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Title: Principles Of Political Economy
Author: John Stuart Mill
Release Date: September 27, 2009 [Ebook 30107]
Language: English***START OF THE PROJECT GUTENBERG EBOOKPRINCIPLES OF POLITICAL ECONOMY***Principles Of Political Economy
By

John Stuart Mill
Abridged, with Critical, Bibliographical,
and Explanatory Notes, and a Sketchof the History of Political Economy,
By

J. Laurence Laughlin, Ph. D.
Assistant Professor of Political Economy in Harvard
University
A Text-Book For Colleges.
New York:
D. Appleton And Company,
1, 3, and 5 Bond Street.
1885

Contents
Preface. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Introductory. . . . . . . . . . . . . . . . . . . . . . . . . . 7
A Sketch Of The History Of Political Economy. . . . . 7
Books For Consultation (From English, French, And
German Authors). . . . . . . . . . . . . . . . . . 53
Preliminary Remarks. . . . . . . . . . . . . . . . . . . 57
Book I. Production. . . . . . . . . . . . . . . . . . . . . . 62
Chapter I. Of The Requisites Of Production. . . . . . . 62
§ 1. The requisites of production. . . . . . . . . . 62
§ 2. The Second Requisite of Production, Labor. . 64
§ 3. Of Capital as a Requisite of Production. . . . 67
Chapter II. Of Unproductive Labor. . . . . . . . . . . 70
§ 1. Definition of Productive and Unproductive
Labor. . . . . . . . . . . . . . . . . . . . 70
§ 2. Productive and Unproductive Consumption. . 71
§ 3. Distinction Between Labor for the Supply of
Productive Consumption and Labor for
the Supply of Unproductive Consumption. 72
Chapter III. Of Capital. . . . . . . . . . . . . . . . . . 75
§ 1. Capital is Wealth Appropriated to Reproductive Employment. . . . . . . . . . . . 75
§ 2. More Capital Devoted to Production than
Actually Employed in it. . . . . . . . . . 78
§ 3. Examination of Cases Illustrative of the Idea
of Capital. . . . . . . . . . . . . . . . . . 81
Chapter IV. Fundamental Propositions Respecting
Capital. . . . . . . . . . . . . . . . . . . . . . . 85
§ 1. Industry is Limited by Capital. . . . . . . . . 85

iv

Principles Of Political Economy§ 2. Increase of Capital gives Increased Employment to Labor, Without Assignable
Bounds. . . . . . . . . . . . . . . . . . . 86
§ 3. Capital is the result of Saving, and all Capitalis Consumed. . . . . . . . . . . . . . . . 90
§ 4. Capital is kept up by Perpetual Reproduction,
as shown by the Recovery of Countries
from Devastation. . . . . . . . . . . . . . 93
§ 5. Effects of Defraying Government Expenditure by Loans. . . . . . . . . . . . . . . . 96
§ 6. Demand for Commodities is not Demandfor Labor. . . . . . . . . . . . . . . . . . 100
Chapter V. On Circulating And Fixed Capital. . . . . . 108§ 1. Fixed and Circulating Capital. . . . . . . . . 108§ 2. Increase of Fixed Capital, when, at the
Expense of Circulating, might be Detrimental to the Laborers. . . . . . . . . . . 110§ 3. —This seldom, if ever, occurs. . . . . . . . . 112
Chapter VI. Of Causes Affecting The Efficiency Of
Production. . . . . . . . . . . . . . . . . . . . . 115§ 1. General Causes of Superior Productiveness. . 115§ 2. Combination and Division of Labor Increase
Productiveness. . . . . . . . . . . . . . . 117§ 3. Advantages of Division of Labor. . . . . . . 120§ 4. Production on a Large and Production on a
Small Scale. . . . . . . . . . . . . . . . 125
Chapter VII. Of The Law Of The Increase Of Labor. . 130§ 1. The Law of the Increase of Production Depends on those of Three Elements—Labor. Capital, and Land. . . . . 130§ 2. The Law of Population. . . . . . . . . . . . 130§ 3. By what Checks the Increase of Populationis Practically Limited. . . . . . . . . . . 133
Chapter VIII. Of The Law Of The Increase Of Capital. 140

v§ 1. Means for Saving in the Surplus above
Necessaries. . . . . . . . . . . . . . . . . 140§ 2. Motive for Saving in the Surplus above
Necessaries. . . . . . . . . . . . . . . . . 141§ 3. Examples of Deficiency in the Strength of
this Desire. . . . . . . . . . . . . . . . . 144§ 4. Examples of Excess of this Desire. . . . . . . 147
Chapter IX. Of The Law Of The Increase Of Production
From Land. . . . . . . . . . . . . . . . . . . . . 151§ 1. The Law of Production from the Soil, a Law
of Diminishing Return in Proportion to
the Increased Application of Labor andCapital. . . . . . . . . . . . . . . . . . . 151§ 2. Antagonist Principle to the Law of Diminishing Return; the Progress of Improvements in Production. . . . . . . . . . . . 155§ 3. —In Railways. . . . . . . . . . . . . . . . . 158§ 4. —In Manufactures. . . . . . . . . . . . . . . 162§ 5. Law Holds True of Mining. . . . . . . . . . 167
Chapter X. Consequences Of The Foregoing Laws. . . 170§ 1. Remedies for Weakness of the Principle ofAccumulation. . . . . . . . . . . . . . . 170§ 2. Even where the Desire to Accumulate isStrong, Population must be Kept within
the Limits of Population from Land. . . . 171§ 3. Necessity of Restraining Population notsuperseded by Free Trade in Food. . . . . 175§ 4. —Nor by Emigration. . . . . . . . . . . . . 177
Book II. Distribution. . . . . . . . . . . . . . . . . . . . . 182
Chapter I. Of Property. . . . . . . . . . . . . . . . . . 182§ 1. Individual Property and its opponents. . . . . 182§ 2. The case for Communism against private
property presented. . . . . . . . . . . . . 185§ 3. The Socialists who appeal to state-help. . . . 188

vi

Principles Of Political Economy§ 4. Of various minor schemes, Communistic
and Socialistic. . . . . . . . . . . . . . . 194§ 5. The Socialist objections to the present orderof Society examined. . . . . . . . . . . . 197§ 6. Property in land different from property inMovables. . . . . . . . . . . . . . . . . . 200
Chapter II. Of Wages. . . . . . . . . . . . . . . . . . . 204§ 1. Of Competition and Custom. . . . . . . . . . 204§ 2. The Wages-fund, and the Objections to it
Considered. . . . . . . . . . . . . . . . . 206§ 3. Examination of some popular Opinions
respecting Wages. . . . . . . . . . . . . 213§ 4. Certain rare Circumstances excepted, HighWages imply Restraints on Population. . 219§ 5. Due Restriction of Population the only
Safeguard of a Laboring-Class. . . . . . . 221
Chapter III. Of Remedies For Low Wages. . . . . . . . 225§ 1. A Legal or Customary Minimum of Wages,
with a Guarantee of Employment. . . . . 225§ 2. —Would Require as a Condition Legal
Measures for Repression of Population. . 228§ 3. Allowances in Aid of Wages and theStandard of Living. . . . . . . . . . . . . 231§ 4. Grounds for Expecting Improvement in Public Opinion on the Subject of Population. 233§ 5. Twofold means of Elevating the Habits of
the Laboring-People; by Education, andby Foreign and Home Colonization. . . . 235
Chapter IV. Of The Differences Of Wages In Different
Employments. . . . . . . . . . . . . . . . . . . . 238§ 1. Differences of Wages Arising from Different
Degrees of Attractiveness in Different
Employments. . . . . . . . . . . . . . . 238§ 2. Differences arising from Natural Monopolies. 241

vii§ 3. Effect on Wages of the Competition of
Persons having other Means of Support. . 243§ 4. Wages of Women, why Lower than those of
Men. . . . . . . . . . . . . . . . . . . . 246§ 5. Differences of Wages Arising from Laws,
Combinations, or Customs. . . . . . . . . 248
Chapter V. Of Profits. . . . . . . . . . . . . . . . . . . 250§ 1. Profits include Interest and Risk; but,correctly speaking, do not include Wagesof Superintendence. . . . . . . . . . . . . 250§ 2. The Minimum of Profits; what produces
Variations in the Amount of Profits. . . . 253§ 3. General Tendency of Profits to an Equality. . 255§ 4. The Cause of the Existence of any Profit;
the Advances of Capitalists consist ofWages of Labor. . . . . . . . . . . . . . 260§ 5. The Rate of Profit depends on the Cost ofLabor. . . . . . . . . . . . . . . . . . . . 262
Chapter VI. Of Rent. . . . . . . . . . . . . . . . . . . 270§ 1. Rent the Effect of a Natural Monopoly. . . . 270§ 2. No Land can pay Rent except Land ofsuch Quality or Situation as exists in lessQuantity than the Demand. . . . . . . . . 271§ 3. The Rent of Land is the Excess of its Return
above the Return to the worst Land in
Cultivation. . . . . . . . . . . . . . . . . 273§ 4. —Or to the Capital employed in the least
advantageous Circumstances. . . . . . . 275§ 5. Opposing Views of the Law of Rent. . . . . 279§ 6. Rent does not enter into the Cost of Production of Agricultural Produce. . . . . . . . 284
Book III. Exchange. . . . . . . . . . . . . . . . . . . . . . 286
Chapter I. Of Value. . . . . . . . . . . . . . . . . . . . 286

viii

Principles Of Political Economy§ 1. Definitions of Value in Use, Exchange
Value, and Price. . . . . . . . . . . . . . 286§ 2. Conditions of Value: Utility, Difficulty ofAttainment, and Transferableness. . . . . 289§ 3. Commodities limited in Quantity by the lawof Demand and Supply: General workingof this Law. . . . . . . . . . . . . . . . . 294§ 4. Miscellaneous Cases falling under this Law. 297§ 5. Commodities which are Susceptible of Indefinite Multiplication without Increaseof Cost. Law of their Value Cost of
Production. . . . . . . . . . . . . . . . . 299§ 6. The Value of these Commodities confirm, inthe long run, to their Cost of Production
through the operation of Demand andSupply. . . . . . . . . . . . . . . . . . . 302
Chapter II. Ultimate Analysis Of Cost Of Production. . 306§ 1. Of Labor, the principal Element in Cost of
Production. . . . . . . . . . . . . . . . . 306§ 2. Wages affect Values, only if different indifferent employments; “non-competinggroups.” . . . . . . . . . . . . . . . . . . 308§ 3. Profits an element in Cost of Production. . . 309§ 4. Cost of Production properly represented bysacrifice, or cost, to the Laborer as wellas to the Capitalist; the relation of thisconception to the Cost of Labor. . . . . . 310§ 5. When profits vary from Employment to
Employment, or are spread over unequal
lengths of Time, they affect Values accordingly. . . . . . . . . . . . . . . . . . 316§ 6. Occasional Elements in Cost of Production;
taxes and ground-rent. . . . . . . . . . . 320
Chapter III. Of Rent, In Its Relation To Value. . . . . . 322

ix§ 1. Commodities which are susceptible of indefinite Multiplication, but not without
increase of Cost. Law of their Value,
Cost of Production in the most unfavorable existing circumstances. . . . . . . . 322§ 2. Such commodities, when Produced in circumstances more favorable, yield a Rent
equal to the difference of Cost. . . . . . . 325§ 3. Rent of Mines and Fisheries and ground-rentof Buildings, and cases of gain analogous
to Rent. . . . . . . . . . . . . . . . . . . 327§ 4. Résumé of the laws of value of each of thethree classes of commodities. . . . . . . 331
Chapter IV. Of Money. . . . . . . . . . . . . . . . . . 333§ 1. The three functions of Money—a Common
Denominator of Value, a Medium of
Exchange, a “Standard of Value”. . . . . 333§ 2. Gold and Silver, why fitted for those purposes.338§ 3. Money a mere contrivance for facilitatingexchanges, which does not affect thelaws of value. . . . . . . . . . . . . . . . 340
Chapter V. Of The Value Of Money, As Dependent
On Demand And Supply. . . . . . . . . . . . . . 343§ 1. Value of Money, an ambiguous expression. . 343§ 2. The Value of Money depends on its quantity. 343§ 3. —Together with the Rapidity of Circulation. 346§ 4. Explanations and Limitations of this Principle.349
Chapter VI. Of The Value Of Money, As Dependent
On Cost Of Production. . . . . . . . . . . . . . . 352§ 1. The value of Money, in a state of Freedom,
conforms to the value of the Bullion
contained in it. . . . . . . . . . . . . . . 352§ 2. —Which is determined by the cost of
production. . . . . . . . . . . . . . . . . 353

xPrinciples Of Political Economy§ 3. This law, how related to the principle laid
down in the preceding chapter. . . . . . . 360
Chapter VII. Of A Double Standard And Subsidiary
Coins. . . . . . . . . . . . . . . . . . . . . . . . 363§ 1. Objections to a Double Standard. . . . . . . 363§ 2. The use of the two metals as money, and the
management of Subsidiary Coins. . . . . 366§ 3. The experience of the United States with adouble standard from 1792 to 1883. . . . 367
Chapter VIII. Of Credit, As A Substitute For Money. . 379§ 1. Credit not a creation but a Transfer of themeans of Production. . . . . . . . . . . . 379§ 2. In what manner it assists Production. . . . . 379§ 3. Function of Credit in economizing the useof Money. . . . . . . . . . . . . . . . . . 381§ 4. Bills of Exchange. . . . . . . . . . . . . . . 383§ 5. Promissory Notes. . . . . . . . . . . . . . . 386§ 6. Deposits and Checks. . . . . . . . . . . . . . 388
Chapter IX. Influence Of Credit On Prices. . . . . . . . 391§ 1. What acts on prices is Credit, in whatever
shape given. . . . . . . . . . . . . . . . . 391§ 2. Credit a purchasing Power, similar to Money. 392§ 3. Great extensions and contractions of Credit.
Phenomena of a commercial crisis analyzed. . . . . . . . . . . . . . . . . . . . 393§ 4. Influence of the different forms of Credit on
Prices. . . . . . . . . . . . . . . . . . . . 396§ 5. On what the use of Credit depends. . . . . . 398§ 6. What is essential to the idea of Money? . . . 399
Chapter X. Of An Inconvertible Paper Currency. . . . . 401§ 1. What determines the value of an inconvertible paper money? . . . . . . . . . . . . 401

xi§ 2. If regulated by the price of Bullion, as
inconvertible Currency might be safe,
but not Expedient. . . . . . . . . . . . . 408§ 3. Examination of the doctrine that an inconvertible Current is safe, if representing
actual Property. . . . . . . . . . . . . . . 410§ 4. Experiments with paper Money in the UnitedStates. . . . . . . . . . . . . . . . . . . . 414§ 5. Examination of the gain arising from theincrease and issue of paper Currency. . . 420§ 6. Résumé of the subject of money. . . . . . . . 423
Chapter XI. Of Excess Of Supply. . . . . . . . . . . . 425§ 1. The theory of a general Over-Supply ofCommodities stated. . . . . . . . . . . . 425§ 2. The supply of commodities in general can
not exceed the power of Purchase. . . . . 426§ 3. There can never be a lack of Demand arisingfrom lack of Desire to Consume. . . . . . 427§ 4. Origin and Explanation of the notion ofgeneral Over-Supply. . . . . . . . . . . . 429
Chapter XII. Of Some Peculiar Cases Of Value. . . . . 432§ 1. Values of commodities which have a joint
cost of production. . . . . . . . . . . . . 432§ 2. Values of the different kinds of agricultural
produce. . . . . . . . . . . . . . . . . . . 434
Chapter XIII. Of International Trade. . . . . . . . . . . 438§ 1. Cost of Production not a regulator ofinternational values. Extension of theword “international.” . . . . . . . . . . . 438§ 2. Interchange of commodities between distance places determined by differences
not in their absolute, but in the comparative, costs of production. . . . . . . . . . 441

xii

Principles Of Political Economy§ 3. The direct benefits of commerce consist
in increased Efficiency of the productive
powers of the World. . . . . . . . . . . . 447§ 4. —Not in a Vent for exports, nor in the gainsof Merchants. . . . . . . . . . . . . . . . 449§ 5. Indirect benefits of Commerce, Economicaland Moral; still greater than the Direct. . 452
Chapter XIV. Of International Values. . . . . . . . . . 454§ 1. The values of imported commodities dependon the Terms of international interchange. 454§ 2. The values of foreign commodities depend,
not upon Cost of Production, but upon
Reciprocal Demand and Supply. . . . . . 455§ 3. —As illustrated by trade in cloth and linen
between England and Germany. . . . . . 460§ 4. The conclusion states in the Equation ofInternational Demand. . . . . . . . . . . 463§ 5. The cost to a country of its imports depends
not only on the ratio of exchange, but on
the efficiency of its labor. . . . . . . . . 466
Chapter XV. Of Money Considered As An Imported
Commodity. . . . . . . . . . . . . . . . . . . . . 469§ 1. Money imported on two modes; as aCommodity, and as a medium of Exchange.469§ 2. As a commodity, it obeys the same laws ofValue as other imported Commodities. . 470
Chapter XVI. Of The Foreign Exchanges. . . . . . . . 475§ 1. Money passes from country to country
as a Medium of Exchange, through the
Exchanges. . . . . . . . . . . . . . . . . 475§ 2. Distinction between Variations in the
Exchanges which are self-adjusting andthose which can only be rectified throughPrices. . . . . . . . . . . . . . . . . . . . 481

xiii
Chapter XVII. Of The Distribution Of The Precious
Metals Through The Commercial World. . . . . 485§ 1. The substitution of money for barter makes
no difference in exports and imports, nor
in the Law of international Values. . . . . 485§ 2. The preceding Theorem further illustrated. . 489§ 3. The precious metals, as money, are of thesame Value, and distribute themselves
according to the same Law, with theprecious metals as a Commodity. . . . . 494§ 4. International payments entering into the“financial account.” . . . . . . . . . . . . 495
Chapter XVIII. Influence Of The Currency On The
Exchanges And On Foreign Trade. . . . . . . . . 499§ 1. Variations in the exchange, which originate
in the Currency. . . . . . . . . . . . . . . 499§ 2. Effect of a sudden increase of a metallic
Currency, or of the sudden creation of
Bank-Notes or other substitutes for Money.500§ 3. Effect of the increase of an inconvertible paper Currency. Real and nominal
exchange. . . . . . . . . . . . . . . . . . 505
Chapter XIX. Of The Rate Of Interest. . . . . . . . . . 510§ 1. The Rate of Interest depends on the Demandand Supply of Loans. . . . . . . . . . . . 510§ 2. Circumstances which Determine the Permanent Demand and Supply of Loans. . . . 511§ 3. Circumstances which Determine the Fluctuations. . . . . . . . . . . . . . . . . . . . 514§ 4. The Rate of Interest not really Connectedwith the value of Money, but often confounded with it. . . . . . . . . . . . . . . 518§ 5. The Rate of Interest determines the price ofland and of Securities. . . . . . . . . . . 519

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Principles Of Political Economy

Chapter XX. Of The Competition Of Different Countries In The Same Market. . . . . . . . . . . . . 522§ 1. Causes which enable one Country to undersell another. . . . . . . . . . . . . . . . . 522§ 2. High wages do not prevent one Country
from underselling another. . . . . . . . . 525§ 3. Low wages enable a Country to undersell another, when Peculiar to certain branchesof Industry. . . . . . . . . . . . . . . . . 531§ 4. —But not when common to All. . . . . . . . 534§ 5. Low profits as affecting the carrying Trade. . 537
Chapter XXI. Of Distribution, As Affected By Exchange.539§ 1. Exchange and money make no Difference inthe law of Wages. . . . . . . . . . . . . . 539§ 2. In the law of Rent. . . . . . . . . . . . . . . 542§ 3. —Nor in the law of Profits. . . . . . . . . . 543
Book IV. Influence Of The Progress Of Society On Production And Distribution. . . . . . . . . . . . . . . . . 547
Chapter I. Influence Of The Progress Of Industry And
Population On Values And Prices. . . . . . . . . 547§ 1. Tendency of the progress of society toward increased Command over the powers of Nature; increased Security, andincreased Capacity of Co-Operation. . . . 547§ 2. Tendency to a Decline of the Value and Costof Production of all Commodities. . . . . 549§ 3. —except the products of Agriculture andMining, which have a tendency to Rise. . 553§ 4. —that tendency from time to time Counteracted by Improvements in Production. . . 558§ 5. Effect of the Progress of Society in moderating fluctuations of Value. . . . . . . . . 559
Chapter II. Influence Of The Progress Of Industry And
Population On Rents, Profits, And Wages. . . . . 564

xv§ 1. Characteristic features of industrial Progress. 564§ 2. First two cases, Population and Capitalincreasing, the arts of production stationary.564§ 3. The arts of production advancing, capitaland population stationary. . . . . . . . . 567§ 4. Theoretical results, if all three Elements
progressive. . . . . . . . . . . . . . . . . 568§ 5. Practical Results. . . . . . . . . . . . . . . . 569
Chapter III. Of The Tendency Of Profits To A Minimum.573§ 1. Different Theories as to the fall of Profits. . . 573§ 2. What determines the minimum rate of Profit? 575§ 3. In old and opulent countries, profits habitually near to the minimum. . . . . . . . . 577§ 4. —prevented from reaching it by commercial
revulsions. . . . . . . . . . . . . . . . . 581§ 5. —by improvements in Production. . . . . . . 583§ 6. —by the importation of cheap Necessaries
and Implements. . . . . . . . . . . . . . 584§ 7. —by the emigration of Capital. . . . . . . . 588
Chapter IV. Consequences Of The Tendency Of Profits
To A Minimum, And The Stationary State. . . . 589§ 1. Abstraction of Capital not necessarily anational loss. . . . . . . . . . . . . . . . 589§ 2. In opulent countries, the extension ofmachinery not detrimental but beneficial
to Laborers. . . . . . . . . . . . . . . . . 590§ 3. Stationary state of wealth and population
dreaded by some writers, but not in itself
undesirable. . . . . . . . . . . . . . . . . 592
Chapter V. On The Possible Futurity Of The LaboringClasses. . . . . . . . . . . . . . . . . . . . . . . 597§ 1. The possibility of improvement while Laborers remain merely receivers of Wages. 597

xvi

Principles Of Political Economy§ 2.—through small holdings, by which the landlord's gain is shared. . . . . . . . . . . . 602§ 3. —through co-operation, by which the manager's wages are shared. . . . . . . . . . 604§ 4. Distributive Co-operation. . . . . . . . . . . 605§ 5. Productive Co-Operation. . . . . . . . . . . 609§ 6. Industrial Partnership. . . . . . . . . . . . . 612§ 7. People's Banks. . . . . . . . . . . . . . . . . 615
Book V. On The Influence Of Government. . . . . . . . . 619
Chapter I. On The General Principles Of Taxation. . . 619§ 1. Four fundamental rules of Taxation. . . . . . 619§ 2. Grounds of the principle of Equality of
Taxation. . . . . . . . . . . . . . . . . . 621§ 3. Should the same percentage be levied on allamounts of Income? . . . . . . . . . . . 623§ 4. Should the same percentage be levied on
Perpetual and on Terminable Incomes? . 627§ 5. The increase of the rent of land from naturalcauses a fit subject of peculiar Taxation. . 629§ 6. Taxes falling on Capital not necessarily
objectionable. . . . . . . . . . . . . . . . 631
Chapter II. Of Direct Taxes. . . . . . . . . . . . . . . 633§ 1. Direct taxes either on income or expenditure. 633§ 2. Taxes on rent. . . . . . . . . . . . . . . . . . 633§ 3. —on profits. . . . . . . . . . . . . . . . . . 634§ 4. —on Wages. . . . . . . . . . . . . . . . . . 636§ 5. —on Income. . . . . . . . . . . . . . . . . . 638§ 6. A House-Tax. . . . . . . . . . . . . . . . . . 640
Chapter III. Of Taxes On Commodities, Or Indirect
Taxes. . . . . . . . . . . . . . . . . . . . . . . . 645§ 1. A Tax on all commodities would fall on
Profits. . . . . . . . . . . . . . . . . . . 645§ 2. Taxes on particular commodities fall on the
consumer. . . . . . . . . . . . . . . . . . 646

xvii§ 3. Peculiar effects of taxes on Necessaries. . . . 648§ 4. —how modified by the tendency of profits
to a minimum. . . . . . . . . . . . . . . 651§ 5. Effects of discriminating Duties. . . . . . . . 653§ 6. Effects produced on international Exchange
by Duties on Exports and on Imports. . . 658
Chapter IV. Comparison Between Direct And Indirect
Taxation. . . . . . . . . . . . . . . . . . . . . . 667§ 1. Arguments for and against direct Taxation. . 667§ 2. What forms of indirect taxation are mosteligible? . . . . . . . . . . . . . . . . . . 671§ 3. Practical rules for indirect taxation. . . . . . 672§ 4. Taxation systems of the United States andother Countries. . . . . . . . . . . . . . . 675§ 5. A Résumé of the general principles of taxation.680
Chapter V. Of A National Debt. . . . . . . . . . . . . 684§ 1. Is it desirable to defray extraordinary public
expenses by loans? . . . . . . . . . . . . 684§ 2. Not desirable to redeem a national Debt by
a general Contribution. . . . . . . . . . . 687§ 3. In what cases desirable to maintain a surplus
revenue for the redemption of Debt. . . . 689
Chapter VI. Of An Interference Of Government
Grounded On Erroneous Theories. . . . . . . . . 693§ 1. The doctrine of Protection to Native Industry. 693§ 2. —had its origin in the Mercantile System. . . 695§ 3. —supported by pleas of national subsistence
and national defense. . . . . . . . . . . . 698§ 4. —on the ground of encouraging young
industries; colonial policy. . . . . . . . . 701§ 5. —on the ground of high wages. . . . . . . . 704§ 6. —on the ground of creating a diversity ofindustries. . . . . . . . . . . . . . . . . . 713§ 7. —on the ground that it lowers prices. . . . . 718

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Principles Of Political Economy

Appendix I. Bibliographies. . . . . . . . . . . . . . . . . . 723
Appendix II. Examination Questions. . . . . . . . . . . . . 732
Footnotes . . . . . . . . . . . . . . . . . . . . . . . . . . 773

[iii]

Preface.

