washington  Notes:  388 

Report  on  Water  Carriers — Government  Ownership  in  Alaskan-Telegraph 

and  Telephone  Prospects — Insurance  as  ''Commerce" 

Book  Reviews  and  Notices  396 

Dunn's  Government  Ownershipof  RaUways  (George  O.  Virtue),  3o<5. — ^WrrniRS*  Money-Changing; 
An  Introductjon  to  Foreign  Exchange  (H.  G.  Moulton),  300. — Van  Hiss's  Concentration  and 
Control  (Allyn  A.  Young),  40a — ^Abbot's  Justice  qnd  the  Modem  Law,  401. — First  Ammal  Ih" 
dustrial  Directory  of  New  Yorh  State,  igi2,  402. — Questions  of  Public  Policy,  40a.— WnWAMS' 
Co-Partnerskip  and  Profit-Sharing,  403. — ^Vogt's  A  Rural  Survey  in  Southwestern  Ohio,  403. — 
Richmond  and  Hall's  A  Study  of  Nine  Hundred  and  Eighty-five  Widows  Known  to  Certain 
Charily  Organisation  Societies  in  1910,  404. — Du  Bois's  The  Negro  American  Artisan,  404. 


THE   UNIVERSITY   OF   CHICAGO   PRESS 
CHICAGO,    ILLINOIS,   U.S.A. 


Agbmts 

THE  CAMBRIDGE  UNIVERSITY  PRESS,  London  and  Edinburgh 

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JAMES  AUmmO  nBU>  J.  LAinUVCK  LAITGNLIlf 

ftOBEAT  FRANILUN  HOXIB  LION  CARROLL  liARftUALL 

CHESTER  WHITNEY  WRIGHT 


Mthfttofy  JEntofJ 

(The  Offioeti  •(  ike  Western  Ecoaomic  Society) 

SHAILER  MATHEWS,  Rretidtnt 

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LEON  a  MARSHALL,  SitrHary  CHARLES  L.  HUTCHINSON,  Trimtmrer- 


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OF 


POLITICAL  ECONOMY 


VoLUMB  22  Ai>Til  19 1 4  Number  4 


THE  BANKING  AND  CURRENCY  ACT  OF  1913.    I 


The  Aldrich-Vreeland  act  of  1908,'  passed  largely  for  political 
effect  and  expiring  July  i,  1914,  was  the  cover  under  which  prepa- 
rations were  made  for  a  thorough  revision  of  our  currency  system. 
That  act  was  negative  in  its  working,  and  no  resort  was  ever  made 
to  its  provisions  for  issuing  emergency  notes  through  currency 
associations.  In  the  autimm  of  191 2  and  1913  the  tension  of  credit 
was  probably  as  extreme  as  in  1907,  but,  as  was  to  have  been 
expected,  no  use  was  made  of  the  act.  The  essential  theory  of  it 
was  the  obvious  dependence  on  an  issue  of  bank  notes  as  the  remedy 
for  a  stringency;  while,  in  truth,  the  difficulty  lay  in  the  short- 
comings of  our  credit  organization.  Deeper  than  the  inelasticity  of 
the  bank  issues  lay  the  inelasticity  of  credit  and  of  the  power  to 
lend.  It  is  interesting,  therefore,  to  watch  the  development  of 
recent  reform  proposals  and  to  see  how  far  they  showed  an  under- 
standing of  the  real  weaknesses  of  our  banking  and  monetary 
system. 

The  formation  of  currency  associations  imder  the  act  of  1908  was 
urged  by  Secretary  MacVeagh  on  the  various  clearing-house  centers; 
but  they  were  organized  with  much  skepticism  as  to  their  actual  use. 
The  tax  on  the  notes  was  imintelligently  heavy,  making  their  use 

'  For  a  full  study  of  this  law,  see  the  article  by  the  piesent  writer  in  the  Journal 
of  Political  Economy  for  October,  1908,  pp.  488^513. 

293 


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294  JOURNAL  OP  POLITICAL  ECONOMY 

almost  prohibitory.  On  the  other  hand,  if  resort  had  been  made 
to  these  notes  rather  than  to  clearing-house  certificates,  they  would 
have  had  the  advantage  of  a  circulation  wider  than  the  narrow 
field  of  the  certificates.  Since  they  could  not,  however,  be  used 
as  lawful  reserves  by  national  banks,  they  would  not,  in  fact,  have 
touched  the  lending  power  of  these  banks  as  directly  as  did  clearing- 
house certificates.  If  A  could  not  get  a  loan  or  extension  at  Bank 
X,  and  transferred  his  account  to  Bank  Y  on  the  promise  of  notes 
to  be  obtained  through  a  currency  association,  A  might  have  used 
these  notes  to  take  up  his  obligation  held  by  Bank  X;  the  next  day 
Bank  X  would  have  presented  these  notes  to  Bank  Y  as  a  demand 
obligation  against  cash  reserves;  thus  they  would  not  have  been  so 
useful  as  clearing-house  certificates  which  could  have  been  used  in 
settling  balances  between  banks.  Yet,  apart  from  the  tax,  some 
bankers  believed  that  these  notes  would  have  been  effective  in  time 
ctf  stress.  Certainly,  by  being  paid  out  to  the  public,  they  might 
have  prevented,  to  some  extent,  the  drawing-down  of  banking 
reserves  of  lawful  money.  At  the  best  they  could  have  been  cmly 
a  palliative.  Yet  it  should  be  noted  that  these  notes,  whatever  their 
^Kdency,  broke  with  the  past  unmistakably  by  being  obtainable 
on  the  pledge  of  other  security  than  United  States  bonds. 

The  provision  in  the  act  creating  a  National  Monetary  Com- 
mission had  important  consequences.  Its  composition,  however, 
was  typical  of  our  methods:  the  i8  members  were  chosen  equally 
from  the  two  houses  of  Congress,  and  practically  none  of  them  were 
experts.  Consequently,  the  education  of  the  Commission  itself 
was  the  first  duty,  and  a  considerable  number  of  treatises  were 
prepared  at  the  behest  of  the  Conunission  on  topics  more  or  less 
pertinent  to  the  subject.  Probably  few  persons  ever  read  them  all; 
they  had  little  influence  on  members  of  Congress,  and  practically 
none  at  all  on  the  general  public.  They  were,  indeed,  desirable  to 
special  students  of  banking.  The  formation  of  a  concrete  plan  of 
reform,  however,  came  through  the  visits  of  the  chairman  and  some 
others  to  Europe  and  through  other  influences.  It  is  to  the  credit 
of  the  chairman.  Senator  Aldrich,  that,  in  comparison  with  his 
attitude  in  1908,  he  performed  a  complete  volte  face.  European 
experience,  well  known  already  to  American  students  of  this  sub- 


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THE  BANKING  AND  CURRENCY  ACT  OF  1913  295 

Ject,  was  now  driven  home  on  those  who  might  influence  the  action 
of  Congress.  But  the  definite  outlines  of  the  plan  presented 
January  17,  1911,  must  have  been  due  to  the  suggestions  of  a  few 
experienced  persons  in  this  country,  who  were  consulted  by  the 
chairman  near  the  end  of  1910.  Whatever  its  origin,  the  plan 
actually  laid  before  the  country  had  the  distinction  of  attacking  the 
pivotal  weakness  of  our  system — the  organization  of  credit.  That 
was  an  epoch-making  advance.  Into  the  personal  and  political 
animosities  connected  with  the  chairman  of  the  Commission  it  is 
needless  to  enter  here;  but  in  getting  legislation  it  is  obvious  that 
political  prejudices  are  facts  as  much  as  stone  walls,  and  they  had 
their  due  influence  on  the  result. 

n 

In  fact,  political  considerations  were  ruling  in  regard  to  a  sub- 
ject which  of  all  others  ought  to  have  had  nonpartisan  treatment. 
During  191 2,  every  effort  was  made  to  keep  the  currency  question 
out  of  politics.  The  fact,  however,  that  the  plan  was  intimately 
associated  with  the  name  of  Senator  Aldrich,  the  head  of  the  Pro- 
tectionist Republicans,  was  present  in  everyone's  mind.  This  fact 
forced  the  question  into  politics.  The  Commission,  from  the 
Republican  point  of  view,  made  the  fatal  mistake  of  waiting  four 
years  before  presenting  its  report  tmtil  the  lower  house  became 
Democratic.  The  reaction  in  favor  of  the  Democratic  party  made 
it  patent  that  no  bill  unsatisfactory  to  the  Democrats  could  become 
a  law.  But  the  demand  for  nonpartisan  action  was  still  so  great 
that  even  Democratic  leaders  believed  that,  while  the  matter  could 
not  be  brought  up  in  the  winter  session  of  1911-12,  just  before  a 
presidential  campaign,  it  ought  to  be  taken  up  in  the  short  session 
of  191 2-13.    Political  events,  however,  swept  these  hopes  aside. 

The  Democratic  Convention  at  Baltimore  saw  a  struggle  be- 
tween the  conservative  and  radical  elements  of  the  party  in  which, 
in  a  sense,  the  latter  won.  Although  Mr.  Bryan  could  not  control 
the  result,  neither  could  the  conservatives.  The  nomination  of 
Woodrow  Wilson,  who  was  not  Mr.  Bryan's  candidate,  created  a 
situation  that  made  it  seem  necessary  to  placate  Mr.  Bryan  by 
allowing  him  to  write  the  platform;  and  the  currency  plank  arrayed 


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296  JOURNAL  OF  POLITICAL  ECONOMY 

the  party  against  ^^  the  so-called  Aldrich  bill  or  the  establishment  of 
a  central  bank."'  The  danger  of  making  the  subject  a  party  issue 
was  diminished,  however,  by  the  Republican  platform,  which 
declared  only  in  favor  of  general  principles  and  not  for  any  specific 
plan.  Consequently,  the  currency  issue  was  little  heard  of  during 
the  campaign.  The  eccentric  declaration  of  the  Progressive  plat- 
form drew  no  discussion.  Very  early  in  the  campaign  it  became 
evident  that  Mr.  Wilson  would  be  elected.  The  election  of  a 
Democratic  Senate  later  gave  his  party  control  of  legislation. 
Hence  Democratic  leaders  had  no  disposition  to  allow  a  currency 
act  to  pass  in  the  short  session,  when  they  could  very  soon  stamp 
their  own  impress  on  the  most  important  problem  up  for  solution 
since  the  Ci'vdl  War — ^least  of  all  a  measure  regarded  as  the  handi- 
work of  Senator  Aldrich,  a  Republican  leader. 

While  Mr.  Wilson  spoke  of  giving  the  question  nonpartisan 
treatment,  he  had  elements  in  his  party  difficult  to  be  imified  on 
common  ground.'  As  early  as  September,  191 2,  it  was  known  that 
the  Pujo  subconunittee  of  the  House,  dominated  by  its  counsel, 
Mr.  Samuel  Untermyer,  intended  to  report  specific  monetary 
legislation  in  connection  with  the  investigation  of  the  ''Money 
Trust."  This  policy  infringed  on  the  legislative  work  of  the  Glass 
subcommittee.  The  conflict  finally  ended  in  the  triumph  of  Mr. 
Glass  (who  in  the  extra  session  of  the  new  Congress,  April,  1913, 
became  chairman  of  the  full  Banking  and  Currency  Conunittee). 
In  the  meantime,  by  the  smnmer  of  191 2,  the  so-called  Aldrich 
Plan  (reported  in  January,  191 1,  to  both  House  and  Senate) 
seemed  to  have  become  politically  dead.  In  November,  191 2,  the 
Glass  subconunittee  was  spurred  into  activity  by  the  work  of  the 

'  It  has  been  claimed  that  the  true  draft  was  altered  by  the  omission  of  the  letter 
'<f/'  and  should  have  read  ''Aldrich  bill  for  the  establishment  of  a  central  bank." 

*  The  radicals  in  the  House,  like  R.  L.  Heniy  of  Texas,  wished  extreme  action  in 
connection  with  the  investigation  of  the  ''Money  Trust,"  hoping  to  get  useful  campaign 
material.  The  resolution  demanding  this  investigation  was  finally  sent  to  the  Banking 
and  Currency  Committee,  where  it  was  given  to  one-half  of  the  committee  presided 
over  by  Mr.  Pujo,  then  the  chairman  of  the  whole  committee;  while  the  other  half  of 
the  committee,  to  be  presided  over  by  Mr.  Carter  Glass,  next  in  rank  to  Mr.  Pujo,  was 
intrusted  with  the  definite  task  of  preparing  legislation  on  banking  and  currency. 
To  Mr.  Glass's  subcommittee  the  plan  of  the  Monetary  Commission  and  other  bills 
were  also  referred. 


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THE  BANKING  AND  CURRENCY  ACT  OP  1913  297 

Pujo  subcommittee.  Up  to  that  time,  tentative  Democratic 
banking  bills  did  not  go  far,  even  proposing  to  leave  untouched  the 
exbting  inelastic  national  bank  notes  secured  by  bonds.  In  fact, 
having  seen  divisions  in  the  party  because  of  silver  and  other 
monetary  issues  in  the  past.  Democratic  leaders  were  loath  to  take 
the  chance  of  arousing  discussion  on  these  questions.  Politicians 
hoped  to  dodge  serious  legislation  by  postponing  it. 

Meanwhile  public  opinion,  developed  in  a  systematic  way,  had 
become  intelligent  and  insistent  in  favor  of  thorough  and  construc- 
tive legislation.  Foreseeing  that  this  could  come  only  through  the 
Democratic  party,  the  South  was  made  the  objective  of  an  active 
propaganda  in  favor  of  banking  reform.'  So  vigorous  and  success- 
ful was  this  work  that,  later,  a  Democratic  Congress  found  many 
of  its  constituencies  demanding  legislation  of  a  sound,  specific 
character.  In  the  Sixty-second  Congress,  in  the  Democratic 
House,  the  radicals  were  outnumbered  2  to  i ;  and  in  the  present 
Sixty-third  Congress  the  ratio  is  probably  about  the  same.  A 
Democratic  Congress,  therefore,  called  in  extra  session  as  early  as 
November,  191 2,  by  President-elect  Wilson,  now  had  to  face  the 
problem  from  which  there  was  no  escape.  Then  Mr.  Wilson's  firm, 
guiding  hand  appeared.  He  was  evidently  advised  of  the  progress 
already  made  by  the  Glass  subconmiittee,  but  he  kept  his  own 
counsel.  From  the  very  date  of  the  calling  of  the  extra  session  in 
November,  the  chances  of  currency  reform  seemed  suddenly  to 
become  favorable.  To  Mr.  Wilson's  championship  more  than  to 
any  other  force  is  due  the  final  legislative  result.    It  was  expected 

>  The  National  Citizens'  League  for  the  Promotion  of  a  Sound  Banking  System, 
with  headquartera  in  Chicago,  began  a  campaign  of  education  throughout  the  country 
in  June,  xgio,  giving  main  attention  to  the  South,  and  to  Progressive  states  in  the 
West  and  Northwest.  Effective  organizations  were  established  in  forty-five  states, 
diiefly  among  business  men.  Contributions  were  solicited  from  banks  on  the  ground 
that  they  represented  also  the  borrowing  business  public,  who  were  mainly  interested 
in  the  reform.  A  vast  amount  of  material  was  printed  in  the  newspapers  and  pam- 
phlets, while  a  volume  on  Banking  Reform  (191 2,  zziii  chapters,  8vo,  pp.  zii+4a8)  was 
published.  For  the  man  in  the  street  simple  exposition  was  supplied  in  a  fortnightly 
issue  and  in  newspapers;  but  the  volume  on  Banking  Reform  was  a  textbook  for  use 
by  editors,  q)eakers,  and  congressmen.  Speaking  was  had  especially  in  the  South. 
The  purpose  of  this  organized  and  systematic  work  was  to  create  public  c^nnion  in  the 
home  districts,  and  it  had  the  expected  result  in  the  final  votes  in  Congress.  The 
League  stopped  its  work  November  i,  1913. 


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298  JOURNAL  OP  POLITICAL  ECONOMY 

that  a  banking  and  currency  bill  would,  if  possible,  be  taken  up  in 
the  extra  session  (spring  of  1913) ;  and  the  Glass  subcommittee  had 
held  hearings  in  January,  intending  to  have  a  bill  ready  by  the 
time  the  extra  session  convened. 

The  still  larger  political  significance  of  banking  and  monetary 
reform,  however,  cannot  be  disregarded.  It  is  well  known  that  the 
Democratic  party  had  in  past  years  sympathized  with  the  pleas 
for  unsound  paper  money,  and  had  been  committed  to  the  free 
coinage  of  silver.  The  Republican  party,  it  is  true,  was  on  its  side 
responsible  for  the  silver  act  of  1890;  but  during  the  control  of  the 
Democratic  party  by  President  Cleveland  his  party  was,  with 
remarkable  generalship,  manoeuvered  into  a  position  of  soundness 
on  the  silver  question.  When  Mr.  Bryan  gained  control  and 
enforced  on  his  party  his  views  in  favor  of  the  free  coinage  of  silver, 
and  the  issue  of  all  paper  money  by  the  government  (involving  the 
retirement  of  national  bank  notes),  the  Democratic  party  was 
successively  beaten  in  every  campaign  which  pivoted  on  those 
issues.  It  was  not  the  strength  of  the  Republican  party,  but  the 
aberrations  of  the  Democratic  party  on  banking  and  currency, 
which  drove  a  majority  of  the  voters  to  elect  Republican  presidents. 
In  view  of  the  disasters  which  had  come  upon  Democrats  through 
monetary  issues,  it  is  easy  to  understand  the  reluctance  of  their 
leaders  to  take  them  up  just  when  party  success  in  the  national 
elections  seemed  possible.  Nevertheless,  the  development  of  indus- 
try in  the  South,  and  the  spread  of  a  business,  rather  than  a  political, 
point  of  view  on  currency  questions  throughout  Democratic  states 
brought  a  growing  belief  that  only  by  passing  a  great  constructive 
act  on  banking  and  currency  could  the  Democratic  party  wipe  out 
the  distrust  due  to  past  eccentricities  on  those  issues,  and  win  that 
confidence  from  the  business  element  which  was  essential  to 
remaining  in  political  power.  The  remarkable  statesmanship  by 
which  President  Wilson,  with  the  aid  of  Democratic  leaders,  put 
their  party  behind  an  epoch-making,  constructive  measure  and 
passed  it  on  December  23,  1913,  is  a  monumental  event  in  our 
political  history.  It  assiunes  the  character  of  a  political  miracle. 
No  little  credit  for  the  political  result  should  be  assigned  to  Mr. 
Bryan,  who  brought  his  large  following  to  the  support  of  the  meas- 


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THE  BANKING  AND  CURRENCY  ACT  OP  1913  299 

ure.  Hereafter,  the  political  lines  on  money  and  banking  questions 
must  be  drawn  in  entirely  new  ways.  The  effects  of  this  act  on 
both  our  business  and  our  political  development  can  scarcely  be 
exaggerated. 

The  actual  result  of  the  new  law  is  remarkably  good;  but  the 
opportunity  ought  not  to  be  let  pass  without  comment  on  our 
American  method  of  legislating  on  subjects  requiring  expert 
knowledge  and  experience.  There  is  a  certain  assumption  (with 
some  rare  exceptions)  that  election  to  the  House  or  Senate  of  oiir 
national  Congress  makes  the  member  an  expert  on  all  subjects  that 
may  come  before  him.  In  other  words,  even  the  members  of  com- 
mittees are  not  experts;  and  yet  these  members  usually  insist  on 
introducing  their  personal  convictions  into  proposed  bills.  Mem- 
bers often  publish  to  the  world  by  their  questions  an  ab}rsmal 
ignorance  of  the  subject  before  them.  Hearings  are  usually  held, 
not  primarily  to  have  various  sides  of  the  problem  presented  to 
experts,  but  to  enable  the  ignorant  member  to  be  taught  and  to 
understand  some  of  the  obvious  parts  of  a  proposed  measure.  In 
hardly  any  other  coimtry  in  the  world  would  inexpert  legislators 
attempt  to  construct  a  bill.  The  matter  would  be  first  referred  to 
a  committee  of  impartial,  trusted  experts,  whose  report  would  then 
be  thoroughly  threshed  out  by  the  legislators  who  are  responsible 
to  public  opinion.  Yet  with  us,  the  fact  of  election  to  Senate  or 
House  seems  to  create  in  the  minds  of  those  elected  a  suspicion  of 
outside  advice.  Since  men  who  are  primarily  politicians,  and  have 
little  or  no  expert  knowledge  or  training,  must  be  personally  con- 
vinced before  a  bill  can  even  be  reported  from  a  committee,  it  is  a 
perpetual  wonder  that  workable  laws  on  technical  subjects  are  ever 
passed.  What  is  the  conclusion?  The  actual  process  of  legisla- 
tion is  not  what  on  the  surface  it  seems  to  be.  The  bill  is  not 
passed  on  its  merits;  for  very  few  of  those  who  vote  on  it  know 
anything  of  its  merits.  This  outcome  may  be  said  to  be  the  neces- 
sary result  of  committee  government.  Not  wholly;  because  that 
theory  assimies  that  committees  are  experts,  which  they  are  not. 
The  conclusion  is  that  an  important  act  gets  on  the  statute  books, 
in  our  political  system,  only  as  a  part  of  a  given  party  policy. 
The  man  in  command  of  the  party's  fortunes,  or  the  few  leaders 


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300  JOURNAL  OF  POLITICAL  ECONOMY 

who  work  with  him,  agree  on  a  measure  and  it  is  ^^put  through" 
by  the  dominant  party,  even  though  these  leaders  know  very 
little  of  the  subject.  The  system  as  thus  described  is  probably  the 
reason  why  our  laws  on  currency  and  banking  have  been  so  defect- 
ive; and  it  may  also  explain  why,  by  a  happy  conjimction  of  events, 
a  remarkably  good  act  has  been  passed,  although  few  of  those  who 
passed  it  really  imderstood  the  essential  features  of  it.* 

m 

The  problem  of  banking  and  currency  reform  was  complicated 
by  a  confusion  of  mind,  even  among  bankers,  in  regard  to  the 
various  kinds  of  banking  which  might  be  carried  on  by  any  one 
institution.  We  were  in  the  midst  of  an  evolution,  not  only  in  our 
business,  but  in  our  credit,  organization.  The  banking  organism, 
which  had  seemed  fairly  homogeneous,  began  to  be  resolved  (as  if 
by  some  gigantic  magnifying  glass)  into  parts  having  separate 
functions  and  purposes.  Already  the  trust  companies,  organized 
under  state  laws,  while  retaining  their  original  departments,  had 
developed  departments  for  commercial  banking  creating  demand 
liabilities.  Meanwhile  national  banks,  although  essentially  com- 
mercial institutions,  began  to  establish  savings  departments. 
Then,  the  growth  of  investment  banking,  and  the  promotion  and 
distribution  of  securities  to  meet  the  phenomenal  growth  of  savings 
by  investors  large  and  small,  in  a  country  of  rapidly  expanding 
wealth,  assumed  an  overshadowing  magnitude,  and  colored  the 
whole  character  of  American  banking  and  finance.  In  addition,, 
the  fact,  well  known  to  economists,  began  to  be  recognized  by 
Americans  generally,  that  we  had  no  institutions  to  cover  the 
demands  for  agricultural  credits  in  rural  districts.  The  inter- 
relations and  analysis  of  these  elements  in  our  banking  system 
are  alluring  and  need  a  large  treatment  by  themselves,  and  this 
must  be  reserved  for  another  time  and  place;  it  is  possible  here 
only  to  refer  to  them  in  order  to  get  a  fairly  clear  imderstanding 
of  the  new  legislation  of  1913. 

Most  of  the  national  banks,  as  well  as  those  under  a  state 
system,  were  carrying  on  two  distinct  kinds  of  banking  imder  one 

*  For  aome  light  on  the  origin  and  legblative  history  of  the  bill,  see  H.  P.  Willis, 
in  American  Economic  Rmew,  March,  I9i4>  pp.  x-x7* 


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THE  BANKING  AND  CURRENCY  ACT  OF  1913  301 

management.  The  test  of  a  commercial  bank  is  that  it  creates 
demand  liabilities;  consequently,  it  should  hold  only  assets  (chiefly 
the  results  of  loans  at  short  time  based  on  actual  transactions  in 
goods)  that  are  liquid  and  can  be  quickly  or  frequently  converted 
into  cash.  The  creation  of  demand  liabilities  (chiefly  in  the  form 
of  demand  deposits)  requires  as  a  condition  of  sound  banking  a 
special  kind  of  assets  readily  adapted  to  meet  an  instant  demand. 
But  the  holding  of  investment  securities  by  commercial  banks  has 
reached  enormous  figures;  and  any  general  demand  for  liquidation 
of  long-time  securities  in  cash  could  not  be  met;  because  an  offer 
on  a  large  scale  wotdd  result  in  a  great  fall  in  the  stock  market,  the 
weakening  of  collateral  held  for  loans,  and  an  impairment  of  all 
credits,  without  creating  the  desired  cash.  The  desire  to  share  in 
the  profits  of  promotions  led  commercial  banks  to  tie  up  resources 
in  non-liquid  form,  with  the  expected  results  in  time  of  panic' 

This  confusion  between  commercial  and  investment  banking, 
which  was  characteristic  of  the  great  cities,  found  a  counterpart 
in  the  small  rural  banks  of  the  West  and  South.  They  too  held 
investment  securities;  but  they  confused  two  distinct  kinds  of  bank- 
ing in  a  different  way.  National,  as  well  as  state,  banks  in  rural 
communities  created  demand  liabilities;  but  because  short-time 
commercial  paper  was  often  limited  in  supply,  and  because  there 
were  no  institutions  dealing  with  agricultural  credits,  the  rural 
banks  to  a  greater  or  less  extent  put  their  resources  into  paper 
based  on  land,  or  in  non-liquid  form.  The  confusion  in 
regard  to  different  kinds  of  banking  in  rural  districts  was  thus 
matched  by  that  in  the  great  cities.  The  consequences  were 
obvious:  in  the  latter  the  essentials  of  reform  were  obscured  by 
the  hue  and  cry  about  "Wall-Street  control,"  which  originated 

'  The  holdings  of  securities  other  than  United  States  bonds  by  all  national  banks, 
on  Jannaiy  13,  1914,  were  $1,030494,711,  of  which  $566,246,910,  or  more  than  one- 
half,  were  held  by  banks  in  the  eastern  states  (New  York,  New  Jersey,  Pennsylvania, 
Delaware,  and  Maryland);  $45,355,914  by  the  southern  states;  $215,119,106  by  the 
middle  western  states;  $34,792,121  by  the  western  states;  and  $65,155,202  by  the 
Pacific  states.  *  It  is  to  be  noted,  however,  that  the  national  banks  on  the  same  date 
show  savings  deposits  (prestunably  time  deposits)  of  $855,914,458,  of  which  comitiy 
banks  held  $755,9i4>458.  For  a  further  study  of  the  legality  and  policy  of  security 
holdings  of  national  banks,  cf .  J.  H.  Hollander,  American  Economic  Review,  December, 
X913,  and  J.  V.  Hogan,  Journal  of  PcHUical  Economy,  November,  1913. 


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302  JOURNAL  OF  POLITICAL  ECONOMY 

really  from  promotions  and  loans  on  securities;  while  in  the  former, 
the  desire  to  help  the  under  dog  (or  small  bank)  led  to  provisions  for 
rural  loans  wholly  inconsistent  with  the  refusal  to  accept  loans  on 
stock-exchange  collateral.  Such  is  the  way  of  legislation  in  a 
democracy. 

IV 

In  order  to  be  able  to  test  the  new  legislation,  it  will  be  interest- 
ing to  summarize  here  the  defects  in  our  banking  and  currency 
system  which  were  generally  accepted  at  the  b^inning  of  the  recent 
campaign  (1910-11):  an  inelastic  bank-note  circulation;  an  ev^i 
more  dangerously  inelastic  credit  system;  ineffective  use  of  a  large 
supply  of  gold;  a  scattering  of  reserves  and  lack  of  co-operative 
action  by  banks  in  times  of  stress;  a  rigid  reserve  system  which 
induced  panics;  state  banks  and  trust  companies  doing  a  com- 
mercial business  but  in  different  systems;  an  independent  Treasury 
divorced  from  the  money  market  which  imperiled  bank  reserves  in 
times  of  difficulty;  the  drift  of  idle  funds  to  the  call-loan  market 
where  they  fed  stock  speculation;  and  the  want  of  American 
banking  facilities  in  other  countries  to  aid  our  foreign  trade.  It 
will  be  fitting  to  watch  as  we  go  on  whether  these  demands,  which 
were  formulated  before  the  new  law  was  even  drawn  up,  have  been 
effectively  covered. 

We  may  now  proceed  to  an  examination  of  the  act  of  December 
23, 1913.  In  order  to  secure  clearness  it  may  be  best  to  discuss  its 
provisions  imder  some  general  heads,  and  imder  each  head  to 
include  the  history  of  the  various  proposals,  as  follows: 

i)  Control  and  Organization 

2)  The  Federal  Reserve  Banks 

3)  The  Note-Issues 

4)  Disposal  of  the  2  Per  Cent  Bonds 

5)  Reserves 

6)  The  Organization  of  Credit 

7)  Clearings 

8)  A  Discount  Market 

9)  Foreign  Banking 


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THE  BANKING  AND  CURRENCY  ACT  OF  1913  303 

V 

Around  the  question  of  organization  and  control  centered  the 
main  antagonism  to  the  plan  of  the  National  Monetary  Commis- 
sion, which  proposed  a  National  Reserve  Association  as  the  means 
for  centralizing  reserves  and  thus  preventing  the  admitted  evil  of 
scattering  of  reserves  existent  imder  the  old  system.  Under  this 
plan  an  elaborate  organization  was  built  up,  beginning  with  local 
associations  of  banks  which  elected  directors  for  district  institutions 
of  ^^ch  there  were  to  be  fifteen  in  the  whole  Union;  these  fifteen 
directorates  were  to  elect  a  central  governing  body  of  forty-five, 
with  an  executive  committee  of  nine,  in  power  over  the  National 
Reserve  Association,  under  which  the  fifteen  institutions  were  to 
be  branches.  It  is  to  be  observed  that  the  directors  of  the  central 
body  were  to  be  chosen  by  the  representatives  of  the  banks.  Such 
an  institution  was  not,  in  the  usual  acceptance  of  the  term,  a 
Central  Bank,  because  it  would  do  no  business  with  the  general 
public.  Nevertheless,  having  one  central  directing  body,  opposition 
was  raised  against  it  on  the  groimd  that  effective  control  over  it 
might  be  obtained  by  ambitious  financial  groups.  This  opposition 
appeared  under  the  so-called  "fear  of  Wall  Street."* 

In  the  original  Glass  Bill,  proposed  by  the  House  Committee, 
and  given  out  imoffidally  Jime  17,  1913,  there  was  proposed  an 
entirely  different  system  of  organization  and  control.  Instead  of 
a  National  Reserve  Association  with  fifteen  branches,  there  was 
offered  a  decentralized  organization  of  separate,  incorporated, 
regional  Reserve  Banks,  in  as  many  districts,  supervised  by  a 
Federal  Reserve  Board,  having  no  capital  and  no  banking  fimc- 
tions.'    Immediately  attention  was  focused  upon  the  composition 

'  In  Congress  it  was  emphatically  stated  that,  irrespective  of  the  merits  of  a 
Central  Bank,  it  could  not  be  proposed  by  Democrats,  because  it  was  forbidden  by  the 
Baltimore  platform.  It  is  difficult  to  reconcile  this  position  with  that  taken  in  favor  6t 
abolishing  all  preferences  to  American  coasting  vessels  going  through  the  Panama  Canal, 
idiich  is  in  direct  opposition  to  the  platform  of  the  Democratic  party.  The  truth 
probably  is  that  political  advantage  was  gained  by  opposing  a  Central  Bank.  In 
addition,  it  may  well  be  that  regional  banks  were  better  suited  to  our  ocmditions. 

*  Mr.  Mann,  the  Republican  leader  in  the  House,  said:  "So  far  as  we  have  been 
able  to  learn,  the  bill  will  be  in  the  main  pieces  stolen  from  the  Aldrich  Monetary  Com- 
mission Report,  with  a  few  radical  provisions  taken  from  the  Bryan  platform  mixed  in. 
It  will  be  a  jumble  of  discordant  ideas*'  (June  33, 1913). 


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304  JOURNAL  OF  POLITICAL  ECONOMY 

and  powers  of  the  Federal  Reserve  Board,  since  it  was  assumed  that 
this  board  would  have  direction  over  the  general  banking  operations 
of  all  the  banks  in  the  country,  state  or  national,  which  might  enter 
the  new  system.  As  to  its  composition,  the  original  Glass  Bill  gave 
equal  representation  on  the  Federal  Reserve  Board  to  the  lending 
bankers,  the  borrowing  business  public,  and  the  government.  A 
Board  of  nine  members  was  to  be  composed  of  (i)  the  Secretary  of 
the  Treasury,  the  Secretary  of  Agriculture,  and  the  Comptroller  of 
the  Currency,  ex  officio;  (2)  three  to  be  chosen  by  the  President 
of  the  United  States,  of  whom  one  wotild  be  designated  as  governor, 
etc.;  and  (3)  three,  presumably  bankers,  to  be  chosen  by  the 
Federal  Reserve  Banks. 

When  the  bill  came  to  be  passed  on  by  Democratic  leaders,  before 
it  was  adopted  as  an  administration  measure,  the  issue  of  control 
became  prominent  and  drew  great  discussion.  The  administration 
demanded  governmental  control  over  the  banking  system,  urging 
that  bankers  per  se  were  the  ones  to  be  supervised,  and,  therefore, 
shotdd  not  control  the  Federal  Reserve  Board  (any  more  than 
railway  men  shotdd  control  the  Interstate  Commerce  Commission). 
Accordingly,  the  Glass  Bill,  before  being  presented  to  the  Demo- 
cratic Caucus  of  the  House,  changed  the  nimaber  of  the  Board  from 
nine  to  seven,  of  whom  the  two  cabinet  officers  and  the  Comptroller 
were  to  be  ex  officio  members,  and  four  others  were  to  be  appointed 
by  the  President,  of  whom  one  (later  changed  to  two)  should  be  a 
person  experienced  in  banking.  The  original  bill  provided  only 
that  the  governor  of  the  Board  could  be  removed  by  the  President 
on  a  statement  of  the  reasons;  while  in  the  changed  bill  the  Presi- 
dent was  given  power  of  removal  for  cause  over  the  four  members 
appointed  by  him  for  a  term  of  ten  years.  On  Jime  23,  1913, 
President  Wilson  read  in  person  to  Congress  his  currency  message 
in  which  he  said: 

The  control  of  the  system  of  banking  and  of  issue  which  our  new  laws  are 
to  set  up  must  be  public,  not  private,  must  be  vested  in  the  government  itsdf , 
so  that  the  banks  may  be  the  instruments,  not  the  masters,  of  business  and  of 
individual  enterprise  and  initiative. 

As  opposed  to  this  view  the  bankers  held  that  they  were  obliged 
by  the  bill  to  enter  the  system,  or  lose  their  charters  as  national 


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THE  BANKING  AND  CURRENCY  ACT  OF  1913  305 

banks;  that  a  portion  of  their  capital  was  ^'commandeered"  for 
the  stock  of  the  new  organizations,  over  which  they  were  refused 
any  control;  that  such  a  forced  contribution  without  representation 
was  practical  confiscation;  that  such  an  invasion  of  the  govern- 
ment into  the  reahn  of  private  ownership  was  '^ socialistic";  and 
that,  in  the  analogy  of  the  Interstate  Commission,  the  Commission 
supervises,  but  does  not  pretend  actually  to  operate,  the  railways, 
while  the  Federal  Reserve  Board  is  given  direct  control  over  bank- 
ing operations.  The  American  Bankers'  Association,  at  Boston, 
October  8,  1913,  opposed  the  compulsory  contribution  of  capital 
without  representation  on  the  Board  as  follows: 

In  return  for  the  capital  thus  appropriated  the  banks  receive  a  certificate, 
which  cannot  be  sold,  assigned,  or  hypothecated,  over  which  none  of  the  usual 
rights  of  property  can  be  exercised.  [National]  banks  are  obliged  to  make  this 
subscription,  or  be  dissolved.  Charters  have  ever  been  regarded  in  the  nature 
of  a  contract,  and  it  is  doubtful  if,  under  our  Constitution,  Congress  can  take 
away  the  charter  of  a  bank  in  this  sununary  manner,  not  because  the  terms  of 
the  charter  have  been  violated  by  the  banks,  but  because  the  bank  management 
might  refuse  to  make  a  coerced  investment  such  as  the  pending  measure 
provides. 

....  If  the  government  can  appropriate  one-tenth  of  a  bank's  o^ital  in 
the  manner  provided  by  this  bill  this  year,  it  may  appropriate  one-tenth  the 
next  year,  and  so  on  until  the  capital  is  all  transferred  to  the  government  bank. 
If  it  can  fix  the  compensation  at  5  per  cent  this  year,  it  may  make  it  4  per  cent 
next  year,  and  3  per  cent,  2  per  cent,  i  per  cent — a  very  simple  and  easy 
process  whereby  the  entire  ci^ital  of  the  banks  may  be  transferred  to  the 
government. 

....  This  proposition  of  the  government  to  take  the  banks' capital  in  the 
manner  provided,  carried  to  the  extreme,  would  easily  accomplish,  so  far  as 
the  national  banks  are  concerned,  this  contention  on  the  part  of  the  Socialists. 
For  those  who  do  not  believe  in  Socialism  it  is  very  hard  to  accept  and  ratify 
this  proposed  action  on  the  part  of  the  government. 

To  the  bankers  political  control  by  appointees  of  the  President, 
without  banking  experience,  meant  incompetent  management. 
Consequently,  they  urged  that  three  members  of  the  Board  should 
be  elected  by  the  directors  of  the  Federal  Reserve  Banks. 

Thus  was  the  issue  joined  between  government  supervision  and 
banking  control.  It  is  now  obvious  that  the  issue  hinges  on  the 
powers  granted  to  the  Federal  Reserve  Board.  If  actual  banking 
operations  are  carried  on,  not  by  the  Reserve  Board  but  by  the 


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3o6  JOURNAL  OP  POLITICAL  ECONOMY 

directors  of  liie  respective  reserve  banks,  a  majority  of  whose 
directors  are  chosen  by  the  member  banks,  the  question  at  issue 
(uractically  disappears.    What,  then,  are  these  powers  ? 

In  sec.  II  are  enumerated  the  powers  of  the  Federal  Reserve 
Board: 

(a)  To  examine,  and  require  weekly  statements  of,  reserve  and  member 
banks. 

(h)  To  permit,  or  by  a  vote  of  five  members  to  require,  one  Federal  Reserve 
Bank  to  rediscount  for  another,  and  to  fix  the  rate  of  discount  charged 
in  such  a  case. 

ifi)  To  suspend  reserve  requirements  for  not  more  than  thirty  days,  pro- 
vided a  tax  is  imposed  on  Reserve  Banks  if  reserves  fall  below  a  certain 
percentage. 

((0  To  supervise  the  issue  and  retirement  of  Federal  Reserve  notes. 

(e)  To  add  to,  or  reclassify,  exbting  reserve  or  central  reserve  cities. 
(/)  To  remove  for  cause  any  officer  or  director  of  any  Reserve  Bank, 
(g)  To  require  Reserve  BaiJcs  to  write  off  worthless  assets. 

(A)  To  suspend  any  Reserve  Bank  for  violations  of  this  act. 

(f)  To  safeguard  all  collateral,  notes,  etc.,  deposited  with  its  agents;  and 
to  make  all  rules  necessary  to  enable  the  Board  to  perform  the  duties, 
functions,  or  services  of  this  act. 

(J)   To  exercise  general  supervision  over  Reserve  Banks. 

{k)  To  permit  national  buiks  to  act  as  trustee,  executor,  etc.,  and  estab- 
lish rules  therefor. 

(0  To  enq>loy  e]q)erts,  assistants,  clerks,  etc.,  and  fix  their  salaries  and 
fees. 

Besides  the  grant  of  these  specific  powers,  additional  powers' 
were  granted  in  other  sections  throughout  the  act  as  follows: 

1.  To  readjust  Federal  Reserve  districts  (sec.  3). 

2.  To  regulate  the  establishment  of  branch  banks  within  the  respective 
Federal  Reserve  districts,  and  appoint  three  directors  for  each  branch 
(sec.  3). 

3.  To  designate  three  members  (Class  C)  for  each  Federal  Reserve  Bank, 
one  to  be  chairman  of  the  board  and  known  as  the  "Federal  Reserve 
Agent'';  and  to  secure  impartial  treatment  to  each  member  bank 
(sec.  4). 

4.  To  call  at  discretion  the  unpaid  half  of  capital  stock;  to  determine  the 
amounts  returned  to  a  bank  withdrawing  from  membership  (sec.  5); 
and  to  pass  on  the  amount  of  any  reduction  of  o^ital  (sec.  28). 

*  Cf .  Report  of  House  Committee  on  Banking  and  Currency ^  September  9, 1913,  No. 
69,  Sixty-third  Cong.,  ist  sess.,  pp.  4^47* 


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THE  BANKING  AND  CURRENCY  ACT  OF  1913  307 

5.  To  pass  on  apidkatioiis  for  membership  from  state  banks,  and  to 
establish  by-laws  therefor;  to  prescribe  rules  enforcing  requirements  of 
this  act  (sec.  9). 

6.  To  require  a  member  bank  to  surrender  its  stock,  if  it  fails  to  comply- 
with  the  law  or  rules  of  the  Board  (sec  9). 

7.  To  levy  on  the  Reserve  Banks  a  semi-annual  assessment  to  cover  the 
e]^>enses  of  the  Board  (sec.  zo). 

8.  To  have  general  8iq)ervision  over  the  Bureau  of  the  Comptroller  of  the 
Currency  (sec.  10). 

9.  To  make  an  annual  report  to  the  Speaker  of  the  House  of  Represen- 
tatives (sec.  10). 

xo.  To  approve  salaries  and  allowances  granted  to  members  of  Advisory 

Council;  and  to  call  meetings  of  said  Council  (sec.  13). 
II.  To  define  the  character  of  the  pi^)er  eligible  for  rediscount  by  Reserve 

Banks;  and  to  regulate  discounts  by  said  banks  of  bills  receivable,  bills 

of  exchange,  and  acceptances  (sec.  13). 
13.  To  fix  the  percentage  of  the  capital  of  a  Reserve  Bank  which  limits 

the  discounts  of  agricultural  paper  having  a  maturity  of  not  over  six 

months  (sec.  13). 

13.  To  establish  rules  for  dealings  in  cable  transfers,  acceptances,  and  bills 
of  exchange,  or  in  securities  of  the  United  States,  or  subdivisions 
thereof,  by  Reserve  Banks  (sec.  14). 

14.  To  review  rates  of  discount  charged  by  Reserve  Banks  (sec.  14). 

15.  To  pass  on  applications  of  Reserve  Banks  wishing  to  engage  in  foreign 
operations  [sec.  14  («)]. 

16.  To  issue  at  discretion  Federal  Reserve  notes  to  Reserve  Banks  on  de- 
posit of  an  equal  amount  of  collateral  seciuity;  to  call  for  additional 
security  therefor;  to  assign  a  distinctive  letter  and  serial  number  for 
notes  issued  by  the  respective  Reserve  Banks;  to  require  each  Reserve 
Bank  to  maintain  at  the  United  States  Treasury  a  gold  reserve  (not 
less  than  5  per  cent)  for  its  own  notes;  to  grant  or  to  reject  any  applica- 
tion for  notes;  to  establish  the  rate  of  interest  to  be  paid  for  such  notes; 
to  make  rules  allowing  substitutions  of  collateral  behind  the  notes; 
and  to  charge  Reserve  Banks  with  all  expenses  due  to  printing,  issue, 
and  retirement  of  such  notes  (sec.  16). 

17.  To  fix  charges  for  checks  cleared  through  Reserve  Banks  and  for 
transfer  of  funds  among  said  banks  (sec.  16). 

18.  To  establish  at  its  discretion  a  Clearing  House  for  Reserve  Banks,  or 
one  for  member  banks  (sec.  16). 

19.  To  require  Reserve  Banks  to  purchase  United  States  bonds  when  mem- 
ber banks  give  them  up  to  withdraw  circulation,  according  to  a  given 
allotment  (sec.  18). 

20.  To  grant  approval  of  refunding  of  2  per  cents  into  3  per  cents  by  the 
Secretary  of  the  Treasury  and  Reserve  Banks  (sec.  18). 


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308  JOURNAL  OF  POLITICAL  ECONOMY 

31.  To  permit  a  non-member  to  obtain  discounts  from  a  Reserve  Bank 
through  a  member  bank;  to  allow  the  reserve  of  a  member  bank  with 
its  Reserve  Bank  to  be  drawn  upon  under  penalties;  and  to  allow 
national  banks  in  Alaska  and  outside  the  continental  United  States 
(except  the  Philippines)  to  join  a  reserve  district  (sec.  19). 

33.  To  examine  member  banks;  to  accept  in  some  cases  examinations  of 
member  banks  by  state  authorities;  to  fix  salaries  of  examiners  (instead 
of  the  present  fee  system);  to  permit  special  examinations;  to  demand 
information  from  a  Reserve  Bank  at  any  time  r^arding  a  member 
bank;  to  order  an  examination  of  each  Reserve  Bank  at  least  once  a 
year  (sec.  si). 

33.  To  add  to  the  list  of  cities  in  which  national  banks  are  not  permitted 
to  loan  on  real  estate  (sec.  34). 

34.  To  approve  or  reject  applications  of  national  banks  to  establish  foreign 
branches,  and  to  order  examinations  of  said  branches  (sec.  25). 

35.  To  force  a  national  bank  to  cease  to  act  as  a  reserve  agent,  if  it  did  not 
enter  the  system  within  60  days  after  the  act  was  passed  (sec.  3). 

A  study  of  these  powers  of  the  Board  shows  that  they  are  mainly 
supervisory  or  administrative  after  the  general  example  of  the 
powers  of  the  Comptroller  of  the  Cxirrency  over  national  banks. 
In  a  few  respects,  however,  it  may  be  said  that  the  Board  has  more 
than  supervisory  powers. 

In  sec.  II  (6)  and  (c)  the  Board  is  given  power  to  require  one 
Reserve  Bank  to  discount  for  another,  and  to  suspend  reserve 
requirements  (for  member  banks  as  well  as  Reserve  Banks)  for  not 
more  than  thirty  days.  This  latter  power,  to  be  sure,  has  been 
exercised  in  effect  by  the  Comptroller's  discretion  in  not  dosing  a 
bank  whose  reserves  were  below  the  legal  limit.  In  making  general 
definitions  regarding  eligible  paper  for  discoimt  (sec.  13),  the  action 
of  the  Board  is  still  in  the  main  supervisory.  Moreover,  it  has  only 
powers  of  review,  not  initiative,  over  the  rate  of  discoimt  set  by 
the  respective  Reserve  Banks  (sec.  14).  Also,  the  Board  may 
reject  applications  from  Reserve  Banks  for  notes,  but  probably 
this  authority  is  only  to  be  exercised  in  order  to  restrict  imhealthy 
expansion,  or  because  the  collateral  was  imdesirable,  and  the  like. 
In  regard  to  establishing  a  system  of  clearings  (sec.  16),  however, 
the  Board  has  powers  of  initiative  which  are  certainly  more  than 
merely  supervisory,  touching  not  only  the  earnings,  but  the  existing 
methods  of  business  of  member  banks.    Also  quite  as  important 


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THE  BANKING  AND  CURRENCY  ACT  OF  igi3  309 

as  any  is  the  power  to  suspend  any  officer  or  director  of  any  Reserve 
Bank  [sec.  11  (/)],  which  means  obviously  any  director  elected  by 
the  banks  as  well  as  its  own  appointees.  Yet  it  is  to  be  observed 
that  in  no  case  is  the  Board  empowered  to  conduct  strictly  banking 
operations  of  discoimt  and  deposit. 

On  the  other  hand,  as  distinctly  opposed  to  the  Federal  Reserve 
Board,  stand  the  Federal  Reserve  Banks,  to  whom  are  given  all 
strictly  banking  fimctions  of  discoimt,  deposit,  and — ^in  a  practical 
sense — ^issue.  While  the  bill  was  in  the  hands  of  the  Senate  com- 
mittee an  attempt  was  made,  and  supported  by  the  Republican 
minority,  to  give  direct  banking  powers  to  the  Reserve  Board,  thus 
creating  a  type  of  central  bank.  Fortunately,  this  proposal  failed. 
Consequently,  the  success  of  the  new  system  must  depend  for  its 
essential  banking  operations  on  the  managements  of  the  respective 
Reserve  Banks. 

As  regards  the  general  question  of  control,  it  is  to  be  noted  that 
there  is  a  distinction  to  be  made  between  governmental  and  political 
control.  There  may  be  governmental  supervision  and  direction 
through  the  Reserve  Board  which  is  not  political,  provided  the 
Board  is  not  governed  by  political  motives  in  its  action.  Appoint- 
ment of  members  of  the  Board  by  the  President  should  not  mean 
political  management  any  more  than  in  the  case  of  the  supervision 
exercised  by  the  Comptroller  of  the  Currency  over  national  banks 
in  the  past;  or  any  more  than  presidential  appointment  of  judges 
means  political  decisions  on  the  law.  More  than  this,  it  is  to  be 
kept  in  mind  that  the  control  of  discoimts  and  deposits,  the  primary 
functions  in  a  banking  system,  is  placed  in  the  hands  of  the  Boards 
of  the  respective.  Reserve  Banks,  the  majority  of  whom  are  elected 
by  member  banks,  and  who  should  be  men  of  practical  banking 
experience.  Thus,  while  there  is  governmental  supervision  by  the 
Reserve  Board,  as  above  described,  all  questions  of  discounts  and 
use  of  deposits,  in  the  daily  roimd  of  business,  are  left  to  technical 
bankers. 

As  to  the  possibility  of  changing  the  political  character  of  the 
Reserve  Board,  let  us  assume  that  President  Wilson  is  succeeded  by 
a  Republican  on  March  4, 1917.  The  Board  is  now  being  appointed 
in  (say)  April,  1914.    Then  the  term  of  the  member  appointed  for 


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3IO  JOURNAL  OF  POLITICAL  ECONOMY 

4  years  will  expire  in  April,  1918;  and  of  the  one  for  6  years,  in 
April,  1920.  Hence  both  of  these  positions,  in  addition  to  the 
appointment  of  the  Secretary  of  the  Treasury,  may  be  filled  by  a 
new  President.  The  term  of  office  of  the  Comptroller  of  the 
Currency,  appointed  in  1914,  being  five  years,  his  successor  would 
be  named  by  a  new  President.  Thus  a  majority  of  the  Board 
(four  out  of  seven)  could  be  reconstituted  in  the  term  of  the  next 
President. 

The  co-ordinating  influence  of  a  supervisory  Board  will  go  far 
to  remedy  the  scattering  of  reserves  formerly  so  great  an  evil;  to 
establish  continuity  of  policy;  to  gain  co-operation  between  all  the 
banks  represented  in  the  Reserve  Banks;  to  check  trouble  in  one 
district  before  it  has  extended  to  another;  and,  without  the  dreaded 
centralization,  to  have  federation  with  local  government  in  each 
district.  Already  concentration,  without  legal  regulation,  had 
appeared,  but  it  had  not  prevented  scattering  of  reserves,  nor  an 
individualistic  condition  of  banking  (very  far  from  the  common 
control  that  had  been  so  much  feared).  The  legal  creation  of  a 
central  body  which  could  have  been  captured  and  used  would  have 
been  a  very  much  more  dangerous  thing.  Regional  banks,  each 
sovereign  in  its  own  district  as  regards  discoimts,  have  probably 
removed  this  danger  forever.  Moreover,  the  Federal  Advisory 
Coimcil,  one  member  chosen  respectively  by  each  Reserve  Bank, 
gives  the  Board  a  nexus  with  conditions  in  all  parts  of  the  Union, 
and  by  the  publicity  of  its  opinions  would  exercise  an  influence 
proportionate  to  the  soimdness  of  its  judgment. 

VI 

The  legislative  struggles  gathered  mainly  about  this  question  of 
central  control.  The  nice  point  in  the  result  was  the  right  adjust- 
ment of  the  powers  of  the  Over-Board  as  compared  with  those  of 
the  Reserve  Banks.  Here  was  the  need  of  high  legislative  skill  as 
well  as  of  practical  banking  insight.  The  outcome  is  remarkable. 
It  would  have  been  easy  to  go  too  far  in  either  direction.  On  the 
one  hand,  due  to  a  current  belief  that  a  control  over  credits  was 
possessed  by  the  larger  banks  of  New  York  City,  there  were  many 
who  regarded  government  control  of  banking  credits  as  the  only 


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TEE  BANKING  AND  CURRENCY  ACT  OF  1913  311 

means  for  securing  equality  of  treatment.  This  attitude  was  a 
part  of  the  present-day  tendency  to  press  for  increasing  govern- 
mental interference  with  trade  and  industry.  While  there  was 
opposition  to  a  central  bank  of  private  capital  and  of  private 
management,  there  was  more  or  less  support  for  a  central  bank 
owned  and  controlled  by  the  government.  Thus,  although  there 
was  a  well-preserved  tradition  in  the  Democratic  ranks  (based  on 
ignorance  of  the  real  services  of  the  Second  United  States  Bank, 
and  which  did  them  little  credit)  against  a  central  bank,  and 
although  Democrats  were  supposed  to  dislike  a  centralization  of 
political  power,  yet  the  opposition  to  the  plan  of  the  national 
Monetary  Commission  was  dearly  due,  not  so  much  to  fear  of  a 
central  bank,  as  to  the  fear  of  a  privately  capitalized  central  institu- 
tion which  might  be  controlled  by  the  "interests." 

On  the  other  hand,  sensible  men  of  all  parties  realized  that  it 
would  be  impracticable  to  allow  government  officials,  often  political 
appointees,  to  do  the  actual  work  of  technical  banking,  to  grant 
loans,  to  manage  resources  and  investments — in  short,  to  iixtroduce 
the  government  into  the  banking  business.  Political  control  was 
obviously  as  dangerous  as  private  financial  control;  and  it  would 
have  been  destructively  inefficient. 

The  solution  of  the  matter  finally  adopted  was,  interestingly 
enough,  centralization  by  districts;  that  is,  a  centralization 
intended  to  prevent  scattering  of  reserves  was  obtained  by  estab- 
lishing in  each  district  an  institution  itself  quite  similar,  in  powers 
within  its  jurisdiction,  to  the  National  Reserve  Association  of  the 
Monetary  Commission.  That  is,  the  government  was  saved  from 
going  into  the  banking  business  by  granting  local  centralization 
with  capital  and  management  supplied  by  the  banks,  and  yet 
federated  under  a  common  authority  in  order  to  establish  govern- 
mental direction  and  unity  of  purpose.  In  its  essence  this  plan 
retained  the  workings  of  local  self-government,  together  with  the 
operation  of  technical  banking  by  those  who  supplied  the  capital, 
imder  general  direction.  This  final  adjustment  which  secured  safe 
and  efficient  methods,  as  contrasted  with  the  chaotic  proposals 
which  might  have  been  adopted,  will  be  a  cause  of  permanent  con- 
gratulation.   The  nice  balancing  of  powers  between  governmental 


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312  JOURNAL  OP  POLITICAL  ECONOMY 

supervision  and  technical  banking  also  appears  in  not  going  too 
far  in  local  decentralization  as  illustrated  in  the  development  of  o\a 
clearing-house  operations.  In  these,  because  of  the  absence  of  any 
l^al  aids,  local  clearing-houses  had  been  granting  efficient  banking 
service  in  times  of  panic,  but  in  an  isolated,  imco-operative  manner. 
Detachment  went  to  extremes;  each  clearing-house  was  working 
less  efficiently,  because  working  by  itself. 

It  is  to  be  observed,  moreover,  that  the  solution  adapted  to 
our  conditions,  in  which  a  widely  scattered  system  of  individual 
banks  had  to  be  retained,  must  be  original  with  us.  In  no  other 
coimtry  were  the  conditions  the  same.  The  relation  of  a  Central 
Bank  in  European  states  to  other  banks  was  not  one  based  on  the 
existence  of  a  system  of  individualistic  and  niunerous  banks  carry- 
ing on  independent  operations.  Therefore,  while  retaining  self- 
management  of  privately  owned  banks,  co-operation  was  obtained 
by  Reserve  Banks  in  local  districts  under  management  by  bankers, 
while  country-wide  and  uniform  action  was  gained  by  governmental 
direction  through  a  Federal  Reserve  Board. 

The  difficulty  of  sectional  differences  of  interest  working  against 
each  other  would,  nevertheless,  have  to  be  met  in  the  practical 
workings  of  any  plan.  If  there  had  been  one  central  institution, 
pressure  would  have  been  brought  upon  the  central  management 
to  help  out  one  section  of  the  coimtry  at  the  expense  of  another. 
Under  a  system  of  regional  banks,  each  section  gets  the  support  of 
its  own  resources  first  of  all,  an  arrangement  by  which  sectional 
antagonism  is  reduced  to  the  minimum.  In  addition,  when  one 
section  is  in  trouble  beyond  its  own  powers  of  recovery,  then  by  aid 
of  the  Reserve  Board,  one  Reserve  Bank  may  come  to  the  aid  of 
another.  Such  a  practice,  it  is  to  be  noted,  has  been  going  on  in  an 
extra-legal  way  in  previous  years  whenever  the  banks  of  a  large 
center  have  sought  assistance  from  New  York.  Such  a  practice 
was  natural  and  inevitable.  In  the  new  law  such  practice  is  openly 
recognized  and  legalized.  It  is,  in  effect,  the  same  kind  of  action 
asked  for  by  one  borough,  whose  protective  equipment  has  been 
taxed  to  excess  by  fire  when  it  seeks  the  aid  of  another  borough, 
not  so  threatened. 


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THE  BANKING  AND  CURRENCY  ACT  OF  1913  313 

A  Federal  Reserve  Bank  is  to  be  established  in  each  of  at  least 
eight,  and  in  not  more  than  twelve,  districts, ''  apportioned  with  due 
regard  to  the  convenience  and  the  customary  course  of  business'' 
in  the  continental  United  States,  excluding  Alaska  (sec.  2).  This 
is  to  be  done  by  the  organization  committee,  who  have  at  this 
writing  not  yet  reported.  Not  only  existing  business  and  trans- 
portation relations  must  be  considered,  but  also  the  nature  of  the 
industries,  in  order  that  all  the  resources  of  a  district  should  not 
be  invested  in  only  one  kind  of  paper  presented  at  the  same  time. 
Obviously  delimitations  of  districts  may  seem  geographically 
curious,  but  yet  be  industrially  correct. 

Each  Reserve  Bank  wUl  perform  all  the  general  functions  of  a 
t3rpical  bank,  and  its  powers  may  briefly  be  enimaerated  as  follows: 

z.  To  incorporate,  have  succession  for  20  years,  and  sue  and  be  sued 

(sec.  4). 
3.  To  appoint  its  own  emplo3rees  (sec.  4). 

3.  To  have  all  the  special  powers  granted  in  this  act,  and  all  those  in- 
cidental to  carrying  on  its  business  of  banking  (sec.  4). 

4.  To  have  a  capital  of  not  less  than  $4,000,000  (sec.  2). 

5.  To  establish  branches  in  its  district,  and  designate  four  of  the  seven 
branch  directors  (sec.  3). 

6.  To  pay  dividends  on  stock,  if  eamed  (sec.  7). 

7.  To  determine  the  relative  amount  of  credit  granted  to  each  bank 
(sec.  4). 

8.  To  obtain  circulating  notes  after  the  manner  of  national  banks  in  the 
interim  before  Reserve  notes  supersede  national  bank  notes  (sees. 

4, 18). 

9.  To  provide  compensation  for  directors  (sec  4). 
zo.  To^be  exempt  from  taxation  (sec.  7). 

zi.  To  elect  a  member  of  the  Advisory  Council  (sec  za). 

Z3.  Tojpass  on  all  discounts  allowed  by  this  act  to  member  banks  (sec.  Z3). 

Z3.  To  fix  the  rate  of  discount  to  member  banks  (sec  Z4). 

Z4.  To  receive  dqposits  from  the  Treasury  or  member  banks,  if  it  keq>s  35 

per  cent  reserves  in  gold  or  lawful  money  (sees.  Z3,  z6). 
Z5.  To  hold  deposits  from,  and  open  accounts  with,  other  Reserve  Banks 

for  exchange  purposes  (sees.  Z3,  Z4). 
z6«  To  buy  and  sell  in  the  open  market  bankers'  acceptances  and  bills 

(sec.  14). 
Z7.  To  deal  in  gold  coin  at  home  and  abroad;  to  borrow  gold  on  security 

of  government  bonds,  etc  (sec  Z4). 


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314  JOURNAL  OF  POLITICAL  ECONOMY 

i8.  To  buy  and  sell  at  home  and  abroad  government  securities,  bills,  notes, 
revenue  warrants,  etc.  (sec.  14). 

19.  To  maintain  agencies,  correspondents,  and  banking  accounts  abroad 
for  dealings  in  bills  of  exchange  (sec.  14). 

20.  To  receive  government  deposits,  and  act  as  fiscal  agent  for  the  United 
States  (sec.  15). 

21.  To  present  commercial  collateral  and  obtain  Federal  Reserve  Notes,  if 
it  holds  a  40  per  cent  reserve  in  gold  for  them  (sec.  16). 

22.  To  receive  at  par  checks  on  member  banks  (sec.  16). 

23.  To  become  a  clearing-house  for  its  district  (sec.  16). 

24.  To  join  in  purchasing  not  over  $25,000,000  per  annum  of  United  States 
bonds  securing  circulation,  in  allotments  designated  by  the  Reserve 
Board  (sec.  18). 

25.  To  have  2  per  cent  bonds  refunded  into  3  per  cents  (sec.  18). 

26.  To  examine  member  banks  and  their  foreign  branches  (sec.  21). 

From  this  exposition  it  will  be  seen  that  each  Federal  Reserve 
Bank  is  to  perform  all  the  fundamental  banking  functions  of  issue^ 
discount,  and  deposit;  but  that  it  is  a  bank  for  banks,  and,  with  some 
exceptions  to  be  noted  later,  not  a  bank  for  the  public.  Viewed 
from  the  standpoint  of  correcting  existing  evils  in  our  banking  and 
currency  system,  it  will  be  found,  from  our  later  discussion,  that  the 
Federal  Reserve  Banks  are  established  for  the  purpose  of  providing 
(i)  through  the  issue  function  an  elastic  currency;  (2)  through  the 
discount  function  the  much-needed  elasticity  of  credit  by  a  reorgani- 
zation of  otir  credit  structure;  and  (3)  through  the  deposit  function 
an  effective  mobilization  of  bank  reserves  to  secure  co-operation  in 
times  of  stress;  and  (4)  to  abolish  the  antiquated  independent 
Treasury  system.  More  than  that,  a  possibility  of  an  extension  of 
the  clearings  functions  seems  to  open  up. 

These  facts  disclose  clearly  that  the  Reserve  Banks  form  the 
backbone  of  the  whole  system,  and  that  its  success  will  depend 
directly  upon  their  management.  Here  is  the  crux  of  the  whole 
matter.  Upon  the  directors  of  these  banks  lies  the  heaviest 
responsibility  arising  from  the  new  law.  It  is  very  much  to  be 
doubted  if  legislators  or  the  public  realize  the  practical  diflSiculty 
of  finding  the  men  competent  to  assume  this  responsibility,  and  of 
insuring  a  sound,  intelligent,  skilled,  and  judicious  management. 
Consequently,  the  methods  of  choosing  the  directors  and  officiab 
are  of  first  importance.    The  nine  directors  of  each  Reserve  Bank 


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TEE  BANKING  AND  CURRENCY  ACT  OF  igi3  315 

have  a  term  of  three  years,  and  are  divided  into  three  classes.  A, 
B,  and  C  (sec.  4).  The  three  members  of  Class  A  are  supposedly 
to  be  bankers,  and  are  chosen  by  the  member  banks  of  the  district. 
The  directors  of  each  member  bank  choose  one  elector;  from  the 
total  list  of  persons  nominated,  one  by  each  bank,  the  electors  are 
to  choose  the  three  directors  of  Class  A.  At  the  same  time  and  by 
the  same  electors,  three  directors  for  Class  B  are  to  be  chosen  in  the 
same  way,  who  shall  be  men  actively  engaged  in  commerce,  agri- 
culture, or  industry  within  the  district.  The  Reserve  Board 
appoints  the  three  members  of  Class  C,  who  shall  have  been  resi- 
dents of  the  district  for  at  least  two  years,  and  one  of  whom  shall  be 
designated  as  chairman  of  the  Board  of  Directors  and  also  as  the 
"Federal  Reserve  Agent."  In  short,  the  constituent  banks  have  the 
power  to  choose  more  than  a  majority  (6)  of  the  directors  of  each 
Reserve  Bank,  while  the  representative  of  the  Reserve  Board  is 
alwa)rs  present.  By  this  arrangement,  technical  banking  opera- 
tions are  relegated  to  the  Reserve  Banks,  and  the  responsibility 
for  good  or  bad  management  is  placed  on  the  banks  themselves,  on 
the  men  whom  they  have  elected. 

In  choosing  the  directors  of  Classes  A  and  B,  the  member  banks 
are  to  be  divided  into  three  general  groups;  "each  group  shall  con- 
tain as  nearly  as  may  be  one-third  of  the  aggregate  niunber  of  the 
member  banks  of  the  district  and  shall  consist,  as  nearly  as  may  be, 
of  banks  of  similar  capitalization  "  (sec.  4) .  Supposedly,  the  electors 
and  nominees  in  each  of  these  groups  act  separately.  If  so,  the  one- 
third  of  the  banks,  made  up  of  those  having  the  largest  capital, 
being  in  one  group,  elect  one  of  the  directors  in  each  class,  A  and 
B,  respectively.  Hence,  the  one-third  of  the  whole  number  of 
banks  in  the  district,  made  up  of  those  having  the  smallest  capital, 
being  in  one  group,  elect  one  director  in  Classes  A  and  B,  respec- 
tively. By  this  method  the  same  niunber  of  banks  having  the 
largest  capitalization  have  no  more  influence  in  electing  directors 
than  those  having  a  small  capital;  which  assiunes  that  banks  of 
small  capital  are  as  competent  as  large  and  successful  banks  to 
select  the  most  capable  directors.  Here  again  is  the  fear  of  the 
"money-power." 

Much  discussion  was  also  had  on  the  most  desirable  niunber  of 


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3i6  JOURNAL  OF  POUTICAL  ECONOMY 

Reserve  Banks.  Irrespective  of  banking  considerations,  to  poli- 
ticians it  was  of  course  imperative  to  have  one  in  each  congressional 
"deestrict."  To  believers  in  a  Central  Bank,  it  was  supposed  that 
a  small  nimiber,  like  fotir,  could  be  made  to  work  like  one.  The 
desire  for  decentralization,  however,  forced  a  larger  nimiber.  But 
it  was  a  mistake  to  fix  upon  any  definite  nimiber  at  the  outset.  It 
would  have  been  better  to  have  started  with  the  three  Central 
Reserve  cities  (New  York,  Chicago,  and  St.  Louis),  having  "regard 
to  the  convenience  and  customary  coxurse  of  business,"  and  to  have 
given  the  Reserve  Board  power  to  increase  the  nimiber  of  districts 
as  time  and  experience  demanded.  In  the  working  of  the  law 
as  it  stands,  we  shall  probably  have  another  illustration  of  the 
impossibility  of  legislation  to  change  materially  the  natural  tend- 
encies of  trade.  The  Reserve  Bank  in  New  York  City  will  be  the 
largest  and  most  influential  because  the  banking  capital  and  trade 
of  New  York  City  is,  and  will  remain,  the  largest.  In  times  of 
stress  other  parts  of  the  country  will  continue  to  some  extent  to  go 
to  New  York  or  Chicago  for  help,  solely  because  it  is  the  place 
where  help  can  be  had.  Yet,  apart  from  these  considerations,  it 
should  not  be  forgotten  that  the  mere  size  of  the  capital  of  a  bank 
is  no  measure  of  its  lending  power.  In  neither  men  nor  banks  is 
size  a  warrant  of  virtue.  The  quaUty  of  its  management,  the 
amount  of  its  deposits,  the  character  of  its  discounts  are  all  of  more 
importance  to  the  efi&dency  of  a  Reserve  Bank  than  the  amoimt  of 
its  capital. 

So  marked  a  departure  from  our  past  banking  institutions  and 
practices  as  is  involved  in  the  new  law  is  certain  to  encounter 
obstacles.  The  very  existence  of  discoxmts,  and  earnings  thereon,  in 
a  Reserve  Bank  depends  upon  the  rediscoxmting  of  paper  received 
in  the  course  of  business  by  member  banks  who  wish  to  get  assist* 
ance  from  a  Reserve  Bank ;  and  yet  rediscounting  has  been  generally 
regarded  in  this  coimtry  as  suspicious,  or  as  an  evidence  of  weakness. 
The  practical  imderhanded  devices  by  which  the  need,  indicated  by 
rediscounting,  has  been  actually  met  would  be  wholly  unnecessary 
under  the  new  act.  Obviously,  if  banks  of  high  standing  and 
strength  have  recourse,  as  they  undoubtedly  will,  to  rediscounting 
paper  at  a  Reserve  Bank,  any  small  bank  can  do  the  same  without 


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THE  BANKING  AND  CURRENCY  ACT  OF  X913  317 

casting  suspicion  upon  its  condition.  What  is  normal  and  usual 
will  cease  to  excite  comment.  But  since  rediscounting  has  been 
resorted  to  in  the  past  only  when  it  was  desired  to  strengthen  a 
bank's  reserves,  it  has  been  held  by  some  experienced  bankers  that 
recourse  to  the  Reserve  Banks  for  rediscounts  will  be  had  only  in 
times  of  stringency,  and  that  in  normal  conditions  of  trade  the 
Reserve  Banks  will  do  little  business. 

In  anticipation  of  inactive  funds,  provision  has  been  made  tcT^ 
allow  the  Reserve  Banks  to  engage  in  certain  open-market  opera- 
tions. It  is  xmderstood,  of  cotirse,  that  it  was  expected  these  banks 
would  discoxmt  only  for  member  banks,  and  not  for  the  public 
(except  as  later  explained).  The  power  to  invest  idle  funds  permits  ^ 
dealings  at  home  or  abroad  in  bonds  and  notes  of  the  United  States, 
and  bills,  notes,  revenue  bonds,  and  warrants  maturing  in  not  over 
six  months  to  anticipate  revenues  of  any  state  or  other  division  of 
the  United  States,  or  of  irrigation,  drainage,  or  reclamation  dis- 
tricts (sec.  14).  Such  dealings  are  to  be  carried  on  imder  rules  of 
the  Reserve  Board,  but  the  power  is  wide.  Under  "bills"  is 
included,  no  doubt,  ''bills  receivable,"  as  mentioned  in  the  section 
preceding  (sec.  13).  Such  bills,  as  well  as  domestic  bills  of 
exchange,  acceptances  authorized  by  this  act,  cable  transfers, 
bankers'  acceptances,  and  bills  of  exchange  ''of  the  kinds  and 
maturities  by  this  act  made  eligible  for  rediscoimt,  with  or  without 
the  indorsement  of  a  member  bank"  may  be  bought  and  sold 
"either  from  or  to  domestic  or  foreign  banks,  firms,  corporations, 
or  individuals"  by  a  Reserve  Bank  (sec.  14).  Here  we  have  a 
surprisingly  large  departure  from  the  limitation  of  business  to 
member  banks.  It  seems  to  suggest  large  possibilities  of  dealings 
with  the  public,  if  the  paper  is  in  the  form  of  bills  of  exchange,  etc. 
It  is  much  to  be  doubted  if  the  effect  of  these  provisions  has  been  - 
fully  foreseen. 

As  regards  dealing  in  public  securities,  or  foreign  bills  of 
exchange,  there  can  be  little  question;  but  it  is  to  be  noted  that 
dealings  in  the  securities  of  foreign  governments  are  not  included. 
It  was  tirged  in  behalf  of  a  Central  Bank  that  it  was  necessary  to 
the  maintenance  of  a  sufficient  fund  of  gold;  and  the  experience  of 
the  Bank  of  France  was  an  obvious  example  of  what  might  be  done. 


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3i8  JOURNAL  OF  POLITICAL  ECONOMY 

It  is  now  to  be  determined  whether  eight  or  more  Reserve  Banks 
can  preserve  our  gold  supply  as  well  as  one  central  institution,  or 
as  it  was  done  through  New  York  in  the  past  voluntarily.  Very 
much  can,  of  coiurse,  be  done  to  regulate  the  international  flow  of 
gold  by  skilful  dealings  in  foreign  exchange;  but  here  we  may  have 
no  imified  action.  On  the  other  hand,  we  are  a  gold-producing 
country;  and  the  Reserve  Banks  must  start  with  strong  gold 
reserves  behind  their  liabilities.  Yet,  apart  from  expected  move- 
ments of  gold  on  a  considerable  scale,  we  must  face  the  possibility 
of  a  great  and  \mexpected  emergency.  It  is  well  known  that  in  the 
past  we  have  had  no  ofiEidal  institution  capable  of  negotiating  for 
gold  with  the  great  European  banks.  Will  a  separate  Reserve 
Bank  be  regarded  as  satisfactory  ?  Perhaps  the  New  York  Reserve 
Bank  will  be  the  one  large  enough  to  be  relied  on.  However  that 
may  be,  each  Reserve  Bank  is  given  specific  power  "to  deal  in  gold 
coin  and  bullion  at  home  or  abroad"  and  "to  contract  for  loans  of 
gold  coin  or  bullion,  giving  therefor,  when  necessary,  acceptable 
security,  including  the  hypothecation  of  United  States  bonds  or 
other  securities  which  Federal  Reserve  banks  are  authorized  to 
hold"  (sec.  14).  Here  will  come  in  the  suitability  of  the  one-year 
3  per  cent  notes  not  having  the  circulation  privilege  given  in 
exchange  for  2  per  cent  bonds  having  the  circulation  privilege 

(sec.  18). 

J.  Laurence  Laughun 
Univbssity  or  CmcAGO 


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THE  FINANCIAL  POLICY  OF  THE  FEDERAL  RESERVE 

BANKS 

Banking  in  the  United  States  is  on  the  eve  of  a  great  develop- 
ment. No  matter  what  may  be  the  final  verdict  concerning  the 
Federal  Reserve  act,  momentous  changes  will  occur  affecting  every 
dass  of  financial  institution  and  every  business  man.  Congress, 
in  preparing  the  Federal  Reserve  act,  did  a  remarkably  good  piece 
of  work;  and  while  the  act  contains  defects,  yet  they  are,  in  the 
main,  of  a  minor  character  and  can  easily  be  remedied  as  experience 
more  clearly  indicates  the  cure.  But  the  national  legislature  can- 
not, by  itself,  erect  a  superstructure  on  our  banking  system  which 
will  give  entire  satisfaction.  The  great  problem  which  now  faces 
the  country  concerns  the  skill  with  which  the  new  system  is  to  be 
operated. 

It  should  be  emphasized  that  the  Federal  Reserve  Banks  are 
largely  under  the  control  of  the  bankers  of  the  coimtry.  Six  out 
of  the  nine  directors  of  each  are  to  be  elected  by  them,  while  two  of 
the  three  Class  C  members,  to  be  designated  by  the  Federal  Reserve 
Board,  must  be  men  of  tested  banking  experience.  It  is  thus 
possible  that  eight  out  of  nine  of  the  directors  of  the  Federal 
Reserve  Banks  will  be  men  of  banking  experience.  Four  of  the 
seven  directors  of  the  branches  of  each  Federal  Reserve  Bank, 
elected  by  the  parent  institution,  will  doubtless  be  bankers.  The 
responsibility  for  the  successful  operation  of  the  Federal  Reserve 
Banks  is  thus  clearly  placed  upon  the  member  banks. 

A  director  of  a  Federal  Reserve  Bank  will  have  to  deal  with 
very  different  problems  from  those  which  he  handled  in  his  service 
with  a  member  institution.  Such  matters  as  whether  Jones,  the 
comer  grocer,  should  be  allowed  to  discount  a  note,  or  whether  it 
is  advisable  for  the  bank  to  purchase  certain  bonds,  will  no  longer 
be  of  prime  importance  to  them.  The  directors  of  the  Federal 
Reserve  Banks  must,  of  course,  give  careful  consideration  to  the 
character  of  paper  which  their  institution  rediscoxmts;  but  reliance 
must  be  placed  not  so  much  upon  personal  knowledge  of  the 

319 


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320  JOURNAL  OF  POLITICAL  ECONOMY 

borrower  as  upon  a  system  of  credit  information  which  will  be 
operated  by  paid  employees. 

The  real  problems  which  the  Federal  Reserve  Banks  will  handle 
are  problems  with  which  their  directors  unfortunately  may  be 
imfamiliar  at  the  beginning.  As  a  witness  before  the  Senate  Com- 
mittee on  Banking  and  Currency  well  said,  the  Federal  Reserve 
Banks  must  not  be  '^  commonplace  banks,  organized  and  operating 
for  profit."  While  it  is  hoped  and  expected  that  these  institutions 
will  be  profitable,  at  least  to  the  extent  of  paying  the  6  per  cent 
cumulative  dividend  on  their  stock,  yet  when  this  is  accomplished 
it  is  not  the  intent  of  the  law  that  the  efforts  of  the  Board  of  Direc- 
tors should  be  devoted  mainly  to  increasing  the  profits  of  the  bank's 
operations. 

The  Federal  Reserve  Banks  will  control  enormous  resources,  the 
management  of  which  is  a  problem  reqidring  the  greatest  acumen, 
skill,  and  ability.  The  paid-in  capital  of  the  Federal  Reserve 
Banks,  if  only  the  national  banks  enter,  will  aggregate  in  the 
neighborhood  of  $53,000,000;  and  when  the  system  has  been  fully 
put  into  operation  the  required  payments  by  member  banks,  repre- 
senting a  part  of  their  reserves,  upon  the  basis  of  present-day 
conditions,  will  aggregate  in  the  neighborhood  of  $365,000,000. 
In  addition  to  this  the  member  banks  may  carry  all  or  any  part  of 
their  optional  reserves,  aggregating  $240,000,000,  on  deposit  with 
the  reserve  banks.  We  can,  therefore,  say  that  Federal  Reserve 
Banks  will  hold  deposits  of  their  member  banks  at  least  equal  to 
$365,000,000,  and  probably  numing  as  high  as  $605,000,000. 
Indeed  it  is  very  likely  that  the  deposits  of  member  banks  may 
considerably  exceed  the  higher  amoimt.  These  balances  imder  the 
provisions  of  the  Federal  Reserve  act  can  be  checked  against,  and 
wiU  no  doubt  be  extensively  used  for  the  purpose  of  selling  exchange. 
In  order  to  keep  the  minimum  reserve  required  by  the  law,  the 
member  banks  will  have  to  keep  on  deposit  considerably  more 
than  the  amoimts  named  above.  It  is  possible,  therefore,  that  the 
deposits  of  member  banks  may  range  as  high  as  $650,000,000  to 
$750,000,000. 

Finally  there  remain  for  consideration  the  deposits  of  the 
government.    It  is  optional  with  the  Secretary  of  the  Treasury  to 


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FINANCIAL  POLICY  OP  PEDERAL  RESERVE  BANKS     321 

keep  balances  with  the  Federal  Reserve  Banks.  It  is  presumed 
that  he  will  carry  a  large  part  of  the  funds  now  in  the  Treasury  on 
deposit  with  these  institutions.  K  such  should  prove  to  be  the 
case,  the  resotirces  of  the  Reserve  Banks  would  thereby  be  increased 
somewhere  between  $150,000,000  and  $200,000,000.  Smnming 
up,  we  find  that  so  far  as  one  can  tell  at  the  present  time,  the  aggre- 
gate resources  of  the  Reserve  Banks  may  range  somewhere  between 
$418,000,000  and  $1,000,000,000. 

The  directors  of  the  Federal  Reserve  Bank  will  find  that  they 
should  carry  a  much  larger  reserve  than  that  to  which  they  had 
been  accustomed.  The  act  provides  that  "every  Federal  Reserve 
Bank  shall  maintain  reserves  in  gold  or  lawful  money  of  not  less 
than  thirty-five  per  centum  against  its  deposits  and  reserves  in 
gold  of  not  less  than  forty  per  centum  against  its  Federal  Reserve 
notes  in  actual  circulation,  and  not  o£fset  by  gold  or  lawful  money 
deposited  with  the  Federal  Reserve  agent." 

One  of  the  greatest  weaknesses  in  American  banking  in  the  past 
has  been  the  almost  imiversal  practice  of  carrying  the  minimum 
reserve  allowed  by  the  law.  If  the  Federal  Reserve  Banks  pursue 
such  a  policy,  trouble  is  inevitable.  The  importance  of  a  large 
reserve  cannot  be  too  strongly  emphasized,  and  the  directors  of 
these  institutions  must  be  forced,  by  public  opinion,  if  necessary,  to 
realize  that  they  are  the  trustees  of  the  nation's  prosperity  and 
that  they  must  carry  large  reserves.  It  is  not  necessary  that  these 
banks  shall  carry  a  definite  percentage  at  all  times.  As  a  matter 
of  fact  no  central  bank  in  the  world  follows  such  a  practice.  The 
size  of  thfe  reserve  should  depend  upon  the  probability  of  a  severe 
stress  being  placed  upon  the  institution.  Preceding  times  of  great 
banking  tension  the  Federal  Reserve  Banks  should  use  every 
means  at  their  command  to  strengthen  their  position  by  increasing 
their  reserves.  It  would  be  very  unsafe  for  the  Federal  Reserve 
Banks  customarily  to  allow  their  reserves  to  run  down  below  50 
per  cent,  and  safety  demands,  at  least  in  the  early  years  when  the 
system  is  getting  into  operation,  that  the  reserves  shall  run  perhaps 
as  high  as  75  per  cent.  If  the  policy  of  large  reserves  is  pursued 
and  if  the  Federal  Reserve  Banks  religiously  adhere  to  the  practice 
of  keeping  their  reserves  almost  entirely  in  the  form  of  gold,  their 


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322  JOURNAL  OF  POLITICAL  ECONOMY 

ability  to  assist  the  member  banks  in  times  of  financial  stress  will 
be  xmquestioned  and  the  primary  purpose  of  the  Federal  Reserve 
act  will  be  accomplished. 

Closely  related  to  the  reserve  which  should  be  carried  by  the 
Reserve  Banks  is  the  matter  of  the  proportion  of  the  reserve  pay- 
ments of  member  banks  which  can  be  made  in  the  form  of  re- 
discounts. The  law  specifies  that  the  Reserve  Banks  may  permit 
member  banks  to  make  one-half  of  their  aggregate  reserve  pay- 
ments in  the  form  of  rediscoxmts.  If  such  should  prove  to  be  the 
rule,  the  cash  reserves  of  the  Reserve  Banks  would  thereby  be 
materially  affected  at  the  outset.  Upon  the  basis  of  otir  mini- 
mum estimate  of  the  resotirces  of  the  Reserve  Banks,  namely 
$418,000,000,  supposing  one-half  of  the  reserve  payments,  aggregat- 
ing $365,000,000,  were  made  by  rediscounts,  the  Reserve  Banks 
would  begin  business  with  a  cash  reserve  of  approximately  56 
per  cent,  and  with  rediscounts  of  approximately  $180,000,000. 
Upon  the  basis  of  aggregate  resotirces  of  $808,000,000  of  which 
$605,000,000  is  composed  of  bank  reserve  balances — ^made  up  one- 
half  in  paper  rediscounted,  and  one-half  by  cash  payments — the 
cash  reserve  would  be  44  per  cent.  It  is  obvious  that  great 
caution  must  be  used  in  this  connection. 

Congress  was  wise  in  giving  to  the  Reserve  Banks  discretion 
concerning  this  matter.  To  decide  what  banks  or  what  sections 
should  be  allowed  to  rediscoxmt  in  connection  with  reserve  pay- 
ments will  require  the  highest  intelligence  and  skill.  Indeed, 
while  it  is  impossible  to  go  into  the  subject  in  any  detail,  one  of  the 
most  serious  problems  which  will  confront  the  directorates  of  the 
Reserve  Banks  relates  to  the  entire  matter  of  making  reserve  pay- 
ments during  the  first  three  years,  and  getting  the  system  into 
operation. 

It  is  interesting  to  speculate  what  rate  of  profit  the  Federal 
Reserve  Banks  must  make  upon  the  money  which  they  loan  out 
in  order  to  meet  their  dividend  requirements.  Presuming,  by  way 
of  illustration,  an  average  reserve  against  deposit  liabilities  of  65 
per  cent  and  disregarding  the  expense  of  doing  business,  it  would 
appear  that  upon  the  basis  of  $418,000,000  of  resources,  the  Federal 
Reserve  Banks  would  have  to  secure  an  average  net  income,  of 


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FINANCIAL  POLICY  OP  PEDERAL  RESERVE  BANKS     323 

2 .  18  per  cent  upon  their  loans  and  investments.  Upon  the  basis  of 
$808,000,000  of  resources,  the  required  average  net  rate  of  return 
would  be  about  i .  13  per  cent. 

Nothing  can  be  foretold  as  to  what  proportion  the  expenses  of 
operation  of  the  Federal  Reserve  Banks  will  bear  to  their  deposits. 
During  the  year  ending  Jxme  30,  1913,  the  operating  expenses, 
losses,  and  taxes  of  the  central  reserve  city  banks  were  equivalent 
to  4  per  cent  on  their  deposits.  It  is  not  likely  that  the  operat- 
ing expenses  of  the  Federal  Reserve  Banks  will  be  so  heavy,  for 
the  central  reserve  dty  banks  have  a  much  larger  nimiber  of  deposit- 
ors and  a  more  expensive  kind  of  business.  If  the  Federal  Reserve 
Banks  should  vigorously  develop  their  clearing  and  collection  busi- 
ness the  expense  arising  from  this  branch  will  be  enormous,  prob- 
ably approximating  closely  the  present  expenses  of  the  central 
reserve  city  institutions.  However,  it  is  possible  for  the  Reserve 
Banks  to  tax  their  clearing  and  collection  expenses  back  upon  the 
member  banks,  and  such  a  policy  should  be  pxirsued.  It  will  be 
impossible  for  the  Reserve  Banks  to  carry  as  heavy  expenses  as 
the  central  reserve  city  institutions,  to  name  a  suitable  rate  of 
rediscount,  and  at  the  same  time  earn  their  dividends. 

No  accoimt  has  thus  far  been  taken  of  any  interest  payment 
to  the  government  or  upon  the  deposits  of  member  banks.  The 
Federal  Reserve  act  is  silent  as  to  whether  the  Reserve  Banks  will 
be  required  to  pay  interest  to  the  government  upon  its  deposits. 
Inasmuch  as  the  excess  profits  of  the  bank,  over  the  6  per  cent  divi- 
dend and  the  amoimt  set  aside  for  surplus,  go  to  the  government, 
the  payment  of  interest  to  the  government  upon  its  deposits  would 
be,  in  substance,  nothing  but  an  advance  payment  of  a  portion  of 
the  profits  which  would  eventually  accrue  to  the  United  States, 
if  the  earnings  of  the  Reserve  Banks  should  prove  to  be  more  than 
was  necessary  to  pay  the  6  per  cent  cumulative  dividend.  The 
Secretary  of  the  Treasury,  however,  is  given  discretion  whether 
he  will  make  deposits  with  the  Federal  Reserve  Banks;  and  since 
the  law  requires  that  national  banks  shall  pay  at  least  i  per  cent 
interest  upon  government  deposits  and  such  larger  amoimt  as  the 
Secretary  of  the  Treasury  shall  require,  the  failtire  to  require  the 
Federal  Reserve  Banks  to  pay  interest  may  put  the  administration 


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324  JOURNAL  OF  POUTICAL  ECONOMY 

in  an  embarrassing  position.  The  innuendo  will  be  heard  that  the 
Secretary  of  the  Treasury  is  playing  into  the  hands  of  the  Federal 
Reserve  Banks;  that  he  is  voluntarily  depriving  the  government 
of  income  which  it  might  otherwise  secure  if  the  funds  were  depos- 
ited with  member  institutions,  and  that  the  Reserve  Banks  should 
be  required  to  pay  at  least  the  same  interest  as  the  member  banks. 

At  the  same  time  there  will  doubtless  arise  a  very  determined 
campaign  on  the  part  of  member  banks  to  require  the  Reserve 
Banks  to  pay  interest  to  them  upon  their  deposits.  Every  banker 
has  become  accustomed  to  the  2  per  cent  interest  paid  upon  reserve 
accoxmts  with  present  reserve  agents,  and  if,  when  he  is  obliged  to 
shift  these  accoxmts  to  the  Federal  Reserve  Bank,  he  finds  that  he 
no  longer  receives  any  income  upon  these  funds,  he  will  complain 
bitterly.  It  is  apparent  to  any  student  of  modem  banking  condi- 
tions that  a  large  part  of  our  difficulties  in  the  past  have  arisen 
because  of  the  practice  of  paying  interest  upon  bankers'  deposits. 
If  the  Federal  Reserve  Banks  should  emulate  the  example  of  the 
old  reserve  agents  and  pay  such  interest,  they  will  at  once  open  the 
door  to  the  same  abuses.  Moreover,  a  2  per  cent  interest  rate 
upon  government  and  bankers'  deposits  would  require  a  rediscount 
rate  in  the  neighborhood  of  6  per  cent,  which  would  entirely 
destroy  the  theory  of  the  act,  because  it  would  be  impossible  to  get 
member  banks  to  rediscount  at  such  a  prohibitive  r4te.  No  great 
central  bank  in  Exirope  generally  follows  the  practice  of  paying 
interest  upon  bankers'  deposits,  and  it  is  the  duty  of  the  directors 
of  the  Federal  Reserve  Bank  to  make  it  clear  that  they  will  not  fall 
into  this  serious  error. 

Insistence  upon  a  non-interest  policy  will  be  difficult.  The 
average  country  bank  receives  by  way  of  interest  on  its  reserve 
accounts  about  $930.00  per  annum,  a  sum  equal  approximately  to 
7.7  per  cent  of  its  total  net  income.  The  average  reserve  dty 
bank  receives  as  interest  on  its  reserve  accoxmts  about  $15,250  j)er 
year,  which  approximates  about  12.2  per  cent  of  its  net  income. 
The  banks  will  not  tamely  surrender  this  income,  particularly  if 
experience  does  not  demonstrate  coxmtervailing  advantages. 

One  other  feature  concerning  the  reserve  policy  of  the  Federal 
Reserve  Banks  deserves  careful  consideration.    A  very  important 


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FINANCIAL  POUCY  OF  FEDERAL  RESERVE  BANKS     325 

power  possessed  by  these  institutions  is  the  right  to  issue  Federal 
Reserve  notes  secured  by  the  deposit  of  commercial  paper  and  by 
a  gold  reserve  equal  to  at  least  40  per  cent  of  the  notes  technically 
outstanding.  The  act  provides  that  each  Federal  Reserve  Bank 
shall  pay  such  a  rate  of  interest  on  the  amoxmt  of  notes  outstand- 
ing as  may  be  established  by  the  Federal  Reserve  Board.  This 
interest  charge  may  play  an  important  part  in  the  financial  policy 
of  the  Federal  Reserve  Banks.  It  is  possible  that  the  Federal 
Reserve  Board  may  make  the  rate  of  interest  so  small  that  it  will 
be  a  negligible  factor.  Again,  the  rate  of  interest  may  be  fixed  at 
a  substantial  amount.  It  is  altogether  probable  that  the  Board 
will  change  the  rate  from  time  to  time,  fixing  a  low  rate  at  times 
when,  in  its  judgment,  it  is  desirable  to  have  notes  issued  and 
advancing  the  interest  rate  when  the  Board  desires  to  limit  expan- 
sion. So  long  as  interest  is  charged,  it  is  obviously  to  the  advan- 
tage of  a  Federal  Reserve  Bank  to  pay  out  lawful  money  or  its  own 
bond-secured  notes  rather  than  to  issue  Federal  Reserve  notes. 
The  former  are  untaxed,  and,  so  long  as  they  are  in  its  vaults,  bring 
in  no  income.  Unless  the  directors  of  the  Federal  Reserve  Banks 
adhere  to  a  broad-minded,  liberal  policy,  there  will  inevitably  be 
a  temptation  to  draw  down  the  lawful  money  reserve  and  even  to 
reduce  the  gold  reserve,  in  order  to  escape  the  tax  on  Federal 
Reserve  notes.  Such  a  policy  would  be  a  national  misfortune. 
So  long  as  the  reserves  of  the  Federal  Reserve  Banks  are  above  the 
point  demanded  by  safety  and  good  judgment,  there  is  no  reason 
why  demands  for  funds  by  a  member  bank  should  not  be  met  out 
of  the  stock  of  lawful  money  and  gold  in  the  vaults  of  the  Reserve 
Banks.  But  when  the  reserves  of  the  Reserve  Banks  fall  to  the 
point  where  any  further  depletion  would  weaken  them  or  cause 
anxiety  among  bankers  and  business  men,  the  Federal  Reserve 
Banks  should  disregard  all  thought  of  the  saving  which  they  can 
effect  by  paying  out  lawful  money  and  should  resort  to  the  practice 
of  issuing  Federal  Reserve  notes. 

If  a  contrary  policy  were  ptirsued  and  the  reserves  were  brought 
down  the  banks  would  thereby  throw  away  the  opportunity  of  later 
issuing  Federal  Reserve  notes  should  an  emergency  arise.  The 
ability  to  issue  Federal  Reserve  notes  in  the  long  run  depends  upon 


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326  JOURNAL  OF  POUTICAL  ECONOMY 

the  amount  of  gold  which  the  Federal  Reserve  Bank  possesses,  for 
the  maximum  amoimt  of  notes  which  can  be  issued  is  really  limited 
by  the  gold  reserve  which  the  bank  is  required  to  hold  against  them. 
Disregarding  for  the  moment  the  reserve  against  the  deposits  of  the 
Federal  Reserve  Banks,  it  can  be  readily  seen  that  if  there  is  a  sur- 
plus of  $100,000,000,  exbting  in  the  form  of  gold,  it  is  theoretically 
possible  for  the  Federal  Reserve  Banks  to  issue  Federal  Reserve 
notes  up  to  the  amoxmt  of  $250,000,000.  The  power  to  issue  notes 
freely  and  without  any  violation  of  the  reserve  requirements  is  one 
of  the  strongest  assets  which  the  Federal  Reserve  Bank  possesses  to 
prevent  or  check  a  panic  or  serious  financial  stringency,  and  the 
ability  to  issue  notes  is  dependent  upon  the  maintenance  of  a  large 
surpliis  reserve,  chiefly  in  gold,  so  that  when  the  demand  arises, 
there  will  be  no  difficulty  in  keeping  40  per  cent  gold  reserve  against 
the  notes  demanded. 

It  must  be  borne  clearly  in  mind  that  the  observance  of  this 
policy  in  no  way  increases  the  likelihood  of  inflation.  It  really 
makes  no  difference,  in  so  far  as  the  volimie  of  circulation  is  con- 
cerned, whether  the  bank  withholds  ten  dollars  of  gold  or  lawful 
money  and  pays  out  ten  dollars  of  Federal  Reserve  notes,  in  response 
to  the  demands  of  the  member  banks,  or  whether  it  ships  the  law- 
ful money  itself.  The  volume  of  money  in  circulation  is  the  same 
in  both  cases.  Indeed,  if  the  policy  of  prudently  issuing  Federal 
Reserve  notes  is  followed,  the  likelihood  of  inflation  is  not  so  great, 
for  this  money  cannot  be  used  by  the  member  banks  as  a  part  of 
their  lawful  reserve  and  hence  is  more  likely  to  be  returned  to  the 
Federal  Reserve  Bank.  Nor  is  there  added  danger  of  an  miwise 
issue  of  Federal  Reserve  notes,  because  the  Reserve  Banks  keep  a 
large  gold  reserve.  The  large  reserve  is  kept  against  the  possi- 
bility that  it  will  be  necessary  to  issue  unexpectedly  a  large  amoxmt 
of  notes  in  response  to  some  emergency.  The  question  whether 
or  not  notes  are  to  be  issued  is  entirely  different  from  the  question 
of  the  bank  so  managing  its  affairs  as  to  be  able  to  issue  the  notes 
whenever  occasions  arise. 

What  should  be  the  investment  policy  of  the  Federal  Reserve 
Banks  ?  The  act  limits  them  to  the  rediscoimt  for  member  banks 
of  notes,  drafts,  and  bills  of  exchange  arising  out  of  actual  commer- 


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FINANCIAL  POUCY  OF  FEDERAL  RESERVE  BANKS     327 

dal  transactions,  with  a  matority  at  the  time  of  discoiint  of  ninety 
days  to  six  months,  and  of  acceptances  indorsed  by  at  least  one 
bank,  which  are  based  on  the  importation  or  exportation  of  goods 
and  which  have  a  maturity  at  the  time  of  discoimt  of  not  more  than 
three  months.  They  have  the  right  to  deal  in  gold  coin  and  bullion, 
to  buy  and  sell  bonds  and  notes  of  the  United  States,  within  certain 
limitations,  and  revenue  warrants  issued  in  anticipation  of  taxes 
by  states,  coimties,  or  other  political  subdivisions,  and  having  a 
maturity  of  not  exceeding  six  months.  In  addition,  the  Reserve 
Banks  can  purchase  and  sell  in  the  open  market  or  to  banks, 
firms,  corporations,  or  individuab,  cable  transfers  and  bills  of 
exchange  and  bankers'  acceptances  of  the  kind  made  eligible  for 
rediscount. 

It  seems  obvious  that  the  cardinal  policy  of  these  banks  should 
be  to  hold  themselves  in  readiness  and  be  able  to  rediscoxmt  for 
member  banks  whenever  and  to  whatever  extent  the  demand  arises, 
so  long  as  the  borrowing  bank  can  be  safely  granted  the  accommo- 
dation. If  the  policy  of  keeping  a  good  surplus  over  and  above 
the  specified  minimimi  reserve  is  followed,  this  should  always  be 
possible.  The  prime  fimction  of  the  Reserve  Banks  is  to  redis- 
count for  member  institutions,  and  they  should  never  lose  sight  of 
this  fact.  It  does  not  follow,  of  course,  that  the  Federal  Reserve 
Banks  should  rediscoxmt  for  member  banks  whenever  called  upon 
to  do  so.  In  fact,  there  will  be  many  tunes  when  prudence  and 
good  banking  judgment  will  demand  that  a  member  institution  be 
refused  additional  accommodation  because  it  is  overextending 
itself  or  because  commercial  conditions  in  that  locality  are  such 
that  a  fxirther  extension  of  credit  would  be  a  misfortune  rather  than 
a  blessing. 

In  order  to  manage  its  rediscount  policy  intelligently  it  will  be 
necessary  for  the  Board  of  Directors  of  a  Federal  Reserve  Bank  to 
devise  a  system  by  which  the  main  characteristics  of  the  business 
of  each  member  bank  can  be  ascertained  at  any  tune,  so  that  when 
an  application  for  rediscounts  is  submitted,  the  Board  wUl  be  in 
possession  of  complete  information  to  determine  whether  it  is  wise 
to  grant  the  accommodation.. 

In  addition,  the  Board  of  Directors  of  the  Federal  Reserve  Bank 


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328  JOURNAL  OF  POUTICAL  ECONOMY 

is  charged  with  the  task  of  keeping  constantly  infonned  concern- 
ing business  conditions  in  every  part  of  their  territory.  This  is 
a  gigantic  task  and  it  is  doubtful  whether  it  could  be  accomplished 
were  it  not  for  the  existence  of  the  bank's  branches  from  which 
valuable  information  and  advice  can  be  secured.  As  a  matter  of 
fact,  a  large  part  of  the  success  of  the  Federal  Reserve  Banks  will 
depend  upon  the  administration  of  these  branches.  The  branch- 
bank  directors  will  inevitably  be  much  better  acquainted  with  local 
conditions  than  will  the  ofiEicers  of  the  parent  institution,  and  they 
will  have  greater  opportunities  for  observation  and  the  passing 
of  intelligent  judgment  concerning  applications  for  rediscounts  by 
member  banks. 

If  we  are  correct  in  otir  conclusion  that  the  primary  function 
of  the  Reserve  Banks  is  to  rediscoimt  for  member  banks  and  there- 
by assist  in  financing  commercial  operations,  it  must  follow  that 
the  other  channels  of  investment  are  of  secondary  importance. 
The  policy  of  the  Federal  Reserve  Banks  as  regards  the  purchase 
of  government  bonds  should  be  governed  by  the  needs  of  the 
coxmtry  for  additional  currency,  the  possible  voluntary  retirement 
of  a  part  of  the  present  national  bank  note  circulation,  or  a  desire 
to  sustain  the  prices  of  government  bonds.  So  long  as  the  bond- 
secured  notes,  which  can  be  issued  by  the  Reserve  Banks  against 
the  government  bonds  owned  by  them,  can  be  kept  in  circulation 
without  difficulty  or  harm  to  the  coimtry,  there  is  no  reason  why 
these  banks  should  not  make  moderate  investments  of  this  char- 
acter. They  should  alwa)rs  keep  in  mind,  however,  that  they  are 
not  investment  institutions,  but  that  their  resources  must  be  kept 
liquid  so  that  almost  unlimited  aid  may  be  extended  to  the  member 
banks  and  business  interests. 

Investments  in  foreign  bills  will  form  an  important  part  of  the 
assets  of  some  of  the  Reserve  Banks.  Not  only  is  this  a  safe  and 
attractive  outlet  for  funds,  but  it  fximishes  a  valuable  aid  in  pro- 
tecting our  gold  supply.  Carefxil  study  should  be  given  by  the 
directorates  of  our  Reserve  Banks  to  the  foreign  exchange  problem 
in  order  that  the  Reserve  Banks  may  be  of  the  greatest  possible 
service  to  the  foreign  commerce  of  the  nation.  Through  their 
newly  authorized  foreign  branches  our  national  banks  can  accept 


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FINANCIAL  POLICY  OF  FEDERAL  RESERVE  BANKS     329 

dollar  drafts  for  which  a  market  can  be  made  by  their  sale  to  the 
branches  of  o\ir  Reserve  Banks. 

Except  to  furnish  a  market  for  idle  funds  there  is  no  reason  why 
the  Reserve  Banks  should  make  much  use  of  the  power  to  pxirchase 
revenue  warrants  issued  by  mimicipalities  against  future  income. 
The  channels  of  miuudpal  borrowing  are  well  developed,  and  such 
loans  now  command  very  attractive  rates  of  interest.  This  type 
of  investment  will  always  be  one  of  secondary  importance. 

Finally,  the  Reserve  Banks  possess  the  power  to  purchase 
domestic  bills  of  exchange  from  banks  or  in  the  open  market  directly 
from  firms,  corporations,  and  individuab.  It  is  important  to 
remember  that  while  the  Reserve  Banks  cannot  buy  commercial 
paper  directly  from  business  men  yet  they  can,  if  they  so  desire, 
purchase  domestic  accepted  commercial  drafts.  Will  this  power 
be  extensively  exercised?  Only  time  can  tell.  The  New  York 
Clearing-House  Association  is  on  record  as  favoring  a  return  to  the 
old  system  of  drafts  instead  of  our  present  practice  of  open  book 
accoimts  and  borrowing  on  single-name  paper.  Other  influential 
organizations  are  taking  the  same  stand.  Btit  even  if  after  several 
years  such  a  change  is  introduced  it  does  not  follow  that  the  Reserve 
Banks  will  make  extensive  use  of  their  power  to  purchase  such  drafts. 
To  do  so  would  place  them  in  active  competition  with  the  member 
banks  which  had  been  compelled  to  furnish  the  capital  now  used 
to  wage  competition.  It  is  very  possible,  however,  that  the 
Reserve  Banks  may  find  this  power  of  distinct  value  in  seeking  a 
profitable  outlet  for  idle  funds,  in  forcing  an  observance  of  their 
lending  policies,  and  in  promoting  better  methods  of  conmierdal 
borrowing. 

Summing  up,  therefore,  it  seems  dear  that  the  cardinal  prindple 
in  the  management  of  the  Federal  Reserve  Banks  will  be  to  dis- 
regard the  course  which  will  lead  to  maximum  profits,  following 
instead  the  path  which  will  lead  to  the  greatest  safety  and  which 
will  permit  these  banks  to  be  of  the  greatest  service  to  the  nation. 
Large  reserves  should  be  maintained,  and  these  should  consist 
chiefly  of  gold.  The  payment  of  interest  upon  bankers'  deposits 
and  government  deposits  should  be  avoided,  if  possible,  for  the 
reason  that  the  payment  of  interest  will  force  the  keeping  of  smaller 


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330  JOURNAL  OP  POUTICAL  ECONOMY 

reserves,  if  the  cumulative  dividend  is  to  be  earned.  The  banks 
should  be  managed,  not  from  the  standpoint  of  profit,  but  from  the 
standpoint  of  safety. 

Yet  this  is  but  one  side  of  the  policy  of  the  Federal  Reserve 
Banks.  Their  power  and  influence  can  be  made  to  extend  much 
farther  than  would  result  solely  from  the  wise  management  of  their 
own  affairs.  These  banks  are  the  financial  trustees  of  the  nation. 
The  coimtry  will  look  to  them  to  see  that  they  exercise  over  the 
member  banks  a  closer  supervision  and  discipline  than  has  been 
possible  in  the  past.  Supplementing  a  negative  control  by  the 
bank  examiners,  who  are  powerless  so  long  as  the  letter  of  the  law 
is  observed,  the  Federal  Reserve  Banks  will  be  a  great  positive 
force.  The  Federal  Reserve  Banks,  with  the  approval  of  the 
Federal  Reserve  agent  or  the  Federal  Reserve  Board,  may  conduct 
examinations  of  a  member  bank,  both  for  the  pxirpose  of  ascertain- 
ing its  condition,  and,  what  will  be  of  equal  importance,  for  the 
purpose  of  determining  the  lines  of  credit  which  are  being  extended 
by  it. 

In  the  long  nm,  the  greatest  work  which  the  Federal  Reserve 
Banks  can  do  for  the  business  men  of  this  coimtry  is  to  improve 
and  standardize  the  methods  of  commercial  borrowing.  I  believe 
it  is  possible  for  these  banks,  with  the  approval  of  the  Federal 
Reserve  Board,  imder  the  power  just  quoted,  to  establish  a  compre- 
hensive credit  information  clearing  service  through  which  the 
aggregate  loans  of  aU  large  borrowers  can  be  known  by  any  bank 
official  and  through  which  excessive  borrowing  or  the  lending  of 
money  to  concerns  pursuing  imwise  financial  policies  can  be  checked 
before  disaster  overtakes  them.  This  is  one  of  the  greatest  needs 
of  our  banking  system.  Because  of  the  highly  competitive  con- 
ditions which  have  always  existed  and  the  large  number  of  bank- 
ing institutions  which  we  have,  every  bank  has  been  forced  to  lend 
more  or  less  in  the  dark.  The  result  has  been  that  losses  have  been 
sustained  which  have  prejudiced  many  institutions  against  commer- 
cial paper,  diverting  money  which  should  be  turned  into  the  chan- 
nels of  business  into  collateral  loans  to  the  disadvantage  of  the  entire 
coimtry.  The  standard  of  commercial  paper  must  be  raised  and 
this  can  be  done  only  by  eliminating  the  weak  debtor.    It  is  to  be 


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FINANCIAL  POLICY  OP  PEDBRAL  RESERVE  BANKS     331 

hoped  that  every  Federal  Reserve  Bank  will  use  its  great  power 
for  the  pxirpose  of  achieving  this  much-desired  end. 

We  might  sum  it  all  up  in  the  conclusion  that  these  banks  are 
not  to  be  like  our  member  banks  have  been,  '^  commonplace  insti- 
tutions organized  and  operating  for  profit,"  but  are  to  be,  in  the 
fullest  sense  of  the  term,  public  servants,  constantly  studying 
banking  conditions  and  following  a  course  which  will  promote 
banking  and  commercial  safety  and  prosperity  rather  than  one 
which  will  yield  the  largest  income  to  their  stockholders.  There- 
fore, the  director  of  the  Federal  Reserve  Bank  must  be  an  entirely 
different  type  from  the  ordinary  director  of  the  member  bank. 
He  must  be  a  student — ^a  man  who  is  willing  to  devote  a  large  amoimt 
of  time  to  a  study  of  business  and  banking  conditions,  and  who  has 
the  peculiar  gift  of  being  able,  by  the  sifting  of  a  tremendous  amoimt 
of  information,  to  secure  a  correct  and  complete  picture  of  the 
situation  as  it  exists.  The  directors  of  the  Federal  Reserve  Banks 
must  be  prepared  at  times  to  adopt  policies  which  may  cause  the 
bank  large  expenditures  or  involve  losses,  if  such  steps  are  neces- 
sary to  promote  the  welfare  of  their  territory.  It  often  has  been 
said  that  there  is  no  altruism  in  business;  yet  if  the  Federal  Reserve 
Banks  are  to  achieve  the  largest  measure  of  success,  they  must 
be  managed  on  an  altruistic  basis.  Time  will  demonstrate  whether 
this  can  be  expected.  Power  sobers  men,  and  responsibilities 
develop  the  grasp  and  ability  necessary  to  handle  a  situation.  The 
first  few  months  and  years  will  be  the  critical  period,  but  if  it  is 
possible  to  develop  a  group  of  traditions  and  fixed  principles  of 
the  right  kind,  in  these  formative  years,  there  is  every  reason  to 
believe  that  the  Federal  Reserve  Banks  of  the  United  States  can 
be  of  as  great  service  to  this  nation  as  the  Bank  of  England,  the 
Bank  of  France,  or  the  Reichsbank  have  been  to  their  respective 

coimtries. 

Thomas  Conway,  Je. 

Whabion  School  or  Finamcb  and  Cqiocercb 
Unwessttt  or  Pknnstlvania 


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BANKING  RESERVES  UNDER  THE  FEDERAL 
RESERVE  ACT 

For  the  purposes  of  this  discussion  the  provisions  of  the  new 
law  relative  to  reserves  may  be  grouped  under  three  heads:  those 
pertaining  to  the  transfer  of  reserves  from  the  present  reserve- 
holding  banks  to  the  new  Federal  Reserve  Banks;  those  providing 
for  a  diminution  and  a  change  in  the  composition  of  the  reserves  of 
member  banks;  and  those  pertaining  to  the  reserves  to  be  held  by 
the  Federal  Reserve  Banks  against  notes  and  deposits. 

Under  the  first  head  it  is  reqxiired  that  for  a  period  of  twelve 
months  after  the  Secretary  of  the  Treasury  shall  have  officially 
annoimced  the  establishment  of  a  Federal  Reserve  Bank,  tuH)" 
twdfihs  of  the  reqxured  reserves  of  all  coimtry  bank  members  and 
tkree-fifteenths  of  those  of  all  reserve  dty  bank  members  shall  be 
kept  on  deposit  in  said  Federal  Reserve  Bank,  and  that  for  each 
succeeding  six  months  an  additional  twelfth  in  the  former  case  and 
an  additional  fifteenth  in  the  latter  shall  be  so  deposited  imtil  the 
total  shall  amoimt  to  five-twelfths  in  the  case  of  co\mtry  banks  and 
to  six-fifteenths  in  the  case  of  reserve  dty  banks.  Member  banks 
in  central  reserve  dties  must  keep  with  the  Federal  Reserve  Bank 
of  their  district  at  all  times  at  least  seven-eighteenths  of  their  reqxiired 
reserves.  One-half  of  the  required  deposit  in  each  case  may  take 
the  form  of  paper  eligible  for  rediscoimt.  It  is  to  be  inferred  that 
the  other  half  must  be  lawful  money.  After  three  years  from  the 
date  of  the  establishment  of  the  Federal  Reserve  Banks,  balances 
in  other  banks  may  not  be  coimted  as  reserves. 


TABLE  I 

RxQunsD 

iM  FXOERAK  RSSBRVS  BaXU 

Pint 
X3  Months 

Fint  Succeed- 
ing 6  Months 

Second  Soooeed- 
iiig6Months 

Theiesfter 

OotDitiy  bulks 

1448,558,000.86 
a86,xxg,©75.ao 
884,560,1x1.68 

%  74,7593x6.80 

xxo,66a,a65.63 

$xx9,X5o,7a5.ao 

76,g8.66o.04 

xxo,663,965.63 

8x49.5x9*633.60 
xxo|66s,a65.63 

$x86,8oo,S4«.» 

EMervedtj  bank* ......... 

Centnl  leterve  dtj  bukt. . . 

339 


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BANKING  RESERVES  UNDER  FEDERAL  RESERVE  ACT     333 

On  the  assumption  that  all  national  banks  and  none  others 
become  members  of  the  new  organization,  the  amoimts  involved  are 
as  given  in  Table  I,  the  statistics  supplied  by  the  report  of  the 
Comptroller  of  the  Currency  for  February  10,  1914,  constituting 
the  basis  of  the  calculation. 

What  the  situation  will  be  in  the  case  of  each  Federal  Reserve 
Bank  it  will,  of  course,  be  impossible  to  state  imtil  the  number  and 
exact  boimdaries  of  the  districts  are  determined.  The  Tninimiim 
amounts  of  lawful  money  that  must  be  transferred  to  the  Federal 
Reserve  Banks  for  reserve  purposes  according  to  these  statistics 
are  indicated  in  Table  II. 


TABLE  n 


AtBeginnmf 


X3  Months  After 


18  Months  After 


aYetisAfter 


From  countiy 
banks 

From  reserve  dty 
banks 

From  central  re- 
serve dty  banks 


l37,379i908.40 
28,611,997.51 
55,331,132.81 


$18,689,954.20 
9,537,332.50 


$18,689,954.20 
9,537,332.50 


$18,689,954.20 
9,537,332.50 


At  the  date  to  which  these  statistics  refer  Qanuary  13,  1914) 
the  country  banks  had  on  hand  in  specie  and  legal  tenders  $284,- 
038,437.67,  the  reserve  dty  banks,  $268,682,167.44,  and  the  cen- 
tral reserve  banks,  $429,198,815 . 45.  Had  the  new  Federal  Reserve 
Banks  been  established  at  that  date,  therefore,  the  country  banks 
would  have  been  obliged  to  transfer  to  the  new  institutions  for 
reserve  pxirposes  an  amount  of  cash  equal  to  13 .  i  per  cent  of  their 
cash  holdings,  the  reserve  dty  banks,  an  amount  equal  to  10.6  per 
cent  of  their  cash  holdings,  and  the  central  reserve  banks  an  amoimt 
equal  to  12 . 9  per  cent  of  their  cash  holdings.  It  is  highly  probable, 
of  course,  that  the  coimtry  banks  will  shift  a  considerable  portion 
of  this  burden  to  the  reserve  dty  banks  and  these  in  turn  to  the 
central  reserve  banks.  That  it  Will  not  be  necessary  for  them  so 
to  do,  however,  is  evident  from  Table  III.  This  table  indicates 
that  on  January  13, 1914,  each  group  coidd  have  made  the  necessary 
transfers  from  its  own  cash  holdings  and  have  had  enough  remain- 
ing to  meet  the  required  payments  on  accoimt  of  subscriptions  to 


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334 


JOURNAL  OF  POLITICAL  ECONOMY 


the  capital  stock  of  the  new  institutions  and  to  satisfy  the  require- 
ments regarding  reserves  that  must  be  kept  in  the  form  of  cash  in 

vaidts. 

TABLE  m 


Country  Banks 


Reserve  City  Bsnks 


Central  Reserve 
City  Banks 


Total  money  holdings  January 
13. 1914 


One-half  reserve  deposit . 

Capital  subscription 

Reserve  in  vaults 

Net  balance 


$284,038^7.67 

37,611,997.51 

29,822,010.37 

186,899,542.00 

29,704,887.79 


$268,682,167.44 

28,611,997.51 

I3»435,704.04 
114,447,990.06 

112,186,475.83 


$429,198,815.45 

5S>33i.i32.8i 
10,4451850.00 

94,853.370.54 
268,568,462.10 


Indeed,  if  the  amoimt  of  the  reqxiired  deposits  for  reserves  in  the 
Federal  Reserve  Banks  had  been  made  wholly  in  cash  instead  of 
one-half,  the  amoimt  assumed  in  the  above  calculations,  the  coun- 
try banks  woidd  have  needed  to  draw  upon  their  balances  with  the 
reserve  dty  banks  to  the  amoimt  of  only  $7,907,109 .  72,  the  reserve 
dty  banks  could  have  made  the  payment  and  had  remaining 
$83,574,478.32,  and  the  central  reserve  banks  could  have  made  the 
payment  and  had  $213,237,329.29  remaining. 

It  is  evident,  therefore,  that  the  transfers  of  lawful  money 
required  by  the  inauguration  of  the  Hew  system  will  not  make 
demands  upon  the  banks  which  they  will  be  unable  to  meet.  Will 
such  transfers  be  likely  in  any  way  to  embarrass  them  or  their  cus- 
tomers ?  Only  in  case  the  net  balance  remaining  after  these  trans- 
fers have  been  made  is  inadequate  to  meet  the  cash  demands  made 
U{>on  the  banks  by  their  regular  customers,  and  then  only  during 
a  possible  interval  between  the  date  of  making  these  transfers  and 
the  date  of  the  opening  of  the  Reserve  Banks  for  business.  After 
such  opening,  cash  in  all  necessary  amounts  should  be  obtainable 
through  rediscounts. 

The  probability  that  there  will  be  any  embarrassment  even  dur- 
ing this  interval  is  very  slight.  In  the  first  place,  all  the  necessary 
preparations  for  opening,  including  the  printing  of  notes  and  their 
delivery  to  the  subtreasuries,  can  and  should  be  made  in  advance 
of  any  calls  for  cash  by  the  Federal  Reserve  Banks;  and  with  pres- 
ent facilities  for  transportation  the  necessary  transfers  precedent 
to  opening  can  be  made  in  a  day  or  two  at  the  longest    It  is  also 


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BANKING  RESERVES  UNDER  FEDERAL  RESERVE  ACT     335 

highly  probable  that  the  surplus  cash  remaining  in  the  banks  after 
these  transfers  will  be  more  than  adequate  to  supply  the  need  dur- 
ing this  short  interval.  Of  course  conditions  will  vary  among 
different  banks  and  in  some  cases  there  will  need  to  be  a  transfer 
of  balances  from  correspondents  and  reserve  agents,  and  perhaps 
a  temporary  curtailment  of  credits.  It  will  usually  be  possible  to 
avoid  the  latter,  however,  by  sales  of  investment  securities,  loans 
from  correspondents,  or  rediscoimts  with  them. 

More  important  than  these  temporary  effects,  however,  are  the 
readjustments  of  banking  relations  which  will  idtimately  residt  and 
which  will  be  permanent.  After  three  years  from  the  opening  of 
the  Federal  Reserve  Banks,  aU  reserve  balances  of  member  banks 
must  be  withdrawn  from  present  reserve  agents;  and,  if  the  clearing 
system  which  the  new  organization  is  authorized  to  establish  is  put 
into  operation,  it  is  probable  that  a  large  portion  of  the  exchange 
balances  now  kept  with  correspondents  Will  be  transferred  to  the 
Federal  Reserve  Banks.  That  is  to  say,  existing  reserve  and  some 
of  the  most  important  exchange  relations  between  banks  will  be 
severed  and  new  ones  formed  with  the  Federal  Reserve  Banks. 
Previous  to  the  selection  of  the  cities  in  which  these  banks  are  to  be 
located  and  the  settlement  of  the  boimdaries  of  the  districts  and 
the  location  of  the  branches,  it  will  be  impossible  to  forecast  with 
any  degree  of  certainty  what  effects  upon  our  banking  system  these 
changes  will  produce.  Probably  the  focal  points  will  be  shifted, 
though  not  greatly,  if  branches  are  established  in  all  existing  reserve 
cities.  The  cities  in  which  the  Federal  Reserve  Banks  are  located 
will,  of  course,  become  the  primary  focal  points,  and  those  in  which 
branches  are  located,  the  secondary  ones.  Washington  will  become 
the  clearing-center  unless,  as  is  possible,  the  Federal  Reserve 
Board  should  decide  to  transfer  it  to  New  York  or  Chicago. 

The  primary  focal  points  of  the  new  system,  that  is,  the  Federal 
Reserve  Banks,  will  doubtless  serve  as  cash  reservoirs  and  cash 
distributing  centers  to  a  greater  extent  than  the  present  reserve 
agents,  since  banks  will  not  need  to  carry  so  much  cash  in  their 
vaidts  as  they  do  at  the  present  time  and  the  means  of  obtaining 
cash  as  needed  will  be  greatly  facilitated.  If  the  facilities  for  trans- 
acting business  with  the  Federal  Reserve  Banks  are  properly  mul- 


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336  JOURNAL  OF  POUTICAL  ECONOMY 

tdplied  through  the  extension  of  branches  and  agencies,  the  practice 
of  hoarding,  so  widespread  at  the  present  time,  ought  to  be  entirely 
discontinued  in  time,  and  our  banks  ought  to  become  accustomed 
to  rely  upon  the  Federal  Reserve  Banks  for  their  daily  supplies  of 
cash,  as  European  banks  do  upon  their  central  institutions.  The 
new  law  still  requires  the  hoarding  of  a  certain  amoimt  of  cash,  but 
we  may  hope  that  the  acquisition  of  the  habit  of  relying  upon  the 
Federal  Reserve  Banks  for  daily  supplies  may  in  time  demonstrate 
the  absurdity  of  hoarding  even  for  reserve  purposes  and  ultimately 
result  in  the  amendment  of  this  feature  of  the  law. 
^/  How  the  transfer  of  reserve  and  exchange  balances  to  the  Fed- 

eral Reserve  Banks  will  affect  the  kinds  and  methods  of  business 
and  the  profits  of  the  banks  which  now  hold  these  balances  can  be 
only  conjectured  at  this  date.  It  seems  highly  probable,  indeed 
ahnost  certain,  that  the  call  loan  business  on  the  New  York  Stock 
Exchange  will  be  considerably  diminished.  The  reserve  funds  now 
devoted  ahnost  exclusively  to  that  business  will  be  diverted  to  other 
uses  both  in  and  outside  of  New  York  City,  and  commercial  paper 
will  compete  with  these  loans  on  the  open  market  on  a  different 
basis  and  much  more  efficiently  than  ever  before.  It  seems  not 
improbable  that  these  two  forms  of  investment  may  change  places 
in  the  regard  of  bankers  and  in  time  approximate  the  relations  they 
now  occupy  on  the  London  market.  In  other  words,  the  stock- 
broker will  no  longer  have  the  advantage  over  aU  other  classes  of 
borrowers  of  being  able  to  furnish  the  most  easily  marketable 
security.  On  the  contrary,  he  will  be  at  a  disadvantage  in  com- 
parison with  other  merchants  and  manufacturers  in  that  his  paper 
will  not  be  rediscoimtable  at  the  Federal  Reserve  Banks. 

There  is  no  good  reason  for  thinking  that  ample  funds  for  the 
operation  of  the  New  York  and  other  stock  markets  of  the  coimtry 
will  not  be  forthcoming  imder  the  new  system,  but  such  funds  will 
probably  be  drawn  from  strictly  investment  rather  than  commercial 
sources  to  a  greater  extent  than  at  present,  and  the  rates  charged 
on  them  will  not  be  subject  to  such  wide  fluctuations  and  will 
ordinarily  be  higher  than  at  present.  As  a  consequence  of  these 
changes  the  proportion  of  speculative  to  other  kinds  of  business 
ought  to  decline  and  security  values  ought  to  be  more  stable. 


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BANKING  RESERVES  UNDER  FEDERAL  RESERVE  ACT     337 

Throughout  the  entire  country  and  espedally  in  the  reserve 
dties  the  demand  for  commercial  paper  should,  and  doubtless  will, 
greatly  increase,  and  the  rate  of  discount  should  correspondingly 
fall.  Such  paper  will  everjrwhere  constitute  the  chief  element  in 
the  secondary  reserves  of  all  banks,  non-member  as  well  as  member, 
and  such  reserves  will  form  a  larger  proportion  of  the  total  than  at 
the  present  time.  The  result  will  doubtless  be  a  differentiation  of 
commercial  and  investment  paper  to  a  degree  imknown  at  the 
present  day  in  this  country.  When  the  ordinary  biisiness  man  is 
able  to  market  commercial  paper  at  a  rate  considerably  lower  than 
investment  paper,  he  will  be  supplied  with  a  motive  for  distinguish- 
ing between  the  two  which  he  does  not  now  possess,  and  the  banks 
will  aid  and  encourage  him  in  so  doing  because  they  must  make 
the  distinction  whenever  they  rediscoimt  with  the  Federal  Reserve 
Banks. 

Such  differentiation  ought  to  have  far-reaching  consequences. 
If  it  is  made  general  and  insisted  on  in  the  practice  of  all  banking 
institutions,  one  of  the  most  potent  causes  of  commercial  crises  will 
be  removed.  In  my  judgment,  such  a  cause  is  to  be  recognized  in 
the  present  widespread  practice,  especially  among  country  banks, 
of  establishing  lines  of  credit  on  the  basis  of  a  customer's  total 
wealth  rather  than  of  the  magnitude  of  his  commercial  transactions, 
and  of  loaning  to  him  on  his  personal  note  with  the  expectation  and 
frequently  with  the  implied  promise  of  an  indefinite  number  of 
renewals.  In  times  of  expansion  this  practice  almost  necessarily 
results  in  inflation  of  credit  and  ultimately  in  forced  liquidation 
which,  if  widespread  and  sufficiently  great  in  magnitude,  almost 
inevitably  produces  a  crisis. 

Next  to  the  transfer  of  reserve  funds  from  present  reserve  agents 
to  the  Federal  Reserve  Banks,  the  most  important  feature  of  the 
new  reserve  system  is  the  diminution,  in  proportion  to  deposits,  of 
the  reserves  reqxiired  to  be  maintained  by  member  banks,  and  the 
change  in  the  composition  of  these  reserves.  In  the  case  of  country 
banks  the  diminution  of  the  reserves  against  demand  deposits  is 
from  15  per  cent  to  12  per  cent,  in  that  of  reserve  dty  banks  from 
25  per  cent  to  15  per  cent,  and  in  that  of  central  reserve  dty  banks 


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338  JOURNAL  OF  POLITICAL  ECONOMY 

from  25  per  cent  to  i8  per  cent.  In  the  case  of  time  deposits  the 
percentage  is  to  be  reduced  to  s  for  all  banks.  After  three  years, 
only  cash  in  vaults  and  balances  with  Federal  Reserve  Banks  may 
be  coimted  as  reserves  and  the  distribution  between  the  two  must 
be  as  follows:  in  coimtry  banks,  at  least  4/12  cash  in  vaults  and 
5/12  balances  and  the  remaining  3/12  distributed  between  the  two, 
as  the  bank  pleases;  reserve  dty  banks,  at  least  6/15  cash  in  vaults, 
6/15  balances,  and  the  remaining  3/15  distributed  between  the  two 
as  the  bank  pleases;  and  in  central  reserve  dty  banks,  at  least  6/18 
cash  in  vaults,  7/18  balances,  and  the  remaining  5/18  distributed 
between  the  two  as  the  bank  pleases. 

H  Under  the  new  system  it  will  be  possible  for  banks  with  safety 
to  approach  the  minimxim  set  by  law  much  more  dosely  than  they 
can  at  the  present  time,  for  the  reason  that  rediscoimtable  com- 
mercial paper  will  then  be  convertible  into  cash  on  short  notice  and 
authority  to  suspend  the  reserve  requirements  will  rest  with  the 
Federal  Reserve  Board.  The  important  question  for  considera- 
tion in  this  connection  is:  Will  the  banks  be  likdy  to  expand  to 
the  limits  set  by  these  lowered  reserve  reqxiirements,  and,  if  they 
do,  what  will  be  the  result  ? 

An  important  factor  in  the  determination  of  the  extent  to  which 
the  banks  will  avail  themselves  of  this  possible  power  of  expansion 
will  be  the  policy  pursued  by  the  Federal  Reserve  Board  in  its 
definition  of  the  paper  which  may  be  admitted  to  discoimt  imder 
the  terms  of  the  new  law,  and  its  policy  in  relation  to  the  issue  of 
Federal  Reserve  notes  and  the  control  of  rediscounts  by  the  Federal 
Reserve  Banks. 

Sec.  13  of  the  act  leaves  considerable  discretion  to  the  Federal 
Reserve  Board  in  the  determination  of  the  paper  admissible  to 
rediscount.    The  second  paragraph  reads  as  follows: 

Upon  the  indorsement  of  any  of  its  member  banks,  with  a  waiver  of 
demand,  notice  and  protest  by  such  bank,  any  Federal  Reserve  Bank  may  dis- 
coimt notes,  drafts,  and  bills  of  exchange  arising  out  of  actual  commercial  trans- 
actions; that  is,  notes,  drafts,  and  bills  of  exchange  issued  or  drawn  for  agri- 
cultural, industrial,  or  commerdal  purposes,  or  the  proceeds  of  which  have  been 
used,  or  are  to  be  used,  fir  sudi  purposes,  the  Federal  Reserve  Board  to  have 
the  right  to  determine  or  define  the  character  of  the  paper  thus  eligible  for 
discoimt,  within  the  meaning  of  this  act.    Nothing  in  this  act  contained  shall 


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BANKING  RESERVES  UNDER  FEDERAL  RESERVE  ACT     339 

be  construed  to  prohibit  such  notes,  drafts,  and  bills  of  exchange,  secured  by 
st^le  agricidtund  products,  or  other  goods,  wares,  or  merchandise  from  being 
eligible  for  such  discount;  but  such  definition  shall  not  include  notes,  drafts, 
or  bills  covering  merely  investments  or  issued  or  drawn  for  the  purpose  of 
carrying  or  trading  in  stocks,  bonds,  or  other  investment  securities,  except 
bonds  and  notes  of  the  government  of  the  United  States.  Notes,  drafts,  and 
bills  admitted  to  discount  under  the  terms  of  this  paragraph  nmst  have  a  matur- 
ity at  the  time  of  discount  of  not  more  than  ninety  days:  Provided,  That  notes, 
drafts,  and  bills  drawn  or  issued  for  agricultural  purposes  or  based  on  live  stock 
and  having  a  maturity  not  exceeding  six  months  may  be  discounted  in  an 
amount  to  be  limited  to  a  percentage  of  the  capital  of  the  Federal  Reserve 
Bank,  to  be  ascertained  and  fixed  by  the  Federal  Reserve  Board. 

In  the  interpretation  of  the  phrases  "actual  commercial  trans- 
actions," "issued  or  drawn  for  agricidtural,  industrial,  or  commer- 
cial purposes,"  "to  be  \ised  for  such  purposes,"  and  "merely  invest- 
ments," considerable  latitude  is  possible.  The  difference  between 
a  construction  of  these  terms  balsed  upon  an  accurate  knowledge  of, 
and  a  strict  regard  for,  the  fimdamental  processes  of  our  economic 
life  and  sound  principles  of  banking  and  one  based  strictly  on  legal 
conceptions,  court  decisions,  the  derivation  of  words,  etc.,  may  be 
very  great.  The  difference  between  a  strict  and  a  liberal  inter- 
pretation on  any  basis  may  also  be  great.  If  these  terms  are  inter- 
preted in  such  a  manner  as  to  confine  rediscoimts  to  the  paper  which 
represents  the  growing  and  harvesting  of  the  crops  and  their  move- 
ment from  producers  to  consumers,  the  movement  of  raw  material 
and  labor  through  the  various  processes  required  for  their  trans- 
formation into  manufactures  ready  for  consimaption,  and  the  dis- 
tribution of  these  manufactures  to  final  consumers,  the  expansion 
of  the  banks  will  be  automatically  regulated.  In  other  words  they 
will  expand  to  the  extent  that  is  necessary  for  the  proper  conduct 
of  these  fimdamental  processes  and  no  farther.  But  if  paper  is 
allowed  to  be  accepted  for  rediscount  which  represents  equipment, 
the  indefinite  holding  of  crops  or  manufactured  goods  for  improved 
market  conditions,  irrigation,  drainage,  and  other  similar  projects — 
paper  which  might  easily  be  made  to  conform  technically  to  the 
requirements  of  Sec.  13 — the  expansion  of  the  banks  will  depend 
upon  such  artificial  stimuli  and  restraints  as  may  be  supplied  by 
the  good  or  bad  judgment  of  their  officers  or  by  the  action  of  the 


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340  JOURNAL  OP  POUTICAL  ECONOMY 

Federal  Reserve  Board  in  the  exercise  of  its  power  over  note  issues 
and  discount  rates. 

/  By  issuing  notes  freely  and  permitting  a  rate  of  discount  below 
that  of  the  markets  in  which  the  Federal  Reserve  Banks  are  located, 
the  Board  may  stimidate  expansion,  and  by  the  opposite  policy  it 
may  curb  any  movement  in  that  direction.  The  kind  of  judgment 
exercised  by  the  officers  of  the  member  banks  will  depend  in  no 
small  degree  upon  the  extent  of  their  ability  to  distinguish  between 
commercial  and  investment  paper  and  upon  their  appreciation  of 
the  importance  of  this  distinction.  To  create  and  diflhise  this 
ability  and  appreciation  will  require  a  campaign  of  education  begun 
at  once  and  strenuoiisly  pursued  for  a  considerable  period  of  time. 

At  the  present  time  most  officers  and  the  general  public  are 
unaware  that  such  a  distinction  in  reality  exists.  Their  experience 
and  training  has  tended  to  obscure  rather  than  to  reveal  it.  Bank 
officers  have  been  accustomed  to  grant  lines  of  credit  to  their  cus- 
tomers on  the  basis  of  their  total  worth  rather  than  of  the  volxune 
of  their  commercial  transactions,  and  the  customers  have  freely  used 
the  funds  advanced  them  for  all  their  needs,  investment  as  well  as 
commercial.  So  long  as  they  have  kept  within  the  lines  granted 
them,  they  have  expected  to  have  their  notes  renewed  indefinitely 
and  have  been  encouraged  in  this  expectation  by  the  practice  of  the 
bankers. 

The  current  use  of  the  term  "commercial  paper"  is  also  mis- 
leading. To  most  people  it  means  paper  which  is  handled  by  a 
broker  as  distinguished  from  that  which  comes  to  the  bank  directly 
from  the  makers.  It  may  or  may  not  be  commercial  paper  in  the 
proper  sense  of  that  term. 

To  change  these  ideas  and  practices  will  reqxiire  conscious  effort, 
the  exercise  of  financial  pressure,  and  time.  The  Federal  Reserve 
Board  will  need  to  make  clear  at  the  outset  the  distinction  between 
commercial  and  investment  paper  and  to  hold  the  Federal  Reserve 
Banks  strictly  to  its  observance  in  their  rediscounts  and  open  mar- 
ket operations.  By  these  means  the  member  banks  will  be  forced 
to  give  attention  to  it  and  to  bring  it  to  the  attention  of  their 
customers.  By  a  slight  difference  in  the  rates  charged  on  commer- 
cial and  investment  paper,  business  men  can  readily  be  induced  to 


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BANKING  RESERVES  UNDER  FEDERAL  RESERVE  ACT     341 

separate  the  one  from  the  other,  but  they  will  need  instruction 
regarding  how  to  do  it,  and  the  source  of  such  instruction,  at  the 
beginning  at  any  rate,  must  be  the  Federal  Reserve  Board. 

At  the  very  beginning,  of  course,  it  will  be  impossible  to  remove 
all  imcertainty  regarding  the  character  of  the  paper  that  is  offered 
for  rediscount.  The  greater  part  of  the  assets  of  most  of  the  mem- 
ber banks  consists  of  promissory  notes  which  do  not  bear  upon 
their  faces  any  evidence  regarding  the  nature  of  the  transaction  in 
which  they  originated,  and  the  bankers  who  own  them  will  not  be 
able  to  furnish  much  evidence  on  this  point.  They  will  be  willing 
and  able  to  guarantee  the  payment  of  the  paper  at  maturity  and 
the  Federal  Reserve  Banks  will  have  to  be  content  with  such 
guaranties.  But  as  soon  as  the  new  machinery  is  in  full  operation 
and  there  has  been  time  for  the  member  banks  to  readjust  their 
methods  and  practices,  there  should  be  strict  insistence  upon  the 
presentation  of  evidence  that  the  paper  offered  for  rediscoimt  is 
actually  commercial  in  character,  and  in  the  reports  which  the 
member  banks  are  reqxiired  to  make  to  the  Federal  Reserve  Board 
a  classification  of  their  assets  into  commercial  and  investment 
paper  ^ould  be  insisted  upon,  and  the  examiners  should  be  in- 
structed to  give  special  attention  to  this  classification  and  to  aid 
the  metnber  banks  in  drawing  the  line  accurately. 

Regarding  the  adequacy  of  these  checks  against  overexpansion, 
experience  alone  can  furnish'  the  final  test.  The  power  granted  the 
Federal  Reserve  Board  seems  to  be  sufidently  great.  If  it  errs  in 
applying  the  commercial  paper  brake,  it  still  may  limit  note  issues 
and  force  up  the  rates  of  discount.  Unless  it  fails  correctly  to 
read  the  signs  which  indicate  overexpansion  and  permits  imsound 
conditions  to  develop  to  too  great  an  extent,  it  ought  to  be  able  to 
control  the  situation  without  difficulty. 

Sec.  16  of  the  new  law  provides  among  other  things  that  "evay 
Federal  Reserve  Bank  shall  maintain  reserves  in  gold  or  lawful 
money  of  not  less  than  thirty-five  per  centum  against  its  deposits 
and  reserves  in  gold  of  not  less  than  forty  per  centum  against  its 
Federal  Reserve  notes  in  actual  circulation,  and  not  offset  by  gold 
or  lawful  money  deposited  with  the  Federal  Reserve  agent."    The 


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342  JOURNAL  OF  POLITICAL  ECONOMY 

gold  reserve  against  notes  may  be  reduced  to  any  amount  below  40 
per  cent,  however,  on  condition  of  the  payment  of  a  graduated  tax 
which  must  be  added  to  the  rate  of  discoimt.  As  regards  note 
issues,  therefore,  the  law  does  not  establish  an  impassable  limit  in 
the  form  of  a  rigid  Tninimum  reserve,  but  instead  it  makes  a  pro- 
gressive increase  in  the  rate  of  discount  compulsory  whenever  the 
gold  reserve  falls  below  40  per  cent,  and  fixes  the  amoimt  of  such 
increase.  When  such  reserves  are  above  40  per  cent  an  increase 
in  the  rate  is  optional  with  the  Federal  Reserve  Banks  and  ulti- 
mately with  the  Federal  Reserve  Board.  As  regards  deposits,  on 
the  other  hand,  the  maintenance  of  a  minimum  reserve  of  35  per 
cent  is  a  rigid  requirement,  the  violation  of  which  would  render 
the  officers  of  a  Federal  Reserve  Bank  subject  to  removal  by  the 
Federal  Reserve  Board. 

A  sharp  Une  is  thus  drawn  between  checking  accoimts  and  note 
issues  as  a  basis  of  expansion,  and  properly,  because  credit  balances 
on  the  former  may  be  coimted  by  member  banks  as  reserves,  while 
notes  may  not  be  so  coimted.  For  example,  the  crediting  on  a 
checking  account  with  a  Federal  Reserve  Bank  of  the  proceeds  of 
the  rediscount  of  a  thousand  dollar  note  would  give  to  a  coimtry 
bank  the  right  to  loan  $8,333^,  to  a  reserve  dty  bank  the  right  to 
loan  $6,666f ,  and  to  a  central  reserve  city  bank  the  right  to  loan 
♦5,555!,  while  the  exchange  of  that  same  note  for  Federal  Reserve 
notes  woidd  not  in  any  respect  directly  increase  the  loaning  power 
--of  these  banks.  It  should  also  be  noted  in  this  connection  that  a 
rise  in  the  rate  of  discount  in  any  degree  will  more  easily  check 
note  issues  than  an  increase  in  balances  on  checking  accoimts, 
,  since  in  the  former  case  whenever  the  Federal  Reserve  Bank  rate 
exceeds  the  market  rate,  the  banks  would  suffer  a  loss,  while  in  the 
latter  case  that  result  would  not  necessarily  follow,  indeed  would 
not  be  likely  to  follow  unless  the  rise  in  the  bank  rate  were  very 
great. 

At  the  present  time  it  is  impossible  to  estimate  the  amount  of 
expansion  which  these  reserve  requirements  would  permit,  since  we 
cannot  with  even  an  approximation  of  accuracy  estimate  the 
amoimt  of  lawful  money  that  will  find  its  way  into  the  vaults  of 
the  Federal  Reserve  Banks.    We  do  not  know  how  much  will  be 


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BANKING  RESERVES  UNDER  FEDERAL  RESERVE  ACT     343 

paid  in  by  member  banks  on  account  of  capital  stock  and  reserves 
or  how  much  will  be  deposited  on  accoimt  by  the  federal  Treasury. 

However,  some  indication  of  what  may  reasonably  be  expected 
is  supplied  by  the  figures  contained  in  the  reports  of  the  national 
banks  to  the  Comptroller  made  on  January  13,  1914,  and  by  the 
amoimt  on  hand  in  the  general  fund  of  the  Treasury  about  that 
time.  On  that  date  the  national  banks  of  the  country  had  in  their 
vaults  $981,919,420. 56  in  lawful  money.  Had  the  Federal  Reserve 
act  been  in  force  at  that  time,  these  banks  would  have  been  obliged 
to  carry  in  their  vaults  for  reserve  purposes  $396,200,902 .  60.  The 
difference  between  these  two  figures,  or  $585,718,517 .  96,  represents 
the  amounts  available  for  the  supply  of  the  customers  of  the  banks, 
with  money  in  denominations  below  five  dollars  and  with  the  means 
of  paying  foreign  balances,  and  for  deposit  in  the  Federal  Reserve 
Banks.  Assuming  that  about  half  of  it  would  have  been  needed 
for  the  use  of  customers,  about  $300,000,000  of  lawful  money  would 
have  been  left  for  deposit  in  the  Federal  Reserve  Banks.  Add  to 
this  $100,000,000,  the  amount  which  the  Secretary  of  the  Treasury 
might  reasonably  be  expected  to  transfer  from  the  general  fund 
which  amoimted  to  $286,129,330.00  on  September  16,  1913,  and 
the  grand  total  is  $400,000,000.  This  amount  of  lawful  money 
would  enable  the  Federal  Reserve  Banks  to  carry  as  a  maximum 
approximately  $1,143,000,000  of  deposits,  a  part  of  which,  probably 
the  larger  part,  coidd  be  tised  by  member  banks  as  reserves. 

A  comparison  of  this  total  with  the  national  bank  balances  held 
by  the  reserve  and  central  reserve  city  banks  on  January  13, 1914 — 
$612,894,753.90 — ^roughly  indicates  the  amoimt  of  expansion  ren- 
dered possible  by  the  new  law. 

On  the  date  to  which  the  above  figures  refer  the  amoimt  of  gold 
coin  and  gold  certificates  in  the  vaults  of  the  banks  and  in  the 
general  fund  of  the  Treasury  was  sufficient  to  have  made  possible 
the  payment  of  the  entire  $400,000,000  to  the  Federal  Reserve 
Banks  in  these  forms.  It  would,  therefore,  have  been  possible  for 
these  banks  to  have  used  this  entire  fund  as  a  basis  for  note  issues 
had  that  been  desirable,  or  to  have  distributed  it  in  any  desired 
proportion  between  the  reserve  for  notes  and  the  reserve  for 
deposits. 


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344  JOURNAL  OF  POLITICAL  ECONOMY 

How  much  room  there  may  be  for  legitimate  expansion  cannot, 
of  course,  be  determined.  The  important  points  to  observe  are  that 
a  fair  margin  for  expansion  will  undoubtedly  be  created  by  the 
inauguration  of  the  new  s)rstem  and  that  the  power  to  check  over- 
expansion  is  lodged  by  the  new  law  in  the  hands  of  the  Federal 
Reserve  Board  and  the  directorates  of  the  Federal  Reserve  Banks. 
It  is  not  likely  that  the  latter  will  be  tempted  to  overexpansion  by 
the  desire  to  earn  large  dividends  and  hence  there  is  no  reason  why 
they  should  permit  their  reserves  to  fall  as  low  as  35  per  cent,  if  for 
any  reason  the  interests  of  the  coimtry  demand  that  they  should 
be  higher.  Indeed  they  can  at  any  time  check  a  tendency  toward 
overexpansion  by  raising  the  rate  of  discount  and,  if  that  is  not 
sufficient,  by  limiting  the  amoimt  of  rediscounts  to  banks  inclined 
to  overexpand.  They  may  even  go  to  the  extent  of  temporarily 
refusing  rediscounts  entirely.  If  the  Federal  Reserve  Banks  do  not 
voluntarily  apply  the  brakes  when  and  where  they  are  needed,  the 
Federal  Reserve  Board  may  compel  them  so  to  do. 

William  Aicasa  "Scott 
Umivzbsity  or  Wisconsin 


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coLLEcrmo  checks  xjnder  the  currency  law 

The  Federal  Reserve  act  recently  passed  by  Congress  contains 
provisions  affecting  the  clearing  and  collection  of  checks  and  drafts 
payable  upon  presentation  which  are  of  vast  importance  to  the 
business  men  and  bankers  of  the  United  States.  However,  much 
misunderstanding  as  to  the  meaning  of  the  law  has  been  caused 
by  the  fact  that  the  provisions  of  the  Glass  bill  and  the  provisions 
of  the  Owen  bill  were  somewhat  conflicting  and  that  the  supporters 
of  these  two  bills  finally  agreed  to  a  compromise.  A  compromise 
imless  very  carefully  arrived  at  could  not  but  work  harm  to  such 
a  complicated  and  technical  part  of  the  law,  and  consequently  it 
is  necessary  to  analyze  carefully  the  exact  wording  of  the  Glass 
bill  and  of  the  Owen  bill  in  order  to  arrive  at  an  imderstanding  of 
the  construction  that  will  probably  be  placed  upon  this  part  of 
the  currency  law. 

There  are  two  sections  in  the  Glass  bill,  the  Owen  bill,  and  the 
currency  law  containing  provisions  for  the  clearing  and  collection 
of  checks  and  drafts.  In  the  Glass  bill  and  the  Owen  bill,  these 
sections  are  known  as  section  14  and  section  17,  while  in  the  cur- 
rency law  they  have  been  changed  to  section  13  and  section  16. 
The  provisions  contained  in  section  13  are  entirely  permissive, 
allowing  reserve  banks  to  handle  certain  checks  and  drafts  pro- 
viding they  wish  to  do  so.  The  provisions  contained  in  section  16 
are  mandatory,  compelling  reserve  banks  to  handle  certain  checks 
and  drafts  tmder  certain  conditions. 

The  following  outline  contains  the  provisions  of  the  Glass  bill, 
the  Owen  bill,  and  the  currency  law  which  affect  the  clearing  and 
collection  of  checks  and  drafts.  These  provisions  have  been  sub- 
divided in  order  that  corresponding  parts  of  the  Glass  bill,  the 
Owen  bill,  and  the  currency  law  may  be  separately  considered. 


345 


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346 


JOURNAL  OP  POUTICAL  ECONOMY 


Glass  Bill  ' 


TlMt  any  Federal  Retenre 
Bank  may  xecehre  from  any 
member  bank  deposits  of  cor- 

)ieat  funds  in  lawful  mooey* 
national  bank  notes,  Federal 
Reserve  notes,  or  checks  and 
drafts  upon  solvent  banks, 
payable  upon  presentation; 


h) 


or,  solely  for  ex- 
cliai^  purposes,  may  receive 
from  other  Federal  Reserve 
Banks  deposits  of  current  funds 
in  lawful  money,  national  bank 
notes,  or  checks  and  drafts  upon 
solvent  banks,  payable  upon 


aiCTXON  Z7 

It  sbsn  be  the  duty  of  every 
Federal  Reserve  Bank  to  re- 
ceive on  deposit,  at  par  and 
)  without  diarge  for  exchange 
or  collection,  checks  and  drafts 
drawn  upon  any  of  its  deposit- 
ors or  by  any  of  its  depositors 
upon  any  other  d^wsitor 

and 
checks  and  drafts  drawn  by 
any  depositor  in  any  other 
Federal  Reserve  Bank  upon 
funds  to  the  credit  of  said  de- 
positor in  said  Reserve  Bank 
last  mentioned. 


OwKV  Bill 

SBcnoN  14 
Any  Federal  Reserve  Bank 
may  receive  from  any  of  its 
member  banks,  and  from  the 
United  States,  deposits  of  cur- 
rent funds  in  lawful  money, 
natfamal  bank  notes.  Federal 
Reserve  notes,  or  checks  and 
drafts  upon  solvent  banks  of  the 
Federal  Reserve  System,  pay- 
able upon  presentation; 

or,  solely 
for  exchange  purposes,  may  re- 
ceive from  other  Federal  Re- 
serve Banks  deposits  of  current 
funds  in  lawful  money,  national 
bank  notes,  or  checks  and 
drafts  upon  solvent  member  or 
other  Federal  Reserve  Banks, 
payable  upon  presentation. 

SECTION  Z7 

Every  Federal  Reserve  Bank 
shall  receive  on  d^Msit  from 
member  banks  or  from  Federal 
Reserve  Banks  checks  and 
drafts  drawn  upon  any  of  its 
depositors. 


^ 


nothing  herein 
contained  to  be  construed  as 
prohibiting  member  banks  from 
C\  making  reasonable  charges  to 
cover  actual  expenses  incurred 
in  collecting  and  remitting  funds 
for  their  patrons. 


f) 


and  when  remitted 
by  a  Federal  Reserve  Bank, 
checks  and  drafts  drawn  by  any 
depositor  in  any  other  Federal 
Reserve  Bank  or  member  bank 
upon  funds  to  the  credit  of  said 
depositor  in  said  Reserve  Bank 
or  member  bank. 

Nothing  herein  contained 
shall  be  construed  as  prohibit- 
ing a  member  bank  from  making 
reasonable  charges  for  checks 
and  drafts  so  debited  to  its 
account,  or  for  follfcting  and 
remitting  funds,  or  for  exchange 
sold  to  its  patrons. 

The  Federal  Reserve 
Board  may,  by  rule,  fix  the 
charges  to  be  collected  by  the 
member  banks  from  its  pa- 
trons whose  checks  axe  cleared 
through  the  Federal  Reserve 
Bank  and  the  charge  which 
may  be  imposed  for  the  serv- 
ice of  dealing  or  collection 
rendered  by  the  Federal  Re- 


CuixmcT  Law 
nciioM  15 
Any  Federal  Reserve  Bank 
may  receive  from  any  of  its 
member  banks,  and  from  the 
United  States,  deposits  of  car- 
rent  funds  in  lawful  money, 
national  bank  notes.  Federal 
Reserve  notes,  or  checks  and 
drafts  upon  solvent  member 
banks,  payable  upon  preseata- 
tkm; 

or,  solely  for  exchange 
purposes,  may  receive  fram 
other  Federal  Reserve  Banks 
deposits  of  current  funds  in 
htwful  money*  national  bank 
notes,  or  checks  and  drafts 
upon  solvent  member  or  other 
Federal  Reserve  Banks,  pay- 
able upon  presentatiott. 

SBcnox  z6 
Every  Federal  Reserve  Bank 
sbsn  recdve  on  deposit  at  par 
from  member  banks  or  from 
Federal  Reserve  Banks  chedca 
and  drafts  drawn  upon  any  ol 
its  depositors. 


and  when  re- 
mitted by  a  Federal  Reserve 
Bank,  checks  and  drafts  drawn 
by  any  d^wsitor  in  any  other 
Federal  Reserve  Bank  or  mem- 
ber bank  upon  funds  to  the 
credit  of  said  depositor  in  said 
Reserve  Bank  or  member  bank. 

Nothing  herein  contained  shaU 
be  construed  as  prohibiting  a 
member  bank  from  charging 
its  sctual  expense  incurred  in 
collecting  and  remitting  funds* 
or  for  exchange  sokl  to  ita 
patrons. 