[iv]

An experience of five years with Mr. Mill's treatise in the classroom not only convinced me of the great usefulness of what still
remains one of the most lucid and systematic books yet publishedwhich cover the whole range of the study, but I have also been
convinced of the need of such additions as should give the resultsof later thinking, without militating against the general tenor of
Mr. Mill's system; of such illustrations as should fit it better for
American students, by turning their attention to the application ofprinciples in the facts around us; of a bibliography which shouldmake it easier to get at the writers of other schools who offer
opposing views on controverted questions; and of some attempts
to lighten those parts of his work in which Mr. Mill frightenedaway the reader by an appearance of too great abstractness, andto render them, if possible, more easy of comprehension to thestudent who first approaches Political Economy through thisauthor. Believing, also, that the omission of much that should
properly be classed under the head of Sociology, or Social
Philosophy, would narrow the field to Political Economy alone,
and aid, perhaps, in clearer ideas, I was led to reduce the twovolumes into one, with, of course, the additional hope that thesmaller book would tempt some readers who might hesitate toattack his larger work. In consonance with the above plan, I
have abridged Mr. Mill's treatise, yet have always retained his
own words; although it should be said that they are not always
his consecutive words. Everything in the larger type on thepage is taken literally from Mr. Mill, and, whenever it has beennecessary to use a word to complete the sense, it has been always
inserted in square brackets. All additional matter introduced byme has been printed in a smaller but distinctive type. The reader

Preface.

3

can see at a glance which part of the page is Mr. Mill's and which
my own.
It has seemed necessary to make the most additions to theoriginal treatise under the subjects of the Wages Question; ofWages of Superintendence; of Socialism; of Cost of Production;of Bimetallism; of the Paper Money experiments in this country;of International Values; of the Future of the Laboring-Classes(in which the chapter was entirely rewritten); and of Protection.
The treatment of Land Tenures has not been entirely omitted,
but it does not appear as a separate subject, because it has atpresent less value as an elementary study for American students.
The chapters on Land Tenures, the English currency discussion,and much of Book V, on the Influence of Government, havebeen simply omitted. In one case I have changed the order ofthe chapters, by inserting Chap. XV of Book III, treating of astandard of value, under the chapter treating of money and its
functions. In other respects, the same order has been followed asin the original work.
Wherever it has seemed possible, American illustrations havebeen inserted instead of English or Continental ones.
To interest the reader in home problems, twenty-four charts
have been scattered throughout the volume, which bear upon
our own conditions, with the expectation, also, that the different
methods of graphic representation here presented would lead
students to apply them to other questions. They are mainly suchas I have employed in my class-room. The use and preparationof such charts ought to be encouraged. The earlier pages of thevolume have been given up to a “Sketch of the History of Political
Economy,” which aims to give the story of how we have arrived
at our present knowledge of economic laws. The student who hascompleted Mill will then have a very considerable bibliographyof the various schools and writers from which to select further
reading, and to select this reading so that it may not fall wholly
within the range of one class of writers. But, for the time that Mill

[v]

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Principles Of Political Economy

is being first studied, I have added a list of the most importantbooks for consultation. I have also collected, in Appendix I,
some brief bibliographies on the Tariff, on Bimetallism, and on
American Shipping, which may be of use to those who may nothave the means of inquiring for authorities, and in Appendix II anumber of questions and problems for the teacher's use.

[vi]

In some cases I have omitted Mr. Mill's statement entirely,
and put in its stead a simpler form of the same exposition which
I believed would be more easily grasped by a student. Of suchcases, the argument to show that Demand for Commodities is not
Demand for Labor, the Doctrine of International Values, and the
Effect of the Progress of Society on wages, profits, and rent, areexamples. Whether I have succeeded or not, must be left for theexperience of the teacher to determine. Many small figures anddiagrams have been used throughout the text, in order to suggest
the concrete means of getting a clear grasp of a principle.

In conclusion, I wish to acknowledge my indebtedness toseveral friends for assistance in the preparation of this volume,
among whom are Professor Charles F. Dunbar, Dr. F. W.
Taussig, Dr. A. B. Hart, and Mr. Edward Atkinson.

J. LAURENCE LAUGHLIN.
HARVARD UNIVERSITY, CAMBRIDGE, MASSACHUSETTS,
September, 1884.

Preface.

5

Chart I

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Principles Of Political Economy
Chart II

[001]

Introductory.

A Sketch Of The History Of Political
Economy.
GENERAL BIBLIOGRAPHY.—There is no satisfactory general
history of political economy in English. Blanqui's “Histoirede l'économie politique en Europe” (Paris, 1837) is
disproportioned and superficial, and he labors under the
disadvantage of not understanding the English school of
economists. He studies to give the history of economic facts,
rather than of economic laws. The book has been translated
into English (New York, 1880).
Villeneuve-Bargemont, in his “Histoire de l'économie
politique” (Paris, 1841), aims to oppose a “Christian political
economy” to the “English” political economy, and indulges
in religious discussions.
Travers Twiss, “View of the Progress of Political Economy
in Europe since the Sixteenth Century” (London, 1847),
marked an advance by treating the subject in the last four
centuries, and by separating the history of principles fromthe history of facts. It is brief, and only a sketch. Julius
Kautz has published in German the best existing history,“Die geschichtliche Entwickelung der National-Oekonomie
und ihrer Literatur” (Vienna, 1860). (See Cossa, “Guide
to the Study of Political Economy,” page 80.) Cossa in
his book has furnished a vast amount of information about

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Principles Of Political Economy
writers, classified by epochs and countries, and a valuable
discussion of the divisions of political economy by various
writers, and its relation to other sciences. It is a very
desirable little hand-book. McCulloch, in his “Introduction
to the Wealth of Nations,” gives a brief sketch of the growthof economic doctrine. The editor begs to acknowledge hisgreat indebtedness for information to his colleague, Professor
Charles F. Dunbar, of Harvard University.

[002]

Systematic study for an understanding of the laws of political
economy is to be found no farther back than the sixteenth
century. The history of political economy is not the history of
economic institutions, any more than the history of mathematics
is the history of every object possessing length, breadth, andthickness. Economic history is the story of the gradual evolution
in the thought of men of an understanding of the laws whichto-day constitute the science we are studying. It is essentiallymodern.1
Aristotle2 and Xenophon had some comprehension of thetheory of money, and Plato3 had defined its functions with someaccuracy. The economic laws of the Romans were all summed
up in the idea of enriching the metropolis at the expense of
the dependencies. During the middle ages no systematic study
was undertaken, and the nature of economic laws was not evensuspected.
It is worth notice that the first glimmerings of political
economy came to be seen through the discussions on money, and1
Yet Blanqui diffusively gives nearly one half of his “History of Political
Economy” to the period before the sixteenth century, when politico-economic
laws had not yet been recognized. A. L. Perry, “Political Economy” (eighteenth
edition, 1883), also devotes thirty-five out of eighty-seven pages to the period
in which there was no systematic study of political economy.
2
Xenophon, “Means of increasing the Revenues of Attika,” ch. ix; also see
his “Economics;” and Aristotle, “Politics,” b. i, ch. vi, b. iii, ch. i.
3“Republic,” b. ii.

A Sketch Of The History Of Political Economy.

9

the extraordinary movements of gold and silver. About the timeof Charles V, the young study was born, accompanied by therevival of learning, the Reformation, the discovery of America,
and the great fall in the value of gold and silver. Modern society
was just beginning, and had already brought manufactures into
existence—woolens in England, silks in France, Genoa, andFlorence; Venice had become the great commercial city of
the world; the Hanseatic League was carrying goods from theMediterranean to the Baltic; and the Jews of Lombardy had bythat time brought into use the bill of exchange. While the supplyof the precious metals had been tolerably constant hitherto, thesteady increase of business brought about a fall of prices. Fromthe middle of the fourteenth to the end of the fifteenth century
the purchasing power of money increased in the ratio of fourto ten. Then into this situation came the great influx of goldand silver from the New World. Prices rose unequally; thetrading and manufacturing classes were flourishing, while others
were depressed. In the sixteenth century the price of wheat
tripled, but wages only doubled; the laboring-classes of Englanddeteriorated, while others were enriched, producing profoundsocial changes and the well-known flood of pauperism, together
with the rise of the mercantile classes. Then new channels of
trade were opened to the East and West. Of course, men saw but
dimly the operation of these economic causes; although the books
now began to hint at the right understanding of the movements
and the true laws of money.
Even before this time, however, Nicole Orêsme, Bishopof Lisieux (died 1382), had written intelligently on money;4but, about 1526, the astronomer Copernicus gave a very good
exposition of some of the functions of money. But he, as well as
4

Roscher exhumed this book, entitled “De Origine, Natura, Jure etMutationibus Monetarum,” and it was reprinted in 1864 by Wolowski at Paris,
together with the treatise of Copernicus, “De Monetae Cudendae Ratione.”

[003]

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[004]

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Latimer,5 while noticing the economic changes, gave no correct
explanation. The Seigneur de Malestroit, a councilor of the Kingof France, however, by his errors drew out Jean Bodin6 to saythat the rise of prices was due to the abundance of money broughtfrom America. But he was in advance of his time, as well as
William Stafford,7 the author of the first English treatise on
money, which showed a perfect insight into the subject. Stafford
distinctly grasped the idea that the high prices brought no loss
to merchants, great gain to those who held long leases, and loss
to those who did not buy and sell; that, in reality, commodities
were exchanged when money was passed from hand to hand.
Such was the situation8 which prefaced the first general system
destined to be based on supposed economic considerations,wrongly understood, to be sure, but vigorously carried out. I
refer to the well-known mercantile system which over-spread
Europe.9 Spain, as the first receiver of American gold andsilver, attributed to it abnormal power, and by heavy duties andprohibitions tried to keep the precious metals to herself. This led
to a general belief in the tenets of the mercantile system, and its
5

Sermon at St. Paul's Cross, 1549 (also see Jacob, “On the Precious Metals,”
pp. 244, 245).
61530-1596. See II. Baudrillart's “J. Bodin et son temps” (Paris, 1853). Bodin
wrote “Réponse aux paradoxes de M. de Malestroit touchant l'enchérissement
de toutes les choses et des monnaies” (1568), and “Discours sur le rehaussement
et la diminution des monnaies” (1578).
7“A Briefe Conceipte of English Policy” (1581). The book was publishedunder the initials “W. S.,” and was long regarded as the production of
Shakespere.
8
For information on this as well as a later period, consult Jacob “On thePrecious Metals” (1832), a history of the production and influences of goldand silver from the earliest times. He is considered a very high authority.
Humboldt's “Essay on New Spain” gives estimates and facts on the productionof the precious metals in America. A very excellent study has been madeby Levasseur in his “Histoire des classes ouvrières en France jusqu'à laRévolution.” For pauperism and its history, Nicholl's “History of the Poor
Laws” is, of course, to be consulted.
9
See Cossa, “Guide,” p. 119.

A Sketch Of The History Of Political Economy.

11

adoption by all Europe. 1. It was maintained that, where gold andsilver abounded, there would be found no lack of the necessaries
of life; 2. Therefore governments should do all in their power
to secure an abundance of money. Noting that commerce andpolitical power seemed to be in the hands of the states having thegreatest quantity of money, men wished mainly to create such a
relation of exports and imports of goods as would bring about
an importation of money. The natural sequence of this was, thepolicy of creating a favorable “balance of trade” by increasing
exports and diminishing imports, thus implying that the gain ininternational trade was not a mutual one. The error consisted
in supposing that a nation could sell without buying, and inoverlooking the instrumental character of money. The errors
even went so far as to create prohibitory legislation, in the hopeof shutting out imported goods and keeping the precious metals
at home. The system spread over Europe, so that France (1544)
and England (1552) forbade the export of specie. But, with themore peaceful conditions at the end of the sixteenth century, theexpansion of commerce, the value of money became steadier,and prices advanced more slowly.
Italian writers were among the first to discuss the lawsof money intelligently,10 but a number of acute Englishmenenriched the literature of the subject,11 and it may be said that10

See Antonio Serra, “Breve Trattato delle Cause che possono fare abbondare
li Regni d' Oro e d' Argento,” Naples, 1613.
11
Thomas Mun, “England's Treasure by Foreign Trade” (published in 1640
and 1664); “Advice of the Council of Trade” (1660), in Lord Overstone's“Select Tracts on Money”; Sir William Petty, “Political Arithmetic,” etc.
(about 1680); Sir Josiah Child, “New Discourse of Trade” (1690); Sir DudleyNorth, “Discourse on Trade” (1691); Davenant's Works (1690-1711); Joshua
Gee, “Trade and Navigation of Great Britain” (1730); Sir Matthew Decker(according to McCulloch, William Richardson), “Essay on the Causes of the
Decline of Foreign Trade” (1744); Sir James Steuart, “An Inquiry into the
Principles of Political Economy” (1767). For this period also consult Anderson's“History of Commerce” (1764), Macpherson's “Annals of Commerce” (1803),
and Lord Sheffield's “Observations on the Commerce of the American States”

[005]

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Principles Of Political Economy

any modern study of political economy received its first definite
impulse from England and France.

[006]

The prohibition of the export of coin was embarrassing to theEast India Company and to merchants; and Mun tried to showthat freedom of exportation would increase the amount of goldand silver in a country, since the profits in foreign trade would
bring back more than went out. It probably was not clear to them,
however, that the export of bullion to the East was advantageous,
because the commodities brought back in return were morevaluable in England than the precious metals. The purpose of
the mercantilists was to increase the amount of gold and silverin the country. Mun, with some penetration, had even pointed
out that too much money was an evil; but in 1663 the English
Parliament removed the restriction on the exportation of coin.
The balance-of-trade heresy, that exports should always exceed
imports (as if merchants would send out goods which, when paid
for in commodities, should be returned in a form of less value
than those sent out!), was the outcome of the mercantile system,
and it has continued in the minds of many men to this day. The
policy which aimed at securing a favorable balance of trade, andthe plan of protecting home industries, had the same origin. If all
consumable goods were produced at home, and none imported,that would increase exports, and bring more gold and silver into
the country. As all the countries of Europe had adopted themercantile theory after 1664, retaliatory and prohibitory tariffs
were set up against each other by England, France, Holland,and Germany. Then, because it was seen that large sums were
paid for carrying goods, in order that no coin should be required
to pay foreigners in any branch of industry, navigation laws
were enacted, which required goods to be imported only inships belonging to the importing nation. These remnants of themercantile system continue to this day in the shipping laws of(1783).

A Sketch Of The History Of Political Economy.

13

this and other countries.12
A natural consequence of the navigation acts, and of themercantile system, was the so-called colonial policy, by which
the colonies were excluded from all trade except with the mothercountry. A plantation like New England, which produced
commodities in competition with England, was looked uponwith disfavor for her enterprise; and all this because of the
fallacy, at the foundation of the mercantile system, that the gain
in international trade is not mutual, but that what one country
gains another must lose.13
An exposition of mercantilism would not be complete withouta statement of the form it assumed in France under the guidance ofColbert,14 the great minister of Louis XIV, from 1661 to 1683. Inorder to create a favorable balance of trade, he devoted himself tofostering home productions, by attempts to abolish vexatious tolls
and customs within the country, and by an extraordinary systemof supervision in manufacturing establishments (which has been
the stimulus to paternal government from which France has never
12

The English Navigation Act of 1651 is usually described as the cause of
the decline of Dutch shipping. The taxation necessitated by her wars is rather
the cause, as history shows it to us. Sir Josiah Child (1668 and 1690) speaksof a serious depression in English commerce, and says the low rate of interest
among the Dutch hurts the English trade. This does not show that the acts
greatly aided English shipping. Moreover, Gee, a determined partisan of themercantile theory, says, in 1730, that the ship-trade was languishing. Sir
Matthew Decker (1744) confirms Gee's impressions. It looks very much as if
the commercial supremacy of England was acquired by internal causes, and in
spite of her navigation acts. The anonymous author of “Britannia Languens”
confirms this view.
13
This was, in substance, the whole teaching of one of the leading and mostintelligent writers, Sir James Steuart (1767), “Principles of Political Economy.”
See also Held's “Carey's Socialwissenschaft und das Merkantilsystem” (1866),
which places Carey among the mercantilists.
14
Forbonnais, “Récherches sur les finances de la France” (1595-1721); Pierre
Clément, “Histoire de Colbert et de son administration” (1874); “Lettres,
instructions et mémoires de Colbert” (1861-1870); “Histoire du système
protecteur en France” (1854); Martin, “Histoire de France,” tome xiii.

[007]

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Principles Of Political Economy

since been able to free herself). Processes were borrowed fromEngland, Germany, and Sweden, and new establishments formaking tapestries and silk goods sprang up; even the sizes offabrics were regulated by Colbert, and looms unsuitable for thesesizes destroyed. In 1671 wool-dyers were given a code of detailed
instructions as to the processes and materials that might be used.
Long after, French industry felt the difficulty of struggling withstereotyped processes. His system, however, naturally resulted
in a series of tariff measures (in 1664 and 1667). Moderate duties
on the exportation of raw materials were first laid on, followed
by heavy customs imposed on the importation of foreign goods.
The shipment of coin was forbidden; but Colbert's criterion ofprosperity was the favorable balance of trade. French agriculture
was overlooked. The tariff of 1667 was based on the theory that
foreigners must of necessity buy French wines, lace, and wheat;that the French could sell, but not buy; but the act of 1667 cut
off the demand for French goods, and Portuguese wines cameinto the market. England and Holland retaliated and shut off theforeign markets from France. The wine and wheat growers of thelatter country were ruined, and the rural population came to theverge of starvation. Colbert's last years were full of misfortune
and disappointment; and a new illustration was given of the
fallacy that the gain from international trade was not mutual.
From this time, economic principles began to be better
apprehended. It is to be noted that the first just observations arosefrom discussions upon money, and thence upon international
trade. So far England has furnished the most acute writers: now
France became the scene of a new movement. Marshal Vauban,15
the great soldier, and Boisguillebert16 both began to emphasize
the truth that wealth really consists, not in money alone, but inan abundance of commodities; that countries which have plentyof gold and silver are not wealthier than others, and that money
15
16“Dîme royale” (1707).
“Factum de la France” (1707).

A Sketch Of The History Of Political Economy.

15

is only a medium of exchange. It was not, however, until 1750
that evidences of any real advance began to appear; for Law's
famous scheme (1716-1720) only served as a drag upon thegrowth of economic truth. But in the middle of the eighteenth
century an intellectual revival set in: the “Encyclopædia” waspublished, Montesquieu wrote his “l'Ésprit des Lois,” Rousseau
was beginning to write, and Voltaire was at the height of his
power. In this movement political economy had an important
share, and there resulted the first school of Economists, termed
the Physiocrats.
The founder and leader of this new body of economic thinkers
was François Quesnay,17 a physician and favorite at the courtof Louis XV. Passing by his ethical basis of a natural order ofsociety, and natural rights of man, his main doctrine, in brief, wasthat the cultivation of the soil was the only source of wealth; thatlabor in other industries was sterile; and that freedom of trade wasa necessary condition of healthy distribution. While known as the“Economists,” they were also called the “Physiocrats,”18 or the“Agricultural School.” Quesnay and his followers distinguishedbetween the creation of wealth (which could only come fromthe soil) and the union of these materials, once created, by laborin other occupations. In the latter case the laborer did not, in
their theory, produce wealth. A natural consequence of this view
appeared in a rule of taxation, by which all the burdens of state
17

When Quesnay was sixty-one years old he wrote the article, “Fermiers,”in the “Encyclopædia” (of Diderot and D'Alembert) in 1756; article “Grains,”
in the same, 1757; “Tableau économique,” 1758; “Maximes générales
du gouvernement économique d'un royaume”; “Problème économique”;“Dialogues sur le commerce et sur les travaux des artisans”; “Droit natural”(1768). “Collection des principaux économistes,” edited by E. Daire (1846), isa collection containing the works of Quesnay, Turgot, and Dupont de Nemours.
See also Lavergne, “Les économistes françaises du 18e siècle” (1870); and H.
Martin, “Histoire de France.” Quesnay's “Tableau économique” was the Koranof the school.
18
From ÇÁqÄ·Ã¹Â ÄÆÂ Æ{ÃµÉÂ, as indicating a reverence for natural laws.

[009]

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expenditure were laid upon the landed proprietors alone, since
they alone received a surplus of wealth (the famous net produit)
above their sustenance and expenses of production. This position,of course, did not recognize the old mercantile theory that foreigncommerce enriched a nation solely by increasing the quantity ofmoney. To a physiocrat the wealth of a community was increased
not by money, but by an abundant produce from its own soil. In
fact, Quesnay argued that the right of property included the rightto dispose of it freely at home or abroad, unrestricted by the state.
This doctrine was formulated in the familiar expression, “Laissez
faire, laissez passer.”19 Condorcet and Condillac favored the
new ideas. The “Economists” became the fashion in France; andeven included in their number Joseph II of Austria, the Kings ofSpain, Poland, Sweden, Naples, Catharine of Russia, and theMargrave of Baden.20 Agriculture, therefore, received a great
stimulus.
Quesnay had many vigorous supporters, of whom the mostconspicuous was the Marquis de Mirabeau21 (father of him of
the Revolution), and the culmination of their popularity wasreached about 1764. A feeling that the true increase of wealthwas not in a mere increase of money, but in the products ofthe soil, led them naturally into a reaction against mercantilism,
but also made them dogmatic and overbearing in their one-sided
system, which did not recognize that labor in all industries
19
The words were not invented by Quesnay, but formed the phrase of amerchant, Legendre, in addressing Colbert; although it was later ascribed, as
by Perry, “Political Economy” (p. 46), and Cossa (p. 150), to one of the
Economists, Gournay. (See Wolowski, in his Essay prefixed to “Roscher's
Political Economy,” p. 36, American translation.)
20
The Margrave Karl Friedrich was the author of “Abrégé des principes del'économie politique” (1775), and applied the physiocratic system of taxation
to two of his villages with disastrous results.
21
He published a first work on “Population” (1756); the “Théorie de l'impôt”(1760); and “Philosophie rurale” (1763). In this latter work Mirabeau adopted
the “Tableau économique” as the key to the subject, and classed it with thediscovery of printing and of money.

A Sketch Of The History Of Political Economy.

17

created wealth. As the mercantile system found a great ministerin Colbert to carry those opinions into effect on a national scale,so the Physiocrats found in Turgot22 a minister, under Louis XVI,
who gave them a national field in which to try the doctrines of
the new school. Benevolently devoted to bettering the conditionof the people while Intendant of Limoges (1751), he was madecomptroller-general of the finances by Louis XVI in 1774. Turgot
had the ability to separate political economy from politics, law,and ethics. His system of freeing industry from governmental
interference resulted in abolishing many abuses, securing a freer
movement of grain, and in lightening the taxation. But therigidity of national prejudices was too strong to allow him
success. He had little tact, and raised many difficulties in hisway. The proposal to abolish the corvées (compulsory repair ofroads by the peasants), and substitute a tax on land, brought hisking into a costly struggle (1776), and attempts to undermine
Turgot's power were successful. With his downfall ended theinfluence of the Economists. The last of them was Dupont deNemours,23 who saw a temporary popularity of the Physiocrats
22

In 1742 Turgot, when scarcely twenty, appeared as a sound writer on Paper
Money in letters to Abbé Cicé. The physiocratic doctrines were presented in amore intelligible form in his greater work, “Réflexions sur la formation et ladistribution des richesses” (1766). Three works of Turgot, on mining property,
interest of money, and freedom in the corn-trade, bear a high reputation.
For works treating of Turgot, see Batbie, “Turgot, philosophe, économiste etadministrateur” (1861); Mastier, “Turgot, sa vie et sa doctrine” (1861); Tissot,“Turgot, sa vie, son administration et ses ouvrages” (1862).
23
He was the editor of the works of Quesnay and Turgot, and wrote a“Mémoire de Turgot” (1817). He opposed the issue of assignats during the
French Revolution, and, falling into disfavor, he barely escaped the scaffold.
Having been a correspondent of Jefferson's, when Napoleon returned fromElba, he came to America, and settled in Delaware, where he died in 1817.
The connection between the Economists and the framers of our Constitution isinteresting, because it explains some peculiarities introduced into our systemof taxation in that document. The only direct taxes recognized by the Supreme
Court under our Constitution are the poll and land taxes; and it is in thisconnection that the constitutionality of the income-tax (a direct tax) is doubted.

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in the early years of the French Revolution, when the Constituent
Assembly threw the burden of taxes on land. But the fire blazed
up fitfully for a moment, only to die away entirely.
All this, however, was the slow preparation for a newer
and greater movement in political economy than had yet been
known, and which laid the foundation of the modern study as
it exists to-day. The previous discussions on money and theprominence given to agriculture and economic considerations by
the Economists made possible the great achievements of Adam
Smith and the English school. A reaction in England against the
mercantile system produced a complete revolution in political
economy. Vigorous protests against mercantilism had appeared
long before,24 and the true functions of money had come tobe rightly understood.25 More than that, many of the mostimportant doctrines had been either discussed, or been given
to the public in print. It is at least certain that hints of muchthat made so astonishing an effect in Adam Smith's “Wealth of
Nations” (1776) had been given to the world before the latter was
written. To what sources, among the minor writers, he was mostindebted, it is hard to say. Two, at least, deserve considerable
attention, David Hume and Richard Cantillon. The former
published his “Economic Essays” in 1752, which contained
what even now would be considered enlightened views onmoney, interest, balance of trade, commerce, and taxation; anda personal friendship existed between Hume and Adam Smith
dating back as far as 1748, when the latter was lecturing in
Edinburgh on rhetoric. The extent of Cantillon's acquirements24
One of the earliest is that of Roger Coke (1675), in which he argues forfree trade, and attacks the navigation acts. Sir Dudley North's “Discourse on
Trade” (1691) urges that the whole world, as regards trade, is but one people,
and explains that money is only merchandise.
25
Joseph Harris, an official in the London Mint, published a very clear
exposition of this subject in his “Essay upon Money and Coins” (1757); but,eighty years before, Rice Vaughan had given a satisfactory statement in his“Treatise of Money.”A Sketch Of The History Of Political Economy.

19

and Adam Smith's possible indebtedness to him have been but
lately recognized. In a recent study26 on Cantillon, the lateProfessor Jevons has pointed out that the former anticipatedmany of the doctrines later ascribed to Adam Smith, Malthus,
and Ricardo. Certain it is that the author of the “Wealth of
Nations” took the truth wherever he found it, received substantial
suggestions from various sources, but, after having devoted
himself in a peculiarly successful way to collecting facts, hewrought out of all he had gathered the first rounded system ofpolitical economy the world had yet known; which pointed outthat labor was at the basis of production, not merely in agriculture,as the French school would have it, but in all industries; andwhich battered down all the defenses of the mediæval mercantile
system. In a marked degree Adam Smith27 combined a logicalprecision and a power of generalizing results out of confused datawith a practical and intuitive regard for facts which are absolutely
necessary for great achievements in the science of political
economy. At Glasgow (1751-1764) Adam Smith gave lectures onnatural theology, ethical philosophy, jurisprudence, and political
economy, believing that these subjects were complementary to
26“Contemporary Review,” January, 1881, “Richard Cantillon.” Adam Smith
had quoted Cantillon on his discussion of the wages of labor, b. i, ch. viii, andevidently knew his book.
27
Born in 1723, and died 1790; he was eleven years younger than Hume.
A Professor of Logic (1751) and Moral Philosophy (1752) at Glasgow, hepublished a treatise on ethical philosophy, entitled the “Theory of Moral
Sentiments” (1739). Dugald Stewart is the authority as to Smith's life, having
received information from a contemporary of Smith's, Professor Miller (seePlayfair's edition of Smith's works); for Adam Smith destroyed all his own
papers in his last illness. His lectures on political economy at Glasgow outlined
the results as they appeared in the “Wealth of Nations”; it was not until 1764
that he resigned his professorship, and spent two years on the Continent (twelve
months of this in France). On his return home he immured himself for ten
years of quiet study, and published the “Wealth of Nations” in 1776. (Seealso McCulloch's introduction to his edition of the “Wealth of Nations,” andBagehot's “Economic Studies,” iii.)

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each other.
A connected and comprehensive grasp of principles was thegreat achievement of Adam Smith;28 for, although the “Wealthof Nations” was naturally not without faults, it has been the basisof all subsequent discussion and advance in political economy.
In Books I and II his own system is elucidated, while Book
IV contains his discussion of the Agricultural School and theattacks on the mercantile system. Seeing distinctly that labor
was the basis of all production (not merely in agriculture), heshows (Books I and II) that the wealth of a country depends
on the skill with which its labor is applied, and upon the
proportion of productive to unproductive laborers. The gains
from division of labor are explained, and money appears as anecessary instrument after society has reached such a division.
He is then led to discuss prices (market price) and value; and,since from the price a distribution takes place among the factorsof production, he is brought to wages, profit, and rent. The
functions of capital are explained in general; the separationof fixed from circulating capital is made; and he discusses
the influence of capital on the distribution of productive andunproductive labor; the accumulation of capital, money, paper
money, and interest. He, therefore, gets a connected set ofideas on production, distribution, and exchange. On questions of
production not much advance has been made since his day; andhis rules of taxation are now classic. He attacked vigorously thebalance-of-trade theory, and the unnatural diversion of industry
in England by prohibitions, bounties, and the arbitrary colonial
system. In brief, he held that a plan for the regulation of industry
by the Government was indefensible, and that to direct private
persons how to employ their capital was either hurtful or useless.
He taught that a country will be more prosperous if its neighbors
28

A glance at Sir James Steuart's treatise (1767) with the “Wealth of Nations”
shows Adam Smith's great qualities; the former was a series of detached essays,
although of wide range, but admittedly without any consistent plan.

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21

are prosperous, and that nations have no interest in injuring eachother. It was, however, but human that his work should have beensomewhat defective.29 A new period in the history of political
economy, however, begins with Adam Smith. As Roscher says,
he stands in the center of economic history.

New writers now appear who add gradually stone after stone
to the good foundation already laid, and raise the edifice tofairer proportions. The first considerable addition comes from a29(a.) He went into a vague discussion upon labor as a measure of value. (b.)
A legal rate of interest received his support, and his argument was answered
effectually by Bentham (“Defense of Usury”). (c.) While not agreeing with
the French school that agriculture is the only industry producing more thanit consumes, and so land pays rent, yet he thinks that it produces more inproportion to the labor than other industries; that manufactures came next; andexportation and commerce after them. This error, however, did not modify his
more important conclusions. Thorold Rogers and even Chevalier, however,claim that Adam Smith drew his inspiration from the French school. (d.) In
the discussion of rent, he failed to follow out his ideas to a legitimate end,
and did not get at the true doctrine. While hinting at the right connection
between price and rent, he yet believed that rent formed a part of price. Of thefundamental principle in the doctrine of rent, the law of diminishing returns,
he had no full knowledge, but came very close to it. He points out that incolonies, when the good soil has all been occupied, profits fall. (e.) In sayingthat every animal naturally multiplies in proportion to, and is limited by, themeans of subsistence, Adam Smith just missed Malthus's law of population. In
fact, Cantillon came quite as near it.
Book III in his “Wealth of Nations” is concerned with the policy of Europe
in encouraging commerce at the expense of agriculture, and has less interestfor us. Book V considers the revenue of the sovereign, and much of it is now

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contribution by a country clergyman, Thomas Robert Malthus,30
in his “Essay on the Principles of Population” (1798). Against theview of Pitt that “the man who had a large family was a benefactor
to his country,” Malthus argued conclusively that “a perfectly
happy and virtuous community, by physical law, is constrained
to increase very rapidly.... By nature human food increases
in a slow arithmetical ratio; man himself increases in a quick
geometrical ratio, unless want and vice stop him.” In his second
edition (1803), besides the positive check of vice and want, hegave more importance to the negative check of “self-restraint,
moral and prudential.” The whole theory was crudely stated at
first; and it raised the cry that such a doctrine was inconsistent
with the belief in a benevolent Creator. In its essence, the law of
population is simply that a tendency and ability exist in mankind
to increase its numbers faster than subsistence, and that this result
actually will happen unless checks retard it, or new means ofgetting subsistence arise. If an undue increase of population led
to vice and misery, in Malthus's theory, he certainly is not to
be charged with unchristian feelings if he urged a self-restraint
obsolete; but his discussion of taxation is still highly important.
30
Among the English Liberals carried away by the French Revolution, andby such theories as those of Condorcet, was William Godwin, the authorof “Political Justice” (1793) and the “Inquirer” (1797), who advocated theabolition of government and even marriage, since by the universal practice ofthe golden rule there would come about a lengthening of life. Malthus tells
us that his study was brought forward as an answer to the doctrines of the“Inquirer,” and he applied his principles to Condorcet's and Godwin's ideas. It
was a period when pauperism demanded attention from all. Malthus favoredthe repeal of the old poor-laws, as destroying independence of character among
the poor.
Malthus also wrote “Principles of Political Economy” (1821) and“Definitions in Political Economy” (1827), but the former did not increase his
reputation. He believed in taxing imported corn, and he gave in his adherence
to the doctrine of over-production. But, on the other hand, he was one ofseveral writers who, almost at the same time, discovered the true theory ofrent. His father was a friend of Godwin, and a correspondent of Rousseau. (See
Bagehot, “Economic Studies,” p. 135.)

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23

by which that evil result should be avoided. Malthus's doctrines
excited great discussion: Godwin says that by 1820 thirty or
forty answers to the essay had been written; and they havecontinued to appear. The chief contributions have been by A.
H. Everett, “New Ideas on Population” (1823), who believedthat an increase of numbers increased productive power; by M.
T. Sadler, “Law of Population” (1830), who taught that human
fertility varied inversely with numbers, falling off with density of
population; by Sir Archibald Alison, “Principles of Population”(1840), who reasoned inductively that the material improvementof the human race is a proof that man can produce more than heconsumes, or that in the progress of society preventive checks
necessarily arise; by W. R. Greg, “Enigmas of Life” (1873); andby Herbert Spencer, “Westminster Review” (April, 1852), and“Principles of Biology,” (part vi, ch. xii and xiii), who worked
out a physiological check, in that with a mental development
out of lower stages there comes an increased demand upon the
nervous energy which causes a diminution of fertility. Since
Darwin's studies it has been very generally admitted that it is theinnate tendency of all organic life to increase until numbers press
upon the limit of food-production; not that population has always
done so in every country.31 Malthus's teachings resulted in themodern poor-house system, beginning with 1834 in England, andthey corrected some of the abuses of indiscriminate charity.
While Adam Smith had formulated very correctly the lawsof production, in his way Malthus was adding to the means bywhich a better knowledge of the principles of distribution was tobe obtained; and the next advance, owing to the sharp discussions
31

See Cairnes, “Logical Method,” Lecture VII, for the best modern statementof the question. Also, Roscher, “Principles of Political Economy,” b. v, whose
extended notes furnish information on facts and as to books. H. Carey, “Social
Science” (edition of 1877), iii, pp. 263-312, opposes the doctrine, as also
Bowen, “American Political Economy” (1870), ch. viii, and Henry George,“Progress and Poverty” (1880), pp. 81-134.

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Principles Of Political Economyof the time on the corn laws, was, by a natural progress, to thelaw of diminishing returns and rent. An independent discoveryof the law of rent is to be assigned to no less than four persons,32
but for the full perception of its truth and its connection withother principles of political economy the credit has been rightly
given to David Ricardo,33 next to Adam Smith without question
the greatest economist of the English school. Curiously enough,although Adam Smith was immersed in abstract speculations, his“homely sagacity” led him to the most practical results; but while
Ricardo was an experienced and successful man of business, heit was, above all others, who established the abstract political
economy, in the sense of a body of scientific laws to whichconcrete phenomena, in spite of temporary inconsistencies, mustin the end conform. His work, therefore, supplemented thatof Adam Smith; and there are very few doctrines fully worked
out to-day of which hints have not been found in Ricardo's
wonderfully compact statements. With no graces of exposition,
32
J. Anderson, “An Inquiry into the Nature of the Corn Laws” (1777),“Agricultural Recreations,” vol. v, p. 401 (1801); Sir Edward West, “Essayon the Application of Capital to Land” (1815); Rev. T. R. Malthus, “AnInquiry into the Nature and Progress of Rent” (1815). The last two appeared
after Anderson's discoveries had been forgotten, but he has the honor of first
discovery.
33
Born in 1772 of Jewish parentage, Ricardo died in 1824. A rich banker,
who made a fortune on the Stock Exchange, he early in life retired frombusiness. The discussions on the Restriction Act and the corn laws led him
to investigate the laws governing the subjects of money and rent. He gained
notice first by his “Letters on the High Price of Bullion” (1810). The “Reply
to Mr. Bosanquet” (1811), and “Inquiry into Rent” (1815), were followedby his greater work, “Principles of Political Economy and Taxation” (1817).
He entered the House of Commons from Portarlington, a pocket borough in
Ireland, and was influential in the discussions on resumption. Although he
was not on the committee, his views on depreciated paper are practicallyembodied in the famous “Bullion Report” (1810). Tooke, “History of Prices,”says the results of the restriction were not known until the time of Ricardo's
contributions. Neither Mill nor Say has had so great an influence as Ricardo
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25

his writings seem dry, but are notwithstanding mines of valuablesuggestions.
In the field of distribution and exchange Ricardo made great
additions. Malthus and West had shown that rent was not
an element in cost of production; but both Malthus and Ricardo
seemed to have been familiar with the doctrine of rent long before
the former published his book. Ricardo, however, saw into its
connection with other parts of a system of distribution.34 The
Malthusian doctrine of a pressure of population on subsistence
naturally forced a recognition of the law of diminishing returns
from land;35 then as soon as different qualities of land were
simultaneously cultivated, the best necessarily gave larger returns
than the poorest; and the idea that the payment of rent was madefor a superior instrument, and in proportion to its superiority
over the poorest instrument which society found necessary touse, resulted in the law of rent. Ricardo, moreover, carried out
this principle as it affected wages, profits, values, and the fall of
profits; but did not give sufficient importance to the operationof forces in the form of improvements acting in opposition to
the tendency toward lessened returns. The theory of rent stillholds its place, although it has met with no little opposition.36 A
34Johann Heinrich von Thünen, a rich land-owner of Mecklenburg, in his“Der isolirte Staat in Beziehung auf Landwirthschaft und National-Oekonomie”(1826), worked entirely by himself, but reached practically the same law ofrent as Ricardo's. In spreading the doctrines of Adam Smith he has influenced
later German writers.
35
The first distinct recognition of this important physical law, according to
McCulloch (Introduction to “Wealth of Nations,” lv), was in a fanciful workof two volumes, entitled “Principes de tout gouvernement,” published in 1766:“Quand les cultivateurs, devenus nombreux, auront défriché toutes les bonnes
terres; par leur augmentation successive, et par la continuité du défrichement,
il se trouvera un point ou il sera plus avantageux à un nouveau colon de prendre
à ferme des terres fécondes, que d'en défricher de nouvelles beaucoup moins
bonnes” (I, p. 126). The author was, however, unaware of the importance of
his discovery.
36
Carey, “Social Science” (I, ch. iv, v), and Bowen, “American Political

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doctrine, quite as important in its effects on free exchange, wasclearly established by Ricardo, under the name of the doctrine of“Comparative Cost,” which is the reason for the existence of any
and all international trade.
The work of Adam Smith was soon known to other countries,
apart from translations. A most lucid and attractive exposition
was given to the French by J. B. Say, “Traité d'économie
politique” (1803), followed, after lecturing in Paris from 18151830, by a more complete treatise,37 “Cours complète d'économie
politique” (1828). While not contributing much that was new,Say did a great service by popularizing previous results ina happy and lively style, combined with good arrangement,
and many illustrations. The theory that general demand andsupply are identical is his most important contribution to thestudy. Although he translated Ricardo's book, he did not
grasp the fact that rent did not enter into price. Say's work
was later supplemented by an Italian, Pellegrino Rossi,38 who,
Economy” (ch. ix), have denied Ricardo's doctrine of rent. Thesupposedconnection between free trade and Ricardo's teachings on rent has prejudiced
protectionists against him. Free trade follows from the theory of international
trade, and has nothing to do with Ricardo's main doctrines. It is true, Ricardo
was a vigorous free-trader. Of opposing views on rent, Carey's argument is themost important.
37
Say drew considerable attention by his theory of “gluts.” He based his idea
of value wholly on utility, which has lately been taken up again by Professor
Jevons. Say was answered on this point by Ricardo in a later edition of his“Political Economy.” See Cairnes, “Leading Principles,” p. 17. As a free-trader
and opponent of governmental interference, he went further than his master,
Adam Smith. Napoleon did not like this part of Say's teaching, saying that it
would destroy an empire of adamant, and tried to induce him to modify his
position, but in vain. The second edition was not allowed to be published until
1815.
38
Educated at Bologna, he went to Geneva in 1816, and was called (1833) by
the French Government to succeed Say in the Collége de France. In 1845 he
was sent as minister to Rome, led the revolutionary movement there, and wasassassinated in 1848. His lectures were taken down in short-hand by one of his
disciples, Porée, and later published.

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27

in his “Cours d'économie politique” (1843-1851), naturalized
the doctrines of Malthus and Ricardo on French soil. His
work is of solid value, and he and Say have given rise to an
active school of political economy in France. In Switzerland,Sismondi expounded Adam Smith's results in his “De la richessecommerciale” (1803), but was soon led into a new position,
explained in his “Nouveaux principes d'économie politique”(1819). This has made him the earliest and most distinguishedof the humanitarian economists. Seeing the sufferings caused byreadjustments of industries after the peace, and the warehouses
filled with unsold goods, he thought the excess of production overthe power of consumption was permanent, and attacked divisionof labor, labor-saving machinery, and competition. Discoveries
which would supersede labor he feared would continue, and theabolition of patents, together with the limitation of population,39
was urged. These arguments furnished excellent weapons tothe socialistic agitators. Heinrich Storch40 aimed to spread theviews of Adam Smith41 in Russia, by his “Cours d'économie
39

Malthus, who held that the unproductive consumption of the rich wasdesirable for the poor, supported Sismondi. The latter was answered by
Say and McCulloch (“Edinburgh Review,” March, 1821), to which Sismondi
replied in his second edition, in 1827, and then withdrew from economic
discussion.
40
A native of Riga, educated in Germany, Storch was charged by the Czar
Alexander with the duty of instructing his sons, the Grand Dukes Nicholas
and Michael, and his treatise is the collection of his lectures. Knowing littleof Malthus or Ricardo, he made a near approach to the doctrine of rent.
His unsparing denunciation of Russian administrative corruption caused theGovernment to forbid the publication of the Russian translation.
41
Cossa, “Guide” (p. 173), points out Sartorius, Lüder, Kraus, and Schlözer
as teachers of Adam Smith, in Germany, followed later by G. Hufeland, J.
F. E. Lotz, and L. H. von Jakob; Count Hogendorp and Gogel, in Holland;
Count Szecheny, in Hungary, and (pp. 211-213) Cagnazzi, Bosellini, Ressi,
Sanfilippo, and Scuderi (the last two protectionists), in Italy. Fuoco (18251827), in Italy, first saw the value of Ricardo's theory of rent, while Gioja
opposed Adam Smith and Say. But K. H. Rau (died 1870), in his “Lehrbuch
der politischen Oekonomie” (1826, fifth edition 1864), had the most extensive

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politique” (1815). Without further developing the theory ofpolitical economy, he produced a book of exceptional meritby pointing out the application of the principles to Russia,
particularly in regard to the effect of a progress of wealth onagriculture and manufactures; to the natural steps by which a new
country changes from agriculture to a manufacturing régime; andto finance and currency, with an account of Russian depreciatedpaper since Catharine II.