The  Federal  Reserve 
Board  shall,  by  rule,  fix  the 
charges  to  be  collected  by  the 
member  banks  from  its  patrons 
wiiose  checks  are  deared 
through  the  Federal  Reserve 
Bank  and  the  diazge  which 
may  be  imposed  for  the  serv- 
ice of  clearing  or  collection 
rendered  by  the  Federal  Re- 


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COLLECTING  CHECKS  UNDER  THE  CURRENCY  LAW     347 

QLAnltiLL  OwWHltiLL  CutaMMCtLkW 

tMCOKM  z7  SBcnoii  17  ncnoii  16 
The  F«denl  Rctcrve  Board  The  Fedefal  Rcaenre  Boerd  The  Federal  Reienre  Board 
Shan    make    and    pcomnlgate  ihaU    make    and    promalgate  thaU  make  and  promulgate  from 
from  time  to  time  legnlationa  from  time  to  time  legnlationa  time  to  time  legulatioosfoveni- 
gofvening  the  tzamfar  ol  funds  governing  the  transfer  of  funds  ing  the  transfer  of  funds  and 
at  par  among  Federal  Reserve  and  charges   therefor   among  charges  theiefbv  among  Fed- 
a\  Ba^  and  may  at  its  discre-  Federal    Reserve    Banks   and  eral  Reserve  Banlcs  and  their 
tioo  eierdse  tlie  functions  of  a  their  branches*  and  may  at  its  bmnches,  and  may  at  its  dis- 
Oearing  House  for  such  Fed-  discretion  eierdse  tlie  functions  cretion  eierdse  the  functions  ol 
eral  Reserve  Baifks  or  may  of  a  Clearing  House  for  such  a  Clearing  House  for  such  Fed- 
designate   a  Federal   Reserve  Federal    Reserve    Baifks,    or  eral  Reserve  Banks,  or  may 
Bank  to  eierdse  such  functions,  may  designate  a  Federal  Re-  dfsignate  a  Federal   Reserve 
serve  Bank  to  eierdse  such  Bank  to  cawwise  such  functions. 


and  may  also  require  each  such  and  may  also  require  and  may  also  require  each  such 

r\  bank  to  eierdse  the  functions  of  each  such  bank  to  eierdse  the  bank  to  eierdse  the  functions 

**)  a  Clearing  House  for  its  member  functions  cl  a  Clearing  House  of  a  Clearing  House  for  its 

banks.  for  its  member  banks.  member  I 


SECTION   13 
<^ 

The  Glass  bill  provided  that  any  national  bank  might  receive 
on  deposit  from  any  of  its  own  member  banks  checks  and  drafts 
drawn  on  any  solvent  bank  whether  a  member  of  the  i;eserve 
sjrstem  or  not. 

The  Owen  bill  provided  that  the  checks  and  drafts  should  be 
limited  to  those  drawn  on  solvent  banks  that  were  members  of  the 
reserve  system. 

The  currency  law  provides  that  the  checks  and  drafts  shall  be 
limited  to  those  drawn  on  solvent  member  banks.  As  section  i 
of  the  currency  law  defines  a  ''member  bank''  as  any  bank  which 
has  become  a  member  of  one  of  the  reserve  banks,  it  is  apparent 
that  the  meaning  of  the  Owen  bill  is  not  changed  and  hence  this 
part  of  the  currency  law  authorizes  any  reserve  bank  to  receive  on 
deposit  from  its  members  or  from  the  United  States  checks  and 
drafts  drawn  on  any  solvent  bank  that  is  a  member  of  the  federal 
reserve  S)rstem. 

b 

Both  the  Glass  bill  and  the  Owen  bill  provided  that  any  reserve 
bank  might  receive  certain  checks  and  drafts  on  deposit  from  other 
reserve  banks  for  exchange  purposes.  The  words  "for  exchange 
purposes''  were  used  because  a  reserve  bank  is  given  no  power  to 


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348  JOURNAL  OF  POUTICAL  ECONOMY 

open  an  account  with  another  reserve  bank  except  as  provided  in 
section  14  of  the  currency  law,  where  any  reserve  bank  is  author- 
ized to  establish  accounts  with  other  reserve  banks  for  exchange 
purposes.  Under  the  Glass  bill  a  reserve  bank  could  so  accept 
from  another  reserve  bank  checks  and  drafts  drawn  upon  any 
solvent  bank  whether  a  member  of  the  reserve  s)rstem  or  not;  but 
\mder  the  Owen  bill  such  checks  and  drafts  were  limited  to  those 
drawn  on  any  solvent  member  bank  or  other  reserve  bank.  The 
oact  wording  of  the  Owen  bill  was  followed  in  the  currency  law 
and  as  a  '^member  bank"  means  any  bank  that  is  a  member  of 
the  reserve  system,  it  is  apparent  that  this  part  of  the  currency  law 
authorizes  any  reserve  bank  to  accept  on  deposit,  for  exchange 
purposes,  from  any  other  reserve  bank,  checks  and  drafts  drawn 
on  any  solvent  bank  that  is  a  member  of  the  reserve  s)rstem  or  on 
any  other  solvent  reserve  bank. 

SECTION  16 

c 

The  Glass  bill  provided  that  a  reserve  bank  should  receive  on 
deposit  at  par  and  without  any  charge  whatever,  checks  or  drafts 
drawn  on  any  bank  that  was  a  member  of  that  particular  reserve 
bank.  The  words  "or  by  any  of  its  depositors  upon  any  other 
depositor"  were  imnecessary,  as  the  words  "checks  and  drafts 
drawn  upon  any  of  its  depositors"  included  all  checks  and  drafts 
on  a  depositor  in  the  reserve  bank,  whether  drawn  by  an  ordinary 
depo^tor  or  by  one  of  the  other  depositors  in  the  reserve  bank. 

The  Owen  bill  omitted  the  unnecessary  words  "or  by  any  of 
its  depositors  upon  any  other  depositor,"  and  merely  provided 
that  any  checks  and  drafts  drawn  upon  any  of  its  depositors  should 
be  received  on  deposit  by  a  reserve  bank;  but  the  Owen  bill 
omitted  the  words  "at  par,"  and  later  on  provided  that  certain 
charges  should  be  made  for  collecting  these  checks  and  drafts. 
This  part  of  the  currency  law  is  a  compromise  between  the  Glass 
bill  and  the  Owen  bill.  The  exact  wording  of  the  Owen  bill  was 
followed  except  that  the  words  "at  par"  which  were  used  in  the 
Glass  bill  were  inserted  in  the  currency  law.  However,  the  words 
"at  par"  are  offset  in  the  currency  law  by  a  subsequent  provision 


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COLLECTING  CHECKS  UNDER  THE  CURRENCY  LAW     349 

that  certain  charges  may  be  made  to  cover  the  expense  of  collecting 
these  checks  and  drafts.  This  inconsistency  is  probably  the  re- 
sult of  a  rather  hasty  compromise;  but  doubtless  the  law  will  be  con- 
strued to  mean  that  the  words  ''at  par"  apply  to  exchange  charges 
proper  and  that  the  collection  charges  later  provided  for  apply  to 
charges  to  be  made  for  the  service  of  handling  the  checks  and  drafts. 
Consequently,  this  part  of  the  law  doubtless  means  that  any  reserve 
bank  must  receive  on  deposit,  from  any  of  its  members  or  from  any 
other  reserve  bank,  checks  and  drafts  drawn  on  any  of  its  own 
members;  and  that  no  exchange  charge  shall  be  made  although 
a  service  charge  may  be  made  under  a  provision  which  appears 
later  on. 

d 

In  addition  to  the  checks  and  drafts  above  noted,  the  Glass  bill 
provided  that  a  reserve  bank  should  also  receive  on  deposit  checks 
and  drafts  drawn  on  any  other  reserve  bank.  The  Owen  bill 
adopted  this  provision  of  the  Glass  bill  but  added  also  checks  and 
drafts  drawn  on  any  bank  that  is  a  member  of  the  reserve  system. 
However,  the  Owen  bill  provided  that  these  various  checks  and 
drafts  should  only  be  accepted  on  deposit  ''when  remitted  by  a 
Federal  Reserve  Bank."  These  words  were  doubtless  added  in 
order  to  make  this  mandatory  section  agree  with  the  permissive 
section  which  is  lettered  b  in  the  above  outline.  Both  of  these 
sections  were  apparently  intended  by  the  framers  of  the  Glass  bill 
to  refer  to  the  same  form  of  transactions,  the  provision  in  section 
13  being  merely  permissive,  but  the  provision  in  section  14  being 
mandatory  and  setting  forth  provisions  concerning  exchange 
charges  and  cost  of  handling.  Hence,  as  the  wording  of  the  cur- 
rency law  follows  the  exact  wording  of  the  Owen  bill,  it  is  apparent 
that  this  part  of  the  currency  law  provides  that  a  reserve  bank 
must  receive  on  deposit,  from  any  other  reserve  bank,  checks  and 
drafts  drawn  on  any  other  reserve  bank  or  on  any  bank  that  is  a 
member  of  the  reserve  system,  without  making  any  exchange 
charge,  although  a  service  charge  is  permitted  under  a  provision 
which  appears  later  on. 

As  the  part  of  section  16  which  is  lettered  c  in  the  above  out- 
line compels  a  reserve  bank  to  receive  on  deposit  from  any  other 


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3SO  JOURNAL  OF  POUTICAL  ECONOMY 

reserve  bank  checks  and  drafts  drawn  on  any  of  its  own  members, 
and  as  a  check  or  draft  drawn  agamst  the  reserve  bank  itself  must 
of  course  be  received  on  deposit  without  any  provision  of  law  to 
that  effect,  it  is  apparent  that  this  part  of  the  section  adds  no  pro- 
vision to  the  law  except  that  a  reserve  bank  must  receive  on  deposit 
from  any  other  reserve  bank  checks  and  drafts  drawn  on  any 
other  reserve. bank  or  on  any  bank  that  is  a  member  of  some  other 
reserve  bank.  This  part  of  the  law  is  of  no  practical  value  because 
a  remitting  reserve  bank  would  prefer  (\mder  the  provisions  of  c) 
to  send  such  checks  and  drafts  direct  to  the  reserve  bank  on  which 
or  upon  the  members  of  which  the  checks  and  drafts  were  drawn. 
Furthermore  this  clause  raises  the  question  how  a  remitting  bank 
would  come  into  possession  of  any  checks  and  drafts  on  other 
reserve  banks  to  remit,  for  there  is  no  provision  in  the  law  allowing 
a  reserve  bank  to  receive  such  checks  and  drafts  from  its  members 
or  from  the  United  States.  This  inconsistency  is  due  to  the  fact 
that  the  framers  of  the  Owen  bill  apparently  misimderstood  the 
meaning  of  this  part  of  the  Glass  bill.  As  noted  above,  the  Glass 
bill  provided  that  a  reserve  bank  should  receive  on  deposit  checks 
and  drafts  drawn  on  any  other  reserve  bank;  and  this  meant  that 
they  should  be  received  on  deposit  by  the  reserve  bank  either  from 
its  own  members,  from  the  United  States,  or  from  any  other  reserve 
bank.  Apparently  the  framers  of  the  Owen  bill  inserted  the  words 
"when  remitted  by  a  Reserve  bank"  without  realizing  that  this 
change  cut  off  the  provision  for  a  reserve  bank  to  receive  on  deposit 
from  its  own  members,  or  from  the  United  States,  checks  and 
drafts  drawn  on  any  other  reserve  bank.  Consequently,  the  change 
made  by  the  framers  of  the  Owen  bill  in  the  wording  that  was  used 
in  the  Glass  bill  not  only  rendered  this  part  of  the  law  of  no  value, 
but  actually  placed  a  considerable  burden  on  business  because 
under  the  law  as  enacted  a  member  bank  receiving  a  draft  on  some 
other  reserve  bank  cannot  send  it  in  to  its  own  reserve  bank  but 
must  collect  it  through  some  other  channel.  This  is  particularly 
unfortunate  in  view  of  the  fact  that  a  member  bank  (under  the  pro- 
visions of  a)  may  be  permitted  to  send  in  to  its  reserve  bank  a 
check  on  a  member  of  some  other  reserve  bank,  though  it  cannot 
send  in  a  draft  on  the  other  reserve  bank  itself. 


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COLLECTING  CHECKS  UNDER  TEE  CURRENCY  LAW     351 


The  Glass  bill  provided  that  nothing  therein  contained  should 
prohibit  a  member  bank  from  charging  reasonable  fees  to  cover 
actual  expense  in  collecting  money  that  was  due  to  its  patrons  to 
whom  the  money  so  collected  was  to  be  remitted. 

The  Owen  bill  adopted  this  provision  of  the  Glass  bill  and 
added  that  nothing  therein  contained  should  prohibit  a  member 
bank  from  making  reasonable  charges  for  exchange,  such  as  New 
York  and  Chicago  drafts,  which  it  might  sell,  or  from  making 
reasonable  charges  for  checks  and  drafts  so  debited  to  its  account. 
The  words  "so  debited  to  its  account *'  were  very  confusing,  because 
there  was  no  reference  in  the  bill  to  any  process  of  debiting  any 
account.  However,  it  developed  that  the  framers  of  the  Owen 
bill  intended  that  a  reserve  bank,  when  it  received  checks  on  one 
of  its  members,  should  not  send  them  to  the  member  with  a  request 
for  a  remittance  less  a  small  charge  as  is  the  present  practice,  but 
that  it  should  inunediately  debit  such  checks  against  the  funds  of 
the  member  bank  which  it  held,  and  this  provision  allowed  the 
member  bank  to  make  a  charge  against  the  reserve  bank  when 
the  reserve  bank  so  debited  any  checks  against  the  account  of  the 
member  bank.  The  currency  law  omitted  this  last  provision 
altogether  and  merely  provides  that  nothing  contained  therein 
shall  prohibit  a  member  bank  from  charging  its  actual  expense 
when  it  collects  and  remits  money  or  when  it  sells  exchange  to  its 
patrons. 

/ 

The  Glass  bill  contained  no  further  provisions  in  regard  to 
exchange  and  collection  charges,  but  the  Owen  bill  provided  that 
the  Federal  Reserve  Board  might  fix  the  charges  that  members  of 
the  reserve  system  could  collect  from  their  patrons  whose  checks 
passed  through  a  reserve  bank,  and  the  charges  that  a  reserve  bank 
could  make  for  the  service  of  clearing  or  collecting  checks.  The 
currency  law  follows  the  exact  wording  of  the  Owen  bill,  even 
including  a  noticeable  grammatical  error,  except  that  it  provides 
that  the  Federal  Reserve  Board  must  fix  the  charges  while  the 
Owen  bill  only  provided  that  it  might  do  so. 

The  wording  of  this  part  of  the  law  does  not  make  it  dear 


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352  JOURNAL  OF  POLITICAL  ECONOMY 

whether  a  member  bank  is  authorized  to  make  charges  against  the 
patrons  who  draw  the  checks  that  pass  through  a  reserve  bank  or 
against  the  patrons  who  deposit  the  checks.  However,  the  views 
of  Senator  Owen  and  his  committee  as  published  on  November 
22,  1913,  by  the  Senate  Committee  on  Banking  and  Currency, 
indicate  that  it  was  the  intention  of  the  framers  of  the  bill  that 
these  charges  should  be  collected  from  patrons  who  deposit  checks 
that  are  to  be  cleared  through  a  reserve  bank. 

There  has  been  some  misunderstanding  also  in  regard  to  the 
provision  for  the  charges  that  a  reserve  bank  can  make  for  the  serv- 
ice of  clearing  or  collecting  checks,  because  the  currency  law  pro- 
vides that  certain  checks  must  be  received  "at  par,"  and  strictly 
speaking,  if  an  item  must  be  received  at  par  no  charge  can  be  made. 

However,  as  heretofore  explained,  expediency  will  doubtless 
make  it  necessary  to  construe  the  law  as  meaning  that  a  reserve 
bank  must  receive  certain  checks  at  par  as  regards  exchange 
charges,  but  that  it  shall  be  allowed  to  make  a  handling  charge  in 
accordance  with  the  rates  fixed  by  the  Federal  Reserve  Board  to 
cover  the  service  rendered. 

g 
The  Glass  bill  provided  that  the  Federal  Reserve  Board  should 
make  rules  governing  the  transfer  of  funds  at  par  from  one  reserve 
bank  to  another,  and  that  the  Federal  Reserve  Board  could  if  it 
wished  act  as  a  clearing-house  for  the  reserve  banks  and  thus 
eliminate  to  a  large  extent  the  shipment  of  money  between  the 
reserve  banks;  or  that  the  Federal  Reserve  Board  could  designate 
some  one  reserve  bank  to  exercise  these  clearing-house  functions 
for  the  reserve  banks.  The  Owen  bill  in  this  regard  followed  the 
Glass  bill  very  closely,  but  changed  the  provision  for  the  transfer 
of  funds  at  par  by  allowing  the  Federal  Reserve  Board  to  provide 
what  charges  should  be  made  for  transfers  of  funds  between 
reserve  banks.  The  currency  law  adopted  the  exact  wording  of 
the  Owen  bill. 

h 
The  Glass  bill  provided  that  the  Federal  Reserve  Board  could 
require  each  reserve  bank  to  exercise  the  functions  of  a  clearing- 


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COLLECTING  CHECKS  UNDER  THE  CURRENCY  LAW     353 

hotise  for  its  members.  The  exact  wording  of  the  Glass  bill  was 
followed  in  the  Owen  bill  and  in  the  currency  law. 

Without  this  power  a  reserve  bank  would  doubtless  have  been 
compelled  to  collect  the  checks  and  drafts  which  it  received  instead 
of  to  dear  them.  In  that  case  a  reserve  bank  would  doubtless 
have  collected  its  out-of-town  checks  and  drafts  in  accordance 
with  the  methods  developed  by  the  Boston  Clearing-House,  sending 
out  daily  to  each  member  all  checks  or  drafts  which  had  been 
received  against  each  such  member.  The  member  would  have 
remitted  for  such  items  upon  receipt  of  them;  and  there  is  nothing 
in  the  currency  law  to  prevent  the  member  from  deducting  an 
exchange  charge  as  has  been  the  practice  in  the  past. 

However,  as  the  Federal  Reserve  Board  may  require  a  reserve 
bank  to  act  as  a  clearing-house,  the  members  will  doubtless  be 
required  to  accede  to  all  the  rules  and  regulations  made  to  govern 
such  clearing-house  operations.  Consequently,  all  checks  on 
members  received  by  the  reserve  bank  will  doubtless  be  handled 
in  much  the  same  way  as  checks  are  now  handled  by  city  clearing- 
houses, except  that  where  a  debit  balance  in  a  city  clearing-house 
is  usually  paid  in  to  the  clearing-house  by  the  bank,  a  debit  balance 
in  a  reserve  bank  clearing-house  will  not  be  paid  in  by  the  bank 
but  will  be  debited  by  the  reserve  bank  against  the  funds  which 
the  member  bank  has  on  deposit  with  the  reserve  bank.  This 
may  be  done  because  the  funds  which  the  member  has  on  deposit 
with  the  reserve  bank  will  represent  money  due  the  member  and 
the  debit  balance  will  represent  money  due  from  the  member,  and 
by  carrying  the  clearing  idea  one  step  farther  the  debit  balance  is 
merely  charged  against  the  funds  due  to  the  member  and  the  trans- 
action is  closed.  A  credit  balance  would  of  course  be  credited  to 
the  funds  due  to  the  member.  As  there  is  no  provision  in  the  law 
which  will  permit  member  banks  to  make  any  charges  on  checks  or 
drafts  which  have  been  debited  to  their  accounts,  a  reserve  bank 
will  be  able  to  collect  these  checks  and  drafts  without  any  expense 
other  than  the  cost  of  handling  them;  and  as  the  reserve  bank  is 
allowed  to  make  a  service  charge  against  the  members  sending  in 
the  checks  and  drafts  to  be  cleared,  it  will  be  able  to  reimbxirse 
itself  for  the  entire  cost  of  clearing.    Rules  and  regulations  will  of 


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354  JOURNAL  OP  POLITICAL  ECONOMY 

course  be  made  covering  the  return  to  the  reserve  bank  of  any  dis- 
honored checks  or  drafts,  and  covering  other  details  of  operation. 

From  the  foregoing  anal3rsis  of  the  exchange  provisions  of  the 
new  law,  the  following  S3mopsis  of  its  practical  operation  can  be 
suggested. 

As  soon  as  the  reserve  banks  are  fully  organized,  the  depositor 
in  a  member  bank  will  find  that  his  checks  will  be  readily  accepted 
throughout  the  country,  whereas  formerly  he  was  usually  requested 
to  remit  in  New  York  or  Chicago  exchange.  He  will  also  find  that 
his  checks  are  returned  to  his  bank,  and  charged  against  his  ac- 
cotmt  much  more  quickly  than  they  formerly  were.  However, 
the  depositor  in  a  non-member  bank  will  find  that  his  checks  are 
handled  as  in  the  past  but  that  they  are  discriminated  against  and 
objected  to  because  they  will  not  be  collected  so  cheaply  or  quickly 
as  checks  on  a  member  bank. 

When  a  check  on  a  member  bank  is  received  by  a  business 
house  from  one  of  its  out-of-town  customers,  the  business  house 
will  deposit  it  with  its  local  bank.  If  this  local  bank  is  a  member 
of  the  reserve  system  it  will  accept  the  check  just  as  at  present,  but 
.the  exchange  which  it  will  charge  the  business  house  will  be  in 
accordance  with  the  rules  made  by  the  Federal  Reserve  Board  and 
will  be  very  much  less  than  the  present  charge  that  is  made  under 
the  clearing-house  rules.  The  local  bank  will  then  redeposit  the 
check  in  its  reserve  bank,  which  must  receive  it  on  deposit  if  it  is 
drawn  on  one  of  its  own  members  and  may  receive  it  on  deposit 
if  it  is  drawn  on  a  member  of  some  other  reserve  bank.  The  reserve 
bank  will  charge  the  local  bank  a  small  service  charge  which  will 
be  fixed  by  the  Federal  Reserve  Board,  but  no  exchange  charge 
will  be  made. 

If  the  local  bank  in  which  the  business  house  deposits  the 
check  is  not  a  member  of  the  reserve  system,  it  will  accept  the 
check  just  as  at  present  and  competition  will  doubtless  generally 
limit  the  exchange  which  it  will  charge  to  the  rate  charged  by 
member  banks.  The  non-member  bank  will  doubtless  redeposit 
the  check  with  some  bank  that  is  a  member,  and  this  member  bank 
will  collect  it  through  its  reserve  bank.    This  can  be  done  because 


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COLLECTING  CHECKS  UNDER  THE  CURRENCY  LAW     355 

there  is  nothing  in  the  law  that  prevents  a  member  bank  from 
accepting  checks  from  non-member  banks  and  clearing  them 
through  its  reserve  bank. 

When  the  check  received  by  the  reserve  bank  is  on  a  member 
of  the  same  reserve  bank  it  will  be  handled  by  the  reserve  bank  in 
its  capacity  as  a  clearing-house  for  its  members.  As  a  result  of 
this  process  the  reserve  bank  will  debit  the  check  against  the  funds 
which  it  holds  to  the  credit  of  the  member  bank  on  which  the  check 
is  drawn,  and  will  then  forward  it  to  the  member  bank  with  a  debit 
advice.  The  member  bank  will  thus  have  no  opportimity  to  make 
an  exchange  charge  as  is  the  custom  at  present. 

When  the  check  received  by  the  reserve  bank  is  on  a  member 
of  some  other  reserve  bank,  then  it  will  be  forwarded  to  the  reserve 
bank  on  a  member  of  which  it  is  drawn,  and  this  reserve  bank  must 
receive  it  without  any  exchange  charge,  but  is  allowed  to  make  a 
small  service  charge  in  accordance  with  the  rules  made  by  the  Fed- 
eral Reserve  Board.  It  will  then  handle  the  check  in  its  capacity 
as  a  clearing-house  for  its  members. 

As  each  reserve  bank  will  have  accounts  for  exchange  purposes 
with  the  other  reserve  banks,  arrangements  will  doubtless  be  made 
for  the  reserve  bank  receiving  the  check  merely  to  debit  it,  less  the 
service  charge,  against  the  funds  which  it  holds  to  the  credit  of  the 
reserve  bank  to  whom  it  is  sending  the  check.  This  process  will 
make  a  further  saving  of  time  and  labor  in  handling  the  check. 

The  transfer  of  balances  due  between  federal  reserve  banks  will 
be  made  in  accordance  with  rules  established  by  the  Federal 
Reserve  Board,  and  many  transfers  may  perhaps  be  avoided  through 
the  operation  by  the  Federal  Reserve  Board  of  a  clearing-house 
for  the  reserve  banks. 

This  sjTstem  of  collecting  checks  will  result  in  a  large  saving 
in  exchange  charges  to  the  business  men  in  the  large  centers.  This 
saving  will  come  about  because  of  two  changes  in  present  conditions: 
first,  the  elimination  of  the  great  waste  brought  about  by  the 
present  operation  of  many  independent  collection  organizations, 
and  the  substitution  therefor  of  one  compact  well-organized  col- 
lection mechanism;  and  second,  the  abolition  of  exchange  charges 
by  member  coimtry  banks  on  checks  drawn  against  them.    Thus, 


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356  JOURNAL  OF  POLITICAL  ECONOMY 

while  the  business  men  in  the  large  centers  will  save  money,  the 
country  banker  in  the  small  places  will  suffer  a  considerable  loss; 
but  the  whole  system  of  collecting  checks  will  be  much  more 
prompt,  efficient,  and  economical  than  in  the  past. 

When  a  check  on  a  non-member  bank  is  received  by  a  business 
house  from  one  of  its  out-of-town  customers,  the  business  house 
will  deposit  it  with  its  local  bank,  which  will  handle  it  much  the 
same  as  in  the  past  because  checks  on  non-member  banks  cannot 
be  cleared  through  the  reserve  system.  The  exchange  charge 
which  the  local  bank  will  make  on  the  check  may  in  time  be  some- 
what less  than  at  present  because  there  may  develop  in  the  large 
centers  a  tendency  to  consolidate  these  checks  in  out-of-town 
clearing-houses  similar  to  those  in  Boston,  Kansas  City,  and  else- 
where. However,  competition  for  business  may  defeat  this  tend- 
ency and  as  a  result  little  change  from  present  conditions  may  be 
experienced  as  regards  checks  on  non-member  banks. 

A  reserve  bank  may  under  the  currency  law  receive  from  the 
United  States  checks  on  any  bank  that  is  a  member  of  the  reserve 
sjrstem;  but  through  an  apparent  error  in  the  law,  a  reserve  bank 
has  no  power  to  receive  from  the  United  States  drafts  drawn  on 
any  other  reserve  bank.  Neither  has  it  the  power  to  receive 
such  drafts  from  any  of  its  members;  and  consequently,  unless 
the  Federal  Reserve  Board  can  rectify  this  apparent  error 
through  the  adoption  of  rules  and  regulations  that  will  be  gen- 
erally acquiesced  in,  it  will  be  necessary  for  the  government  to 
deposit  a  draft  on  a  reserve  bank  only  in  the  bank  upon  which 
it  is  drawn  and  for  a  member  bank  which  has  received  a  draft 
on  another  reserve  bank  to  forward  the  draft  to  some  one  of 
its  correspondents  who  happens  to  be  a  member  of  the  reserve 
bank  upon  which  the  draft  is  drawn.  This  correspondent  can  of 
course  send  it  in  to  its  reserve  bank  because  a  reserve  bank  must 
receive  from  one  of  its  members  a  draft  that  is  drawn  upon  the 
reserve  bank  itself.  The  difficulty  may  perhaps  be  obviated  if  the 
Federal  Reserve  Board  should  rule  that  the  power  which  is  given 
a  reserve  bank  to  open  accounts  for  exchange  purposes  in  other 
reserve  banks  is  sufficiently  broad  so  that  every  reserve  bank  can 
become  a  "depositor''  in  every  other  reserve  bank.    Drafts  drawp 


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COLLECTING  CHECKS  UNDER  THE  CURRENCY  LAW     357 

on  other  reserve  banks  might  then  be  considered  as  drafts  drawn 
against  depositors,  and  as  each  reserve  bank  may  receive  on  deposit 
from  its  members  and  from  the  United  States  checks  and  drafts 
drawn  on  any  of  its  depositors,  the  apparent  error  in  the  law  would 
be  offset. 

The  currency  law  touches  upon  the  business  of  collecting  what 
are  usually  termed  "customers'  drafts,"  and  also  upon  the  business 
of  selling  New  York,  Chicago,  and  other  exchange,  it  being  pro- 
vided that  nothing  contained  in  the  currency  law  shall  prohibit 
a  member  bank  from  charging  its  actual  expenses  for  rendering 
these  services. 

Many  bankers  have  believed  that  the  free  circulation  of  indi- 
vidual checks  3hould  be  discouraged  in  the  United  States  and  that 
drafts  on  the  reserve  banks  should  take  the  place  of  individual 
checks  in  the  remittance  of  funds  over  any  considerable  distances. 
However,  the  Reserve  act  having  establidied  the  reverse  prindide 
as  the  law  of  the  land,  the  hearty  support  of  all  bankers  will  doubt- 
less be  given  to  every  effort  that  is  made  to  develop  the  far-reaching 
and  beneficial  changes  from  present  conditions  that  will  come  about 
as  a  result  of  the  so-caUed  exchange  provisions  of  the  currency  law. 

Geoege  Woodeuff 
Joust,  III. 


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THE  RELATION  OF  THE  NEW  CURRENCY  ACT  TO  THE 
WORK  OF  COMMERCIAL  PAPER  HOUSES 

The  function  of  the  commercial  paper  house  is,  on  the  one  hand, 
to  supply  credit  to  business  houses  by  discounting  their  notes,  and, 
on  the  other  hand,  to  furnish  to  banks  which  have  imemployed 
funds  a  liqiddy  quickly  maturing  form  of  investment.  The  neces- 
sity for  so  obtaining  credit  and  the  demand  by  banks  for  a  liquid 
form  of  investment  are  vital  alike  to  business  and  banking,  and 
will  exist  imder  any  system  of  currency.  The  effect  of  the  new 
law  on  the  work  of  commercial  paper  houses  will  be  at  most  a 
change  only  of  form,  or  in  method  of  doing  business,  and  not  in  the 
nature  of  the  service  performed. 

In  the  present  practice  of  commercial  paper  hoiises  advances  of 
funds  are  made  by  the  discoimting  of  promissory  notes.  The  money 
so  obtained  is  used  by  the  borrower  in  the  piurchase  of  goods  and 
in  preparing  them  for  market.  When  the  goods  are  marketed  and 
paid  for,  the  proceeds  of  their  sale  enable  the  borrower  to  pay  his 
notes. 

The  term  '' commercial  paper"  originally  indicated  notes  or 
acceptances  given  in  settiement  for  goods  bought;  but  the  com- 
mercial practice  of  settling  bills  by  notes  has  long  since  been  dis- 
continued in  this  coimtry  owing  to  the  offering  by  wholesalers  of 
substantial  discounts  for  payment  in  cash.  This  practice  is  so 
general  that  a  concern  which  does  not  discount  its  bills  is  regarded 
as  being  in  a  strained  finandal  position.  Discounting  has  become 
in  this  coimtry  the  touchstone  of  credit  standing.  To  such  an 
extent  is  this  true  that  a  merchant  who  fails  to  discoimt  his  bills 
cannot  possibly  withstand  competition.  Indeed,  in  many  lines  the 
cash  discoimt  constitutes  the  entire  margin  of  net  profit.  The 
result  is  that  most  concerns  borrow  from  their  banks  or  brokers  on 
their  promissory  notes  in  order  to  take  advantage  of  the  cash  dis- 
coimts.  It  is  apparent  from  this  that  such  notes  are  issued  against 
goods  which  the  borrower  has  purchased,  and  their  payment 
depends  upon  his  properly  marketing  his  goods.    In  the  case  of 


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NEW  CURRENCY  ACT  AND  COMMERCIAL  PAPER  HOUSES   359 

bills  receivable,  the  merchant  who  discounts  them  with  his  bank  or 
broker  is  obtaining  funds  on  goods  which  he  has  sold;  the  proper 
marketing  of  the  goods  upon  which  the  bills  are  created  will  depend 
upon  the  ability  of  another  merchant  than  the  one  who  obtains  the 
bank  credit  on  them. 

The  extending  of  merchandise  credits  when  the  cash  discoimt 
test  is  removed  can  be  abused  to  a  greater  degree  than  direct  bank 
loans.  The  merchant  is  alwa)rs  eager  to  sell,  and  a  customer  who 
need  not  pay  cash  may  be  tempted  to  buy  beyond  his  means,  but 
the  bank  which  has  fixed  his  line  of  credit  has  thereby  set  the  limit 
of  his  purchases.  The  danger  of  overexpanded  credit  is  thus 
checked  at  the  source. 

There  has  been  some  apprehension  that  \mder  the  new  law  an 
attempt  was  to  be  made  to  restore  the  old  practice  and  to  favor  the 
use  of  indorsed  bills  receivable  as  against  simple  promissory  notes. 
For  the  reason  stated,  this  seems  to  me  to  be  an  \mdesirable  change 
and  one  which  would  inevitably  tend  toward  undue  expansion  of 
credit.  However,  if  the  practice  of  obtaining  credit  by  discounting 
indorsed  bills  receivable  is  to  take  precedence  over  the  use  of  promis- 
sory notes,  and  the  latter  instrument  is  to  be  gradually  abandoned, 
the  work  of  the  commercial  paper  house  will  consist  of  buying  and 
selling  indorsed  bills  receivable  instead  of  promissory  notes.  This 
will  in  no  way  affect  its  general  function. 

Aside  from  any  change  in  the  character  of  the  loans  dealt  in  by 
the  commercial  paper  house,  it  is  quite  evident  that  its  method  of 
operation  will  be  affected  in  many  ways.  I  shall  not  attempt  to 
trace  the  gradual  changes  as  the  law  is  put  into  effect  step  by  step, 
but  rather  shall  consider  conditions  after  the  law  is  in  full  swing 
and  operation. 

In  considering  the  relation  of  the  new  law  to  the  commercial 
paper  house,  it  is  well  to  notice  briefly  the  features  which  more  par- 
ticularly affect  the  paper-buying  ability  of  banks.  The  first  of  these 
is  the  smaller  reserve  required.  After  the  three-year  interim 
allowed  for  the  gradual  shifting  of  reserves,  the  reserve  requirements 
for  country  banks  will  have  been  reduced  from  15  per  cent  to  12  per 
cent;  for  reserve  city  banks,  from  25  per  cent  to  15  per  cent;  and  for 
central  reserve  banks  from  25  per  cent  to  18  per  cent  on  all  demand 


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36o  JOURNAL  OP  POLITICAL  ECONOMY 

deposits;  and  the  reserve  required  against  time  deposits  will  be  5 
per  cent  in  each  case.  It  will  be  noticed  that  under  the  new  act  a 
sharp  distinction  in  reserve  requirements  is  made  as  between  time 
and  demand  deposits,  only  5  per  cent  being  required  on  time 
deposits,  whereas  under  the  old  act  the  same  reserve  was  required 
against  time  as  against  demand  deposits. 

The  second  important  feature  is  the  fact  that  reserves  must  be 
kept  in  a  bank's  own  vaults  or  in  the  Federal  Reserve  Bank  of  its 
district.  Deposits  by  coimtry  banks  in  reserve  or  central  reserve 
dties,  and  deposits  made  with  central  reserve  cities  by  banks 
located  in  reserve  cities  will  no  longer  be  counted  as  part  of  the 
depositing  bank's  reserve. 

The  third  feature  is  the  discontinuance  of  the  use  by  coimtry 
banks  of  reserve  and  central  reserve  banks  as  their  collecting  agents, 
and,  it  is  hoped,  the  eventual  discontinuance,  in  large  measure,  of 
the  whole  practice  of  banks  using  other  banks  for  this  purpose. 
Under  the  new  act,  banks  will  deposit  items  drawn  on  banks  in  their 
own  district  directly  with  the  Federal  Reserve  Bank,  and  such  items 
will  thus  automatically  become  a  part  of  their  reserve,  the  Federal 
Reserve  Bank  in  turn  charging  them  up  to  the  member  bank  on 
which  they  are  drawn.  While  no  provision  has  yet  been  made  for 
Federal  Reserve  Banks  to  receive  items  on  member  banks  of  another 
district,  it  is  believed  that  such  an  arrangement  will  eventually 
be  completed. 

The  fourth  and  most  important  of  all  these  features  is  the 
rediscounting  fimction  of  the  Federal  Reserve  Bank.  The  new  act 
provides  that 

upon  the  indorsement  of  any  of  its  member  banks  ....  any  federal  reserve 
bank  may  discount  notes,  drafts,  and  bills  of  exchange  arising  out  of  actual 
commercial  transactions,  that  is,  notes,  drafts,  and  bills  of  exchange  issued  or 
drawn  for  agricultural,  industrial,  or  commercial  purposes,  or  the  proceeds  of 
which  have  been  used  or  are  to  be  used  for  such  purposes. 

Heretofore,  in  the  older  and  more  thickly  populated  districts  of  the 
United  States,  it  has  been  the  exception  rather  than  the  rule  for 
good  banks  to  rediscount  paper,  and  the  fact  that  they  never  have 
rediscounted  has  been  a  matter  of  pride  with  many  banks.  Espe- 
cially has  this  been  true  of  banks  in  reserve  and  central  reserve  dties, 


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NEW  CURRENCY  ACT  AND  COMMERCIAL  PAPER  HOUSES  361 

which  have  disliked  exceedingly  to  show  an  item  of  rediscount  on 
their  published  statement;  but  with  an  official  government  sanction 
on  this  procedure,  rediscounting  will  become  a  perfectly  normal 
incident  of  the  banking  business. 

Let  us  now  consider  the  effect  of  the  new  law  on  the  country 
bank.  It  is  apparent  that  the  decrease  in  legal  reserve,  in  itself, 
necessarily  means  larger  resources  available  for  loans.  The  increase 
in  loanable  funds  will  be  even  greater  than  the  amount  represented 
by  the  percentage  of  reduction  in  the  reserve  actually  required, 
because  under  the  present  sjrstem  conservative  banking  practice 
has  necessitated  the  maintaining  of  reserves  in  excess  of  the  legal 
requirements.  Under  our  present  system,  the  limits  of  credit 
allowed  to  borrowing  banks,  other  credit  requirements  being  satis- 
fied, are  in  a  large  measure  determined  by  the  amount  of  their 
average  balances  in  reserve  and  central  reserve  cities.  As  a  result 
many  country  banks  are  compelled  to  keep  large  balances  with  their 
reserve  dty  correspondents  at  certain  seasons,  as  a  compensation 
for  the  rediscounting  accommodations  which  they  are  compelled  to. 
seek  of  these  correspondent  banks  during  other  seasons  of  the  year 
when  their  local  demand  is  strong,  as,  for  instance,  during  the  crop- 
moving  period.  Under  the  operation  of  the  new  law,  the  necessity 
for  these  balances  will  have  been  obviated,  because  the  Federal 
Reserve  Bank  will  rediscount  for  its  member  banks  in  proportion  to 
their  legitimate  needs  rather  than  in  proportion  to  the  amo\mt  of 
their  balance. 

Country  banks  have  also  carried  large  balances  with  reserve  and 
central  reserve  banks  in  order  to  get  favorable  terms  on  collections, 
the  larger  balance  compensating  the  dty  bank  for  the  trouble  and 
expense  of  collecting.  The  Federal  Reserve  Bank  will  now  act  as 
a  dearing-house  and  will  accept  for  immediate  credit  checks  on  other 
member  banks  and  drafts  on  other  Federal  Reserve  Banks  at  par. 

Many  country  banks  have  heretofore  carried  a  large  balance 
with  reserve  and  central  reserve  banks  as  a  general  measure  of 
prudence  in  order  to  be  prepared  for  emergendes.  They  will  not 
feel  the  same  necessity  under  the  new  law  because  they  will  know 
that  in  an  emergency  they  can  immediatdy  rediscoimt  at  the 
Federal  Reserve  Bank, 


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362  JOURNAL  OP  POLITICAL  ECONOMY 

It  is  apparent  from  all  this  that  the  country  banks  will  have  a 
much  larger  voliune  of  loanable  funds  than  at  present,  and  will  pur- 
chase commercial  paper  even  more  extensively  than  now. 

Furthermore,  commercial  paper  is  likely  to  supplant  certain  less 
liquid  forms  of  investment  now  held  by  coimtry  banks.  Many 
banks  which  carry  a  large  amount  of  loans  secured  by  stock 
exchange  collateral,  which  will  be  ineligible  for  rediscount,  will  find 
it  advisable  to  carry  a  larger  proportion  of  convertible  paper. 
Many  of  them  in  the  past  have  carried  bonds  as  an  investment  on 
the  theory  that  they  are  always  marketable.  While  it  is  true  that 
there  is  always  a  market  for  high-grade  bonds,  it  has  usually  been 
the  case  that  at  times  when  such  banks  have  had  to  realize  on  their 
bonds  the  rates  on  money  have  been  high  and  the  price  of  bonds 
correspondingly  low.  This  experience  has  proved  costly  to  many 
banks.  But  if  a  bank  should  buy  paper  even  during  a  period  of 
very  cheap  money  and  should  be  obliged  to  rediscoimt  it  during  a 
period  of  very  high  money,  the  loss  would  be  inconsequential,  since 
the  paper  would  have  only  a  short  time  to  nm. 

The  effect  of  the  new  act  on  the  dty  bank  is  more  difficult  to 
determine.  It  is  evident,  however,  that  just  as  in  the  case  of  the 
country  bank  its  loaning  power  will  increase  to  the  extent  that  its 
legal  reserve  requirements  are  decreased.  It  will  also  have  an 
increased  loaning  power,  from  the  fact  that  it  will  be  able  to  include 
in  its  reserve  a  large  amount  of  funds  which  are  now  not  available 
for  that  purpose.  This  has  particular  reference  to  so-called 
"transit  items" — that  is,  checks  drawn  on  out-of-town  banks  for 
which  the  depositor  has  received  credit,  but  which  the  receiving 
bank  is  obliged  to  send  out  for  collection.  In  the  ordinary  course 
of  business  several  days  elapse  before  returns  are  received  on  these 
items,  and  the  bank  holding  them  is  not  allowed  in  the  meantime 
to  treat  them  as  part  of  its  reserve.  In  the  case  of  large  Chicago 
banks,  these  so-called  "transit  items"  amount  to  many  millions  of 
dollars.  Under  the  new  act  the  bank  will  deposit  such  items  with 
the  Regional  Federal  Reserve,  where  they  will  be  counted  as  part 
of  its  reserve. 

The  loaning  power  of  banks  in  reserve  cities  will  also  be  increased 
to  the  extent  that  the  banks  will  no  longer  find  it  necessary  to  keep 


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NEf¥  CURRENCY  ACT  AND  COMMERCIAL  PAPER  HOUSES   363 

balances  with  other  banks  to  obtain  collection  service.  City  banks 
now  have  large  funds  tied  up  in  deposits  with  each  other.  The 
Federal  Reserve  Banks  will  collect  and  remit  for  member  banks, 
thus  eliminatuig  the  necessity  for  such  deposits. 

These  increases  of  loaning  power,  however,  will  be  more  than 
offset  by  decreased  loaning  power  as  a  result  of  probable  withdrawal 
of  country  deposits.  In  our  consideration  of  the  effect  of  the  new 
act  upon  coimtry  banks,  we  have  fully  set  out  the  reasons  why 
country  balances  will  be  greatly  diminished.  This  decrease  of 
country  deposits  will  imdoubtedly  come  about  very  gradually, 
however,  and  there  will  always  be  a  considerable  quantity  of  such 
deposits.  It  will  take  the  country  banker  some  time  to  accustom 
himself  to  the  lower  reserves  permitted  by  the  new  act,  and  instead 
of  keeping  these  surplus  reserves  with  the  Federal  Reserve  Bank  he 
will  natundly  keep  them  in  the  dty  bank,  because  he  will  thus  get 
interest  on  them.  Moreover,  many  country  banks  will  want  some 
service  from  their  dty  correspondent  not  obtainable  from  the 
Federal  Reserve  Banks,  such  as  the  taking  of  surplus  lines  of  their 
customers  without  indorsement,  the  supplying  of  general  credit 
information,  the  assistance  of  the  dty  bank  in  the  investment  of 
their  fimds,  and  other  inddental  services.  To  obtain  such  service 
some  deposits  will  be  maintained. 

It  is  generally  true  of  dty  banks  doing  a  commercial  business 
that  their  direct  loans  to  customers  exceed  their- loanable  funds 
derived  from  their  own  capital  and  their  individual  deposits.  This 
will  probably  be  true,  even  with  the  decreased  reserves  required 
under  the  new  act.  The  deposits  by  coimtry  banks  have  served  to 
provide  the  necessary  funds.  It  follows  that  a  substantial  reduc- 
tion in  country  balances  must  be  followed  by  a  large  reduction  in 
loans.  This  will  be  accomplished  in  one  or  more  of  the  following 
ways,  or  more  probably  by  all  of  the  following  ways:  (i)  the  con- 
traction of  loans  to  customers,  (2)  the  cessation  of  purchases  of 
commercial  paper,  (3)  rediscounting  with  the  Federal  Reserve 
Bank. 

The  net  result  of  all  this  is  that  dty  banks  which  have  heretofore 
been  large  purchasers  of  commercial  paper  will  have  little  or  no 
surplus  funds  to  invest  in  the  purchase  of  commercial  paper;  in 


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364  JOURNAL  OP  POUTICAL  ECONOMY 

fact,  commercial  paper  houses  will  probably  have  to  extend  larger 
lines  of  credit  to  dieir  customers  to  offset  the  decreased  lines 
obtainable  at  the  banks.  It  is  evident,  however,  that  the  total 
loanable  funds  of  the  entire  country  will  be  substantially  increased, 
so  that  the  decreased  dty  demand  for  paper  must  be  more  than 
offset  by  the  increased  country  buying  of  paper.  It  is  thus  quite 
apparent  that  the  commercial  paper  houses  will  have  to  take 
cognizance  of  the  coimtry  banks  as  furnishing  the  real  market  for 
open  market  purchases,  and  they  will  have  to  organize  their  work 
accordingly. 

It  is  also  likely  that  the  act  will  open  a  new  field  for  the  com- 
mercial paper  house — ^namely,  that  of  dealing  in  bank  rediscoimts. 
The  rate  of  discoimt  in  different  Federal  Reserve  Banks  will  differ 
according  to  the  demand  for  money  in  each  particular  district 
For  example,  it  is  quite  probable  that  at  some  seasons  of  the  year 
the  discoimt  rate  of  the  Federal  Reserve  Bank  serving  the  banks  in 
Texas  might  be  6  per  cent,  while  that  of  the  Federal  Reserve  Bank 
in  Chicago  would  be  only  4  per  cent.  It  would  be  entirely  within 
the  province  of  the  commercial  paper  house  to  rediscount  paper 
bearing  the  indorsement  of  Texas  b^mks  at  a  rate  slightly  below  the 
rate  fixed  by  the  Federal  Reserve  Bank  of  the  Texas  district,  and 
place  this  paper  with  banks  in  Illinois.  It  would  simply  be  another 
opportunity  for  the  broker  to  exercise  his  fimction  of  acting  as  a 
mediimi  between  borrower  and  lender,  and  thus  tending  to  lessen 
the  disparity  in  rates. 

It  is  evident  from  the  forgoing  that  there  will  be  a  largely 
increased  supply  of  loanable  funds.  There  is  nothing  in  the  act, 
however,  to  create  any  new  or  imusual  demand  for  funds,  so  that 
it  is  a  fair  conclusion  that  the  effect  of  the  new  act  will  be  to  lower 
rates  of  interest  in  general,  and  particularly  rates  on  commercial 
paper. 

On  the  whole,  the  general  work  of  the  commercial  paper  house 
will  require  very  little  change  to  accommodate  itself  to  the  new  law. 
Credit  investigation  will  be  the  same,  and  methods  of  marketing 
paper  will  remain  substantially  as  at  present.  The  only  important 
change  that  will  follow  will  be  in  the  location  and  distribution  of 
the  market  for  absorbing  the  paper.        Robert  C.  Schaffner 

CmcAOO,  III. 


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CONSTITUTIONAL  RESTRICTIONS  ON 
MUNICIPAL  DEBT 

This  paper  is  concerned  with  a  criticism  of  the  present  con- 
stitutional restrictions  on  municipal'  indebtedness  in  the  United 
States.    These  restrictions  may  be  simmiarized  as  follows: 

First:  Municipalities  generally  are  forbidden  to  subsidize 
private  capital.  There  are  many  exceptions  to  this  rule,  however, 
of  which  Wisconsin  and  Iowa  may  be  dted  as  examples.  The 
states  having  constitutions  adopted  more  recently,  as,  for  instance, 
Wyoming,  South  Dakota,  North  Dakota,  Oklahoma,  New  Mexico, 
and  Arizona,  all  prohibit  such  subsidies. 

Second:  The  amotmt  of  debt  which  may  be  contracted  is  gener- 
ally limited  to  a  definite  percentage  of  the  assessed  value  of  property 
within  the  districts  in  question. 

Third:  A  maximum  period  of  years  is  usually  named  in  the  con- 
stitutions beyond  which  debts  are  not  allowed  to  run. 

Fourth:  A  referendiun  vote  is  required  for  the  contraction  of 
long-time  or  bonded  debt. 

Fifth:  A  direct  tax  is  required  to  be  levied  at  the  time  the 
bonded  debt  is  incurred,  and  at  each  succeeding  year  thereafter 'to 
pay  the  interest  as  it  accrues  and  the  principal  at  maturity. 

Sixth:  Money  borrowed  for  certain  piuposes  is  not  cotmted 
in  computing  the  constitutional  indebtedness. 

Seventh:  A  definite  limit  extended  beyond  the  ordinary  one 
is  frequently  allowed  for  certain  classes  of  debt  which  are  supposed 
to  carry  with  them  no  financial  burden  because  of  the  revenue- 
bearing  capacity  of  the  properties  for  which  the  money  is  used. 

Let  us  discuss  these  various  constitutional  limitations  as  to 
their  purpose  and  adequacy. 

Mimidpal  corporations  are  in  essence  of  a  twofold  character. 
From  one  point  of  view  they  are  administrative  units,  in  so  far  as 
they  are  agents  of  the  state;  from  another  point  of  view  they  are 

>  The  term  mimidpality  is  here  used  to  mdude  all  the  minor  political  miits  of 
the  states,  such  as  counties,  towns,  dties,  school  districts,  drainage  districts,  etc. 

36s 


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366  JOURNAL  OP  POLITICAL  ECONOMY 

business  units,  in  so  far  as  they  are  created  to  provide  local  necessi- 
ties and  conveniences.  The  former  characteristic  is  illustrated  by 
the  county  units  which  are  created  primarily  to  aid  the  state  in 
administering  justice,  in  promoting  education,  etc.  They  have  a 
direct  and  almost  exclusive  reference  to  the  general  policy  of  the 
state,  and  serve  as  agents  through  which  this  policy  may  be  carried 
out.  The  latter  characteristic  is  illustrated  in  street-paving,  in  drain 
and  sewer  construction,  in  sewage  disposal,  and  in  the  general  busi- 
ness functions  of  cities.  Thus,  while  a  dty  is  an  arm  of  the  state, 
in  the  administration  of  law,  for  instance,  it  is,  at  the  same  time, 
and  is  becoming  more  and  more  so,  a  business  unit  through  which 
its  stockholders — the  public — ^are  served.  From  this  point  of  view 
a  dty  should  be  regarded  as  subject  to  many  of  the  same  laws  of 
finance  as  a  private  corporation.  The  same  standards  of  service 
must  be  furnished,  and,  ceteris  paribus^  at  the  same  cost  to  the  con- 
sumers. Capital  must  be  supplied  and  replaced  when  worn  out, 
extensions  and  improvements  made,  depreciation  provided  for, 
and  the  properties  kept  up  as  producing  imits.  What  dties  need 
from  the  state  is  power  to  carry  on  local  government;  what'they 
should  do  is  in  large  measure  to  be  determined  by  those  alone  con- 
cerned acting  in  the  capadty  of  a  corporate  unit.  The  responsibili- 
ties of  effecting  a  desired  end  should  rest  with  the  appropriate 
offidals,  and  the  execution  of  the  polides  determined  be  according 
to  approved  business  and  economic  prindples.  The  accepted 
fimctions  of  political  units  constantiy  change,  and  the  regulations 
governing  their  activities  must  be  formulated  in  the  light  of  this  fact. 
A  hard-and-fast,  an  a  priori  philosophy  of  the  relations  of  the 
state  to  its  minor  units,  as  well  as  of  the  rdations  of  the  latter  to 
commercial  and  industrial  enterprises,  is  bound  to  be  archaic 
almost  as  soon  as  it  is  formulated.  State  control  over  local  finance 
is  necessary — the  patrimony  of  both  is  in  large  measure  identical. 
But  to  be  effective,  it  must  be  dynamic  and  elastic,  and  these  quali- 
ties our  present  constitutional  restrictions  do  not  possess. 

There  are  no  valid  objections  to  the  constitutional  prohibitions, 
now  almost  universal  among  the  states,  against  mimidpalities 
lending  their  credit  to  and  subscribing  to  the  stock  of  private  corpo- 
rations. The  era  of  timidity  and  scardty  of  private  capital  is  passed, 


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CONSTITUTIONAL  RESTRICTIONS  ON  MUNICIPAL  DEBT    367 

and  subsidies  in  the  form  of  public  aid  are  no  longer  necessary  to 
attract  and  promote  legitimate  private  enterprises.  The  market 
for  private  securities,  through  the  perfection  of  exchanges,  is  now 
so  vast  and  the  supply  of  capital  so  responsive  to  the  demand  that 
requisite  funds  are  readily  collected  for  enterprises  of  distinct 
benefit  to  industrial  growth  or  stipremacy.  Such  restrictions,  being 
essentially  a  matter  of  policy,  and  requiring  no  technical  or  extended 
definition,  and  not  involving  questions  of  technique  and  adminis- 
trative excellence,  may  conveniently  be  placed  in  the  fimdamental 
law  as  settled  for  an  indefinite  period.  Conditions  calling  for  a 
reversal  of  public  opinion  will  not  frequently  arise,  and  if  they  do, 
the  changes  demanded  may  likewise  be  incorporated  in  the  con- 
stitutions. The  other  restrictions  require  extended  and  detailed 
treatment. 

Municipal  credit  ultimately  rests  upon  the  taxing  power. 
Resources  of  municipalities,  except  for  the  few  properties  which 
are  revenue-bearing,  lie  in  the  value  of  private  property  subject 
to  taxation.  Taxes  become  a  first  lien  upon  this  value,  and  it  is 
to  this  that  the  creditor  looks  for  the  satisfaction  of  his  claims. 
But  values  for  tax  purposes,  in  the  United  States,  are  assessed 
values — a  certain  percentage  of  the  capitalized  market  value — and, 
to  guard  against  undue  taxation,  constitution-makers  have  expressed 
the  amoimt  of  debt  permissible  to  a  mimidpality  as  a  certain  per- 
centage of  this  assessed  value.  The  determining  consideration  in 
fixing  the  debt  limit  has  been  the  amo\mt  of  debt  and  not  the  need 
or  desirability  of  a  policy  of  deficit  financiering.  But  these  two 
aspects  of  this  question,  although  confused  even  today  in  our 
latest  constitutions,  are  nevertheless  quite  dissimilar,  and  should 
be  discussed  separately. 

The  general  property  tax  is  distinctively  American,  and  was 
common  among  the  states  at  an  early  date.  This  tax,  although 
possessed  of  some  points  of  value,  when  properties  are  simple 
and  tangible,  is  now  discredited  and  generally  considered  a  failure. 
With  its  weaknesses  as  a  system  of  taxation  we  are  not  concerned, 
but  the  difficulties  involved  in  its  assessment  are  pertinent  to  our 
inquiry.  These,  when  approached  from  the  point  of  view  of 
public  borrowing,  present  new  and  interesting  problems. 


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368  JOURNAL  OP  POUTICAL  ECONOMY 

Constitutional  restrictions  based  upon  the  assessed  value  of 
property  are  imposed  to  prevent  public  credit  from  being  abtised. 
But  if  property  is  imder-assessed,  the  use  of  credit,  even  when  a 
policy  of  deficit  financiering  is  justified,  is  prevented,  in  proportion 
to  the  degree  of  under-assessment  and  despite  the  fact  that  the 
debt  limit,  measured  in  terms  of  actual  property  value,  in  reality 
has  not  been  reached.  Limitations  on  the  use  of  debt  must 
serve,  among  other  purposes,  (i)  to  prevent  undue  or  extortionate 
taxation,  and  (2)  to  express  the  relative  proportions  in  which  tax 
burdens  should  be  divided  between  the  present  and  the  future  tax- 
payers. The  total  burden  which  taxpayers  must  bear  will  approxi- 
mately be  equal  from  one  tax  period  to  another,  but  the  proportions 
in  which  it  is  divided,  as  between  current  revenues  and  debt  obliga- 
tions, must  of  necessity  vary  with  each  change  of  policy  adopted  and 
with  each  new  project  undertaken.  To  make  the  borrowing  power 
a  certain  percentage  of  the  assessed  value  of  property  answers  only 
half  of  the  problem,  and  this  part  in  an  unscientific  manner. 
Borrowing  is  a  necessary  financial  device  for  public  corporations 
to  employ.  It  is  liable  to  abuse,  however,  and  needs  to  be  regulated^ 
but  regulation  must  not  be  made  dependent  upon  the  willingness  or 
ability  of  local  assessors  to  evaluate  property  correctly  or  uniformly. 

The  difficulties  involved  in  such  a  scheme  of  regulation,  in  so 
far  as  the  assessment  of  property — the  measure  of  permissible 
debt — ^is  concerned,  are  excellently  illustrated  in  the  experience 
of  cities  and  other  local  divisions  in  Wisconsin  and  other  states. 
The  constitution  of  Wisconsin  gives  counties  the  privilege  to  borrow 
to  the  extent  of  5  per  cent  of  their  assessed  value,  according  to  the 
last  preceding  assessment  for  state  and  county  piuposes.  Sup- 
posing this  limit  to  be  reasonable,  let  us  see  to  what  extent  its 
effectiveness  is  negatived  by  the  assessment  of  the  general  property 
tax  of  the  state.  The  average  ratio  of  assessed  to  true  value  of 
property  in  Richland  County  for  the  five  years  ending  1909  was 
48.36  per  cent.  The  similar  ratios  for  the  same  period  for  the 
adjoining  counties,  viz.,  Vernon,  Crawford,  Sauk,  Iowa,  and 
Grant,  were,  respectively,  55 .  18  per  cent,  51 .  34  per  cent,  S3  •  79  P^r 
cent,  51.00  per  cent,  and  65.14  per  cent;  that  is,  the  borrowing 
power  computed  in  terms  of  borrowing  capacity — true  value — ^was 


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CONSTITUTIONAL  RESTRICTIONS  ON  MUNICIPAL  DEBT    369 

from  3  per  cent  to  17  per  cent  higher  for  the  last-named  counties 
than  for  Richland.  The  variations  of  the  ratios  of  assessed  to 
true  value  for  all  the  counties  of  the  state,  1905-9  inclusive,  are  indi- 
cated by  the  following  frequency  classification:' 

Katio  oi  AMHed  to  T^iie  Value 
Nninber  of  Couulfes  Per  Cent 

2  30.00  1039.99 

17  40.00  to  49.99 

32  50.00  to  59.99 

14  60.00  to  69.99 

6  70.00  to  79.99 

Interpreted  in  terms  of  power  to  borrow,  these  results  give  the 
counties  with  an  assessed  value  of  70.00  to  79.99  per  cent  of  their 
true  value  practically  double  the  borrowing  power  of  those  with 
assessed  values  from  40.00  to  49.99  P^^  c^^^*  '^^  question  is 
not  whether  coimties  should  borrow  5  per  cent  or  nothing  at  all; 
it  is  whether  assessed  value  of  property  is  a  satisfactory  basis 
upon  which  to  measure  borrowing  capacity. 

The  same  sort  of  analysis  may  be  extended  to  cities  in  Wiscon- 
sin. The  constitution  gives  to  the  cities  a  5  per  cent  borrowing 
power  and  bases  it  upon  the  assessed  value  of  property  within 
their  limits.  The  average  ratio  of  assessed  to  true  value  of  the 
property  in  Washburn  City,  Bayfield  County,  for  the  five-year 
period  1905-9  inclusive,  was  97.72  per  cent.  The  corresponding 
percentage  for  Beaver  Dam  City,  Dodge  County,  was  44-72  per 
cent.  The  chief  cities  in  Dodge  Coimty,  for  the  same  period, 
show  the  following  percentages  of  assessed  to  true  value  of  property: 
Beaver  Dam,  44.72  per  cent;  Waupim,  68.21  per  cent;  Mayville, 
44.62  per  cent;  Horicon,  63.16  per  cent;  Juneau,  55.92  per  cent; 
and  Watertown  (the  part  in  Dodge  County) ,  50 .  39  per  cent.  These 
figures  are  probably  more  nearly  uniform  and  nearer  to  true  value 
\  than  are  the  corresponding  figures  in  most  other  states,  yet  they 

forcibly  prove  that  assessed  value  of  property  is  an  imperfect 
basis  upon  which  to  compute  borrowing  capacity. 
\  Inasmuch  as  this  measure  is  common  among  the  states,  let 

us  still  extend  our  analysis  to  cities  outside  of  Wisconsin.    Table  I 

*  These  figures  were  compiled  ham  the  records  of  the  Wisconsin  State  Tax  Com- 
mistion,  and  were  arrived  at  <m  the  basb  of  bona  fide  sales. 


\ 


/ 


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370 


JOURNAL  OP  POUTICAL  ECONOMY 


shows  the  ratios  of  assessed  to  true  vahie  of  real  property  in  the 
158  cities  of  the  United  States  with  populations  over  30,000 
in  1908.  This  table  indicates  that  the  same  variations  in  the 
assessment  are  found  in  the  larger  cities — cities  where  the  use  of 
borrowed  funds  is  absolutely  necessary  and  where  there  is  con- 
stant effort  to  expand  the  limit.  Sometimes  resort  is  had  to  con- 
stitutional amendment.    The  recent  experience  of  New  York 

TABLE  I 

SHOwmo  THE  Ratios  or  Assessed  to  True  Value  or  Real  Propeety  in  Cities 

or  THE  United  States  with  Population  over  30,000  in  1908 


Rino  or  AnunD  to 

Tkub  Value 

PbeCbht 

Total 

NuMBBK  or  Cribs  Havxho  Pofulatiow 

Niunber 

FttCent 

Over 

•OOjOOO 

100,000 

to 
300/100 

SOfioo 

to 
xoo^ooo 

50,000 

IS  to  19.99 

aoto  34.99 

2S  to  29.99 

30  to  34.99 

3S  to  39.99 

40  to  44.99 

4S  to  49. 99 

so  to  54.99 

SS  to  S9. 99 

60  to  64. 99 

6s  to  69.99 

70  to  74.99 

7<  to  70.00 

4 

4 
2 
I 

I 

2 
IS 

4 
19 
IS 

7 
10 

3. S3 
2.53 
1.27 
0.63 

l:t 

1.27 
9.50 
a. S3 

12. 02 
9.50 
4.43 
6.33 

739 
1.27 
1.90 
1.27 
29.73 

I 

X 

2 

2 

X 

I 

I 

2 

2 

2 

3 

8 
4 
7 
9 
3 
3 

3 

I 

3 

I 

6 

2 
I 

80  to  84. 99 

8s  to  89.99 

90  to  94. 99 

9S  to  99.99 

100 

12 

2 

3 

2 

47 

17 

2 

6 

17 

Total 

158 

100. 00 

16 

30 

47 

6S 

City  is  a  case  in  point.  Often  the  courts  are  appealed  to,  to  hold 
that  this  or  that  is  outside  the  legal  limit.  Even  out-and-out 
evasion  is  not  considered  bad  taste  when  drctimstances  seem  to 
warrant,  and  when  the  political  ring  is  in  command.  Chicago 
furnishes  an  excellent  example  of  the  effect  of  the  assessment  of 
property  upon  the  amoimt  of  debt  that  may  be  contracted.  The 
legal  debt  limit  is  5  per  cent  of  the  assessed  value  of  property. 
But  property  is  assessed  at  about  15  per  cent  of  its  true  value,  and 
notwithstanding  this  city  has  half  of  the  population  of  New  York, 


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CONSTITUTIONAL  RESTRICTIONS  ON  MUNICIPAL  DEBT    371 

it  has  but '' one-eleventh  of  the  gross  mdebtedness  and  about  one- 
fifteenth  of  its  assessed  value "»  The  smaUness  of  the  debt 

of  the  dty  of  Chicago  is  directly  attributable  to  the  "extremely 
low  assessment.''' 

Under-assessment  and  variation  in  assessment  are  common  to 
all  tax  jurisdictions.*  The  iniquities  of  the  general  properly  tax 
are  extended  to  the  domain  of  public  borrowing,  and  discrimination 
between  localities  similarly  situated,  with  similar  needs  and  with 
equal  ability  to  satisfy  them,  is  thus  inevitable.  Control  and  regu- 
lation are  conditioned  upon  the  success  or  failure  of  our  local  tax 
officials  in  the  assessment  of  a  tax  no  longer  suited  to  oiu:  complex 
industrial  life  and  our  varied  classes  of  properties.  Such  a  scheme 
of  control  is  not  only  imsdentific  but  absolutely  indefensible.  It 
permits  an  increase  in  the  amoimt  of  debt  and  a  decrease  in  the 
proportion  of  taxes  by  the  simple  device  of  increasing  the  assessed 
value  and  lowering  the  tax  rate.  Such  a  thing  is  more  than 
speculation.  It  has  been  practiced  time  and  time  again.^  But 
even  if  it  shoidd  never  be  resorted  to  the  possibility  of  so  doing 
and  the  incentive  to  do  so  are  always  present.  Thus,  the  raison 
d^Hre  of  regulation — the  guaranty  of  equality  between  the  present 
and  the  future  taxpayers — ^is  completely  negatived. 

« D.  F.  WUcox,  SchHfien  des  VereinsfUr  SoOdlpMik,  CXXm,  176. 

•  D.  F.  Wilcox,  The  American  City,  p.  393. 

>  The  ratios  of  assessed  to  true  value  for  472  dties,  towns,  villages,  and  school 
districts,  chosen  at  random  from  all  parts  of  the  United  States,  are  as  follows: 


RAtio  of  AsMssed  to  True  Value 
PerCeot 

No.  of 
TniitftTicfs 

Ratio  of  Asseaaed  to  True  Value 
Percent 

No.  of 
TnntanTfii 

O-XQ.gQ 

3 

0 

34 

55 

10 
39 

0 
78 

I 

6o-6a.oo 

68 

so-a4.09 

DC— 00  00     

48 
xo 

35—20.99 

70-74.99 

30-^4.99 

7<-70.00 

64 

31 

35—39.99 

inj:??::::::::::::::::::::: 

40-44 .99 

85—80 .  09 

2 

45— 49 .99 

14 
0 

50-54.99 

oc— 00.00 

55-59.99 

45 

These  data  were  collected  from  the  Commercial  ami  Financial  CkronicU,  StaU  and  CUy  Supplement, 


1009. 


4  See  references  to  the  practice  in  New  York  City  in  1903,  and  in  Philadelphia, 
a  year  or  two  later,  in  Stale  and  Local  Taxation,  Second  Litemational  Conference, 
1909,  p.  537.  See  also  £.  P.  Allinson  and  Boise  Penrose,  Philadelphia:  A  History  of 
Municipal  Development  (Philadelphia,  1888),  pp.  376-77. 


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372  JOURNAL  OP  POLITICAL  ECONOMY 

Moreover,  this  scheme  of  regulation  presupposes  that  the  needs 
of  a  dty,  town,  county,  or  other  municipal  corporation  for  bor- 
rowed funds  are  proportional  to  the  value  of  property.  This 
is  not  necessarily  true.  An  increase  in  the  value  of  dty  property 
is  due,  primarily,  to  growth  in  population,  to  improvements 
made,  to  the  perfection  of  industrial  processes,  and  to  the  compe- 
tition for  advantageous  situations,  etc.  But  the  need  of  a  par- 
ticular locality  for  borrowed  fimds  may  be  due  to  the  failure  of 
private  initiative  to  satisfy  collective  wants,  to  a  desire  to  increase 
the  general  welfare  by  methods  the  expense  of  which  cannot  and 
ought  not  to  be  added  to  the  tax  rate,  to  certain  effects  of  the 
complexity  of  social  conditions,  to  the  age  of  the  community,  to 
the  enterprise  shown  in  making  improvements,  etc.,  causes  any  one 
or  all  of  which  may  have  nothing  directly  to  do  with  the  increased 
value  of  property.  Increase  in  tiie  value  of  property  does  indicate 
ability  to  bear  tax  burdens,  but  it  does  not  explain  the  amount  of 
burden  which  should  be  borne  by  the  present  generation  by  current 
tax  levy,  or  by  future  generations  in  the  form  of  long-term  indebted- 
ness. The  amount  of  fimds  acquired  by  the  use  of  public  credit  is 
related  to  the  value  of  property,  but  only  indirectly.  The  direct 
relationship  is  between  this  and  the  total  contribution,  and  it  is  this 
fact  which  is  lost  sight  of  in  any  scheme  which  relates  debt  solely  to 
the  assessed  value  of  property. 

It  would  certainly  be  wrong  to  contend  that  the  amount  of 
public  debt  incurred  bears  no  relation  to  the  value  of  property. 
To  the  public  creditor  debt  is  almost  solely  related  to  it,  since, 
in  most  commimities,  the  only  source  of  pubUc  credit  is  taxable 
wealth.  But  to  say  that  the  necessary  regulation  of  public  bor- 
rowing is  accomplished  when  debt  equivalent  to  a  certain  percentage 
of  the  value  of  taxable  property  is  allowed,  is  equally  incorrect. 
Borrowing  involves  far  more  than  the  amount  of  debt.  To  the 
taxpayer  it  involves  the  purpose  of  debt,  payment  of  debt,  equaliza- 
tion of  burdens  between  the  present  and  the  future,  economical 
and  efficient  use  of  the  amounts  borrowed,  etc.  The  amoimt  must 
be  reasonable  and  suited  to  the  economic  and  political  needs  of 
the  public  corporation  employing  it.  like  taxes,  since  both  are 
levies  upon  private  income,  it  must  find  its  justification  in  the 


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CONSTITUTIONAL  RESTRICTIONS  ON  MUNICIPAL  DEBT    373 

results  arising  out  of  its  utilization.  What  is  demanded  is  a 
reasonable  return  for  a  given  outlay;  and  the  finandal  means  best 
adapted,  when  all  interests  are  considered,  should  receive  the 
support  of  the  taxpayer. 

Another  important  objection  may  be  made  to  the  assessed 
value  of  property  as  an  adequate  basis  upon  which  to  compute  debt. 
In  the  assessment  of  property  for  the  purposes  of  taxation,  that 
owned  by  public  corporations  is  not  placed  upon  the  tax  rolls,  and 
so  we  have  the  interesting  anomaly  of  corporations  with  the  most 
property  having  the  least  borrowing  power.  But,  it  is  said,  the 
major  part  of  such  property  is  non-revenue-bearing,  and  cannot, 
therefore,  support  public  credit;  and  that  debt  contracted  for 
revenue-bearing  properties  is,  in  most  constitutions,  outside  of 
the  debt  limit.  This  is  conceded,  but  concerning  the  latter  phase 
of  the  contention  mote  will  be  said  later  on.  The  foimdation  of 
credit  in  public  economy  is  the  taxing  power.  Taxes  in  the  United 
States  are  computed  upon  the  assessed  valuation  of  property,  but 
the  real  source  of  credit — the  willingness  to  endure  taxation — ^has 
little  relation  to  this  assessing  expedient.  The  assessment  can  be 
low,  high,  or  indifferently  made,  and  this  of  itself  have  little  conr 
nection  with  the  people's  willingness  to  contribute.  The  point 
insisted  upon  is  that  the  willingness  to  pay  taxes  and  to  support 
credit  is  antecedent  and  the  method  of  acquiring  the  contribution 
subsequent.  But  the  constitutional  requirements  consider  only 
private  property.  The  value  attached  to  public  property  is 
ignored  because  it  is  non-revenue-bearing,  even  though  its  existence 
does  indicate  an  ability  and  a  willingness  to  pay,  and  therefore  does 
support  credit. 

Indeed,  property  such  as  public  buildings,  bridges,  street 
improvements,  sewerage  plants,  parks,  etc.,  although  they  yield 
no  net  return  and  are  a  heavy  drain  upon  the  taxes,  are  precisely 
the  things  which,  as  works  of  utility,  convenience,  and  ornamenta- 
tion, add  to  the  value  of  private  holdings,  and  serve  as  additional 
security  upon  which  credit  may  rest.'  One  would  hardly  claim 
that  the  presence  of  212  parcels  of  land  and  other  property,  includ- 

*  See  Maurice  Muhleman,  ''Municipal  Bonds  and  Municipal  Credit,"  Bankers' 
Law  Journal^  August,  191 1,  p.  642. 


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374  JOURNAL  OP  POUTICAL  ECONOMY 

ing  churches,  schools,  hospitals,  lodges,  etc.,  with  an  approximate 
value  of  $3,000,000,'  together  with  the  university  grounds  and 
buildings,  all  of  which  are  tax  exempt,  do  not  materially  affect 
the  credit  of  Madison,  Wisconsin,  as  a  borrowing  unit.  And  yet 
all  these  factors,  so  vital  in  the  determination  of  the  rate  of 
interest  at  which  municipalities  can  borrow,  are  totally  ignored 
by  the  requirement  which  bases  debt  solely  upon  the  assessed  value 
of  property. 

Instances  are  not  unheard  of  where  dty  property  has  been  sold 
to  satisfy  debt  obligation.  It  represents  an  accimiulated  fimd,  and 
one  upon  which  a  city  can  realize  in  the  case  of  approaching  bank- 
ruptcy. Property  shows  an  ability  to  pay;  the  taxes  levied  and  the 
permanent  properties  acquired  as  a  result  of  expenditure  are  evi- 
dences of  a  willingness  to  pay,  and  it  is  the  latter  which  supports 
credit  because  taxes  are  levied  by  those  who  actually  make  the  con- 
tributions. This  is  not  a  tremendously  important  matter,  in  the 
smaller  cities,  because  the  value  of  municipal  properties,  except  in 
comparatively  few  instances,  would  not,  if  added  to  the  assessment 
of  private  property,  materially  affect  their  borrowing  power.  The 
point  is  mentioned  in  this  connection  only  because  it  seems  funda- 
mentally unsound  to  make  borrowing  power  for  public  corporations 
inversely  proportional  to  the  value  of  property  owned,  while  in 
private  corporations,  with  which  public  corporations  are  often 
brought  into  competition,  and  by  the  standards  of  which  municipal 
enterprise  is  often  judged,  borrowing  is,  other  things  being  equal, 
directly  proportional  to  property. 

When  mtmidpalities  are  viewed  as  administrative  areas  alone, 
as  aids  in  canying  out  a  central  policy,  it  is  conceivable  that  some      $. 
definite  limit  shoiild  be  placed  on  the  amount  of  income  that  should      \ 
be  devoted  to  public  uses.    But  when  they  are  viewed  as  corpora-       1 
tions  created  to  insure  to  their  members  the  conveniences  and 
necessities  of  local  government  it  is  submitted  that  there  is  no      t 
standard  except  that  of  results  which  shows  the  amount  of  private       j 
income  that  shoiild  be  diverted  into  public  channels.    The  end  is       \ 
alwa)rs  the  most  economic  satisfaction  of  wants.    Some  wants  are 
public,  others  are  private,  and  the  shifting  of  them  from  the  one 

■  Madison  City  Assessor  in  the  Wisconsin  State  Journal,  Madison,  January  18, 
1911. 


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CONSTITUTIONAL  RESTRICTIONS  ON  MUNICIPAL  DEBT    375 

cat^ory  to  the  other  makes  difficult  any  a  priori  determination  of  |/ 
the  amoimts  to  be  appropriated  by  taxation  or  acquired  by  borrow-  • 
ing.    The  amount  of  debt  that  a  community  should  incur  is  not   \ 
an  arbitrary  percentage  of  an  ill-defined  assessment,  but  that   \ 
part  of  the  total  burden  the  people  are  willing  to  shoulder  which    ' 
justly  and  economically  cannot  be  assimilated  to  the  taziug  ma- 
chinery.   There  is  no  danger  in  debt,  per  se — the  danger  lies  in 
the  failure  to  pay  debt.    And  here  again  the  constitutional  limita- 
tions are  open  to  criticism.    This  leads  to  a  consideration  of  the     ■ 
time  which  a  public  debt  should  be  allowed  to  run. 

The  justification  of  incurring  long-time  indebtedness  is  to 
equalize  the  burden  of  public  expenditure  between  the  present  j 
and  the  future  taxpayer.  Some  expenditures  are  necessary  from 
which  the  chief  benefits  are  realized  in  the  future,  or  which  endure 
through  a  period  of  time,  and  it  is  only  just  that  those  who  receive 
the  benefits  should  bear  the  expense.  This  equalization  can  be 
effected  by  making  the  duration  of  loans  approximately  equiva- 
lent to  the  life  of  the  properties  acquired.  That  debts  should  be 
paid  is  recognized  in  the  maturing  periods  placed  in  our  consti- 
tutions. But  unfortunately  the  laws  which  provide  for  the  use 
of  the  borrowing  power  far  too  frequently  extend  the  periods  to  the 
maxima  named  in  the  constitutions.  These  periods  are  almost 
always  taken  advantage  of  by  dty  officials,  who,  through  inexperi- 
ence in  handling  loans,  or  through  choice,  put  off  the  day  of  settle- 
ment as  long  as  possible.  Milwaukee,  Wisconsin,  issues  all  her 
bonds  for  2a-year  periods,  and  among  such  issues  are  Bath  bonds. 
Bridge  bonds.  Viaduct  bonds,  City  Hall  bonds.  Docking  and 
Dredging  bonds,  Emergency  Hospital  bonds.  Fire  Department 
bonds,  Park  bonds,  Refunding  bonds,  etc.*  St.  Paiil,  Minnesota, 
with  an  outstanding  debt  of  $9,040,000  on  January  i,  1909,  showed 
82  distinct  issues  of  bonds,  all  running  30  years.  Among  these 
were  Workhouse  bonds.  Building  bonds.  Park  bonds.  Macadamizing 
bonds.  Court  House  bonds.  Sewer  Connection  bonds,  etc.*  Of  the 
130  different  cities  of  the  United  States  with  population  over  30,000 
in  1908,  which  issued  bonds  in  that  year,  the  average  period  in  16 
dties  was  less  than  10  years;  in  65  cities,  10  to  22  years;  in  36 

>  Annual  Report  of  the  City  Comptroller,  1909,  pp.  28  ff. 
^Annual  Report  of  the  City  Comptroller ,  January  i,  1909. 


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376  JOURNAL  OF  POUTICAL  ECONOMY 

cities,  22  to  31  years;  and  in  13  cities,  31  to  51  years.  But  16  per 
cent  of  all  the  periods  were  between  10  and  13  years;  18  per  cent 
between  19  and  22  years;  and  19  per  cent  between  28  and  31  years.' 
So  long  as  the  duration  of  loans  is  pushed  to  the  limit  set  in  the 
constitution,  or  allowed  to  concentrate  upon  the  even  numbers, 
as  ID,  20,  and  30  years;  and  so  long  as  half  of  the  outstanding  debt 
of  our  158  largest  cities  matures  after  a  period  of  20  years,  there  is 
no  evidence  of  any  conscious  attempt  to  suit  the  period  of  debt 
payment  to  the  life  of  properties  acquired.  Again,  the  constitu-  I 
tional  restriction  fails  to  indicate  the  proper  solution  of  this  phase  / 
of  public  debt. 

The  problems  involved  in  the  determination  of  the  proper     \ 
periods  for  debt  contracts  are  economic,  and  each  demands  specific      \ 
attention.    This  is  not  a  question  of  policy  suitable  for  consti-      \ 
tutional  statement.    There  is  no  general  rule  that  aU  debts  should 
be  paid  within  a  specified  number  of  years.    Debts  should  be  paid. 
This  is  an  accepted  canon  of  public  finance;  when  they  shoiild  be        \ 
paid  can  be  determined  only  after  an  analysis  of  the  life  or  utility  of 
each  property,  and  after  general  social  policy  and  the  most  approved 
experience  in  the  solution  of  such  problems  have  been  given  due 
consideration. 

The  constitutional  requirement  that  a  direct  annual  tax  be 
levied  at  the  time  a  loan  is  made,  and  each  year  thereafter,  sufficient 
to  pay  the  interest  as  it  accrues  and  the  principal  at  maturity,  is 
conmion  to  constitutional  mtmicipal  debt  limits.  This  measure 
of  safety  is  to  insure  against  perpetual  debt,  and  to  serve  as  a  pro- 
tection for  future  taxpayers.  Time  was  when  public  credit  was 
based  upon  the  accumulation  and  continuance  of  such  a  fund. 
Now,  however,  public  credit  almost  invariably  rests  upon  the  taxing 
power,  and  the  actual  presence  of  sinking  funds  plays  little  or  no 
part  in  its  determination.  The  constitutional  and  legislative 
requirements  that  these  be  provided  do  not  insure  their  tnaintenance. 
An  annual  tax  may  be  levied  in  good  faith,  but  a  fund  may  never 
materialize.  Indeed,  today,  if  a  fund  is  accumulated,  it  does  not 
serve  as  a  guaranty  against  further  taxation  for  the  purpose  for 
which  it  is  accumulated,  but  rather  is  imiformly  considered  by  the 

>  Statistics  of  CiUes  with  Population  over  jo^ooo  in  igo8,  Washington,  D.C.;  data 
taken  from  Table  XXXVI. 


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CONSTITUTIONAL  RESTRICTIONS  ON  MUNICIPAL  DEBT    377 

courts  as  an  offset  to  debt  obligation,  in  the  detennination  of  con- 
stitutional indebtedness,  thereby  extending  the  debt  limit  by  the 
amount  accumulated.  One  thing  is  certain,  the  taxpayer  fre- 
quently finds  little  protection  in  the  accumulation  of  such  "funds." 
Many  important  questions  are  involved  in  overlapping  political 
jurisdictions  borrowing  under  general  blanket  provisions  of  the 
state  constitutions.  Ordinarily  these  documents  extend  to  aU 
independent  political  corporations  the  power  to  borrow  money. 
Thus,  the  amount  of  indebtedness  which  a  particular  people  may  be 
called  upon  to  endure  depends  wholly  upon  the  disposition  of  the 
legislatures  to  create  such  imits.  Nebraska  and  South  Carolina 
limit  the  total  amoimt  of  debt  that  may  be  incurred  by  such  over- 
lapping jurisdictions.  It  is  surprising  that  so  many  of  the  consti- 
tutions confuse  the  fiction  of  independent  corporations  with  the 
facts  of  local  finance.  The  device  so  artfully  conceived  of  in  the 
period  of  state  and  mtmidpal  aid  to  railroads,  whereby  the  people 
in  one  capacity  assumed  responsibilities  and  expenses  which  they 
refused  in  another,  is  still  being  operated  under  our  latest  constitu- 
tions. There  is  no  reason  why  all  political  units  should  not  be 
accorded  the  privilege  of  borrowing  money  if  there  is  sufficient 
justification  for  its  use,  but  there  is  likewise  no  reason  why  all 
corporations  should  enjoy  this  privilege  to  an  almost  unlimited 
and  uncontrolled  extent,  merely  because  they  happened  to  be 
termed  by  the  legislatures  "independent."'  If  the  purposes  for 
which  a  corporation  within  a  city,  for  instance,  wishes  to  borrow 
are  municipal,  there  are  no  economic  reasons  why  the  debt  shoiild 
not  be  termed  mimicipal  and  be  charged  to  the  service  of  govern- 
ment in  that  district.  Many,  if  not  the  majority  of  the  so-called 
"independent"  corporations  are  purely  administrative  districts 
created  either  to  carry  out  the  policies  of  states  or  to  subdivide  the 
functions  and  expedite  the  administrations  of  cities.'  The  debts 
incurred  fall  upon  the  taxpayers  generally  and  the  burdens  they 

'  See  James  M.  Gray,  LmiUUions  of  the  Taxing  Power,  p.  11 10,  for  a  statement  of 
the  rulings  of  the  court  in  this  matter. 

*  The  following  independent  districts  having  borrowing  power  are  found  in  cities 
of  the  United  States  with  population  over  30,000  in  1908:  School  districts  in  72  dties; 
Park  districts  in  5  cities;  Sanitary  districts  in  2  cities;  Poor  district  in  i  dty;  Bridge 
district  in  i  dty;  Water  district  in  i  dty;  and  District  for  Police  in  i  dty  (StatisUcs 
of  CUUs  wiik  Population  over  so,ooo  in  igo8,  p.  22). 


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378  JOURNAL  OP  POUTICAL  ECONOMY 

impose  shoiild  be  charged  against  the  taxpayers  whether  residing  in 
corporations  independent  or  otherwise.  But  the  courts  do  not  so 
interpret  these  provisions.'  "Without  wholly  denying  the  legis- 
lative power  in  the  creation  of  subordinate  governmental  agencies,*'* 
it  woiild  be  impossible  for  the  courts  to  arrest  the  evils  arising  from 
the  conflict  of  jurisdictions.  Nor  should  they  be  called  upon  to 
formulate  and  enforce  a  correct  principle.  The  difficulties  lie  in 
the  failure  of  constitution-makers  to  square  political  philosophy 
with  actual  facts.  Borrowing  power  ought  not  to  come  to  every 
political  corporation  as  by  birthright.  It  need  not  accompany 
the  taziQg  power  at  all.  When  it  is  conferred,  however,  it  should 
be  adequate  to  the  purposes  at  hand.  Whether  a  particular 
service  is  done  by  one  administrative  unit  or  by  another  is  impor- 
tant only  in  so  far  as  economy  and  efficiency  are  involved.  Under 
the  present  constitutional  limitations  what  is  or  is  not  local  debt 
must  always  remain  indefinite  because  the  distinction  is  affected 
by  a  mass  of  imcertainties  and  by  dissimilar  laws,  and  its  deter- 
mination depends  in  large  part  upon  the  attitude  of  the  courts  in 
deciding  the  legal  questions  involved. 

There  is  another  grave  defect  in  our  present  constitutional 
restrictions  on  local  indebtedness.  Certain  forms  of  debt,  as 
loans  made  in  anticipation  of  taxes  to  be  collected,  and  debt  for 
certain  specified  purposes,  as  for  providing  water,  sewage  disposal, 
etc.,  are  often  omitted  from  the  legal  limit.  Let  us  consider  these 
practices  in  the  order  named. 

The  purpose  of  temporary  indebtedness,  or  temporary  loans, 
is  to  bridge  over  the  period  from  one  tax  collection  to  another. 

>  In  WUson  v.  Board  of  Trustees,  37  N.E.  Rep.  203,  a  sanitaiy  district  is  allowed 
independent  borrowing  powers  under  Art.  DC,  sec  12,  of  the  constitution  of  Illinois. 
In  Wilson  V.  The  Board  of  Education,  et  al.,  81  N.W.  Rep.  952  (S  J>.),  a  city  debt  b  not 
counted  in  the  determination  of  a  debt  limit  of  a  school  district,  although  the  district 
is  wholly  within  the  limits  of  the  city.  Conversely,  in  VaUeUy  v.  Board  of  Park  Con^ 
missianers,  in  N.W.  Rep.  615  (N.D.),  1907,  school  district  indebtedness  is  not 
counted  in  the  determination  of  the  debt  of  the  dty,  although  the  dty  wholly  includes 
the  district.  See  also  NaUonal  Life  Insurance  Company  v.  Mead,  133  S.D.  37;  Kemte' 
bee  Water  District  v.  City  of  WaterviUe,  52  Atl.  Rep.  774, 1902;  see  also  the  interesting 
interpretation  of  the  New  York  constitution  in  32  N.E.  622.  Other  cases  bearing  on 
this  general  question  are:  Todd  v.  City  of  Laurens,  26  S.E.  682,  S.C.,  1897;  Wikoxen 
V.  City  of  Blujfion,  54  N.E.  no,  Ind.;  Board  of  Education  v.  Bitting,  9  N.M.  588. 

'  Gray,  op.  cit.,  p.  xno. 


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CONSTITUTIONAL  RESTRICTIONS  ON  MUNICIPAL  DEBT    379 

Expenditure  is  a  continuous  process;  taxes  are  collected  ordinarily 
but  once  a  year,  and  the  income  and  outgo  of  money  cannot  readily 
be  adjusted  to  each  other.  Temporary  loans,  therefore,  are 
resorted  to.'  They  are  frequently  justified  on  the  ground  that  it  is 
cheaper  to  borrow  for  current  expenditure  during  the  year,  and  to 
pay  the  amount  contracted  at  the  end  of  the  year  out  of  taxes,  than 
to  deposit  the  taxes  in  banks  with  interest  at  the  current  rate^ 
because  the  interest  received  will  be  less  than  the  value  of  the  taxes 
to  the  taxpayers  during  the  year.^  Such  loans,  because  theoreti- 
cally o£Fset  by  taxes  to  be  collected,  are  ordinarily  not  computed 
in  determining  constitutional  debts.  Taxes  are  offset,  for  the  mo- 
ment, as  it  were,  but  these  loans  represent  in  most  municipalities  a 
constantly  recurring  item,  the  interest  of  which  is  not  offset*  but 
operates  with  the  same  pressure  as  do  the  interest  charges  on 
funded  debt.  If  the  purposes  of  debt  restrictions  are  only  to  pro- 
hibit the  deferment  of  taxes,  then  temporary  loans  may  be  com- 
puted as  outside  of  the  debt  limit,  providing  they  are  paid  at 
maturity  and  are  not  issued  in  amounts  exceeding  the  revenues 
actually  collected  and  against  which  they  are  issued.^  But  if  their 
purpose  is  to  protect  the  taxpayer  against  imdue  and  burdensome 
taxation,  then  temporary  loans  are  clearly  within  the  debt  limit, 
for  the  oppression  lies  in  the  permanent  interest  charge  which  they 
entail,  and  this  of  course  must  be  made  up  from  the  taxes  collected. 
New  York  City  is  completely  converted  to  the  use  of  temporary 
loans,  prefers  them  to  any  scheme  involving  half-yearly  or  quarterly 

'  How  £ar  a  dty  may  anticipate  its  taxes  so  as  to  expend  them  in  advance  of  their 
odkction  is  often  before  the  court.  The  taxes  must  have  been  actually  "  levied," 
Law  et  al.  v.  The  Peofie  ex  rel.,  87  Bl.  385, 399;  also  PenUm  v.  Bhk,  11  Utah  78.  On 
the  general  question  see  Bankers'  Magaame  (New  York),  XXX,  946.  On  the  prac- 
tice in  New  York  City  of  indulging  in  temporary  loans,  see  Annals  oj  the  American 
Academy t  Vol.  LXI  (1912),  in  which  Mr.  William  A.  Prcndergast,  cky  con^>trollery 
criticizes  the  old  method  and  outlines  the  present  plan  followed  in  odlecting  adequate 
funds  to  tide  the  dty  over  from  one  tax  collection  period  to  the  next. 

*New  York  Advisory  Commission  on  Taxation  and  Pinance,  1908,  pp.  34-359 
Lawson  Purdy,  secretary. 

*  Concerning  the  interest  on  such  loans  in  Massadiusetts  see  SiaUstics  ofMunidpai 
Pinances,  1907,  p.  xxvi. 

4  See  Report  of  ike  New  York  Advisory  Commission  on  Taxation  and  Pinance,  190S, 
for  an  account  of  the  practice  of  New  York  at  that  time  in  making  such  loans  in  exoesa 
of  the  taxes  collected. 


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38o  JOURNAL  OF  POUTICAL  ECONOMY 

tax  payments,  and  issued  during  January,  February,  March,  April, 
May,  1910,  the  following  amounts  respectively:  $12,223,325; 
$18,323,600;  $9,343>o«>;  $21,396,440,  and  $31,828,231.'  Of  the 
total  gross  outstanding  debt  of  the  158  largest  cities  of  the  United 
States  in  1908, 9 . 3  per  cent  was  for  temporary  loans,  revenue  loans, 
and  outstanding  warrants.'  In  the  33  cities  in  Massachusetts  with 
population  over  5,000  in  1907,  the  proportion  of  temporary  loans 
to  total  outstanding  debt  of  all  kinds  constituted  3.7  per  cent; 
while  of  the  total  interest  payments  for  all  debt  the  proportion 
occasioned  by  temporary  loans  constituted  6.1  per  cent.  In  the 
case  of  the  65  towns  of  the  same  state  with  population  over  5,000 
in  the  same  year,  the  proportion  of  temporary  loans  to  total 
outstanding  debt  of  all  kinds  constituted  8.1  per  cent;  while  of 
the  total  interest  payments,  the  proportion  for  temporary  loans 
equaled  12.5  per  cent.^  These  figures  show  that  the  interest  pay- 
ments for  temporary  loans  for  cities  and  towns  of  Massachusetts 
form  one-eighth  to  one-sixteenth  of  the  total.  Of  what  significance 
is  the  fact  that  91 . 8  per  cent  of  the  loans  incurred  by  the  towns  of 
the  above  state,  and  92 .  i  per  cent  of  the  loans  incurred  by  the  cities 
of  the  same  state  are  paid  during  the  year,  if,  as  soon  as  canceled, 
they  are  again  negotiated  ?  The  principal  appears  and  disappears, 
but  the  interest  is  a  continuous  item  and  it  is  this  which  constitutes 
the  drain  upon  the  taxpayer.  Even  in  the  field  of  temporary 
debt  there  are  many  problems  which  call  for  careful  consideration 
in  spite  of  the  present  constitutional  restrictions  and  limitations. 
It  was  noted  above,  for  further  discussion,  that  it  is  usual 
to  count  as  outside  the  constitutional  debt  limit  debts  for  pur- 
poses which  are  ostensibly  revenue-bearing.  Surrounded  by  the 
safeguards   specified  in   the    constitutions   of   New   York^   and 

'  Commercial  and  Financial  Chronicle,  XC,  126,  392,  649, 1000, 1255, 1508. 

*  Statistics  of  Cities  with  Population  over  30,000  in  igo8,  p.  244. 
i  Statistics  of  Municipal  Finances,  1907,  pp.  62,  65,  186,  191. 

*  Indebtedness  contracted  for  the  following  purposes  falls  outside  of  the  consti- 
tutional debt  limit:  "For  a  public  improvement  owned  or  to  be  owned  by  the  dty 
which  yields  to  the  dty  current  net  revenue,  after  making  any  necessary  allowances 
for  repairs  and  maintenance,  for  which  the  dty  is  liable  in  excess  of  the  interest  on 
said  debt  and  of  the  annual  instalments  necessary  for  its  amortization,  may  be 
exduded  in  ascertaining  the  power  of  said  dty  to  become  otherwise  indebted,  provided 


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CONSTITUTIONAL  RESTRICTIONS  ON  MUNICIPAL  DEBT    381 

Virginia,*  some  of  the  objections  to  this  practice  lose  their  weight. 
The  objectionable  thing  consists  in  allowing  a  municipality  to  omit 
this  debt  from  the  constitutional  limit  and  at  the  same  time  sell  its 
bonds  upon  the  security  of  the  taxing  power.  True,  the  debt  to 
be  thus  omitted  in  the  cases  of  New  York  and  Virginia  must  be  paid 
from  the  revenues  realized,  but  whether  success  or  failure  attends 
the  venture  the  creditor  has  the  taxing  power  to  fall  back  upon. 
If  the  utility  or  service  supplied  is  of  such  a  nature  as  legitimately  to 
make  the  debt  contracted  for  it  not  a  burden  upon  the  taxes,  con- 
sistency would  demand  that  the  debt  be  guaranteed  by  the  proper- 
ties themselves,  or  their  earning  power.  The  creditor  is  fully 
protected,  but  the  debtor,  the  taxpayer  as  distinct  from  the  con- 
sumer, may  be  imposed  upon  in  case  of  failure,  for  the  debt  is  still 
the  legal  obligation  of  the  mtmidpality. 

Our  general  conclusions  may  be  summarized  as  follows: 

1.  The  prohibitions  against  municipalities  lending  their  credit  to 
or  subscribing  to  the  stock  of  private  corporations  seems  justified, 
and  might  well  be  made  universal  and  absolute. 

2.  The  assessed  value  of  property  as  a  basis  upon  which  to  gauge 
the  amoimt  of  debt  that  is  permissible  for  mimicipalities  to  incur 

that  a  smking  fund  for  its  amortization  shall  have  been  established  and  maintained 
and  that  the  indebtedness  shall  not  be  so  excluded  during  any  period  of  time  when  the 
revenue  aforesaid  shall  not  be  sufficient  to  equal  the  said  interest  and  amortization 
instalments,  and  except  further  that  any  indebtedness  heretofore  incurred  by  the  dty 
of  New  York  for  any  rapid  transit  or  dock  investments  may  be  so  excluded  proportion- 
ally to  the  extent  to  which  the  current  net  revenue  received  by  said  dty  therefrom 
shall  meet  the  interest  and  amortization  instalments  therefor,  provided  that  any 
increase  in  the  debt-incurring  power  of  the  dty  of  New  York  which  shall  result  from  the 
exdusion  of  debts  heretofore  incurred  shall  be  available  only  for  the  acquisition  or  con- 
struction of  properties  to  be  used  for  rapid  transit  or  dock  purposes." — ConstituHon 
of  New  York,  1894,  as  amended  1909,  Art.  VIII,  sec  10. 

'  The  provision  of  the  Viiginia  constitution  declares  that  the  exemption  from  the 
debt  limit  shall  apply  only  so  long  as  the  munidpal  plants  for  supplying  water,  etc., 
succeed  in  producing  suffident  revenue  to  pay  the  cost  of  operation  and  administration, 
''induding  interest  on  bonds  issued  therefor,  and  the  cost  of  insurance  against  loss 
by  injury  to  persons  or  property,  and  an  annual  amount  to  be  covered  into  a  sinking 
fund  suffident  to  pay,  at  or  before  maturity,  all  bonds  issued  on  account  of  said  under- 
taking," and  all  "bonds  outstanding  shall  be  induded  in  determining  the  limitation 
of  the  power  to  incur  indebtedness  unless  the  prindpal  and  interest  thereof  be  made 
payable  exdusively  from  the  receipts  of  the  undertaking."— C^ns/i^Mm  of  Virginia, 
1902,  sec.  1276. 


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382  JOURNAL  OP  POUTICAL  ECONOMY 

is  open  to  criticism  (a)  because  the  assessment  of  property  is 
imperfectly  made,  thus  allowing  discrimination  between  political 
units  similarly  situated  and  similarly  able  to  borrow;  (b)  because 
borrowing  may  be  and  is  indulged  in  too  freely  by  increasing  the 
assessment,  and  taxes  used  too  sparingly  by  lowering  the  tax 
rate;  (c)  because  such  regulations  make  the  need  for  borrowed 
funds  proportional  to  the  value  of  property;  and  (d)  because  no 
account  is  taken  of  valuable  city  properties  not  found  on  the  tax 
rolls,  which  nevertheless  actively  support  public  credit. 

3.  In  fixing  the  borrowing  power  of  mimidpaUties  at  a  stated 
percentage  of  the  assessed  value  of  property,  a  proper  definite 
ratio  of  public  to  private  income  is  presupposed,  and  the  constantly 
increasing  public  needs  are  therefore  not  provided  for  without  a  con- 
stant revision  of  the  percentage.  Constitutional  amendments  are 
difficult  to  get,  and  even  when  secured  they  meet  only  the  needs 
of  a  particular  time  and  place  and  are  unsuited  for  general  applica- 
tion. 

4.  The  possibility  of  issumg  bonds  to  run  the  maximum  periods 
named  in  the  constitutions  is  eagerly  taken  advantage  of,  and  as  a 
resiilt  much  of  the  debt  issued  violates  the  canon  of  taxation  which 
requires  that  the  burdens  of  taxation  be  as  equitably  distributed 
between  the  present  and  the  future  taxpayers  as  the  nature  of  the 
services  growing  out  of  their  utilization  will  admit. 

5.  The  grant  of  borrowing  privileges  to  all  independent  corpora- 
tions necessarily  results  in  an  overlapping  of  tax  areas,  and  in  an 
undue  extension  of  debt. 

6.  The  omission  of  temporary  loans  from  the  debt  limit  seems 
unwarranted,  as  does  also  the  omission  of  debt  for  certain  pur- 
poses supposed  to  be  revenue-bearing,  when  the  bonds  issued 
therefor  are  secured  by  the  general  taxing  power  rather  than  by 
the  properties  themselves  or  their  earning  capacity. 

While  the  constitutional  restrictions  on  local  indebtedness  are 
open  to  severe  criticism,  they  are  by  no  means  devoid  of  some 
virtues.  They  were  imposed  for  the  most  part  in  a  time  of  undue 
speculation  and  abuse  of  public  credit,  and  at  least  had  the  salutary 
effect  of  protecting  many  mtmidpaUties  from  bankruptcy.  But 
the  causes  which  produced  them  in  the  main  no  longer  exist,  and 


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CONSTITUTIONAL  RESTRICTIONS  ON  MUNICIPAL  DEBT    383 

there  are  only  the  slightest  chances  of  their  recurring.  Some  of 
the  causes  of  abuse  still  remain,  such  as  the  corruption  that  attends 
municipal  administration,  but  these  have  endured  in  spite  of  the 
restrictions.  Municipal  debt  has  grown  imder  the  restrictions, 
and  will  continue  to  grow.  City  life  and  development  are  depend- 
ent upon  its  utilization,  and  its  legitimacy  as  a  companion  to 
direct  taxation  is  acknowledged  by  all.  Grants  of  aid  to  private 
capital  are  rapidly  being  supplanted  by  expenditures  involving 
competition  with  private  capital  in  furnishing  service.  The  ques- 
tion, therefore,  is  how  borrowing  can  be  utilized  legitimately, 
and  expenditures  of  public  fimds  regiilated  adequately,  so  as  to 
guarantee  a  maximum  of  service  for  a  given  outlay,  and  not,  how 
local  debt  can  be  most  effectively  suppressed  by  rigid  constitu- 
tional restrictions.  The  .question  at  base  is  administrative  and 
not  constitutional. 

Horace  Secrist 
NoxiHwxsTxsN  University 


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NOTES 

FINANCING  OF  FARMS  IN  SASKATCHEWAN 

Some  instructive  infonnation  relative  to  financing  of  farms  in  the 
Prairie  Provinces  of  the  Canadian  West  is  submitted  in  the  report  of 
the  Royal  Commission  Appointed  by  the  Government  of  Saskatchewan 
to  Inquire  into  Ways  and  Means  for  Establishing  Agricultural  Credit. 
The  report  recognizes  "a  great  need  of  cheaper  credit,  based  on  sound 
security,  spread  over  a  considerable  term  of  years,  applied  to  assist 
mixed  farming  and  to  improve  the  lot  of  the  average  farmer  on  a  half 
section." 

The  Commission  issued  under  date  of  January  28, 1913,  appointing 
Messrs.  John  H.  Haslam,  Charles  A.  Dunning,  and  Edward  H.  Oliver, 
the  latter  professor  of  history  and  economics  in  the  University  of  Sas- 
katchewan, to  investigate  the  whole  question  of  agricultural  credit  in 
relation  to  the  needs  and  limitations  of  Saskatchewan  conditions.  The 
inquiry  was  divided  into  two  tasks:  (i)  an  examination  of  conditions 
within  the  province  and  (2)  an  investigation  into  methods  for  supplying 
agricultural  credit  in  Europe  and  elsewhere.  On  account  of  the  early 
departure  to  Europe  of  the  United  States  Commission  charged  with  a 
similar  investigation,  the  Saskatchewan  Commission  found  it  necessary 
to  undertake  the  second  task  before  the  first.  For  the  work  outside  the 
province,  it  was  decided  that  Mr.  Dimning,  together  with  Mr.  A.  F. 
Mantle,  deputy  minister  of  agriculture  for  Saskatchewan,  who  acted  as 
honorary  secretary  of  the  Commission,  should  investigate,  in  Great 
Britain  and  to  some  extent  on  the  Continent,  the  question  of  possible 
sources  of  supply  of  money.  Chairman  Haslam  and  Professor  Oliver, 
meanwhile,  studied  the  rural  credit  systems  of  Europe.  In  this  they 
were  associated  with  the  American  Commission  on  Co-operation  and 
Agricultural  Credit,  Mr.  Haslam  being  made  a  vice-chairman  of  the 
Section  on  Distribution,  and  Mr.  Oliver  a  vice-chairman  of  the  Section 
on  Finance  or  Credit.  The  examination  into  provincial  conditions 
was  made  at  a  series  of  public  sittings  held  in  Saskatchewan  during 
August  last.  Mortgages  and  personal  loans  were  the  subjects  of  most 
consideration. 

384 


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NOTES  385 

It  was  found  that  during  the  fifteen  months  ended  August  15, 1913, 
there  were  no  less  than  1,723  sale  and  mortgage  proceedings  under  mort- 
gages in  Saskatchewan.' 

Probably  not  less  than  2  per  cent  of  the  farmers  of  Saskatchewan  were 
subjected  to  these  proceedings  under  the  conditions  that  obtained  in  this 
period.  Of  the  mortgages  in  connection  with  these  proceedings  150,  or  8.7 
per  cent,  bore  an  interest  rate  less  than  8  per  cent.  But  435,  or  over  25  per 
cent,  bore  an  interest  rate  higher  than  8  per  cent;  261,  or  over  15  per  cent, 
a  rate  of  10  per  cent  or  higher;  35,  a  rate  of  12  per  cent  or  higher;  and  3,  a  rate 
of  15  per  cent.  And  these  mortgages  were  placed  at  these  rates  before  the 
present  upward  trend  in  interest  rates  occurred. 

The  Commission  reported  that  the 
interest  payments  on  mortgage  loans  are  usually  met  the  year  they  fall  due, 
payments  are  seldom  pressed  for,  and  renewal  of  the  mortgage  is  made  easy. 
In  fact  the  present  system  of  payments  seems  designed  to  render  renewal 
necessary  and  debt  perpetual.  Viith  the  final  payment  so  large  the  borrower 
can  seldom  meet  it  out  of  the  current  year's  income.  The  mortgage  is  not  only 
renewed;  the  amoimt  of  the  loan  is  very  frequently  increased. 

These  features  of  our  mortgage  system  are  reprehensible.  The  mortgage 
is  not  calculated  to  develop  business  habits  nor  promptness.  It  is  a  document 
that  places  the  farmer,  from  the  beginning,  in  an  impossible  situation.  It 
hokis  out  to  him  the  prospect  of  confronting  a  payment  which  he  can  never 
hope  to  meet.  Under  the  guise  of  a  short-term  mortgage  there  actually  exists 
a  system  of  long-term  mortgages,  but  with  this  difference,  that  the  farmer  is 
compelled  to  renew  every  five  years  or  lose  his  farm  should  he  fail  to  meet 
the  mortgage. 

Purposes  for  which  loans  on  mortgages  are  granted  are  summarized 
thus: 

1.  To  consolidate  past  debts. 

2.  For  machinery.  In  this  matter  there  has  been  considerable  over- 
stocking, due,  as  one  farmer  stated,  to  the  '^science  of  salesmanship." 

3.  For  stock. 

4.  For  building  and  general  equipment. 

5.  To  provide  working  ci4>ital. 

6.  To  buy  more  land. 

7.  To  ''finance  trips  East"  or  similar  purposes. 

In  a  few  cases  loan  companies  will  supply  funds  up  to  50  per  cent  of 
their  own  valuation  of  the  property.  Trust  companies  are  prohibited, 
by  law,  from  advancing  more  than  that  amount.  In  the  majority  of 
cases,  only  about  30  per  cent  of  the  valuation  of  the  property  is  granted. 

'  These  returns  probably  are  not  quite  complete. 


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386  JOURNAL  OP  POLITICAL  ECONOMY 

In  judging  the  Canadian  banking  system  as  it  a£Fects  Saskatchewan, 
the  Commission  considered  not  only  the  complaints  against  the  banks, 
but,  as  well,  the  services  which  they  have  rendered.-  The  sunmiaiy 
is  as  follows: 

1.  Services  rendered  by  the  banks: 

a)  Until  recently  they  have  in  general  afforded  an  abundance  of  credit. 

()  They  have  pushed  out  into  the  smaller  places  and  granted  credit  facili- 
ties when  the  amount  of  business  to  be  secured  immediately  did  not  yidd  a 
profit. 

c)  They  have  exerted  an  educative  influence  upon  the  business  habits  of 
the  community  and  inculcated  the  virtue  of  promptness. 

2.  Complaints  against  the  banks: 

a)  They  have  frequently  sought  to  dominate  the  policy  of  those  businesses 
to  which  they  have  advanced  credit. 

()  They  have  sought  rather  to  pay  dividends  and  to  support  expensive 
edifices  than  to  afford  credit  to  customers  at  reasonable  rates. 

c)  They  are  not  controlled  within  the  province  and  in  a  time  of  stress 
when  credit  facilities  are  most  required,  the  banks  withdraw  them  from  the 
western  provinces. 

d)  Their  charges  for  transferring  funds  are  unreasonably  high. 

e)  The  rate  of  interest  on  loans  is  unnecessarily  large. 

f)  The  interest  allowed  on  dq>osits  is  too  low. 

g)  Their  ^^pathies  lie  with  the  commercial  rather  than  with  the  agri- 
cultural class. 

Relative  to  interest  rates  charged  by  the  banks,  the  Conmiission 
says: 

The  most  striking  feature  in  connection  with  banking  rates  of  interest  in 
thb  province  is  not  that  they  have  been  high,  although  they  have  been  hi^, 
but  that  they  have  been  so  different  in  various  parts  of  the  province.  In 
R^ina,  Moose  Jaw,  Saskatoon,  and  the  older  and  more  closely  settled  parts 
of  the  province,  where  the  competition  among  banks  is  keen,  loans  have  been 
made  to  farmers  this  summer  at  8  per  cent.  In  other  districts,  good  farming 
districts,  like  Fillmore  or  Kindersley  for  instance,  the  rate  has  been  regularly 
9  per  cent.  The  Commission  has  scores  of  cases  brought  to  its  attention  where 
the  rate  was  lo  per  cent  and  in  some  instances  even  12  per  cent.  In  districts 
like  Tisdale,  Battleford,  Radisson,  and  Shellbrook,  there  has  been  nothing  less 
than  10  per  cent.  In  this  matter  farmers  of  the  province  have  fared  better 
at  the  hands  of  the  banks  during  the  recent  stringency  than  have  many  of  our 
urban  popidation  at  the  hands  of  individuals  who  had  money  to  loan.  The 
Commission  has  encoimtered  no  farmer's  loan  where  on  amoimts  greater  than 
$100  the  nominal  rate  has  been  higher  than  12  per  cent,  although  the  Conmiis- 
sion is  in  possession  of  notes  where  the  minimum  charge  of  $1  amounts  to  as 
much  as  i8i  per  cent. 


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NOTES  387 

From  the  findings  of  the  inquiry  there  is  no  doubt  that  the  largest 
item  in  the  indebtedness  of  Saskatdiewan  farmers  is  the  amoimt  which 
is  due  to  mortgage  companies.  This  amount  is  placed  at  $65,000,000 
as  a  conservative  estimate.  For  the  next  largest  amoimt,  implement 
companies  are  responsible.  From  evidence  submitted  confidentially 
to  the  Commission  by  only  a  limited  number  of  branch  ofiSces,  it  is 
certain  that  the  total  indebtedness  of  farmers  to  merely  six  branch  offices 
is  $15,106,726.68.  It  is  not  improbable  that  at  present  between  $35,- 
000,000  and  $40,000,000  is  outstanding  for  machinery.  The  amoimt 
owing  on  agreements  of  sale  for  land  is  very  considerable.  To  one  com- 
pany the  farmers  of  this  province  owe  $5,770,000  and  to  another,  $3,622,- 
920.45.  The  amount  due  for  pre-emptions,  for  horses,  for  store  credit, 
lumber,  bank  credit,  and  for  miscellaneous  debts,  together  with  that  due 
for  the  purchase  of  land,  is  not  less  than  $50,000,000.  The  farmers  of 
Saskatchewan  are  paying  interest  on  at  least  $150,000,000.  If  this  is 
the  case,  then  their  agricultural  credit  is  costing  them  $12,000,000 
annually.  The  saving  of  only  i  per  cent  in  interest  would  mean  the 
saving  to  the  farming  industry  of  over  $1,500,000  per  year.  If  farmers 
could  secure  money  at  a  rate  as  much  as  2  per  cent  cheaper  than  at 
present  they  could,  by  making  their  payments  on  the  amortization  plan, 
discharge  their  total  indebtedness  in  about  twenty-four  years'  time  by 
simply  continuing  to  pay  what  they  are  now  paying  for  interest. 

Tlie  average  indebtedness  of  Saskatchewan  farmers  is,  perhi^s, 
$1,500.  The  average  farm  of  the  province  consists  of  about  295  acres. 
Thus  the  indebtedness  of  the  farmers  is  slightly  in  excess  of  $5  per  acre 
of  land  under  occupation  at  the  present  time. 

Turning  to  its  constructive  task,  the  Commission  observes  that 
whether  the  development  of  better  credit  is  sought  through  institutions 
strictly  co-operative,  strictly  governmental,  or  partly  co-operative  and 
partly  governmental,  three  principles  ought  to  be  applied:  (i)  that 
loans  be  provided  to  farmers  only  upon  unquestioned  security  and  for 
approved  agricultural  productive  or  improvement  purposes  only;  (2) 
that  provision  be  made  for  repa3anent  upon  the  amortization  plan; 
(3)  that  the  aim  should  be  to  render  a  service  to  the  borrower  and  not  to 
secure  a  profit  to  the  institution. 

Its  recommendations  look  to  the  creation  under  provincial  govern- 
ment auspices  of  a  Saskatchewan  Co-operative  Farm  Mortgage  Asso- 
ciation with  local  associations  in  affiliation,  the  central  body  to  raise 
fimds  as  desired  by  issuance  of  mortgage  bonds,  fully  guaranteed  by 
the  Saskatchewan  government.    It  is  further  proposed  that  mortgage 


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388  JOURNAL  OF  POLITICAL  ECONOMY 

loans  be  extended  to  fanners,  who  are  members  of  the  association,  on 
an  amortization  basis,  to  cover  a  period  of  not  less  than  fifteen  years 
and  not  more  than  thirty-five  years,  such  loans  to  be  limited  in  amount 
to  40  per  cent  of  the  central  commission's  valuation  of  the  property  to 
be  mortgaged,  and  the  rate  of  interest  to  cover  only  the  actual  cost 
of  granting  the  loan  and  not  provide  any  profit.  The  liability  of  the 
individual  member,  under  the  scheme,  is  limited  to  150  per  cent  of  the 
amount  of  his  loan.  The  report  also  contemplates  establishment,  as 
soon  as  possible,  under  control  of  the  Co-operative  Farm  Mortgage  Asso- 
ciation, of  a  bank  for  personal  credit,  in  accordance  with  the  provisions 
of  the  Canadian  Bank  Act,  with  headquarters  within  the  province 
of  Saskatchewan.  The  scheme  is  now  under  consideration  by  the 
provincial  government. 

S.  Roy  Weaver 
Toronto,  Ont. 


WASHINGTON  NOTES 

REPORT  ON  WATER  CARRIERS 

One  of  the  most  complete  discussions  of  shipping  conditions  of  recent 
years  has  just  been  issued  by  the  House  of  Representatives  Committee 
on  Merchant  Marine  and  Fisheries  as  Volume  IV  of  its  Proceedings^ 
the  volume  being  a  '^report  on  steamship  agreements  and  afiUiations 
in  the  American  foreign  and  domestic  trade."  The  document  comprises 
459  pages  and  is  a  very  complete  review  of  facts,  many  of  which  were 
not  heretofore  readily  available,  while  some  have  been  entirely  inacces- 
sible. It  appears  that  the  steamship  companies,  during  the  investiga- 
tion of  the  winter  of  191 2-13,  finally  came  to  the  conclusion  that  their 
best  policy  lay  in  the  adoption  of  a  system  of  absolute  frankness,  includ- 
ing die  filing  of  most  of  their  pooling  agreements  with  the  committee. 
While  the  report  goes  in  very  great  detail  into  the  mechanics  of  the 
steamship  business  and  its  organization,  the  chief  interest  is  found  in 
the  conclusions  arrived  at  with  respect  to  methods  of  control  of  com- 
petition. What  has  been  learned  on  that  point  as  to  domestic  trade 
may  be  siunmarized  somewhat  as  follows: 

I.  Control  through  acquisition  of  water  lines:  (a)  direct  railroad 
ownership  and  operation  of  such  lines;  {b)  railroad  ownership  through 
subsidiaries;  (c)  control  by  lease;  ((/)  ownership  of  vessel  lines  by  other 
vessel  lines;  (e)  joint  control  of  water  lines  by  railroads;  (/)  control  of 
one  water  carrier  over  another  or  of  a  railroad  over  a  water  carrier; 


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NOTES  389 

(g)  commimity  of  interest  through  stockholders;  (k)  raihoad  control 
of  competing  lines  through  the  ownership  of  a  forwarding  company, 
.  thereby  throwing  water  companies  back  upon  local  biisiness;  (i)  owner- 
ship of  exclusive  terminal  facilities;  (j)  ownership  of  carriers  by  pro- 
ducing and  trading  companies. 

2.  Control  through  agreement  or  understanding:  (a)  agreements 
between  water  lines  to  divide  territory  or  on  fixed  rates;  (b)  traffic 
associations;  (c)  requirement  of  unanimous  consent  of  existing  members 
in  traffic  associations  prior  to  admission  of  outside  line;  (d)  agreements 
not  to  charter  or  sell  vessels  to  certain  lines  or  for  specified  purposes. 

3.  Control  through  special  practices:  (a)  intentional  injury  to  or 
production  of  inefficiency  in  a  water  carrier  after  control  of  it  has  been 
obtained;  (b)  chartering  of  q>ace  on  competing  water  lines,  such  space 
not  being  used  while  other  shippers  are  deprived  of  it;  (c)  control  of 
terminal  facilities  to  the  disadvantage  of  competitors;  (d)  ownership 
of  available  water  frontage  without  use  of  it;  (e)  extreme  cutting  of 
rates;  (/)  manipulation  of  rates  so  as  to  destroy  the  economy  and  use 
of  a  water  route;  (g)  establishment  of  contracts  between  water  lines 
and  shippers  whereby  rebates  are  granted  if  such  sh^>pers  send  their 
entire  product  by  a  single  line,  the  object  being  to  drive  independent 
lines  out  of  business;  (h)  imdue  raising  of  marine  insurance  rates  to 
independent  lines  in  order  to  compel  them  to  charge  higher  transporta- 
tion rates;  (i)  allowance  of  a  limited  amount  of  freight  by  combinations 
to  competing  lines  with  the  understanding  that  this  freight  will  be  with- 
drawn if  the  competition  is  made  troublesome;  (j)  diversion  of  bulk 
traffic  by  special  allowances  for  milling  or  manufacturing  in  transit; 
(i^)  grant  of  special  access  to  docks  to  preferred  water  carriers,  others 
being  refused;  (/)  refusal  by  railroads  to  issue  through  bills  of  lading 
except  to  favored  lines;  (m)  establishment  of  exceptionally  high  rates 
for  rail  haul  on  commodities  that  have  come  part  way  by  vessel  but 
must  be  shipped  over  a  short  section  of  railway  at  the  end  of  haul.  Some 
other  minor  methods  of  competition  are  mentioned  but  these  are  the 
chief  that  have  been  developed  in  the  course  of  the  inquiry. 

With  regard  to  foreign  trade  conditions,  the  committee  finds  that 
the  methods  employed  for  the  control  of  competition  are  about  as 
follows: 

I.  Effecting  an  agreement  or  imderstanding  with  reference  to  the 
rates  charged,  including  (a)  fixed  rate  agreements,  (b)  minimum  rate 
agreements,  (c)  differential  rate  agreements,  (d)  domination  of  one  line 
by  another. 


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390  JOURNAL  OF  POUTICAL  ECONOMY 

2.  Apportioning  the  traffic  by  allotting  the  ports  from  or  to  which 
sailings  are  to  take  place. 

3.  Apportioning  the  traffic  by  restricting  the  number  of  sailings  of 
each  line. 

4.  Limiting  the  volume  of  freight  which  certain  lines  may  carry. 
$.  Pooling  the  freight  receipts  from  all  or  a  portion  of  the  cargo. 

6.  Agreements  between  steamship  conferences  in  special  cases. 

7.  Requirements  that  lines  deposit  a  specified  sum  as  a  guaranty  ci 
good  faith,  such  sums  to  be  forfeited  if  the  dq;)ositing  line  renders  any 
assistance  to  a  non-<:onference  line. 

Among  the  methods  of  meeting  competition  of  lines  outside  of  the 
various  conferences  the  conmiittee  recognizes: 

1.  The  deferred  rebate  system. 

2.  The  use  of  "fighting  ships/'  for  the  purpose  of  making  special* 
rate  cuts  and  driving  out  independent  lines. 

3.  Contracts  with  shippers,  including  (a)  joint  contracts  made  by 
the  conference  as  a  whole,  (b)  contracts  made  by  the  individual  members 
of  the  conference,  (c)  contracts  with  large  sh^pers  for  all  of  the  bulk 
of  their  f rdght. 

4.  Agreements  with  railroads  relative  to  the  character  of  the  steam- 
ship  service  from  the  various  ports. 

All  this  does  not  necessarily  mean  that  the  conmiittee  believes  the 
pools  and  agreements  to  have  been  injurious  in  all  cases;  on  the  contrary 
it  sees  in  them  certain  improvements  in  stability  of  rates  and  greater 
regularity  of  sailings.  However,  it  reconmiends  certain  changes  of  law, 
among  them  the  following: 

1.  In  foreign  trade: 

a)  That  concerns  engaged  in  foreign  trade  be  brought  under  the 
control  of  the  Interstate  Conunerce  Conmiission. 

b)  That  all  agreements  be  filed  with  the  Conmiission. 

c)  That  the  Commission  be  authorized  to  investigate  complaints 
charging  unreasonableness  of  water  rates. 

d)  That  rebating  of  freights  be  made  illegal. 

e)  That  the  Interstate  Commerce  Commission  be  allowed  to  initiate 
investigations  of  its  own  into  the  business  of  water  carriers. 

f)  That  the  use  of  ^'fighting  ships"  and  deferred  rebates  be  prohibited. 

g)  That  adequate  penalties  be  provided  for  the  abuses  referred  to. 

2.  In  domestic  trade: 

a)  That  the  Interstate  Commerce  Commission  be  given  full  jiuis- 
diction  over  water  carriers. 


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NOTES  391 

b)  That  water  carriers  be  required  to  file  with  the  Commission  all 
agreanents  affecting  interstate  transportation. 

c)  That  rebates  and  discriminations  between  shippers  be  forbidden. 

d)  That  the  Commission  be  given  power  to  make  investigations  on 
its  own  responsibility  with  reference  to  domestic  water  carriers. 

e)  That  various  railroad  practices  designed  to  injure  water  carriers 
be  prohibited,  and  that  the  issue  of  through  bills  of  lading  to  water 
carriers  be  required. 

f)  That  railroads  be  compelled  to  make  their  tenninal  facilities 
available  to  water  carriers  on  equal  terms. 

g)  That  provision  be  made  for  equal  treatment  for  all  shippers  and 
water  carriers  by  transfer  and  lighterage  concerns  when  forming  a  link 
in  interstate  or  foreign  commerce. 

h)  That  all  interstate  traffic  on  canals  be  brought  within  the  juris- 
diction of  the  Interstate  Commerce  Commission. 

It  is  not  believed  likely  that  any  action  will  be  had  upon  the  elaborate 
and  far-reaching  provisions  of  this  report  at  the  current  session  of  Con- 
gress, or  probably  until  there  has  been  much  more  extensive  and 
thorough  consideration  of  its  terms.  A  good  many  of  the  points 
recommended  certainly  will  not  be  acted  upon  at  all  in  the  near  future. 
Others  are  likely  to  receive  careful  attention  at  no  distant  day. 

GOVERNMENT  OWNERSHIP  IN  ALASKA 

In  signing  the  Alaska  railroad  bill  on  March  12,  President  Wilson 
has  taken  the  final  step  conmiitting  the  government  to  an  elaborate 
experiment  in  public  ownership  and  operation  of  railroads.  This 
measure,  now  a  law,  provides  that  the  President  through  "officers, 
agents,  or  agencies  of  his  own  selection,"  including  such  as  he  may  detail 
from  the  engineer  corps  of  the  army  and  navy,  may  locate  "a  route  or 
routes  for  a  line  or  lines  of  standard-gauge  railroad"  not  to  exceed  1,000 
miles  "so  located  as  to  connect  one  or  more  of  the  open  Pacific  harbors 
on  the  southern  coast  of  Alaska  with  the  navigable  waters  in  the  interior 
of  Alaska  and  with  a  coal  field  or  fields  3rielding  coal  sufficient  in  quantity 
or  quality  for  naval  use,  so  as  best  to  aid  in  the  development  of  the  agri- 
cultural and  mineral  or  other  resources  of  Alaska  and  the  settlement 
of  public  lands  therein."  The  President  is  also  to  purchase  all  equip- 
ment for  the  construction  and  operation  of  the  railroads,  build  docks, 
wharves,  and  terminal  facilities,  fix  and  change  rates  of  transportation 
with  the  aid  of  the  Interstate  Commerce  Conunission,  and  employ  all 
officers  and  men  needed  for  the  operation  of  the  road.    The  President 


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392  JOURNAL  OF  POLITICAL  ECONOMY 

may,  however,  lease  the  raOroad  and  the  telegraph  and  telephone  lines 
accompan3dng  it  for  a  period  of  twenty  years  after  completion;  he  may 
condemn  other  property  or  purchase  it  as  he  sees  fit,  whenever  he  deems 
best.  The  power  could  not  be  more  inclusive  and  absolute  in  reference 
to  the  subject  over  which  it  is  to  be  exercised.  In  order  to  supply 
means  for  the  scheme,  an  issue  of  $35,000,000  of  3  per  cent  bonds, 
redeemable  after  ten  years  and  payable  thirty  years  from  date,  is  author- 
ized, while  $1,000,000  is  immediately  set  aside  for  first  expenses,  this 
amount,  however,  to  be  a  part  of  the  $35,000,000.  By  means  of  a  "rail- 
way redemption  fimd,"  into  which  are  to  be  paid  the  net  earnings  of 
the  railroad  and  50  per  cent  of  all  mone3rs  derived  from  the  sale  of  public 
lands  in  Alaska,  provision  is  made  for  a  resource  to  pay  the  interest  on 
the  bonds  and  to  supply  the  cash  for  their  ultimate  redemption  as  needed. 
The  Alaska  railroad  bill  is  of  particular  interest  apart  from  the  fact 
that  it  provides  for  government  ownership  and  probably  government 
operation  of  a  railway,  inasmuch  as  it  is  only  one  phase  of  a  large  policy. 
The  next  element  in  that  policy  is  the  creation  of  an  "Alaska  develop- 
ment board"  whose  function  would  be  that  of  controlling  and  caring 
for  all  public  lands  in  Alaska,  including  actual  agricultural  land,  mining 
resources,  and  practically  everything  else  except  the  mere  matter  of 
tranq>ortation  which  is  by  the  new  bill  brought  imder  the  oversight 
and  control  of  the  Interstate  Commerce  Commission  acting  with  the 
President.  When  the  enormous  extent  of  Alaska  and  its  undeveloped 
resources  is  considered,  it  is  seen  that  the  foundation  has  been  laid  for 
a  gigantic  enterprise  of  government  ownership  and  exploitation,  very 
much  greater  in  its  probable  scope  than  is  indicated  by  the  transporta- 
tion phases  of  the  scheme.  It  is  now  definitely  planned  to  employ  in  the 
construction  the  machinery  used  on  the  Panama  Canal,  and  probably 
such  elements  of  the  personnel  of  the  Canal  enterprise  as  appear  to  be 
available  for  the  work.  The  operation  is  under  the  general  jurisdiction 
of  Secretary  Lane  of  the  Department  of  the  Interior,  who  has  already 
imdertaken  the  preliminary  task  of  selecting  engineers  and  other  sub- 
ordinates for  the  conduct  of  the  work.  The  official  annoimcement  is 
that  progress  in  construction  will  be  hastened  as  rapidly  as  may  be,  as 
preliminary  surveys  have  indicated  approximately  where  the  line  should 
be  located. 

TELEGRAPH  AND  TELEPHONE  PROSPECTS 

The  continued  growth  and  increasing  strength  of  the  movement 
for  government  control  of  telegraph  and  telephone  services  in  the  United 
States  is  most  impressively  illustrated  in  the  activity  of  the  Post-Officc 


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NOTES  393 

Department  in  preparing  and  publishing  data  in  support  of  its  position 
on  that  subject.  The  latest,  and  one  of  the  most  thorough,  treatments 
of  the  situation  that  have  been  put  out  by  the  department  is  found  in  a 
document  issued  imder  date  of  February  13,  but  just  made  available, 
entitled  ''Government  Ownership  of  Electrical  Means  of  Communica- 
tion" (S.Doc.  399,  63d  Cong.,  2d  sess.).  In  this  document  is  given  the 
result  of  a  lengthy  investigation  into  conditions  of  government  owner- 
ship of  these  two  services,  accompanied  by  a  theoretical  consideration 
of  the  conditions  prevailing  today  in  the  United  States.  With  reference 
to  the  government  acquisition  of  the  telegraph  the  Postmaster-General 
says: 

Under  government  control,  the  postal  service  of  our  country  has  prospered, 
ei^anded,  and  devdoped  to  its  present  hi^  state  of  working  and  economical 
efficiency,  adopting,  in  the  course  of  its  growth,  practically  every  means  of 
transmitting  intelligence,  except  electricity.    The  service  has  gone  hand  in 

hand  with  the  advance  guard  of  civilization The  United  States  alone 

of  the  leading  nations  has  left  to  private  enterprise  the  ownership  and  opera- 
tion of  the  telegraph  and  telephone  facilities. 

In  dealing  with  the  telephone  question  the  letter  says: 
It  is  needless  here  to  enter  into  the  manifold  advantages  and  benefits  that 
would  accrue  to  the  people  from  a  universal  telephone  service  ....  as  it 
has  done  with  the  mails,  it  is  the  duty  of  the  government  to  make  this  facility 
available  to  all  of  its  citizens  without  discrimination. 

Inasmuch,  however,  as  the  investigating  conmiittee  intrusted  with 
the  study  of  the  subject  by  the  Postmaster-General  found  that  the  cost 
to  the  government  would  be  enormous  were  it  to  attempt  to  take  over 
the  whole  telegn^h  and  telephone  network  of  the  country,  the  conmiittee 
makes  the  following  concrete  recommendation: 

Your  committee  has  reached  the  conclusion  that  the  only  way  to  afford 
to  the  people  the  complete  and  modem  postal  facilities  that  the  Constitution 
makes  it  the  duty  of  the  government  to  provide  is  to  put  into  effect  the  following 
recommendations : 

1.  That  Congress  declare  a  government  monopoly  over  all  telegraph, 
telephone,  and  radio  communication  and  such  other  means  for  the  transmission 
of  intelligence  as  may  hereafter  develop. 

2.  That  Congress  acquire  by  purchase  at  this  time  at  appraised  value  the 
commercial  telephone  network,  except  the  farmer  lines. 

3.  That  Congress  authorize  the  Postmaster-General  to  issue,  at  his  dis- 
cretion and  imder  such  regulations  as  he  may  prescribe,  revocable  licenses 
for  the  operation,  by  private  individuab,  associations,  companies,  and  cor- 
porations, of  the  telegraph  service  and  such  parts  of  the  telq>hone  service  as 
may  not  be  acquired  by  the  government. 


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394  JOURNAL  OF  POLITICAL  ECONOMY 

The  results  of  the  investigation  give  probably  a  better  cond^ised 
survey  of  the  situation  in  regard  to  the  use  of  the  telegraph  and  tele- 
phone in  various  countries  than  has  thus  far  been  made  available  in 
other  documents.  One  of  the  interesting  statistical  comparisons  pre- 
sented relates  to  the  relative  use  of  the  telephone  and  telegraph  during 
recent  years.  In  the  decade  1900-1910  with  an  increase  of  about  18 
per  cent  in  population  there  was  an  increase  in  average  daily  telephone 
connections  of  287  per  cent,  while  the  increase  in  the  nimiber  of  tele- 
graph messages  was  only  18  per  cent,  local  business  being  almost  entirely 
lost  by  the  telegraph  companies  to  the  telephone  concerns.  Even  in 
the  long-distance  commimication  the  trend  seems  to  be  in  favor  of  the 
telephone  and  against  the  telegraph. 

INSURANCE  AS  '^COIOCERCE" 

An  important  decision  a£fecting  controverted  points  relative  to 
insurance  has  been  handed  down  by  the  Supreme  Court  of  the  United 
States  in  the  case  of  New  York  Life  Insurance  Co.  v.  Deer  Lodge  Couniy^ 
Montana.  The  main  burden  of  the  decision  is  to  the  effect  that  insurance 
is  not  interstate  commerce.  Some  time  ago  legislation  was  adopted 
in  Montana  under  which  all  insurance  corporations  were  required  to 
pay  a  ^>ecified  tax  each  year  upon  the  excess  of  premiums  (after  deduct- 
ing losses  and  regular  expenses)  within  the  state.  This  legislation  was 
attacked  by  the  New  York  Life  Insurance  Co.  as  repugnant  to  the  con- 
stitutional provisions  relating  to  interstate  comimerce.  The  New  York 
Life  authorities  had  no  difficulty  in  showing  that  all  their  business  was 
transacted  through  agents  who  received  their  instructions  by  mail  or 
tel^raph  from  New  York  City,  that  place  being  also  the  depository  of 
the  company's  funds  as  well  as  the  point  at  which  loans  were  determined 
upon  and  from  which  the  amoimt  of  the  loans  was  sent  forward.  Inas- 
much as  the  company  never  had  local  headquarters  in  Montana  it  was 
claimed  that  Montana's  tax  was  therefore  a  tax  on  interstate  commerce, 
the  character  of  the  business  as  described  in  detail  being  commercial 
in  character  and  certainly  passing  between  the  several  states.  In 
handing  down  a  decision  contrary  to  the  view  that  insurance  is  inter- 
state commerce,  the  Supreme  Court  now  goes  back  to  the  early  portion 
taken  more  than  one  hundred  years  ago  in  Paul  v.  Virginia  where  the 
court  held  that  there  was  nothing  in  the  nature  of  insurance  to  warrant 
its  being  considered  commerce,  the  making  of  an  insurance  contract 
being  simply  incidental  to  commercial  relationships  and  having  nothing 
necessarily  to  do  with  commerce  as  such.    On  the  other  hand,  the  Deer 


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NOTES  395 

Lodge  decision  declines  to  r^ard  the  fact  that  policies  of  insurance  may 
be  made  use  of  for  the  purpose  of  negotiating  loans  as  a  good  ground 
for  endowing  them  with  a  commercial  character  in  law.  Thus  the  effort 
of  the  insurance  companies  to  emancipate  themselves  from  state  control 
is  again  checked  by  the  Supreme  Court  of  the  United  States,  notwith- 
standing that  the  judges  apparently  recognize  the  injury  done  to  existing 
insurance  sj^tems  as  a  result  of  differences  of  policy  among  the  several 
states.  It  has  been  believed  by  some  of  the  larger  insurance  concerns 
that  a  time  had  arrived  when  government  control,  which  has  been 
carried  so  far  in  other  directions,  might  also  be  applied  by  the  federal 
authorities  to  insurance,  thereby  enabling  them  to  feel  a  greater  degree 
of  certainty  with  reference  to  the  r^ulations  and  restrictions  with  which 
they  must  comply  in  transacting  business.  This  latest  decision  has 
practically  rendered  such  expectations  nugatory  for  a  good  while  to 
come. 


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BOOK   REVIEWS   AND   NOTICES 


Government  Ownership  of  Railways.  By  Samuel  O.  Dunn.  New 
York:  D.  Appleton  &  Co.,  1913.  8vo,  pp.  vii+400.  $1.50 
net. 

The  recent  swift  change  in  public  opinion  on  the  question  of  govern- 
ment activities  is  hardly  less  than  revolutionary.  If  tiie  change  rests  on 
conviction,  on  a  careful  examination  of  the  problems  involved,  there  need 
perhaps  be  no  alarm.  But  if  it  is  due  to  an  iminformed  optimism,  or 
the  easy  philosophy  of  imitation,  or  a  sort  of  "weary  fatalism,"  to  use 
the  expression  of  a  recent  brilliant  essayist,  which  accepts  '^any  present 
tendency  as  a  fatal  force  which  it  is  useless  if  not  wrong  to  curb,"  then 
it  is  a  matter  of  concern,  and  we  may  well  agree  with  Mr.  Dunn  that 
the  question  of  government  versus  private  ownership  ought  now,  before 
it  becomes  a  partisan  question,  to  be  receiving  serious  attention. 

Mr.  Dunn's  new  book  is  a  helpful  essay  in  this  direction.  After 
a  survey  of  existing  relations  between  the  railways  and  the  state  in  the 
commercial  nations,  he  shows  in  a  chapter  on  the  "Causes  of  Govern- 
ment OwnershQ)"  that  the  conditions,  economic  and  political,  which 
have  led  to  public  control  elsewhere,  such  as  lack  of  capital  and  initiative, 
military  necessity  and  the  like,  do  not  exist  here.  If  there  are  reasons 
for  acquiring  the  roads  in  this  country  they  differ  from  those  which  have 
led  other  coimtries  to  that  policy.    Are  there  such  ? 

Combining  in  an  admirable  way  the  deductive  and  the  inductive 
method,  the  author  examines  the  arguments  most  persistently  urged 
for  government  ownership.  In  the  matter  of  capital  cost  he  agrees  that 
imder  present  conditions  the  government  would  in  the  United  States  be 
able  to  supply  capital  at  a  saving  of  perhaps  120  millions  a  year  as 
compared  with  dividend  and  interest  pa3anents  by  the  companies.  This 
estimate  is  based  on  a  purchase  price  of  16  billions  and  3^  per  cent 
bonds  floated  at  par.  But  the  saving  would  be  reduced  if  the  purchase 
price  were  greater  than  16  billions,  as  it  probably  would  be,  and  a  slight 
advance  in  the  interest  rate  might  easily  wipe  out  the  saving.  Never- 
theless under  present  conditions,  the  lower  cost  of  capital  due  to  a  high 
public  credit  resting  on  the  taxing  power  is  admitted  as  an  argument 
of  some  weight  for  government  ownership.    It  is  pointed  out,  however, 

396 


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BOOK  REVIEWS  AND  NOTICES  397 

that  the  cost  of  capital  to  private  companies  may  be  reduced  if  tax- 
payers  are  willing  to  take  the  risks  of  the  business  by  guaranteeing  a 
return  on  railroad  investments. 

In  a  chapter  on  the  'Condition  of  Labor/'  full  of  shrewd  observa- 
tion and  keen  analysb,  the  conclusion  is  reached  that  on  the  whole  there 
is  reason  for  the  working-man's  belief  that  conditions  of  emplojrment 
would  be  improved  under  public  management.  Wages  would  prob- 
ably be  higher  and  the  amoimt  of  labor  done  would  probably  be  less 
than  under  private  control.  If  railway  labor  is  not  now  getting  as  high 
relative  wages  as  labor  in  other  industries,  the  readjustment  would  be  a 
social  gaiD.  But  there  is  no  reason  for  supposing  that  the  advance  in 
wages  would  stop  with  such  readjustment,  if  indeed  there  be  one  to 
make.  In  some  respects  the  condition  of  labor  would  be  worse  under 
government  management,  for  capable  men  at  least.  Appointments  and 
promotions  are  now  as  a  rule  made  according  to  merit;  under  govern- 
ment control  they  would  be  made,  if  not  for  political  reasons,  then  by 
some  hard-and-fast  rule,  such  as  seniority  or  the  passing  of  dvil  service 
examinations.  The  man  of  capacity  would  be  the  loser  by  such  a  policy, 
as  would  also  the  service.  While  agreeing  to  the  general  soimdness  of 
the  author's  argument,  one  may  observe  in  this  connection  that  differ- 
ences in  req)ect  to  labor  conditions  under  the  two  systems  of  control  are 
tending  to  become  less  marked.  Unnecessary  additions  to  the  labor 
force  may  be  made  under  private  control  as  is  shown  by  recent  train- 
crew  l^islation;  arbitration  boards  seem  likely  to  award  wage  increases 
pari  passu  with  the  rising  cost  of  living  r^ardless  of  the  effect  on  net 
earnings;  the  large  salaries  of  the  higher  o£Gicials,  the  supposed  sine 
qua  nan  of  successful  railway  management — a  condition  that  democracies, 
it  is  often  said,  will  not  meet — ^may  yet  imder  private  control  have  to  be 
shrunk  to  something  like  democratic  standards.  For  two  public  boards 
at  least  have  recently,  while  making  awards,  looked  askance  at  the 
salary  list,  and  salaries  may  be  expected  to  be  taken  into  account  in  future 
inquiries  into  the  rate  advances. 

Turning  to  relative  efficiency  under  the  two  systems,  Mr.  Dunn  finds 
for  private  management.  Public  management,  it  is  admitted,  would 
make  possible  many  economies.  The  item  of  advertising,  for  example, 
now  about  $8,500,000  for  American  roads,  could  be  largely  saved  and  the 
item  of  $20,000,000  for  soliciting  could  be  eliminated  entirely.  Consoli- 
dation would  make  possible  a  reduction  in  terminal  and  office  expenses 
in  large  dties,  as  also  in  the  list  of  officials,  though  experience  in  demo- 
cratic communities  discloses  little  disposition  to  economize  in  this  way. 


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398  JOURNAL  OF  POLITICAL  ECONOMY 

On  the  other  hand,  it  is  notable  how  far  the  economies  of  consolidation 
have  ahready  been  brought  about  by  the  development  of  our  great 
systems  and  by  extensive  standardization.  The  savings,  it  is  argued, 
would  be  slight  compared  with  the  probable  waste  from  making  un- 
profitable extensions  and  improvements,  from  heavy  increases  in  the 
cost  of  labor,  and  from  less  efficient  management. 

Perhaps  the  most  vital  clusters  in  Uie  book  are  those  which  deal 
with  rate-making  and  the  adjustment  of  rates.  Fewer  unfair  discrimina- 
tions are  to  be  expected  under  state  control;  but  there  seems  no  justi- 
fiable hc^  that  they  would  be  lower;  or  that  the  passenger  service  would 
be  made  to  pay  its  due  proportion  of  the  expenses;  or  that  the  rates 
would  be  adjusted  so  as  to  bring  about  the  fullest  all-around  devel(q>- 
ment  of  the  country;  for  ''state  railways  tend  to  put  their  domestic 
rates  on  a  rigid  distance  basis,  which  interferes  with  the  development  of 
a  large  traffic,  prevents  the  freest  industrial  and  commercial  conq>etition, 
and  builds  up  local  monopolies  or  quasi-monopolies.  But  hare  again 
it  is  to  be  remarked  that  the  distinction  between  private  and  public 
ownership  tends  to  grow  less  striking.  Public  rate-making  authorities 
seem  more  and  more  inclined  to  preserve  geographical  advantages  by 
establishing  distance  tarififs  and  to  circumscribe  the  power  of  the  com- 
panies to  develop  long-distance  traffic. 

Even  those  who  do  not  agree  with  the  conclusions  reached  by  Mr. 
Dunn  will  be  impressed  by  tibe  candor  with  which  he  approaches  his 
study.  No  one  appreciates  more  fully  than  he  the  difficulties  of  com- 
paring railway  statistics  in  countries  having  such  varied  conditions  as 
those  from  which  he  draws  his  illustrations.  He  gives  warning  of  these 
diffictdties  at  every  turn,  and  deals  with  both  the  theoretical  and  the 
statistical  aspects  of  the  very  complex  problem  as  a  student  rather  than 
as  an  advocate. 

There  are  many  who  might  agree  with  each  important  step  in  the 
argument  and  yet  disagree  with  the  author  in  his  final  judgment  against 
public  ownership;  for  one  important  phase  of  the  problem  is  not  dis- 
cussed. It  may  be  true  that  present  rates  on  private  roads  conq)are 
favorably  with  those  on  public  roads;  but  what  of  the  future?  The 
decision  in  the  Minnesota  rate  case  has  eliminated  some  of  the  extrava- 
gant claims  of  the  railroads  for  a  high  valuation  of  their  property;  but 
the  cost-of-reproduction  theory  still  persists  and  if  it  is  finally  accepted 
by  the  courts  there  seems  little  likelihood  that  the  fall  in  rates  which 
might  normally  be  expected  on  public  roads  with  an  increasing  density 
of  traffic  will  ever  come.    If  the  basis  for  charges  is  automatically  to 


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BOOK  REVIEWS  AND  NOTICES  399 

increase  whenever  there  is  an  increase  in  wages,  of  prices  of  materials, 
of  lawyers'  fees,  or,  above  all,  of  the  value  of  land  along  the  right  of  way, 
on  the  theory  that  it  would  cost  more  to  construct  the  road  if  it  were  to 
be  rebuilt;  if  favorably  situated  roads,  built  at  a  low  cost,  are  to  continue 
indefinitely  to  wax  fat  as  rent-takers,  because  of  the  necessity  of  allowing 
them  to  charge  the  same  rates  as  their  less  favorably  situated  competitors, 
an  increasing  nimiber  of  thoughtful  persons  will  accept  the  view  sug- 
gested by  Commissioner  Lane  in  the  Advances  in  Raks — Western  Case 
of  iQiif  '^that  it  will  be  wise  for  the  government  to  protect  its  people 
by  taking  to  itself  these  properties  at  present  value  rather  than  wait 
the  day,  perhaps  thirty  or  fifty  years  hence,  when  they  will  have  multi- 
plied in  value  ten-  or  twenty-fold." 

George  O.  Virtue 
Umiveksity  ov  Nebxaska 


Money-Changing;   An  Introduction  to  Foreign  Exchange.    By  Hartley 

Withers.    New  York:    E.  P.  Dutton  &  Co.,  1913.    i2mo,  pp. 

viii-l-183.    $1.75. 

In  this  little  volume  on  the  foreign  exchanges  Mr.  Withers  has  added 
another  to  his  popular  treatises  on  finance.  The  book  is  an  outgrowth 
of  a  series  of  lectures  recently  delivered  before  the  English  Institute  of 
Bankers.  It  is  written  in  a  style  so  very  readable  that  the  exchanges  lose 
much  of  the  "appalling  awesomeness"  that  has  always  surrounded  the 
subject.  In  general  scope  and  aim  the  book  is  comparable  to  Escher's 
Elements  of  Foreign  Exchange  and  Clare's  A  BC  of  the  Foreign  Exchanges. 
While  it  is  a  more  usable  volume  than  Clare's  it  is  perhaps  less  adequate 
than  Escher's  book  for  the  purposes  of  collegiate  instruction.  Though 
more  entertaining  than  the  Elements  of  Foreign  Exchange,  it  is  hardly  as 
well  ads^ted  for  scientific  study.  Margraff's  International  Exchange, 
while  unfortunately  marred  by  heaviness  of  style,  is  much  superior  to 
Money-Changing  as  a  scientific  and  comprehensive  treatment  of  the 
subject. 

The  book  covers,  in  nine  chapters,  the  factors  involved  in  interna- 
tional pa3anents,  the  rates  of  exchange,  commercial  and  finance  bills, 
and  the  discoimt  and  bullion  markets.  The  author's  treatment  of  com- 
mercial letters  of  credit  and  finance  bills  appears  to  the  reviewer  par- 
ticularly good.  He  makes  a  point  of  important  bearing  on  the  theory 
of  international  trade  in  relation  to  changes  of  price  levels  when  he 
shows  that  finance  bills  are  the  immediate  means  of  balancing  interna- 
tional pa3anents.    "It  must  be  remembered  that,  since  the  price  of 


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400  JOURNAL  OF  POLITICAL  ECONOMY 

credit  is  a  much  smaller  item  in  the  calculations  of  a  merchant  or  manu- 
facturer than  in  those  of  a  financier  who  is  fl3dng  kites,  the  effect  of 
money  rates  on  international  trade  is  much  slower  than  on  international 
financing"  (p.  144).  The  point  is  also  clearly  brought  out  that  gold 
shipments  may  take  place  at  varying  rates — ^in  other  words,  that 
gold  points  vary  within  certain  limits,  and  that  gold  will  be  shipped 
whenever  any  dealer  can  figure  a  slight  profit  in  doing  so. 

Overemphasis  is  doubtless  placed  on  the  imique  position  of  London  as 
a  free  market  for  gold.  The  author  takes  Mr.  Escher  to  task  as  being 
better  as  an  American  than  as  an  economist  in  holding  that  the  market 
for  gold  in  the  United  States  is  peculiarly  free.  Mr.  Withers  appar- 
ently feels  that  the  lack  of  direct  redeemability  of  our  silver  and  silver 
certificates  in  gold  constitutes  a  very  grave  situation  and  in  practice 
seriously  restricts  the  market  for  gold.  Perhaps  Mr.  Escher  would 
find  in  this  comment  evidence  that  Mr.  Withers  is  a  good  Englishman^ 

H.   G.  MOULTON 

Umiverstty  07  Chicago 


Concentration  and  Control.  By  Charles  R.  Van  Hise.  New  York : 
Macmillan,  1912.    8vo,  pp.  xiii+288.    $2.00  net. 

When  this  volimie,  then  fresh  from  the  press,  was  confided  to  the 
reviewer,  the  national  political  party  conventions  were  yet  to  be  held, 
and  declarations  of  policy  toward  the  trust  problem  were  e]q>ected  from 
each  of  them.  The  book  had  been  hurried  to  publication  that  it  might 
be  of  influence  at  the  time.  But  the  one  party  which  definitely  welcomed 
its  doctrines  was  defeated,  and  a  very  different  program  of  trust  regula- 
tion is  on  its  way  to  enactment.  The  book  now  stands  merely  as  a  dear- 
cut  exposition  of  the  views  of  the  opposition. 

Yet,  after  making  every  allowance  for  the  fact  that  it  was  thrown 
together  hurriedly,  the  book  cannot  be  given  high  rank.  It  lacks  the 
qualities  of  restrained  judgment  and  discriminating  an^ysis  that  one 
expects  from  a  writer  of  President  Van  Hise's  scientific  achievements. 
The  words  ''concentration"  and  ''co-operation"  are  used  in  euphemistic 
fashion  to  cover  a  multitude  of  things.  Under  the  head  of  the  "  economic 
advantages  of  concentration,"  the  various  advantages  that  have  been 
claimed  for  large  plants,  large  business  imits,  ordinary  combinations, 
int^rated  combinations,  and  monopoly  are  lumped  together  in  a 
chaotic  way.  The  presentation  of  statistical  "facts  regarding  concen- 
tration "  is  disfigured  by  the  erroneous  assimiption  that  the  earlier  federal 


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BOOK  REVIEWS  AND  NOTICES  401 

censuses  of  manufactures,  like  that  of  1905,  included  only  the  ''factory 
industries."  The  discussion  of  ''the  laws  r^arding  co-operation"  is 
based  too  largely  upon  one  l^al  textbook  and  clearly  overestimates  the 
degree  of  restraint  of  trade  permissible  under  the  common  law. 

There  is  no  recognition  of  the  profound  diffictdty  of  the  economic 
questions  relating  to  the  "inevitableness"  of  an  increasing  measure  of 
combination  and  to  the  advantages  of  combination  per  se.  Nor  is  Presi- 
dent Van  Hise  any  more  fortunate  in  his  discussion  of  remedies.  Some 
of  his  proposals  are  such  as  most  economists  are  agreed  upon,  but  his 
emphasis  is  put  upon  the  permission  of  "reasonable  co-operation," 
which,  while  going  to  the  length  of  price  agreements,  restriction  of  out- 
put, etc.,  is  not  to  be  allowed  to  amount  to  monopoly.  One  wonders 
just  what  President  Van  Hise  means  by  monopoly! 

Prices,  as  well  as  the  conditions  of  boUi  competition  and  "co- 
operation," are  to  be  controlled  by  conmiissions,  but  no  account  is  taken 
of  the  root  difficulty  of  this  program  of  control,  i.e.,  the  conditions  under 
which  new  enterprise  and  new  capital  shall  be  allowed  to  come  into  a 
r^ulated  business.  The  analogy  of  the  control  of  natural  monopolies 
is  pushed  altogether  too  far. 

Mention  should  be  made,  however,  of  the  admirable  discussion  of 
the  necessity  of  r^ulating  the  exploitation  of  natural  resources,  and 
tribute  should  be  paid  to  the  fine  and  wholesome  q)irit  of  devotion  to  the 
public  welfare  which  pervades  the  whole  book. 