For the next advance, we must again look to England. Passing
by McCulloch42 and Senior, a gifted writer, the legitimate suc-influence in Germany in expounding Adam Smith's system, with proper
improvements. Another important writer of this school was F. B. W. vonHermann, “Staatswirthschaftliche Untersuchungen” (1832).
42
From 1810 to 1840, political economy was a favorite study in England,
and many writers deserve mention. There were Huskisson, a great financier;Thomas Tooke (1773-1858), who began his matchless “History of Prices”(1823); Lord Overstone (Samuel Jones Loyd), “Tracts and other Publications
on Metallic and Paper Currency” (1858); Robert Torrens (1784-1864), “Essayon the Production of Wealth” (1821); Archbishop Whately, “Introductory
Lectures” (1831), and “Easy Lessons on Money Matters”; Cobden and Sir
Robert Peel; N. W. Senior (1790-1864), Professor of Political Economy
at Oxford, article on “Political Economy” (1836) in the “Encyclopædia
Metropolitana,” and “Lectures on the Cost of obtaining Money” (1830).
Senior showed great ability in analyzing cost of production, and stands far
above McCulloch in real ability. J. R. McCulloch (1789-1864), who preceded
Mill, wrote a good but dry textbook, “Principles of Political Economy” (1825),“A Treatise on the Principles, Practice, and History of Commerce” (1833), an
excellent “Dictionary of Commerce” (last enlarged edition, 1882), “Literatureof Political Economy” (1845). He edited Ricardo's works, with a biography,
published a “Select Collection of Scarce and Valuable Tracts on Money”(1856), “A Treatise on the Principles and Practical Influence of Taxation andA Sketch Of The History Of Political Economy.

29

cessor of Ricardo is John Stuart Mill.43 His father, James Mill,44

the tenure of land, lost him any considerable influence.
the Funding System” (1845). He contributed nothing practically new to thestudy. Miss Harriet Martineau (1802-1876) gave some admirable althoughsomewhat extended stories in illustration of the various principles of political
economy, entitled “Illustrations of Political Economy” (1859). This period in
England was signalized by the abolition of the Corn Laws (1846), and the
Navigation Laws (1849), the passage of the Bank Act (which separated theissue from the banking department, 1844), and the general abandonment ofprotective duties. Cf. Noble, “Fiscal Legislation, 1842-1865” (1867).
43
Born in 1806, he died in 1873. For his extraordinary education see his“Autobiography.” When thirteen years old, he began the study of political
economy through lectures from his father while walking; he then (1819) read
Ricardo and Adam Smith, and at fourteen he journeyed to France, where helived for a time with J. B. Say. He entered the East India Office at seventeen,
was occupied finally in conducting the correspondence for the directors, where
he remained until 1858. When about twenty, Mill met twice a week in
Threadneedle Street, from 8.30 to 10 A.M.{FNS, with a political economy
club, composed of Grote, Roebuck, Ellis, Graham, and Prescott, where they
discussed James Mill's and Ricardo's books, and also Bailey's “Dissertations on
Value.” In these discussions, chiefly with Graham, Mill elaborated his theoryof international values. In 1865 he entered Parliament for Westminster, and

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introduced him into a circle of able men, of which Bentham wasthe ablest, although his father undoubtedly exercised the chief
influence over his training. While yet but twenty-three, in his firstbook, “Essays on some Unsettled Questions of Political Economy” (1829-1830), he gained a high position as an economist.
In one form or another, all his additions to the study are to befound here in a matured condition. The views on productive
and unproductive consumption, profits, economic methods, andespecially his very clever investigation on international values,
were there presented. His “Logic” (1843) contains (Book VI)
a careful statement of the relation of political economy to othersciences, and of the proper economic method to be adopted ininvestigations. Through his “Principles of Political Economy”(1848) he has exercised a remarkable influence upon men in alllands; not so much because of great originality, since, in truth, he
only put Ricardo's principles in better and more attractive form,
but chiefly by a method of systematic treatment more lucid andpractical than had been hitherto reached, by improving vastly
beyond the dry treatises of his predecessors (including Ricardo,
who was concise and dull), by infusing a human element into
his aims, and by illustrations and practical applications. Evenyet, however, some parts of his book show the tendency to too
great a fondness for abstract statement, induced probably by adislike to slighting his reasons (due to his early training), and by
the limits of his book, which obliged him to omit many possible
illustrations. With a deep sympathy for the laboring-classes, he
was tempted into the field of sociology in this book, although hesaw distinctly that political economy was but one of the sciences,a knowledge of which was necessary to a legislator in reachingfor three years had a singular, characteristic, independent, but uninfluential
career. His adherence to two radical reforms, woman suffrage and changes in
44
He (1773-1836) wrote the “History of India” (1817-1819), and “Elementsof Political Economy” (1821). He was intimate with Ricardo, Bentham, Austin,and Zachary Macaulay.

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31

a decision upon social questions. Mill shows an advance beyond
Ricardo in this treatise, by giving the study a more practicaldirection. Although it is usual to credit Mill with originating thelaws of international values, yet they are but a development ofRicardo's doctrine of international trade, and Mill's discussionsof the progress of society toward the stationary state were also
hinted at, although obscurely, by Ricardo. In the volumes of
Mr. Mill the subject is developed as symmetrically as a proof ingeometry. While he held strongly to free trade,45 he gave little
space to the subject in his book. All in all, his book yet remains
the best systematic treatise in the English language, althoughmuch has been done since his day.46
He who has improved upon previous conceptions, and been
the only one to make any very important advance in the sciencesince Mill's day, is J. E. Cairnes,47 in his “Leading Principles
of Political Economy newly expounded” (1874). Scarcely any
before his death, while working only in hopeless pain, was the period of
his greatest literary activity. He collected his “Essays in Political Economy,
Theoretical and Applied” (1873), in which he traced with great ability theeffect of the gold-discoveries; brought out his “Leading Principles” (1874),
and an enlarged edition of his “Logical Method” (second edition, 1875). The
first edition of this last book was the result of lectures delivered in Dublin
about 1858. In his earlier years the interest he felt in the United States led him
into a very vigorous and masterly study of “The Slave Power; its Character,
Career, and Probable Dangers” (1862); “The Revolution in America” (1862).
He then wrote “Colonization and Colonial Government” (1864), and “Negro
Suffrage” (1866). He finally succumbed to his fatal disease, and passed awayprematurely, July 8, 1875. A short sketch of his personal character was written
by Professor Fawcett, in the “Fortnightly Review,” August 1, 1875, p. 149.
45
In his “infant industries” argument, and his statement on navigation laws
(B. v, ch. x, §1), he conceded a great deal of free-trade ground; but in a
private letter, 1866 (see New York “Nation,” May 29, 1873), he denied that heintended the “infant industries” argument to apply to the United States. He did
not consider New England and Pennsylvania any longer as young countries
within the limits of his meaning. See also Taussig's “Protection to Young
Industries” (1883).
46
W. T. Thornton (1813-1880), in a volume “On Labor: its Wrongful Claims

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previous writer has equaled him in logical clearness, originality,
insight into economic phenomena, and lucidity of style. He
subjected value, supply and demand, cost of production, andinternational trade, to a rigid investigation, which has given us
actual additions to our knowledge of the study. The wages-fundtheory was re-examined, and was stated in a new form, although
Mr. Mill had given it up. Cairnes undoubtedly has given it
its best statement. His argument on free trade (Part III, chapteriv) is the ablest and strongest to be found in modern writers.
This volume is, however, not a systematic treatise on all theprinciples of political economy; but no student can properly
pass by these great additions for the right understanding of thescience. His “Logical Method of Political Economy” (1875) isa clear and able statement of the process to be adopted in an
economic investigation, and is a book of exceptional merit andusefulness, especially in view of the rising differences in theminds of economists as to method.
A group of English writers of ability in this period havewritten in such a way as to win for them mention in connection
Political Economy in University College, London. In 1881 he gave up academic
teaching, to devote himself to literature. He investigated the permanence of
the English coal-supply in “The Coal Question” (second edition, 1866).
“The Theory of Political Economy” (1871) contains his application of themathematical method, and a bibliography of similar attempts. “The Railways
and the State” are to be found in his “Essays and Addresses” (1874). He
prepared an elementary book, “Primer of Political Economy” (second edition,1878). He was a contributor to the journals, and especially to the “London
Statistical Journal.” His last books were “The State in Relation to Labor”(1882), which deals with the question of state interference; and “Methodsof Social Reform” (1883), containing a paper on industrial partnerships. He
also advanced the theory that the presence of sun-spots affected agriculture
unfavorably, and that, coming somewhat regularly, they produced a constantsuccession of commercial crises. (See “Nature,” xix, 33, 588.) At the early
age of forty-seven he was unfortunately drowned while bathing near Bexhill,
England (1882).

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33

with Cairnes and Mill. Professor W. Stanley Jevons48 put
himself in opposition to the methods of the men just mentioned,
and applied the mathematical process to political economy, but
without reaching new results. His most serviceable work has
been in the study of money, which appears in an excellent form,“The Money and Mechanism of Exchange” (1875), and in an
investigation which showed a fall of the value of gold since
the discoveries of 1849. In this latter he has furnished a model
for any subsequent investigator. Like Professor Jevons, T. E.
Cliffe Leslie49 opposed the older English school (the so-called“orthodox”), but in the different way of urging with great ability
the use of the historical method, of which more will be said in

and Rightful Dues” (1869), attacked Mill's position on demand and supply, andon wages, so that Mill in consequence abandoned his doctrine of wages, in the“Fortnightly Review,” May 1, 1869. Mr. Cairnes, however, rescued the WagesFund theory from Mr. Mill in his “Leading Principles” (1874). Thornton also
wrote “Over-Population, and its Remedy” (1846), and an excellent book, “Pleafor Peasant Proprietorship” (1848). See also “Nineteenth Century,” August,
1879, for an answer by Thornton to Mr. Cairnes on the wages question.
47
James Eliot Cairnes was born at Drogheda, 1824; was educated at Trinity
College, Dublin, and made Whately Professor there in 1856. Having been
Professor of Political Economy in Queen's College, Galway, he left Ireland in1866 to accept the chair of Political Economy in University College, London.
In that year, through an attack of inflammatory rheumatism, he fell under
the power of a painful and growing malady which rendered him physically
helpless, and portended certain death in the near future. The three years
48
Professor Jevons (1835-1882) was educated at University College, London,and spent the years from 1854 to 1859 in the Australian Royal Mint, where
he became interested in the gold question. He wrote a study on “A Serious
Fall in the Value of Gold ascertained” (1863), which attracted great attention.
A fine metaphysician and mathematician, he did not give his whole time toeconomic work. In 1866 he became Professor of Logic and Cobden Lecturer on
Political Economy in Owens College, Manchester, but later became Professor of49
Like Cairnes, Thomas Edward Cliffe Leslie was a native of Ireland, and

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speaking of later German writers.50 He also distinguished himself
by a study of land tenures, in his “Land Systems and Industrial
Economy of Ireland, England, and Continental Countries”(1870), which was a brilliant exposition of the advantages ofsmall holdings.
By far the ablest of the group, both by reason of his natural
gifts and his training as a banker and financial editor, was Walter
Bagehot.51 In his “Economic Studies” (1880) he has discussedwith a remarkable economic insight the postulates of political
economy, and the position of Adam Smith, Ricardo, and Malthus;
in his “Lombard Street” (fourth edition, 1873), the money market
is pictured with a vivid distinctness which implies the possessionof rare qualities for financial writing; indeed, it is in this practical
way also, as editor of the London “Economist,”52 that he madehis great reputation.
Of living English economists, Professor Henry Fawcett,53 in
educated at Trinity College, Dublin. He was called to the bar, but gave up thelaw when offered the professorship of Political Economy in Queen's College,
Belfast. Besides his discussion of land tenures, he published “Political and
Moral Philosophy” (1874). He long suffered from bad health, and died January
28, 1882. His volume of “Land Systems” is now (1884) out of print, andscarce. He had also devoted himself to financial reform.
50
See p. 33.
51
Born 1826, died 1877. He was early made familiar with banking inconnection with the Stuckey Banking Company, in Somersetshire; was
educated at University College, London. In 1858 he married the daughterof James Wilson, the editor of the London “Economist,” whom he succeeded.
He was a political student of a rare kind, as is shown by his “English
Constitution” (second edition, 1872), “Physics and Politics” (1872), “Literary
Studies” (second edition, 1879). He also wrote “Depreciation of Silver” (1877).
52
Established in 1848, and unquestionably the most useful economic
publication for English questions.
53
Born 1833. His eye-sight was lost by an accidental shot in 1858, but he waschosen Professor of Political Economy at Cambridge in 1863. His “Manual”
and the “Economic Position of the British Laborer” (1865) gave him reputation,in 1865 he entered Parliament, and since 1880 he has been Postmaster-General
in Mr. Gladstone's administration. He has published “Pauperism, its Causes andA Sketch Of The History Of Political Economy.

35

his “Manual of Political Economy” (1865; sixth edition, 1883),
is a close follower of Mill, giving special care to co-operation,
silver, nationalization of land, and trades-unions. He is anexponent of the strict wages-fund theory, and a vigorous freetrader. Professor J. E. Thorold Rogers, of Oxford, also holds aloof
from the methods of the old school. His greatest contribution
has been a “History of Agriculture and Prices in England,” from1255 to 1793, in four volumes54 (1866-1882).
Of all the writers55 since Cairnes, it may be said that, while
adding to the data with which political economy has to do, andputting principles to the test of facts, they have made no actual
addition to the existing body of principles; although questionsof distribution and taxation are certainly not yet fully settled, as
is seen by the wide differences of opinion expressed on subjects
falling within these heads by writers of to-day.
It now remains to complete this sketch of the growth of political
economy by a brief account of the writers on the Continent andin the United States, beginning with France. About the time
Remedies” (1871), “Speeches” (1878), “Free Trade and Protection” (1878).
His wife (born 1847), Millicent Garret Fawcett, reduced his “Manual” into
“Political Economy for Beginners” (1869), and also wrote “Tales in Political
Economy” (1874). Died November 13, 1884.
54
He has also published “Social Economy” (1872); a small “Manual of
Political Economy” (third edition, 1878); and a very considerable work, “SixCenturies of Work and Wages: the History of English Labor,” 1250-1883(1884). He has edited Adam Smith's “Wealth of Nations,” and written “Cobden
and Modern Political Opinion” (1873), and “The Colonial Question,” in the
Cobden Club Essays (1872).
55
Of other books, mention should be made of G. J. Goschen's most admirable“Theory of Foreign Exchanges” (eighth edition, 1875); “Reports and Speeches
on Local Taxation” (1872); T. Brassey's “Work and Wages” (third edition,
1883); E. Seyd, “Bullion and the Foreign Exchanges” (1868); H. D. McLeod, an
eccentric writer, “Dictionary of Political Economy” (only one vol., A-C, 1863,
published); and “Theory and Practice of Banking” (second edition, 1875-1876);
H. Sidgwick, “Principles of Political Economy” (1883); J. Caird, “LandedInterest” (fourth edition, 1880); L. Levi, “History of British Commerce”(1872).

[027]

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Principles Of Political Economyof the founding of the London “Economist” (1844) and “TheStatistical Journal” (1839) in England, there was established
in Paris the “Journal des Économistes” (1842), which contains
many valuable papers. On the whole, the most popular writer
since J. B. Say has been Bastiat,56 who aspired to be theFrench Cobden. He especially urged a new57 view of value,
which he defined as the relation established by an exchange ofservices; that nature's products are gratuitous, so that man can
not exact anything except for a given service. Chiefly as a foe
of protection, which he regarded as qualified socialism, he has
won a reputation for popular and clever writing; and he was led
to believe in a general harmony of interests between industrial
classes; but in general he can not be said to have much influenced
the course of French thought. On value, rent, and population,
he is undoubtedly unsound. A writer of far greater depth
than Bastiat, with uncommon industry and wide knowledge,
56
Frédéric Bastiat (1801-1850) began life in a commercial house at Bayonne,
but gained notice first by an article, “De l'influence des tarifs français et anglais
sur l'avenir des deux peuples,” in the “Journal des Économistes” of 1844,and consequently had a very short period of literary activity. The corn-law
agitation in England and the revolutionary movement of 1848 led him to write
chiefly against protection and socialism. He translated Cobden's speeches,“Cobden et la Ligue” (1845). His arguments against protection, “Sophismeséconomiques” (1846-1847), have been translated and published in this country;
but the more extended exposition of his doctrine of value diminishing with thegrowth of civilization, and the harmony of all interests is in the “Harmonieséconomiques” (1850). In this his position is not much different from Carey's.
His other books were “Capital et rente” (1849), directed against gratuitousloans; “Protectionisme et communisme” (1849), showing protection to becommunism for the rich; “Propriété et loi” (1848), directed against socialism;and “Essais sur l'économie politique” (1853); “Le Libre-échange” (1855).
“Œuvres complètes,” 7 tom. (1855-1864).
57
Carey, however, claimed, with probable truth, that Bastiat borrowed theidea from him, and Bastiat did not appear well in the controversy. Almost no
one has followed the French writer in his theory except Professor A. L. Perry,of Williams College, Massachusetts, who has shaped his general argument
according to this view of value. Also see Cairnes, “Essays in Political

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37

was Michel Chevalier,58 easily the first among modern Frencheconomists. He has led in the discussion upon the fall of gold,
protection, banking, and particularly upon money; an ardent
free-trader, he had influence enough to induce France to enter
into the commercial treaty of 1860 with England. One of theablest writers on special topics is Levasseur,59 who has given us
a history of the working-classes before and since the Revolution,and the best existing monograph on John Law. The mostindustrious and reliable of the recent writers is the well-known
statistician, Maurice Block,60 while less profound economists

Economy,” p. 312.
58
Chevalier (1806-1879) first drew attention in an experiment of SaintSimonism in 1830-1833. After traveling in the United States, and writing
excellent books on the country and its railways, he became professor in the
Collége de France, where his lectures were collected in a “Cours d'économie
politique” (1842-1850; second edition, 1855-1866). His third volume, “La
Monnaie,” is a standard treatise on money, with an extensive bibliography.
His treatise “Examen du système commerciale connu sous le nom de système
protecteur” (1851) is now somewhat out of date. In his book “De la Baisse,probable de l'or” (1859), translated by Richard Cobden, he held that, unlessprevented, gold would drive out the French currency, as against Faucher, whothought the fall temporary, and would progressively diminish. Other books are,“De l'industrie manufacturière en France,” and “La liberté du travail” (1848).
59
Émile Levasseur (born 1828) was professor at Alençon, 1852-1854, andelected a member of the Academy of Sciences in 1868. He has published“Récherches historiques sur le système de Law” (1854); “La question de l'or”(1858); “Histoire des classes ouvrières en France depuis la conquête de Jules
César jusqu'à la révolution” (1859); the same history continued, “Depuis 1789
jusqu'à nos jours” (1867); “La France industriale” (1865); “Cours d'économie
rurale, la France et ses colonies” (1868); “Précis d'économie politique” (fourth
edition, 1883).
60
Born in Berlin in 1816, but since 1821 living in France. He was long

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were J. A. Blanqui61 and Wolowski.62 The latter devoted himself
enthusiastically to banks of issue, and bimetallism. A small
group gave themselves up chiefly to studies on agriculture anda fertile writer: “Mobilisation du Crédit Foncier” (1839); “De l'organisation
du travail” (1846); “Études de l'économie politique et de statistique” (1848);“Henri IV, économiste, introduction de l'industrie de la soie en France” (1855);“Introduction de l'économie politique en Italie” (1859); “Les finances dela Russie” (1864); “La question des banques” (1864); his testimony in the“Enquête sur les principes et les faits généraux qui régissent la circulation
monétaire et fiduciaire” (1866); “La banque d'Angleterre et les banquesd'Écosse” (1867); “La liberté commerciale et les résultats du traité de commercede 1860” (1868); “L'or et l'argent” (1870); “La change et la circulation”; and atranslation of Roscher.
connected with the Bureau de Statistique Générale, and the Ministry ofAgriculture and Commerce, but in 1861 he left office and gave himself wholly
to private work. In this year he received the Montyon prize for statistics,
not given since 1857. His chief books are: “Des charges de l'agriculturedans les divers pays de l'Europe” (1850), a work crowned by the Institute;“Statistique de la France, comparée avec les divers états de l'Europe” (1860);“Le dictionnaire de l'administration française” (second edition, 1878); “Lesfinances de la France depuis 1815” (1863); “Les théoriciens du socialisme en
Allemagne” (1872); and in connection with M. Guillaumin, “L'annuaire del'économie politique,” since 1856.
61
Jérôme-Adolphe Blanqui ainé (1798-1854) in 1833 succeeded to the chairA Sketch Of The History Of Political Economy.

39

land-tenures—H. Passy,63 Laveleye, and Lavergne.64 The latteris by far the most important, as shown by his “L'économie
rurale de la France depuis 1789” (1857), which gives a meansof comparing recent French agriculture with that before the
Revolution, as described in Arthur Young's “Travels in France”(1789). The best systematic treatise in French is the “Précis deof J. B. Say in the Conservatoire des Arts et Métiers, and was one of thefounders of the “Journal des économistes.” Besides his “Histoire de l'économie
politique en l'Europe” (1837-1852), he published a “Résumé de l'histoire ducommerce et de l'industrie” (1826); “Précis élémentaire d'économie politique”(1826); “Rapports, histoire de l'exposition des produits de l'industrie française
en 1827” (1827); “Cours d'economie politique” (2 vols., 1837-1838), andnotices of Huskisson and J. B. Say.
62
Louis Wolowski (1810-1876), of Polish origin, was Chevalier's chief
antagonist, and Professor of Legislation at the Conservatoire des Arts etMétiers (1839); founded the first Crédit Foncier of Paris, and was elected to
the Institute in the place of Blanqui. In 1875 he was chosen senator. He was
63
Hippolyte-Philibert Passy (1793-1880) was educated for the army, andserved at Waterloo. He was more prominent as a statesman than as an
economist. In 1838 he entered the Academy in the place of Talleyrand, butpolitics left him unoccupied, and he wrote “Des systèmes de culture et de leurinfluence sur l'économie sociale” (1846), and “Des causes de l'inégalité desrichesses” (1849).
64
M. Léonce de Lavergne (1809-1880) came from Toulouse to Paris in
1840, elected deputy in 1846, a member of the Institute in 1855, and became
professor in the Institut agronomique of Versailles. He was also the authorof “L'économie rurale de l'Angleterre, de l'Écosse, et de l'Irlande” (1854),

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la science économique” (1862), by Antoine-Élise Cherbuliez,65
a Genevan. The French were the first to produce an alphabeticalencyclopædia of economics, by Coquelin and Guillaumin,
entitled the “Dictionnaire de l'économie politique” (1851-1853,
third edition, 1864). Courcelle-Seneuil,66 by his “Traité théoriqueet pratique d'économie politique” (second edition, 1867); andtranslated into English (1855); “L'agriculture et la population” (1857), a striking
confirmation of Malthusianism; “Les économistes françaises du dixhuitième
siècle” (1870). He also has contributed largely to the “Revue des Deux
Mondes” and the “Journal des Économistes.” For a personal sketch by Cliffe
Leslie, see “Fortnightly Review,” February, 1881.
65
Born at Geneva, 1797, and died at Zurich, 1869. After studying law, hebecame an advocate, and in 1833 Professor of Law in the place of Rossi. In
1837 he was made Professor of Political Economy and Public Law at Geneva.
He was also a member of the Swiss Grand Council. Besides his treatise, hewrote: “Richesse ou pauvreté” (1840); “Le socialisme, c'est la barbarie” (1848);“Études sur les causes de la misère” (1853); and aided in the “Dictionnaire del'économie politique.”66
J. G. Courcelle-Seneuil (born 1813) left a commercial career to become awriter, first for the journals, and later for the “Dictionnaire politique” (edited
by Pagnerre). In 1848 he was connected with the Ministry of Finance, andcalled to a professorship of Political Economy in Santiago, Chili, 1853-1863.
His chief work is a “Traité théorique et pratique d'économie politique” (1858),
but he has also published “La crédit de banque” (1840), reforms for the bank ofFrance; “Traité des opérations de banque” (1852; sixth edition, 1876); “Traitédes entreprises industrielles, commerciales, et agricoles” (1854); “Études sur lascience sociale” (1862); “Leçons élémentaires d'économie politique” (1864);

A Sketch Of The History Of Political Economy.