Allyn  a.  Young 

COKNELL  UmVESSTTY 


Justice  and  the  Modem  Law.  By  Everett  V.  Abbot.  Boston  and  New 
York:  Houghton  Mifflin  Co.,  1913.  8vo,  pp.  ix-l-299.  $1.60. 
This  book  is  a  lawyer's  plea  for  the  realization,  in  present-day  legal  admin- 
istration, of  the  ethical  standards  which  the  author  asserts  are  inherent  in  both 
the  common  and  the  constitutional  law.  Modem  courts  have  departed  from 
the  moral  law,  upon  which  these  latter  laws  were  founded,  when  confronted  by 
changed  conditions.  The  attorney  of  today  has  frequently  shown  his  inca- 
pacity to  apply  the  reasoning  of  the  leading  cases  to  new  issues,  and  he  has  often 
been  led  into  absurdities  by  blind  adherence  to  rules  which  have  lost  their  sub- 
.stance.  The  rise  of  the  corporation,  for  instance,  has  created  problems  of  rate 
regulation  and  trust  control.  In  the  most  important  cases  involving  these 
questions,  either  the  advocates  have  utterly  failed  to  comprehend  the  vital 
points  or  the  court  has  dismissed,  as  immaterial,  argument  that  was  funda- 
mentally soimd,  although  sometimes  inadequately  expressed.  The  judges  have 
also  consciously  usurped  legislative  power.    However,  the  fault  of  the  present 


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402  JOURNAL  OF  POLITICAL  ECONOMY 

administration  of  the  law  is  to  be  attributed  primarily  not  to  the  character  of 
the  judiciary  nor  to  the  inelasticity  of  eighteenth-century  maxims,  but  to  the 
prevalence  of  hasty  generalizations  and  of  illogical  reasoning  in  the  decisions 
of  even  the  hi^est  courts.  Substantial  justice  can  be  attained  only  by  the 
demand  that  no  case  be  decided  without  sufficient  reason,  valid  and  just  in  and 
of  itself,  and  that  no  weight  of  authority,  however  great,  be  allowed  to  serve  as 
a  substitute  for  clear  thinking.  If  Supreme  Court  justices  cannot  be  prevailed 
upon  to  study  logic,  at  least  an  ultimate  remedy  is  to  be  foimd,  the  author 
believes,  in  the  education  of  the  coming  generation  of  attorneys  in  the  rules 
of  argumentation. 

The  clearness  of  reasoning  which  the  author  displays  in  discussing  the 
judicial  interpretation  of  such  laws  as  the  Sherman  anti-trust  act  is  marred  by 
unconscious  bias.  Although  he  stigmatizes  the  action  of  courts  in  handing 
down  opinions  based  on  insufficient  evidence  and  without  giving  aU  parties  an 
opportunity  to  be  heard,  he  himself  would  give  scant  hearing  to  men  ^o 
differ  with  him  as  to  viewpoint  or  method. 


First  Annual  Industrial  Directory  of  New  York  State,  igi2.  Conq>iled 
and  published  under  the  direction  of  John  Williams^  Conunis- 
sioner  of  Labor.  Albany:  State  Department  of  Labor,  1913.  8vo, 
pp.  ccbdv+s62. 

This  volume  was  compiled  for  the  very  practical  purpose  of  giving  definite 
information  as  to  the  character  of  the  laboring  population  and  the  industrial 
conditions  by  localities  to  the  prospective  manufacturer,  who,  it  is  h(^>ed, 
will  seize  the  importunity  thiis  presented  and  be  guided  into  the  community 
best  adapted  to  his  requirements,  and,  consequently,  most  likely  to  be  benefited 
by  his  presence. 

The  volume  is  divided  into  three  parts,  as  follows:  (i)  descriptions  of 
cities  and  villages  having  a  population  of  1,000  or  more  with  special  reference 
to  features  of  importance  from  the  standpoint  of  industrial  organization;  (2) 
tables  showing  conditions  relative  to  population,  agriculture,  banking,  manu- 
facturing, factories,  factory  employees,  and  hours  of  labor;  (3)  register  of  fac- 
tories, listing  the  name,  street  address,  product,  and  number  of  employees  of 
each  of  the  large  factories  in  the  different  communities  of  the  state. 

This  is  the  first  of  the  annual  industrial  directories  which  are  to  be  pre- 
pared by  the  New  York  Commissioner  of  Labor  imder  the  provisions  of  the 
New  York  act  of  1911. 

Questions  of  Public  Policy.  New  Haven:  Yale  University  Press,  1913. 
i2mo,  pp.  134.    $1 .  25  net. 

This  book  contains  the  Page  lectures  delivered  in  the  year  1913  at  the 
Sheffield  Scientific  School,  Yale  University.  The  lectures  are  foiur  in  number. 
The  first,  "The  Character  and  Influence  of  Recent  Immigration,"  was  given  by 


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BOOK  REVIEWS  AND  NOTICES  403 

J.  W.  Jenks,  the  second,  '^The  Essential  and  Unessential  in  Currency  Legis- 
lation," by  A.  Piatt  Andiew,  the  third,  ''The  Value  of  the  Panama  Canal  to 
This  Country,"  by  Emory  R.  Johnson,  and  the  fourth,  ''Benefits  and  Evils  of 
the  Stock  Exchange,"  by  Willard  V.  King. 

These  lectures  state  and  explain  very  clearly,  in  a  general  way,  the  essential 
tc^ics  and  questions  that  may  arise  in  any  discussion  of  the  above  subjects. 
They  are  valuable,  not  so  much  for  any  arguments  which  are  advanced  or  for 
facts  or  proofs  given,  as  for  their  point  of  view,  their  suggestiveness.  To  one 
unacquainted  with  the  subjects,  the  lectures  give  a  general  idea  which  can 
readily  be  enlarged  by  further  study.    They  are  well  worth  anyone's  reading. 


Co-Partnership  and  ProJU^haring,  By  Aneubin  Williams.  New 
York:  Henry  Holt  &  Co.,  1913.  i6mo,  pp.  256.  $0.50. 
The  first  few  chapters  the  author  devotes  to  the  discussion  of  the  nature 
and  origin  of  profit-sharing  and  co-partnership.  This  is  followed  by  the 
presentation  and  discussion  of  some  of  the  most  notable  among  the  various 
methods  of  sharing  the  net  product  between  o^ital  and  labor.  The  advan- 
tages and  disadvantages  of  each  method  are  hheOy  discussed.  The  last  three 
chapters  of  the  book  are  devoted  to  the  consideration  of  (i)  the  relation  of 
co-partnership  to  trade  unions,  (2)  the  relation  of  co-partnershq>  to  co- 
operation, and  (3)  the  transformation  of  capitalism.  The  author  has  high 
hopes  for  the  movement  to  which  he  has  devoted  a  great  part  of  his  time  for 
more  than  twenty  years  and  which  he  believes  is  "destined  to  do  in  the  indus- 
trial world  what  the  introduction  of  constitutional  rights  has  done  in  govern- 
ment." On  reading  the  book  one  is  at  once  struck  with  the  honesty,  frankness, 
and  open-mindedness  with  which  the  author  treats  his  problems. 


A  Rural  Survey  in  Southwestern  Ohio.    By  P.  L.  Vogt.    (Miami  Uni- 
versity Bulletin,  Series  XI,  No.  8.)    Oxford,  Ohio,  1913.    8vo, 

pp.  93. 

This  bulletin  discusses  the  economic,  social,  religious,  educational,  and 
tenancy  conditions  of  Darke,  Montgomery,  Preble,  and  Butler  counties  in 
Southwestern  Ohio.  A  considerable  progress  in  the  development  of  rural 
communities  in  shown  by  the  gradual  rise  in  affluence,  culture,  and  spirit  of 
co-operation  in  the  farm  life. 

An  increase  in  tenancy  has  natiurally  resulted  from  national  prosperity 
and  the  consequent  increase  of  land  values.  The  defects  of  the  S3rstem,  as 
pointed  out  by  the  author,  are  neither  intrinsic  nor  irremediable.  The  de- 
clining membership  of  the  churches  shows  only  the  reflection  of  the  spirit 
of  the  modem  age  and  is  not  a  thing  in  itself  to  deplore.  Tlie  condition  of 
social  progress  is  not  any  creed  or  dogma,  but  equality  of  opportunity  for  all. 


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404  JOURNAL  OF  POLITICAL  ECONOMY 

A  Study  of  Nine  Hundred  and  Eighty-five  Widows  Known  to  Certain 

Charity  Organization  Societies  in  1910.    By  Mary  E.  Richmond 

and  Fred  S.  Hall.    New  York:  Charity  Organization  Department 

of  the  Russell  Sage  Foundation,  1913.    8vo,  pp.  83.    $0. 25^ 

The  first  part  of  this  study  is  devoted  to  an  analysis  of  the  returns  from  an 

investigation  into  the  living-conditions  of  985  fatherless  families  in  nine  cities 

in  1910.    In  the  last  30  pages,  the  authors  have  sununarized  in  paragraphs  the 

facts  in  regard  to  61  widows  who  were  specially  studied.    The  schedule  used 

in  obtaining  these  data  covers  a  very  broad  range  of  questions,  some  of  which 

mig^t  be  expected  to  elicit  indefinite  or  unsatisfactory  answers,  but  it  seems  to 

have  been  well  adapted  to  the  purposes  of  the  investigators.    As  a  first-hand 

study  of  a  problem  that  toudies  many  social  questions,  such  as  industrial 

insurance,  delinquency  of  children,  and  working-conditions  for  women,  this 

survey  claims  the  especial  attention  of  the  student  of  charities  and  corrections. 


The  Negro  American  Artisan.  Edited  by  W.  E.  B.  Du  Bois.  (Atlanta 
University  Publications,  No.  17.)  Atlanta,  Ga.:  Atlanta  Uni- 
versity Press,  1912.  lamo,  paper,  pp.  144.  $0.75. 
This  is  a  rq>ort  of  a  social  study  made  by  Atlanta  University  under  the 
patronage  of  the  trustees  of  the  John  F.  Slater  Fund.  A  previous  study  and 
report  was  made  in  1902,  and  issued  as  Bulletin  No.  7  of  the  "Atlanta  Univer- 
sity Publications."  The  present  bulletin,  dealing  with  the  negro  American 
artisan,  gives  first  a  very  valuable  bibliography  relating  to  the  social  and 
economic  life  of  the  negro.  It  then  discusses  briefly  such  subjects  as  '^The 
African  Artisan,"  ''The  ante-Bellum  Negro  Artisan,"  ''The  Economics  of 
Emancipation,"  "The  Occupation  of  Negroes,"  by  sections  and  states,  "The 
Negro  and  Organized  Labor,"  "The  Training  of  Negro  American  Artisans," 
and  "The  Economic  Future  of  the  Negro  American."  The  subjects  reveal 
the  nature  of  the  publication.  Such  studies  cannot  but  render  great  aid  in 
attacking  the  perplexities  of  the  negro  problem. 


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7%e  Elements  of 
Debating 

Br  LEVERETT  S.  LtON 

C»A  bi^-sdioo}  manual,  givifig 
detailed  instniction  in  the  art  q£ 
debatiDg.  Theptaantngaxtd  com- 
positioa  of  a»  aggymcBt  are  £&- 
cussed  at  length,  and  noteworthy 
examples  are  quoted  and  analyzed. 
A  bibliography  leads  the  way  to  a 
wider  study  of  the  subject,  and  a 
list  of  suggested  topics  will  prove 
us^ul  in  the  arrangmg  of  debates. 

J  JO  pages,  i2mo,  cloth;  ffrice  $i.op,  postage 
extra  (weight  14  oz.)  ' 


THE  UNIVERSITY  OP  CHICAGO  PRESS 
Chicago  IllinoU 


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The  text  describes  the  various  forms  of  social  insurance  known  in  the  United  States  and  Canada; 
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Volume  XXII  .^/^^ '■'^^"'^  %x  Number  5 


.i» 


-V' 


Political  Economy 

PUBL^BD  BY  THB  UNIVERSITY  OP  CHICAGO 
A  IN  CO-OPBRATION  WITH 

THE  WESTERN  ECONOMIC  SOCIETY 


MAY   1914 


The  Banking  and  Currency  Act  of  1913.    11 

/.  LaurcTwe  Laughlin     405 

Commercial  Piqper  and  the  Federal  Reserve  Banks 

O.  M  W.  Sprague     436 

The  Probable  Effects  of  the  New  Currency  Act  on  Bank 

Investments  Jacob  H.  Hollander     444 

The  Eksticity  of  Note  Issue  und^r  the  New  Currency  Law 

EM.  Taylor     453 

Trade  Unionism  ill  the  United  States:  The  Interpretation 

of  Union  Tjrpes  Robert  F.  Hoxie     464 

Notes  482 

Wasluiigton  Notes:  4S2 

The  New  ReMrve  DMtricle~-IUilwm3r  Capitol  Cotto— The  Rural  Credit  Bill 

Book  Reviews  and  Notices  492 

BBabd's  An  Economic  Inlerprttation  of  the  Constitution  of  the  United  Stales  (Chester  W.  Wright), 
4g2. — Bock's  The  Granger  Movement.  A  Study  of  Agricultural  Organitation  and  Its  Politicct,  Eco^ 
nomic,  and  Social  Manifestations,  1870^1880  (John  G.  Thompson),  495. — Smith's  Industrial  and 
Commercial  Geography  (Edward  V.  Robinson),  498.— Jebb's  The  Britannic  Questum  (D.  A. 
IVIacGibbon),  501. — Knoop's  Outlines  of  Railway  Economics  (Harold  F.  Lane),  502. — Rubinow's 
Socia'  Insuranu  (C.  R.  Henderson),  scu.— Dehn's  The  German  Cotton  Industry,  504.— Le  Bon's 
The  Psychology  of  Revolution,  506.— Emsry's  Politician,  Party  and  People,  506.— Mathews' 
Taxation  and  the  Distribution  of  Wealth,  507.~-Wbhbekg's  Die  Bedenr^orm  im  Ltckte  des  kumamis* 
iischen  So»iatismus,  508. 


THE   UNIVERSITY   OF   CHICAGO   PRESS 
CHICAGO,   ILLINOIS,   U.S.A. 


AcBirn 

THE  CAMBRIDGE  UNIVERSITY  PRESS,  London  and  Edinburgh 

KARL  W.  HIERSEMANN,  Lbipzig 

THE  MARUZEN-KABUSHIKl-KAISHA,  Tokyo,  Osaka,  Kyoto 

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The 


Journal  of  Political  Economy 


Edited  by 
JAMES  ALFRED  FIELD  J.  LAURENCE  LAUGHLIN 

FREDERIC  BENJAMIN  GARVER  LEON  CARROL|  MARSHALL 

ROBERT  FRANKLIN  HOXIE  HAROLD  GLENN  MOULTON 

CHESTER  WHITNEY  WRIGHT 


Advisory  Editors 

(The  Offioen  of  the  Western  Economic  Society) 

SHAILER.MATHEWS,  Prttident 

GEORGE  E.  VINCENT,  Viet-Prtsident       FRANKLIN  MacVEAGH,  Vicg-FrtsidtMt 

LEON  C.  MARSHALL,  Sterttary  CHARLES  L.  HUTCHINSON,  Treasurer 


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JUN  291914 
THE    JOURNAL 

OF 

POLITICAL  ECONOMY 


Volume  22  Muy  IQI4  Number  5 


THE  BANKING  AND  CURRENCY  ACT  OF  1913.    H 

VII 

Ai>art  from  the  effect  of  the  Federal  Reserve  Act  of  1913  on 
our  credit  system,  its  relations  to  our  currency  system  will  have 
special  interest  to  the  general  public,  notably  to  those  who  have 
been  concerned  with  the  struggles  over  government  issues  and  free 
silver.  For  a  long  time  this  country  has  been  facing  a  decision 
on  the  question  whether  the  forms  of  money  (irrespective  of  the 
standard,  be  it  gold  or  silver)  needed  as  media  of  exchange  by  the 
daily  round  of  busmess  should  be  issued  by  the  government,  after 
the  example  of  the  United  States  notes  (i.e.,  greenbacks),  or  by  the 
banks,  after  the  example  of  national  bank  notes.'  In  order  to 
determine  the  bearing  of  the  new  law  on  this  general  question,  a 
statement  of  the  provisions  regarding  note-issues  will  first  be  given. 

No  change  is  made  in  regard  to  any  of  the  following  forms  of 
money:  gold,  gold  certificates,  silver,  silver  certificates  and  United 
States  notes.  Indeed,  all  past  questions  touching  the  standard 
were  definitely  settled  by  a  remarkable  amendment  in  the  House, 
now  embodied  in  sec.  26  of  the  new  act,  which  emphasized  the 
maintenance  of  the  gold  standard: 

Nothing  m  this  Act  contained  shall  be  construed  to  repeal  the  parity 
provision  or  provisions  contained  in  an  Act  improved  March  fourteenth,  nine- 
teen hundred,  entitled  "An  Act  to  define  and  fix  the  standard  of  value,  to 

*  Cf.  the  author's  analysis  in  Latter-Day  Problems^  in  du^.  z,  "Government  vs. 
Bank  Issues"  (1909)  pp,  373-98. 

405 


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4o6  JOURNAL  OF  POLITICAL  ECONOMY 

maintain  the  parity  of  all  forms  of  money  issued  or  coined  by  the  United 
States,  to  refund  the  public  debt,  and  for  other  purposes/'  and  the  Secretary 
of  the  Treasury  may^  for  the  purpose  of  maintaining  such  parity  and  to 
strengthen  the  gold  reserve,  borrow  gold  on  the  security  of  United  States 
bonds  authorized  by  section  two  of  the  Act  last  referred  to  or  for  one-year 
gold  notes  bearing  interest  at  a  rate  of  not  to  exceed  three  per  centum  per 
anniun,  or  sell  the  same  if  necessary  to  obtain  gold. 

Likewise,  the  only  provision  affecting  the  greenbacks  is  that 
(sec.  7)  which  devotes  the  net  earnings  from  Reserve  Banks  accru- 
ing to  the  United  States  "to  supplement  the  gold  reserve  held 
against  outstanding  United  States  notes,"  or  to  reduce  the  bonded 
indebtedness,  at  the  discretion  of  the  Secretary  of  the  Treasury. 

The  direct  purpose  of  the  new  act  is  to  replace  the  national 
bank  notes,  within  a  period  of  twenty  years  or  more,  by  Federal 
Reserve  notes.    These  notes  are  described  as  follows  (sec.  16): 

Federal  reserve  notes,  to  be  issued  at  the  discretion  of  the  Federal  Reserve 
Board /(If  the  purpose  of  making  advances  to  the  Federal  reserve  banks  through 
the  Federal  reserve  agents  as  hereinafter  set  forth  and  for  no  other  purpose, 
are  hereby  authorized.  The  said  notes  shall  be  obUgalions  of  the  United  States 
and  shall  be  receivable  by  all  national  and  member  banks  and  Federal  reserve 
banks  and  for  all  taxes,  customs,  and  other  public  dues.  They  shall  be  redeemed 
in  gold  on  demand  at  the  Treasury  Department  of  the  United  States,  in  the  City 
of  Washington,  District  of  Columbia,  or  in  gold  or  lawful  money  at  any  Federal 
reserve  bank. 

These  notes  can  be  obtained  only  by  a  Federal  Reserve  Bank, 
on  the  deposit  of  an  equal  amount  of  commercial  paper  as  defined 
by  sec.  13.  Each  note  issued  shall  carry  on  its  face  the  distinctive 
letter  and  serial  number  of  the  Reserve  Bank  putting  it  out,  thus 
making  each  Reserve  Bank  responsible  for  the  redemption  of  its 
own  issues.  That  is,  instead  of  United  States  bonds,  as  in  the  case 
of  national  bank  notes,  the  security  behind  the  Federal  Reserve 
notes  is  to  be  commercial  paper;  while  these  notes  are  also  "a  first 
and  paramoimt  lien  on  all  the  assets"  of  the  issuing  Reserve  Bank. 
The  Federal  Reserve  Board,  through  its  federal  reserve  agent  in 
each  Reserve  Bank,  may  charge  the  latter  a  rate  of  interest  on  these 
notes,  at  its  option;  and  the  Board  has  the  right,  if  it  so  chooses,  to 
refuse  entirely  any  application  for  notes.  The  Comptroller  of  the 
Currency  shall  provide  the  plates  and  dies,  have  a  supply  of  notes 


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TEE  BANKING  AND  CURRENCY  ACT  OF  Iplj  407 

ready  for  each  bank,  and  charge  all  expenses  to  such  banks.  There 
is  no  limit  to  the  total  amount  of  such  notes;  and  there  is  no  tax 
when  issues  pass  beyond  a  certain  sum,  except  the  possible  charge 
of  a  rate  of  interest,  as  just  mentioned.  In  effect,  the  supply  of 
these  notes  is  directly  related  to  the  supply  of  rediscoimted  com- 
merdal  paper,  although  the  whole  of  any  rediscoimt  is  not,  by 
any  means,  likely  to  be  paid  out  in  notes.  So  much  for  the  methods 
of  issuing  these  notes. 

As  regards  the  contraction  of  the  notes  when  not  needed, 
redemption  is  provided  for  by  gold  reserves  of  40  per  cent  against 
notes  outstanding.  No  Reserve  Bank  shall  pay  out  the  notes  of 
any  other  Reserve  Bank  under  a  penalty  of  10  per  cent;  but  it  is 
obliged  to  present  such  notes  for  credit  or  redemption  to  the 
bank  that  issued  them.  Likewise,  Federal  Reserve  notes  presented 
at  the  Treasury  are  redeemed  out  of  a  gold  fimd  left  with  the 
Treasury  by  the  Reserve  Banks  which  shall  not  be  less  than  5  per 
cent  (but  counting  as  part  of  the  40  per  cent  reserve);  and  the 
Treasury  will  remit  any  notes  thus  redeemed  to  the  respective 
Reserve  Bank  for  reimbursement.  A  Reserve  Bank,  although 
required  to  hold  reserves  of  40  per  cent  in  gold  against  its  out- 
standing notes,  may  redeem  them  either  in  gold  or  lawful  money. 
When  a  Reserve  Bank  wishes  to  reduce  its  liability  for  Federal 
Reserve  notes,  even  if  its  own  notes  are  not  obtainable,  it  may 
deposit  with  the  Federal  Reserve  Agent  any  Federal  Reserve  notes, 
gold,  gold  certificates,  or  lawful  money.  By  these  provisions,  it  is 
obvious  that  contraction  of  notes,  not  needed  by  the  public,  is  fully 
provided  for.  In  short,  elasticity  of  note-issues — expansion  in 
time  of  need  and  contraction  when  the  need  has  passed — ^is  fully 
provided.  Furthermore,  there  can  be  no  possible  question  as  to 
their  safety,  secured  as  they  are,  first,  by  a  gold  reserve  of  40  per 
cent;  second,  by  the  pledge  of  picked  commercial  paper  to  the 
par  value  of  the  notes;  third,  by  a  first  lien  on  all  the  assets  of  the 
Reserve  Bank;  and,  finally,  by  the  guaranty  of  the  United  States 
— ^an  obligation  not  likely  ever  to  be  called  upon,  in  view  of  the 
prior  protection. 

The  language  of  the  act  (in  sec.  16)  relating  to  Federal  Reserve 
notes  is  equivocal.    It  is  an  obvious  attempt  to  satisfy  those  who 


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4o8  JOURNAL  OF  POLITICAL  ECONOMY 

believe  in  government  issues  of  paper  money;  whfle  at  the  same 
time  it  is  not  the  purpose  seriously  to  impair  the  real  fimctions  of 
the  issues  as  bank  notes.  Thus  the  final  outcome  of  the  time- 
honored  dispute,  so  far  as  reached  by  this  act,  seems  to  be  in 
essence  and  in  practical  operation  a  settlement  in  favor  of  bank 
notes;  for  the  Federal  Reserve  notes  are  in  no  real  sense  gov- 
ernment issues.  The  Treasury  has  no  power  to  issue  them  in 
payment  of  governmental  expenses;  since  the  initiative  must  come 
from  the  Reserve  Banks,  and  only  on  the  offer  of  commercial  paper 
originating  in  a  private  business  transaction.  Although  not  so 
stated  literally,  the  notes  are  liabilities  of  the  Reserve  Banks,  since 
they  must  redeem  them,  and  since  the  notes  are  a  first  lien  on  all 
the  assets  of  such  banks.  To  state  that  the  notes  are  the  obli- 
gations of  the  United  States  and  may  be  redeemed  at  the  Treasury 
is  only  "a  frill,"  of  no  practical  import;  since  it  is  inconceivable 
that  the  government  should  ever  be  called  upon  to  meet  this  obli- 
gation. To  say  that,  in  issuing  the  notes,  the  Treasury  is  "making 
advances"  to  the  Federal  Reserve  Banks  is  meaningless  (and,  if 
it  serves  a  political  purpose,  no  harm  is  done) ;  since  the  action  of 
the  Board  in  passing  out  notes  in  return  for  a  pledge  of  commercial 
paper  is  as  purely  administrative  as  the  present  action  of  the  Comp- 
troller in  handing  over  printed  national  bank  notes  in  return  for 
a  pledge  of  United  States  bonds.  Nothing  in  the  words  of  the  act 
can  be  construed  as  making  these  notes  government  issues,  any 
more  than  national  bank  notes  are  government  issues.'  On  this 
outcome,  and  on  the  escape  from  serious  monetary  error,  the 
coimtry  is  to  be  congratulated. 

The  new  law  looks  forward  to  a  new  basis  for  the  bank-note 
circulation  which  has  been  based  on  United  States  bonds.  These 
notes  are  eventually  to  be  displaced  with  Federal  Reserve  notes 
based  on  commercial  paper.  This  displacement,  involving  the 
disposal  of  $740,000,000  of  United  States  bonds  now  used  to  secure 
circulation,  will  be  treated  later. 

A  national  bank  entering  the  new^stem  is  not,  however, 

'  It  is  not  worth  while  to  give  attention  to  the  claim  that  Federal  Reserve  notes 
are  "fiat  money/'  because,  being  government  obligations,  the  government  makes  no 
provision  for  their  redemption.    Other  provisions  remove  them  from  this  imputation. 


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THE  BANKING  AND  CURRENCY  ACT  OF  1913  409 

obliged  to  give  up  its  present  circulation;  and  the  withdrawal  of 
national  bank  notes  by  existing  national  banks  is  tied  up  with  the 
disposal  of  the  bonds  to  which  the  circulation  privilege  is  already 
attached.  Nor  are  national  banks  obliged  to  present  their  bonds 
for  exchange  into  others  having  no  circulation  privilege  under 
sec.  18,  unless  they  choose.  Consequently,  the  displacement  of 
existing  national  bank  notes  by  Federal  Reserve  notes  will  be  long 
deferred.  If  it  had  been  possible  to  dispose  of  the  bonds  amount- 
ing to  $740,000,000  to  the  full  satisfaction  of  the  banks,  how 
could  an  equal  amount  of  Federal  Reserve  notes  be  issued  to  take 
their  place  ?  Since  the  latter  were  to  be  secured  only  by  commer- 
cial paper,  instead  of  bonds,  it  follows  that  there  would  have  been 
a  considerable  contraction  of  bank  notes,  unless  the  Reserve  Banks 
had  discoimted  paper  on  hand  to  at  least  $740,000,000.  Obviously, 
this  simi  could  not  be  coimted  on;  and  a  contraction  of  the  cur- 
rency would  not  have  been  politically  wise.  Hence  the  provisions 
of  the  House  bill,  allowing  a  more  or  less  rapid  substitution  of 
reserve  notes  for  national  bank  notes,  were  dropped  by  the  Senate. 
Of  course,  under  the  new  act,  quite  independently  of  the  national 
bank  circulation,  Federal  Reserve  notes  may  be  issued  at  any  time 
to  any  amoimt  according  to  the  provisions  of  sec.  16.  If  issued 
they  would  be  an  addition  to  the  existing  national  bank  drctdation; 
and  the  security  behind  them  would  be  commercial  paper,  not 
bonds. 

If,  however,  national  banks  prefer  to  sell  their  bonds  they  may 
do  so,  after  December  23, 1915,  and  within  a  period  of  twenty  years 
thereafter,  in  limited  amoimts  each  year  (sec.  18).  The  bonds  thus 
disposed  of  by  the  banks  are  to  be  taken  over  by  the  Federal 
Reserve  Banks;  and  the  latter  are  then  to  be  allowed  to  take  out 
national  bank  notes  on  depositing  these  bonds  with  the  Comptroller, 
in  the  same  way  as  national  banks  do  now;  although  they  are  not 
obliged  to  do  so.'  To  the  extent  that  Federal  Reserve  Banks 
should  not  take  out  notes  on  the  bonds  they  have  acquired  there 

>  If  these  notes  are  issued  to  Federal  Reserve  Banks  under  the  same  conditions 
as  to  national  banks,  the  former  must  pay  the  tax  of  one-fourth  of  i  per  coit,  if  the 
bonds  pay  only  2  per  cent;  but  in  sec  7  the  former  are  free  from  federal  taxation. 
Cf.  Conway  and  Patterson,  The  Operation  of  the  New  Bank  Aa,  pp.  i38r-39. 


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4IO  JOURNAL  OP  POLITICAL  ECONOMY 

would  be  a  contraction  of  the  national  bank  circulation.  But  it 
is  planned  to  prevent  any  considerable  contraction  of  the  national 
bank  circxilation,  even  if  the  national  banks  dispose  of  their  bonds 
(cf.  sec.  4,  Eighth).  The  final  disposal  of  these  bonds  by  the 
Federal  Reserve  Banks  will  be  discussed  later. 

Understanding  that  the  national  bank  circulation  is  not  likely 
to  be  reduced  for  the  present,  while  the  Reserve  Banks  may  at  any 
time  add  to  the  existing  monetary  supply,  are  we  to  expect,  so  far 
as  notes  are  concerned,  an  undesirable  expan^on  ?  By  expansion 
must  be  meant  the  tendency  to  grant  loans,  through  the  too  great 
ease  of  issuing  notes  or  granting  credits,  without  due  regard  to  the 
soundness  of  the  transaction.  So  long  as  loans  are  carefully  restricted 
to  safe  loans  based  on  an  actual  exchange  of  goods  no  swelling  of 
liabilities  occurs  which  must  be  finally  reduced  by  forced  liquida- 
tion. That  is,  imdue  expansion  has  its  origin  in  excessive,  or 
unsound,  loans.  An  extension  of  bank  notes,  then,  can  cause 
expansion  only  so  far  as  it  aids  in  an  expansion  of  loans.  If  so, 
how  will  the  note-issues  under  the  new  act  work  ? 

An  increase  in  bank  notes  can  be  used  for  two  general  purposes: 
(i)  to  satisfy  the  need  of  a  mediimi  of  exchange  in  the  hands  of  the 
public;  or,  (2)  to  supply  bank  reserves.  In  the  former  case,  if 
pocket  money  and  till  money  is  already  sufficiently  supplied,  then^ 
imless  the  monetary  customs  of  the  people  have  changed,  no  more 
bank  notes  will  remain  in  circulation,  provided  they  are  redeemable 
in  gold  or  lawful  money.  In  the  latter  case,  the  Federal  Reserve 
notes  cannot  be  kept  as  reserves  by  member  banks.  But,  it  is  said, 
they  may  be  presented,  the  same  day  they  are  obtained  on  a  loan, 
for  gold  and  lawful  money  by  which  reserves  could  be  enlarged. 
On  the  contrary,  if  a  member  bank  wished  to  increase  its  reserves 
by  a  rediscotmt,  it  would  not  need  to  draw  notes  at  aU,  but  would 
leave  the  proceeds  of  the  loan  to  its  credit  at  the  Reserve  Bank,  in 
which  form  it  is  ipso  facto  added  to  its  reserve  account.  There 
still  remains,  however,  the  possibility  of  getting  Federal  Reserve 
notes  and  exchanging  them  for  lawful  money  £lt  a  non-member 
bank  which  can  use  Federal  reserve  notes  as  reserves.'  There 
would,  however,  be  no  more  reason  for  this  action  than  for  the  one 

'  Cf.  Conway  and  Patterson,  op.  cU,,  p.  253. 


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THE  BANKING  AND  CURRENCY  ACT  OF  igi3  411 

just  mentioned,  since  it  would  be  less  trouble  to  leave  the  proceeds 
of  a  loan  at  a  Federal  Reserve  Bank  on  deposit  where  it  would 
count  as  reserve.  For  these  general  reasons,  then,  there  does  not 
seem  to  be  any  ground  for  apprehension  that  the  Federal  Reserve 
notes  will,  per  $e,  be  so  put  into  circulation  as  to  cause  expansion. 
If  any  such  expansion  is  intended,  it  can  be  more  easily  accom- 
plished, without  the  use  of  the  notes,  through  loans,  deposit 
accounts,  and  checks. 

There  are  those,  however,  who  measure  expansion  by  the 
increase  of  prices.  They  probably  hold  that  an  addition  to  the 
circulation,  according  to  the  quantity-theory  of  prices,  would  raise 
prices;  also,  that  an  extension  of  loans,  without  the  use  of  bank 
notes,  would  stimulate  credit  and  raise  prices.'  Redemption,  on 
the  other  hand,  would  always  force  a  test  of  the  solvency  of  the 
transaction  on  which  the  credit  is  based;  thus  credit  is  kept  whole- 
some and  normal,  so  long  as  unsound  loans  are  prevented.^  A 
possibility  of  undue  inflation  is  suggested,  it  may  be  mentioned,  by 
such  a  reduction  of  reserve  requirements  as  would  weaken  the 
certainty  of  redemption;  but  this  consideration  could  not  apply 
to  the  Federal  Reserve  notes,  under  this  act. 

vm 

The  removal  of  a  bank  circulation  secured  by  United  States 
bonds  having  been  determined  upon  by  general  consent,  a  practi- 
cable and  just  disposal  of  the  $740,000,000  bonds  has  not  been 
easily  found.  The  largest  i>art  of  these  bonds  yield  only  2  per 
cent;  solely  as  an  investment  they  would  sell  below  70;  but, 
since  they  have  the  "circulation  privilege"  (or  right  to  serve  as 
security  for  national  bank  notes)  the  demand  for  them  by  national 
banks  in  the  past  has  kept  them  above  par,  some  having  sold  even 
as  high  as  no.  When  the  new  bill  appeared,  the  national  banks 
were  directiy  concerned  wiUi  the  possibility  of  losses  on  their  bonds, 

« Cf.  O.  M.  W.  Sprague,  "The  Federal  Reserve  Act  of  1913,"  Quarlerly  JovmaF 
of  Economics,  February,  1914,  p.  340. 

*  "The  security  against  the  consequences  of  inflation  is  not  to  be  found  in  the 
limitation  or  eztincticoi  of  notes,  but  in  specie  redemption  for  all  liabilities,  and  in 
the  encouragement  given  sound  banking  by  steady  oversight  and  ptd}lidty."' 
C.  F.  Dimbar,  Economic  Essays,  p.  185. 


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412  JOURNAL  OP  POLITICAL  ECONOMY 

if  the  drailation  privilege  were  withdrawn  from  them.  In  the  pro- 
posed law  the  treatment  of  these  bonds  was  the  problem  least  well 
thought  out. 

When  the  Glass  bill  became  known,  June  i8,  1913,  it  contained 
sections  then  numbered  18,  19,  and  20.  Sec.  18  provided  that  no 
national  bank  should  issue  notes  in  excess  of  the  amoimt  outstand- 
ing at  the  passage  of  the  act;  sec.  19  repealed  the  former  acts 
requiring  banks  to  hold  bonds  to  the  amoimt  of  one-fourth  of  their 
capital  (if  less  than  $150,000);  and  sec.  20  required  the  Secretary 
on  application  to  exchange  the  2  per  cent  bonds  having  the  cir- 
culation privilege  for  3  per  cents  not  having  this  privil^e  (but  pay- 
able 20  years  from  date  and  exempt  from  all  taxation)  to  an  amoimt 
each  year  not  exceeding  5  per  cent  of  the  total  quantity  of  bonds 
held  by  the  Treasury,  while,  as  fast  as  the  2's  were  refunded,  "the 
power  of  national  banks  to  issue  circulating  notes  secured  by  United 
States  bonds  shall  cease  and  terminate";  and  at  the  end  of  20 
years  all  the  2's  should  be  exchanged  for  3's,  and  all  national  bank 
notes  be  recalled  and  redeemed. 

To  most  politicians  the  note  question  is  of  primary  importance; 
indeed,  to  allow  banks  under  any  circumstances  to  issue  notes  is 
to  grant  the  "money  power"  a  privilege.  Conferences  of  leaders 
were  held.  Senator  Owen,  chairman  of  the  Senate  conmuttee, 
demanded  the  omission  of  sees.  18,  19,  and  20  in  order  that  the 
question  might  be  left  to  future  legislation;  and  he  gained  his 
point.  Then,  on  the  representation  of  a  conmuttee  of  the  American 
Bankers  Association,  these  sections  of  the  bill  were  reinserted; 
and  on  June  26,  19 13,  the  bill  including  them  was  introduced  into 
the  House  and  Senate. 

As  these  sections  stood,  the  2's  could  not  be  sold  in  the  future 
to  secure  circulation,  since  no  more  national  bank  notes  could  be 
issued  than  were  outstanding  at  the  passage  of  the  act;  and  the 
only  outlet  would  be  their  exchange  for  3's.  On  June  28  the  finan- 
cial columns  of  the  press  noted  a  decline  in  the  price  of  the  2's  to 
par.  At  the  best  they  could  not  sell  higher  than  the  3's  into  which 
they  were  to  be  exchanged;  and  European  states  were  not  able  to 
borrow  at  par  at  3  per  cent.  Just  at  that  time  a  tendency  of  the 
interest  rate  on  permanent  investments  toward  a  higher  level  showed 


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THE  BANKING  AND  CURRENCY  ACT  OF  igij  413 

itself.  It  might  be  that  within  the  term  of  20  years  the  3's 
might  not  be  worth  par,  it  was  said;  thus,  somehow,  the  belief 
spread  that  on  the  passage  of  the  act  the  circulation  privilege  would 
be  practically  taken  away.  But,  whatever  the  reason,  timid  hold- 
ers of  the  2's  began  to  throw  them  on  the  market;  hence,  as  the 
demand  was  small,  a  very  few  offers  were  sufficient  to  send  down 
the  price,  and  during  July  they  were  quoted  at  95. 

United  States  bonds  (including  2's)  had  also  been  used  to 
secure  government  deposits  with  the  banks  (some  $50,000,000). 
If  by  the  new  act  government  deposits  were  to  be  transferred  to  the 
Federal  Reserve  Banks,  then  the  demand  for  2's  (or  any  other 
United  States  bonds)  would  to  that  extent  be  diminished. 

This  embarrassing  situation'  brought  out  a  statement  from 
Washington  about  the  middle  of  Jxily  that  sec.  20  would  be  so 
modified  as  to  allow  all  banks  to  take  out  circulation  on  the  2's  as 
long  as  they  were  not  exchanged  for  3's;  that  the  exchange  of  2's 
into  3's  would  be  permissive;  and  that  at  the  end  of  20  years  the 
holder  of  2's  would  receive  par  and  accrued  interest  in  cash.  In 
effect,  the  circulation  privilege  was  to  be  restored.  It  was  also 
stated  that  sec.  18  had  been  left  in  the  bill  by  error;  and  when  the 
bill  was  presented  to  the  House  caucus  August  15,  sec.  18  had  been 
omitted.  Moreover,  at  this  time  (July  31)  Secretary  McAdoo 
announced  he  would  deposit  $25,000,000  to  $50,000,000  of  govern- 
ment funds  with  the  banks  of  the  South  and  West  to  relieve  any 
autumnal  stringency.  To  get  these  deposits  banks  must  have  out- 
standing at  least  40  per  cent  of  their  authorized  circulation,  and  if 
they  pledged  government  bonds  these  would  coimt  as  par  against 

*  As  a  consequence  of  the  fall  in  the  prices  of  the  2's,  Secretary  McAdoo  on  July 
38, 1913,  made  the  following  statement  to  the  public: 

"The  3  per  cent  bonds  are  worth  par,  notwithstanding  their  decline  in  the  New 
York  market,  a  decline  due  not  to  any  impairment  of  their  intrinsic  value,  but  almost 
wliolly  to  what  appears  to  be  a  campaign  waged  with  every  indication  of  concerted 
action  on  the  part  of  a  number  of  influential  New  York  dty  banks  to  cause  a{^re- 
hension  and  uneasiness  about  these  bonds,  in  order  to  help  them  in  their  efforts  to 
defeat  the  currency  tnll." 

The  banks  retorted  that  it  was  unlikely  they  would  try  to  impair  the  value  of 
their  own  assets  amounting  to  $740,000,000.  On  the  other  hand,  the  statement 
might  have  retained  radical  support  in  Congress  for  a  bill  suf^sed  to  be  antagonised 
by  the  large  banks. 


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414  JOURNAL  OF  POLITICAL  ECONOMY 

deposits.    To  that  extent  the  demand  for  United  States  bonds 
would  be  increased  and  their  price  be  raised.^ 

Finally,  in  the  later  stages  of  this  legislation,  the  present  pro- 
visions regarding  bonds  were  inserted  in  sec.  i8  of  the  new  act. 
After  December  23,  1915,  and  for  20  years  thereafter,  any  member, 
bank  wishing  to  retire  its  circulation  may  oflfer  its  bonds  at  par  to 
the  Treasury  of  the  United  States;  at  the  end  of  each  quarter,  the 
Federal  Reserve  Board  may  require  each  Federal  Reserve  Bank  to 
purchase  a  certain  proportion  of  the  bonds  offered.  The  Reserve 
Banks  may  then  take  out  notes,  imder  the  same  conditions  as 
national  bai^  notes,  equal  in  amount  to  the  bonds  they  have  pur- 
chased. If  they  do  this,  there  will  be  no  contraction  of  notes 
secured  by  bonds. 

It  is  expected,  however,  that  Federal  Reserve  Banks  will  not 
present  to  the  Comptroller  all  their  bonds  as  security  for  notes; 
since  any  Reserve  Bank  may  have  its  2  per  cent  bonds  against 
which  no  circulation  is  outstanding  refimded,  one-half  into  30- 
year  3  per  cent  gold  bonds  without  the  drcxilation  privilege,  and 
one-half  into  one-year  gold  notes  of  the  United  States  bearing  3  per 
cent  interest,  without  the  circulation  privilege.  Thus,  instead  of  the 
2's,  it  may  have  long-term  3  per  cent  bonds  which  it  can  sell  in  the 
open  market,  and  one-year  notes  which  will  be  highly  useful  in  bor- 
rowing gold  in  any  foreign  market.  To  the  extent  that  Federal 
Reserve  Banks  refund  their  bonds  the  national  bank  circulation 
will  be  reduced;  but  at  no  time  will  the  bonds  held  by  member 
banks  lose  their  circulation  privilege,  and  after  two  years  they  can 
be  sold  at  par  in  amoimts  of  not  more  than  $25,000,000  in  any 
one  year.  It  follows,  therefore,  that  not  all  the  bonds  can  be  dis- 
posed of  in  20  years. 

DC 

The  lending  power  of  a  bank,  whether  the  loan  is  carried 
through  by  notes  or  by  a  deposit-accoimt  given  to  the  borrower,  is 
influenced  by  the  regulations  affecting  reserves,  which  are  the  cash 

>  Furthermore,  state  and  municipal  bonds,  etc.,  other  than  bonds  of  the  United 
States  would  be  accepted  at  a  valuation  of  75  per  cent,  and  prime  commercial  p^)er 
at  65  per  cent.  This  was  the  first  time  commercial  assets  were  ever  permitted  under 
the  act  of  March  4, 1907  (sec.  3)  to  be  used  as  security  for  government  deposits.  Since 
the  passage  of  the  present  act,  it  has  no  further  importance,  except  that  it  went  lax 
beyond  the  action  of  Secretary  Shaw,  so  much  criticised  at  the  time. 


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THE  BANKING  AND  CURRENCY  ACT  OF  1913  415 

means  for  meeting  demand  liabilities.  On  this  important  feature, 
it  should  be  noted  that  the  plan  of  the  National  Monetary  Com- 
mission made  no  changes  in  the  old  system  of  reserves.  Under  the 
national  banking  system,  country  banks  were  obliged  to  hold  15 
per  cent  reserves  in  lawful  money  against,  deposits,  of  which  9  per 
cent  could  be  kept  with  banks  in  reserve  or  central  reserve  cities; 
the  banks  in  the  forty-seven  reserve  cities  were  obliged  to  hold 
reserves  of  25  per  cent,  of  which  12^  per  cent  could  be  kept  with 
banks  in  central  reserve  cities;  while  banks  in  the  three  central 
reserve  cities  had  to  maintain  reserves  of  25  per  cent.  Moreover, 
the  required  redemption  fimd  of  5  per  cent  of  outstanding  circula- 
tion cotdd  be  coimted  toward  reserves  for  deposits.  This  rede- 
positing  of  reserves  in  trade  centers  arose  for  business  reasons: 
customers  of  local  banks  needed  drafts,  or  exchange,  on  cities  where 
they  purchased  goods;  and  such  banks  had  to  keep  fimds  there  on 
which  to  draw.  That  is,  redepositing  of  reserves  was  due  to  the 
need  of  exchange.  Whether  there  were  reserve  laws  or  not,  fimds 
would  have  to  center  where  the  most  goods  were  bought  and 
sold.  Some  centralization  of  reserves  in  tliis  way  was  normal  and 
inevitable. 

By  selling  exchange  on  large  dty  banks  a  local  bank  creates 
demand  liabilities  at  a  distance;  yet  it  has  demand  liabilities 
in  its  deposit  accounts  at  home.  The  two  things  are  different  and 
lead  to  much  confusion  of  mind.  The  sum  kept  with  a  dty  corre- 
spondent to  coVer  exchange  is  really  only  a  checking  account,  and 
in  no  sense  a  real  reserve  in  cash  that  can  be  called  for  on  demand; 
it  is  constantly  bdng  wiped  out  and  replenished  by  miscellaneous 
items.  But  'under  the  ddusion  that  these  funds  are  reserves 
(strengthened  by  the  fact  that  the  law  permits  them  to  be  called 
legal  reserves),  local  banks  seem  to  think  they  can  call  on  them  in 
time  of  stress;  then,  of  course,  they  cannot  get  the  cash,  and  are 
highly  indignant.  In  truth,  checking  accoimts  to  cover  exchange 
are  not  real  reserves.  This  consideration  should  be  kept  in  mind 
in  studying  the  effect  of  the  reduction  of  the  percentages  for  reserves 
in  the  new  act. 

For  demand  deposits,  in  the  new  law,  a  country  bank  is  required 
to  maintain  reserves  of  12  per  cent;  three  years  after  the  establish- 
ment of  the  Federal  Reserve  Banks,  4  per  cent  must  be  kept  at 


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4i6  JOURNAL  OF  POLITICAL  ECONOMY 

home,  5  per  cent  in  the  Federal  Reserve  Bank,  and  the  remaming 
3  per  cent,  either  at  home  or  with  the  reserve  bank  at  the  option 
of  the  coimtry  bank.'  That  is,  after  three  years,  no  funds  left  with 
dty  correspondents  can  be  coimted  as  legal  reserves.  In  short, 
funds  to  cover  .change,  so  long  as  it  is  drawn  on  dty  correqwnd- 
ents,  must  be  carried  independently  of  legal  reserves.  On  the 
other  hand,  if  exchange  is  drawn  in  the  future  on  the  Federal 
Reserve  Banks,  or  branches  (instead  of  on  other  banks,  as  now), 
fimds  coimted  as  reserves  will  still  be  used  to  cover  exchange. 
Therefore,  the  reduction  in  the  minimum  requirement  from  15  to 
12  per  cent  reserve  is  more  nominal  than  real. 

A  reserve  dty  bank,  in  the  new  act,  is  required  to  maintain 
reserves  of  15  per  cent  of  its  demand  deposits;  after  three  years, 

5  per  cent  shall  be  kept  at  home,  6  per  cent  in  its  Federal  Reserve 
Bank,  and  the  remaining  4  per  cent  dther  at  home  or  with  the 
Reserve  Bank  at  option.*  As  with  coimtry  banks,  no  deposits 
in  other  banks  will  then  count  as  legal  reserves. 

A  central  reserve  dty  bank  is  required  to  hold  reserves  of  18 
per  cent  against  its  demand  deposits,  of  which,  from  the  beginning, 

6  per  cent  must  be  kept  in  its  own  vaults,  7  per  cent  in  its  Federal 
Reserve  Bank,  and  the  remaining  5  per  cent  either  at  home  or  with 
its  reserve  bank  at  its  option. 

Inasmuch  as  items  passing  from  a  depositing  bank  to  its  reserve 
agent  should  not  be  counted  as  reserves  until  collected,  they  should 
not  be  included  by  the  reserve  agent  as  deposits  on  which  reserves 
are  to  be  computed.  The  new  act,  therefore,  enacted  (sec.  20) 
that  "in  estimating  the  reserves  required  by  this  Act,  the  net 
balance  of  amounts  due  to  and  from  other  banks  shall  be  taken  as 
the  basis  for  ascertaining  the  deposits  against  which  reserves  shall 
.  be  determined.  Balances  in  reserve  banks  due  to  member  banks 
shall,  to  the  extent  herein  provided,  be  counted  as  reserves." 

For  all  these  classes  of  banks  a  new  distinction  is  introduced 
between  demand  and  time  deposits:    demand  deposits  comprise 

>  In  the  transition  period  of  three  years  the  bank  must  keep  5  per  cent  at  home; 
in  the  Federal  Reserve  Bank  for  the  first  twelve  months  2  per  cent;  and  for  eadi 
succeeding  six  months  an  additional  i  per  cent,  until  5  per  cent  is  reached. 

'  In  the  transition  period  of  three  years  the  bank  must  keep  6  per  cent  at  home; 
in  the  Federal  Reserve  Bank  for  the  first  twelve  months  3  per  cent;  and  for  each  suc- 
ceeding six  months  an  additional  i  per  cent,  until  6  per  cent  is  readied. 


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THE  BANKING  AND  CURRENCY  ACT  OF  1913  417 

all  those  payable  within  thirty  days,  and  time  deposits  all  those  pay- 
able after  thirty  days,  including  savings  accounts,  etc.,  subject  to 
thirty  days*  notice.  Any  bank  is  required,  in  addition  to  the  above 
requirements  for  demand  deposits,  to  hold  only  5  per  cent  reserves 
against  time  deposits.  As  nearly  as  can  be  estink  «Qd,  about  one- 
third  of  the  deposits  of  country  banks  are  time  deposits;  of  reserve 
dty  banks,  about  8  per  cent;  of  central  resarve  dty  banks,  about 
I  per  cent.  Taking  into  account  both  the  reduction  of  reserves 
against  demand  deposits,  and  that  due  to  the  low  rate  on  time 
deposits,  the  nominal  reserves  (irrespective  of  redepositing)  have 
been  lowered  by  more  than  one-third,  as  may  be  seen  from  Table  I, 
based  on  the  last  reports  of  the  conditions  of  national  banks: 

TABLE  I 
[000,000  omitted] 


Maich4.igx4 

Net 

Depodti 

Total 

CeitiD> 
catet 

Total 
SaTiMs 
Depodta 

Total 

Tfane 

Deposits 

Requiied 

Rewnrea 

andefOld 

Syrtcm 

Reqairad 

Rewnrea 

under  New 

System 

Reaervea 
Releaaed 

under 
New  Act 

Country  Banks.. 
Reserve  aty 

Banks 

Central  Reserve 

aty  Banks... 

$3,761 
1,970 
1.773 

$485 
59 
15 

$777 
93 

z 

$1,262 

152 
16 

$564 
492 
443 

$363 
280 

317 

$201 
212 
126 

Totals 

$7,504 

$559 

$871 

$1,430 

$1,499 

$960 

$539 

Although  the  nominal  reserves,  especially  of  country  banks, 
have  thus  been  lowered,  there  remains  the  problem  of  the  effect 
on  the  banks  and  on  business  of  the  transfer  of  reserves,  if  any,  from 
the  present  reserve  dty  banks  to  the  Federal  Reserve  Banks.  As 
to  the  sums  which  must  be  at  once  moved  to  comply  with  the  law, 
the  computations'  which  have  been  made  show  clearly  that  the 

>  Cf.  W.  A.  ScoU,  "Banking  Reserves  under  the  Federal  Reserve  Act,"  Journal 

of  PoUUcd  Economy  f  April,  1914. 

[000,000  omitted) 


January  13, 1914 

Country  Banks 

Reserve  City 
Banks 

Central  Reserve  City 
Banks 

$284.0 
37.4 

*9'1 

$286.6 

s8.6 

13.4 

1x4.4 

xxs.s 

$429.2 

One-half  deposit  oiP  reserves 

55.3 

5  per  cent  rabacription  to  capital 

Reserves  feoaircd  at  hone 

Bi(lt~Y  '^  fiif)*  >M>l^<ngff 

See  also  the  figures  of  Omway  and  Patterson,  op,  cU.^  pp.  ^si-sa,  259,  267-69, 
272,275-76,299,301,306. 


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JOURNAL  OF  POLITICAL  ECONOMY 


cash  holdings  of  the  various  classes  of  banks  are  more  than  sufficient 
to  cover  the  transfers  of  the  reserves,  the  pajonent  of  the  required 
3  per  cent  on  the  capital  subscription  of  6  per  cent  upon  capital 
and  surplus,  and  to  retain  enough  reserves  in  their  own  vaults  to 
meet  the  requirements  of  the  act.  That  is,  it  would  not  be  neces- 
sary for  banks  to  call  upon  their  present  reserve  agents  to  cover  the 
initial  pajonents  to  the  Federal  Reserve  Banks;  but  it  is  assumed 
that  one-half  of  the  reserves  to  be  first  paid  into  the  Federal 
Reserve  Banks  would  be  obtained  (as  permitted  in  sec.  20)  by 
deposit  of  eligible  commercial  paper  (as  described  in  sec.  13).  In 
short,  these  figures  present  the  minimimi  transfers  in  initiating 
the  new  system.  Additional  pajonents  will  go  on  during  the  first 
three  years. 

In  viewing  the  effect  of  the  transfer  of  fimds  on  business  loans, 
it  is  to  be  noted  that,  of  course,  the  whole  of  the  amoimt  deposited 
by  local  banks  in  reserve  dty  banks  is  not  needed  merely  to  cover 
exchange.  As  is  well  known,  the  pajonent  of  2  per  cent  interest  on 
deposits  by  reserve  agents  attracts  funds  when  idle  at  home;  and 
a  large  deposit  accoimt  with  its  dty  correspondent  gives  the  local 
bank  corresponding  advantages  of  treatment.  In  the  last  report 
the  figures  were  as  given  in  Table  II. 

TABLE  n 
[000,000  omitted] 


Much  4, 1914 

Country  Banks 

Reserve  City  Banks 

Central  Reserve  City  Banks. . . 


Cash  and  s  P^  Cent 
Redemption  Ftmd 


Deposits  with 
Reserve  Agents 


$391 
261 

449 


*W- 


^ 


$1,001 


I837 


The  total  net  deposits  of  national  banks  subject  to  reserve 
requirements  at  that  date  were  $7,504,000,000.  Thxis  the  actual 
cash  of  $1,001,000,000  was  only  13.3  per  cent  of  deposits;  since 
the  $837,000,000  of  deposits  with  reserve  agents  was  not  cash. 
Hence  the  demand  of  member  banks  upon  their  reserves  in  the 
reserve  cities,  if  made,  for  transference  to  Federal  Reserve  Banks 
would  really  fall  uppn  the  $1,001,000,000  of  cash  actually  held  in 
the  present  system. 


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THE  BANKING  AND  CURRENCY  ACT  OF  1913  419 

The  important  consideration,  however,  lies  in  the  lending  power 
of  the  banks  after  and  because  of  these  transfers.  With  the 
balances  left  over  in  their  reserves,  can  they  still  care  for  their  cus- 
tomers ?  That  question  is  obviously  the  one  which  is  forcing  the 
banks  to  be  cautious  with  loans  until  the  adjustment  is  finally 
completed.  There  are,  however,  two  matters  which  may  relieve 
any  possible  tension.  In  the  first  place,  the  above  computation 
has  not  called  for  withdrawals  from  reserve  agents.  It  is  well  to  be 
on  the  safe  side  in  assuming  this;  for  the  present  reserves  with 
reserve  agents  cotdd  not  be  called  upon  to  any  extent  in  cash,  since 
they  are  themselves  the  basis  of  loans  made  by  the  reserve  agents. 
But,  in  the  second  place,  the  most  important  and  effective  method 
of  taking  care  of  the  needs  of  customers  in  the  transition  period, 
and  the  one  which  would  keep  credits  flexible,  would  be  the  redis- 
counting  of  short-time  paper  by  member  banks  at  the  Federal 
Reserve  Banks.  The  immediate  effect  of  such  a  rediscoimt  would 
be  an  increase  of  the  reserves  of  the  member  bank,  so  long  as  the 
proceeds  of  the  rediscount  were  left  with  the  Federal  Reserve  Bank. 

In  addition,  the  use  of  government  deposits  in  this  transitional 
period  would  be  a  very  important  element.  The  deposits  of  the 
United  States  held  by  national  banks  is  about  $58,000,000;  while 
the  other  fimds  of  the  Treasury  would  allow  the  deposit  of  a  much 
larger  siun  with  the  banks.  Instead  of  placing  large  amounts  with 
Federal  Reserve  Banks  at  the  outset,  it  may  be  wise  to  aid  the 
member  banks  by  additional  deposits. 

As  a  counter-weight  to  this  possible  restriction  on  loans,  it 
should  be  kept  in  mind  that  the  deposits  of  funds  with  dty  corre- 
spondents to  cover  exchange  would  no  longer  be  so  necessary,  if 
instead  exchange  is  drawn  on  the  Federal  Reserve  Bank  where 
fimds  exist  to  cover  such  drafts.  To  be  sure,  the  payment  of  2 
per  cent  interest  on  deposits  with  the  present  reserve  agents,  and 
the  tendency  to  continue  long-established  relations  with  these 
agents,  will  work  to  retain  the  present  exchange  methods  and  to 
keep  funds  with  present  dty  correspondents. 

The  general  effect  of  the  changes  in  the  reserve  system  seem,  on 
their  face,  to  make  easier  an  expansion  of  credit.  That  is,  less  cash 
reserves  need  to  be  carried;  and  member  banks  would  have  no 


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420  JOURNAL  OF  POLITICAL  ECONOMY 

reason  for  carrying  as  high  reserves  as  in  the  past,  if  they  hold 
short-time  paper  such  as  they  can  use  in  getting  notes  from  the 
Federal  Reserve  Bank.  And  yet,  in  the  transitional  period,  we 
are  likely  to  see  more  or  less  caution  and  restriction  of  credit. 
That  is,  at  the  start,  the  tendencies  toward  expansion  and  restric- 
tion very  nearly  balance  each  other. 

As  concerns  the  reserves  of  the  Federal  Reserve  Banks,  as  dis- 
tinct from  member  banks,  there  is  a  requirement  of  a  35  per  cent 
reserve  against  deposits  to  be  kept  in  gold  or  lawftd  money;  and 
against  outstanding  Federal  Reserve  notes  a  reserve  of  40  per  cent 
in  gold.  Any  reserve  requirements  specified  in  this  act,  however, 
may  be  suspended  for  thirty  days  (and  later  for  fifteen  days  at  a 
time)  provided  a  graduated  tax  is  imposed  on  the  deficiencies. 
Further  it  is  enacted  (sec.  10) : 

That  when  the  gold  reserve  held  against  Federal  reserve  notes  falls  below 
forty  per  centum,  the  Federal  Reserve  Board  shall  establish  a  graduated  tax 
of  not  more  than  one  per  centum  per  annum  upon  such  deficiency  until  the 
reserve  falls  to  thirty-two  and  one-half  per  centum,  and  when  said  reserve 
falls  below  thirty-two  and  one-half  per  centum,  a  tax  at  the  rate  increas- 
ingly of  not  less  than  one  and  one-half  per  centum  per  annum  upon  each 
two  and  one-half  per  centum  or  fraction  thereof  that  such  reserve  falls 
below  thirty-two  and  one-half  per  centum.  The  tax  shall  be  paid  by  the 
reserve  bank,  but  the  reserve  bank  shall  add  an  amount  equal  to  said  tax  to 
the  rates  of  interest  and  discount  fixed  by  the  Federal  Reserve  Board. 

Under  the  provisions  of  the  act,  a  Federal  Reserve  Bank  might 
carry  no  gold  at  all  behind  its  deposits,  and  only  the  40  per  cent 
of  gold  behind  its  notes;  and  even  then  it  could  redeepi  its  notes 
in  lawful  money. 

X 

The  Federal  Reserve  Act  of  1913  undoubtedly  opens  an  entirely 
new  epoch  in  the  operations  of  credit  and  currency.  Possibly 
because  the  developments  in  credit  and  in  the  mechanism  of 
exchange  have  produced  momentous  changes  in  the  last  fifty  or 
seventy-five  years,  it  is  safe  to  say  that  an  act  which  should  fully 
meet  the  conditions  of  today  must  be  more  important  than  any 
previous  federal  statute,  not  even  excepting  the  National  Banking 
Act  of  1864,  or  the  Act  of  1791  establishing  the  first  United  States 


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THE  BANKING  AND  CURRENCY  ACT  OF  igij  421 

Bank.  Certainly  no  previous  measiire  has  attempted  to  strike 
directly  at  the  long-recognized  rigidity  of  our  credit  system,  which 
has  itself  led  to  unnecessary  paroxysms  of  trade  in  the  past,  and 
which  has  also  brought  to  light  the  underlying  weaknesses  of  our 
currency  system.  For,  wider  and  deeper  than  the  inelasticity  of 
oiu*  circulation  has  been  the  inelasticity  of  our  credit  system.  And 
yet,  until  this  act,  practically  the  whole  attention  of  reformers  has 
been  directed  to  creating  an  elastic  note  system.  In  the  work  of 
the  Indianapolis  Monetary  Commission  of  1898  this  was  eminently 
true. 

So  far-reaching  a  measure  as  this  demands  comparison  with  the 
great  enactments  of  other  countries,  especially  with  the  English 
Bank  Act  of  1^44.  That  law  was  passed  to  meet  a  situation  not 
unlike  our  own:  gold  redemption  had  been  secured  since  182 1; 
crises  had  beeii  disagreeably  destructive;  it  was  desired  to  have 
a  note-circulation  which  would  act  like  gold;  as  with  us  now,  the 
use  of  checks  drawn  upon  deposit-accounts  had  been  growing;  and 
it  was  generally  believed  that  all  difficulties  were  traceable  to  the 
note-issues.  Then  came  the  act  of  1844,  which  set  the  notes  off 
by  themselves  in  the  Issue  Department;  while  the  deposit  and  dis- 
count functions  were  relegated  solely  to  the  Banking  Department. 
With  what  result?  That  the  operations  of  credit,  independent 
of  the  note-issues,  cotdd,  through  the  Banking  Department,  pro- 
vide the  most  effective  of  all  media  of  exchange  (the  deposit- 
currency);  they  could  expand  with  trade;  they  could  develop 
overtrading  and  crises;  they  could  produce  all  the  results  formerly 
charged  solely  to  note-issues.  The  unintended  lessons  of  the 
Bank  Act  of  1844  are  the  most  important  in  our  monetary  litera- 
txire.  Although  the  act  represented  the  doctrines  of  the  Currency 
School,  its  actual  operations  were  the  triimiph  of  the  Banking  Prin- 
ciple. So  with  our  act  of  1913:  while  to  many  the  matter  of  chief 
importance  has  seemed  to  be  the  note-issues,  the  real  heart  of  the 
measure  is  to  be  foimd  in  the  purely  banking  functions  of  discount  | 
and  deposit.  Not  only  are  these  pivotal,  but  they  dominate  the  ' 
whole  question  of  the  note-issues. 

In  our  own  country  the  struggles  associated  with  the  greenbacks 
and  silver  have  centered  attention  on  the  circulation  and  the  quan- 


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422  JOURNAL  OF  POLITICAL  ECONOMY 

tity  of  it  in  use.  They  have  influenced  the  attitude  toward  bank 
notes  by  leading  some  politicians  to  think  that  the  issue  of  notes 
by  banks  would  enable  these  banks  to  control  the  "money-market'* 
and  the  credit  operations  of  the  country.  Moreover,  the  last  pre- 
vious act  (the  so-called  Aldrich-Vreeland  Act  of  1908),  intended  to 
/protect  the  country  against  possible  panics,  was  based  throughout 
,  on  the  assimiption  that  credit  emergencies  cotdd  be  met  by  an  issue 
of  national  bank  notes  through  currency  associations.  Perhaps 
no  other  statement  than  that  wotdd  be  needed  to  eaplain  why,  in 
the  serious  emergencies  in  the  autumns  of  191 2  and  1913,  no  resort 
was  made  to  the  act  of  1908.  So  firmly  intrenched  is  this  idea  in 
the  minds  of  our  public  men  that  in  the  new  law  of  1913  the  act  of 
1908  was  extended  for  another  year;  and  the  present  Secretary  of 
the  Treasury  has  assured  the  country  that  the  act  would  be  resorted 
to  if  necessary. 

When  a  loan  is  made  by  a  bank  it  creates  a  demand  liability  in 
favor  of  the  borrower  that  can  be  met  either  by  its  own  notes  (or 
cash  from  its  reserves)  or  by  a  deposit-account.  Whether  notes, 
or  checks  drawn  on  deposit-accoimts,  are  used  by  the  borrower 
depends  on  the  kind  of  transaction,  or  on  the  business  habits  of 
the  community  where  he  wishes  to  make  a  payment.  The  elas- 
ticity so  much  extolled  may  be  demanded  in  two  different  condi- 
tions. In  the  first  place,  the  seasonal  demand  for  currency  in  the 
autimm  has  exposed  the  inelasticity  of  both  our  note  and  credit 
systems.  It  has  given  strong  support  to  those  who  think  our 
troubles  center  in  the  currency.  Why?  Because  in  the  past 
the  demand  both  for  strengthening  reserves  and  for  paying  cus- 
tomers has  been  a  demand  for  some  form  of  money.  Hence  the 
emphasis  on  the  need  of  an  elastic  currency;  and  so  far  as  this  need 
of  actual  currency  exists,  it  is  imperative.  But  this  is  only  a  part 
of  the  truth,  and  not  the  most  important  part  of  it. 

In  the  second  place,  the  demand  which  comes  in  time  of  a  panic 
brings  us  to  the  very  core  of  the  matter.  Here  the  real  need  is  for 
elasticity  of  credit;  although  to  many  minds  even  panic  conditions 
are  supposed  to  demand  treatment  in  the  form  of  additional  issues 
of  notes.    Where  we  have  the  deposit-currency  well  developed  (as 


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THE  BANKING  AND  CURRENCY  ACT  OF  1913  423 

in  the  United  States  and  Great  Britain) ,  there  is  no  lack  of  a  medium 
of  exchange.  Even  in  the  worst  of  the  crisis,  if  a  borrower  can 
obtain  a  loan,  he  has  no  diffictdty  in  getting  a  medium  of  exchange. 
Consequently,  the  need  of  forms  of  money  is  then  of  importance 
primarily  as  it  affects  the  reserves  of  banks  and  their  lending  power. 
Of  course,  a  bank's  own  notes  cannot  be  used  in  its  reserves.  Hence 
the  real  need  is  to  stop  the  drain  on  cash  reserves,  or  to  obtain  that 
by  which  reserves  can  be  replenished.  How  can  this  be  done? 
And  how  does  the  new  act  afford  help  at  this  point  ? 

In  the  past,  the  National  Banking  Act  caused  rigidity  of  credit 
through  its  regulations  touching  not  only  its  note-circulation,  but 
also  its  reserves;  and  most  of  all  by  the  absence  of  all  provisions 
for  converting  good  coromerdal  paper  into  a  means  of  payment — 
whether  the  borrower  calls  for  notes,  or  uses  a  deposit-account. 
That  is,  the  system  was  so  constructed  that  when  customers 
were  in  the  most  trouble  and  most  needed  help — ^when  bank 
reserves  were  being  drawn  down — the  bank  was  obliged  to  refuse 
loans,  to  contract  existing  loans,  to  sell  any  available  assets  it  had 
for  cash,  and  to  try  to  increase  the  ratio  of  its  reserves  to  its  de- 
mand liabilities.  Under  the  new  act,  just  the  reverse  will  be  true. 
In  times  of  distress  there  will  be  no  need  of  contracting  credit; 
in  fact,  the  only  time  when  it  may  be  necessary  to  contract  credit 
will  be  to  check  possible  expansion  during  a  tendency  to  over-trade 
(which  will  be  discussed  later).  So  far  as  borrowers,  or  the  public, 
need  forms  of  money  in  exchanging  goods,  or  for  various  other  needs, 
Federal  Reserve  notes  can  be  obtained  so  long  as  holders  of  good 
commercial  paper  demand  such  money.  Therefore,  irrespective 
of  the  elastic  dqx>sit-currency,  there  will  be  no  inelasticity  of  a 
mediimi  of  exchange  for  the  public;  it  can  be  had  as  needed,  at 
any  time. 

But  how  does  the  act  touch  the  reserves  and  the  rediscoimts  so 
that  it  may  bring  about  the  much-desired  elasticity  of  credit  ?  This 
is  the  nerve  center  of  the  whole  act.  The  pivotal  provisions  are 
those  which  allow  any  member  bank  to  have  certain  kinds  of  short- 
time  paper  rediscoimted  at  its  Federal  Reserve  Bank.  At  this 
institution  the  loan  creates  in  favor  of  the  borrowing  bank  a  deposit- 
account.    Then  the  pith  of  the  operation  resides  in  the  fact  that  all 


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424  JOURNAL  OF  POLITICAL  ECONOMY 

sums  kept  on  deposit  at  a  Reserve  Bank  count  as  legal  reserves  for 
the  given  member  bank.  That  is,  the  rigidity  of  credit-banking 
in  the  past,  the  destructive  snatching  for  reserves,  are  displaced 
by  a  system  which  allows  good  commercial  paper — ^under  certain 
limitations — to  be  converted  into  lawful  reserves.  This  is  the  pro- 
cess which  directly  touches  the  lending  power  of  a  member  bank  to 
its  customers.  Therefore,  in  a  time  of  panic — ^if  any  such  arrives — 
there  will  be  no  reason  for  a  run  on  cash  reserves,  or,  if  there  is  a 
semblance  of  it,  there  will  be  a  quick  and  ready  way  by  which  the 
reserves  can  be  replenished.  There  can  be  no  serious  run  on  the 
cash  by  the  public,  because  the  member  bank  can  furnish  at  will 
reserve  notes,  by  making  request  for  them  at  the  Reserve  Bank  and 
having  them  charged  against  its  deposit-account  there.  But  it 
must  still  be  kept  in  mind  that  banks  deal  primarily  in  credit,  and 
only  incidentally  in  money.  A  sale  of  goods,  which  forms  the  basis 
of  conunerdal  paper,  is  thereby  coined  into  a  means  of  payment, 
and  gives  rise  to  its  own  medium  of  exchange  without  necessarily 
calling  on  any  forms  of  money.  And  yet  the  elasticity  of  the  notes 
and  of  credit  are,  as  they  should  be,  linked  together.  In  short, 
both  notes  and  deposits  (on  which  checks  can  be  drawn)  respond 
directly  to  the  volimie  of  conunerdal  loans;  and  these  loans  are 
directly  related  to  the  general  volume  of  goods  bought  and  sold. 
Thus,  automatically  the  amoimt  of  notes  and  the  deposits  adjust 
themselves  to  the  needs  of  trade.  This  outcome  is  one  which  no 
system  of  notes  directly  issued  by  a  government  could  possibly 
bring  about.  ^ 

The  kind  of  paper  made  acceptable  for  rediscount  imder  the 
decree  of  the  Federal  Reserve  Board  is  all-important  (sec.  13).  The 
essential  point  in  the  new  law  is  the  distinction  between  mercantile 
and  investment  paper.  It  was  not  intended  that  the  paper  pre- 
sented for  rediscount  should  have  been  drawn  to  carry  stocks,  bonds, 
etc.,  or  goods  in  warehouse  held  for  higher  prices;  nor  to  aid  in 
securing  capital  for  fixed  investment  in  irrigation,  water-power, 
street-railway,  manufacturing  plant,  or  similar  purposes.  On 
the  other  hand,  it  was  intended  to  encourage  loans  based  on 
the  movement  of  goods  from  the  producer  to  the  consumer. 


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THE  BANKING  AND  CURRENCY  ACT  OF  1913  425 

Granting  this  general  distinction,  there  remains  the  task  of 
stating  just  what  kind  of  paper  in  common  use  conforms  to  the 
spirit  of  the  act. 

About  thirty  years  ago  a  change  took  place  in  our  forms  of 
paper.  Previously,  buyers  of  goods  gave  the  sellers  their  notes  for 
the  allowed  term  of  credit  in  payment  for  the  goods,  and  these  notes, 
usually  indorsed  by  the  seller,  were  discounted  at  the  banks.  This 
was,  strictly  speaking,  "  two-name  commercial  paper."  Under  this 
practice,  in  case  of  goods  subsidiary  to  further  manufacturing  pro- 
cesses (like  ore,  pig  iron,  steel,  and  rails)  there  might  be  several 
notes  in  the  hands  of  the  banks  covering  substantially  the  same 
goods  at  different  stages  of  manufacture.  This  practice  has  today 
practically  disappeared. 

The  introduction  of  trade  discounts'  made  it  more  profitable 
for  the  buyer  to  borrow  at  his  bank  and  pay  cash  for  his  goods. 
Borrowers  in  good  standing  could  thus  pay  cash;  while  those  of 
poor  credit  created  "commercial  paper."  That  is,  the  one-name 
promissory  notes  of  borrowers  in  good  standing  at  the  banks  were 
the  best  paper  offered;  yet  it  was  not  directly  based  on  the  sale  of 
goods.  The  advantage  of  this  method  was  that  it  practically  put 
trade  on  a  cash  basis.  This  development,  moreover,  seems  to  be 
peculiar  to  this  country. 

On  the  other  hand,  the  modem  practice  has  the  disadvantage 
that  it  is  not  easy  to  know  whether  the  borrower  uses  the  proceeds 
of  his  loan  to  pay  for  goods,  or  whether  he  may  use  it  for  invest- 
ment purposes;  or  in  some  fixed  form  that  is  not  liquid.  Moreover, 
the  acceptable  borrower,  once  given  a  certain  line  of  credit,  usually 
keeps  up  to  his  limit  by  renewals,  or  continuous  loans,  without 
clearing  up  his  accoimt  by  paying  off  his  loans. 

In  addition  it  should  be  made  clear  that,  besides  the  notes  thus 
described,  a  concern  may  obtain  large  loans  through  the  agency  of 
note-brokers,  who  sell  them  to  banks.  These  are  the  direct, 
unsecured  obligations  of  the  borrowers.  The  business  of  the  note- 
broker  has  increased  phenomenally  with  the  growth  of  the  trade 

<  This  influence  has  been  fully  described  in  an  article  by  the  writer  on  "The 
Aldrich-Vreeland  Act"  in  the  Journal  of  Political  Economy ^  October,  1908,  pp.  509-za. 


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426  JOURNAL  OF  POLITICAL  ECONOMY 

discoiint.  If  a  borrower  cannot  obtain  cash  to  take  advantage  of 
the  trade  discounts,  with  the  aid  of  the  note-brokers,  his  standing 
is  obviously  low. 

The  Federal  Reserve  Board,  therefore,  not  being  able  to  alter 
business  habits  at  once,  must  try  to  establish  rules  which  wotdd 
admit  the  highest  grade  one-name  promissory  notes,  but  would 
demand  evidence  that  the  loan  was  not  used  for  investment,  but 
for  strictly  mercantile  purposes.  The  discounting  bank  must  be 
held  req>onsible  for  such  evidence.  In  this  way,  the  spirit  of  the 
act  will  be  recognized,  although  the  paper  is  not  "strictly  commer- 
cial." Yet  there  will  certainly  arise  a  tendency  to  devise  forms  of 
paper,  which,  while  consistent  with  the  existence  of  trade  dis- 
counts, will  disclose  more  distinctly  than  the  present  promissory 
note  the  purpose  of  the  borrower  to  use  the  loan  for  mercantile^ 
and  no  other,  purpose. 

Such  being  the  provisions  of  the  new  act  regarding  elasticity 
of  credit,  are  there  any  dangers  of  expansion  ?  Forttmately  the 
essential  functions  of  discount  are  not  hemmed  in  by  detailed  legis- 
lative prohibitions;  fortunately,  one  must  say,  because  discounting 
must  always  remain  a  matter  of  judgment,  and  much  must  be  left 
to  the  management.  Yet,  on  the  other  hand,  this  very  freedom 
from  restraint  might  result,  under  unwise  management,  in  inflation 
and  danger.  This  is  inherent  in  the  very  nature  of  banking;  since 
under  any  system,  good  or  bad,  everything  depends  upon  the  kinds 
of  loans  made. 

Even  with  this  new  act,  it  is  not  to  be  supposed  that  we  shall 
never  see  any  more  crises.  Crises  are  more  or  less  inevitable, 
because  an  act  of  Congress  cannot  prevent  human  optimism  from 
over-trading  in  goods.  Thus  no  matter  how  perfect  is  the  machin- 
ery of  oxir  credit  system,  it  will  register  the  spasms  of  trade.  The 
essential  point  to  be  gained  by  a  desirable  system  of  credit  is  that 
it  should  not  aggravate  the  inevitable  distxirbances  which  will  arise 
in  emergencies  of  business;  in  the  past,  our  rigid  laws  magnified  any 
departure  from  regular  conditions.  In  Europe,  the  banking  sys- 
tems are  such  as  to  minimize,  and  not  magnify,  trouble;  which  is 
the  reason  why  Europe  in  recent  times  has  been  free  from  destruc- 
tive panics,  while  this  country  has  abounded  in  them. 


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THE  BANKING  AND  CURRENCY  ACT  OF  igi3  427 

The  elasticity  of  credit  implies  both  expansion  and  contraction 
according  to  the  needs  of  business.  Since  any  loan  may  be  carried 
through  by  a  bank  giving  either  its  own  notes  (or  other  cash)  or  a 
deposit-account,  expansion  may  be  aided  either  by  an  over-issue 
of  notes  or  by  an  excessive  creation  of  deposit-accoimts.  In  some 
quarters,  it  is  assumed  that  expansion  can  be  regulated  by  regu- 
lating the  issue  of  notes,  or  by  taxing  them,  or  the  like.  This  is 
not  true  to  the  extent  supposed.  As  a  mediiun  of  exchange  in  pay- 
ing wages,  for  traveling  expenses,  and  for  retail  transactions,  a  cer- 
tain sum  of  notes  is  always  needed;  but  amounts  beyond  that  will 
normally  return  to  the  banks.  If  the  notes  could  be  used  as  / 
reserves,  they  wotdd  enable  banks  to  expand  loans.  But  Federal 
Reserve  notes  cannot  be  used  as  reserves  by  member  banks;  and 
here  is  a  check  on  undue  expansion.  The  danger,  however,  may 
exist  elsewhere;  these  notes,  like  present  national  bank  notes, 
cotdd  be  used  by  the  17,000  state  institutions  in  their  reserves. 
So  much,  for  present  purposes,  as  to  expansion  through  the  notes 
(which  are  not  limited  in  amount). 

Those  loans,  it  should  be  noted,  which  result  in  deposit-accountSr 
at  Federal  Reserve  Banks  (and  which  are  not  drawn  down  by  I 
requests  for  notes)  directly  increase  the  reserves  of  member  banks  \ 
until  transferred  by  check.    Thus  the  lending  power  of  the  mem-  \ 
ber  bank  is  more  quickly  and  extensively  enlarged  by  this  process 
than  by  the  issue  of  notes.    Herein  lies  the  pivotal  question  of  over- 
expansion.    Passing  by  the  question  of  over-expansion  through  the 
issue  of  notes,  it  is  desired  mainly  to  study  here  that  arising  only 
from  the  use  of  deposit-accoimts  and  checks,  because  these  opera- 
tions are  less  understood  and  are  more  elusive.    Here  the  possibility  f 
of  expansion  is  even  greater  than  in  connection  with  notes,  because  | 
the  proceeds  of  a  loan  at  a  Reserve  Bank,  if  left  there,  at  once  j 
count  as  reserves,  and  permit  another  increase  of  loans. 

To  this  possibility  of  serious  expansion,  what  are  the  practical 
checks  to  be  found  in  the  bill?  They  may  briefly  be  listed  as 
follows: 

I.  Against  notes  the  Reserve  Bank  must  carry  40  per  cent  gold  reserves; 
and  against  deposits  35  per  cent  reserves  in  gold  or  lawful  money.  But  expan- 
sion will  first  develop  in  the  member  banks.  They  are  not  required  to  keep 
as  large  reserves  as  before  against  deposits  (carrying,  of  course,  no  reserves 


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428  JOURNAL  OF  POLITICAL  ECONOMY 

for  notes).  They  can  make  inore  profit  with  the  same  reserves  by  canying 
more  loans.  Thus,  there  is  no  restriction  here,  except  that  of  refusal  of  loans 
by  the  Reserve  Bank. 

2.  In  Europe  the  real  control  over  expansion  is  in  the  rate  of  discount 
charged  to  the  borrower.  So  must  it  be  here,  if  it  is  raised  early  and  not  after 
the  expansion  has  arrived;  but  watch  must  be  kept  on  the  particular  bank 
beginning  to  e:q>and  its  loans,  and  the  treatment  must  be  individually  implied 
at  the  source. 

3.  A  still  more  important  check  resides  in  the  provision  (sec  13)  that 
Reserve  Banks  shall  rediscount  only  ''notes,  drafts,  and  bills  of  exchange 
arising  out  of  actual  commercial  transactions,"  having  a  maturity  of  not  over 
90  days;  although  a  limited  amount  of  live-stock  ps4>er  may  have  a  maturity 
not  exceeding  six  months.  The  final  definition  of  all  such  paper  is  left  to  the 
Reserve  Board.  But  loans  secured  by  investment  security  cannot  be  redia- 
counted.  The  spirit  of  the  act,  as  already  explained,  forbids  loans  for  carry- 
ing goods  in  storage  for  a  higher  price,  and  should  confine  loans  to  paper  based 
on  goods  actually  sold.  Just  how  to  define  such  ps4>er  lays  a  heavy  req>onsi- 
bility  on  the  Federal  Board.  On  it  will  finally  dq)end  the  kind  of  assets 
allowed  to  Reserve  Banks. 

4.  A  real  restriction  exists  in  making  rediscounts  on  only  short-time  paper; 
but  90  da3rs  is  somewhat  too  long  for  the  best  liquidity  of  assets.  It  was 
asserted,  however,  that  country  banks  would  gain  no  advantage  by  the  new 
system,  because  they  had  little  or  no  short-time  paper.  By  the  call  of  the 
Comptroller,  August  9, 1913,  it  was  disclosed  that  the  national  banks  reporting 
held  loans  of  $3,427,055,157  maturing  in  90  da3rs,  and  $2,594,351,440  maturing 
in  a  longer  period;  or  58  per  cent  of  the  former,  and  42  per  cent  of  the  latter. 
The  6,736  country  banks  (outside  central  reserve  and  reserve  cities)  held 
$1,735,000,000  loans  having  a  maturity  of  90  days  or  less,  and  $1,337,000,000 
maturing  over  90  days.  That  is,  even  country  banks  hold  more  short-time 
than  long-time  paper.  There  is  obviously  enough  paper  to  allow  of  expansion, 
so  far  as  quantity  goes.    The  real  check  must  be  in  passing  on  the  paper. 

5.  The  exclusion  of  investment  paper  cuts  off  all  possibility  of  expansion 
by  stock  exchange  speculation  through  the  help  of  rediscounts  at  Reserve 
Banks.  It  is  to  be  remembered,  however,  that  any  member  bank  can  still 
loan  on  stock-exchange  collateral  to  the  extent  that  it  does  not  wish  for  redis- 
counts; and  that  all  state  institutions  not  members  can  loan  on  such  coUateraL 
We  have  not,  therefore,  seen  the  end  of  stock  speculation. 

6.  Rediscounts  at  the  Reserve  Banks  must  be  indorsed  by  the  borrowing 
bank.    Hence  there  will  be  some  check  here. 

7.  Also,  no  .member  bank  may  loan  more  than  10  per  cent  of  its  capital 
and  surplus  to  any  one  person  or  firm.    That  is  much  the  same  now. 

8.  A  real  check  is  found  in  the  restriction  of  discounts  on  acceptances  to 
those  based  on  importation  or  exportation  of  goods;  and  even  these  shall  not 
exceed  one-half  the  paid-up  capital  and  surplus  of  the  borrowing  member  bank. 


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THE  BANKING  AND  CURRENCY  ACT  OF  igij  429 

The  omission  of  domestic  acceptances  is  a  serious  handicap  to  the  desired  dis- 
count market,  but  it  works  toward  a  restriction  of  potential  expansion. 

9.  In  practice  the  paper  must  pass  rigid  scrutiny  in  more  than  one  step. 
First,  it  must  satisfy  the  member  bank;  second,  it  must  be  satisfactory  to  the 
Reserve  Bank;  and,  thirdly,  if  notes  are  wanted,  it  must  pass  the  jud^^ent  of 
the  Agent  of  the  Reserve  Board. 

10.  The  power  of  the  Reserve  Board  to  examine  into  the  operations  of 
reserve  banks,  and  the  frequent  or  special  examinations  of  member  banks,  will 
give  an  important  control  over  expansion,  or  imsound  banking,  if  legitimately 
used  (sees.  21,  22,  33). 

11.  Again,  it  is  to  be  noted  that,  in  rediscounting,  a  large  number  of  indi- 
vidual banks  will  be  related  to  each  other  in  a  co-operative  f  a^on.  Something 
of  an  institutional  character  has  been  introduced,  and  it  is  possible  to  place 
responsibility  here  and  there  as  was  never  possible  before.  This  development 
should  gradually  and  by  experience  prove  of  importance  in  controlling  over- 
expansion. 

12.  Finally,  if  fear  arises  from  the  absence  of  any  limit  on  note-issues,  it 
is  to  be  remembered  that  the  Reserve  Board  can  impose  a  tax  upon  them  at 
their  discretion,  which  tax  will  be  added  to  the  rate  of  discount  to  the  borrower. 
Such  a  provision  should  accomplish  the  time-honored  piurpose  of  the  European 
taxes  on  notes  passing  a  certain  limit.  To  remove  all  limits  on  notes  was  right ; 
but  it  was  a  courageous  thing  to  put  it  in  the  bill,  because  many  people  think 
expansion  is  largely  to  be  attributed  to  the  quantity  of  issues.  In  my  opinion, 
trouble  is  less  likely  to  arise  from  the  notes  than  from  the  possible  use  of 
dq>osit-accounts  following  loans  which  demand  only  checks  as  a  medium  of 
exchange. 

It  must  be  emphasized  that  the  possibilities  of  imdue  expansion 
of  credit  cannot  be  removed  by  any  legal  provisions  in  an  act. 
It  may  create  machinery,  but  the  speed  with  which  it  will  be  run 
will  depend  upon  the  judgment  of  the  man  at  the  throttle.  Elas- 
ticity of  credit  has  been  given  us  with  all  its  possibilities  of  good  to 
business,  together  with  all  its  possibilities  for  abuse.  The  whole 
safety  of  our  credit  fabric,  therefore,  rests  upon  those  who  pass  on 
the  paper  discounted.  Consequently,  the  success  of  the  new 
system  depends  primarily  on  the  men  selected  to  manage  the 
several  Reserve  Banks.  In  practical  operation,  they  are  more  im- 
portant than  those  on  the  Reserve  Board. 

XI 

The  new  act  has  made  possible  a  new  departxire  of  very  great 
importance  in  the  technical  methods  of  clearings  and  collections. 


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430  JOURNAL  OF  POLITICAL  ECONOMY 

How  great  a  departure  it  is  not  possible  yet  to  say-  It  is  a  further 
development  of  economizing  devices  in  the  settlement  of  credits. 
For  a  long  time  the  charges  of  clearing-houses  have  been  a  source 
of  dissatisfaction.  The  original  field  of  clearing-houses  was 
limited  to  local  banks  in  one  city,  but  now  it  is  being  extended 
somewhat  by  such  a  system  as  that  inaugurated  by  Boston, 
ELansas  City,  and  some  other  cities.  In  the  new  act  larger  questions 
of  joint  action  over  wide  districts,  or  even  over  the  whole  country, 
are  being  raised.  The  problem  is:  Can  the  gains  of  dty  clearing- 
houses and  collections  be  extended  to  the  whole  territory  of  the 
United  States  ? 

All  the  regulations  touching  this  matter  in  the  new  act  are  as 
follows: 

Any  Federal  reserve  bank  may  receive  from  any  of  its  member  banks,  and 
from  the  United  States,  deposits  of  current  funds  in  lawful  money,  national* 
bank  notes.  Federal  reserve  notes,  or  checks  and  drafts  upon  solvent  memba 
banks,  payable  upon  presentation;  or,  solely  for  exchange  purposes,  may  receive 
from  other  Federal  reserve  banks  deposits  of  current  funds  in  lawful  mon^, 
national-bank  notes,  or  checks  and  drafts  iq>on  solvent  member  or  other  reserve 
banks,  payable  iq>on  presentation  (sec.  13). 

Every  Federal  reserve  bank  shall  receive  on  deposit  at  par  from  member 
banks  or  from  Federal  reserve  banks  checks  and  drafts  drawn  upon  any  of  its 
depositors,  and  when  remitted  by  a  Federal  reserve  bank,  chedcs  and  drafts 
drawn  by  any  depositor  in  any  other  Federal  reserve  bank  or  member  bank 
upon  funds  to  the  credit  of  said  dq>ositor  in  said  reserve  bank  or  member  bank. 
Nothing  herem  contained  shall  be  construed  as  prohibiting  a  member  bank 
from  charging  its  actual  e]q)ense  incurred  in  collecting  and  remitting  funds, 
or  for  exchange  sold  to  its  patrons.  The  Federal  Reserve  Board  shall,  by  rule, 
fix  the  charges  to  be  collected  by  the  member  banks  from  its  patrons  whose 
checks  are  cleared  through  the  Federal  reserve  bank  and  the  charge  which  may 
be  inq)osed  for  the  service  of  clearing  or  collection  rendered  by  the  Federal 
reserve  bank  (sec.  16). 

In  these  sections,  in  spite  of  some  blundering  due  to  a  com- 
promise on  technical  questions,  and  from  a  desire  to  conciliate 
country  banks  (whose  earnings  are  largely  affected  by  charges  for 
collections),  some  important  advances  were  made:  any  Federal 
Reserve  Bank  may  receive  on  deposit  from  its  members  or  from 
the  United  States,  checks  and  drafts  drawn  on  any  solvent  member 
bank;   "for  exchange  purposes"  any  Federal  Reserve  Bank  may 


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THE  BANKING  AND  CURRENCY  ACT  OF  1913  431 

accept  from  any  other  Reserve  Bank  checks  and  drafts  drawn  on 
any  solvent  member  bank  or  other  Reserve  Bank;  but  it  is  said 
(sec.  16)  that  such  items  shall  be  received  at  par;  while  elsewhere 
certain  charges  are  allowed  for  collecting  them,  which  has  been 
interpreted  by  exchange  experts  as  making  no  charge  for  exchange, 
but  allowing  a  charge  for  cost  of  service.  But  independent  of 
"exchange  purposes,"  any  Reserve  Bank  must  receive  at  par  from 
member  banks,  or  from  other  Reserve  Banks,  checks  and  drafts 
drawn  on  any  member  bank  in  the  system,  that  is,  withouta  charge 
for  exchange;  but  yet  a  member  bank  is  not  to  be  prohibited  from 
charging  actual  expenses  for  collection  or  exchange  to  its  patrons.' 

The  Reserve  Board  is  to  fix  the  charges  levied  by  member 
banks  on  patrons  if  these  checks  are  cleared  through  a  Reserve 
Bank,  and  also  to  fix  the  charge  of  the  Reserve  Bank  for  its  cost 
of  clearing  or  collection. 

Bearing  directly  on  a  future  system  of  clearings  for  the  whole 
country,  sec.  16  provides  as  follows: 

The  Federal  Reserve  Board  shall  make  and  promulgate  from  time  to  time 
regulations  governing  the  transfer  of  funds  and  charges  therefor  among  Fed* 
eral  reserve  banks  and  their  branches,  and  may  at  its  discretion  ezerdse  the 
functions  of  a  clearing  house  for  such  Federal  reserve  banks,  or  may  designate 
a  Federal  reserve  bank  to  ezerdse  such  functions,  and  may  also  require  each 
such  bank  to  exercise  the  functions  of  a  clearing  house  for  its  member  banks. 

Since  a  member  bank  will  have  reserves  in  its  Reserve  Bank, 
a  balance  in  the  clearings  by  a  Reserve  Bank  against  a  member 
bank  can  be  directly  charged  against  the  account  of  said  member 
bank,  and  all  charges  for  collection  would  be  avoided.  Any  cost 
for  handling  these  clearings  could  be  charged  by  the  Reserve  Bank 
against  member  banks.  A  saving  over  the  present  methods  is 
thus  possible.  How  far  a  wide-reaching  system  of  clearings  may 
be  developed,  in  spite  of  the  extensive  clerical  service  required, 

*  It  has  been  pointed  out  by  George  Woodruff,  Journal  of  Political  Economy ^ 
April,  1914,  p.  350,  that  the  insertion  of  the  words  "when  remitted  by  a  Reserve 
Bank''  prevents  a  Reserve  Bank  from  receiving  on  deposit  from  its  own  members,  or 
irom  the  United  States,  checks  and  drafts  drawn  on  any  other  Reserve  Bank.  That 
is,  a  member  bank  receiving  a  draft  on  a  Reserve  Bank  other  than  its  own  cannot  send 
it  to  its  own  Reserve  Bank;  although  it  can  send  in  to  its  own  Reserve  Bank  a  check 
drawn  on  a  member  bank  in  another  district. 


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432  JOURNAL  OP  POLITICAL  ECONOMY 

depends  largely  on  organization,  and  future  dispositions.    It  is 
possible  that  the  present  city  clearing-houses  may  be  superseded. 

It  should  be  remembered,  however,  that,  at  present,  only 
national  banks  (speaking  generally)  have  joined  the  new  system. 
There  are  more  than  twice  as  many  banks  out  of  the  system  as  in 
it;  and  the  relations  of  the  national  to  state  banks  and  trust  com- 
panies must  be  reckoned  with.  The  liabilities  of  the  national 
banks  to  these  outside  institutions  amount  to  over  $1,200,000,000; 
while  there  is  due  from  them  to  national  baiiks  a  stmi  nearly  half 
as  large  as  from  other  national  banks. 

There  is,  \mder  the  new  law,  a  discrimination  in  favor  of  a 
*  check  drawn  on  any  member  bank:  in  the  future  it  will  be  received 
at  par  in  any  part  of  the  country  equally  with  New  York  or  Chicago 
exchange.  Therefore  all  past  methods  of  drawing  exchange  are 
to  a  certain  extent  likely  to  be  upset.  Certainly,  checks  on  non- 
member  banks  will  be  discriminated  against,  and  they  must  go 
through  the  old  process  of  collection,  which  will  not  be  so  quick  or 
so  inexpensive  as  that  of  member  banks.  Competition  of  non- 
member  banks  may  lower  the  cost,  or  checks  on  non-member  banks 
may  be  collected  by  depositing  checks  of  non-member  banks  with 
member  banks. 

The  use  of  checks  drawn  by  individuals  on  their  local  banks  to 
make  payments  even  of  small  smns  in  any  part  of  the  country  lies 
at  the  bottom  of  the  extensive  system  of  collections  and  clearings 
in  the  United  States.  In  Europe  this  burden  b  largely  escaped  by 
being  thrown  on  remittances  through  banks.  The  new  act  clinches 
the  present  habit,  and  makes  it  permanent,  by  supplying  the  means 
of  continuing  it. 

XII 

It  had  been  hoped  by  the  friends  of  the  National  Monetary 
Commission  plan  to  introduce  in  this  country  a  discount  market 
such  as  exists  in  the  financial  centers  of  Europe.  A  discount 
market  obviously  means  a  market  where  certain  kinds  of  paper 
can  be  sold  at  any  time.  To  suit  paper  for  such  a  market  it 
must  have  universal  acceptability,  by  having  a  maker  whose 
credit  is  accepted  in  any  market.  Established  institutions, 
rather  than  private  persons,  are  likely  to  be  thus  recognized. 


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THE  BANKING  AND  CURRENCY  ACT  OF  1913  433 

Promissory  notes,  the  usual  paper  discounted  in  this  country,  are 
the  promises  of  individuals  or  firms,  and  therefore  have  no  wide 
recognition.  The  process  of  making  an  acceptance  is  as  follows: 
The  person  wishing  credits  will  go  to  a  large  mercantile  house,  or 
bank,  and  ask  the  privilege  of  drawing  a  bill  on  it,  falling  due  at  a 
date  in  the  future,  which  will  be  accepted  by  them  on  presentation. 
The  house,  or  bank,  writes  across  the  face  of  the  bill  the  word 
"accepted,"  with  the  date  and  its  signature.  A  promise  to  pay  in 
the  future  to  a  bank  and  "accepted"  by  it  has  the  security  and 
recognition  of  the  acceptor.'  Hence,  the  use  of  acceptances  has 
been  urged  as  necessary  to  the  existence  of  a  discount  market  in 
this  country. 

Hitherto,  acceptances  have  not  been  permitted  by  law  to 
national  banks.  Under  the  new  act  our  banks  are  allowed  to 
accept,  as  follows: 

Any  member  bank  may  accept  drafts  or  bills  of  exchange  drawn  upon  it 
and  growing  out  of  transactions  involving  the  importation  or  exportation  of 
goods  haviog  not  more  than  six  months  sight  to  nm;  but  no  bank  shall  accept 
such  biUs  to  an  amount  equal  at  any  time  in  the  aggregate  to  more  than  one- 
half  its  paid-up  capital  stock  and  surplus  (sec.  13). 

The  limitation  of  acceptances  to  transactions  in  foreign  trade, 
and  the  omission  of  authority  to  make  acceptances  based  on  domes- 
tic transactions,  obviously  limit  the  supply  of  paper  which  could 
be  offered  in  a  general  discount  market.  The  reason  for  such 
omission  was  the  fear  of  undesirable  expansion,  if  the  right  to 
accept  were  given  free  rein.  In  all  cases  the  customer  asking  for 
the  acceptance  agrees  to  provide  the  accepting  bank  with  funds 
to  cover  the  acceptance  a  few  days  before  it  falls  due.  The  acceptor 
only  lends  his  credit,  to  the  customer,  and  does  not  advance  any 
cash.  Hence  in  accepting  a  bill  drawn  on  it,  a  bank  would  not 
create  a  liability  in  a  deposit  account  against  which  it  must  carry 
reserves,  and  in  this  country  the  temptation  to  accept  beyond 
moderation  might  have  been  too  strong  to  be  resbted,  if  a  curb  were 
not  introduced.  As  the  law  stands,  a  limited  use  of  acceptances  is 
permitted,  which  may  be  extended  by  later  legislation,  provided 

*For  a  useful  descripticm  of  the  practical  workings  of  acceptances,  see  Conway 
and  Patterson,  op,  cU,,  diap.  xi. 


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434  JOURNAL  OF  POLITICAL  ECONOMY 

traditions  of  safety  may  be  hereafter  established.  Moreover,  it  is 
doubtful  if  bills  of  exchange  drawn  on  the  actual  exchange  of  goods, 
or  bills  drawn  on  banks,  in  order  to  provide  acceptances  could  be 
extended  to  such  an  extent  in  this  country  as  to  supplant  the 
promissory  note. 

Besides  the  general  market  for  acceptances,  the  new  act  per- 
mits Federal  Reserve  Banks  to  deal  in  them: 

Any  Federal  reserve  bank  may  discount  acceptances  which  are  based  on  the 
inq>ortation  or  exportation  of  goods  and  which  have  a  maturity  at  time  of  dis- 
count of  not  more  than  three  months,  and  indorsed  by  at  least  one  member 
bank.  The  amount  of  acceptances  so  discounted  shall  at  no  time  exceed  one- 
half  the  paid-up  capital  stock  and  surplus  of  the  bank  for  which  the  rediscounts 
are  made  (sec.  13). 

If  our  acceptances  based  on  cotton,  for  instance,  were  made 
salable  in  London,  or  on  the  Continent,  they  would  in  effect  pro- 
vide a  means  of  bringing  in  foreign  capital  to  finance  the  movement 
of  our  crop.    This  would  be  an  obvious  advantage. 

In  other  respects,  the  purpose  of  selling  acceptances  in  a  dis- 
count market  would  be  to  change  the  assets  of  the  holder  into  cash. 
So  far  as  member  banks  wish  to  do  this,  they  may  obtain  the  end 
in  another  way,  by  rediscounting  paper  with  a  Federal  Reserve 
Bank;  but  such  operations  are  limited  by  the  resources  of  capital 
at  the  disposal  of  the  Reserve  Banks. 

xra 

So  far  as  Americans  are  engaged  in  foreign  trade,  or  are  located 
in  foreign  countries,  they  labor  under  some  disadvantage,  if  they 
are  obliged  to  do  their  business  through  foreign  banking  institu- 
tions. In  international  relations,  and  in  granting  of  loans,  the 
trade  of  any  one  country  is  usually  favored  by  the  institutions 
owned  by  the  citizens  of  that  country.  Our  business  men  are  not 
so  well  known  that  they  can  obtain  loans  from  foreign  banking 
houses  in  Buenos  Aires  or  Hongkong  as  favorably  as  those  who 
have  been  long  known  to  the  commercial  and  banking  institutions. 
A  young  (;ountry  must  fight  for  its  recognition  in  trade;  and  it 
needs  the  support  abroad  of  its  own  powerful  banking  institutions. 

Moreover,  American  bankers  are  now  obliged  to  share  com- 


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THE  BANKING  AND  CURRENCY  ACT  OF  1913  435 

missions  with  foreign  bankers  on  an  immense  amount  of  inter- 
national trade  originating  with  us.  At  present  American  drafts 
and  bills^  if  sent  abroad  in  payment  of  imports  from  Europe,  could 
not  be  sold  in  the  discount  markets  of  Europe,  because  the  Ameri- 
can firms  are  not  sufficiently  well  known. 

As  soon  as  our  foreign  trade  warrants  it,  and  as  soon  as  we  have 
capital  enough  to  be  employed  out  of  the  country,  foreign  banking 
branches,  if  profitable,  will  come  into  being  \mder  the  provisions 
of  the  new  act  (sec.  25).  Such  branches  are  permitted  to  national 
banks  having  a  capital  and  surplus  of  $1,000,000  or  more,  subject 
to  examination  by  the  Federal  Reserve  Board,  and  provided  the 
accounts  of  each  branch  are  kept  separately  from  those  of  any  other 
branch. 

There  are  many  other  matters  which  might  be  touched  upon  in 
connection  with  the  new  law;  but  within  the  space  allowed  it  has 
been  possible  to  discuss  only  the  chief  topics  selected.  There  are 
imfortimate  provisions  in  the  act,  such  as  those  in  sec.  24,  permitting 
loans  on  farm  lands  by  banks  that  create  demand  liabilities.  They 
should  not  tie  up  their  resources  in  an  imliquid  form  like  land. 
But  the  sum  and  substance  of  the  whole  act  is  so  remarkably  good, 
that  the  combined  support  of  both  bankers  and  the  public  is  certain 
to  be  given  to  it  to  the  end  that  it  may  work  smoothly  and  bring 
a  long-desired  reform  to  an  expectant  nation. 

J.  Laurence  Laughlin 
Uniysbsxty  of  CmcAOO 


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COMMERCIAL  PAPER  AND  THE  FEDERAL  RESERVE 

BANKS 

The  Federal  Reserve  Board  is  empowered  to  formulate  rules 
and  regulations  for  putting  into  effect  many  requirements  which 
very  wisely  are  expressed  in  general  terms  in  the  Federal  Reserve 
Act.  One  of  the  first  and  most  important  duties  of  the  Board 
will  be  to  determine  the  character  of  the  paper  which  the  reserve 
banks  may  rediscount  for  member  banks.  Li  this  particular 
instance  the  act  is  explicit  regarding  certain  requirements,  while 
others  are  left  to  the  determination  of  the  Board  in  accordance 
with  general  principles  laid  down  in  the  measure.  Rediscounts 
are  restricted  to  paper  maturing  within  ninety  days,  aside  from 
a  limited  amount  of  agricultural  and  live-stock  paper  maturing 
within  six  months.  Notes,  drafts,  and  bills  of  exchange  may  be 
rediscounted;  in  other  words,  form  is  immaterial,  since  practically 
all  kinds  of  negotiable  instnmients  used  for  borrowing  purposes 
are  included.  Collateral  loans  when  the  collateral  consists  of 
stocks  or  bonds  are  specifically  excluded  from  rediscoxmt,  while 
commercial  paper,  whatever  its  form,  is  eligible.  The  act  does  not 
define  commercial  loans  except  in  most  general  terms,  but  directs 
the  Federal  Reserve  Board  to  do  so  more  precisely. 

The  provision  in  the  act  regarding  the  general  character  of  the 
p>aper  which  may  be  rediscounted  reads  as  follows: 

Upon  the  indorsement  of  any  of  its  member  banks,  with  a  waiver  of 
demand,  notice,  and  protest  by  such  bank,  any  Federal  reserve  bank  may 
discount  notes,  drafts,  and  bills  of  exchange  arising  out  of  actual  commercial 
transactions;  that  is,  notes,  drafts,  and  bills  of  exchange  issued  or  drawn 
for  agricultural,  industrial,  or  commercial  purposes,  or  the  proceeds  of  which 
have  been  used,  or  are  to  be  used,  for  such  purposes,  the  Federal  Reserve 
Board  to  have  the  right  to  determine  or  define  the  character  of  the  paper  thus 
eligible  for  discoimt,  within  the  meaning  of  this  Act. 

It  may  at  once  be  noted  that  the  word  "commercial"  is  given 
first  a  broad  and  later  a  restricted  meaning.  When  coupled  with 
agricultural  and  industrial,  it  evidently  means  merchandizing  or 
trading;  when  used  alone,  it  evidently  includes  not  only  trading  but 

436 


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COMMERCIAL  PAPER  AND  FEDERAL  RESERVE  BANKS     437 

also  agricultural  and  industrial  operations.  Any  sale  of  goods  may 
properly  be  described  as  a  merchandising  or  trading  transaction 
from  the  point  of  view  of  the  seller.  But  if  the  purchaser  is  engaged 
in  agriculture  or  in  manufacturing,  the  purchase  is  not  for  him  a 
trading  operation,  strictly  speaking,  and  so,  in  the  restricted  sense 
of  the  word  "commercial,"  loans  made  to  such  persons  to  enable 
them  to  finance  purchases  would  not  be  commercial  loans.  Under 
the  broader  definition  of  the  term,  it  is  evidently  the  intent  of  the 
law  that  the  paper  both  of  the  seller  and  of  the  purchaser  of  goods 
is  eligible  for  rediscount  if  the  proceeds  are  to  be  used  in  connection 
with  current  undertakings.  The  term-  "commercial  loan"  may 
provisionally  be  defined,  therefore,  as  any  loan  which  enables  a 
borrower  who  is  engaged  in  the  production  or  distribution  of  goods 
to  finance  such  quick  assets  as  he  may  require,  whether  merchan- 
dise purchased  or  goods  sold. 

Most  of  the  loans  made  by  conmierdal  banks  provide  the 
business  community  with  no  more  funds  than  are  needed  for  these 
purposes,  but  in  particular  cases  there  is  no  certainty  that  this  is 
the  limit  of  accommodation  granted.  It  is  the  duty  of  the  Federal 
Reserve  Board  to  formulate  such  regulations  regarding  rediscounts 
as  will  make  it  reasonably  certain  in  practice  that  the  proceeds  of 
rediscotmted  paper  have  been  used  to  finance  quick  assets.  In 
framing  its  regulations,  however,  the  Board  is  not  bound  to  con- 
fine itself  solely  to  those  which  would  exclude  from  rediscount 
paper  which  is  not  of  a  commercial  character.  Additional  restric- 
tions may  properly  be  imposed  in  order  to  enhance  the  safety 
and  liquidness  of  the  paper  rediscounted,  and  also  to  lessen  the 
danger  of  the  overeiq)ansion  of  credit.  But  at  the  same  time  care 
must  be  taken  not  to  impose  restrictions  so  stringent  in  character 
that  the  banks  generally  would  not  in  the  ordinary  course  of  their 
business  secure  eligible  p)aper.  The  general  economic  advantage 
of  the  community  must  also  be  considered.  Restrictions  should 
not  be  imposed  which  would  hamper  business  enterprise  or  lead 
to  the  concentration  of  credit  in  the  large  cities. 

Before  making  any  attempt  to  apply  these  various  considera- 
tions to  the  determination  of  the  kind  of  paper  which  should  be 
rediscounted  by  the  reserve  banks,  it  is  necessary  to  give  considera- 


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438  JOURNAL  OF  POUTICAL  ECONOMY 

tion  to  the  two  quite  distinct  principles  upon  which  in  practice 
credit  is  granted  by  banks.  Commercial  credit  may  be  based  either 
upon  specific  transactions,  the  purchase  and  sale  of  particular  com- 
modities, or  upon  the  character  and  business  condition  of  the  bor- 
rower as  determined  from  statements  and  in  other  ways.  Each 
of  these  principles  gives  rise  to  two  methods  of  borrowing — the 
specific  transaction  to  the  discount  of  double-name  mercantile  bills 
and  notes  and  to  loans  on  book  credits,  the  general  standing  of  the 
borrower  to  smgle-name  paper  and  to  the  bank  acceptance. 

The  specific  transaction  has  from  time  inunemorial  been 
regarded  as  a  proper  basis  for  bank  credit,  while  credit  has  been 
granted  in  large  volume  upon  the  other  principle  only  within 
comparatively  recent  times.  Tradition  is  all  in  favor  of  the  specific 
transaction,  and  at  first  sight  it  would  seem  self-evident  that  if 
the  maker's  own  note  is  good  the  addition  of  another  signature 
could  hardly  fail  to  make  it  still  better.  Analysis,  however,  will 
show  that  single-name  paper  may  be  and  in  practice  is  distinctly 
superior  in  very  nearly  every  respect.  This  is  because  the  two 
kinds  of  paper  are  the  outcome  of  two  quite  different  methods  of 
conducting  business  and  that  method  which  occasions  single-name 
paper  is  far  more  conducive  to  sound  and  healthy  trade  and  indus- 
trial conditions. 

Single-name  paper  and  the  bank  acceptance  have  to  an  increas- 
ing extent  taken  the  place  of  double-name  mercantile  paper  all 
over  the  world,  except  in  France  where  three  names  are  required 
at  the  Bank  of  France.  The  payment  of  cash  for  commodities 
has  brought  this  change  about.  In  some  lines  of  business  because 
of  the  marketable  nature  of  the  product,  and  in  others  because 
of  the  strong  position  of  producers,  cash  payments  have  been 
insisted  upon.  In  many  other  lines  of  business  the  obvious  advan- 
tage of  speedy  payment  has  been  sufficient  to  lead  to  the  offer  of 
discotmts  for  cash  much  above  ordinary  rates  for  bank  loans. 
When  purchasers  pay  cash,  obviously  the  double-name  mercantile 
bill  or  indorsed  note  cannot  come  into  existence.  Purchasers  must 
Hther  have  enough  capital  of  their  own  to  make  payments  or  must 
borrow  directly  from  their  banks. 

In  European  countries  there  is  not  a  little  direct  borrowing,  but 


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COMMERCIAL  PAPER  AND  FEDERAL  RESERVE  BANKS     439 

funds  are  also  secured  through  bank  acceptances.  The  bank 
acceptance  is,  however,  nothing  more  than  single-name  paper 
indorsed  by  one  bank  and  discounted  by  another  bank.  The 
general  credit  situation  is  not  appreciably  strengthened  by  this 
arrangement.  If  A  draws  a  bill  on  bank  X,  which  after  acceptance 
is  discounted  by  bank  Y,  and  the  bill  of  B  accepted  by  Y  is  dis- 
counted by  X,  there  is  no  greater  security  for  the  two  loans  taken 
together  than  would  be  given  if  A  had  borrowed  directly  from  X 
and  B  from  Y.  Inasmudi  as  banks  in  this  country  may  not  accept 
bills  drawn  for  domestic  purposes,  borrowers  in  this  country  must 
be  able  to  secure  funds  on  their  own  promissory  notes  if  they  are 
to  continue  to  make  cash  payments. 

Business  is  altogether  likely  to  be  kept  in  a  stronger  condition 
when  cash  payments  are  the  rule  than  when  each  producer  and 
dealer  owes  for  what  he  has  bought  and  is  owed  for  what  he  has 
sold.  Many,  nay  most,  men  are  so  constituted  that  in  periods  of 
active  business  and  general  optimism  they  will  buy  far  more  on 
credit  than  they  would  have  bought  if  required  or  expected  to  pay 
cash.  Mercantile  credit  is  far  more  Hkelv  to  be  extended  beyond 
safe  limits  than  bank  credit,  partly  because  the  rate  of  return  on 
sales  is  greater  than  that  on  bank  loans,  and  even  more  because 
bankers,  comparatively  speaking,  are  a  highly  conservative  class 
of  business  men.  Where  purchasing  ability  is  limited  by  cash 
payments,  it  is  to  be  expected  that  the  danger  of  a  generally 
overextended  condition  of  business  will  be  somewhat  lessened. 
Even  where  cash  discounts  are  not  taken,  dealers  selling  goods  to 
numerous  purchasers  scattered  over  a  wide  territ(^  would  find 
the  handling  of  mercantile  bills  and  notes  far  more  expensive  and 
troublesome  than  book  accounts  and  direct  borrowing  from  the 
banks.  Moreover,  on  account  of  the  various  explicit  or  implied 
warranties  generally  customary  when  goods  are  sold  from  samples 
by  traveling  salesmen,  many  bills  and  notes  would  not  be  negotia- 
ble instruments  and  would  therefore  be  unavailable  for  discounting 
purposes. 

When  this  problem  is  considered  from  the  standpoint  of  the 
banks,  the  same  conclusion  emerges.  If  credit  is  based  upon  specific 
transactions,  there  is  no  means  of  determining  whether  the  amount 


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440  JOURNAL  OF  POUTICAL  ECONOMY 

of  borrowing  on  the  sales  made  has  been  kept  within  safe  limits,, 
having  regard  both  to  the  character  of  the  purchasers  and  to  the 
obligation  of  the  borrowers  to  those  from  whom  they  have  pur- 
chased. Many  of  the  most  notable  failures  in  banking  history 
(the  Gumey  failure  for  example)  have  been  due  to  excessive  dis- 
coimts  of  paper  representing  actual  sales  of  commodities,  because 
purchasers  had  overbought  and  the  borrowing  sellers  were  over- 
burdened with  obligations  on  account  of  what  they  themselves  had 
purchased. 

Borrowing  on  sales  made  on  a  time  basis  creates  contingent 
liabilities,  and  notoriously,  contingent  liabilities  are  likely  to  be 
regarded  as  no  liability  at  all.  Cash  payments  tend  to  HiminJRli 
the  contingent  obligations  of  borrowers.  They  free  the  banks  to  a 
large  extent  from  the  necessity  of  going  behind  the  borrower  to  the 
persons  to  whom  he  has  sold  his  product.  In  the  early  years  of 
the  evolution  of  borrowing  on  single-name  paper  it  was  perhaps 
less  safe  than  double-name  paper.  As  the  practice  has  become 
more  general,  statements  from  borrowers  and  credit  analyses  have 
become  customary  and  they  are  proving  potent  safeguards. 
Gradually  a  more  exact  knowledge  of  the  limits  within  which 
credit  can  be  safely  granted  to  particular  persons  and  in  different 
lines  of  business  is  being  developed.  This  knowledge  can  never 
be  developed  satisfactorily  if  the  spedfic  transaction  is  made 
the  basis  for  credit.  Much  of  course  remains  to  be  done  in  the 
field  of  credit  analysis.  All  borrowers  do  not  furnish  statements. 
They  are  often  incomplete  or  carelessly  put  together,  and  sometimes 
are  dishonest  fabrications.  They  are  also  generally  furnished  at 
too  infrequent  intervals.  Here  the  Federal  Reserve  Board  may 
render  valuable  service  by  setting  up  requirements  regarding 
single-name  paper  which  will  further  the  efforts  of  member  banks 
in  securing  accurate  and  current  information.  The  Board  might 
well  require  annual  and  perhaps  semiaimual  statements  from  all 
borrowers  whose  paper  was  made  eligible  for  rediscount,  and  in 
the  case  of  large  borrowers  an  audit  by  certified  public  accountants. 

Single-name  paper  seems  at  first  sight  far  less  liquid  than 
double-name  paper  arising  out  of  specific  transactions.  In  the 
ordinary  course  of  business  it  is  presumed  that  the  date  of  payment 


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COMMERCIAL  PAPER  AND  FEDERAL  RESERVE  BANKS     441 

will  be  sufficiently  distant  to  permit  the  purchaser  to  complete 
the  transaction  in  connection  with  which  the  purchase  was  made. 
Paper  of  this  character  is  in  a  sense  self-liquidating.  This  is, 
however,  also  true  of  single-name  paper  if  it  has  been  confined 
within  proper  limits.  In  each  instance  a  part  of  the  quick  assets 
of  the  borrower  is  financed,  and  in  each  case  if  the  volume  of  busi- 
ness is  reduced  the  borrower  will  be  able  to  liquidate  a  part  of  his 
obligations.  But  if  the  volume  of  his  dealings  is  not  lessened, 
even  though  particular  loans  may  be  liquidated,  new  loans  will 
have  taken  their  place.  This  is  true  whether  the  borrowing  is  on 
double-  or  on  single-name  paper. 

The  view  has  found  expression  in  some  quarters  that  the  over- 
expansion  of  credit  is  impossible  if  loans  are  based  upon  actual 
transactions.  A  moment's  reflection  will  disclose  the  dangerous 
fallacy  in  this  contention.  Suppose  that  all  sales  were  put  upon 
a  time  basis  and  that  all  the  resulting  receivables  were  discounted 
at  the  banks;  it  is  certain  that  an  amount  of  credit  vastly  greater 
than  that  at  present  granted  would  be  required.  Prices  of  com- 
modities would  advance  and  these  advances  would  furnish  the 
basis  for  a  still  greater  voltmie  of  credit  upon  the  same  physical 
volmne  of  trade.  Of  course  most  persons  would  be  too  wise  to 
discoimt  all  receivables,  but  if  particular  transactions  are  made  the 
primary  basis  for  loans,  and  credit  analysis  instead  of  being 
strengthened  is  allowed  to  lapse,  many  would  take  advantage  of 
the  situation.  The  banks  would  have  no  adequate  check  upon 
excessive  borrowing  by  particular  firms. 

The  universal  use  of  double-name  paper  would  almost  certainly 
prove  to  be  an  especially  grievous  matter  for  farmers  and  other 
small  producers.  The  farmer  now  receives  cash  for  very  nearly 
all  that  he  sells,  but  if  cotton  and  grain  dealers  should  be  imable 
to  borrow  from  banks  in  order  to  pay  cash,  the  farmer  would  be 
obliged  to  accept  notes  and  bills  of  exchange  for  his  products. 
These  he  might  sell  to  his  local  banks,  but  surely  the  credit  of 
dealers  in  agricultural  commodities  can  be  far  more  accur;ately 
determined  by  the  bankers  of  the  cities  who  come  into  direct 
contact  with  them. 

Any  attempt  to  restore  the  use  of  double-name  paper  would 


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442  JOURNAL  OP  POLITICAL  ECONOMY 

iK)t  only  involve  revolutionary  changes  in  existing  banking  arrange- 
ments but  would  also  tend  toward  the  concentration  of  credits 
in  the  large  cities.  Aside  from  the  double-name  p>aper  which 
might  be  created  if  farmers  were  paid  in  notes,  its  use  would  tend 
to  concentrate  generally  desirable  paper  in  the  large  distributing 
centers  of  the  coimtry.  The  sales  by  wholesalers  to  retailers,  for 
example,  now  give  rise  to  a  demand  for  loans  wherever  the  goods 
are  delivered.  Under  the  double-name  arrangement,  the  paper 
would  appear  where  the  sales  offices  of  producers  are  situated, 
chiefly  in  the  large  cities. 

The  only  possible  ground  for  excluding  single-name  paper 
from  rediscounting  would  seem  to  be  the  difficulty  of  making  cer- 
tain that  the  proceeds  of  such  loans  have  in  fact  been  used  or  are 
to  be  used  for  conmaerdal  purposes.  Names  of  two  persons  engaged 
in  businesses  which  would  naturally  make  one  a  purchaser  of  the 
product  of  the  other  provide  fair  evidence  that  the  paper  is  of  the 
right  sort.  In  the  case  of  single-name  paper  the  difficulties  are 
greater  but  not  insuperable — certainly  they  are  not  great  enough 
to  warrant  its  exclusion  from  rediscounting.  It  will  not  be  difficult 
for  the  reserve  banks  to  find  out  whether  the  one  name  is  that  of 
a  person  engaged  in  business  who  might  therefore  be  expected  to 
be  borrowing  for  commercial  purposes.  A  copy  of  the  statement 
of  the  borrower  filed  with  his  own  bank  would  furnish  some  indi- 
cation whether  or  not  his  borrowings  were  beyond  what  might  be 
safely  employed  in  financing  his  current  assets.  Further  regula- 
tions designed  for  the  same  purpose  might  be  set  up,  but  a  detailed 
consideration  of  such  regulations  does  not  fall  within  the  limits 
of  the  present  paper. 

Both  single-  and  double-name  paper  should  be  eligible  for  redis- 
count without  differences  in  rate  for  similar  maturities.  Double- 
name  paper  will  continue  in  use  in  those  parts  of  the  country  in 
which  there  is  a  scarcity  of  banking  credit  relative  to  local  demand 
for  its  use.  It  is,  however,  probable  that  under  the  operation  of 
the  federal  reserve  banking  system  banking  funds  will  flow  more 
readily  between  different  sections  of  the  coimtry.  Consequently 
means  will  become  available  for  the  further  extension  of  the  practice 
of  cash  payments  and  the  use  of  single-name  paper. 


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COMMERCIAL  PAPER  AND  FEDERAL  RESERVE  BANKS     44J 

The  opinion  has  been  eiq)ressed  in  some  quarters  that  there  can 
be  no  broad  discount  market  in  the  United  States  unless  a  consider- 
able amount  of  double-name  paper  becomes  available.  This  view 
is  based  upon  a  complete  misconception  of  the  true  nature  of  a 
discount  market.  A  broad  discount  market  is  one  to  which  many 
borrowers  and  lenders  regularly  resort.  We  have  long  had  such 
a  market  in  this  country  in  normal  times  provided  by  note  brokers. 
In  periods  of  financial  strain,  this  market  has  invariably  become 
seriously  dislocated  on  account  of  the  absence  of  any  central  redis- 
counting  institutions  such  as  are  to  be  provided  through  the 
establishment  of  the  federal  reserve  banks.  In  fact,  unless  single-  . 
name  paper  is  discriminated  against  by  the  Federal  Reserve  Board, 
it  is  probable  that  the  volmne  of  paper  marketed  by  note  brokers 
will  not  be  less  than  in  the  past  and  may  be  very  much  greater.  ^ 
It  is  even  more  certain  that  the  ordinary  banks  will  rediscotmt  for 
each  other  with  greater  freedom.  A  broad  and  stable  discoimt 
market  will  thus  be  secured.  Nothing  more  could  be  accomplished 
through  the  return  to  the  antiquated  practice  of  double-name  trade 
paper. 

Improvement  of  present  practice  in  the  granting  of  conunerdal 
credit  rather  than  revolutionary  changes  is  all  that  is  required 
under  the  terms  of  the  Federal  Reserve  act.  Nothing  more  is 
needed  to  provide  the  reserve  banks  with  paper  which  will  meet 
every  test  of  safety  and  which  will  be  of  general  advantage  to  the 
conununity. 

O.  M.  W.  Sprague 
Hakvasd  UiavBKsrrY 


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THE  PROBABLE  EFFECTS  OF  THE  NEW  CURRENCY 
ACT  ON  BANK  INVESTMENTS 

Any  notable  change  in  the  banking  system  of  a  modem  indus- 
trial country  may  be  expected  to  aflfect  the  accustomed  policies  of 
four  distinct  elements  of  the  community:  the  national  treasury,  the 
users  of  credit,  the  owners  of  the  banks,  and  the  public  at  laige. 
This  is  as  certain  to  occur  in  outcome  of  the  Federal  Reserve  act 
of  December  23,  1913,  as  in  train  of  the  two  other  great  events  in 
owe  banking  history — the  veto  of  the  charter  renewal  of  the  Second 
Bank  of  the  United  States  in  1832  and  the  passage  of  the  National 
Bank  act  in  1863.  The  purpose  of  the  present  paper  is  to  consider 
the  effect  of  the  act  upon  the  banks  themselves,  so  far,  at  least,  as 
concerns  their  actual  investments  and  their  future  investing  policy. 

A  bank's  investment  might  be  defined  as  that  part  of  its 
resources  embodied  in  income-yielding  securities,  acquired  or 
retained  outside  of  the  course  of  its  normal  functions  of  loan  and 
discount.  This  defimtion  serves  to  exclude,  as  non-income  yielding, 
the  banking  plant  and  equipment,  and,  as  only  temporarily  retained, 
the  ordinary  contents  of  the  bank's  portfolio — ^bills  receivable, 
promissory  notes,  and  commercial  paper  generally.  So  delimited, 
the  assets  of  the  national  banks  are  reduced  to  two  considerable 
items:  (i)  United  States  bonds  deposited  to  secure  note  circulation, 
public  deposits,  or  "on  hand,"  and  (2)  securities  other  than  United 
States  bonds  acquired  for  investment  purposes.  On  January  13, 
1914,  the  7,493  national  banks  owned  $792,056,800  United  States 
bonds.  On  the  same  date  their  net  holdings  of  securities  other  than 
United  States  bonds  were  $1,041,698,974.  Combined,  the  two 
items  exceeded  the  total  capital  and  surplus  of  the  banks. 

The  ownership  of  United  States  bonds  by  the  banks  has  been 
a  legal  requirement  since  the  passage  of  the  National  Bank  act. 
Under  the  provision  of  law  that  every  bank  shall  deposit  prescribed 
quotas  of  bonds  before  beginning  business,  the  ownership  of  some 
part  of  their  aggregate  holdings  is  mandatory.  The  preparatory 
requirements  of  the  Aldrich-Vreeland  act  and  the  time  restrictions 


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THE  CURRENCY  ACT  AND  BANK  INVESTMENTS       445 

upon  withdrawal  of  note  circulation  may  be  taken  to  explain  the 
acquisition  and  retention  of  an  additional  amount.  The  policy  of 
the  Treasury  in  depositing  public  fimds  with  the  banks  in  times  of 
monetary  stringency  upon  the  security  of  United  States  bonds  is 
a  further  reason  for  such  purchase.  There  remain  to  be  accoimted 
for  a  very  large  volume  of  United  States  bonds,  the  ownership  of 
which  by  the  national  banks  is  to  be  explained  by  less  specific,  but 
generally  related,  considerations.  The  courtesy  of  Deputy  Comp- 
troller T.  P.  Kane  has  made  it  possible  to  supplement  the  data 
contained  in  the  Comptroller  of  the  Currency's  report  by  exact 
information  as  to  one  phase,  at  least,  of  this  problem.  On  Octo- 
ber 21,  1913,  the  7,509  national  banks  of  the  United  States  had 
United  States  bonds  on  deposit  with  the  Treasurer  of  the  United 
States  to  secure  note  circulation  to  the  amoimt  of  $737,480,840. 
Of  this  aggregate,  the  deposits  made  in  accordance  with  the  pro- 
vision requiring  minimum  bond  deposits  prior  to  beginning  business 
were  only  $149,604,345,  leaving  what  has  been  described  as 
"excess"  bond  deposits  to  the  amoimt  of  $587,876,495  to  secure 
corresponding  note  circulation.  To  this  must  be  added  the  further 
holdings  ($50,610,110)  deposited  as  security  for  public  deposits  and 
also  an  amoimt  ($6,199,710)  "on  hand."' 

The  actual  occasion  and  course  of  such  "excess"  holdings  invite 
much  more  careful  and  detailed  analysis  than  has  been  accorded 
thereto.  In  general  it  may  be  ventured  that  the  disposition  of  the 
banks  to  take  out  circulation  in  excess  of  the  amount  of  mandatory 
bond  deposits  has  been  induced  by  considerations  of  banking  profit; 
but  that  even  after  any  considerable  profit  has  ceased  to  accrue 
therefrom,  the  maintenance  of  note  circulation,  involving  of  course 

*  The  number  of  banks,  capital,  United  States  bonds  deposited,  amount  required^ 
and  excess  deposited,  by  geographical  dividons,  are  as  follows  (October  21, 191 3): 


Divkkm 

Number 

Capital 

Bonds 
Deposited 

Bonds 
Requited 

Excess 
Deposited 

New  England 

Eastern 

sax 
S 

$103,086,700 

337.a56MOX 

X74A19.8SO 

283,482,700 

72,577.500 

89,320,105 

629,653 

$  63,814,100 
212,052,060 
i40,893.4ao 
X97»3a3,700 

316,250 

$  14,040,87s 
36,996,225 
32,732,007 
38,547.175 
16,344,375 
10301,275 
82,413 

$  49,773.225 
175.055,835 
108,161,413 

Middle  

1s8.776.525 

Weitem 

39.647.755 

56,227.005 

233,837 

Pacific 

Hawaii 

Total 

7,599 

$1,059,402,908 

$149,604^5 

$S87,876»A0S 

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446  JOURNAL  OF  POLITICAL  ECONOMY 

the  purchase  and  deposit  of  bonds,  has  come  to  be  regarded  as 
proper  procedure  for  a  normal  conservative  bank  desirous  of  con- 
ducting its  affairs  in  harmony  with  the  spirit  and  intent  of  the 
National  Bank  act  and  its  traditional  administration. 

Under  the  Federal  Reserve  act  neither  of  the  two  purposes 
which  have  induced  the  banks  to  acquire  and  hold  United  States 
bonds — note  circulation  and  public  deposits — is  finally  retained. 
The  provision  of  law  requiring  bond  deposit  as  a  condition  prece- 
dent to  the  issue  of  a  charter  to  a  member  bank  is  repealed,  and 
note-issuing  power  is  conferred  upon,  and  will  ultimately  be  exclu- 
sively exercised  by,  the  district  banks.  Although  the  right  of  the 
Secretary  of  the  Treasury  to  use  member  banks  as  depositaries  is 
specifically  preserved,  Treasury  funds  are  likely  imder  ordinary 
drcimistances  to  be  deposited  with  district  banks.  The  ultimate 
operation  of  the  system  thus  seems  to  contemplate  no  other  use  for 
United  States  bonds  by  member  banks  than  as  ordinary  income- 
yielding  investment  assets. 

Bearing  in  mind  the  conditions  and  terms  imder  which  a  large 
part  of  the  bonds  were  acquired,  such  withdrawal  of  use  threatened 
heavy  loss  to  the  banks.  Moreover,  from  the  Treasury's  stand- 
point, the  imfavorable  effect  upon  market  price  of  rapid  or  urgent 
liquidation  of  such  securities  was  imdesirable.  These  considera- 
tions induced  the  insertion  in  the  new  measure  of  elaborate  pro- 
visions looking  to  the  gradual  conversion  and  redemption  of  the 
banks'  holdings  of  United  States  bonds.  Two  years  after  the  pas- 
sage of  the  act,  and  at  any  time  during  a  period  of  twenty  years 
succeeding,  that  is  to  say  from  December  23, 1915,  to  December  23, 
1935,  any  member  bank  may  signify  its  intention  to  retire  the  whole 
or  part  of  its  outstanding  circulation  and  to  sell  the  corresponding 
deposited  bonds.  The  bonds  so  released  are  to  be  acquired  by  the 
federal  reserve  banks  as  the  basis  of  a  corresponding  issue  of  cir- 
culating notes.  There  are,  however,  important  limitations  upon 
this  conversion  privilege.  Purchase  of  the  bonds  by  the  reserve 
banks  is  not  obligatory,  but  subject  to  the  discretion  of  the  Federal 
Reserve  Board.  Not  more  than  $25,000,000  bonds  in  the  aggregate 
may  be  purchased  in  any  one  year.  It  is  not  clear,  in  the  event  of 
applications  for  retirement  exceeding  $25,000,000,  how  purchase 


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TEE  CURRENCY  ACT  AND  BANK  INVESTMENTS       447 

will  be  made,  whether  according  to  priority  of  application  or  to 
proportionate  allotment,  or  by  discretionary  selection.  Finally, 
not  even  the  entire  $25,000,000  is  available,  since  included  therein 
are  such  bonds  possessing  circulating  privilege  as  the  reserve  banks 
may  acquire  independently  and  utilize  by  deposit  for  taking  out 
'^circulating  notes."  Such  bond-secured  circulating  notes  of  the 
federal  reserve  banks  are  to  be  distinguished,  of  course,  from  the 
federal  reserve  notes,  based  upon  collateral  security. 

The  new  measure  thus  contemplates  the  ultimate  taking-over 
by  the  reserve  banks  at  par  and  interest  of  a  large  part,  possibly 
all,  of  the  United  States  bonds  now  held  by  the  member  banks. 
To  prevent  contraction  or  to  avoid  change,  this  taking  over  is 
spread  over  a  long  term  of  years,  with  an  expiry  on  the  banks' 
option  discouraging  possible  reluctance  to  withdraw  circulation. 
In  the  interim  the  market  price  of  such  bonds  will  be  maintained 
by  the  right  of  the  district  banks  to  buy  in  the  open  market  or 
elsewhere  either  as  a  basis  for  circulation  or  for  resale.  On  the 
whole,  the  provisions  of  the  measure  seem  designed  not  so  much 
to  relieve  the  banks  of  their  holdings  as  to  maintain  the  price  of  the 
bonds.  This  is  sound  financial  policy  and  a  course  probably  not 
ynacceptable  to  the  banks. 

More  important  both  in  absolute  amount  and  in  problematic 
future  are  the  banks'  holdings  of  securities  other  than  United 
States  bonds.'  On  January  13, 1914,  the  net  volume  of  such  securi- 
ties was  $1,041,698,974 — the  largest  absolute  amoimt  and  the  third 
largest  proportion  relative  to  total  banking  assets  held  at  a  corre- 
sponding season  in  the  history  of  the  national  banking  system. 
Approximately  the  same  aggregate  ($1,094,185,585)*  was  distributed 
on  Jime  4, 1913,  the  latest  available  date,  as  follows:  railroad  bonds 
$345,204,195;  industrial  C' all  other")  bonds,  $220,120,541;  public 
utility  bonds,  $197,459,668;  state,  county,  and  municipal  bonds, 
$175,345,382;  various  other  securities,  $156,055,799. 

Authority  to  make  investments  in  bonds,  although  not  expressly 

>Tbe  growth  of  such  holdings  is  analyzed  by  the  present  writer  in  a  paper  on 
"The  Security  Holdings  of  National  Banks"  in  the  American  Economic  Renew, 
December,  1913,  from  which  the  paragraphs  that  follow  have  been  extracted. 

'No  deduction  is  made  of  "bonds  borrowed"  ($43t3i5>4<^5)« 


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448  JOURNAL  OF  POLITICAL  ECONOMY 

conferred,  has  been  held  to  be  included  in  the  powers  of  a  national 
bank  to  discount  and  negotiate  promissory  notes,  bills  of  exchange, 
and  other  evidences  of  debt,  and  this  administrative  construction 
has  been  confirmed  by  judicial  decision  that  national  banks  are 
authorized  to  purchase  corporate  and  municipal  bonds  as  such  evi- 
dences of  debt.  Whatever  doubt  may  have  remained,  in  the  ab- 
sence of  adjudication  by  the  United  States  Supreme  Court,  was 
de  facto  dispelled  in  1908  by  the  provisions  of  the  Aldrich-Vreeland 
act  looking  to  the  possible  acceptance  of  bonds  other  than  United 
States  bonds  as  security  for  additional  note  circulation.' 

The  motives  leading  to  such  investments  have  been  in  some 
cases  specific  and  local — as  the  purchase  of  the  bonds  of  a  particular 
state  or  dty  for  tax-exemption  purposes,  or  to  serve  as  the  legal  or 
practical  requisite  for  securing  public  or  semi-public  deposits.  So, 
too,  the  profitable  banking  account  of  a  private  corporation  may 
sometimes  be  more  certainly  retained  by  participation  in  its  finan- 
cing. But  such  purchases,  as  well  as  the  bonds  acquired  by  the 
taking-over  of  hypothecated  securities,  explain  only  a  fractional 
part  of  the  banks'  aggregate  holdings. 

As  familiar  banking  practice,  the  purchase  and  ownership  of 
such  securities  by  the  national  banks  has  been  commonly  explained 
upon  the  theory  of  a  "secondary  reserve."  Sound  banking  policy, 
it  is  held,  dictates  that  cash  reserves  should  be  supplemented  by 
income-producing  investments  of  indubitable  safety  and  easy 
marketability — available  for  quick,  favorable  conversion  into  cash 
when  monetary  drain  threatens  exhaustion  of  the  primary  reserve. 
Bonds — state,  county,  municipal,  railroad,  public  utility,  and  indus- 
trial— ^have  been  the  only  forms  of  investment  legally  available,  or 
at  least  available  in  sufficient  amoimt,  for  this  purpose.  Such 
inference  is  confirmed  by  the  fact  that  the  country  banks  have 
throughout  invested  a  larger  proportion  of  their  resources  in  bonds 
than  have  the  dty  banks. 

.  In  accordance  with  the  theory  of  a  "secondary  reserve,"  the 
proportion  of  their  resources  which  the  banks  might  be  expected 
to  maintain  in  the  form  of  such  securities  should  be — apart  from 
seasonal,  cyclical,  and  sectional  fluctuations — reasonably  constant, 

*  Report  of  the  Cohtptrotter  of  the  Cwrency,  1909,  p.  9. 


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THE  CURRENCY  ACT  AND  BANK  INVESTMENTS       449 

As  a  matter  of  fact,  practically  from  the  establishment  of  the 
national  banking  system  to  the  present  time  the  ratio  of  security 
holdings  to  banking  resources  has  increased.  Occasionally  there 
has  been  decline;  but  thereafter  the  tendency  has  been  resumed 
and  a  higher  ratio  attained.  Nor  has  the  gain  in  relative  impor- 
tance of  securities  been  at  the  expense  of  any  one  item  or  group  of 
items  of  banking  assets.  One  element  after  another  has  tended  to 
increase  or  diminish  in  response  to  specific  episodes  in  our  monetary 
history;  but  the  point  of  arrest  or  reversal  has  been  far  less  remote. 
Although  the  banks  have  applied  an  increasing  proportion  of 
their  resources  to  investment  securities,  this  movement  has  been 
continuous  in  tendency  rather  than  uniform  or  regular  in  pace. 
An  examination  of  the  changes  in  ratio  from  year  to  year  indicates 
that  the  gain  has  been  markedly  greater  in  certain  periods  than  in 
others.  The  principle  of  variation  which  might  be  supposed  to 
prevail,  in  accordance  with  the  theory  of  ''secondary  reserve,"  is 
that  the  banks  buy  bonds  rapidly  in  dull  times  when  cash  accumu- 
lates and  business  demands  slacken,  and  slowly  or  not  at  all  (or 
indeed  liquidate  some  part  of  such  holdings  as  they  have)  when 
business  is  active  and  cash  in  demand.  The  actual  course  of  varia- 
tion, as  exhibited  in  the  experience  of  the  national  banks,  both  in 
the  aggregate  and  in  groups,  has  been  notably  different  from  this 
simple  or  absolute  movement  and  can  be  siunmarized  in  the  follow- 
ing tentative  statement:  The  national  banks  buy  bonds  freely  in 
periods  of  high  business  activity  characterized  by  attendant  cir- 
cumstances of  large  cash  deposits,  active  markets,  pool  operations, 
security  flotations,  and  syndicate  imderwritings.  This  upward 
movement  is  checked  by  the  fatigue  which  follows  speculative 
excess  and  foreshadows  the  advent  of  finandal  disturbance.  Panic 
strain  is  neither  anticipated  nor  relieved  by  the  liquidation  of 
securities.  With  the  prostration  that  marks  the  end  of  spasm, 
securities  are  again  freely  acquired — ^in  part  the  enforced  taking- 
over  of  hypothecated  collateral,  in  part  the  productive  reinvestment 
of  swollen  reserves.  This  prostration  is  succeeded  by  depression, 
marked  by  smaller  cash  deposits  and  inactive  financing,  during 
which  the  banks  add  but  slowly  to  their  bond  holdings.  If  there 
be  premature  recovery,  securities  are  bought  more  actively;  but 


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4SO  JOURNAL  OF  POLITICAL  ECONOMY 

with  the  relapse  into  duhiess  this  tendency  in  turn  is  arrested. 
Not  until  business  activity  is  resumed  on  a  large  scale  are  bonds 
again  bought  with  rapidity  and  the  cycle  resiimed. 

It  thus  appears  that  the  banks  have  continuously  devoted  an 
increasing  part  of  their  resources  to  the  purchase  of  bonds,  in  con- 
trast to  the  movement  of  loans  and  discoimts  and  cash  reserves, 
imtil  the  amoimt  so  invested  now  practically  equals  their  paid-in 
capital  stock.  The  occasions  for  such  purchase,  as  evidenced  by  a 
comparison  of  alternating  periods  of  rapid  and  slow  acquisition, 
have  been  not  only  the  accumulation  of  unemployed  funds  and  the 
absence  of  other  channels  of  profitable  employment  in  periods  of 
business  prostration,  but  also  the  attractiveness  and  pressure  of  new 
security  flotations  by  reason  of  syndicate  participation,  anticipated 
rise  in  value,  or  mere  corporate  contacts,  in  times  of  business  ac- 
tivity. Securities  so  acquired  have  failed  notably  to  serve  as  a 
form  of  secondary  reserve  to  meet  the  demands  of  expanding  busi- 
ness or  panic  strain,  being  non-liquid  either  in  seasonal  or  in 
cyclical  requirement. 

The  question  now  arises  as  to  the  extent  to  which  this  bond- 
buying  policy  of  the  banks  is  likely  to  be  affected  by  the  new  law. 
Distinction  can  here  as  elsewhere  be  drawn  between  absolute  ten- 
dency and  actual  conduct — ^between  what  the  banks  might  reason- 
ably be  expected  to  do  and  what  they  will  actually  do  in  practice. 
It  is  clear  that  the  chief  ostensible  occasion  for  such  purchase — 
the  fact  that  bonds  are  the  only  eligible  forms  of  investment  in 
times  of  idle  money — will  be  affected  by  the  availability  of  accepted 
commercial  paper.  It  is  also  evident  that  changes  in  reserve 
requirements  and  in  exchange  and  clearing  arrangements  will  leave 
the  country  banks  with  ampler  fimds  for  investment — z,  condition 
not  coimterbalanced  by  corresponding  alterations  on  the  part  of 
the  dty  banks. 

Too  sanguine  expectations  have  perhaps  been  voiced  as  to  the 
development  of  a  free  discount  market.  As  it  involves  an  almost 
radical  change  in  the  methods  of  conducting  business,  some  time 
is  likely  to  elapse  before  the  prevailing  system  of  open  credits  and 
trade  discoimts  will  be  replaced  by  a  system  of  domestic  bills  and 
bank  acceptances.    Even  thereafter  it  is  not  clear  that  paper  of 


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THE  CURRENCY  ACT  AND  BANK  INVESTMENTS       451 

this  kind  will  be  available  at  the  required  times  in  sufficient  volume 
to  meet  the  demands  of  banks. 

Moreover,  we  must  face  the  fact  familiar  to  every  practical 
banker  that  the  banks  buy  bonds,  not  only  to  make  otherwise  idle 
money  income-yielding,  but  also  to  profit  by  a  prospective  rise  and 
to  participate  in  modem  corporate  financing.  Neither  practice  is 
in  conformity  with  the  soundest  banking  principles.  In  so  far  as 
the  motive  of  such  investment  is  the  lure  of  larger  interest  return 
and  of  speculation  for  the  rise,  the  practice  is  indefensible.  In  so 
far  as  the  purchase  of  bonds  by  the  banks  has  grown  up  as  an  inci- 
dent of  modem  corporate  financing — ^induced  by  the  requirements 
of  the  corporations  rather  than  by  the  necessities  of  the  banks — 
the  occasion  itself  is  vaUd  but  the  mode  of  its  exercise  improper. 
An  essential  function  of  an  efficient  money  market  is  the  temporary 
holding  of  security  issues  in  the  interval  between  original  emission 
and  definite  absorption  by  investors.  But  this  service  cannot  be 
economically  imdertaken  nor  adequately  performed  by  commercial 
banks.  Aside  from  matters  of  equipment  and  competence,  there 
is  an  inevitable  coincidence  in  time  between  the  demand  for  such 
fiscal  service  and  the  requirement  for  ampler  commercial  accommo- 
dation— with  the  result  of  strain  and  cost  to  the  credit-xising 
community. 

Accustomed  as  the  banks  are  to  bond-buying  and  its  accompany- 
ing incidents,  delayed  in  operation  and  imdetermined  in  amount  as 
the  development  of  a  discount  market  is  certain  to  be,  the  prevail- 
ing bond-buying  practice  of  the  banks  is  likely  to  be  checked  rather 
than  stopped.  It  is  this  consideration  indeed  which  justifies  the 
question  whether  some  restrictive  legislation  upon  the  freedom  of 
the  banks  to  make  such  purchases  might  not  properly  figure  in 
future  legislation  as  a  reasonable  device  to  aid  the  successful  opera- 
tion of  tlfe  proposed  changes  in  banking  procedure. 

A  final  consideration  has  to  do  with  the  effect  of  the  new  measure 
upon  the  securities  which  the  banks  now  actually  own  rather  than 
with  their  future  policy  with  respect  to  such  investments.  The 
same  influences  which  are  likely  to  check  further  bond-buying  may 
be  counted  upon  to  encourage  liquidation  of  present  holdings — the 
proceeds  to  be  utilized  either  for  distribution  among  stockholders 


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452  JOURNAL  OP  POUTICAL  ECONOMY 

or  for  reinvestment  in  commercial  paper  of  a  kind  available  for 
rediscoimt  by  the  reserve  banks.  This  liquidation  tendency  will  in 
turn  be  delayed  by  the  circumstance  which  has  heretofore  defeated 
the  use  of  security  holdings  as  efficient  secondary  reserve  and  which 
has  effected  practically  uninterrupted  increase  in  their  absolute  and 
relative  amoimt — customary  piurchase  of  securities  by  the  banks  at 
high  price  levels  and  reluctant  sale  at  low  price  levels. 

Bearing  in  mind  the  fimdamental  soimdness  of  the  new  act,  the 
comparative  banking  experience  of  other  countries,  and  the  tremen- 
dous adaptability  of  American  business  character,  there  is  every 
reason  for  anticipating  the  most  salutary  effects  from  its  operation. 
Certainly  the  measure  carries  no  menace  to  the  owners  of  national 
banks  and  indeed  promises  correction  of  certain  imwholesome  tend- 
encies in  bank  investments. 

Jacob  H.  Hollander 

Johns  Hopkins  University 


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THE  ELASTICITY  OF  NOTE  ISSUE  UNDER  THE  NEW 
CURRENCY  LAW 

To  anyone  who  has  been  interested  in  currency  reform  for,  say, 
twenty  years,  probably  nothing  is  more  striking  than  the  change 
in  emphasis  which  has  taken  place  among  the  advocates  of  reform 
during  this  period.  The  typical  reform  plan  of  the  earlier  time,  for 
example  the  so-called  Baltimore  plan  brought  forward  in  1894, 
devoted  itself  almost  exclusively  to  providing  a  thoroughly  elastic 
note  issue,  based  on  ordinary  assets.  In  contrast,  the  new  law 
has  as  its  central,  primary  object  the  organization  into  at  least 
regional  unity  of  something  like  the  entire  banking  system  of  the 
country.  Doubtless  this  difference  in  the  two  reform  plans  was 
not  altogether  due  to  a  fundamental  difference  of  opinion  with 
respect  to  what  would  be  the  ideal  scheme.  The  reformers  of  the 
earlier  period  were  not  indifferent  to  the  need  for  centralized 
organization  in  the  banking  system.  But  they  considered  any 
scheme  involving  a  central  bank,  like  the  old  Bank  of  the  United 
States,  quite  chimerical;  and  they  were  probably  right.  But  times 
change;  and  men  change  with  them.  For  one  reason  or  another 
we  have  all  become  more  tolerant  of  centralization  in  business 
matters,  as  also  more  tolerant  of  that  increase  in  governmental 
control  which  increased  centralization  in  business  seems  to  make 
necessary.  With  at  least  fairly  general  approval,  a  system  of 
regional  organization  has  been  set  up,  involving  a  very  high  degree 
of  centralization  and  a  very  high  degree  of  governmental  control. 
But  with  this  change  in  the  method  of  reform,  it  became  inevitable 
that  the  more  important  ends  which  earlier  schemes  sought  to 
accomplish  by  giving  the  note  a  high  degree  of  elasticity  should  be, 
in  no  small  measure,  attained  by  other  means.  In  consequence, 
the  need  for  elasticity  in  the  note  issue  will  be  much  diminished 
imder  the  new  law.  Nevertheless,  it  is  admitted  that  this  need 
will  not  disappear  altogether.  Elasticity  in  the  note  issue  will  be 
wanted  partly  to  assist  in  utilizing  the  newer  methods  of  dealing 
with  the  difficulties  involved  and  partly  to  supplement  those  newer 

453 


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454  JOURNAL  OF  POUTICAL  ECONOMY 

methods.  Accordingly,  the  question  **How  far  does  the  note  issue 
under  the  new  system  seem  likely  to  prove  an  elastic  one  ?"  is  still 
important. 

From  the  beginnings  of  agitation  for  currency  reform  the  advo- 
cates of  elasticity  have  recognized  more  or  less  clearly  two  kinds: 
(i)  what  we  may  call  seasonal  or  ordinary  elasticity,  and  (2)  what 
we  may  call  emergency  elasticity.  By  the  former  was  meant  the 
power  of  a  note  issue  to  adjust  its  volume  to  those  moderate  changes 
in  the  need  for  money  which  show  themselves  in  the  course  of  an 
ordinary  year.  By  emergency  elasticity  was  meant  the  power  of  a 
note  issue  to  adjust  its  volume  to  those  extraordinary  changes  in  need 
which  connect  themselves  with  the  typical  banking  panic.  The 
evils  which  it  was  believed  that  seasonal  or  ordinary  elasticity 
would  remedy  were  principally  (i)  the  siunmer  shortage  of  cur- 
rency for  moving  crops,  together  with  the  temporary  but  more  or 
less  serious  stringency  in  the  New  York  money  market  which 
accompanies  that  shortage,  and  (2)  the  plethora  or  excess  of 
currency  which  usually  appears  three  or  f oiur  months  after  the  crop- 
moving  period  has  terminated.  The  evils  which  emergency  elas- 
ticity was  expected  to  relieve  were  principally  (i)  the  stringency 
which  precipitates  the  panic,  (2)  the  money  famine  consequent  on 
general  bank  suspension  after  the  panic  has  fidly  developed,  and 
(3)  the  glut  of  currency  which  attends  the  depression  following 
a  panic,  often  leading  to  excessive  exports  of  gold  and  thus  endan- 
gering the  whole  credit  system  of  the  coimtry. 

Let  us,  now,  take  up  seasonal  or  ordinary  elasticity,  and  ask 
ourselves  whether  the  new  notes  are  likely  to  possess  this  charac- 
teristic. First,  how  about  the  expansibility  needed  to  supply 
adequate  funds  for  crop-moving  ?  At  this  point,  it  must  at  once 
be  admitted  that  the  new  currency  does  not  meet  the  demands  of 
the  case  in  quite  the  thoroughgoing  way  which  the  earlier  schemes 
thought  to  be  necessary.  The  ideal  of  the  earlier  plans  was  to 
provide  an  adequate  and  easily  utilized  power  of  issue,  located  at 
the  very  place  where  the  need  for  expansion  is  felt,  i.e.,  in  the 
local  bank.  The  new  law  gives  up  this  idea  entirely.  The  local 
bank  will  not  have  power  to  issue  the  new  currency  at  all.  In  so 
far  as  its  customers  are  to  get  any  benefit  from  that  currency  the 


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ELASTICITY  OF  NOTE  ISSUE  UNDER  NEW  LAW        455 

benefit  must  come  through  two  chamiels  which  the  coimtry  bank 
could  use  in  getting  the  needed  fimds,  even  if  the  currency  had  no 
expansibility,  namely,  (i)  calling  in  its  balances  kept  with  banks 
more  centrally  situated,  and  (2)  borrowing  from  such  central  banks. 
In  other  words,  the  new  power  of  issue  will  help  out  in  l^e  crop- 
moving  period  merely  because  it  will  put  the  reserve  banks  in  a 
better  position  to  respond  to  the  call  of  the  coimtry  banks  for  the 
return  of  their  own  balances  and  for  advances  on  discounted  paper. 
Judged  from  this  point  of  view  only,  the  elasticity  provided  by 
the  new  law  is  doubtless  adequate.  If  the  reserve  banks  have  not 
kept  themselves  in  a  position  to  meet  the  calls  of  their  country 
members  from  money  already  in  possession,  they  will  surely  be 
able  to  put  themselves  into  such  a  position  by  expanding  their  issue 
of  notes.  In  one  sense,  then,  the  new  issue  has  adequate  expan- 
sibility for  ordinary  needs.  There  still  perhaps  remains  a  doubt 
whether  effective  elasticity  is  after  all  assured,  for  it  is  not  clear  that 
the  country  bank  which  needs  money  for  crop-moving  purposes 
will  have  the  wherewithal  to  get  advances  from  the  reserve  bank — 
that  is,  that  it  will  have  paper  of  the  proper  kind  and  in  sufficient 
amount  for  rediscount.  However,  it  seems  probable  that  the  act  as 
finally  passed  has  met  this  need  by  providing  that  agricultural 
paper  shall  be  admitted  on  rather  more  liberal  terms  than  paper 
arising  out  of  ordinary  commercial  or  manufacturing  business. 
If  this  be  so,  it  would  seem  that  the  provisions  of  the  new  law  for 
securing  one  phase  of  seasonal  elasticity — expansibility— are  fairly 
adequate. 