41

Baudrillart, by a good compendium. Joseph Garnier, Dunoyer,67
Paul Leroy-Beaulieu,68 Reybaud,69 De Parieu,70 Léon Say,71
Boiteau, and others, have done excellent work in France, andWalras72 in Switzerland.
As Cobden had an influence on Bastiat, so both had an
influence in Germany in creating what has been styled by
opponents the “Manchester school,” led by Prince-Smith (died1874). They have worked to secure complete liberty ofcommerce and industry, and include in their numbers manymen of ability and learning. Yearly congresses have beenorganized for the purpose of disseminating liberal ideas, andan excellent review, the “Vierteljahrschrift für Volkswirthschaft,
Politik, und Kulturgeschichte,”73 has been established. They
have devoted themselves successfully to reforms of laborlaws, interest, workingmen's dwellings, the money system,
and banking, and strive for the abolition of protective duties.
“La banque libre” (1867); “Liberté et socialisme” (1868); and articles in the“Dictionnaire de l'économie politique.”
67
Died 1862; author of “De la liberté du travail” (1845).
68
Professor of Political Economy at the Collége de France, author of an
extended and able “Traité de la science des finances” (third edition, 1883). He
has also published “De l'état moral et intellectual des populations ouvrières etde son influence sur le taux des salaires” (1868); “Récherches economiques,
historiques, et statistiques sur les guerres contemporaines” (1869); “La question
ouvrière au XIX siècle” (second edition, 1882); “L'administration locale en
France et en Angleterre” (1872); “Le travail des femmes au XIX siècle” (1873);“Essai sur la répartition des richesses” (1880; second edition, 1883); and “Dela colonisation chez les peuples modernes” (1882).
69
He published two volumes on Socialism (see list of books p. 44). In several
volumes on the “Régime des manufactures” he described the condition of thesilk, woolen, cotton, and iron industries.
70
The most vigorous advocate of monometallism in France. He also wrote
well on taxation, “Traité des impôts” (4 vols., 1866-1867).
71
His “Rapport sur l'indemnité du guerre” to the Corps Législatif gives theaccount of the most marvelous exchange operation of modern times, arisingfrom the payment of the indemnity by France to Germany (1871-1873).
72
An advocate of the mathematical method.
73
Founded in 1863, published at Berlin, and edited by Dr. Eduard Wiss.

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Schulze-Delitzsch has acquired a deserved reputation for thecreation of people's banks, and other forms of co-operation.
The translator of Mill into German, Adolph Soetbeer,74 is themost eminent living authority on the production of the precious
metals, and a vigorous monometallist. The school is represented
in the “Handwörterbuch der Volkswirthschaftslehre” (1865) ofReutzsch. The other writers of this group are Von Böhmert,75
Faucher, Braun, Wolff, Michaelis, Emminghaus,76 Wirth,77
Hertzka, and Von Holtzendorf. The best known of the German
protectionists is Friedrich List, the author of “Das nationale
System der politischen Oekonomie” (1841), whose doctrines arevery similar to those of H. C. Carey in this country.78 An able
writer on administrative functions and finance79 is Lorenz Stein,of Vienna.
But German economists are of interest, inasmuch as they
have established a new school who urge the use of the historical
74

Long Secretary to the Chamber of Commerce at Hamburg, and now
honorary professor at Göttingen.
75
Professor of Political Economy at Zürich in 1866, since 1875 directorof statistics at Dresden, and editor of “Der Arbeiterfreund.” He made avaluable study of industrial partnerships, “Die Gewinnbetheiligung” (second
edition 1878). He also wrote “Freiheit der Arbeit” (1858), and “Beiträge zur
geschichte des Zunftwesens” (1861).
76
His most important work is “Das Armenwesen und die Armengesetzebung
in Europäischen Staaten” (1870). Selected essays from this have been translated
into English by E. B. Eastwick, “Poor Relief in Different Parts of Europe”(1873).
77
Max Wirth is at Vienna, and has devoted himself to a “Geschichte derHandelskrisen” (1874), including the crisis of 1873. Baron von Hock has
written a history of the finances of France, and of the United States—“DieFinanzen und die Finanzgeschichte der vereinigten Staaten von Amerika”(1867).
78
This book has been translated into English by G. A. Matile, with notes by
Stephen Colwell (1856).
79
Mohl on administration, and Rau and A. Wagner on finance, also deserve
mention. Stein, besides other works, is the author of a handbook, “Die
Verwaltungslehre” (1870).

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43

method in political economy, and it is about the question of
method that much of the interest of to-day centers. In 1814
Savigny introduced this method into jurisprudence, and about
1850 it was applied to political economy. The new school
claim that the English “orthodox” writers begin by an a priori
process, and by deductions reach conclusions which are possibly
true of imaginary cases, but are not true of man as he reallyacts. They therefore assert that economic laws can only betruly discovered by induction, or a study of phenomena first,
as the means of reaching a generalization. To them Bagehot80
answers that scientific bookkeeping, or collections of facts, inthemselves give no results ending in scientific laws; for instance,since the facts of banking change and vary every day, no one
can by induction alone reach any laws of banking; or, forexample, the study of a panic from the concrete phenomena
would be like trying to explain the bursting of a boiler withouta theory of steam. More lately,81 since it seems that the newschool claim that induction does not preclude deduction, andas the old school never intended to disconnect themselves from“comparing conclusions with external facts,” there is not such a
cause of difference as has previously appeared. Doubtless theinsistence upon the merits of induction will be fruitful of good to“orthodox” writers, in the more general resort to the collectionof statistics and means of verification. It is suggestive also thatthe leaders of the new school in Germany and England havereached no different results by their new method, and in the main
agree with the laws evolved by the old English school. The
economist does not pretend that his assumptions are descriptionsof economic conditions existing at a given time; he simply
considers them as forces (often acting many on one point or
80“Fortnightly Review” (1876).
In Ely's “The Past and Present of Political Economy” (p. 9) it is clear the
new school do not differ so much in reality as in seeming from the methods ofthe English writers, like Cairnes.
81

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occasion) to be inquired into separately, inasmuch as concrete
phenomena are the resultants of several forces, not to be known
until we know the separate operation of each of the conjoined
forces.

[035]

The most prominent of the new school is Wilhelm Roscher,82of Leipsic, who wrote a systematic treatise, “System derVolkswirthschaft” (1854, sixteenth edition, 1883), in the firstdivision of which the notes contain a marvelous collection offacts and authorities. He agrees in results with Adam Smith,Ricardo, Malthus, and Mill, but does not seem to have known
much of Cairnes. This book, however, is only a first of four
treatises eventually intended to include the political economy of(2) agriculture, (3) industry and commerce, and (4) the stateand commune. The ablest contemporary of Roscher, who wasis the only American to whom he refers.
82
The first division of Roscher's (born 1817) treatise, also known under thetitle of “Grundlagen der Nationalökonomie,” has been translated here by J.
J. Lalor, in two volumes, “Principles of Political Economy” (1878), with anessay by Wolowski on the historical method inserted. In 1840 he was madePrivat-Docent at Göttingen, and professor extraordinary in 1843. In 1844 he
was called to a chair at Erlangen, but since 1848 he has remained at Leipsic. A
list of Roscher's works is as follows:“Grundriss zu Vorlesungen über die Staatswirthschaft nach geschichtlicher
Methode” (1843); “Kornhandel und Theuerungspolitik” (third edition,1852); “Untersuchungen über das Colonialwesen”; “Verhältniss der
Nationalökonomie zum klassischen Alterthume” (1849); “Geschichte derenglischen Volkswirthschaftslehre im 16.
und 17.
Jahrhunderts”;“Ein nationalökonom.
Princep der Forstwirthschaft”; “Ansichten derVolkswirthschaft aus dem geschichtlichen Standpunkte” (second edition,
1861); “Die deutsche Nationalökonomie an der Grenzscheide des 16.
und 17. Jahrhunderts” (1862); “Gründungsgeschichte des Zollvereins”(1870); “Betrachtungen über die Währungsfrage der deutschen Müntzreform”(1872); “Geschichte der Nationalökonomie in Deutschland” (1874);“Nationalökonomie des Ackerbaues” (eighth edition, 1875). His historiesof political economy in England and Germany are particularly valuable (seeA Sketch Of The History Of Political Economy.

45

probably the first to urge the historical method, is Karl Knies,83 in“Die politische Oekonomie vom Standpunkte der geschichtlichen
Methode” (1853, second edition, 1881-1883). The third of thegroup who founded the historical school is Bruno Hildebrand,84
of Jena, author of “Die Nationalökonomie der Gegenwart und
Zukunft” (1848).
The German mind has always been familiar with theinterference of the state, and a class of writers has arisen,
not only advocating the inductive method, but strongly imbued
with a belief in a close connection of the state with industry;
and, inasmuch as the essence of modern socialism is a resort
to state-help, this body of men, with Wagner at their head, hasreceived the name of “Socialists85 of the Chair,” and now wielda wide influence in Germany. Of these writers,86 Wagner, Engel,
Schmoller, Von Scheel, Brentano, Held, Schönberg, and Schäffle
are the most prominent.
review by Cliffe Leslie, “Fortnightly Review,” July, 1875). But he does not
rightly estimate the English writers when he takes McLeod as a type; and Carey
83
Professor at Marburg, then at the University of Friedburg, in Breisgau, andnow at Heidelberg. He has also studied railways (1853), and telegraphs (1857),
and money and credit, “Geld und Credit” (1873-1879).
84
Died 1878. He devoted himself mainly to criticism of other systems, andseems to be the least able of the three.
85“Catheder-Socialisten,” or “Professional Socialists.”86
By far the ablest is Adolph Wagner, of Berlin, editor of Rau's “Lehrbuch
der politischen Oekonomie” (1872). He also published “Die russische
Papierwährung” (1868); “Staatspapiergeld, Reichs-Kassen Scheine, undBanknoten” (1874); “Unsere Müntzreform” (1877); “Finanzwissenschaft”(1877); and “Die Communalsteuerfrage” (1878).
Dr. Eduard Engel was formerly the head of the Prussian Bureau of Statistics.
Professor Gustav Schönberg, of Tübingen, with the assistance of twenty-one
other economists, produced a large “Handbuch der politischen Oekonomie”(1882). The school have expressed their peculiar doctrines in the “Zeitschrift für
die gesammte Staatswissenschaft” (quarterly, founded 1844, Tübingen), andthe “Jahrbücher für Nationalökonomie” (established at Jena, 1863). Also, see
A. Wagner's “Rede über die sociale Frage” (1872), H. v. Scheel's “Die Theorie
der socialen Frage” (1871), and G. Schmoller's “Ueber einige Grundfrage des

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The historical school has received the adhesion of Émile deLaveleye,87 in Belgium, and other economists in England andthe United States. While Cliffe Leslie has been the most vigorous
opponent of the methods of the old school, there have been manyothers of less distinction. Indeed, the period, the close of which
is marked by J. R. McCulloch's book, was one in which theold school had seemingly come to an end of its progress, fromtoo close an adhesion to deductions from assumed premises.
Mill's great merit was that he began the movement to better
adapt political economy to society as it actually existed; and thehistorical school will probably give a most desirable impetus to
the same results, even though its exaggerated claims as to thetrue method88 can not possibly be admitted.
Italian writers have not received hitherto the attention they
deserve. After 1830, besides Rossi, who went to France, there
was Romagnosi, who dealt more with the relations of economics
Robert Lowe (Lord Sherbrooke) replied to Leslie and Ingram (“NineteenthCentury,” November, 1878). For most of this literature it will be necessary toconsult the magazines. Cliffe Leslie, “Fortnightly Review” (November, 1870),
placed Adam Smith among the inductive economists; D. Syme attacked theold methods, “Westminster Review,” vol. xcvi (1871); Cairnes represented theold school, and discussed the new theories, “Political Economy and Comte,”
in the “Fortnightly Review,” vol. xiii, p. 579 (1870), “Political Economy andLaissez Faire,” vol. xvi, p. 80 (1871), and in 1872; see also his admirable“Logical Method”; F. Harrison discussed the limits of political economy,
ibid. (1865), and answered Cairnes in an article on “Cairnes on Political
Economy and M. Comte,” “Fortnightly Review,” vol. xiv, p. 39 (1870).
W. Newmarch gave attention to Ingram's paper, “Statistical Journal” (1871).
Leslie, “Fortnightly Review” (1875), and G. Cohn, ibid. (1873), wrote onpolitical economy in Germany. Leslie also contributed an article on “Political
Economy and Sociology,” “Fortnightly Review,” vol. xxxi, p. 25 (1879),
and the “Bicentenary of Political Economy,” in the “Bankers' Magazine,” vol.
xxxii, p. 29. Leslie examined the philosophical method, “Penn Monthly”(1877); Jevons saw the only hope for the future in the mathematical method,“Fortnightly Review” (1876); McLeod asks, “What is political economy?” inthe “Contemporary Review” (1875); Maurice Block entered the discussion,“Penn Monthly” (1877), and “Bankers' Magazine,” March and November,

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47

to other studies; Cattanes, who turned to rural questions and free
trade (combating the German, List); Scialoja, at the Universityof Turin; and Francesco Ferrara, also at Turin from 1849 to1858. The latter was a follower of Bastiat and Carey, as regards
value and rent, and at the same time was a radical believer inlaissez-faire. Since the union of Italy there has been a newinterest in economic study, as with us after our war. The
most eminent living Italian economist is said to be Angelo
Messedaglia, holding a chair at Padua since 1858. He has
excelled in statistical and financial subjects, and is now engaged
on a treatise on money, “Moneta,” of which one part has been
issued (1882). Marco Minghetti and Fedele Lampertico standabove others, the former for a study of the connection of political
economy with morals, and for his public career as a statesman;the latter for his studies on paper money and other subjects.
Carlo Ferrais presented a good monograph on “Money and thesee “Revue des Deux Mondes,” April 15, 1863; “Études d'économie rurale,
la Neerlande” (1864); “La marché monetaire depuis cinquante ans” (1865);“Land Systems of Belgium and Holland,” in the Cobden Club volume on “LandTenures” (1870); “Bi-metallic Money,” translated by G. Walker (1877); “Lasocialisme contemporaine” (1881); “Éléments d'économie politique” (1882),
which satisfies a certain modern demand for “ethical political economy.”
88
Leslie found support in a well-known paper read before the Association
for the Advancement of Science (see “London Statistical Journal,” December,
1878; also see “Penn Monthly,” 1879), by J. K. Ingram, who claimed thatthe old school isolated the study of economic from other social phenomena,and that Ricardo's system was not only too abstract, but that its conclusions
were of so absolute a character that they were little adapted for real use.
1878. Henry Sidgwick answers Leslie in a paper on “Economic Method,”in the “Fortnightly Review,” vol. xxxi (1879), p. 301. See also essay by
Wolowski prefixed to Roscher's “Political Economy” (English translation);
Roscher's own statement in Chapters II and III of the Introduction to his“Political Economy,” and Laveleye's “New Tendencies of Political Economy”(1879). See also “Penn Monthly,” vol. vii, p. 190, and “Bankers' Magazine,”
vol. xxxiii, pp. 601, 698, 761; vol. xxxvi, pp. 349, 422; S. Newcomb for an
admirable essay “On the Method and Province of Political Economy,” “North
American Review” (1875), vol. cxxi, p. 241, in which the “Orthodox” method

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Forced Currency” (1879); and Boccardo issued a library of
selected works of the best economists, and a large Dictionary of
Political Economy, “Dizionario universale di Economia Politica
e di Commercio” (2 vols., second edition, 1875). Luigi Luzzati
is a vigorous advocate of co-operation; and Elia Lattes has madea serious study of the early Venetian banks.
Political economy has gained little from American writers. Of
our statesmen none have made any additions to the science, andonly Hamilton and Gallatin can properly be called economists.
Hamilton, in his famous “Report on Manufactures” (1791),
shared in some of the erroneous conceptions of his day; but
this paper, together with his reports on a national bank and the
public credit, are evidences of a real economic power. Gallatin's“Memorial in Favor of Tariff Reform” (1832) is as able as
Hamilton's report on manufactures, and a strong argument against
protection. Both men made a reputation as practical financiers.
“With few exceptions, the works produced in the United States
have been prepared as text-books89 by authors engaged in college
is strongly supported; and an extreme position in favor of the historical method
in a pamphlet, “The Past and Present of Political Economy,” by R. T. Ely(1884).
Rects und der Volkswirthschaft” (1875). A. E. F. Schäffle, once Minister ofCommerce at Vienna, gained considerable reputation by “Das gesellschaftliche
System der menschlichen Wirthschaft” (third edition, 1873).
87
Émile de Laveleye (born 1822) studied law at Ghent, but since 1848 has
given himself up to political economy and public questions. Through the pagesof the “Revue des Deux Mondes” he gained attention in 1863, and the next year
was made Professor of Political Economy at the University of Liége. In 1869
he received an election as corresponding member of the Academy of Sciences.
While a fertile writer on political subjects, he has produced “La question d'or”(1860); “Essai sur l'économie rurale de la Belgique” (1863); a study on “Suisse,”
89
Daniel Raymond, “The Elements of Political Economy” (1820). Thomas
Cooper, “Lectures on the Elements of Political Economy” (1826); “A Manual of
Political Economy” (1834). Willard Phillips, “A Manual of Political Economy”(1828); “Propositions concerning Protection and Free Trade” (1860). President
Francis Wayland (1796-1865), “The Elements of Political Economy” (1837).
Henry Vethake, “Principles of Political Economy” (1838). From 1840 to the

A Sketch Of The History Of Political Economy.

49

instruction, and therefore chiefly interested in bringing principles
previously worked out by others within the easy comprehensionof undergraduate students.”90 Of these exceptions, Alexander H.
Everett's “New Ideas on Population”91 (1822), forms a valuablepart in the discussion which followed the appearance of Malthus's“Essay.” The writer, however, who has drawn most attention,
at home and abroad, for a vigorous attack on the doctrinesof Ricardo is Henry Charles Carey.92 Beginning with “TheRate of Wages” (1835), he developed a new theory of value(see “Principles of Political Economy,” 1837-1840), “which hedefined as a measure of the resistance to be overcome in obtaining
things required for use, or the measure of the power of nature
over man. In simpler terms, value is measured by the costof reproduction. The value of every article thus declines as
the arts advance, while the general command of commodities
constantly increases. This causes a constant fall in the valueof accumulated capital as compared with the results of present
civil war there appeared F. Bowen's “Principles of Political Economy” (1856),
since changed to “American Political Economy” (1873), which opposed
the Malthusian doctrine and defended protection; John Bascom's “Political
Economy” (1859); and Stephen Colwell's “Ways and Means of Payment”(1859). After the war, “Science of Wealth” (1866), by Amasa Walker, alecturer in Amherst College, and father of F. A. Walker.
90Prof. C. F. Dunbar, “North American Review,” January, 1876, in an
admirable review of economic science in America during the last century(1776-1876).
91
See supra, p. 16.
92
Carey (1793-1879) was the son of an Irish exile, and began a businesscareer at the age of twelve. At twenty-eight he was the leading partner inthe publishing firm of Carey & Lea, Philadelphia, from which he retired in
1835, to devote himself wholly to political economy. His leading works havebeen translated into French, Italian, Portuguese, German, Swedish, Russian,Magyar, and Japanese. He has written thirteen octavo volumes, three thousand
pages in pamphlet form, and twice that amount for the newspaper press. See“Proceedings of the American Academy of Science” (1881-1882, p. 417), and
W. Elder's “Memoir of Henry C. Carey” (January 5, 1880). The latter gives alist of his books.

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labor, from which is inferred a tendency toward harmony rather
than divergence of interests between capitalist and laborer.” This
theory of value93 he applied to land, and even to man, in his desire
to give it universality. He next claimed to have discovered alaw of increasing production from land in his “Past, Present, andFuture” (1848), which was diametrically opposed to Ricardo's
law of diminishing returns. His proof was an historical one,that in fact the poorer, not the richer lands, were first taken into
cultivation. This, however, did not explain the fact that different
grades of land are simultaneously under cultivation, on which
Ricardo's doctrine of rent is based. The constantly increasing
production of land naturally led Carey to believe in the indefinite
increase of population. He, however, was logically broughtto accept the supposed law of an ultimate limit to numberssuggested by Herbert Spencer, based on a diminution of human
fertility. He tried to identify physical and social laws, and fused
his political economy in a system of “Social Science” (1853),
and his “Unity of Law” (1872). From about 1845 he became aprotectionist, and his writings were vigorously controversial. In
his doctrines on money he is distinctly a mercantilist;94 but, by
his earnest attacks on all that has been gained in the science up
to his day, he has done a great service in stimulating inquiry andcausing a better statement of results. While undoubtedly the best
known of American writers, yet, because of a prolix style and an
illogical habit of mind, he has had no extended influence on his
countrymen.95
93

Bastiat's “Harmonies économiques” appeared in 1850, and the question of
his indebtedness to Carey was discussed, rather unfavorably to Bastiat, in aseries of letters in the “Journal des économistes” for 1851.
94
See an able study, by Adolphe Held, “Carey's Socialwissenschaft und das
Merkantilsystem” (1866).
95
His system appears also in the books of disciples: E. Peshine Smith, “AManual of Political Economy” (1853), William Elder's “Questions of the Day”
(1871), and of Robert E. Thompson's “Social Science and National Economy”(1875). A condensation of Carey's “Social Science” has been made by KateA Sketch Of The History Of Political Economy.