Passing,  now,  to  the  other  side  of  elasticity — ^i.e.,  contractility — 
can  we  say  as  much  ?  Will  the  new  issues  promptly  retire  when 
their  special  task  is  over?  Prima  fade,  the  verdict  here  is  less 
favorable  than  in  the  previous  case.  In  general,  there  are  two 
principal  processes  by  which  a  note  circulation  may  be  contracted: 
(i)  driving  the  notes  out  of  circulation,  and  (2)  drawing  them  out. 
In  so  far  as  the  former  process  is  depended  upon,  means  are  devised 
to  make  sure  that  the  notes  shall  persistently  return  to  the  issuer 
even  against  his  will — they  shall  have  good  homing  power.  By 
the  second  process,  it  is  made  to  the  advantage  of  the  issuer  of  the 
notes  to  hasten  their  withdrawal  himself. 


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4S6  JOURNAL  OF  POUTICAL  ECONOMY 

As  respects  insuring  contractility  by  the  former  of  these  pro- 
cesses, the  act  certainly  cannot  claim  to  promise  high  efficiency. 
The  driving-out  process  requires  roughly  the  fulfilment  of  two  con- 
ditions: (i)  keeping  the  channels  for  the  return  of  notes  to  the 
issuer  fairly  open,  and  (2)  supplying  outsiders  with  a  motive  for 
sending  the  notes  home.  As  regards  the  former  of  these  condi- 
tions, the  new  system  probably  is  all  right.  The  return  of  the 
notes  to  the  issuer  seems  not  to  be  impeded  by  the  inconvenience 
or  expensiveness  of  the  process.  All  member  banks  and  all  reserve 
banks  must  receive  these  notes;  and  the  reserve  banks  will  probably 
have  branches  within  easy  reach  of  any  part  of  the  district.  Hence, 
any  holder  desiring  to  get  notes  back  to  the  issuing  bank  will  find 
the  process  easy  and  the  way  open.  But  good  homing  power 
requires  more  than  this.  It  requires,  namely,  that  adequate 
motives  be  supplied  to  people  generally,  or,  at  least,  to  banks  gen- 
erally, for  seeing  that  the  notes  get  back.  It  is  not  enough  that  the 
track  be  smooth;  people  must  desire  to  use  it.  Now,  earlier  plans 
for  securing  elasticity  relied  on  two  principal  motives  for  inducing 
holders  to  send  notes  back  to  the  issuer:  (i)  the  desire  of  such 
holders  to  make  room  for  their  own  notes,  and  (2)  their  desire  to 
exchange  money  which  has  various  limitations  imposed  upon  it 
for  money  which  is  free  from  those  limitations.  It  is  plain  that  the 
new  system  makes  only  a  limited  use  of  the  former  of  these  meth- 
ods of  procedure.  WUkin  the  district  for  which  any  particular 
reserve  bank  is  the  central  bank,  this  particular  force  will  be 
practically  inoperative;  for  the  power  to  issue  notes  on  the  basis 
of  common  assets  is  not  given  to  any  but  the  reserve  banks,  and  the 
profitableness  of  the  power  to  issue  the  old  type  of  note  has  always 
proved  too  low  to  induce  banks  generally  to  take  much  trouble  to 
get  their  own  notes  into  circulation.  As  between  the  reserve  banks 
of  the  different  districts,  however,  this  particular  motive  will,  of 
course,  be  more  or  less  in  evidence,  since  these  reserve  banks  will 
all  be  competitors  for  this  opportunity.  But  even  here  the  motive 
in  question  will  not  play  a  large  part,  since  more  effective  means 
for  insuring  the  return  of  the  notes  from  outside  reserve  banks  are 
provided  in  other  parts  of  the  law. 


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ELASTICITY  OF  NOTE  ISSUE  UNDER  NEW  LAW        457 

As  regards  the  second  motive  for  returning  idle  notes — that  is, 
the  desire  to  exchange  a  money  subject  to  various  limitations  or 
disabilities  for  one  not  subject  to  those  limitations — the  new  act 
does  somewhat  better  than  it  does  in  respect  to  the  first  motive. 
It  is,  indeed,  true  that,  within  their  own  district,  no  special  dis- 
ability, like  being  forbidden  to  be  paid  out  by  other  banks,  is  put 
on  the  new  notes.  But  they  are  always  subject  to  the  disability 
of  not  being  legal  reserve  money  in  the  case  of  federal  banks;  and 
hence  such  banks  will  be  more  or  less  disposed  to  return  the  notes 
issued  by  their  own  reserve  banks,  in  order  to  exchange  them  for 
reserve  money.  It  may  be  doubted,  however,  whether  in  ordi- 
nary times  this  will  prove  a  very  potent  force,  since  country  banks 
will  usually  keep  reserves  considerably  in  excess  of  legal  require- 
ments, and  so  will  not  need  to  discriminate  nicely  between  the 
two  sorts  of  money.  As  between  different  districts,  the  case  for 
the  homing  power  of  the  new  notes  is  rather  stronger,  since  reserve 
banks  are  prohibited  from  paying  out  the  notes  of  other  reserve 
banks  under  penalty  of  a  10  per  cent  tax.  Even  here,  however, 
the  provisions  are  none  too  adequate.  While  the  notes  of  a  par- 
ticular reserve  bank  must  not  be  paid  out  by  the  reserve  banks 
of  other  districts,  there  is  no  prohibition  against  their  being  paid 
out  by  the  member  banks  of  other  districts;  and  it  is  doubtful 
whether  there  is  sufficient  motive  to  induce  said  member  banks  of 
other  districts  to  send  in  these  notes  to  their  own  reserve  banks  and 
so  start  them  on  their  homeward  journey.  The  desire  to  exchange 
money  which  cannot  be  used  as  reserve  for  that  which  can  be 
would  have  some  force;  but,  under  many  circumstances,  it  would 
probably  prove  rather  inadequate. 

Another  disability  which  contributes  to  the  homing  power  of  a 
bank  note,  and  which  is  actually  used  in  the  case  of  our  old  note,  is 
not  used  with  this  new  note — I  mean,  the  fact  that  they  are  not 
receivable  for  customs  dues.  The  decision  to  omit  this  provision 
was  perhaps  wise;  but  it  throws  out  a  potent  motive  for  sending 
notes  home,  and  thus  throws  away  an  opportunity  to  make  better 
provision  for  their  contractility.  On  the  whole,  then,  it  must  be 
acknowledged  that,  in  so  far  as  homing  power  is  dependent  on 


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4S8  JOURNAL  OF  POLITICAL  ECONOMY 

giving  to  outsiders  strong  and  persistent  motives  for  sending  notes 
home,  the  new  law  is  not  altogether  satisfactory. 

We  have  seen  that  there  is  very  little  in  the  new  system  to  secure 
that  the  notes  shall  have  good  homing  power — shall  get  home  by 
what  we  have  called  the  driving-in  process.  Is  the  system  better 
off  as  respects  the  drawing-in  process?  Are  matters  so  arranged 
that  the  issuing  bank  will  have  the  power  and  the  desire  to  with- 
draw its  notes — or  at  least  contract  the  currency  proportionately — 
when  the  need  for  the  notes  has  fallen  off  ?  As  respects  the  first 
part — making  sure  that  the  issuing  bank  shall  have  the  power  to 
retire  its  notes,  or  at  any  rate  to  effect  a  corresponding  contraction 
of  the  currency — the  new  system  is  practically  perfect,  as  indeed 
was  the  old  one.  That  is,  any  reserve  bank  desiring  to  contract 
its  note  obligations  may  at  its  discretion  deposit  with  the  federal 
reserve  agent  reserve  notes,  gold,  or  lawful  money.  Obviously, 
this,  if  not  strictly  a  contraction  of  its  note  circulation,  at  least 
brings  about  the  desired  contraction  of  the  general  circulation. 

When,  however,  we  consider  the  provisions  of  the  new  law  for 
insuring  that  reserve  banks  shall  desire  to  contract  their  circula- 
tion when  the  special  need  has  passed,  we  find  that  the  law  does 
not  promise  quite  so  well.  The  favorite  device  for  accomplishing 
this  result  has  been,  of  course,  a  tax  on  issues,  similar  to  the  5  per 
cent  tax  of  the  German  system.  Apparently,  the  new  law  provides 
for  something  equivalent  to  this  in  the  shape  of  an  interest  charge 
by  the  Federal  Reserve  Board,  the  rate  to  be  fixed  by  said  board. 
How  far  this  device  will  prove  effective  in  practice  it  is  not  safe  to 
predict.  In  order  that  it  should  induce  the  banks  to  contract  their 
circulation,  drcimistances  must  have  arisen  imder  which  the 
issuing  bank  would  be  earning  on  its  outstanding  notes  a  profit 
smaller  than  the  tax  itself.  Now,  it  does  not  seem  certain  that  an 
excessive  issue  of  notes  would  necessarily  bring  about  this  condi- 
tion. In  the  first  place,  in  the  absence  of  good  homing  power,  a 
volume  of  notes  in  excess  of  business  needs  would  not  necessarily 
cause  an  accumulation  of  those  notes  in  the  vaults  of  the  bank 
issuing  them.  Secondly,  so  long  as  member  banks  are  free  to  keep 
their  balances  in  banking  institutions  other  than  their  reserve 
banks,  an  excess  of  notes  would  not  necessarily  cause  the  general 


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ELASTICITY  OF  NOTE  ISSUE  UNDER  NEW  LAW        459 

cash  holdings  of  reserve  banks  to  be  abnormally  large.  For,  so 
long  as  the  ordinary  New  York  banks  are  permitted  to  pay  interest 
on  bankers'  balances,  country  banks  will  to  a  considerable  extent 
keep  their  balances  with  these  outside  New  York  banks;  and  it 
seems  not  unlikely  that  the  excessive  monetary  stock  thus  accumu- 
lating in  New  York  City  would,  instead  of  getting  into  the  hands 
of  the  New  York  reserve  bank,  largely  remain  in  the  hands  of  the 
outside  banking  institutions  and  be  employed  more  or  less  as  it 
has  been  in  the  past,  that  is,  in  financing  doubtful  enterprises  and 
supporting  excessive  speculation.  But  if  the  reserve  banks  do  not 
feel  the  pressure  of  excessive  issues  in  the  shape  of  accumulations 
of  notes  or  some  form  of  money  in  their  own  vaults,  they  may  con- 
ceivably be  able  to  invest  advantageously  all  the  funds  in  their 
possession,  and,  in  that  case,  the  rate  of  interest  charged  by  the 
Federal  Reserve  Board  will  not  furnish  an  adequate  motive  for  the 
retirement  of  their  issues.  Doubtless,  however,  this  may  in  some 
d^ee  be  answered  by  saying  that  even  an  excess  which  was  felt 
only  outside  the  reserve  bank  would,  after  all,  compel  the  reserve 
bank  to  contract  its  issues,  since  it  would  lower  the  rate  of  dis- 
coimt  so  greatly  that  reserve  banks  could  not  profitably  invest  their 
ordinary  holdings,  and  consequently  would  wish  to  get  rid  of  the 
interest  charge.  Perhaps  this  is  true;  but  it  would  by  no  means 
insure  the  prompt  and  full  contraction  which  most  reformers  have 
considered  desirable. 

From  the  foregoing  it  would  seem  that  one  of  the  devices  for 
inducing  the  reserve  banks  to  contract  their  issues  after  the  need 
for  them  had  passed — ^that  is,  charging  interest  upon  such  issues — 
is  not  certain,  at  any  rate,  to  prove  adequate;  it  will  not  surely 
eliminate  the  winter  plethora  in  New  York  City  which  is  supposed 
to  stimulate  and  support  excessive  stock  speculation.  But  the 
new  law  contains  another  provision  which  may  be  viewed  as  a 
device  for  supplying  the  issuing  banks  with  a  motive  for  contract- 
ing their  issues,  namely,  the  requirement  that  such  banks  shall  keep 
a  gold  reserve  equal  to  40  per  cent  of  their  issues.  Is  this  likely 
to  prove  eflEective?  Probably  not.  Whatever  might  be  true  in 
panicky  times,  it  seems  certain  that  in  an  ordinary  year  the  gold 
holdings  of  a  reserve  bank  will  be  much  above  40  per  cent  of  its 


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46o  JOURNAL  OF  POLITICAL  ECONOMY 

note  issue.  If  this  be  true,  the  maintenance  of  this  40  per  cent 
could  become  difficult  only  when  the  excess  of  money  was  so  great 
as  to  cause  a  dangerous  exportation  of  gold  from  the  country,  and 
this  surely  would  show  a  very  inadequate  degree  of  contractility. 
In  short,  the  new  law  does  not  insure  that  issuing  banks  shall  be 
sufficiently  disposed  to  draw  in  their  notes  any  more  than  it 
insures  that  outsiders  will  drive  them  in.  It  would  seem,  then, 
that  the  new  law  does  not  promise  to  give  to  the  note  issue 
the  degree  of  contractility  which  has  hitherto  been  considered 
desirable.  In  other  words,  there  is  some  point  in  the  fear  expressed 
by  many  bankers  that  the  new  law  will  result  in  note  inflation — at 
least  in  so  far  as  the  avoiding  of  this  danger  is  dependent  on  the 
contractility  of  the  note  issue.  Very  likely,  however,  the  possi- 
bility of  such  inflation  is  sufficiently  guarded  against  by  other  pro- 
visions of  the  law. 

We  have  discussed  the  adequacy  of  the  new  note  issue  in  req)ect 
to  seasonal  or  ordinary  elasticity.  We  pass  on  now  to  consider  its 
adequacy  in  respect  to  emergency  elasticity — the  elasticity  which 
enables  a  currency  to  adjust  itself  to  those  extraordinary  fluctua- 
tions in  need  which  mark  a  banking  panic  and  the  depression  that 
follows.  Broadly  speaking,  it  is  pretty  certain  that  at  this  point 
the  new  law  will  get  a  more  favorable  verdict  than  in  the  previous 
case.  As  pointed  out  in  an  earlier  connection,  the  banking  panic, 
when  fully  developed,  gives  rise  to  three  difficulties  and  so  to  three 
needs:  (i)  fimds  to  relieve  the  antecedent  stringency  which  threat- 
ens a  complete  collapse  of  the  credit  structure;  (2)  a  circulating 
mediimi  for  ordinary  trade  when  a  general  suspension  of  payment 
by  the  banks  has  brought  on  a  money  famine;  and  (3)  a  prompt 
and  thoroughgoing  contraction  of  the  circulation  in  the  depression 
which  follows  the  panic.  Now,  there  surely  can  be  no  doubt  that, 
under  the  new  law,  the  availability  of  an  issue  sufficient  in  volume 
instantly  to  relieve  the  antecedent  stringency,  and  so  to  put  a  stop 
to  a  panic  before  it  had  developed  serious  dimensions,  is  assured. 
In  fact,  it  is  not  at  all  improbable  that,  xmder  the  new  S3rstem,  the 
reserve  banks  will  be  able  to  check  the  development  of  such  a  panic 
at  the  very  outset  without  increasing  at  all  their  note  issues.  But, 
if  this  does  not  prove  true — ^if  it  turns  out  that  more  currency  is 


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ELASTICITY  OF  NOTE  ISSUE  UNDER  NEW  LAW        461 

needed  for  this  purpose — there  woidd  seem  to  be  no  shadow  of 
doubt  that  the  new  system  will  insure  the  forthcoming  of  such  cur- 
rency both  of  a  quality  and  in  a  quantity  which  will  be  fully  ade- 
quate to  the  task  put  upon  it.  (i)  The  notes  to  be  issued,  being 
obligations  of  the  federal  Treasury,  will  be  as  acceptable  as  gold 
even  on  the  eve  of  a  panic.  (2)  There  is  no  limit  to  the  absolute 
amount  of  these  notes.  (3)  The  practical  limit  set  by  the  require- 
ment that  discoimted  paper  shall  be  furnished  as  a  basis  for  their 
issue  is  of  no  real  significance,  since  such  paper  will  undoubtedly  be 
vastly  greater  in  volimie  than  any  need  which  could  arise.  Accord- 
ingly, there  can  be  no  doubt  that  the  new  system  provides  all  the 
expansibility  needed  to  abort,  or  reduce  to  comparative  harmless- 
ness,  any  panic  which  might  arise. 

A  word  now  with  respect  to  the  second  need  which  an  emer- 
gency circulation  is  supposed  to  meet,  that  is,  an  ordinary  circu- 
lating mediimi  for  trade  when  banks  have  by  common  consent 
suspended  payment.  In  the  first  place,  if  we  are  right  in  supposing 
that  the  new  law  will  surely  prevent  any  panic  from  reaching  such 
a  degree  of  intensity,  it  is  obvious  that  we  shall  not  have  occasion 
to  meet  the  particular  diflSculty  here  xmder  consideration — that 
our  note  issue  will  not  be  called  on  to  display  this  particular  sort 
of  elasticity.  If,  however,  it  be  supposed  that  the  foregoing  pre- 
diction does  not  turn  out  to  be  correct — ^if  experience  proves  that 
panics  can  still  go  so  far  as  to  cause  banks  generally  to  suspend 
payments,  to  hold  on  to  every  form  of  reasonably  solid  money, 
and  to  try  to  satisfy  the  public  with  substitutes — our  verdict  for  the 
new  currency  would  necessarily  be  less  favorable.  We  should  have 
to  admit  that  the  new  law  does  little  or  nothing  to  relieve  such  a 
situation.  Broadly  speaking,  the  new  money  will  be  altogether 
too  good  to  meet  this  particular  need.  Banks  that  had  reached  a 
stage  of  panic  sufficiently  intense  to  cause  them  to  suspend  pay- 
ment— to  hoard  the  ordinary  forms  of  money — ^would  be  sure  to 
hoard  money  as  good  as  those  notes  are  boimd  to  be.  That  is,  the 
new  issue  would  immediately  pass  into  hoards,  as  did  the  green- 
backs which  the  Secretary  of  the  Treasury  reissued  during  the 
panic  of  1873,  ^^d>  therefore,  would  bring  little  if  any  relief  to 
the  cxirrency  famine  which  had  developed.    In  fact,  it  is  almost 


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462  JOURNAL  OP  POLITICAL  ECONOMY 

impossible  to  conceive  any  form  of  note  fitted  for  this  particular  task 
except  one  which  was  so  bad  that  there  was  no  danger  of  its  being 
hoarded.  That  is,  the  only  proper  way  to  meet  this  particular 
need  of  a  severe  panic  is  to  make  sure  that  it  does  not  arise  at  all; 
and,  in  this  respect,  the  new  law  promises  well. 

We  come,  finally,  to  the  third  need  which  emergency  elasticity 
is  supposed  to  meet,  that  is,  a  prompt  and  great  contraction  of  the 
circulation  when  the  panic  has  passed  and  the  inevitable  business 
depression  consequent  upon  such  a  panic  has  set  in.  Here,  again, 
though  not  in  the  same  degree  as  in  the  last  case,  if  the  new  law 
proves  as  successful  as  many  conservative  students  e:q)ect,  the 
need  in  question  will  be  little,  if  at  all,  experienced.  We  shall 
usually  escape  the  extreme  business  inflation  of  the  antepanic 
period;  the  panic  itself  will  be  much  abated,  if  not  completely 
eliminated;  and,  in  consequence,  the  trade  reaction  which  natu- 
rally follows  a  panic  will  be  much  diminished  in  intensity.  If  this 
turns  out  to  be  true,  the  circulation  will  never  again  show  such  an 
extraordinary  glut  as  characterized  the  winter  of  1893-94.  Never- 
theless, it  can  hardly  be  doubted  that,  after  even  an  incipient  panic, 
there  will  be  some  reaction,  and  consequently  a  more  or  less  pleth- 
oric condition  of  the  cxirrency  will  follow.  Will  the  new  issue 
have  sufficient  contractility  to  meet  this  need?  Earlier  in  this 
paper  we  have  seen  that  the  conditions  attached  to  the  new  issue 
are  in  general  not  favorable  to  contractility,  in  that  they  do  not 
provide  for  either  the  prompt  driving  home  or  the  prompt  drawing 
home  of  the  notes  when  the  necessity  for  their  issue  is  past.  Out- 
siders lack  adequate  motives  for  sending  the  notes  home;  issuers 
lack  adequate  motives  for  calling  them  home.  The  case  for  emer- 
gency contractility,  however,  is  somewhat  better  than  the  case  for 
ordinary  contractility.  First,  it  is  probable  that  the  homing  power 
of  the  note  will  prove  greater  at  such  a  time  than  in  an  ordinary 
year,  for,  at  such  a  time,  outside  banks  will  not  be  able  to  find 
investments  for  their  funds,  since  speculative  trading  will  dis- 
appear altogether  and  business  generally  will  be  at  a  very  low  ebb. 
Again,  it  seems  certain  that  the  issuing  bank  will,  in  this  case,  have 
more  than  the  usual  motive  for  bringing  about  a  contraction  of  the 
circulation.    The  chief  reason  why  such  a  bank  may  not  be  eager 


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ELASTICITY  OP  NOTE  ISSUE  UNDER  NEW  LAW        463 

in  ordinary  times  to  hasten  the  retirement  of  its  notes  is  the  fact 
that,  provided  the  notes  do  not  accumulate  in  its  own  vaults,  such 
a  bank  will  gain  more  by  using  the  funds  in  its  possession  to  make 
loans  than  it  would  by  using  them  to  retire  notes,  assimiing  that 
the  interest  charge  made  by  the  Federal  Reserve  Board  is  not 
placed  excessively  high.  But  it  is  practically  certain  that,  in  the 
depression  which  follows  a  panic,  no  reserve  bank  will  have  oppor- 
tunities for  keeping  all  of  its  funds  busy;  and  since,  in  that  case, 
the  interest  charge,  however  small,  will  be  a  dead  loss,  the  bank  will 
have  adequate  motive  for  effecting,  as  promptly  as  possible,  an 
adequate  contraction  of  its  note  liabilities.  This  motive  would  be 
still  further  strengthened  should  the  glut  prove  sufficient  to  cause 
a  decided  drain  of  gold,  since,  in  that  case,  the  reserve  banks  will 
find  difficulty  in  maintaining  the  required  40  per  cent  reserve.  On 
the  whole,  then,  we  seem  warranted  in  affirming  that,  as  respects 
emergency  elasticity,  the  new  notes  will  give  no  serious  disappoint- 
ment. 

Finally,  as  respects  elasticity  in  general,  though  the  note  issue, 
viewed  by  itself,  does  not  seem  quite  fitted  to  satisfy  the  tests 
which  an  old-fashioned  advocate  of  elasticity  is  inclined  to  impose 
upon  it,  yet,  when  we  take  the  new  law  as  a  whole,  it  seems  not 
unreasonable  to  affirm  that  it  promises  to  accomplish,  directly  or 
indirectly,  most  of  the  ends  which  we  had  hoped  to  attain  through 
elasticity  and  hence  promises  to  give  us  a  system  which  in  essentials 
is  truly  and  adequately  elastic. 

F.  M.  Taylor 

Umivessitt  or  MicmoAM 


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TRADE  UNIONISM  EST  THE  UNITED  STATES 

THE  ESSENCE  OF  UNIONISM  AND  THE  INTERPRETATION  OF 

UNION  TYPES 

In  the  preceding  paper,  on  the  general  character  and  types  of 
trade  unionism,'  two  leading  propositions  were  advanced  as  work- 
ing hypotheses  for  the  interpretation  of  the  facts:  first,  that  union- 
ism is  not  a  unified,  consistent  entity;  secondly,  that  what  is  called 
imionism  is  in  reality  the  manifold  expression  of  a  series  of  distinct 
and  essentially  contradictory  types  and  varieties.  Such  types  and 
varieties  were  distinguished  tentatively  with  respect  to  both  struc- 
ture and  function,  and  the  leading  representatives  in  each  division 
were  briefly  characterized  as  they  appear  to  exist  in  the  United 
States  today.  Thus,  structurally,  the  union  complex  was  analyzed 
into  six  main  forms  of  organization,  each  represented  by  a  series  of 
territorial  and  sometimes  industrial  imits;  viz.,  the  craft  union,  the 
trades  union,  the  compound  craft  union,  the  quasi-industrial  union, 
the  industrial  union,  and  the  labor  union,  Fimctionally,  the 
attempt  was  made  to  distinguish  four  main  types  and  four  sub- 
ordinate varieties;  viz.,  business  unionism,  uplift  unionism,  revolts- 
tionary  unionism,  and  predatory  unionism  as  types  f  socialistic  and 
quasi-anarchistic  unionism  as  varieties  of  the  revolutionary  type, 
hold-up  and  guerrilla  unionism  as  variants  of  the  predatory  type. 

This  discussion  of  the  general  character  and  types  of  unionism 
was  professedly  tentative  and  suggestive.  At  its  close  the  writer 
admitted  that  strong  objections  might  apparently  be  urged  against 
the  hypotheses  advanced.  Therefore,  in  view  of  their  supreme 
importance  in  connection  with  the  whole  interpretation  of  unionism, 
our  judgments  of  it,  and  any  practical  proposals  with  regard  to  it, 
the  promise  was  made  to  subject  their  validity  at  once  to  the  induct- 
ive or  historical  test.  Specifically  stated,  this  requires  us,  if  our 
hypotheses  are  to  be  maintained,- to  prove  by  reference  to  imdis- 
puted  facts,  past  and  present,  that  these  \mion  types  do  exist  as 

'  Journal  of  Political  Economy,  XXn,  201  (March,  1914). 
'  A  possible  fifth  type  was  also  suggested,  viz.,  dependent  umomsm. 

464 


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TRADE  UNIONISM  IN  THE  UNITED  STATES  465 

described,  and  that  their  nature  and  relationships  are  such  as  to 
allow  of  no  escape  from  the  conclusion  that  unionism  is  essentially 
a  series  of  independent  group  manifestations  which  from  the  prac- 
tical standpoint  cannot  be  interpreted,  evaluated,  and  judged  as  a 
simple  consistent  whole  or  as  a  succession  of  more  or  less  accidental 
and  temporary  variations  from  a  single  normal  type. 

At  first  blush  the  process  of  proof  here  required  appears  to  be 
very  simple.  It  would  seem  necessary  merely  to  furnish  imdis- 
puted  evidence  of  the  existence,  past  and  present,  of  imions  or 
imion  groups  possessing  the  characteristics  of  these  assimied  types. 
A  moment's  thought,  however,  makes  it  clear  that  something  other 
than  this  is  required  to  prove  that  imionism  is  in  reality  non- 
imitary  in  character.  For  it  is  evident  that  the  mere  successive 
existence  of  such  variations  in  the  past  might  in  itself  indicate  only 
adaptations  of  one  and  the  same  unionism  to  a  changing  environ- 
ment, while  their  present  existence  alone  might  be  evidence  either 
of  survivals  of  past  adaptations  destined  shortly  to  disappear  or 
of  merely  temporary  aberrations  from  the  normal.  In  either  case, 
if  nothing  more  were  adduced  it  would  be  possible  still  to  regard 
imionism  as  a  single  definite  entity,  since  successive  adaptations  of 
a  species  to  alterations  in  environment  do  not  necessarily  destroy 
its  identity,  nor  do  concurrent  variations,  imless  these  become  per- 
manently established  as  conflicting  or  rival  forms. 

What,  then,  are  the  real  tests  or  criteria  of  distinct  imion  types, 
and  what  is  the  process  of  proof  necessary  to  establish  their  exist- 
ence ?  It  is  evident  that  to  answer  this  question  with  assurance, 
and  therefore  to  remove  all  doubt  in  regard  to  the  mode  of  procedure 
here  demanded,  a  more  thorough  imderstanding  is  required  of  the 
nature  and  interdependence  of  these  imion  variants  which  we  have 
described.  This  involves  a  positive  interpretation  of  \mionism  in 
terms  of  its  general  f imctional  and  structural  character  and  relation- 
ships. Let  us  then  attempt  to  indicate  clearly  the  essential  quality 
and  conditions  of  existence  of  this  combination  of  function  and 
structure  called  \mionism. 

Students  in  general  have  approached  imionism  on  the  structural 
side,  and  have  treated  it  as  though  the  union  were  essentially  an 


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466  JOURNAL  OF  POLITICAL  ECONOMY 

organic  iinit  with  certain  fxmctional  attributes;  and  hitherto  we 
have  spoken  of  the  functional  and  structural  forms  as  though  they 
were  independent  and  co-ordinate  expressions  of  unionism.  Both 
of  these  attitudes  are  xmtenable.  From  the  standpoint  of  motives 
and  ends,  as  well  as  from  that  of  its  character  and  significance  as  a 
social  problem,  the  real  unionism — ^its  primary  and  essential 
expression — ^is  fxmctional.  The  structural  form  b  altogether 
secondary  and  dependent.  This  will  be  made  evident  by  a  brief 
analysis  of  the  motives  which  actuate  prospective  unionists  and  the 
manner  and  purposes  for  which  the  union  is  brought  into  being. 

What  concerns  men  primarily  in  their  social  relationships  as 
ends  to  be  striven  for  is  not  forms  of  organization  but  standards 
of  living — ^using  this  phrase  to  cover  not  merely  the  narrow  economic 
aspect  of  life  but  social  standards  generally,  including  moral  and 
judicial  as  well  as  material  conditions,  rights,  and  privil^es.  As 
social  beings  we  are  all  concerned  primarily  with  the  problem  of 
living  as  presented  by  these  conditions  and  standards;  and  our 
attention  is  focused  on  the  solution  of  this  problem  in  terms  of  our 
particular  needs  and  the  peculiar  circumstances  which  we  have  to 
face  and  overcome.  In  our  efforts  to  comprehend  and  solve  this 
problem  each  of  us  develops  more  or  less  completely  and  sjrste- 
matically  an  interpretation  of  life — an  explanation  of  things  as  they 
are  in  terms  of  the  conditions  and  relationships  of  which  we  are 
conscious  and  the  forces  which  determine  these.  And  along  with 
this  interpretation  there  tends  to  grow  up  in  the  mind  of  each  some 
plan  or  scheme  for  the  modification  or  complete  alteration  of  the 
situation  in  the  furtherance  of  his  special  ideals  or  interests. 

The  wage-worker  is  no  exception  in  respect  to  all  this.  His 
hopes  and  fears  center  primarily  about  such  matters  as  employ- 
ment, wages  and  hours,  conditions  of  work,  modes  of  remuneration 
— ^in  short,  the  most  vital  concerns  which  immediately  touch  his 
present  and  future  well-being — and  the  economic,  ethical,  and  juridi- 
cal conditions,  standards,  and  forces  that  practically  determine 
these  matters;  and  his  mind  focuses  on  the  problem  of  living  as 
presented  in  these  terms.  In  his  attempt  to  comprehend  and  solve 
this  problem  he  also  develops  some  sort  oL  social  viewpoint — an 
interpretation  of  the  social  situation  as  viewed  from  the  stand- 
point of  his  peculiar  experiences  and  needs — and  a  set  of  beliefs 


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TRADE  UNIONISM  IN  THE  UNITED  STATES  467 

concerning  what  should  and  can  be  done  to  better  the  situation, 
especially  as  it  bears  upon  the  conditions  of  living  which  he  faces.' 

The  scope  and  character  of  this  viewpoint  and  the  mode  of  its 
development  in  the  mind  of  the  worker  varies  with  the  individual. 
If  he  b  by  nature  and  training  thoughtful  and  independent,  he  may 
work  out  his  own  conclusions,  subject  of  course  to  the  imconsdous 
influence  of  the  general  body  of  opinion  about  him,  and  his  inter- 
pretation and  solution  may  cover  the  widest  range,  including  not 
only  the  immediate  economic  conditions  and  relationships  which 
confront  him,  but  the  ethical  and  legal  foundations  upon  which 
these  rest.  One  indeed  frequently  encounters  workmen  who  have 
thus  possessed  themselves  of  a  complete  and  often  esoteric  social 
philosophy. 

If,  on  the  other  hand,  the  individual  worker  is  intellectually 
untrained  and  sluggish,  his  view  is  likely  to  be  relatively  narrow, 
concerned  mainly  with  his  own  immediate  conditions  and  relation- 
ships, and  taken  over  bodily  from  the  current  opinion  of  his  asso- 
ciates. In  such  cases  he  is  likely  to  reflect  merely  the  opinions  of 
some  stronger  or  more  expansive  personality  who  has  constituted 
himself  a  leader.  But  whatever  its  range  or  quality,  and  however 
it  may  have  been  acquired,  each  worker  possesses  and  is  guided  by 
some  sort  of  social  philosophy  rooted  in  his  peculiar  temperament 
and  in  his  immediate  experiences  and  relationships. 

It  is  evident  that  imder  these  circumstances  workers  similarly 
situated  economically  and  socially,  closely  associated  and  not  too 
divergent  in  temperament  and  training,  will  tend  to  develop  a 

'  The  statement  in  the  text  does  not  of  couise  attempt  to  cany  the  analysb  back 
to  its  ultimate  basis.  To  quote  a  comment  by  Professor  Geoige  H.  Mead:  ''This 
process  is  fundamentally  a  process  of  the  coming  to  a  new  self-consciousness  on  the 
part  of  the  laborer  in  tiie  changing  industrial  conditions  in  which  he  finds  himself. 
It  is  a  great  mistake  to  identify  this  fundamental  impulse  with  the  occasions  which  give 
it  expression.  The  individual  laborer  can  become  conscious  of  himself  only  in  so  for 
as  he  realizes  himself  in  the  common  attitude  of  the  group  over  against  the  employing 
class  or  another  group  of  workers,  and  the  idiole  history  of  the  develc^nnent  of  society 
has  shown  that  this  negative  attitude  must  precede  any  consciousness  of  common 
interests  which  bind  this  group  to  others  in  society.  The  trade  union  is  then  one  step 
in  the  process  of  socializing  the  laborers  brou^^t  about  under  the  modem  process  of 
industry,  and  goes  through  the  same  stages  through  which  the  conununity  itself  has 
passed  in  advancing  from  hostile  groups  into  a  conscious  oiganization  of  diverse  but 
interacting  elements  of  society." 


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468  JOURNAL  OF  POUTICAL  ECONOMY 

common  interpretation  of  the  social  situation  and  a  common  solu- 
tion of  the  problem  of  living.  This  may  come  about  gradually  and 
spontaneously,  or  it  may  be  the  apparently  sudden  outcome  of  some 
crisis  in  the  lives  of  the  men  concerned.  It  may,  for  example, 
resxilt  immediately  from  some  alteration  for  the  worse  in  the  condi- 
tions of  living,  or  an  interference  with  what  are  considered  estab- 
lished rights  and  modes  of  action,  of  which  cases  in  point  woxild  be 
wholesale  discharges  from  employment  or  the  discharge  of  favorite 
individuals,  a  lowering  of  the  wage  rate,  the  requirement  of  more 
onerous  or  more  dangerous  conditions  of  work,  a  sudden  rise  in  the 
prices  of  necessities,  some  police  action  or  legal  decision  which 
touches  the  workers  on  the  raw  with  respect  to  modes  of  action  or 
their  assimied  dignity  and  rights  as  men.  Or  this  crystallization  of 
sentiment  may  come  about  as  the  result  of  the  appearance  from 
without  or  the  rise  from  within  the  group  of  a  purposeful  agitator 
and  leader — a  man  whose  personality  or  position  commands  atten- 
tion, who  is  capable  of  putting  into  general  form  the  discontents  of 
the  individuals  and  offering  a  positive  solution  of  their  difficulties. 
But  whatever  the  immediate  cause,  the  result  is  the  same.  A  social 
group  is  thus  constituted,  marked  off  by  a  more  or  less  imified  and 
well-developed  but  effective  viewpoint  or  group  psychology. 

As  soon  as  this  state  of  affairs  has  been  reached  group  action  is 
a  natural  consequence.  Those  whose  interpretations  of  the  situa- 
tion and  solutions  of  the  problem  are  sufficiently  alike  to  make 
co-operation  apparently  possible,  spontaneously  or  under  purpose- 
fxil  leadership  band  themselves  together  for  common  effort  and 
mutual  assistance.  They  come  together  thus,  not  primarily  to 
establish  and  vindicate  a  form  of  organization — the  organization  is 
merely  means  to  end — ^but  to  establish  and  maintain  certain  con- 
ditions of  living — to  put  through  a  remedial  program  based  on  their 
common  interpretation  of  the  social  situation  viewed  from  the 
standpoint  of  their  immediate  conditions  and  needs. 

Thus  the  imion  comes  into  existence.'  It  goes  back  in  its  genesis 
ultimately  to  the  common  needs  and  problems  of  the  wage-workers; 

X  Umonism  then  is  not  a  thing  which  exists  only  among  wage-workeis.  In  its 
broadest  sense  it  may  be  as  pervasive  as  social  grouinng.  It  may  exist  wherever  in 
society  there  is  a  group  of  men  with  consciousness  of  common  needs  and  interests  i^Murt 
from  the  rest  of  society.    What  distinguishes  kade  unionism  from  other  forms  is  that 


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TRADE  UNIONISM  IN  THE  UNITED  STATES  469 

it  arises  immediately  out  of  the  consdousness  of  the  commion  or 
group  character  of  those  needs  and  problems;  it  exists  for  conmion 
action  looking  to  the  betterment  of  the  living-conditions;  it  appears 
primarily  as  a  group  interpretation  of  the  social  situation  in  which 
the  workers  find  themselves,  and  a  remedial  program  in  the  form 
of  aims,  policies,  and  methods;  the  organization  and  the  specific 
form  or  structure  which  it  takes  are  merely  the  instnmients  which 
the  group  adopts  for  propagating  its  viewpoint  and  putting  its  pro- 
gram into  effect.  In  short,  looking  at  it  from  the  standpoint  of 
motives  and  ends,  as  well  as  from  that  of  its  character  as  a  social 
problem,  the  heart  and  core  of  the  thing — ^its  essential  aspect  or 
expression — ^is  fxmctional.  Its  structural  or  organic  expression  is 
secondary  and  dependent.' 

it  expresses  the  viewpoint  and  interpretation  of  groups  of  wage-workers.  As  a  matter 
of  fact  we  have  no  lack  of  unions  of  employers,  unions  of  merchants,  unions  of  farmers, 
and  unions  of  professional  men.  The  curious  thing  is  that  men  who  themselves  are 
members  of  one  sort  of  union,  in  so  many  cases  cannot  be  made  to  believe  that  unions 
of  another  sort  are  anything  but  lumatural  and  vicious  products. 

'  In  practice  and  specifically,  the  genesb  of  unions  is  of  course  a  matter  of  much 
variation,  and  the  actual  order  of  events  is  not  always  as  stated  in  the  text.  Spas- 
modic action  often  precedes  organization,  and  organization  frequently  antedates  any 
general  or  rationalized  formulation  of  viewpoint,  interpretation,  and  program.  Fre- 
quently blind  and  spasmodic  revolt  against  some  particular  grievance  or  condition  is 
die  first  objective  step  in  the  formation  of  a  union.  This  revolt  may  be  brought  about 
by  the  personal  influence  of  one  or  a  few  men,  and  the  crowd  may  act  more  as  the 
result  of  imitation  or  emotion  than  from  dear  consciousness  of  a  common  viewpoint 
and  problem;  after  which  a  paid  organizer  appears  and  attempts  to  teach  the  workers 
or  a  select  number  the  union  viewpoint  and  program,  and  to  effect  a  permanent  organi- 
zation. But  even  in  such  cases  some  consciousness  of  common  needs  and  problems 
has  preceded  action  and  organization,  and  unless  the  conditions  are  present  for  the 
development  of  a  common  viewpoint,  interpretation,  and  program,  and,  further, 
unless  the  organization  is  adapted  to  make  these  effective,  it  will  not  work.  Unless 
these  elements  are  present  some  organization  may  indeed  be  created,  but  it  will  soon 
disintegrate.  This  accounts,  indeed,  for  the  great  proportion  of  unions  that  prove 
altogether  ephemeral.  They  are  based  on  the  temporary  existence  of  special  and 
exceptional  circumstances,  or  are  the  work  of  one  or  two  men  whose  special  influence 
has  for  the  time  created  the  semblance  of  a  group  psychology  among  a  body  of  men 
incapable  of  continuous  common  thought  and  action.  Under  these  circumstances,  as 
soon  as  the  special  exigency  is  past,  or  the  special  leadership  withdrawn,  the  group  is 
bound  to  break  up.  In  other  words,  the  native  consdousness  in  the  group  member- 
ship of  actually  existing  common  needs  and  problems  is  primal.  Without  it  and 
without  adaptation  to  it  no  organization  can  long  exist  and  function.  In  the  most 
vital  sense,  then,  the  statement  in  the  text  represents  the  true  genesis  of  the  imion 
and  the  true  relation  of  its  functional  and  structural  expressions. 


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470  JOURNAL  OP  POLITICAL  ECONOMY 

If,  then,  functional  and  structural  types  of  trade  unionism  exist, 
we  have  here  the  most  definite  indications  of  what  must  be  their 
nature  and  relationships.  Assxmiing  their  existence,  the  fimctional 
type  is  simply  a  specific  case  of  group  psychology.  It  is  a  social 
interpretation  and  remedial  program  held  by  a  group  of  wage- 
workers.  Obviously  there  may  be  as  many  of  these  fimctional 
types  as  there  are  groups  of  workers  with  vitally  different  social 
viewpoints  and  plans  of  action.  The  structural  type,  on  the  other 
hand,  is  simply  one  of  the  organic  methods  by  means  of  which  the 
functional  types  seek  to  maintain  discipline  among  their  members 
and  to  put  into  effect  their  programs  of  action.  Evidently  there 
may  be  as  many  structural  types  as  there  are  distinct  organic  modes 
of  combination  effective  for  these  purposes.  The  functional  type 
is  unionism  of  a  certain  species.  The  structural  type  is  one  organic 
form  in  which  it  may  clothe  istelf .  In  other  words,  the  structural 
type  is  related  to  the  fimctional  type  somewhat  as  government  is 
related  to  the  nation.  It  is  altogether  a  subordinate  and  dependent 
manifestation. 

But  do  such  types  exist  ?  So  far  as  concerns  structural  types, 
this  has  been  generally  conceded.  What  can  we  say,  then,  in  regard 
to  the  functional  aspect  of  the  case  ?  Let  us  carry  the  analysis  a 
step  farther.  It  is  evident  that,  once  the  viewpoint  stated  above 
is  comprehended  and  accepted,  we  should  look  for  distinct  and  con* 
flicting  varieties  of  unionism,  functionally  speaking.  We  should 
expect  these  to  appear  wherever  and  whenever  there  exist  groups 
of  workers  with  well-defined  and  conflicting  social  viewpoints. 
Moreover,  we  should  expect  to  find  them  existing  not  only  in  suc- 
cession but  concurrently,  and  not  only  in  different  industries  but 
among  the  workers  in  the  same  industry  and  even  in  the  same 
craft.  For  as  soon  as  we  concede  that  the  union  is  in  essence  an 
expression  of  group  psychology  we  realize  that  it  will  get  its  specific 
character  not  merely  from  environmental  conditions  but  from  these 
in  conjimction  with  the  temperamental  characteristics  of  the 
workers  concerned,  and  that  consequently  imion  variants  are  likely 
to  appear  with  a  variation  in  either  of  these  factors.  In  short,  we 
should  expect  to  find  concurrent  functional  variation  and  conflict 
to  be  among  the  chief  features  of  contemporary  unionism  in  a 


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TRADE  UNIONISM  IN  THE  UNITED  STATES  471 

country  like  our  own,  with  its  diversity  of  environmental  conditions 
and  its  richness  of  radal  and  temperamental  contrasts. 

And  the  facts  amply  confirm  the  deduction:  not  only  does  the 
student  of  American  unionism  encoimter  different  imion  groups  in 
different  industries  with  widely  varying  viewpoints  and  interpreta- 
tions, but  different  unions  with  varjdng  aims,  polides,  and  methods 
contending  for  the  domination  of  the  same  industry.  And  nothing 
is  more  characteristic  of  the  situation  than  the  descent  of  this  form 
of  conflict  into  the  particular  imion  where  rival  groups  or  factions 
struggle  for  the  control  of  the  organization  in  the  interests  of  con- 
flicting interpretations  and  programs.  The  bitterness  of  these  con- 
tests and  their  continuance  over  long  periods  and  under  different 
sets  of  leaders  leaves  no  doubt  that  they  spring,  in  part  at  least, 
from  the  existence  of  irreconcilable  viewpoints.' 

Conflicting  fimctional  variants  then  certainly  do  exist  in  the 
union  complex.    But  are  these  variants  union  types  in  the  sense 

'  Ab  illustrations  of  the  statement  in  the  text  the  following  specific  cases  of  union 
conflict  based  mainly  on  differences  of  viewpoint  and  program  may  be  dted:  In  the 
eighties  and  early  nineties  the  American  Federation  of  Labor,  claiming  to  rq)resent 
in  general  what  we  have  called  business  unionism,  was  engaged  in  a  struggle  for  su- 
premacy with  the  Knights  of  Labor,  the  assumed  proponent  of  idealistic  uplift  union- 
ism, and  since  1905  the  American  Federation  has  had  to  encounter  the  bitter  opposition 
of  ihe  quasi-anarchistic  Industrial  Workers  of  the  World.  During  the  most  of  this 
time  the  control  of  the  Federation  has  been  more  or  less  seriously  threatened  by  the 
socialistic  unionists  working  within  the  organization.  The  I.W.W.  has  been  in  a  chronic 
state  of  internal  conflict  since  its  establishment  in  1905.  In  1908  it  split  into  two 
irreconcilable  factions  resulting  in  the  formation  of  a  socialistic  I.W.W.  (the  Detroit 
I.W.W.)  which  has  since  maintained  a  separate  exbtence.  At  the  present  moment 
the  older  organization  is  in  most  serious  straits  due  to  internal  dissensions.  Serious 
contests  over  general  policy  are  not  infrequent  in  state  and  dty  central  units  of  the 
American  Federaticm  of  Labor.  A  notable  example  is  the  case  of  the  Chicago  Federa- 
tion of  Labor,  the  control  of  which  some  years  since  was  threatened  by  the  violent 
efforts  and  the  drastic  measures  of  a  predatory  group  ruled  by  "Skinny  Madden," 
and  which  has  been  almost  constantly  hara^ed  by  the  efforts  of  the  socialistic 
unionists  to  fierce  upon  it  their  viewp(Hnt  and  polides.  Contests  within  national 
and  local  unions  between  rival  factions  representing  conflicting  union  varieties  find 
well-known  recent  examples  in  the  cases  of  the  United  Mine  Workers,  the  Electrical 
Workers,  the  Association  of  Machinists,  the  Painters,  Decorators,  and  Paperhangers, 
the  Bakery  and  Confectionery  Workers,  the  Carpenters  and  Joinersr— to  name  only  a 
few  of  many.  Contests  between  national  unions  for  control  of  the  trade  or  industry 
find  current  examples  in  the  struggle  between  the  Brotherhood  of  Railroad  Trainmen 
and  the  Switchmen's  Union  of  North  America,  and  between  the  two  unions  in  the  boot- 
and  shoemaking  industry. 


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472  JOURNAL  OF  POUTICAL  ECONOMY 

that  they  preclude  the  assumption  of  a  single  consistent  unionism 
at  bottom  ?  This  is  the  question  for  practical  proof.  In  order  to 
clear  the  ground  for  direct  consideration  of  this  question,  one 
more  point  in  the  general  interpretation  of  unionism  demands 
consideration. 

If  the  validity  of  the  preceding  analysis  be  conceded,  it  is  evi- 
dent that  the  orthodox  causal  and  historical  interpretation  of  imion- 
ism  must  be  abandoned  or  thoroughly  revised.  It  has  been  the 
habit  of  students  to  look  upon  trade  imionism  as  fundamentally 
an  economic  manifestation  and  to  interpret  it  almost  exclusively, 
or  at  least  primarily,  in  terms  of  industrial  or  economic  factors. 
Thus  one  school  woxild  explain  unionism  in  terms  of  the  develop- 
ment of  the  process  of  production  in  its  narrow  sense,  making  of  it 
a  succession  of  organic  adaptations  to  the  conditions  and  needs  of 
the  workers  produced  immediately  by  the  successive  types  or  imits 
of  capitalistic  enterprise,  e.g.,  the  small  craft  imit,  the  industrial 
unit,  and  the  enlarged  industrial  unit  or  trust.  Unionism  thus 
appears  ultimately  as  the  organic  corollary  of  the  form  of  the  tool 
or  machine.  Another  school  insists  that  imionism  is  to  be  explained 
primarily  in  terms  of  the  development  of  markets  and  the  character 
and  scope  of  market  competition,  endeavoring  to  show  that  the 
different  forms  of  unionism  correspond  naturally  to  the  conditions 
existing  in  conjimction  with  the  customs  market,  the  retail  com- 
petitive market,  and  the  wholesale  market.  Here  transportation 
is  perhaps  the  most  potent  imderlying  determinant.  It  is  not 
denied  that  other  factors  have  a  formative  influence,  especially, 
for  example,  the  presence  or  absence  of  free  land,  the  political  ideals 
and  situation,  and  the  state  of  public  education.  But  these  factors 
are  looked  upon  as  modifiers.  Environment  is  practically  the  sole, 
and  economic  environment  the  chief,  formative  force,  and  unionism 
is  again  regarded  as  a  series  of  successive  adaptations  of  one  and  the 
same  thing  to  the  changing  environmental  conditions. 

These  attempts  at  explanation  simply  or  mainly  in  industrial 
or  economic  terms  resxilt  largely  from  the  habit  of  regarding  union- 
ism primarily  as  an  organic  phenomenon  and. thus  centering  the 
attention  on  structural  forms  and  changes,  and  are  the  chief  cause 
for  failure  to  recognize  the  possible  non-unitary  character  of  union- 


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TRADE  UNIONISM  IN  THE  UNITED  STATES  473 

ism.  For  as  soon  as  we  discard  the  older  mode  of  approach  and 
look  at  unionism  as  primarily  functional  in  character,  the  appear- 
ance of  orderly  succession  vanishes,  and  the  simple  modes  of  inter- 
pretation described  above  are  seen  to  be  altogether  inadequate 
to  account  for  the  facts.  We  have  then  to  explain  chiefly  the 
existence  of  contradictory  group  interpretations  and  programs 
which  succeed  each  other  apparently  in  no  order  accoxmtable  for 
by  changes  in  the  economic  situation,  and  which  appear,  as  we  have 
pointed  out,  not  only  consecutively  in  conjxmction  with  different 
systems  of  production  and  marketing,  but  concurrently,  and  not 
merely  in  the  same  general  industrial  and  social  milieu^  but  among 
workers  in  the  same  trade  and  even  in  the  same  union. 

Evidently  functional  variations  thus  existing  and  persisting  can- 
ndt  be  explained  in  economic  or  even  in  environmental  terms  alone. 
They  can  be  accounted  for  only  on  the  supposition  that  primary 
forces  besides  the  industrial  and  environmental  are  vitally  responsible 
for  their  genesis  and  being.  In  short,  an  interpretation  of  unionism, 
not  in  monistic,  but  in  dualistic  or  pluralistic  terms  is  required. 

What  then  conceivably  are  these  relatively  permanent,  non- 
industrial  factors  which  enter  into  the  determination  of  the  primary 
or  functional  character  of  imionism?  Since  these  diverse  view- 
points and  interpretations  which  make  up  unionism  are  obviously 
specific  cases  of  group  or  social  psychology,  we  have  merely  to 
inquire  what  are  the  determining  factors  of  the  psychology  of  social 
groups.  This  query  the  social  psychologist  stands  ready  to  answer 
with  considerable  assurance.  He  assures  us  that  one  of  these 
factors  is  environment — ^not  economic  environment  merely,  but 
political,  social,  and  traditional  as  well,  in  the  sense  of  the  whole 
body  of  transmitted  sentiments,  ideas,  and  precepts — moral,  reli- 
gious, and  customary.  But  he  assures  us  also  that  over  against 
environment  as  thus  broadly  interpreted  is  another  factor,  perhaps 
equally  potent  and  certainly  more  permanent.  This  is  the  sub- 
jective factor.  It  includes  temperament  and  aptitudes,  both 
personal  and  racial,  which  show  themselves  as  between  different 
races  and  individuals  in  relatively  permanent  and  conflicting 
feelings,  ideals,  and  attitudes.  It  is  these  temperamental  differ- 
ences plus  environmental  influences  that  at  any  moment  cause 


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474  JOURNAL  OF  POUTICAL  ECONOMY 

individuals  to  differ  in  respect  to  what  is  good  and  bad,  right  and 
wrong,  just  and  unjust;  which  mold  and  color  their  social  interpre- 
tations, and  thus,  through  the  primal  forces  of  association,  bring 
about  psychological  groups  with  diverse  and  conflicting  viewpoints 
and  programs  of  action/  We  may  then  reasonably  conclude  that 
the  existence  of  concurrent  and  conflicting  fimcticmal  variants  is  to 
be  explained  as  the  outcome  of  different  combinations  of  all  these 
relatively  permanent  forces  that  affect  the  j>sychology  of  group 
membership,  both  environmental  and  subjective  or  temperamental, 
and  since  the  fxmctional  aspect  of  unionism  is  its  primary  and 
essential  expression  it  also  is  to  be  explained  causally  and  historically 
in  the  same  terms.* 

With  this  general  interpretation  of  unionism  in  hand  we  are 
now  in  a  position  to  comprehend  the  nature  of  the  problem  involved 
in  the  assiunption  that  unionism  is  at  bottom  non-tmitary,  and  to 
state  clearly  and  specifically  the  character  and  methods  of  proof 
which  are  required  to  validate  this  assmnption.  The  problem  is 
one  which  evidently  concerns  primarily  the  existence  and  character 
of  functional  union  types.  We  shall  therefore  consider  this  a^)ect 
of  the  matter  first,  postponing  for  the  present  the  discussion  of 
structural  types  and  their  relation  to  the  main  issue. 

We  have  seen  that  functional  union  variants  do  exist.  What 
then  must  be  proved  with  respect  to  them  in  order  to  establish  the 
main  contention  ?  It  would  follow  from  all  that  has  been  said  that 
the  real  tests  of  the  validity  of  these  variants  as  types  are  concur- 
rent existence  as  rival  farms  of  imionism  and  relative  permanence  or 
stability  as  such.  Only  in  so  far  as  they  stand  these  tests  can  we 
be  sure  that  they  are  more  than  successive  adaptations  of  one  and 
the  same  unionism  to  changing  environment,  or  more  than  tem- 
porary and  accidental  variations  from  a  single  union  norm;  and 

>  See  C.  H.  Cooley,  Soctal  OrtanizaHon;  W.  G.  Sumner,  Folkways;  W.  I.  Tliomas^ 
"Race  Psychology,"  American  Journal  of  Sociology,  XVn,  725-75;  G.  Taide,  Tlu 
Laws  of  ImitaHon, 

*  This  insistence  on  a  dualisdc  interpretation  of  unionism  is  not  necessarily  out 
of  harmony  with  a  belief  in  philosophical  monism  or  even  with  adherence  to  the 
"eomomic  interpretation  of  history."  It  implies  nothing  in  regard  to  the  ultimate 
determinants  of  radal  and  temperamental  differences.  It  takes  them  simply  as  fixed 
data  for  the  present  and  recent  situation. 


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TRADE  UNIONISM  IN  THE  UNITED  STATES  475 

only  in  so  far  can  we  assert  that  unionism  is  not  after  all  an  essen- 
tially consistent  though  developing  whole. 

But  the  question  at  once  arises:  Just  what  is  implied  specifi- 
cally in  the  terms  "rival  forms  or  expressions"  and  "relative  per- 
manence or  stability"  ?  In  order  to  constitute  a  type  must  there 
be  a  perfectly  defined  and  completely  isolated  union  variant, 
exactly  objectified  in  a  formal  organization  which  has  existed  from 
the  initial  genesis  of  unionism,  or  will  less  rigid  requirements  suffice  ? 

Certainly  it  must  be  shown  that  these  fimctional  variants  exist 
at  the  same  time  among  the  wage-workers  as  consciously  formulated 
and  essentially  conflicting  social  interpretations  with  special  regard 
to  the  needs  and  problems  of  the  workers  and  the  best  methods  of 
arriving  at  their  solution;  and  that  these  conflicting  interpretations, 
once  established,  persist  and,  so  far  as  we  can  see,  do  not  tend  to 
revert  or  to  develop  into  some  one  of  the  interpretations  or  into  a 
single  conmion  interpretation. 

On  the  other  hand,  at  least  three  apparent  qualifications  of  these 
conditions  are  possible  without  destroying  the  practical  reality  and 
significance  of  distinct  functional  types.  In  the  first  place,  no 
specific  degree  of  scope  and  generality  with  respect  to  the  group 
interpretation  and  program  is  essential.  These  may  be  exceedingly 
narrow,  concerned  merely  with  the  immediate  economic  conditions, 
relationships,  and  standards  of  living  of  the  workers  involved;  that 
is,  they  may  comprehend  simply  a  set  of  more  or  less  co-ordinated 
assimiptions  in  regard  to  the  rights  of  the  men  with  respect  to 
wages,  hours,  and  conditions  of  employment,  the  mode  of  determin- 
ing these,  and  the  methods  to  be  used  in  securing  reasonable  terms 
with  the  employer  and  enforcing  them.  Or  the  group  interpreta- 
tion may  constitute  a  complete,  definite,  and  rationalized  social 
philosophy,  and  the  program  may  cover  the  whole  field  of  economic, 
political,  ethical,  juridical,  and  social  conditions  and  relationships 
of  the  workers.  The  only  essential  point  is  that  the  viewpoint  and 
program,  whatever  their  scope  and  character,  shall  conmiand  the 
adherence  of  the  membership  of  the  group  so  as  to  constitute  an 
effective  motive  and  guide  to  group  action.  If  this  condition  is 
met  the  type  exists.  The  interpretation  may  be  what  it  will;  the 
question  is:    Does  it  work  as  a  imifying  and  dynamic  group  force  ? 


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476  JOURNAL  OP  POUTICAL  ECONOMY 

It  is  equally  true^  secondly  and  thirdly,  that  these  functional 
types  can  exist  and  can  in  so  far  show  the  essential  diversity  and 
manifold  character  of  unionism  independent  of  any  structural 
qualifications  whatever  and  apart  from  the  existence  of  actual 
union  programs  conforming  exactly  to  them.  For  the  functional 
type,  It  must  not  be  forgotten,  is  a  group  viewpoint  or  interpreta- 
tion and,  provided  it  exists,  persists,  and  its  adherents  strive  to 
secure  for  it  practical  effectiveness  and  the  structural  means  appro- 
priate thereto,  it  is  a  imion  type,  r^ardless  of  the  structural  form 
through  which  or  with  which  it  may  be  obliged  to  work,  and  regard- 
less of  the  ability  of  its  advocates  to  secure  its  exclusive  objectifica- 
tion  in  the  programs  of  any  particular  organizations.'  It  is  not 
necessary,  even,  that  different  functional  types  should  always  find 
expression  in  different  and  conflicting  union  organizations.  On  the 
contrary,  it  is  possible,  and  indeed  it  often  happens,  that  the  con- 
flict between  the  fimctional  types  goes  on  within  one  and  the  same 
imion  organization,  taking  the  form  of  a  struggle  for  control  between 
two  or  more  factions  holding  to  vitally  different  social  viewpoints 
and  interpretations.  As  a  matter  of  fact  this  internal  conflict  is  a 
characteristic  feature  of  unions,  and  at  any  moment  there  is  almost 
always  some  factional  compromise  and  some  practical  admixture 
of  fimctional  type  programs.  Official  imion  programs,  therefore, 
rarely  exist  perfectly  true  to  type.  This  is  one  reason  why  the 
multiple-type  character  of  unionism  has  been  generally  overlooked. 
But  this  admixture  in  practice  no  more  negates  the  fact  and  sig- 
nificance of  union  types  than  does  the  practical  absence  of  pure 
democracy,  unmixed  oligarchy,  or  absolute  despotism  n^ate  the 
varied  type  and  character  of  government,  nor  does  the  fact  that  most 
capitalistic  incomes  are  mixed  negate  or  destroy  the  significance  of 
the  truth  that  social  income,  aside  from  that  which  goes  to  wages,  is 
divided  into  the  essentially  diverse  income  types — ^profits,  interest, 

'  A  good  illustratkni  of  this  statement  is  fumished  by  the  American  Syndicalist 
League.  No  one  prepared  to  admit  the  existence  of  functional  types  at  all  would  deny 
a  place  among  them  to  revolutionary  Syndicalism.  Yet  it  is  not  the  primary  aim  of 
the  Syndicalist  League  to  form  separate  union  organizations  with  correct  S3mdicalist 
programs,  but  gradually  to  transform  American  unionism  by  the  process  of  sjMritual 
penetration.  It  advises  all  Syndicalists  to  join  the  unions  of  their  trade  and  to  agitate 
within  the  organization. 


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TRADE  UNIONISM  IN  THE  UNITED  STATES  477 

and  rent — and  that  actual  distribution  is  to  be  so  far  interpreted 
in  terms  of  these  types  and  their  fundamental  determinants.^ 

If  there  is  any  doubt  in  regard  to  the  aptness  of  these  analogies, 
let  us  put  the  case  in  the  worst  possible  light  for  our  contention,  and 
then  deal  with  it  on  its  own  merits.  We  have  from  the  first  insisted 
that  unionism  is  what  it  is,  and  must  be  interpreted  as  we  find  it. 
But  if  there  is  no  exact  correlation  between  functional  and  struc- 
tural types,  and  if  actual  union  programs  rarely  occur  type  pure, 
how  then  can  these  functional  types  be  the  effective  guides  to  union 
action  or  true  clues  to  the  interpretation  of  actual  unionism  ?  The 
answer  is  to  be  found  in  the  pragmatic  and  dynamic  character  of 
imionism.  It  is  not  a  made-to-order  and  finished  product,  but  is 
in  a  constant  state  of  flux  and  development.  For  the  most  part 
it  changes,  not  by  the  process  of  creations  de  novo,  but  by  the  slow 
transformation  of  existing  programs  and  structure.  Unionism  as 
it  is,  then,  is  not  a  set  of  fixed  forms  and  programs,  but  is  a  develop- 
ing process,  and  it  is  just  this  process  of  change  and  transition  that 
the  student  mUst  chiefly  consider  if  he  is  to  understand  and  inter- 
pret the  phenomenon. 

But  what  is  the  real  nature  of  this  process  of  change  ?  No  one 
who  has  made  a  careful  study  of  imionism  can  doubt  that  it  is  a 
matter  of  practical  adaptation  to  the  exiting  relative  strength  or 
of  continuous  readjustment  to  the  shifting  of  balance  of  power 
between  contending  groups  and  factions.  New  conditions  arise, 
creating  new  problems  which  must  be  faced  and  solved.    Each 

'  Neither  is  the  existence  and  significance  of  union  types  negated  by  the  fact  that 
in  times  of  serious  crises  unionists  and  unions  of  one  type  are  likely  to  rally  temporarily 
to  the  support  of  those  of  another,  nor  by  the  further  fact  that  within  unions  bodies 
of  men  are  foimd  who  act  now  with  one  and  now  with  another  faction.  The  first  case 
finds  its  analogy  in  war  between  nations,  when  for  the  time  being  partisans  of  all  types 
of  government  unite  against  foreign  aggression.  The  second  case  illustrates  the  force 
of  personality  and  imitation  in  the  determination  of  sodal  grouping.  In  the  unions 
there  are  a  few  men  of  strong  personality  and  decided  opinions.  There  are  more  of 
an  imitative  disposition  who  get  their  opinions  from  others.  The  former  in  their 
positive  interpretations  and  programs  represent  and  maintiiin  the  distinct  and  con- 
flicting union  types.  The  latter  are  followers  who  sometimes  shift  in  their  allegiance 
from  leader  to  leader  and  thus  from  type  to  type,  with  changes  in  associations  and 
conditions.  Thb  fact  does  not  negate  the  existence  of  the  types,  but  throws  light 
rather  on  the  conditions  which  determine  the  outcome  of  contests  between  factions 
representing  types. 


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478  JOURNAL  OP  POUTICAL  ECONOMY 

group  has  its  solution  based  on  its  own  general  viewpoint  and 
interpretation.  The  actual  resultant  in  terms  of  the  union  pro- 
gram and  structure  will  reflect  the  relative  power  of  the  groups. 
Or  new  members  are  admitted,  and,  the  personnel  having  changed, 
a  new  balance  of  power  between  factions  is  established.  Soon  this 
new  balance  will  be  reflected  in  the  official  poKdes,  methods,  atti- 
tudes, and  perhaps  structural  features,  of  the  imion.  Thus,  while 
the  types  persist,  the  actual  union  program  and  methods  change 
and  develop.  It  is  then  evidently  in  terms  of  the  interpretations 
and  programs  of  these  conflicting  groups,  i.e.,  in  terms  of  the  types 
and  their  causes,  that  we  are  to  find  the  clues  to  the  interpretation 
of  imionism  as  it  actually  exists  and  is  becoming. 

And  just  because  imionists  are  in  the  main  pragmatic  in  their 
outlook  we  should  not  expect,  except  rarely,  to  find  actual  union 
programs  and  imion  structures  existing  type  pure.  Nor  should  we 
ordinarily  expect  any  definite  correlation  in  practice  between  func- 
tional and  structural  types.  Doubtless  such  a  correlation  naturally 
exists  to  a  considerable  extent,  certain  structural  arrangements 
being  naturally  adapted  to  the  carrying-out  of  certain  group  pro- 
grams. But  ordinarily  while  there  is  hope  of  a  gradual  transforma- 
tion toward  the  desired  type  its  adherents  will  remain  in  the  imion. 
It  is  only  when  one  faction  gives  up  hope  of  working  its  will  from 
within  that  it  will  withdraw  and  set  up  a  new  organization,  and  it 
is  only,  therefore,  under  such  circumstances  that  we  ordinarily  find 
an  exact  correspondence  between  the  actual  imion  programs  and 
structures  and  the  pure  types.  We  may  safely  conclude,  then,  that 
the  absence  of  exact  correlation  between  structural  and  functional 
types  in  practice,  and  between  the  latter  and  actual  imion  pro- 
grams, does  not  militate  against  the  reality  of  distinct  and  per- 
sisting functional  types  and  their  practical  significance. 

Turning  now  to  the  matter  of  structural  types,  it  is  evident  that 
the  problem  before  us  assumes  a  very  different  and  much  less 
important  aspect.  Distinct  structural  types  do  exist,  as  is  gener- 
ally admitted,  but  neither  are  they  always  rival  forms  nor  is  there 
always  absence  among  them  of  developmental  mutability.  It  does 
seem  to  be  rather  characteristic  of  the  existence  of  these  types  that 


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TRADE  UNIONISM  IN  THE  UNITED  STATES  479 

their  several  advocates  should  be  in  actual  conflict  in  the  endeavor 
to  displace  one  by  another;  but,  on  the  other  hand,  they  are  often 
found  in  quite  harmonious  and  supplemental  relationship  in  the 
same  organic  group,  each  appearing  to  meet  a  different  practical 
need.  A  well-recognized  case  in  point  is  the  existence  and  rela- 
tionship within  the  general  organization  of  the  American  Federa- 
tion of  Labor  of  cr^t  and  trades  unions.  Nor  do  these  distinct 
structural  types  alwa}rs  appear  to  be  quite  independent  in  their 
genesis.  This  happens  in  some  cases,  but  there  seem  to  be  clear 
cases  of  developmental  transition.  Thus  the  compoimd  craft  union 
is  sometimes  a  transformation  of  the  craft  imion  by  the  simple 
process  of  combination,  and  the  industrial  union  seems  often  to  be 
the  outcome  of  a  simple  enlargement  of  the  elements  in  the  com- 
pound craft  union. 

If,  then,  structural  types  stood  in  the  same  relationship  to  our 
problem  as  functional  types,  and  if,  therefore,  in  order  to  establish 
the  manifold  character  of  unionism  it  were  necessary  to  apply  the 
same  criteria  to  them  with  the  same  degree  of  stringency,  there  is 
no  doubt  that  the  case  could  not  be  maintained.  Here  we  doubt- 
less find  the  chief  explanation  for  the  fact  that  students  have 
yielded  so  long  and  so  generally  to  the  popular  assimiption  that 
unionism  is  at  bottom  one  and  the  same  thing,  that  imion  variants 
are  but  adaptations  of  a  single  norm  to  changing  environment,  or 
at  most  temporary  and  accidental  aberrations  from  it.'  This  is 
the  conviction  with  which  the  student  of  imionism  would  naturally, 
and  indeed  almost  inevitably,  be  impressed  if  he  entered  upon  the 
study  primarily  from  the  structural  standpoint,  and  placed  his 
emphasis  upon  structural  forms  and  relationships.  He  would  then 
see  imionism  beginning  in  the  local  craft  organization  as  a  response 
to  the  conditions  created  by  the  primitive  type  of  capitalistic  enter- 
prise or  to  its  corresponding  market  structure,  and  developing  by 
a  gradual  transformation  tiirough  larger  imits  to  more  complex 
structural  arrangements  to  meet  conditions  imposed  primarily  by 
economic  evolution.    And  so  long  as  he  looked  at  the  imion 

<  The  popular  assumption  seems  to  be  in  itself  partly  a  matter  of  blind  partisan- 
ship, partly  a  matter  of  tactical  advantage,  and  partly  a  belief  in  things  hoped  for. 


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48o  JOURNAL  OF  POLITICAL  ECONOMY 

primarily  as  a  structural  entity,  and  thought  of  aims,  policies,  and 
activities  as  f  imctions  or  means  of  the  organic  thing,  he  could  adopt 
no  other  than  the  unitary  or  normalistic  assumption. 

If,  however,  the  primary  and  essential  union  expression  is 
fimctional,  and  if  it  is  further  true  that  functional  variations  may 
exist  regardless  of  any  structural  qualifications  whatever — the 
same  functional  variant  making  use  of  different  structural  forms 
without  losing  its  identity  or  permanency,  and,  contrariwise,  dis- 
tinct and  contradictory  functional  variants  working  through  the 
same  structural  arrangements — ^it  is  evident  that  this  appearance 
of  things  would  be  far  from  conclusive  of  the  real  character  of 
unionism.  Doubtless  entire  absence  of  distinct  structural  types 
would  render  impossible  positive  proof  of  the  non-imitary  character 
of  unionism,  but  it  is  evident  that  the  tests  which  need  be  applied 
to  prove  their  existence  in  harmony  with  this  hypothesis  are  not  the 
same  as  in  the  case  of  the  functional  t3^s.  Absolute  rivalry  is 
not  essential.  It  is  sufficient  if  the  modes  of  organization  be  vitaUy 
different  in  principle.  In  short,  the  tests  of  distinct  structural 
types  demanded  by  our  hypothesis  seem  to  be  merely  the  con- 
temporary and  historical  presence  in  the  imion  complex  of  distinct 
and  alternative  forms  of  organization. 

To  recapitulate,  then,  briefly  in  regard  to  the  nature  of  the  prob- 
lem involved  in  the  assumption  that  unionism  is  non-unitary  in 
character:  It  has  been  seen  that  this  assumption  is  one  which  rests 
almost  exclusively  on  the  existence  and  persistence  of  fimctional 
imion  types.  In  order  to  prove  the  truth  of  the  assimiption  beyond 
reasonable  doubt,  it  must  be  shown  that  these  fimctional  types 
exist  concurrently  as  conflicting  or  rival  social  interpretations  and 
remedial  programs,  held  and  advocated  by  different  groups  of  wage- 
workers;  it  must  be  shown  that,  once  established,  these  rival  view- 
points persist  and  exhibit  no  tendency  as  such  to  revert  to  a  single 
or  conmion  viewpoint;  but  it  is  not  necessary  that  they  should  be 
shown  to  attain  any  specific  degree  of  scope  or  generality  beyond 
what  is  necessary  to  command  group  adherence  and  effectively  to 
guide  group  action,  that  they  should  be  necessarily  associated  with 
any  particular  organic  forms  or  structural  types,  that  each  should 
find  practical  expression  exclusively  in  a  different  organization,  or, 


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TRADE  UNIONISM  IN  THE  UNITED  STATES  481 

finally,  that  the  program  of  any  particular  organization  or  group 
of  organizations  should  at  any  moment  conform  exactly  to  any  one 
of  them.  In  the  matter  of  structure  it  is  necessary  to  show  merely 
the  existence  of  distinct  and  alternative  forms  of  organization. 

Such  being  the  problem,  what  is  the  process  of  proof  required  ? 
Evidently  we  have  here  a  matter  which  must  be  dealt  with  his- 
torically. We  must  first  determine  which  of  these  distinct  imion 
variants  have  had  more  than  an  ephemeral  existence.  So  far  as 
structural  forms  are  concerned,  this  should  be  sufficient.  In  regard 
to  those  fimctional  variants  that  have  persisted,  it  must  be  proved 
that  they  have  had  their  genesis  in  different  combinations  of  rela- 
tively permanent  factors  both  environmental  and  temperamental. 

To  be  exhaustive,  the  proof  doubtless  should  be  both  positive 
and  negative.  Negatively  it  should  be  established  that  where  no 
concurrent  and  conflicting  functional  variants  exist  the  environ- 
ment of  the  workers  entering  into  combination  is  essentially  imif orm 
and  that  the  workers  themselves,  racially,  temperamentally,  and 
traditionally,  are  essentially  homogeneous.  Positively  it  should  be 
proved  that  existing  and  historical  concurrent  conflicting  variants 
owe  their  origin  and  persistence  to  vitally  diverse  combinations  of 
environmental  and  subjective  factors  operating  in  connection  with 
the  groups  concerned. 

Perfectly  complete  and  satisfactory  proof  of  our  fundamental 
hypothesis  respecting  the  general  character  of  unionism  and  union 
types  in  the  United  States  would  then  demand  the  most  searching 
study  of  our  union  history  with  special  reference  to  the  economic, 
political,  traditional,  and  temperamental  factors  involved.  It  is 
not  possible  to  secure  complete  proof  in  this  wise,  owing  both  to 
the  paucity  of  well-authenticated  historical  material  and  to  the 
enforced  limits  of  a  periodical  series.  We  shall,  however,  attempt 
to  assemble  enough  evidence  of  this  character  for  the  practical 
testing  of  our  thesis  and  for  significant  generalizations  in  regard  to 
the  general  character  of  union  development  in  the  United  States. 

ROB£RT  F.  HoxiE 
University  of  Chicago 


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NOTES 
WASHINGTON  NOTES 

THE  NEW  I^SEEVE  DISTSICTS 

The  first  step  in  providing  for  the  definite  establishmoit  of  the  new 
banking  and  currency  system  has  been  taken  by  the  Organization  Com- 
mittee created  under  the  law  of  December  23,  1913.  This  committee 
announced  on  April  3  the  outline  of  the  reserve  districts  that  have  been 
determined  upon  as  a  result  of  a  series  of  hearings  held  throughout  the 
country  during  the  past  few  weeks,  and  the  sid>sequent  deUberaticms 
thereon.  In  brief ,  the  plan  now  announced  provides  for  the  establish- 
moit  of  12  districts,  the  maximum  number  permitted  under  the  law,  and 
will  result  in  dividing  the  country  into  districts  whose  characteristics 
would  be  practically  as  shown  in  the  table  on  p.  483. 

The  princq>les  upon  which  the  division  has  been  made  are  set 
forth  only  in  very  general  terms,  the  committee  stating  them  in  part 
thus: 

Among  the  many  factors  which  governed  the  committee  in  determining 
the  req)ective  districts  and  the  selection  of  the  cities  which  have  been  chosen 
were: 

First,  the  ability  of  the  member  banks  within  the  district  to  provide  the 
minimiitn  capital  of  $4,000,000  required  for  the  Federal  reserve  bank  on  the 
basis  of  6  per  cent  of  the  coital  stock  and  surplus  of  member  banks  within 
the  district. 