51

The effect of the civil war is now beginning to show itself
in an unmistakable drift toward the investigation of economic
questions, and there is a distinctly energetic tone which may
bring new contributions from American writers. General Francis
A. Walker,96 in his study on “The Wages Question” (1876), has
combated the wages-fund theory, and proposed in its place a
doctrine that wages are paid out of the product, and not out ofaccumulated capital. Professor W. G. Sumner97 is a vigorous
writer in the school of Mill and Cairnes, and has done goodwork in the cause of sound money doctrines. Both General
Walker and Professor Sumner hold to the method of economic
investigation as expounded by Mr. Cairnes; although several
younger economists show the influence of the German school.
Professor A. L. Perry,98 of Williams College, adopted Bastiat's
theory of value. He also accepts the wages-fund theory, rejects
the law of Malthus, and, although believing in the law ofdiminishing returns from land, regards rent as the reward for a

McKean, in one volume, octavo.
96
The son of Amasa Walker, and formerly Professor of Political Economy
and History in the Sheffield Scientific School of Yale College, he has become
well known for his statistical work in connection with the United States census.
His “Statistical Atlas of the United States” (1874) is unequaled. He has also
published “Money” (1878); “Money, Trade, and Industry” (1879); “Political
Economy” (1883); and “Land and Rent” (1884). The last book replies
to various attacks on Ricardo's doctrine of rent, and particularly to Henry
George's “Progress and Poverty.” General Walker in 1883 became Presidentof the Massachusetts Institute of Technology in Boston. He is also well known
as an advocate of bimetallism.
97
Professor of Political and Social Science in Yale College, and author of a“History of American Currency” (1874); “Lectures on the History of Protectionin the United States” (1877); “What Social Classes owe to Each Other” (1883).
He is a monometallist, and has devoted himself vigorously to the advocacy of
free trade. His last book is a study in sociology, not in political economy.
98
He has written “Political Economy” (eighteenth edition, 1883), and also
“Introduction to Political Economy,” an elementary work on the same basis as
the former.

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service rendered. Another writer, Henry George,99 has gained
an abnormal prominence by a plausible book, “Progress andPoverty” (1880), which rejects the doctrine of Malthus, andargues that the increase of production of any kind augments
the demand for land, and so raises its value. His conclusions
lead him to advocate the nationalization of land. Although in
opposition to almost all that political economy has yet produced,
his writing has drawn to him very unusual notice. The increasing
interest in social questions, and the general lack of economic
training, which prevents a right estimate of his reasoning bypeople in general, sufficiently account for the wide attention hehas received.
Of late, however, new activity has been shown in theestablishment of better facilities for the study of political
economy in the principal seats of learning—Harvard, Yale,
Cornell, Columbia, Michigan, and Pennsylvania: and a“Cyclopædia of Political Science” (1881-1884, three volumes)
has been published by J. J. Lalor, after the example of the French
dictionaries.

[043]

99
Henry George was born in Philadelphia, 1839, ran away to sea, and in 1857
entered a printing-office in San Francisco. In 1871 he was one of the foundersof the “San Francisco Post,” which he gave up in 1875, and received a public
office. He first began to agitate his views in a pamphlet entitled “Our Land andLand Policy” (1871), but not until the comparative leisure of his occupation(1875) gave him opportunity did he seriously begin the study which resulted
in his “Progress and Poverty.” This volume was begun in the summer of 1877,
and finished in the spring of 1879. The sale of the book, it is needless to say,has been phenomenal. He has also applied his doctrine of land to Ireland,
in a pamphlet entitled “The Irish Land Question” (1882). His last book is acollection of essays entitled “Social Problems” (1884). His home is now in
New York.

Books For Consultation (From English,
French, And German Authors).
GENERAL TREATISES FORMING A PARALLEL COURSE OF READINGWITH MILL.
Professor Fawcett's “Manual of Political Economy” (London,
sixth edition, 1883) is a brief statement of Mill's book, withadditional matter on the precious metals, slavery, trades-unions,
co-operation, local taxation, etc.
Antoine-Élise Cherbuliez's “Précis de la science économique”(Paris, 1862, 2 vols.) follows the same arrangement as Mill, andis considered the best treatise on economic science in the Frenchlanguage. He is methodical, profound, and clear, and separates
pure from applied political economy.
Other excellent books in French are: Courcelle-Seneuil's“Traité théorique et pratique d'économie politique” (1858),(Paris, second edition, 1867, 2 vols.), and a compendium byHenri Baudrillart, “Manuel d'économie politique” (third edition,1872).
Roscher's “Principles of Political Economy” is a good exampleof the German historical method; its notes are crowded with facts;
but the English translation (New York, 1878) is badly done. Thereis an excellent translation of it into French by Wolowski.
A desirable elementary work, “The Economics of Industry”(London, 1879), was prepared by Mr. and Mrs. Marshall.
Professor Jevons wrote a “Primer of Political Economy”(1878), which is a simple, bird's-eye view of the subject in a very
narrow compass.
IMPORTANT GENERAL WORKS.
Adam Smith's “Wealth of Nations” (1776). The edition of
McCulloch is perhaps more serviceable than that of J. E. T.
Rogers.

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Ricardo's “Principles of Political Economy and Taxation”(1817).
J. S. Mill's “Principles of Political Economy” (2 vols.,
1848—sixth edition, 1865).
Schönberg's “Handbuch der politischen Oekonomie” (1882).
This is a large co-operative treatise by twenty-one writers fromthe historical school.
Cairnes's “Leading Principles of Political Economy” (1874);“Logical Method” (1875), lectures first delivered in Dublin in
1857.
Carey's “Social Science” (1877). This has been abridged in
one volume by Kate McKean.
F. A. Walker's “Political Economy” (1883). This author differsfrom other economists, particularly on wages and questions of
distribution.
H. George's “Progress and Poverty” (1879). In connection
with this, read F. A. Walker's “Land and Rent” (1884).
TREATISES ON SPECIAL SUBJECTS.
W. T. Thornton's “On Labor” (1869).
McLeod's “Theory and Practice of Banking” (second edition,
1875-1876).
M. Block's “Traité théorique et pratique de statistique” (1878).
Goschen's “Theory of Foreign Exchanges” (eighth edition,1875).
J. Caird's “Landed Interest” (fourth edition, 1880), treating ofEnglish land and the food-supply.
W. G. Sumner's “History of American Currency” (1874).
John Jay Knox's “United States Notes” (1884).
Jevons's “Money and the Mechanism of Exchange” (1875).
Tooke and Newmarch's “History of Prices” (1837-1856), insix volumes.
Leroy-Beaulieu's “Traité de la science des finances” (1883).
This is an extended work, in two volumes, on taxation and55
finance; “Essai sur la répartition des richesses” (second edition,
1883).
F. A. Walker's “The Wages Question” (1876); “Money”(1878).
L. Reybaud's “Études sur les réformateurs contemporains, ou
socialistes modernes” (seventh edition, 1864).
DICTIONARIES.
McCulloch's “Commercial Dictionary” (new and enlarged
edition, 1882).
Lalor's “Cyclopædia of Political Science” (1881-84) is devoted
to articles on political science, political economy, and American
history.
Coquelin and Guillaumin's “Dictionnaire de l'économie
politique” (1851-1853, third edition, 1864), in two large volumes.
REPORTS AND STATISTICS.
The “Compendiums of the Census” for 1840, 1850, 1860, and1870, are desirable. The volumes of the tenth census (1880)
are of great value for all questions; as is also F. A. Walker's“Statistical Atlas” (1874).
The United States Bureau of Statistics issues quarterly
statements; and annually a report on “Commerce andNavigation,” and another on the “Internal Commerce of theUnited States.”
The “Statistical Abstract” is an annual publication, by thesame department, compact and useful. It dates only from 1878.
The Director of the Mint issues an annual report dealing withthe precious metals and the circulation. Its tables are important.
The Comptroller of the Currency (especially during theadministration of J. J. Knox) has given important annual reports
upon the banking systems of the United States.
The reports of the Secretary of the Treasury deal with thegeneral finances of the United States. These, with the twolast mentioned, are bound together in the volume of “Finance
Reports,” but often shorn of their tables.

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There are valuable special reports to Congress ofcommissioners on the tariff, shipping, and other subjects,
published by the Government.
The report on the “International Monetary Conference of1878” contains a vast quantity of material on monetary questions.
The British parliamentary documents contain several annual“Statistical Abstracts” of the greatest value, of which the one
relating to other European states is peculiarly convenient anduseful. These can always be purchased at given prices.
A. R. Spofford's “American Almanac” is an annual of great
usefulness.
[047]

Preliminary Remarks.
Writers on Political Economy profess to teach, or to investigate,
the nature of Wealth, and the laws of its production anddistribution; including, directly or remotely, the operation of
all the causes by which the condition of mankind, or of any
society of human beings, in respect to this universal object ofhuman desire, is made prosperous or the reverse.
It will be noticed that political economy does not include
ethics, legislation, or the science of government. The resultsof political economy are offered to the statesman, who reaches
a conclusion after weighing them in connection with moral
and political considerations. Political Economy is distinct
from Sociology; although it is common to include in theformer everything which concerns social life. Some writers
distinguish between the pure, or abstract science, and theapplied art, and we can speak of a science of political economy
only in the sense of a body of abstract laws or formulas. This,
however, does not make political economy less practical thanphysics, for, after a principle is ascertained, its operation is
to be observed in the same way that we study the force ofgravitation in a falling stone, even when retarded by opposing
forces. An economic force, or tendency, can be likewise
distinctly observed, although other influences, working at
the same time, prevent the expected effect from following
its cause. It is, in short, the aim of political economy toinvestigate the laws which govern the phenomena of material
wealth. (Cf. Cossa, “Guide,” chap. iii.)

While the [Mercantile] system prevailed, it was assumed,
either expressly or tacitly, in the whole policy of nations, that
wealth consisted solely of money; or of the precious metals,
which, when not already in the state of money, are capable ofbeing directly converted into it. According to the doctrines then

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prevalent, whatever tended to heap up money or bullion in acountry added to its wealth.
More correctly the Mercantilists (in the sixteenth and seventeenth centuries) held that where money was most plentiful,
there would be found the greatest abundance of the necessaries
of life.100[049]Whatever sent the precious metals out of a country
impoverished it. If a country possessed no gold or silver mines,
the only industry by which it could be enriched was foreign trade,
being the only one which could bring in money. Any branch of
trade which was supposed to send out more money than it broughtin, however ample and valuable might be the returns in anothershape, was looked upon as a losing trade. Exportation of goods
was favored and encouraged (even by means extremely onerous
to the real resources of the country), because, the exported goods
being stipulated to be paid for in money, it was hoped that thereturns would actually be made in gold and silver. Importation ofanything, other than the precious metals, was regarded as a loss
to the nation of the whole price of the things imported; unlessthey were brought in to be re-exported at a profit, or unless,being the materials or instruments of some industry practiced in
the country itself, they gave the power of producing exportable
articles at smaller cost, and thereby effecting a larger exportation.
The commerce of the world was looked upon as a struggle among
nations, which could draw to itself the largest share of the goldand silver in existence; and in this competition no nation could
gain anything, except by making others lose as much, or, at theleast, preventing them from gaining it.
The Mercantile Theory could not fail to be seen in its true
character when men began, even in an imperfect manner,
to explore into the foundations of things. Money, as money,100

Cf. p. 4, supra.

Preliminary Remarks.

59

satisfies no want; its worth to any one consists in its being a
convenient shape in which to receive his incomings of all sorts,
which incomings he afterwards, at the times which suit him best,
converts into the forms in which they can be useful to him.
The difference between a country with money, and a country
altogether without it, would be only one of convenience; a savingof time and trouble, like grinding by water instead of by hand,or (to use Adam Smith's illustration) like the benefit derived
from roads; and to mistake money for wealth is the same sortof error as to mistake the highway, which may be the easiest
way of getting to your house or lands, for the house and lands
themselves.
Money, being the instrument of an important public andprivate purpose, is rightly regarded as wealth; but everythingelse which serves any human purpose, and which nature does
not afford gratuitously, is wealth also. To be wealthy is tohave a large stock of useful articles, or the means of purchasing
them. Everything forms, therefore, a part of wealth, which has
a power of purchasing; for which anything useful or agreeable
would be given in exchange. Things for which nothing could
be obtained in exchange, however useful or necessary they may
be, are not wealth in the sense in which the term is used in
Political Economy. Air, for example, though the most absoluteof necessaries, bears no price in the market, because it can beobtained gratuitously; to accumulate a stock of it would yield no
profit or advantage to any one; and the laws of its production
and distribution are the subject of a very different study from
Political Economy. It is possible to imagine circumstances inwhich air would be a part of wealth. If it became customary tosojourn long in places where the air does not naturally penetrate,
as in diving-bells sunk in the sea, a supply of air artificiallyfurnished would, like water conveyed into houses, bear a price:
and, if from any revolution in nature the atmosphere became
too scanty for the consumption, or could be monopolized, air

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might acquire a very high marketable value. In such a case, thepossession of it, beyond his own wants, would be, to its owner,
wealth; and the general wealth of mankind might at first sightappear to be increased, by what would be so great a calamity tothem. The error would lie in not considering that, however richthe possessor of air might become at the expense of the rest of
the community, all persons else would be poorer by all that they
were compelled to pay for what they had before obtained without
payment.
Wealth, then, may be defined, all useful or agreeable things
which possess exchangeable value; or, in other words, all usefulor agreeable things except those which can be obtained, in thequantity desired, without labor or sacrifice.
This is the usual definition of wealth. Henry George (see“Progress and Poverty,” pp. 34-37) regards wealth as consisting “of natural products that have been secured, moved,
combined, separated, or in other ways modified by humanexertion, so as to fit them for the gratification of humandesires.... Nothing which Nature supplies to man without hislabor is wealth.... All things which have an exchange value
are, therefore, not wealth. Only such things can be wealth the
production of which increases and the destruction of which
decreases the aggregate of wealth.... Increase in land values
does not represent increase in the common wealth, for what
land-owners gain by higher prices the tenants or purchasers
who must pay them will lose.” Jevons (“Primer,” p. 13) defines wealth very properly as what is transferable, limited insupply, and useful. F. A. Walker defines wealth as comprising“all articles of value and nothing else” (“Political Economy,”p. 5). Levasseur's definition (“Précis,” p. 15) is, “all material
objects possessing utility” (i.e., the power to satisfy a want).
(Cf. various definitions in Roscher's “Political Economy,”
section 9, note 3.) Perry (“Political Economy,” p. 99) rejects
the term wealth as a clog to progress in the science, andPreliminary Remarks.

61

adopts property in its stead, defining it as that “which can bebought or sold.” Cherbuliez (“Précis,” p. 70) defines wealthas the material product of nature appropriated by labor for thewants of man. Carey (“Social Science,” i, 186) asserts that
wealth consists in the power to command Nature's services,
including in wealth such intangible things as mental qualities.
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Book I. Production.

Chapter I. Of The Requisites Of Production.

§ 1. The Requisites of Production are Two: Labor,and Appropriate Natural Objects.
There is a third requisite of production, capital (see page 58).
Since the limitation to only two requisites applies solely toa primitive condition of existence, so soon as the element oftime enters into production, then a store of capital becomes
necessary; that is, so soon as production requires such a termthat during the operation the laborer can not at the same time
provide himself with subsistence, then capital is a requisite ofproduction. This takes place also under any general divisionof labor in a community. When one man is making a pin-head,
he must be supplied with food by some person until the pinsare finished and exchanged.

Labor is either bodily or mental; or, to express the distinction
more comprehensively, either muscular or nervous; and it isnecessary to include in the idea, not solely the exertion itself,
but all feelings of a disagreeable kind, all bodily inconvenienceor mental annoyance, connected with the employment of one's
thoughts, or muscles, or both, in a particular occupation.

§ 1. The requisites of production.

63

The word “sacrifice” conveys a just idea of what the laborer undergoes, and it corresponds to the abstinence of thecapitalist.
[054]

Of the other requisite—appropriate natural objects—it is tobe remarked that some objects exist or grow up spontaneously,of a kind suited to the supply of human wants. There are cavesand hollow trees capable of affording shelter; fruits, roots, wild
honey, and other natural products, on which human life canbe supported; but even here a considerable quantity of labor isgenerally required, not for the purpose of creating, but of finding
and appropriating them.
Of natural powers, some are unlimited, others limited inquantity. By an unlimited quantity is of course not meant
literally, but practically unlimited: a quantity beyond the use
which can in any, or at least in present circumstances, be madeof it. Land is, in some newly settled countries, practicallyunlimited in quantity: there is more than can be used by theexisting population of the country, or by any accession likely
to be made to it for generations to come. But, even there, landfavorably situated with regard to markets, or means of carriage,
is generally limited in quantity: there is not so much of it aspersons would gladly occupy and cultivate, or otherwise turn touse. In all old countries, land capable of cultivation, land at leastof any tolerable fertility, must be ranked among agents limited inquantity. Coal, metallic ores, and other useful substances foundin the earth, are still more limited than land.
For the present I shall only remark that, so long as the quantityof a natural agent is practically unlimited, it can not, unlesssusceptible of artificial monopoly, bear any value in the market,
since no one will give anything for what can be obtained gratis.
But as soon as a limitation becomes practically operative—assoon as there is not so much of the thing to be had as would
be appropriated and used if it could be obtained for asking—the64

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ownership or use of the natural agent acquires an exchangeablevalue.

[055]

Rich lands in our Western Territories a few years ago could
be had practically for the asking; but now, since railways andan increase of population have brought them nearer to themarkets, they have acquired a distinct exchange value. The
value of a commodity (it may be anticipated) is the quantityof other things for which it can be exchanged.

When more water-power is wanted in a particular district
than there are falls of water to supply it, persons will give an
equivalent for the use of a fall of water. When there is more land
wanted for cultivation than a place possesses, or than it possessesof a certain quality and certain advantages of situation, land ofthat quality and situation may be sold for a price, or let for anannual rent.

§ 2. The Second Requisite of Production, Labor.
It is now our purpose to describe the second requisite ofproduction, labor, and point out that it can be either direct orindirect. This division and subdivision can be seen from theclassification given below. Under the head of indirect labor
are to be arranged all the many employments subsidiary to
the production of any one article, and which, as they furnish
but a small part of labor for the one article (e.g., bread), aresubsidiary to the production of a vast number of other articles;
and hence we see the interdependence of one employment onanother, which comes out so conspicuously at the time of acommercial depression.
“We think it little to sit down to a table covered with articles
from all quarters of the globe and from the remotest isles of thesea—with tea from China, coffee from Brazil, spices from the§ 2. The Second Requisite of Production, Labor.

65

East, and sugar from the West Indies; knives from Sheffield,
made with iron from Sweden and ivory from Africa; withsilver from Mexico and cotton from South Carolina; all being
lighted with oil brought from New Zealand or the Arctic
Circle. Still less do we think of the great number of persons
whose united agency is required to bring any one of thesefinished products to our homes—of the merchants, insurers,
sailors, ship-builders, cordage and sail makers, astronomicalinstrument makers, men of science, and others, before a poundof tea can appear in our market.”101

The labor102 which terminates in the production of an article
fitted for some human use is either employed directly about thething, or in previous operations destined to facilitate, perhaps
essential to the possibility of, the subsequent ones. In making
bread, for example, the labor employed about the thing itself isthat of the baker; but the labor of the miller, though employed
directly in the production not of bread but of flour, is equally partof the aggregate sum of labor by which the bread is produced;
as is also the labor of the sower, and of the reaper. Some may
think that all these persons ought to be considered as employing
their labor directly about the thing; the corn, the flour, and thebread being one substance in three different states. Without
disputing about this question of mere language, there is still theplowman, who prepared the ground for the seed, and whoselabor never came in contact with the substance in any of its
states; and the plow-maker, whose share in the result was still
more remote. We must add yet another kind of labor; that oftransporting the produce from the place of its production to theplace of its destined use: the labor of carrying the corn to market,
and from market to the miller's, the flour from the miller's to thebaker's, and the bread from the baker's to the place of its final
consumption.
101
102

Bowen, “American Political Economy,” p. 25.
This is the beginning of Chapter II in the original treatise.

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Besides the two classes of indirect laborers here mentioned,
those engaged in producing materials and those in transportation, there are several others who are paid fractions out of thebread. Subsidiary to the direct labor of the bread-maker is thelabor of all those who make the instruments employed in theprocess (as, e.g., the oven). Materials are completely changed
in character by one use, as when the coal is burned, or theflour baked into bread; while an instrument, like an oven,is capable of remaining intact throughout many operations.
The producer of materials and the transporter are paid by thebread-maker in the price of his coal and flour when left at
his door, so that the price of the loaf is influenced by thesepayments. Those persons, moreover, who, like the policeand officers of our government, act to protect property andlife, are also to be classed as laborers indirectly aiding in the
production of the given article, bread (and by his taxes thebread-maker helps pay the wages of these officials). Shading off into a more distant, although essential, connection isanother class—that of those laborers who train human beingsin the branches of knowledge necessary to the attainment ofproper skill in managing the processes and instruments of anindustry. The acquisition of the rudiments of education, and,in many cases, the most profound knowledge of chemistry,
physics and recondite studies, are essential to production; andteachers are indirect laborers in producing almost every article
in the market. In this country, especially, are inventors a classof indirect laborers essential to all ultimate production as it
now goes on. The improvements in the instruments of production are the results of an inventive ability which has madeAmerican machinery known all over the world. They, too, as
well as the teacher, are paid (a small fraction, of course) out of
the ultimate result, by an indirect path, and materially change
the ease or difficulty, cheapness or dearness, of production innearly every branch of industry. In the particular illustration
given they have improved the ovens, ranges, and stoves, sothat the same or better articles are produced at a less cost than§ 3. Of Capital as a Requisite of Production.

67

formerly. All these indirect laborers receive, in the way of
remuneration, a fraction, some more, some less (the farther
they are removed from the direct process), of the value of the
final result.

§ 3. Of Capital as a Requisite of Production.

But another set of laborers are to be placed in distinct contrast
with these, so far as the grounds on which they receive
their remuneration is concerned. These are the men engaged
previously in providing the subsistence, and articles by which
the former classes of labor can carry on their operations.

The previous employment of labor is an indispensable condition
to every productive operation, on any other than the very smallest
scale. Except the labor of the hunter and fisher, there is scarcely
any kind of labor to which the returns are immediate. Productive
operations require to be continued a certain time before theirfruits are obtained. Unless the laborer, before commencing his
work, possesses a store of food, or can obtain access to the storesof some one else, in sufficient quantity to maintain him until the
production is completed, he can undertake no labor but such as
can be carried on at odd intervals, concurrently with the pursuitof his subsistence.
The possession of capital is thus a third requisite of production,
together with land and labor, as noted above. Henry George(“Progress and Poverty,” chap. iv) holds an opposite opinion:“The subsistence of the laborers who built the Pyramids was
drawn, not from a previously hoarded stock” (does he notforget the story of Joseph's store of corn?), “but from theconstantly recurring crops of the Nile Valley.”

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He can not obtain food itself in any abundance; for every
mode of so obtaining it requires that there be already foodin store. Agriculture only brings forth food after the lapseof months; and, though the labors of the agriculturist are notnecessarily continuous during the whole period, they must occupy
a considerable part of it. Not only is agriculture impossible
without food produced in advance, but there must be a very great
quantity in advance to enable any considerable community tosupport itself wholly by agriculture. A country like England or
the United States is only able to carry on the agriculture of thepresent year because that of past years has provided, in thosecountries or somewhere else, sufficient food to support theiragricultural population until the next harvest. They are only
enabled to produce so many other things besides food, because
the food which was in store at the close of the last harvest
suffices to maintain not only the agricultural laborers, but a large
industrious population besides.

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The claim to remuneration founded on the possession of food,available for the maintenance of laborers, is of another kind;remuneration for abstinence, not for labor. If a person has a store
of food, he has it in his power to consume it himself in idleness,or in feeding others to attend on him, or to fight for him, or tosing or dance for him. If, instead of these things, he gives it
to productive laborers to support them during their work, hecan, and naturally will, claim a remuneration from the produce.
He will not be content with simple repayment; if he receives
merely that, he is only in the same situation as at first, and has
derived no advantage from delaying to apply his savings to his
own benefit or pleasure. He will look for some equivalent forthis forbearance:103 he will expect his advance of food to comeback to him with an increase, called, in the language of business,a profit; and the hope of this profit will generally have been
103

This is his “sacrifice,” which corresponds to the exertion of the laborer.

§ 3. Of Capital as a Requisite of Production.

69

a part of the inducement which made him accumulate a stock,by economizing in his own consumption; or, at any rate, which
made him forego the application of it, when accumulated, to his
personal ease or satisfaction.
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Chapter II. Of Unproductive Labor.

§ 1. Definition of Productive and Unproductive
Labor.
Labor is indispensable to production, but has not always
production for its effect. There is much labor, and of a highorder of usefulness, of which production is not the object.
Labor has accordingly been distinguished into Productive andUnproductive. Productive labor means labor productive ofwealth. We are recalled, therefore, to the question touched uponin our [Preliminary Remarks], what Wealth is.
By Unproductive Labor, on the contrary, will be understoodlabor which does not terminate in the creation of material wealth.
And all labor, according to our present definition, must beclassed as unproductive, which terminates in a permanent benefit,
however important, provided that an increase of material products
forms no part of that benefit. The labor of saving a friend's life
is not productive, unless the friend is a productive laborer, andproduces more than he consumes.
The principle on which the distinction is made is perfectly
clear, but in many cases persons may be misled chiefly inregard to matters of fact. A clergyman may at first sight
be classed as an unproductive laborer; but, until we know
the facts, we can not apply the principle of our definition.
Unless we know that no clergyman, by inculcating rules ofmorality and self-control, ever caused an idler or wrong-doer
to become a steady laborer, we can not say that a clergyman isa laborer unproductive of material wealth. Likewise the army,or the officers of our government at Washington, may or may
not have aided in producing material wealth according as they§ 2. Productive and Unproductive Consumption.

71

do or do not, in fact, accomplish the protective purposes forwhich they exist. So with teachers. There is, however, nodisparagement implied in the word unproductive; it is merely
an economic question, and has to do only with forces affecting
the production of wealth.

Unproductive may be as useful as productive labor; it may be
more useful, even in point of permanent advantage; or its use may
consist only in pleasurable sensation, which when gone leaves notrace; or it may not afford even this, but may be absolute waste.
In any case, society or mankind grow no richer by it, but poorer.
All material products consumed by any one while he producesnothing are so much subtracted, for the time, from the material
products which society would otherwise have possessed.
To be wasted, however, is a liability not confined tounproductive labor. Productive labor may equally be waste,
if more of it is expended than really conduces to production. If
defect of skill in laborers, or of judgment in those who direct
them, causes a misapplication of productive industry, labor iswasted. Productive labor may render a nation poorer, if thewealth it produces, that is, the increase it makes in the stockof useful or agreeable things, be of a kind not immediately
wanted: as when a commodity is unsalable, because produced ina quantity beyond the present demand; or when speculators build
docks and warehouses before there is any trade.

§ 2. Productive and Unproductive Consumption.
The distinction of Productive and Unproductive is applicableto Consumption as well as to Labor. All the members of thecommunity are not laborers, but all are consumers, and consume
either unproductively or productively. Whoever contributes
nothing directly or indirectly to production is an unproductive

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consumer. The only productive consumers are productive
laborers; the labor of direction being of course included, as wellas that of execution. But the consumption even of productive
laborers is not all of it Productive Consumption. There isunproductive consumption by productive consumers. What they
consume in keeping up or improving their health, strength, andcapacities of work, or in rearing other productive laborers to
succeed them, is Productive Consumption. But consumption onpleasures or luxuries, whether by the idle or by the industrious,
since production is neither its object nor is in any way advanced byit, must be reckoned Unproductive: with a reservation, perhaps,of a certain quantum of enjoyment which may be classed amongnecessaries, since anything short of it would not be consistent
with the greatest efficiency of labor. That alone is productive
consumption which goes to maintain and increase the productive
powers of the community; either those residing in its soil, in
its materials, in the number and efficiency of its instruments ofproduction, or in its people.
I grant that no labor really tends to the enrichment of society,which is employed in producing things for the use of unproductive
consumers. The tailor who makes a coat for a man who producesnothing is a productive laborer; but in a few weeks or months
the coat is worn out, while the wearer has not produced anything
to replace it, and the community is then no richer by the laborof the tailor than if the same sum had been paid for a stall at theopera. Nevertheless, society has been richer by the labor while
the coat lasted. These things also [such as lace and pine-apples]
are wealth until they have been consumed.

§ 3. Distinction Between Labor for the Supply of
Productive Consumption and Labor for the Supply of
Unproductive Consumption.

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We see, however, by this, that there is a distinction more
important to the wealth of a community than even that between
productive and unproductive labor; the distinction, namely,
between labor for the supply of productive, and for the supply of
unproductive, consumption; between labor employed in keeping
up or in adding to the productive resources of the country,
and that which is employed otherwise. Of the produce of thecountry, a part only is destined to be consumed productively; theremainder supplies the unproductive consumption of producers,
and the entire consumption of the unproductive class. Supposethat the proportion of the annual produce applied to the first
purpose amounts to half; then one half the productive laborers of
the country are all that are employed in the operations on which
the permanent wealth of the country depends. The other half areoccupied from year to year and from generation to generationin producing things which are consumed and disappear without
return; and whatever this half consume is as completely lost,as to any permanent effect on the national resources, as if
it were consumed unproductively. Suppose that this second
half of the laboring population ceased to work, and that the
government maintained them in idleness for a whole year: thefirst half would suffice to produce, as they had done before, theirown necessaries and the necessaries of the second half, and tokeep the stock of materials and implements undiminished: theunproductive classes, indeed, would be either starved or obliged
to produce their own subsistence, and the whole community
would be reduced during a year to bare necessaries; but thesources of production would be unimpaired, and the next year
there would not necessarily be a smaller produce than if nosuch interval of inactivity had occurred; while if the case had
been reversed, if the first half of the laborers had suspended
their accustomed occupations, and the second half had continued
theirs, the country at the end of the twelvemonth would havebeen entirely impoverished. It would be a great error to regret

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the large proportion of the annual produce, which in an opulent
country goes to supply unproductive consumption. That so greata surplus should be available for such purposes, and that it should
be applied to them, can only be a subject of congratulation.
This principle may be seen by the following classification:(A) Idlers; or unproductive laborers—e.g., actors.
(B) Productive laborers—e.g., farmers.
(C) Producing wealth for productive consumption, one half theannual produce.
(D) Producing wealth for unproductive consumption (A), one
half the annual produce.
Group D are productive laborers, and their own necessaries
are productively consumed, but they are supplied by C, who keep
themselves and D in existence. So long as C work, both C and D
can go on producing. If D stopped working, they could be still
subsisted as before by C; but A would be forced to produce forthemselves. But, if C stopped working, D and C would be left
without the necessaries of life, and would be obliged to cease
their usual work. In this way it may be seen how much more
important to the increase of material wealth C are than D, wholabor “for the supply of unproductive consumption.” Of course,
group D are desirable on other than economic grounds, because
their labor represents what can be enjoyed beyond the necessities
of life.

Chapter III. Of Capital.

§ 1. Capital is Wealth Appropriated to Reproductive
Employment.
It has been seen in the preceding chapters that besides the primaryand universal requisites of production, labor and natural agents,
there is another requisite without which no productive operations
beyond the rude and scanty beginnings of primitive industry
are possible—namely, a stock, previously accumulated, of the
products of former labor. This accumulated stock of the produceof labor is termed Capital. What capital does for production is, toafford the shelter, protection, tools, and materials which the workrequires, and to feed and otherwise maintain the laborers during
the process. These are the services which present labor requires
from past, and from the produce of past, labor. Whatever things
are destined for this use—destined to supply productive laborwith these various prerequisites—are Capital.
Professor Fawcett, “Manual” (chap. ii), says: “Since thelaborer must be fed by previously accumulated food, ... someof the results of past labor are required to be set aside to sustain
the laborer while producing. The third requisite of production,
therefore, is a fund reserved from consumption, and devoted
to sustain those engaged in future production.... Capital is notconfined to the food which feeds the laborers, but includes
machinery, buildings, and, in fact, every product due to man'slabor which can be applied to assist his industry” (chap. iv).
General Walker (“Political Economy,” pages 68-70) defines
capital as that portion of wealth (excluding unimproved landand natural agents) which is employed in the production of
new forms of wealth. Henry George (“Progress and Poverty,”

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Principles Of Political Economy
page 41) returns to Adam Smith's definition: “That partof a man's stock which he expects to yield him a revenue
is called his capital.” Cherbuliez (“Précis,” page 70) points
out the increasing interdependence of industrial operations
as society increases in wealth, and that there is not a single
industry which does not demand the use of products obtainedby previous labor. “These auxiliary products accumulatedwith a view to the production to which they are subservient”
form what is called capital. Carey (“Social Science,” iii,
page 48) regards as capital all things which in any way form
the machinery by which society obtains wealth. Roscher's
definition is, “Every product laid by for purposes of further
production.” (“Political Economy,” section 42.) By some,labor is regarded as capital.104

A manufacturer, for example, has one part of his capital in theform of buildings, fitted and destined for carrying on this branchof manufacture. Another part he has in the form of machinery. A
third consists, if he be a spinner, of raw cotton, flax, or wool; if
a weaver, of flaxen, woolen, silk, or cotton thread; and the like,according to the nature of the manufacture. Food and clothingfor his operatives it is not the custom of the present age that heshould directly provide; and few capitalists, except the producers
of food or clothing, have any portion worth mentioning of theircapital in that shape. Instead of this, each capitalist has money,
which he pays to his work-people, and so enables them to supply
themselves. What, then, is his capital? Precisely that part ofhis possessions, whatever it be, which he designs to employ incarrying on fresh production. It is of no consequence that a part,or even the whole of it, is in a form in which it can not directly
supply the wants of laborers.
Care should be taken to distinguish between wealth, capital,
and money. Capital may be succinctly defined as saved wealth104

See Roscher's note 1, section 42, for various definitions of capital.

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devoted to reproduction, and the relations of the three terms
mentioned may be illustrated by the following figure: The
area of the circle, A, represents the wealth of a country; thearea of the inscribed circle, B, the quantity out of the whole
wealth which is saved and devoted to reproduction and called
capital. But money is only one part of capital, as shown by thearea of circle C. Wherefore, it can be plainly seen that not all
capital, B, is money; that not all wealth, A, is capital, although
all capital is necessarily wealth as included within it. It is notalways understood that money is merely a convenient article
by which other forms of wealth are exchanged against eachother, and that a man may have capital without ever having
any actual money in his possession. In times of commercial
depression, that which is capital to-day may not to-morrow
satisfy any desires (i.e., not be in demand), and so for the time
it may, so to speak, drop entirely out of our circles above.
For the moment, not having an exchange value, it can not be
wealth, and so can the less be capital.

Suppose, for instance, that the capitalist is a hardware
manufacturer, and that his stock in trade, over and above hismachinery, consists at present wholly in iron goods. Iron goods
can not feed laborers. Nevertheless, by a mere change ofthe destination of the iron goods, he can cause laborers to befed. Suppose that [the capitalist changed into wages what hehad before spent] in buying plate and jewels; and, in order to

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render the effect perceptible, let us suppose that the change takes
place on a considerable scale, and that a large sum is diverted
from buying plate and jewels to employing productive laborers,
whom we shall suppose to have been previously, like the Irish
peasantry, only half employed and half fed. The laborers, on
receiving their increased wages, will not lay them out in plateand jewels, but in food. There is not, however, additional foodin the country; nor any unproductive laborers or animals, as in
the former case, whose food is set free for productive purposes.
Food will therefore be imported if possible; if not possible, thelaborers will remain for a season on their short allowance: but
the consequence of this change in the demand for commodities,
occasioned by the change in the expenditure of capitalists from
unproductive to productive, is that next year more food will be
produced, and less plate and jewelry. So that again, without
having had anything to do with the food of the laborers directly,
the conversion by individuals of a portion of their property,
no matter of what sort, from an unproductive destination toa productive, has had the effect of causing more food to beappropriated to the consumption of productive laborers. The
distinction, then, between Capital and Not-capital, does not lie
in the kind of commodities, but in the mind of the capitalist—in
his will to employ them for one purpose rather than another; andall property, however ill adapted in itself for the use of laborers,
is a part of capital, so soon as it, or the value to be received fromit, is set apart for productive reinvestment.

§ 2. More Capital Devoted to Production than
Actually Employed in it.
As whatever of the produce of the country is devoted to
production is capital, so, conversely, the whole of the capital of

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the country is devoted to production. This second proposition,
however, must be taken with some limitations and explanations.
(1) A fund may be seeking for productive employment, and findnone adapted to the inclinations of its possessor: it then is capitalstill, but unemployed capital. (2) Or the stock may consist of
unsold goods, not susceptible of direct application to productive
uses, and not, at the moment, marketable: these, until sold, are in
the condition of unemployed capital.
This is not an important distinction. The goods are doubtlessmarketable at some price, if offered low enough. If no one
wants them, then, by definition, they are not wealth so longas that condition exists.

(3) [Or] suppose that the Government lays a tax on the
production in one of its earlier stages, as, for instance, by taxing
the material. The manufacturer has to advance the tax, before
commencing the manufacture, and is therefore under a necessityof having a larger accumulated fund than is required for, oris actually employed in, the production which he carries on.
He must have a larger capital to maintain the same quantity of
productive labor; or (what is equivalent) with a given capital hemaintains less labor. (4) For another example: a farmer may enteron his farm at such a time of the year that he may be required to
pay one, two, or even three quarters' rent before obtaining any
return from the produce. This, therefore, must be paid out of his
capital.
(5) Finally, that large portion of the productive capital of acountry which is employed in paying the wages and salaries oflaborers, evidently is not, all of it, strictly and indispensably
necessary for production. As much of it as exceeds the actual
necessaries of life and health (an excess which in the caseof skilled laborers is usually considerable) is not expended insupporting labor, but in remunerating it, and the laborers could

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wait for this part of their remuneration until the production iscompleted.
The previous accumulation of commodities requisite for production must inevitably be large enough to cover necessaries,
but need not be more, if the laborer is willing to wait for
the additional amount of his wages (the amount of his unproductive consumption) until the completion of the industrial
operation. In fact, however, the accumulation must be sufficient to pay the laborer all his wages from week to week, by
force of custom (wherever there is any considerable divisionof labor), and also sufficient to purchase tools and materials.
The various elements of capital are materials, instruments, andsubsistence, giving “instruments” its wide signification which
includes money (the tool of exchange), and other necessary
appliances of each special kind of production.

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In truth, it is only after an abundant capital had alreadybeen accumulated that the practice of paying in advance any
remuneration of labor beyond a bare subsistence could possibly
have arisen: since whatever is so paid is not really applied to
production, but to the unproductive consumption of productive
laborers, indicating a fund for production sufficiently ample toadmit of habitually diverting a part of it to a mere convenience.
It will be observed that I have assumed that the laborers arealways subsisted from capital:105 and this is obviously the fact,
though the capital need not necessarily be furnished by a person
called a capitalist.
The peasant does not subsist this year on the produce of thisyear's harvest, but on that of the last. The artisan is not livingon the proceeds of the work he has in hand, but on those of105
General Walker (“Political Economy,” Part II, Chap. iv) adopts the same
position, although seemingly inconsistent with his doctrine on the rate ofwages. The “rate of wages” is, however, a different thing from the source of alaborer's subsistence. See Book II, Chapter II, § 2.

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work previously executed and disposed of. Each is supported bya small capital of his own, which he periodically replaces fromthe produce of his labor. The large capitalist is, in like manner,
maintained from funds provided in advance.

§ 3. Examination of Cases Illustrative of the Idea of
Capital.
That which is virtually capital to the individual is or is not capitalto the nation, according as the fund which by the supposition hehas not dissipated has or has not been dissipated by somebody
else.
Let the reader consider, in the four following suppositions,
whether or not the given capital has wholly dropped out of
the circle in the diagram, page 67. In (3) and (4) the wealth isentirely dissipated; as it can not longer be in circle A, it cannot, of course, be in circle B.

(1.) For example, let property of the value of ten thousand
pounds, belonging to A, be lent to B, a farmer or manufacturer,
and employed profitably in B's occupation. It is as much capital
as if it belonged to B. A is really a farmer or manufacturer,
not personally, but in respect of his property. Capital worth ten
thousand pounds is employed in production—in maintaining
laborers and providing tools and materials—which capitalbelongs to A, while B takes the trouble of employing it, andreceives for his remuneration the difference between the profit
which it yields and the interest he pays to A. This is the simplestcase.
(2.) Suppose next that A's ten thousand pounds, instead ofbeing lent to B, are lent on mortgage to C, a landed proprietor,
by whom they are employed in improving the productive powers

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Principles Of Political Economyof his estate, by fencing, draining, road-making, or permanent
manures. This is productive employment. The ten thousand
pounds are sunk, but not dissipated. They yield a permanent
return; the land now affords an increase of produce, sufficientin a few years, if the outlay has been judicious, to replace theamount, and in time to multiply it manifold. Here, then, is a valueof ten thousand pounds, employed in increasing the produce ofthe country. This constitutes a capital, for which C, if he lets his
land, receives the returns in the nominal form of increased rent;
and the mortgage entitles A to receive from these returns, in the
shape of interest, such annual sum as has been agreed on.
(3.) Suppose, however, that C, the borrowing landlord, isa spendthrift, who burdens his land not to increase his fortune
but to squander it, expending the amount in equipages andentertainments. In a year or two it is dissipated, and without
return. A is as rich as before; he has no longer his ten thousand
pounds, but he has a lien on the land, which he could still sell
for that amount. C, however, is ten thousand pounds poorer thanformerly; and nobody is richer. It may be said that those arericher who have made profit out of the money while it was being
spent. No doubt if C lost it by gaming, or was cheated of it byhis servants, that is a mere transfer, not a destruction, and those
who have gained the amount may employ it productively. But
if C has received the fair value for his expenditure in articles
of subsistence or luxury, which he has consumed on himself, orby means of his servants or guests, these articles have ceased toexist, and nothing has been produced to replace them: while if
the same sum had been employed in farming or manufacturing,the consumption which would have taken place would have been
more than balanced at the end of the year by new products,
created by the labor of those who would in that case havebeen the consumers. By C's prodigality, that which would havebeen consumed with a return is consumed without return. C'stradesmen may have made a profit during the process; but, if

83
the capital had been expended productively, an equivalent profit
would have been made by builders, fencers, tool-makers, andthe tradespeople who supply the consumption of the laboringclasses; while, at the expiration of the time (to say nothing of
an increase), C would have had the ten thousand pounds or its
value replaced to him, which now he has not. There is, therefore,on the general result, a difference, to the disadvantage of thecommunity, of at least ten thousand pounds, being the amountof C's unproductive expenditure. To A, the difference is notmaterial, since his income is secured to him, and while thesecurity is good, and the market rate of interest the same, he canalways sell the mortgage at its original value. To A, therefore,
the lien of ten thousand pounds on C's estate is virtually a capitalof that amount; but is it so in reference to the community? It isnot. A had a capital of ten thousand pounds, but this has been
extinguished—dissipated and destroyed by C's prodigality. A
now receives his income, not from the produce of his capital,
but from some other source of income belonging to C, probably
from the rent of his land, that is, from payments made to him byfarmers out of the produce of their capital.
(4.) Let us now vary the hypothesis still further, and supposethat the money is borrowed, not by a landlord, but by the state.
A lends his capital to Government to carry on a war: he buys
from the state what are called government securities; that is,
obligations on the Government to pay a certain annual income.
If the Government employed the money in making a railroad,this might be a productive employment, and A's property would
still be used as capital; but since it is employed in war, that is,in the pay of officers and soldiers who produce nothing, and indestroying a quantity of gunpowder and bullets without return,the Government is in the situation of C, the spendthrift landlord,and A's ten thousand pounds are so much national capital which
once existed, but exists no longer—virtually thrown into the sea,
as wealth or production is concerned; though for other reasons

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the employment of it may have been justifiable. A's subsequent
income is derived, not from the produce of his own capital, butfrom taxes drawn from the produce of the remaining capital of
the community; to whom his capital is not yielding any return,to indemnify them for the payment; it is all lost and gone, andwhat he now possesses is a claim on the returns to other people's
capital and industry.
The breach in the capital of the country was made when the
Government spent A's money: whereby a value of ten thousand
pounds was withdrawn or withheld from productive employment,
placed in the fund for unproductive consumption, and destroyed
without equivalent.
The United States had borrowed in the late civil war, by
August 31, 1865, $2,845,907,626; and, to June 30, 1881,
the Government had paid in interest on its bonds, “fromtaxes drawn from the produce of the remaining capital,”$1,270,596,784, as an income to bondholders. From this canbe seen the enormous waste of wealth to the United States
during the war, and consequently the less existing capital
to-day in this country; since, under the same inducements tosave, the smaller the outside circle (wealth), the less the inside
circle (capital) must be.

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Chapter IV. Fundamental Propositions
Respecting Capital.

§ 1. Industry is Limited by Capital.
The first of these propositions is, that industry is limited bycapital. To employ labor in a manufacture is to invest capitalin the manufacture. This implies that industry can not be
employed to any greater extent than there is capital to invest. The
proposition, indeed, must be assented to as soon as it is distinctly
apprehended. The expression “applying capital” is of course
metaphorical: what is really applied is labor; capital being an
indispensable condition. The food of laborers and the materials
of production have no productive power; but labor can not exert
its productive power unless provided with them. There can be
no more industry than is supplied with materials to work up andfood to eat. Self-evident as the thing is, it is often forgottenthat the people of a country are maintained and have their wants
supplied, not by the produce of present labor, but of past.
Therefore, as capital increases, more labor can be employed.
When the Pittsburg rioters, in 1877, destroyed property, or
the product of past labor, they did not realize then that thatproperty might, but now could never again, be employed for
productive purposes, and thereby support laborers.

They consume what has been produced, not what is about tobe produced. Now, of what has been produced, a part only isallotted to the support of productive labor; and there will notand can not be more of that labor than the portion so allotted(which is the capital of the country) can feed, and provide withthe materials and instruments of production.