.  Second,  the  mercantile,  industrial  and  financial  connections  existing  in 
each  district  and  the  relations  between  the  various  portions  of  the  district 
and  the  dty  selected  for  the  location  of  the  Federal  reserve  bank. 

Third,  the  probable  ability  of  the  Federal  reserve  bank  in  each  district, 
after  organization  and  after  the  provisions  of  the  Federal  reserve  act  shall  have 
gone  into  effect,  to  meet  the  legitimate  demands  of  business,  whether  normal 
or  abnormal,  in  accordance  with  the  spirit  and  provisions  of  the  Federal  reserve 
act. 

Fourth,  the  fair  and  equitable  division  of  the  available  coital  for  the 
Federal  reserve  banks  among  the  districts  created. 

Fifth,  the  general  geographical  situation  of  the  district;  transportation 
lines,  and  the  facilities  for  speedy  communication  between  the  Federal  reserve 
bank  and  all  portions  of  the  district. 

Sixth,  the  population,  area,  and  prevalent  business  activities  of  the  district, 

482 


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NOTES 


483 


S  S,  I  5.  ^  R  ?  5  R  a  5 

C«        M        M  M 


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484  JOURNAL  OF  POLITICAL  ECONOMY 

whether  agricultural,  manufacturing,  mining,  or  conmiercial;    its  record  of 
growth  and  development  in  the  past  and  its  prospects  for  the  future. 

In  determining  the  several  dbtricts,  the  conmiittee  has  endeavored  to 
follow  state  lines  as  closely  as  practicable  and  whenever  it  has  been  found  neces- 
sary to  deviate,  the  division  has  been  along  lines  which  are  believed  to  be 
most  convenient  and  advantageous  for  the  district  affected. 

The  plan  of  division  indicated  by  the  conunittee  has  already  received 
very  severe  criticism,  this  criticism  being  particularly  addressed  to  the 
following  points: 

1.  The  establishment  of  the  maximum  number  of  12  districts,  not- 
withstanding that  the  advice  of  a  large  number  of  bankers  and  business 
men  had  been  in  favor  of  the  limitation  of  the  number  to  the  minimum 
required  by  law. 

2.  The  failure  to  create  a  single  large  overshadowing  bank  with  a 
capital  of  not  less  than  $25,000,000  to  $30,000,000,  such  a  bank  having 
been  strongly  recommended  on  the  ground  that  an  institution  of  such  a 
size  was  necessary  to  control  foreign  exchange  operations  and  to  direct 
the  course  of  trade  and  monetary  operations  between  the  United  States 
and  foreign  countries. 

3.  The  placing  of  too  many  districts  on  the  Atlantic  Coast  while 
the  West  was  left  relatively  unsupplied  with  districts  and  banks. 

4.  The  faulty  division  of  the  coimtry  between  the  several  districts 
in  certain  particulars.  Among  these  particulars  are  expressly  men- 
tioned (a)  the  selection  of  boimdary  lines  that  would  include  larger  and 
richer  centers  as  tributary  to  smaller  and  weaker  points  at  which  reserve 
banks  were  situated,  {b)  the  artificial  separation  of  certain  portions 
naturally  tributary  to  a  given  city  and  their  inclusion  in  a  r^on  assigned 
to  another  city,  (c)  the  erroneous  assignment  of  certain  regions  to 
cities  with  which  they  have  comparatively  poor  or  slow  transportation 
connections. 

These  objections,  as  thus  classified,  practically  simunarize  the  whole 
case  against  the  plan  of  districting,  but  there  is  a  distinct  difference  in 
the  weight  to  be  given  to  the  various  criticisms.  As  to  whether  the 
maximum  or  minimum  number  of  districts  should  have  been  created, 
decided  difference  of  opinion  imdoubtedly  exists  in  responsible  circles,  not 
a  few  persons  taking  the  view  that  if  possible  the  12  districts  should  have 
been  mapped  out,  assiuning  of  course  that  each  could  be  assigned  a 
capital  adequate  to  the  creation  of  a  reasonably  strong  bank  in  the  district 
under  consideration.  This  point  may  be  regarded  therefore  as  essen- 
tially a  question  of  difference  in  theory  or  of  attitude  toward  the  banking 
organization  question  in  general. 


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486  JOURNAL  OF  POLITICAL  ECONOMY 

In  the  same  way  the  faflure  or  refusal  to  create  a  single  bank  of 
predominant  capital  is  not  considered  as  affording  ground  for  the  pessi- 
mistic criticisms  that  are  voiced  in  some  quarters.  The  New  York 
reserve  bank  actually  provided  for  will  have  a  much  larger  capital  than 
any  other  institution  in  the  system,  and,  while  its  capital  is  materially 
smaller  than  the  combined  capital  and'  surplus  of  several  of  the  other 
institutions  located  in  the  dty  of  New  York,  this  fact  is  not  r^arded 
as  necessarily  indicating  an3rthing  very  definite  with  reference  to  the 
effectiveness  of  the  proposed  plan.  As  a  matter  of  fact,  the  Bank  of 
England  is  considerably  below  several  other  institutions  in  London,  so 
far  as  relates  to  aggregate  resoiuxes.  This  does  not  prevoit  the  Bank 
of  England  from  exercising  a  predominant  control  over  the  prevailing 
rate  of  discount.  A  similar  condition  exists  in  some  of  the  continoital 
countries.  It  is  believed,  therefore,  that  the  size  allowed  to  the  New 
York  institution  is  amply  suffidoit  to  permit  of  the  establishmoit  of  an 
effective  bank.  Moreover,  too  little  weight  appears  to  have  been 
allowed  in  current  discussion  to  the  fact  that  the  Federal  Reserve  Board 
will  exercise  a  powerful  central  control  over  the  whole  system  and  will 
undoubtedly  succeed  in  uniting  the  differoit  institutions  in  a  single  and 
well-considered  national  policy. 

A  different  point  of  view  is  evidently  entertained  by  careful  thinkers 
with  respect  to  the  actual  districting.  The  third  point  already  men- 
tioned above— that  too  many  districts  have  been  placed  on  the  Atlantic 
Coast  while  the  West  is  left  relatively  unsupplied— is  regarded  as  having 
very  considerable  force.  As  things  stand,  the  Atlantic  Coast  districts 
are  represented  by  the  cities  of  Boston,  New  York,  Philadelphia,  Rich- 
mond, and  Atlanta.  This  is  considered  clearly  one  too  many,  the 
unnecessary  dty  and  district  being  Richmond.  By  leaving  out  the 
Richmond  district,  a  much-needed  district  which  could  have  been  used 
elsewhere  would  have  been  saved  with  positive  benefit  to  the  other 
districts  on  the  Atlantic  Coast  which  are  now  too  thickly  packed  together 
to  admit  of  a  healthy  growth.  The  belief  prevailing  in  sound  quarters 
is  that  the  Atlanta  district  with  its  very  limited  capital  would  have  been 
better  off  had  not  the  states  of  North  and  South  Carolina,  which  properly 
bdong  to  it,  been  pared  away  in  order  to  provide  a  southern  extension 
for  the  Richmond  district.  In  the  same  way,  the  northward  extension 
of  the  Richmond  district  tended  to  force  the  northern  boundary  of  the 
Philadelphia  district  to  the  shores  of  New  York  harbor,  thereby  depriv- 
ing New  York  City  of  a  portion  of  its  natural  territory—the  northern 
rim  of  New  Jersey— while  in  like  manner  the  rearrangement  of  boundaries 


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NOTES  487 

necessitated  by  the  insertion  of  the  Richmond  district  tended  to  prevent 
the  inclusion  of  western  Connecticut  with  New  York,  and  to  force  other 
adjustm^ts  g^erally  believed  to  be  out  of  harmony  with  the  '' con- 
venience and  customary  course  of  business." 

In  a  somewhat  similar  fashion,  the  fourth  criticism  already  men- 
tioned is  finding  support  among  informed  stud^ts  of  banking.  This 
criticism  closely  follows  that  which  has  been  last  considered.  By  making 
Baltimore,  for  eauunple,  tributary  to  Richmond,  and  New  Oleans  to 
Atlanta,  an  injury  was  done  not  only  to  local  pride  but  also  to  the 
convenient  and  customary  development  of  trade  relations.  The  work 
done  in  this  regard  seems  to  make  it  unavoidable  that  there  should  be 
a  considerable  reversal  of  the  current  of  business  in  a  number  of  districts, 
the  clearing  of  checks  and  the  obtaining  of  rediscounts  being  carried 
on  at  points  where  under  other  conditions  they  would  never  have  been 
placed.  Undoubtedly  this  kind  of  change  will  cause  .some  friction,  but 
there  seems  to  be  little  doubt  that  the  amount  of  it  has  been  consider- 
ably exaggerated.  Those  who  are  diq)osed  to  place  too  much  stress 
upon  the  effect  of  the  districting  overlook  the  fact  that  the  new  system 
is  simply  superadded  to  existing  banking  arrangements  and  that  it  in 
no  way  interferes  with  them.  Even  the  redistr&ution  of  reserves  does 
not  affect  them,  since  the  gross  amount  of  required  reserve  is  so  reduced 
under  the  new  banking  act  that  banks  which  have  been  in  the  habit  of 
keeping  reserve  balances  with  the  old  reserve  cities  could  continue  to 
do  so  without  serious  hardship  under  the  new  law,  even  if  these  balances 
were  not  counted  as  reserves.  They  would  be  as  well  off  as  they  were 
before.  The  criticism  of  the  districting  really  amounts  in  the  last  analy- 
sis to  a  statemoit  that  the  work  has  not  been  done  as  well  as  it  might 
have  been,  and  that  if  it  had  been  more  carefully  performed  the  opera- 
tion of  the  new  S3rstem  would  have  been  somewhat  smoother  and  easier 
to  manage. 

There  is  general  agreement  that,  irrespective  of  the  districting— but 
the  more  important  because  of  the  way  in  which  this  districting  has  been 
done — a  fimdamoitally  important  influence  will  be  exerted  upon,  the 
new  system  by  the  plan  that  is  mapped  out  for  clearing  and  for  the  rela- 
tionship between  branch  offices  and  reserve  banks.  If  the  reserve 
banks  establish  branches  with  a  fair  degree  of  freedom  at  points  where 
they  are  most  needed,  and  if  these  branches  are  permitted  to  transmit 
their  items  for  clearance  direct  to  the  head  offices  of  the  other  reserve 
districts,  it  is  believed  that  the  location  of  the  reserve  banks,  which  are 


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488  JOURNAL  OF  POLITICAL  ECONOMY 

said  to  have  been  placed  without  due  care  and  consideration,  will  not 
be  a  matter  of  fimdamental  importance.  Such  a  plan  will,  therefore, 
be  of  primary  significance  and  will  have  to  be  announced  early  if  it  is 
to  go  into  actual  effect  upon  the  organization  of  the  system.  It  is  a 
notable  fact  that  the  Organization  Committee  did  not  in  its  announce- 
ment make  any  statement  about  the  location  of  branches.  .  It  evidently, 
and  perhaps  wisely,  felt  that  in  leaving  this  matter  to  be  attended  to  by 
the  several  banks  themselves  it  accomplished  all  that  could  be  done  in 
the  direction  of  offsetting  any  friction  or  irritation  that  might  be  felt 
in  consequence  of  the  methods  employed  in  districting.  The  reserve 
banks  will  be  able  to  locate  their  own  branches,  and  it  may  easily  be 
that  in  certain  of  the  districts  the  branches  will  be  more  important  than 
the  head  offices  in  the  volume  of  their  transactions.  This  would  be  an 
anomalous  condition,  but  one  which  would  perhaps  result  in  no  serious 
harm.  At  all  events,  it  seems  likely  to  be  the  direction  in  which  actual 
development  will  go  on.  The  next  step  in  the  organization  of  the  system, 
the  naming  of  the  Federal  Reserve  Board,  will  probably  be  taken  before 
even  any  tentative  announcements  are  made  with  respect  to  the  organiza- 
tion of  the  individual  banks.  The  Board  will  then  be  in  a  position  to 
direct  the  details  of  the  organization  in  each  district,  and  to  appoint 
the  respresentatives  of  the  government,  including  the  Federal  reserve 
agent  and  his  deputy,  in  each  region. 

RAILWAY  CAPITAL  COSTS 

The  Interstate  Commerce  Commission  has  now  practically  finished 
its  hearings  with  reference  to  the  proposed  railroad  rate  increase;  and 
while  it  will  probably  receive  some  further  argument  on  the  general  ques- 
tion of  costs  of  capital  and  conditions  imder  which  railroad  securities  are 
sold,  it  will,  according  to  expectations,  make  these  hearings  largely  pro 
forma,  so  that  the  case  of  the  railroads  may  be  said  to  be,  to  all  intents 
and  purposes,  already  in  hand.  The  feature  of  the  work  of  the  past 
month  has  been  the  filing  of  evidence  with  the  Interstate  Commerce 
Commission  regarding  the  actual  conditions  under  which  the  railroads 
today  find  themselves  compelled  to  get  the  funds  they  require.  Very 
careful  inquiries  have  been  made  into  the  recent  changes  in  the  jdeld  of 
railroad  securities,  that  is  to  say,  in  the  rate  that  new  bonds  must  bear  in 
order  to  induce  buyers  to  take  them  up.  The  data  thus  filed  seem  to  make 
it  certain  that  the  average  rate  of  yield  on  new  issues  of  railroad  securities 
during  the  past  ten  years  has  advanced  about  one-fourth,  that  is  to  say, 
if  the  average  yield  was  4  per  cent  ten  years  ago  it  is  5  per  cent  today 


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NOTES  489 

with  reference  to  a  supposed  standard  bond  selling  at  an  assumed  stable 
figure.  This  fact,  established  by  much  detailed  evidence,  leads  to  inter- 
esting conclusions.  As  the  average  amount  annually  expended  by  the 
roads  during  the  past  six  years  for  additions  and  betterments  has  been 
about  $600,000,000,  it  is  plain  that  in  order  to  earn  4. 10  per  cent  (the 
average  yield  of  selected  railroad  bonds  in  1903)  the  year  191 1  would 
require  additional  gross  receipts  over  and  above  those  obtained  of 
$78,544,061,  it  being  assiuned  that  the  operating  ratio  was  68 .  68  per  cent 
as  shown  by  the  figures  for  that  year.  Of  course  this  computation  is  based 
upon  the  assumption  that  the  roads  can  issue  bonds  based  on  first  mort- 
gages for  the  whole  volume  of  new  capital  required  and  can  sell  them  at 
prices  equivalent  to  those  realized  ten  years  ago.  Granting,  however, 
that  this  assumption  is  taken  as  correct,  the  payment  of  an  extra  i  per 
cent  on  $600,000,000,  the  annual  new  capital  required,  would  necessitate 
$19,157,088  in  additional  gross  revenue.  In  order  to  get  this  on  the 
ton-mile  basis  of  7.54  mills  it  would  be  necessary  to  add  2,540,727,867 
ton-miles  of  freight.  This,  however,  could  not  be  done  without  adding 
large  new  facilities  which  cannot  be  had  imder  existing  earning  conditions. 

In  addition  to  this  situation  as  to  capital,  there  must  be  considered, 
as  has  now  been  made  plain  in  the  testimony  before  the  Commission, 
the  fact  that  the  economies  instituted  by  railroads  during  the  past  few 
years  and  the  increased  traffic  resulting  therefrom  have  not  been  suffi- 
cient to  offset  the  increased  cost  of  wages,  materials,  supplies,  and  taxes, 
so  that  although  there  has  been  a  very  large  increase  in  fixed  charges  the 
railroads  have  had  less  money  available  with  which  to  meet  such  charges. 
This  showing  seems  to  indicate  in  the  most  positive  manner  the  conclu- 
sion that,  despite  a  most  urgent  need  for  capital  wherewith  to  make  up 
in  efficiency  losses  that  have  occurred  through  the  reduction  of  what 
can  be  accomplished  through  the  use  of  fimds  for  wages,  materials,  and 
the  like,  there  is  no  means  of  obtaining  such  additional  capital  except  by 
proving  to  the  investor  that  the  railroads  are  able  to  meet  his  demands 
as  to  greater  security  through  the  earning  of  much  larger  net  sums. 
This  argument  has  been  most  effectively  presented  in  the  data  filed  with 
the  Conmiission  by  Vice-President  W.  H.  Williams  of  the  Delaware  & 
Hudson  Co.,  who  has  made  one  of  the  most  careful  studies  of  the  situa- 
tion as  to  railway  credit  and  increased  competition  for  capital  that  has 
as  yet  been  presented  to  the  Interstate  Commerce  Commission.  Mr. 
Williams  in  his  analysis  reaches  the  conclusion  that: 

I.  There  has  been  a  general  increase  in  the  interest  return  demanded  of 
investment  securities  and  at  the  same  time  the  railroads  have  been  forced  to 


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490  JOURNAL  OP  POLITICAL  ECONOMY 

meet  growing  competition  in  the  investment  field  from  the  so-called  pubUc 
utility  and  industrial  enterprises  which  are  able  to  offer  the  higher  rates  of 
interest,  and  from  governmental  sources  which  have  increased  their  demands 
for  capital  and  have  raised  their  tax  ratSs  in  order  to  make  their  demands 
effective. 

2.  The  ability  of  the  railroads  to  secure  new  capital  has  been  in^>aired  by 
the  reduction  in  the  factor  of  safety.  Investors  have  noted  the  increased  pro- 
portion of  the  total  financing  depending  upon  bond  issues,  and  the  failure  of 
the  additional  capital  invested  during  recent  years  to  earn  any  or  an  adequate 
return. 

Probably  the  argument  before  the  Commission  with  reference  to  the 
conditions  in  the  matter  of  railroad  capital  requirements  has  never  before 
been  so  effectively  represented  as  it  has  in  this  case,  and  the  fact  is  fully 
recognized  both  by  members  of  the  Conunission  and  by  the  so-called 
members  of  Congress.  That  is  shown  in  the  outburst  of  criticism  on  the 
floor  of  the  Senate,  originating  with  Senators  La  Follette  and  Cummins, 
the  two  most  extreme  anti-railroad  men  in  the  so-called  "Progressive" 
wing  of  that  body.  Their  arguments,  offered  in  formal  speeches,  have 
been  intended  to  show  statistically  and  otherwise  the  facts  as  to  the 
great  increase  in  railroad  incomes  during  the  past  ten  or  fifteen  years. 
With  this  general  showing  no  one,  of  course,  is  disposed  to  quarrel,  the 
chief  conunent  being  that  such  arguments  fail  to  consider  the  increased 
costs  of  operation  and  of  capital  which  have  much  more  than  offset  the 
growth  in  revenue  during  the  period  in  question. 

THE  RUKAL  CREDIT  BILL 

Congress  has  definitely  taken  up  the  task  of  preparing  a  rural  credit 
bill  as  a  complement  to  the  Federal  Reserve  act  passed  last  December. 
The  work  has  been  intrusted  to  a  joint  subconmiittee  of  the  Senate  and 
House  which  has  been  laboring  upon  the  preliminary  draft  of  a  measure 
intended  to  provide  a  satisfactory  means  for  the  extension  of  loans  to 
farmers.  It  is  expected  that  the  new  bill  will  be  indorsed  by  the  adminis- 
tration and  introduced  into  both  houses  at  a  very  early  date.  The 
chief  features  of  the  measure  are  expected  to  be  about  as  follows:  After 
providing  for  the  establishment  of  local  institutions  organized  to  extend 
loans  secured  by  a  first  lien  on  farm  lands,  the  measure  will  authorize  the 
establishment  of  banking  institutions  empowered  to  issue  bonds  repre- 
senting the  local  first  mortgages  taken  over  from  the  institutions  which 
originally  made  them.  These  bonds  may  be  sold  to  investors  or  may 
be  turned  over  to  the  local  institutions  themselves  in  pa3rment  for  the 


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NOTES  491 

mortgages,  or  may  be  diq)osed  of  in  both  ways;  but  in  any  event  the  plan 
will  be  to  obtain  fresh  capital  for  further  loans  upon  real  estate  by  ulti- 
mately getting  the  bonds  into  the  hands  of  investors  who  will  hold  them 
and  in  return  furnish  the  funds  necessary  for  the  farm  loans.  Amortiza- 
tion payments  will  enable  the  makers  of  the  mortgages  to  cancel  their 
indebtedness  in  the  course  of  a  fixed  term  of  years  by  pa3dng  in  at 
stated  intervals  a  specified  percentage  upon  the  amount  of  the  face  of  the 
loan.  A  general  supervisory  board,  or  government  mechanism  of  some 
kind,  will  be  created  to  furnish  the  proper  oversight  and  insure  the  legiti- 
mate management  of  the  bond  and  mortgage  exchanges.  It  is  recog- 
nized that  the  success  of  the  plan  will  depend  fundamentally  upon  a 
conservative  and  appropriate  appraisal  of  the  lands  upon  which  the 
securities  are  based  and  that  such  an  appraisal  cannot  be  satisfactorily 
made  except  under  the  most  minute  supervision  and  control  in  order 
that  the  possibilities  of  danger  in  overestimate  may  be  kept  down  to  the 
narrowest  minimum  consistent  with  the  proper  working  of  the  system. 
Such  appraisals  if  correctly  carried  out  will,  it  is  expected,  avoid  the 
danger  of  a  real  estate  expansion  that  would  raise  values  and  threaten 
the  soundness  of  the  system  as  a  whole.  It  is  believed,  however,  that 
other  safeguards,  prominent  among  them  the  limitation  of  the  purposes 
for  which  loans  can  be  made,  must  be  carefully  applied.  These  purposes, 
it  is  thought,  should  include  only  the  improvement  of  the  land  on  the 
security  of  which  the  loan  is  contracted,  although  some  would  permit  the 
making  of  loans  to  a  certain  extent  for  the  purpose  of  paying  off  a  portion 
of  the  purchase  money  required  in  the  acquisition  of  farm  lands.  Further 
than  thb,  proper  provision  for  reserves  against  loss  and  suitable  pro- 
tection in  cases  where  default  has  occurred  are  likewise  to  be  called  for. 
The  prospects  of  passing  such  a  rural  credit  bill  at  the  current  session  of 
Congress  had  be«i  accounted  good  up  to  the  time  that  the  hostilities  with 
Mexico  became  acute.  Such  a  measure  is  urgently  desired  by  members 
of  Congress  who  have  agricultural  constituencies,  and  the  President  had 
quite  definitely  conmiitted  himself  to  some  such  plan  last  year,  when 
the  general  banking  and  currency  act  was  under  consideration.  The 
Mexican  situation  may  in  this  case,  as  in  many  others,  limit  the  possi- 
bilities of  progress  and  may  consequently  prevent  the.  adoption  of  a 
bill  by  both  houses  before  adjournment.  That  a  rural  credit  measure 
framed  on  these  lines  will,  however,  be  approved  and  passed  by  Congress 
before  the  expiration  of  many  months  is  now  generally  conceded. 


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BOOK   REVIEWS   AND   NOTICES 


An  Economic  Interpretation  of  the  Constitution  of  the  United  States. 
By  Charles  A.  Beard.  New  York:  Macmillan,  1913.  8vo, 
pp.  viiH-330.    $2 .  25  net. 

That  our  Constitution  was  framed  and  its  ratification  secured  largely 
through  the  efforts  of  the  conservative,  propertied,  and  commercial 
classes  seeking  both  protection  from  the  attacks  of  the  debtor  and  agrarian 
classes  and  power  to  further  the  ends  of  trade,  is  now  a  generally  accepted 
proposition.  But  such  a  systematic  analysis  and  interpretation  of  the 
Constitution  from  the  point  of  view  of  the  economic  interests  involved  as 
is  presented  in  the  volume  before  us  has  not  hitherto  been  attempted. 

The  author  starts  out  by  differentiating  the  various  groups  of  eco- 
nomic interests  to  be  found  at  this  period;  such  as  those  holding  public 
securities — ^who  it  is  estimated  gained  $40,000,000  by  the  government's 
refunding  of  the  debt;  those  interested  in  manufactures,  in  commerce,  or 
in  western  lands;  those  holding  money  or  loans;  small  landed  holders, 
especially  those  with  mortgages;  and  debtors  generally.  Under  the 
Confederation  the  course  of  affairs  had  been  most  unfavorable  for  the 
propertied  interests;  their  rights  had  been  constantly  threatened  by  the 
debtor  classes,  and  the  central  government  was  too  weak  and  powerless 
either  to  maintain  its  own  credit  or  to  help  trade  and  commerce.  Some 
change  was  inevitable.  A  detailed  analysis  of  the  economic  interests 
of  the  members  of  the  Convention  indicates  that  most  of  the  members 
came  from  towns,  where  of  course  the  personalty  was  largely  held,  and 
that  not  one  represented  in  his  personal  economic  interests  the  small 
farming  or  mechanic  class.  At  least  five-sixths  were  immediately  and 
personally  interested,  and  to  a  greater  or  less  extent  were  economic 
beneficiaries  from  the  adoption  of  the  Constitution.  Forty  out  of  the  55 
were  holders  of  public  securities.  Personalty  in  the  shape  of  money 
loans  was  represented  by  24  members;  in  the  form  of  lands  for  ^>ecula- 
tion,  by  14;  in  mercantile,  manufacturing,  and  shipping  interests,  by  11 ; 
and  in  slaves,  by  15. 

Turning  to  discuss  the  Constitution  itself  as  an  economic  document, 
our  author  declares  that  this  phase  is  best  set  forth  in  the  Federalist^ 
which  is  "  the  finest  study  in  the  economic  interpretation  of  politics  which 
exists  in  any  language;  and  whoever  would  understand  the  Constitution 

492 


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BOOK  REVIEWS  AND  NOTICES  493 

as  an  economic  document  need  hardly  go  beyond  it "  (p.  153).  Moreover, 
^' every  fimdamental  appeal  in  it  is  to  some  material  and  substantial 
interest"  (p.  154).  The  system  of  government  therein  set  up  is  declared 
to  consist  of  two  parts:  first,  a  positive  one  creating  a  government 
endowed  with  certain  powers  and  so  constructed  as  to  break  the  force 
of  majority  rule  and  prevent  the  invasion  of  property  rights  by  minorities; 
secondly,  a  negative  part  restricting  state  legislatures  which  during  the 
Confederation  had  been  so  active  in  their  attacks  on  capital.  The 
author  then  discusses  the  various  articles,  particularly  those  dealing  with 
the  taxing  power,  the  support  of  the  army  and  navy,  the  control  of  com- 
merce and  of  western  lands,  to  show  how  each  was  designed  with  the 
purpose  of  protecting  property  rights.  An  examination  of  the  political 
doctrines  of  the  members  of  the  Convention,  accompanied  by  extracts 
from  their  writings,  is  made  for  the  purpose  of  showing  that  the  members 
were  quite  aware  of  the  conflict  of  economic  interests  involved.  The 
method  of  ratifying  the  Constitution  was  revolutionary  in  character,  for 
otherwise  the  people  would  not  have  adopted  it;  and  ratification  was 
secured  only  by  the  most  cautious  and  astute  methods.  In  the  popular 
vote  it  is  estimated  that  about  one-third  of  the  adult  males  were  dis- 
franchised, and  probably  only  between  a  fifth  and  a  quarter  actually 
took  part  in  electing  delegates.  The  opposition  was  scattered  and 
lacked  leadership,  and  this  facilitated  the  work  of  the  well-organized, 
alert,  class-conscious,  propertied  groups  and  finally  won  adoption.  The 
discussion  and  vote  in  the  state  ratifying  conventions  still  further  brought 
out  the  fact  that  the  opposition  was  to  be  found  in  the  agricultural  regions 
and  in  the  sections  where  the  debtor  class  had  sought  for  paper  money. 
To  sum  it  up  with  the  author's  final  paragraph:  "The  Constitution  was 
not  created  by  the  'whole  people'  as  the  jurists  have  said;  neither  was 
it  created  by  the  states  as  southern  nullifiers  long  contended;  but  it  was 
the  work  of  a  consolidated  group  whose  interests  knew  no  state  bounda- 
ries and  were  truly  national  in  their  scope"  (p.  325). 

The  value  of  this  volume  consists  in  the  careful  gathering  together 
of  such  evidence  as  the  author  had  opportunity  to  obtain  concerning  the 
views  and  the  immediate  economic  interests  of  the  groups  concerned  in 
formulating  and  furthering  the  ratification  of  the  Constitution.  The 
researches  in  the  records  of  the  Department  of  the  Treasury  constitute 
the  most  important  contribution  of  the  volume,  while  his  gathering 
together  in  one  place  of  extracts  from  contemporary  writings  showing 
the  influence  of  economic  forces  is  most  suggestive.  To  the  reviewer, 
interested  in  the  problem  as  an  economist,  this  increased  contribution  to 


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494  JOURNAL  OP  POUTICAL  ECONOMY 

our  knowledge,  and  e^)ecially  the  recognition  given  to  economic  forces  by 
a  historian,  are  most  welcome. 

As  the  author  carefully  states,  however,  this  is  not  an  exhaustive 
study,  but  fragmentary  and  intended  to  suggest  new  lines  of  historical 
research.  The  volxmie  has  been  confined  to  the  immediate  situation  as 
foimd  to  exist  under  the  Confederation.  Even  in  this  limited  field  there 
is  no  attempt  to  go  back  to  the  actual  economic  conditions,  to  find  out 
about  the  business  depression  which  existed,  or  to  inquire  to  what  extent 
that  was  due  to  the  form  of  government  under  the  Confederation.  This 
economic  background  is  not  developed  and  attention  is  concentrated  on 
the  writings  and  economic  connections  of  the  leaders.  The  effect  of  this 
method  is  particularly  noticeable  in  the  chapter  on  the  "  Constitution  as 
an  Economic  Document."  Assuredly  to  understand  the  fimdamental 
conditions  which  shaped  the  provisions  affecting  the  material  interests 
involved  we  have  to  go  back  to  the  whole  previous  history  of  the  Colonies, 
though  to  be  sure  much  of  this  only  forecasts  what  was  to  take  place  later 
under  the  Confederation.  For  example,  take  that  fundamental  featiure, 
the  fact  that  the  federal  government  is  one  of  delegated  powers  only  and 
that  the  states  retain  all  the  rest.  Surely  that  cannot  be  understood 
except  in  the  light  of  the  isolated  and  provincial  economy  which  separated 
the  groups  of  Colonies  in  early  years,  though  of  course  religious,  geo- 
graphic, political,  and  other  forces  entered  in  as  well  as  economic.  Nor 
can  the  demand  for  more  power  for  the  federal  government  be  understood 
without  some  reference  to  early  signs  of  a  growing  national  economy 
during  the  later  years.  Moreover,  it  must  be  remembered  that  the  very 
existence  of  a  democratic  form  of  government  in  no  small  degree  made 
possible  the  greater  freedom  of  play  for  the  large  groups  of  economic 
interest  involved. 

It  should  be  noted  too  that  there  is  no  attempt  to  answer  the  ques- 
tion ^s  to  the  interpretation  of  the  Constitution.  The  reader  has  pre- 
sented to  him  simply  the  facts  that  bear  out  the  author's  point  of 
view.  Nowhere  is  any  effort  made  to  weigh  the  relative  importance 
of  the  forces  seeking  political  freedom,  religious  liberty,  or  material 
gain. 

It  is  doubtless  true  that  the  immediate  causes  for  the  change  in  our 
form  of  government  were  the  necessity  of  adequate  financial  support  for 
the  government  and  the  desire  to  place  in  its  hands  the  power  to  protect 
property  rights  and  to  foster  industry  and  commerce.  Under  the  Con- 
federation the  individualistic  tendencies  freed  by  the  Revolution  were 
degenerating  into  a  form  of  anarchy  which  among  other  things  caused 


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BOOK  REVIEWS  AND  NOTICES  495 

heavy  losses  to  the  propertied  classes.  Yet  the  protection  of  property 
interests,  which  it  is  said  those  who  agitated  for  the  change  primarily 
sought,  might  have  been  secured  by  other  forms  of  government  than 
that  adopted.  But  a  less  representative  form  of  government  stood  no 
chance  of  being  adopted.  Why  ?  Because  the  people  regarded  political 
liberty  as  the  most  essential  of  all  rights,  certainly  an  absolutely  funda- 
mental factor  and  not  to  be  explained  on  economic  grounds  alone. 
The  final  explanation  for  the  form  of  government  actually  chosen 
must  of  course  go  back  to  an  infinite  number  of  forces  working  through- 
out our  Colonial  history.  We  have  here  a  statement  of  one  group  of 
these  forces  so  far  as  they  were  reflected  by  the  writings  and  economic 
connections  of  the  leaders  at  the  period  of  formation  and  adoption.  It 
is  made  plain  what  the  groups  of  economic  interests  were  and  that  they 
must  have  been  of  great  importance,  though  the  more  fimdamental 
economic  background  of  it  all  is  not  developed.  And  the  questions,  what 
forces  other  than  the  economic  were  operative,  and  how  important  they 
were  as  compared  with  the  ecopomic,  still  remain. 

Chester  W.  Weight 
Univeksity  of  Chicago 


e  e^opoc 


The  Granger  Movement.  A  Study  of  Agricultural  Organization  and 
Its  Political^  Economic,  and  Social  Manifestations ^  1870-1880. 
By  Solon  Justus  Buck.  (Vol.  XIX  of  "Harvard  Historical 
Studies.")  Cambridge:  Harvard  University  Press,  1913. 
8vo,  pp.  xi+384.    $2 .00  net. 

Not  a  few  of  the  recent  volumes  relating  to  agriculture  that  the 
revival  of  interest  in  that  branch  of  industry  has  brought  forth  faith- 
fully reflect  in  their  crudely  exploitative  character  the  early  type  of 
agriculture  in  this  country.  It  is  especially  refreshing,  therefore,  to 
delve  into  this  volume  of  Dr.  Buck's,  which  so  well  illustrates  the  merits 
of  intensive  cultivation. 

In  an  introductory  chapter  on  "Fundamental  Conditions"  the 
author  gives  a  very  satisfactory  account  of  the  causes  of  the  discontent 
among  farmers  which  finally  came  to  a  head  in  the  "  Granger  movement" 
of  the  seventies.  Among  the  causes  thus  eniunerated  are  the  following: 
relatively  less  rapid  improvement  in  the  conditions  existing  among 
farmers  than  characterized  other  classes  subsequent  to  the  Civil  War, 
the  one-crop  system,  the  abuses  associated  with  railroad  transportation, 
excessive  charges  by  manufacturers  and  middlemen,  the  credit  system, 


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496  JOURNAL  OP  POLITICAL  ECONOMY 

excessive  taxation,  appreciation  of  a  depredated  currency,  overproduc- 
tion in  farm  crops,  and  a  relative  decline  in  the  social  status  of  the  tillers 
of  the  soil.  In  the  judgment  of  the  reviewer,  the  author  fails  to  empha- 
size the  fundamentally  important  part  played  by  the  government  land 
policy  as  the  ultimate  cause  of  most  of  the  conditions  which  he  lists, 
though  he  does  give  a  certain  emphasis  to  this  point.  Again,  the  view 
that  farming  had  declined  from  a  status  of  honor  in  the  ''early  days 
of  the  republic"  to  a  condition  of  disrespect  in  the  period  in  question 
must  be  regarded  with  doubt  by  the  agricultural  historian  who  recalls 
the  lamentations  over  the  low  estate  of  agriculture  in  those  same 
''early  dsLys"  and  who  is  familiar  with  the  constant  repetition,  decade 
after  decade,  of  the  sentiment  that  agriculture  had  declined  from  a  con- 
dition of  honor  at  some  previous  period  to  a  very  low  estate  but  was  just 
about  to  regain  its  position  of  honor  again. 

Chap,  ii  gives  a  full  account  of  the  origin,  rise,  culmination,  and 
decline  of  the  Patrons  of  Husbandry — the  period  of  decline  coinciding 
with  the  apparent  failure  of  the  granger  railway  legislation  and  with 
the  probably  more  real  faQure  of  tha  co-operative  activities  of  the 
order.  Including  a  chapter  treating  of  ^fhe  Granger  movement  as  a 
political  force  and  relating  largely  to  the  subject  of  transportation, 
four  chapters  are  occupied  with  this  latter  subject.  The  Granger  rail- 
way legislation  in  Illinois,  Minnesota,  Iowa,  and  Wisconsin  naturally 
comes  in  for  a  large  share  of  attention,  while  one  chapter  is  occupied 
with  the  Granger  cases  in  the  Supreme  Court.  The  thorough  character 
of  the  study  is  nowhere  better  illustrated  than  in  these  chapters.  The 
very  proper  conclusion  is  reached  that  while  the  immediate  economic 
effects  of  the  Granger  agitation  for  railroad  regulation  were  small,  the 
indirect  results  were  more  important,  since  it  led  to  the  decisions  of  the 
Supreme  Court  which  established  the  right  of  public  control  over  the 
railroads  and  laid  the  foimdation  for  later  legislation. 

Though  the  author  modestly  disclaims  exhaustive  treatment  in 
the  chapter  treating  of  "Business  Co-operation"  as  a  feature  of  grange 
activity,  it  must  be  admitted  that  he  has  succeeded  in  conveying  a 
very  considerable  amount  of  information  with  reference  to  this  phase 
of  the  general  subject.  However,  since  the  subject  of  agricultural 
co-operation  is  likely  to  attract  increasing  attention  in  the  future  in  the 
United  States,  it  is  to  be  regretted  that  less  attention  was  not  given  to 
the  subject  of  railway  legislation  and  more  to  the  subject  of  co-operation. 
But  here  spoke  the  historian  rather  than  the  economist.  We  are  told  that 
an  "almost  incredible  number"  of  co-operative  or  pseudo-co-operative 


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BOOK  REVIEWS  AND  NOTICES  497 

enterprises  were  established;  and  the  aggr^ate  business  done  by  the 
local  agencies  during  the  years  1873-75  is  declared  to  have  been  enor- 
mous and  undoubtedly  to  have  effected  very  considerable  savings  to  the 
members.  The  author  is  of  the  opinion  that  if  the  National  Grange 
had  taken  up  the  matter  in  the  beginning  and  had  worked  out  a  com- 
prehensive system  of  co-operation  for  the  order,  as  later  (1876)  it  did 
set  forth  rules  embod3ang  the  Rochdale  plan,  much  confusion  and  dis- 
aster might  have  been  avoided.  Where  the  Rochdale  plan  was  followed 
no  small  d^ee  of  success  was  actually  realized;  and  it  seems  a  fair 
deduction  from  the  author's  discussion  to  conclude  that  if  this  plan  had 
been  adhered  to  from  the  first  and  the  co-operators  had  been  willing 
gradually  to  broaden  their  activities  rather  than  to  ''rush  pell-mell  into 
all  sorts  of  business  schemes/'  there  might  have  been  a  different  story  to 
tell  than  that  of  the  general  failure  of  the  co-operative  enterprises.  At 
any  rate  the  farmers  came  to  learn  their  power  as  well  as  to  gain  a  more 
adequate  appreciation  of  the  services  afforded  by  the  middlemen,  while 
the  merchants  and  manufacturers  on  their  part  learned  that  the  farmers 
were  not  helpless,  and  moderated  their  charges  accordingly. 

A  chapter  on  the  social  and  educational  features  of  the  Grange 
brings  out  the  fact  that  these  were  not  only  the  original  features  but  that 
they  have  proved  the  most  permanent  features  and  that  the  (organization 
has  been  most  permanently  successful  where  these  features  have  been 
most  emphasized. 

In  estimating  the  significance  of  the  movement  as  a  whole,  the  author 
correctly  regards  it  as  something  more  than  a  farmers'  movement — ^in 
short,  as  part  of  the  manifestation  that  with  the  close  of  the  Civil  War 
American  history  had  entered  upon  a  new  phase  in  which  the  dominant 
feature  has  been  the  struggle  of  the  people  to  preserve  political  and  eco- 
nomic democracy,  which  was  threatened  by  the  influence  of  great 
accumulations  and  combinations  of  capital.  Assent  can  also  be  given 
to  the  author's  contention  that  the  contemporaneous  labor  movement 
was  a  parallel  feature  of  the  same  general  movement.  But  when  he 
refers  to  the  disappearance  of  the  frontier  as  having  closed  an  opportunity 
previously  open  to  the  oppressed  and  discontented  and  as  thus  having 
contributed  materially  to  the  general  revolt  against  corporate  wealth,  it 
is  clear  that  the  author  has  made  a  faux  pas.  Not  yet  had  the  dis- 
appearance of  the  frontier,  except  in  a  merely  formal  sense,  begun. 
The  author's  own  statistics  as  to  the  expansion  of  farm  area  during  the 
period  in  question  constitute  his  own  refutation.  It  was  not  restriction 
of  the  farming  area  but  a  plethora  of  land  with  the  resulting  over- 


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498  JOURNAL  OF  POLITICAL  ECONOMY 

production  that  created  depression  among  the  fanning  interests. 
Neither  could  disappearance  of  the  frontier  have  left  the  laborer  at  the 
mercy  of  the  capitalist  at  this  period,  since,  as  a  matter  of  fact,  the  f ronti^ 
had  not  yet  disappeared.  A  really  fundamental  basis  of  the  disturbance 
of  labor  conditions  might  far  better  have  been  emphasized  in  this  con- 
nection. This  factor  relates  to  the  disturbance  created  by  the  introduc- 
tion of  revolutionizing  economies,  in  the  nature  of  labor-saving  machinery 
and  labor-saving  agencies  in  general.  Given  time  for  industry  to  adjust 
itself  in  the  form  of  the  development  of  new  activities  to  satisfy  new 
wants,  such  economies  ultimately  result  in  a  higher  standard  of  living 
and  in  normal  conditions  of  emplo3rment  again.  But  after  the  wonder- 
ful outburst  of  productive  energy  associated  with  and  following  the 
Civil  War,  to  which  outburst  the  author  himself  refers,  there  ensued 
what  might  be  called  a  period  of  temporary  general  overproduction, 
with  resulting  unemplo3rment,  low  wages,  and  derangement  of  labor 
conditions  in  general.  The  more  recent  actual  disappearance  of  the 
frontier  has — as  might  have  been  anticipated — ^really  benefited  the 
farmer;  while  it  is  doubtful  if,  even  at  the  present,  labor  has  much  more 
than  b^un  to  be  imfavorably  influenced  by  the  disappearance  of  the 
frontier.  Dr.  Buck  has,  in  common  with  other  authorities,  antedated 
the  influence  of  the  disappearance  of  the  frontier  by  almost  a  generation. 
With  reference  to  this  whole  matter  it  may  be  said  that  it  is  significant 
that  David  A.  Wells's  RecetU  Economic  Changes  does  not  appear  in  the 
bibliography. 

A  good  index  and  bibliography  and  copious  footnote  references 
increase  the  usefulness  of  this  voliune,  which  has  many  merits  and  few 

defects. 

John  G.  Thompson 
UNiVERsmr  Of  Illinois 


Industrial  and  Commercial  Geography,  By  J.  Russell  Smith.  New 
York:  Henry  Holt  &  Co.,  1913.    8vo,  pp.  xi+914.    $3.50. 

The  aim  of  this  stately  volume  is,  in  the  words  of  the  author,  "to 
interpret  the  earth  in  terms  of  its  usefulness  to  himianity.  Since  the 
primary  interest  is  humanity  rather  than  parts  of  the  earth's  surface, 
the  book  deals  with  hxmian  activities  as  sheeted  by  the  earth,  rather 
than  with  parts  of  the  earth  as  they  affect  human  activities." 

In  spite  of  this  implied  limitation  of  the  subject  to  the  effects  of 
physical  environment,  no  such  limitation  is  actually  apparent  in  the 
treatment,  human  and  economic  causes  receiving  their  full  share  of 


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BOOK  REVIEWS  AND  NOTICES  499 

credit.  The  author's  conception  thus  stands  at  the  opposite  extreme 
from  the  one  advocated  (if  not  extensively  exemplified)  by  those  who 
seek  to  claim  economic  geography  as  a  branch  of  physical  science.  As 
treated  by  Professor  Smith,  the  subject  is  clearly  a  part  of  economics, 
or  more  specifically,  of  that  description  of  industry  which  forms  the 
concrete  basis  of  theoretical  economics.  This  book  should  therefore  be 
welcomed  by  all  who  hold  that  economic  geography  is  a  social  rather 
than  a  physical  or  natural  science. 

The  plan  of  treatment  adopted  is  S3rstematic,  that  is,  by  industries, 
rather  than  by  regions  or  any  compound  method  such  as  the  one  favored 
by  Adams  and  by  one  or  two  others.  Part  I  (pp.  1-623),  called  "Indus- 
trial Geography,"  comprises  seventeen  chapters,  as  follows:  (i)  our 
changing  environment;  (2)  the  place  and  nature  of  agriculture;  (3)  the 
cereds;  (4)  starch  foods;  (5)  the  animal  industry;  (6)  the  vegetable, 
fruit,  and  wine  industries;  (7)  sugar;  (8)  condiments  and  tobacco;  (9) 
fisheries;  (10)  the  fundamentals  of  manufacture;  (11)  the  forest  indus- 
tries and  paper;  (12)  fibers,  textiles,  and  clothing;  (13)  leather  and  rub- 
ber; (14)  machinery,  shipbuilding,  and  metal  industries;  (15)  chemical 
raw  materials  and  manufacture;  (16)  the  mineral  industries;  (17)  the 
expansion  of  industry  and  resources.  Part  II,  called  "Conunerdal 
Geography,"  contains  sixteen  chapters  (pp.  624-902)  devoted  to  (i)  the 
law  of  trade;  (2)  the  world  highway — the  ocean  and  its  carriers;  (3  to 
12)  principal  trade  routes  of  specific  parts  of  the  world,  especially  by 
sea;  (13)  the  trade  center  and  its  development;  (14)  the  work  of  the 
trade  center;  (15)  the  balance  of  trade  and  its  relation  to  industrial 
development;  (16)  the  influence  of  geographic  factors  on  the  commer- 
cial policy  of  nations.  This  part  is  essentially  a  summary  of  the 
author's  previous  books  on  the  Organization  of  Ocean  Commerce  and 
the  Ocean  Carrier. 

The  author  argues  that  the  treatment  by  industries  "brings  causes 
and  results  together  in  their  explanatory  relation";  but  this  is  precisely 
the  relation  which  (as  the  reviewer  sees  it)  the  systematic  or  industry 
plan  of  treatment  tends  to  obscure.  For  example,  wheat  is  a  sunmier 
crop  in  some  districts  and  a  strictly  winter  crop  in  others;  yet  the 
reasons  for  this  difference  cannot  be  niade  clear  imless  either  the  student 
has  taken  recently  a  good  course  in  physical  geography,  or  else  there  is 
interjected  in  the  midst  of  the  discussion  of  the  wheat  industry  a  section 
on  climate.  Moreover,  even  if  this  is  done,  the  student  cannot  hope  to 
obtain  from  scattered  incidental  references  a  clear  and  comprehensive 
conception  of  the  economic  character  of  any  particular  part  of  the  world; 


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SOO  JOURNAL  OP  POUTICAL  ECONOMY 

especially  when,  as  in  this  book,  the  transportation  side  of  the  subject  is 
separated  from  production,  thus  necessitating  a  further  splitting-up  of 
the  material  relating  to  any  one  country.  It  follows  that  while  this 
book  contains  a  wealth  of  material  and  will  be  of  decided  interest  to 
instructors  and  advanced  students,  its  use  seems  likely  to  offer  some 
difficulties  in  the  lower  college  years,  at  least  with  students  not  already 
well  trained  in  physical  geography. 

In  addition  to  this  limitation,  there  are  various  detaik  as  to  facts, 
language,  or  doctrines  which  seem  to  invite  criticism.  A  few  of  them 
(noted  in  less  than  sixty  pages  of  text)  may  be  worth  mentioning  to 
illustrate  what  is  here  meant,  and  with  a  view  to  a  second  edition. 

"A  group  of  people  can  only  prosper  ....  when  their  environment 
furnishes  them  an  abundance  of  food''  (p.  3).  True  under  primitive, 
but  n6t  under  modem,  conditions,  provided  the  environment  furnishes 
something  else  of  value. 

"One  of  the  essences  of  war  is  transportation"  (p.  10).  One  is 
tempted  to  ask.  What  is  an  "essence  of  war"  ?  Does  "essence  of"  mean 
the  same  thing  as  "essential  to"  ? 

"The  wheat-grower  cannot  afford  to  haul  wheat  in  wagons  more 
than  40  or  45  miles"  (p.  14).  The  Tenth  Census  estimated  20  miles  as 
the  limit. 

"In  the  great  dty  ....  he  must  pay  ....  for  a  host  of  services 
that  add  no  value  to  the  goods  and  often  detract  from  their  value" 
(p*  33)*  It  is  difficult  to  make  out  in  what  sense  "value"  is  here  used. 
It  cannot  be  the  proper  sense  of  "power  in  exchange,"  because  the  fact 
that  services  are  paid  for  proves  that  they  have  added  to  value  in  this 
sense;  nor  can  it  even  mean  utility,  miless  time  and  place  utilities  be 
ignored.  In  any  case,  the  meaning  here  given  to  "value"  is  imknown 
to  economics. 

"These  new  lands  ....  were  ....  often  actually  given  away. 
This  made  the  production  of  wheat  a  much  cheaper  process  ....  than 
in  Europe,  where  rent  and  interest  on  land  value  is  high"  (pp.  54-55). 
This  passage  clearly  inverts  the  relation  of  cause  and  effect,  making 
economic  rent  a  cause,  rather  than  a  result,  of  price. 

"Bruges,  l3nbiig  securely  on  the  canals  that  connected  the  Rhine 
with  the  ocean "  (p.  852).  The  sittiation  here  suggested  is  geographically 
impossible,  as  Bruges  lies  seven  miles  inland  from  the  sea  and  is  sq>a- 
rated  from  the  Rhine  by  the  valleys  of  the  Meuse  and  the  Schelde.  The 
channel  referred  to  was  natural,  not  artificial,  and  led  directly  to  the 
open  sea.    (Longnon,  Atlas  historique,  Plate  VIII.) 


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BOOK  REVIEWS  AND  NOTICES  501 

As  against  these  matters,  which  seem  to  argue  haste  or  inadequate 
proofreading,  it  is  a  pleasure  to  note  that  the  author  is  sound  on  the 
''balance  of  trade"  idea.  This  is,  in  fact,  one  of  the  few  books  on  this 
subject  which  are  not  infected  with  the  old  mercantilist  fallacy  as  to  the 
object  of  commerce. 

Edwaiu)  V.  Robinson 

University  of  Minnesota 


The  BrikmnicQuesiian.  By  Riceqisd  Jebb.  London:  Longmans, 
Green  &  Co.,  1913.    i2mo,  pp.  262.    I0.35. 

This  is  a  tract  for  the  times  which  should  be  especially  welcome  to 
those  interested  in  the  evolution  of  a  great  empire.  With  almost  meticu- 
lous care  the  historian  of  the  Imperial  Conference  traces  out  the  tangled 
web  of  policies  and  interests  which  comprise  the  Britannic  question. 
Every  feature  of  the  problem  receives  searching  analysis  and  considera- 
tion, and  the  persevering  reader  will  be  well  repaid  by  the  insight  he  will 
have  obtained  into  the  larger  problems  of  the  British  empire. 

Unlike  most  writers  upon  imperial  topics  Mr.  Jebb  does  not  lose 
sight  of  the  great  importance  of  the  economic  side  of  the  problem. 
In  this  respect  the  book  should  appeal  to  students  of  economics  generally, 
for  it  is  really  a  study  in  the  economics  of  a  geographically  decentralized 
empire.  Practically  all  of  the  schemes  which  he  weighs  and  finds  wanting 
owe  their  rejection  to  economic  considerations.  For  example.  Imperial 
Federation,  "by  which  is  meant  the  creation  of  a  federal  parliament 
with  an  executive  responsible  to  it"  and  "limited  to  foreign  affairs 
and  defense,"  is  dismissed  as  "impracticable"  because  it  divorces  foreign 
affairs  from  trade  and  revenue.  The  author  points  out  that  in  both 
Germany  and  South  Africa  "political  union  was  actually  preceded  by  a 
customs  union."  On  the  other  hand,  the  union  of  Sweden  and  Norway 
went  to  pieces  ultimately  over  divergent  commercial  poUdes,  while 
Austria  and  Hungary  only  averted  disruption  by  a  compromise  tariff. 

With  such  careful  consideration  of  the  economic  difficulties  involved 
in  a  change  in  the  relationship  between  Great  Britain  and  her  colonies, 
there  is  some  irony  in  the  fact  that  Mr.  Jebb's  own  constructive  scheme 
is  most  vulnerable  at  this  point.  Mr.  Jebb's  idea  is  that  Great  Britain 
should  forsake  her  free -trade  position  and  institute  tariff  reform.  The 
distinctive  feature  of  this  change  should  be  that "  colonial  produce  would 
be  dutiable  as  well  as  foreign  produ^^  albeit  at  a  lower  rate  of  duty." 
This  would  provide,  he  thinks,  m^^,  revenue,  ^ive  some  advantage  to 
British  agriculture,  and  afford  am  J^  tedpiocalix^S  ^  British  pre!  er- 


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502  JOURNAL  OF  POLITICAL  ECONOMY 

ence  in  colonial  tariffs.    Along  with  this  proposal  he  supports  the  plan 
of  fleet  units  maintained  by  autonomous  colonial  states. 

The  author's  claim  that  the  incidence  of  a  food  tax  would  lie  alto- 
gether upon  the  producer  is  quite  doubtful.  Certainly  the  proposition 
deserves  careful  examination  before  being  made  fundamental  to  an 
imperial  policy.  Granted,  moreover,  the  logic  of  Mr.  Jebb's  contention, 
surely  the  prospect  of  the  colonial  producer  paying  this  tax  in  order  that 
the  British  farmer  might  be  relieved  would  not  presage  economic  harmony 
within  the  empire.  Both  here  and  in  the  view  that  Great  Britain  should 
change  her  tariff  to  secure  a  basis  for  reciprocating  preferences  is  implied 
the  protectionist  theory  of  international  trade — a  tariff  as  a  weapon  of 
retaliation  and  reward  rather  than  as  a  purely  fiscal  instrvunent. 

Further,  in  point  of  fact,  Mr.  Jebb  overestimates  the  sentiment  for  an 
imperial  preference.  The  Fielding  tariff,  which  embodied  the  idea  in 
Canada,  was  never  received  with  any  great  enthusiasm  by  the  commercial 
interests  of  the  Dominion.  Long  before  Sir  Wilfrid  Laurier's  govern- 
ment met  defeat  the  movement  that  way  was  dead,  killed,  some  hint,  by 
the  Canadian  Manufacturers'  Association.  True  the  preference  yet 
stands,  but  so  modified  that  it  is  absolutely  innocuous. 

Quite  apart  from  the  main  discussion,  it  is  interesting  to  observe 
that  Mr.  Jebb  reveals  an  attitude,  increasingly  common  in  British 
pubh'cists,  of  distrust  of  British  parliamentary  institutions.  Such 
expressions  as  ''restoring  health  to  the  diseased  parliamentary  system," 
"the  progressive  discredit  of  the  British  House  of  Conunons,"  "the 
machine-made  fetters  of  democracy,"  the  parliamentary  procedure 
which  has  become  "farcical,"  would  indicate  that  the  mother  of  parlia- 
ments has  not  escaped  some  of  the  influences  which  beset  representative 
institutions  in  the  United  States  and  Canada. 

D.  A.  MacGibbon 

Brandon  College 


Outlines  of  Railway  Economics.  By  Douglas  Knoop.  New  York: 
Macmillan,  1913.  8vo,  pp.  274.  $1.50. 
This  book  is  based  on  a  course  of  lectures  on  "  Economics  with  Special 
Reference  to  Railwajrs,"  given  at  the  Midland  Railway  Institute,  Derby, 
and  at  the  University  of  Sheffield,  and  now  printed  with  various  additions 
and  alterations.  The  author  is  a  lecturer  on  economics  in  the  University 
of  Sheffield,  and  late  Langton  Fellow  of  the  University  of  Manchester. 
In  this  work  he  has  approached  railway  problems,  particularly  those 
relating  to  rate-making,  from  the  standpoint  of  the  economist,  seeking  to 


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BOOK  REVIEWS  AND  NOTICES  503 

show  how  the  economic  principles  which  underlie  business  and  industry 
in  general  apply  to  railways  in  particular,  and  primarily  to  the  railwa}rs 
of  the  United  Kindgom.  Therefore  the  earlier  chapters  are  devoted  to 
a  preliminary  discussion  of  certain  portions  of  economic  theory,  the 
inclusion  of  which  has  the  advantage  of  emphasizing  the  connection 
between  general  economics  and  railway  economics.  After  discussing 
these  general  principles  affecting  the  demand  for  commodities  and 
services  and  the  various  agents  of  production,  the  law  of  decreasing 
returns,  and  the  law  of  increasing  returns,  the  author  takes  up  the  appli- 
cation of  the  laws  of  increasing  and  decreasing  returns  to  railways, 
showing  how  up  to  a  certain  point  of  capacity  the  unit  cost  of  producing 
transportation  may  be  steadily  decreased  by  an  increase  of  traffic,  but 
that  after  the  maximum  capacity  of  the  facilities  has  been  reached  the 
attempt  to  handle  additional  traffic  without  increasing  the  investment 
in  fadlities  will  only  result  in  increasing  costs.  An  excellent  chapter 
is  devoted  to  a  discussion  of  the  various  kinds  of  combinations  among 
railway  companies  with  their  causes  and  effects;  but  by  far  the  most 
interesting  parts  of  the  book  are  the  chapters  explaining  the  theory  of 
rate-making,  in  which  the  author  illustrates  his  points  in  an  unusually 
illuminating  manner  by  comparisons  with  the  methods  by  which  prices 
of  conmiodities  in  general  are  determined  under  competitive  conditions 
and  under  the  play  of  economic  influences.  Several  chapters  are  devoted 
to  the  explanation  of  the  theory  of  ''differential  charging"  and  its 
practical  applications  to  the  prices  of  various  kinds  of  commodities  and 
services.  As  applied  to  railways  this  theory  is  briefly  stated  by  the 
author  as  follows:  "It  will  be  worth  while  selling  some  of  the  transporta- 
tion below  the  average  cost  of  production,  provided  the  extra  sales  there- 
by rendered  possible  reduce  the  average  cost  of  production  sufficiently 
to  make  the  total  surplus,  arising  from  the  excess  of  the  high  prices  over 
the  new  average  cost  of  production,  exceed  the  total  deficiency  arising 
from  the  low  prices  falling  short  of  the  new  average  cost  of  production." 
Upon  this  theory,  after  showing  why  the  cost  of  transportation  cannot  be 
exactly  apportioned  to  various  kinds  of  traffic,  the  author  explains 
the  effect  of  the  various  factors  which  bring  about  the  variations  in 
rates  on  different  kinds  of  traffic,  both  those  which  affect  the  costs  of 
transporting  different  kinds  of  conmiodities  and  those  which  affect  the 
value  of  the  service  of  transportation  of  different  commodities,  the  chief 
factors  including  weight,  bulk,  value,  purposes  for  which  products  are 
used,  etc.  Especially  clear  is  the  discussion  of  the  various  kinds  of 
competition  to  which  railways  and  commodities  are  subjected  and  the 
influence  of  competition  on  rates. 


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S04  JOURNAL  OP  POLITICAL  ECONOMY 

The  two  final  chapters  are  devoted  to  a  brief  general  outlme  of  the 
history  of  railway  regulation  and  of  the  argiunents  for  and  against  rail- 
way nationalization. 

Hasold  F.  Lame 

Chicago,  III.  

Social  Insurance.  By  I.  M.  Rubinow.  New  York:  Henry  Holt 
&  Co.,  1913.    8vo,  pp.  vii+525.    $3.00  net. 

The  hand  of  the  trained  actuary  is  seen  in  this  most  recent  discussion 
of  social  insurance.  There  are  some  advantages  in  treating  the  subject 
by  topics  instead  of  by  countries,  since  the  principle  under  consideration 
may  thus  be  studied  in  all  its  applications  without  repetition  or  confusion. 
Insurance  against  industrial  accidents,  sickness,  old  age,  invalidism  and 
death,  and  unemployment,  as  developed  in  various  countries,  is  sub- 
jected to  a  thorough  examination,  and  advocated  in  good  temper  but 
with  conviction.  Only  one  statement  (p.  420)  can  be  given  place  in  this 
brief  notice.  After  declaring  that  the  annual  amount  spent  by  American 
workmen  for  burial  benefits  alone  increased  from  less  than  $2,000,000 
in  1881  to  $183,000,000  in  1911,  this  striking  conclusion  is  reached: 
"The  American  working  class  pays  for  funeral  insurance  as  much  as  is 
contributed  in  Germany  by  all  three  parties  concerned,  the  wage- 
workers,  the  employers,  and  the  state,  for  (i)  accident  insurance,  (2)  sick- 
ness insurance,  (3)  fimeral  insurance,  (4)  maternity  insurance,  (5)  in- 
validity insurance,  and  (6)  old-age  insurance,  combined."  It  seems 
incredible  that  this  preposterous  distribution  of  earnings  should  continue. 
To  secure  fairly  adequate  cover  of  all  risks  no  additional  burden  need  be 
placed  on  employers  and  employed;  the  present  expenditures,  properly 
distributed,  will  meet  the  most  essential  requirements. 

The  book  will  be  found  useful  by  teadier  or  citizen  who  wishes  to 

have  a  reliable,  clearly  written,  untechnical  work  covering  all  aspects 

of  the  problem. 

C.  R.  Henderson 
University  of  Chicago 


The  German  Cotton  Industry.    By  R.  M.  R.  Dehn.    "Publications  of 
the  University  of  Manchester,"  Economic  Series  No.  14,  Gartside 
Reports  on  Industry  and  Commerce,  No.  10.     Manchester,  Eng- 
land: University  Press,  1913.    8vo,  pp.  xii-hio4.    $1 .  20  net. 
This  report  is  a  distinct  contribution  to  the  progress  of  economic  investi- 
gation of  industrial  life.    The  expansion  of  modem  Germany  has  broadened 
a  field  of  research  which  has  wonderful  possibilities.    The  author,  viewing  this 


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BOOK  REVIEWS  AND  NOTICES  505 

development  from  an  En^^ish  angle,  has  selected  for  his  particular  study  a 
phase  of  the  general  movement  that  is  fraught  with  no  ordinary  interest  to 
that  important  English  industrial  class  to  whom  the  growth  of  the  German 
cotton  mills  calls  forth  the  specter  of  foreign  competition.  Mr.  Dehn  no 
doubt  has  this  in  mind  when  he  makes  the  continual  comparison  between  con- 
ditions in  the  German  cotton  industry  and  those  of  the  Lancashire  mills, 
although  this  method  of  treatment  also  serves  the  admirable  puipose  of  asso- 
ciating the  unfamiliar  facts  with  the  familiar.  So  well  are  the  latter  subordi- 
nated to  the  central  theme  that  none  of  the  distinctness  of  the  special  inquiry 
is  lost.  Indeed,  the  American  reader  is  given  a  new  insight  into  this  aspect  of 
English  industry. 

The  pronounced  merit  of  the  study  is  the  logical  and  well-balanced  arrange- 
ment of  the  subject-matter.  Chap,  i,  the  "Historical  Introduction,"  prq>ares 
the  ground  for  the  consideration  of  the  ''Local  Distribution  of  Manufacturers." 
The  present  decentralization  and  consequent  weakness  of  the  German  cotton 
industry  is  an  outgrowth  of  early  conditions.  ''The  fact  emerges  that  the 
industry  is  made  up  of  a  large  number  of  small  industries  which  have  originated 
at  different  times  and  under  widely  different  circumstances.  Many  of  them, 
founded  at  a  time  when  the  play  of  economic  forces  was  hemmed  in  by  political 
divisions  which  have  since  ceased  to  exist,  find  themselves  situated  now  so 
imfavorably  that  they  must  needs  struggle  hard  to  survive"  (p.  29).  In  chap, 
iii,  the  author  discusses  the  handici^s  under  which  the  industry  is  actually 
working.  In  the  following  chapter  the  unusual  features  of  the  German  cotton 
exchanges  are  explained  in  relation  to  their  connection  with  the  world-market. 
In  the  concluding  chapters  the  lot  of  the  German  operative  is  compared  with 
that  of  the  En^^ish  workman  to  the  disadvantage  of  the  former.  The  traces 
of  paternalism  in  the  relationship  between  the  German  employer  and  his 
employees,  the  lack  of  self-conscious  class  organization  among  the  operatives, 
is  brought  into  strong  relief  by  the  statement  of  the  independence  and  strength 
of  the  English  trade  union.  Only  a  comparatively  small  fraction  of  the 
German  operatives  are  affiliated  with  any  organization  (about  18  per  cent  of 
the  total  number)  and  the  effectiveness  of  imited  action  is  largely  destroyed  by 
the  cleavage  along  political  lines.  Yet,  while  the  two  leading  associations 
were  organized  by  rival  political  parties  their  purpose  has  not  as  a  matter  of 
fact  been  subordinated  to  party  ends  and  they  do  frequently  co-operate.  The 
causes  of  the  wide  differences  between  the  English  and  the  German  unions  are 
to  be  found  in  differences  in  the  growth  of  the  two  industries  and  in  the  habits 
and  traditions  of  the  operatives.  Yet  the  author  believes  that  the  German 
cotton  industry  represents  but  an  earlier  stage  of  the  English  development  and 
hence  he  concludes  that  these  differences  are  not  funckmental  and  that  the 
conditions  leading  to  the  inefficient  t^ot^S  ^^  ^^  younger  industry  will  dis- 
appesLT  with  maturity. 

A  study  of  this  character  shoui       ^^ve  to  Vie  oi  eapedal  value  to  the  stu- 
dent of  business  organization  a^^^  ^^0>i^*  ^^'^  atUacl  the  general  reader. 

it 


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So6  JOURNAL  OF  POUTICAL  ECONOMY 

There  is  both  the  opportunity  and  the  need  of  further  investigation  of  this 
general  character.  

The  Psychology  of  Revolution.  By  Gustave  le  Bon.  New  York: 
Putnam,  1913.    i2mo,  pp.  337.    $2.50. 

The  author  divides  his  book  into  three  parts.  Part  I  deals  with  the  psycho- 
logical elements  of  revolutionary  movements.  Revolutions  are  of  three  kinds: 
(i)  Scientific,  which  are  the  most  important  although  they  attract  but  little 
attention.  ''Such  revolutions  are  fittingly  spoken  of  as  evolution,  on  account 
of  their  slowness.  In  the  domain  of  ideas  they  are  purely  intellectual.  Our 
sentiments  and  beliefs  do  not  affect  them.''  (2)  Political  revolutions.  In  this 
form,  as  in  religious  revolutions,  ''reason  plajrs  only  a  feeble  part  in  their 
genesis."  The  word  "discontent"  sums  up  the  causes  that  produce  political 
revolutions.  (3)  Religious.  Intolerance  is  at  the  base  of  religious  revolutions. 
The  forms  of  mentality  prevalent  during  revolution  the  author  sums  up  under 
the  heads  of  m3rstic.  Jacobin,  revolutionary,  and  criminal. 

Part  U  is  devoted  to  the  French  Revolution.  A  discussion  of  the  origin 
of  the  Revolution  is  followed  by  an  analysis  of  the  influences  exerted  on  the 
Revolution  by  the  rational,  affective,  mystic,  and  collective  elements.  The 
rational  element  exerted  but  little  influence.  The  mystic  element  perhi^s 
was  the  most  important.  It  gave  to  the  Revolution  the  character  of  a  religious 
belief  with  its  fury  and  devastation.  The  affective  and  collective  elements 
also  exerted  a  great  influence  on  the  character  of  the  Revolution. 

In  Part  III  the  author  discusses  "the  recent  evolution  of  revolutionary 
principles."  Here  he  applies  his  psychological  principles  to  the  interpretation 
of  more  recent  cataclysms,  such  as  those  in  Turkey,  Portugal,  and  China. 

Written  in  a  clear,  simple,  and  fascinating  style,  the  book  is  an  attempt  to 
solve  some  of  the  perplexing  problems  of  history  by  the  practical  applica- 
tions of  modem  psychology.  The  tone  of  the  book  is  positive,  certain,  sure. 
"The  study  of  the  French  Revolution  to  which  a  great  part  of  this  book  is 
devoted  will  perhaps  deprive  the  reader  of  more  than  one  illusion,  by  proving 
to  him  that  the  books  which  recoimt  the  history  of  the  Revolution  contain  in 
reality  a  mass  of  legends  very  remote  from  reality."  One  can  hardly  fail  in 
reading  Part  m  to  notice  the  prejudiced  viewpoint  of  the  author  and  is  led 
to  feel  that  the  book  was  written  with  a  preconceived  purpose,  namely,  to 
belittle  the  movement  by  which  government  is  taking  a  more  active  part  in  the 
economic  and  social  life  of  its  people. 


Politician,  Party  and  People.    By  Henry  Crosby  Emery.  New  Haven: 
Yale  University  Press,  1913.    i2mo,  pp.  183.    $1 .  25  net. 
This  book  is  made  up  of  five  addresses  delivered  in  the  Page  lecture  series, 

191 2,  before  the  Senior  class  of  the  Sheffield  Scientific  School,  Yale  University. 

The  subjects  of  the  lectures  are  as  follows:  (i)  "The  Voter  and  the  Facts"; 


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BOOK  REVIEWS  AND  NOTICES  507 

(2)  "The  Voter  and  the  Party";  (3)  "The  Voter  and  His  RepresenUtive"; 
(4)  "The  R^resentative  and  His  Constituency";  (5)  "The  Representative 
and  His  Party."  In  the  first  lecture  the  author  urges  the  necessity  for  the 
voter  to  acquaint  himself  with  the  facts  regarding  legislative  matter,  and  points 
out  the  difficulty  of  securing  reliable  information.  In  his  second  and  third 
lectures  he  discusses  the  relation  of  the  voter  to  his  party  and  to  his  repre- 
sentative. In  state  and  national  elections  the  voter  is  urged  to  support  party 
principles;  qualifications  of  candidates  are  of  secondary  importance.  In  the 
case  of  municipal  elections,  party  measures  are  by  no  means  so  paramount  as 
in  national  affairs.  The  voter  is  urged  to  select  the  party  whose  principles 
most  nearly  r^resent  his  own  and  to  support  that  party.  In  choosing  a 
national  representative  the  problem  is  usually  far  more  a  question  of  the  party 
to  be  supported  than  of  the  particular  man  to  be  elected,  for  by  means  of  a 
single  congressional  vote  the  whole  course  of  policy  may  be  changed.  The 
fourth  lecture  advocates  the  idea  of  the  independence  of  a  l^islative  rq>re- 
sentative  (as  regards  his  particular  constituency)  in  exercising  his  own  best 
judgment  and  following  his  own  conscience  in  working  for  the  general  good. 
At  the  same  time,  however,  the  rq)resentative  must  remember  that  he  is  a 
representative,  that  he  represents  the  particular  district  from  which  he  is 
elected  and  that  a  certain  part  of  his  time  and  attention  should  be  devoted  to 
the  people  of  that  district.  In  his  fifth  lecture  the  author  speaks  of  the  growing 
power  of  the  president,  of  the  influence  of  party  leaders,  and  of  the  use  of  the 
caucus.  It  is  here  urged  that  the  representative  should  vote  with  his  party, 
unless  he  cannot  conscientiously  do  so. 

Throughout  the  book  party  solidarity  is  urged  as  against  individual  inde- 
pendence, on  the  groimd  that  to  secure  the  continuance  and  success  of  some 
political  principle,  party  solidarity  is  necessary.  The  author  has  pressed  this 
point  of  view  rather  too  far.  This  he  admits  when  at  the  close  he  says:  "I 
have  spoken  more  strongly  on  one  side  than  I  might  otherwise  have  done, 
because  of  the  character  of  my  audience." 


Taxation  and  the  Distribution  of  Wealth.     By  Frederic   Mathews. 

Garden  City:  Doubleday,  Page  &  Co.,  1914.    8vo,  pp.  xiii+680. 

$2 .  50  net. 

The  author  of  this  work  has  been  entirely  too  modest  in  his  choice  of  a  title. 
While  it  may  appear  to  many  that  the  solution  of  the  problems  involved  in 
Taxation  and  the  Distribution  of  Wealth  should  furnish  subject-matter  adequate 
for  a  book  of  700  pages,  Mr.  Mathews  has  not  limited  himself  to  the  con- 
sideration of  these  problems.  In  sixty-four  chs^ters  he  deals  in  a  more  or  less 
authoritative  manner  with  theories  of  protection  and  of  taxation,  with  the 
theoiy  and  practice  of  politics,  with  religion,  intellectual  progress,  the  prac- 
ticability of  socialism,  and  finally  with  the  history  of  philosophy  from  Thales 
to  the  present  time.    We  can  readily  agree  that  "it  is  impossible  to  discuss 


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So8  JOURNAL  OF  POLITICAL  ECONOMY 

national  financial  methods  in  their  wider  application,  without  meeting  political 
and  social  questions  leading  into  fields  not  limited  by  economic  inquiry";  but 
the  line  must  be  drawn  somewhere  and  all  the  social  and  political  questions  on 
the  calender  cannot  be  regarded  as  problems  in  taxation. 

As  long  as  Mr.  Mathews  confines  himself  to  theories  of  taxation  we  can 
readily  follow  him.  He  argues  for  an  exclusive  tax  on  land  values,  which  he 
regards  as  the  "natural  tax."  But  when  he  turns  his  attention  to  other  sub- 
jects we  are  inclined  to  agree  with  him  (p.  658)  that  the  preacher's  dictum 
concerning  the  fatality  ''of  the  making  of  many  books"  has  considerate 
validity  even  in  modem  times. 

In  his  discussion  of  the  theories  of  taxation  the  author  has  no  arguments 
not  already  to  be  found  in  the  writings  of  single-taxers,  although  his  practical 
recommendations  are  frequently  novel  enough.  The  chapter  on  the  incidence 
of  land  taxes  is  practically  all  quoted  from  Shearman's  Natural  Taxationy  and 
very  considerable  parts  of  other  chapters  are  credited  to  secondary  works. 

The  book  can  hardly  be  recommended  to  serious  students  of  pubHc  finance. 


Die  Bodenreform  im  LicfUe  des  humanisiischm  Sozialismus.  Von  Hein- 
RICH  Wehberg.  Munich  and  Leipzig:  Duncker  &  Humblot,  1913. 
8vo,  pp.  xiii+167.    M.  s*  ' 

The  four  essa3rs  comprising  the  book — (i)  "The  Platform  of  Humanistic 
Socialism,"  (2)  "The  Single  Tax  from  the  Standpoint  of  Free  Trade,"  (3) 
"  The  Nationalization  of  the  Mines,"  (4)  "  The  Housing  Problem  "—written  by 
Dr.  Wehberg,  a  physician,  in  1891-95,  are  now  republished  by  the  Single  Tax 
(Bodenreform)  Society  in  conmiemoration  of  the  twenty-fifth  anniversary  of 
the  founding  of  the  society.  The  book  serves  also  to  honor  the  memoiy  of  an 
otherwise  obscure  single-taxer  who  was  the  first  president  of  the  Bund  JUr 
BodenbesUzreform  organized  in  1888.  The  essa3rs  are  recapitulations  of  the 
sin^e-tax  principles  as  expoimded  by  the  early  "Bodenreformer,"  Stamm, 
Fltirscheim,  and  Hertzka.  In  some  of  his  views  the  author  is  at  variance  with 
single-taxers  in  general,  especially  in  his  insistence  that  under  government 
ownership  of  the  land  even  urban  land  will  tend  to  fall  in  value.  This  differ^ce 
of  opinion  is  held  responsible  for  Wehberg's  withdrawal  from  active  participa- 
tion in  the  affairs  of  the  society.  By  himianistic  socialism,  it  is  interesting  to 
note,  he  intended  to  differentiate  the  single-tax  movement,  the  purpose  of 
which  was  "to  free  mankind  from  economic  injustice  and  misery,"  from  the 
materialistic  collectivism  represented  by  the  Social  Democratic  party,  and  to 
emphasize  the  importance  of  human,  individual  initiative  and  effort.  The  book 
offers  nothing  new;  its  interest  lies  merely  in  its  historic  value.  It  is  to  be 
regretted  that  the  interesting  preface  setting  forth  the  life  and  activities  of  Dr. 
Wehberg  and  of  the  b^innings  of  the  single-tax  movement  in  Germany  is 
anonymous. 


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