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Because industry is limited by capital, we are not, however, toinfer that it always reaches that limit. There may not be as manylaborers obtainable as the capital would maintain and employ.
This has been known to occur in new colonies, where capital has
sometimes perished uselessly for want of labor.
In the farming districts of our Middle and Western States,in harvest-time, crops have been often of late years ruined
because farm-hands could not be obtained. In earlier days,
President John Adams was unable to hire a man in Washington
to cut wood in the surrounding forests with which to warm
the White House.

The unproductive consumption of productive laborers, thewhole of which is now supplied by capital, might cease, or be
postponed, until the produce came in; and additional productive
laborers might be maintained with the amount.
[Governments] can create capital. They may lay on taxes, andemploy the amount productively. They may do what is nearly
equivalent: they may lay taxes on income or expenditure, andapply the proceeds toward paying off the public debts. The
fund-holder, when paid off, would still desire to draw an income
from his property, most of which, therefore, would find its way
into productive employment, while a great part of it would havebeen drawn from the fund for unproductive expenditure, sincepeople do not wholly pay their taxes from what they would havesaved, but partly, if not chiefly, from what they would havespent.

§ 2. Increase of Capital gives Increased Employment
to Labor, Without Assignable Bounds.
While, on the one hand, industry is limited by capital, so, on theother, every increase of capital gives, or is capable of giving,

87
additional employment to industry; and this without assignable
limit. I do not mean to deny that the capital, or part of it,
may be so employed as not to support laborers, being fixed inmachinery, buildings, improvement of land, and the like. In any
large increase of capital a considerable portion will generally
be thus employed, and will only co-operate with laborers, notmaintain them.
It will be remembered, however, that subsistence is but one
part or element of capital; that instruments and materials
form a large part of capital. But still the question of mere
maintenance is rightfully discussed, because it is asserted today that, while the rich are growing richer, the poor lack eventhe food to keep them alive; and throughout this discussion
Mr. Mill has in view the fact that laborers may exist in thecommunity either “half fed or unemployed.”

What I do intend to assert is, that the portion which is destinedto their maintenance may (supposing no alteration in anythingelse) be indefinitely increased, without creating an impossibilityof finding the employment: in other words, that if there are
human beings capable of work, and food to feed them, they
may always be employed in producing something. It is verymuch opposed to common doctrines.106 There is not an opinion
more general among mankind than this, that the unproductive
expenditure of the rich is necessary to the employment of thepoor.
It is to be noticed that, in fact, after the arts have so far
advanced in a community that mankind can obtain by theirexertion more than the amount of the mere necessaries oflife sufficient on the average for the subsistence of all, any
106

The opinion mentioned above in the text is that of the believers in overproduction, of whom the most distinguished are Mr. Malthus, Dr. Chalmers,
and Sismondi.

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further production rendered possible to the human race by
new discoveries and processes is naturally unproductively
consumed, and that consequently a demand for labor for
unproductive consumption is essential for the employment of
all existing laborers. This, however, can be done, because
enough capital has been brought into existence to create thedemand for the labor. Yet it is clear that it is not expenditure,but capital, by which employment is given to the poor.

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Suppose that every capitalist came to be of opinion that, notbeing more meritorious than a well-conducted laborer, he ought
not to fare better; and accordingly laid by, from conscientious
motives, the surplus of his profits; unproductive expenditure is
now reduced to its lowest limit: and it is asked, How is theincreased capital to find employment? Who is to buy the goods
which it will produce? There are no longer customers even for
those which were produced before. The goods, therefore (it issaid), will remain unsold; they will perish in the warehouses,
until capital is brought down to what it was originally, or rather
to as much less as the demand of the customers has lessened. But
this is seeing only one half of the matter. In the case supposed,
there would no longer be any demand for luxuries on the part ofcapitalists and land-owners. But, when these classes turn theirincome into capital, they do not thereby annihilate their powerof consumption; they do but transfer it from themselves to thelaborers to whom they give employment. Now, there are two
possible suppositions in regard to the laborers: either there is,or there is not, an increase of their numbers proportional to theincrease of capital. (1.) If there is, the case offers no difficulty.
The production of necessaries for the new population takes theplace of the production of luxuries for a portion of the old, andsupplies exactly the amount of employment which has been lost.
(2.) But suppose that there is no increase of population. The
whole of what was previously expended in luxuries, by capitalists
and landlords, is distributed among the existing laborers, in the

89form of additional wages. We will assume them to be alreadysufficiently supplied with necessaries.
What follows? That the laborers become consumers ofluxuries; and the capital previously employed in the productionof luxuries is still able to employ itself in the same manner;
the difference being, that the luxuries are shared among thecommunity generally, instead of being confined to a few,
supposing that the power of their labor were physically sufficient
to produce all this amount of indulgences for their whole number.
Thus the limit of wealth is never deficiency of consumers, but of
producers and productive power. Every addition to capital gives
to labor either additional employment or additional remuneration.
That laborers should get more (a) by capitalists abstaining
from unproductive expenditure than (b) by expenditure in
articles unproductively consumed is a question difficult for
many to comprehend, and needs all the elucidation possible.
To start with, no one ever knew of a community all of whose
wants were satisfied: in fact, civilization is constantly leading
us into new fields of enjoyment, and results in a constantdifferentiation of new desires. To satisfy these wants is thespring to nearly all production and industry. There can,therefore, be no stop to production arising from lack of desire
for commodities. “The limit of wealth is never deficiency of
consumers,” but of productive power.
Now, in supposition (2) of the text, remember that thelaborers are supposed not to be employed up to their fullproductive power. If all capitalists abstain from unproductive
consumption, and devote that amount of wealth to production,
then, since there can be no production without labor, the same
number of laborers have offered to them in the aggregate alarger sum of articles for their exertions, which is equivalent
to saying they receive additional wages.
But some persons want to see the process in the concrete,
and the same principle may be illustrated by a practical case.

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It is supposed that all laborers have the necessaries of life
only, but none of the comforts, decencies, and luxuries. Let
A be a farmer in New York, who can also weave carpets,
and B a lumberman in Maine. A begins to want a betterhouse, and B wishes a carpet, both having food, clothing, andshelter. One of the capitalists abstaining from unproductive
consumption, as above, is X, who, knowing the two desiresof A and B, presents himself as a middle-man (i.e., he gives amarket for both men, as is found in every center of trade, as
well as in a country store), furnishing A the tools, materials,
etc., and giving him the promise of lumber if he will create
the carpet, and promising B the carpet if he will likewise
produce the additional lumber. To be more matter of fact, X
buys the carpet of A, and sells it to B for the lumber. Thus
two new articles have been created, and for their exertions A
has received additional wages (either in the form of lumber,or of the money paid him for the carpet), and B has received
additional wages (either in the form of a carpet, or the money
paid him by X for the lumber). If A and B are regarded as
typifying all the laborers, and X all the above capitalists, inthe multiplicity of actual exchanges, it will be seen that A
and B are creating new articles to satisfy their own demand,
instead of meeting the demands of X. If their primary wants
are already supplied, then they take their additional wages in
the form of comforts and decencies. When Class X forego
their consumption, but add that amount to capital, they do notgive up their title to that capital, but they transfer the use ofit, or their consuming power, to others for the time being.
This question will be more fully discussed in § 6.

§ 3. Capital is the result of Saving, and all Capital is
Consumed.

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A second fundamental theorem respecting capital relates to thesource from which it is derived. It is the result of saving.
If all persons were to expend in personal indulgences all thatthey produce, and all the income that they receive from what
is produced by others, capital could not increase. Some saving,
therefore, there must have been, even in the simplest of all statesof economical relations; people must have produced more thanthey used, or used less than they produced. Still more must
they do so before they can employ other laborers, or increase
their production beyond what can be accomplished by the workof their own hands. If it were said, for instance, that the only
way to accelerate the increase of capital is by increase of saving,
the idea would probably be suggested of greater abstinence andincreased privation. But it is obvious that whatever increases the
productive power of labor, creates an additional fund to makesavings from, and enables capital to be enlarged, not only without
additional privation, but concurrently with an increase of personal
consumption. Nevertheless, there is here an increase of saving,in the scientific sense. Though there is more consumed, there isalso more spared. There is a greater excess of production overconsumption. To consume less than is produced is saving; andthat is the process by which capital is increased; not necessarily
by consuming less, absolutely.
The economic idea of saving involves, of course, the intentionof using the wealth in reproduction. Saving, without thismeaning, results only in hoarding of wealth, and while hoarded
this amount is not capital. To explain the process by which
capital comes into existence, Bastiat has given the well-known
illustration of the plane in his “Sophisms of Protection.”107

A fundamental theorem respecting capital, closely connectedwith the one last discussed, is, that although saved, and the result
107

Page 371, English translation, N. Y. (1871).

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of saving, it is nevertheless consumed. The word saving does not
imply that what is saved is not consumed, nor even necessarily
that its consumption is deferred; but only that, if consumed
immediately, it is not consumed by the person who saves it. If
merely laid by for future use, it is said to be hoarded; and, while
hoarded, is not consumed at all. But, if employed as capital, it is
all consumed, though not by the capitalist. Part is exchanged fortools or machinery, which are worn out by use; part for seed ormaterials, which are destroyed as such by being sown or wroughtup, and destroyed altogether by the consumption of the ultimate
product. The remainder is paid in wages to productive laborers,
who consume it for their daily wants; or if they in their turnsave any part, this also is not, generally speaking, hoarded, but(through savings-banks, benefit clubs, or some other channel)
re-employed as capital, and consumed. To the vulgar, it is not
at all apparent that what is saved is consumed. To them, every
one who saves appears in the light of a person who hoards. The
person who expends his fortune in unproductive consumption islooked upon as diffusing benefits all around, and is an object ofso much favor, that some portion of the same popularity attaches
even to him who spends what does not belong to him; who not
only destroys his own capital, if he ever had any, but, underpretense of borrowing, and on promise of repayment, possesses
himself of capital belonging to others, and destroys that likewise.

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This popular error comes from attending to a small portion
only of the consequences that flow from the saving or the
spending; all the effects of either, which are out of sight, beingout of mind. There is, in the one case, a wearing out of tools,a destruction of material, and a quantity of food and clothing
supplied to laborers, which they destroy by use; in the othercase, there is a consumption, that is to say, a destruction, ofwines, equipages, and furniture. Thus far, the consequence to thenational wealth has been much the same; an equivalent quantityof it has been destroyed in both cases. But in the spending, this93
first stage is also the final stage; that particular amount of the
produce of labor has disappeared, and there is nothing left; while,on the contrary, the saving person, during the whole time that thedestruction was going on, has had laborers at work repairing it;
who are ultimately found to have replaced, with an increase, theequivalent of what has been consumed.
Almost all expenditure being carried on by means of money,
the money comes to be looked upon as the main featurein the transaction; and since that does not perish, but onlychanges hands, people overlook the destruction which takes
place in the case of unproductive expenditure. The money being
merely transferred, they think the wealth also has only been
handed over from the spendthrift to other people. But this issimply confounding money with wealth. The wealth which has
been destroyed was not the money, but the wines, equipages,
and furniture which the money purchased; and, these having
been destroyed without return, society collectively is poorer
by the amount. In proportion as any class is improvident or
luxurious, the industry of the country takes the direction of
producing luxuries for their use; while not only the employment
for productive laborers is diminished, but the subsistence andinstruments which are the means of such employment do actuallyexist in smaller quantity.

§ 4. Capital is kept up by Perpetual Reproduction, as
shown by the Recovery of Countries from
Devastation.
To return to our fundamental theorem. Everything which is
produced is consumed—both what is saved and what is said tobe spent—and the former quite as rapidly as the latter. All theordinary forms of language tend to disguise this. When people

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talk of the ancient wealth of a country, of riches inherited fromancestors, and similar expressions, the idea suggested is, that theriches so transmitted were produced long ago, at the time when
they are said to have been first acquired, and that no portionof the capital of the country was produced this year, except asmuch as may have been this year added to the total amount. The
fact is far otherwise. The greater part, in value, of the wealthnow existing [in the United States] has been produced by humanhands within the last twelve months.
“In the State of Massachusetts it is estimated that the capital,on the average, belonging to each individual does not exceed$600, and that the average annual product per capita is about$200; so that the total capital is the product of only two or
three years' labor.”108

The land subsists, and the land is almost the only thing thatsubsists. Everything which is produced perishes, and most things
very quickly. Most kinds of capital are not fitted by their nature to
be long preserved. Westminster Abbey has lasted many centuries,
with occasional repairs; some Grecian sculptures have existed
above two thousand years; the Pyramids perhaps double or treble
that time. But these were objects devoted to unproductive use.
Capital is kept in existence from age to age not by preservation,
but by perpetual reproduction; every part of it is used anddestroyed, generally very soon after it is produced, but those who
consume it are employed meanwhile in producing more. The
growth of capital is similar to the growth of population. Every
individual who is born, dies, but in each year the number born
exceeds the number who die; the population, therefore, always
increases, though not one person of those composing it was alive
until a very recent date.
This perpetual consumption and reproduction of capital afford
the explanation of what has so often excited wonder, the great
108

Edward Atkinson, “Labor and Capital, Allies not Enemies,” p. 60.

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rapidity with which countries recover from a state of devastation.
The possibility of a rapid repair of their disasters mainly depends
on whether the country has been depopulated. If its effective
population have not been extirpated at the time, and are not
starved afterward, then, with the same skill and knowledge
which they had before, with their land and its permanent
improvements undestroyed, and the more durable buildings
probably unimpaired, or only partially injured, they have nearly
all the requisites for their former amount of production. If thereis as much of food left to them, or of valuables to buy food, as
enables them by any amount of privation to remain alive and inworking condition, they will, in a short time, have raised as greata produce, and acquired collectively as great wealth and as greata capital, as before, by the mere continuance of that ordinary
amount of exertion which they are accustomed to employ in theiroccupations. Nor does this evince any strength in the principle ofsaving, in the popular sense of the term, since what takes placeis not intentional abstinence, but involuntary privation.

The world has at any given period the power, under existing
conditions of production and skill, to create a certain amountof wealth, as represented by the inner rectangle, W. Each
increased power of production arising from conquests over
Nature's forces, as the use of steam and labor-saving machinery, permits the total wealth to be enlarged, as, in the figure,to rectangle W'. For the production of wealth are required
labor, capital, and land; therefore, if the labor and land are notdestroyed by war, there need not necessarily be in existence
all the previous capital. If there are the necessaries for all,and only sufficient tools to accomplish the work, they will,in a few years, again recreate all the wealth that formerly
existed, regain the same position as before, and go on slowly
increasing the total wealth just as fast as improvements in thearts of production render it possible.

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Principles Of Political Economy§ 5. Effects of Defraying Government Expenditure
by Loans.

[084][An application of this truth has been made to the question ofraising government supplies for war purposes.] Loans, being
drawn from capital (in lieu of taxes, which would generally havebeen paid from income, and made up in part or altogether byincreased economy), must, according to the principles we havelaid down, tend to impoverish the country: yet the years in which
expenditure of this sort has been on the greatest scale have often
been years of great apparent prosperity: the wealth and resourcesof the country, instead of diminishing, have given every signof rapid increase during the process, and of greatly expanded
dimensions after its close.
During our civil war, at the same time that wealth was being
destroyed on an enormous scale, there was a very general
feeling that trade was good, and large fortunes were made. At
the close of the war a period of speculation and overtrading
continued until it was brought to a disastrous close by the
panic of 1873. Much of this speculation, however, was due toan inflated paper currency.

We will suppose the most unfavorable case possible: thatthe whole amount borrowed and destroyed by the Government
was abstracted by the lender from a productive employment inwhich it had actually been invested. The capital, therefore, of

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the country, is this year diminished by so much. But, unless theamount abstracted is something enormous, there is no reason in
the nature of the case why next year the national capital should
not be as great as ever. The loan can not have been taken fromthat portion of the capital of the country which consists of tools,
machinery, and buildings. It must have been wholly drawn fromthe portion employed in paying laborers: and the laborers will
suffer accordingly. But if none of them are starved, if their wages
can bear such an amount of reduction, or if charity interposes
between them and absolute destitution, there is no reason that
their labor should produce less in the next year than in the year
before. If they produce as much as usual, having been paid lessby so many millions sterling, these millions are gained by theiremployers. The breach made in the capital of the country is thus
instantly repaired, but repaired by the privations and often thereal misery of the laboring-class.
As Mr. Mill points out, during the Napoleonic wars, in France
the withdrawal of laborers from industry into the army wasso large that it caused a rise of wages, and a fall in the profits
of capital; while in England, inasmuch as capital, rather thanmen, was sent to the Continent in the war, the very reverse
took place: the diversion of “hundreds of millions of capitalfrom productive employment” caused a fall of wages, andthe prosperity of the capitalist class, while the permanent
productive resources did not fall off.

This leads to the vexed question to which Dr. Chalmers
has very particularly adverted: whether the funds required by agovernment for extraordinary unproductive expenditure are bestraised by loans, the interest only being provided by taxes, orwhether taxes should be at once laid on to the whole amount;which is called, in the financial vocabulary, raising the whole ofthe supplies within the year. Dr. Chalmers is strongly for the lattermethod. He says the common notion is that, in calling for the

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whole amount in one year, you require what is either impossible,
or very inconvenient; that the people can not, without great
hardship, pay the whole at once out of their yearly income; andthat it is much better to require of them a small payment every
year in the shape of interest, than so great a sacrifice once forall. To which his answer is, that the sacrifice is made equallyin either case. Whatever is spent can not but be drawn fromyearly income. The whole and every part of the wealth producedin the country forms, or helps to form, the yearly income ofsomebody. The privation which it is supposed must result fromtaking the amount in the shape of taxes is not avoided by taking
it in a loan. The suffering is not averted, but only thrown upon
the laboring-classes, the least able, and who least ought, to bear
it: while all the inconveniences, physical, moral, and political,
produced by maintaining taxes for the perpetual payment of theinterest, are incurred in pure loss. Whenever capital is withdrawn
from production, or from the fund destined for production, to belent to the state and expended unproductively, that whole sum
is withheld from the laboring-classes: the loan, therefore, is intruth paid off the same year; the whole of the sacrifice necessary
for paying it off is actually made: only it is paid to the wrong
persons, and therefore does not extinguish the claim; and paid by
the very worst of taxes, a tax exclusively on the laboring-class.
And, after having, in this most painful and unjust of ways, gone
through the whole effort necessary for extinguishing the debt,
the country remains charged with it, and with the payment of its
interest in perpetuity.
The United States, for example, borrows capital from A, withwhich it buys stores from B. If the loan all comes from within
the country, A's capital is borrowed, when the United Statesshould have taken that amount outright by taxation. When themoney is borrowed of A, the laborers undergo the sacrifice,the title to the whole sum remains in A's hands, and the claim
against the Government by A still exists; while, if the amount99
were taken by taxation, the title to the sum raised is in thestate, and it is paid to the right person.
The experience of the United States during the civil war isan illustration of this principle. It is asserted that, as a matterof fact, the total expenses of the war were defrayed by theNorthern States, during the four years of its continuance, outof surplus earnings; and yet at the close of the conflict a debt
of $2,800,000,000 was saddled on the country.
The United States borrowed
Revenue during that time
Total cost of the war$2,400,000,000
1,700,000,000$4,100,000,000

In reality we borrowed only about $1,500,000,000 insteadof $2,400,000,000, since (1) the Government issued paper
which depreciated, and yet received it at par in subscriptions
for loans. Moreover, the total cost would have been much
reduced had we issued no paper and (2) thereby not increased
the prices of goods to the state, and (3) if no interest accounthad been created by borrowing. But could the country
have raised the whole sum each year by taxation? In
the first fiscal year after the war the United States paidin war taxes $650,000,000. At the beginning of the struggle,
to June 30, 1862, the expenditure was $515,000,000, andby June 30, 1863, it had amounted to $1,098,000,000; sothat $600,000,000 of taxes a year would have paid the war
expenses, and left us free of debt at the close.
A confirmatory experience is that of England during theContinental wars, 1793-1817:
Total war expenditures
Interest charge on the existing debt
Total amount required
Revenue for that period
Deficit£1,060,000,000
235,000,000£1,295,000,000
1,145,000,000£150,000,000

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To provide for this deficit, the Government actually
increased its debt by £600,000,000. A slight additional
exertion would have provided £150,000,000 more of revenue,
and saved £450,000,000 to the taxpayers.109[087]

The practical state of the case, however, seldom exactly
corresponds with this supposition. The loans of the less wealthy
countries are made chiefly with foreign capital, which would
not, perhaps, have been brought in to be invested on any
less security than that of the Government: while those ofrich and prosperous countries are generally made, not withfunds withdrawn from productive employment, but with the new
accumulations constantly making from income, and often witha part of them which, if not so taken, would have migrated tocolonies, or sought other investments abroad.

§ 6. Demand for Commodities is not Demand forLabor.
Mr. Mill's statement of the theorem respecting capital,
discussed in the argument that “demand for commodities
is not demand for labor,” needs some simplification. For thispurpose represent by the letters of the alphabet, A, B, C, ...
X, Y, Z, the different kinds of commodities produced in theworld which are exchanged against each other in the processof reaching the consumers. This exchange of commodities
for each other, it need hardly be said, does not increase thenumber or quantity of commodities already in existence; since
their production, as we have seen, requires labor and capitalin connection with natural agents. Mere exchange does notalter the quantity of commodities produced.
109

Cf. Bowen, “American Political Economy,” p. 399.

§ 6. Demand for Commodities is not Demand for Labor.
To produce a plow, for example, the maker must havecapital (in the form of subsistence, tools, and materials) ofwhich some one has foregone the use by a process of saving
in order that something else, in this case a plow, may be
produced. This saving must be accomplished first to an
amount sufficient to keep production going on from day today. This capital is all consumed, but in a longer or shorter
term (depending on the particular industrial operation) it isreproduced in new forms adapted to the existing wants ofman. Moreover, without any new exertion of abstinence, thisamount of capital may be again consumed and reproduced, andso go on forever, after once being saved (if never destroyedin the mean while, thereby passing out of the category not
only of capital, but also of wealth). The total capital of thecountry, then, is not the sum of one year's capital added
to that of another; but that of last year reproduced in a newform this year, plus a fractional increase arising from newsavings. But, once saved, capital can go on constantly aiding
in production forever. This plow when made is exchanged(if a plow is wanted, and the production is properly adjusted
to meet desires) for such other products, food, means forrepairing tools, etc., as give back to the plow-maker all thecommodities consumed in its manufacture (with an increase,called profit).
Returning to our illustration of the alphabet, it is evident
that a certain amount of capital united with labor (constituting
what may be called a productive engine) lies behind the
production of A (such as the plow, for example), and to which
its existence is due. The same is true of Z. Suppose that 5,000of Z is produced, of which 4,000 is enough to reimburse thecapital used up by labor in the operation, and that the ownerof commodity Z spends the remaining 1,000 Z in exchange
for 1,000 of commodity A. It is evident (no money being
used as yet) that this exchange of goods is regulated entirelyby the desires of the two parties to the transaction. No
more goods are created simply by the exchange; the simple

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process of exchange does not keep the laborers engaged on
A occupied. And yet the owner of Z had a demand forcommodity A; his demand was worthless, except throughthe fact of his production, which gave him actual wealth,or purchasing power, in the form of Z. His demand forcommodity A was not the thing which employed the laborers
engaged in producing A, although the demand (if known
beforehand) would cause them to produce A rather than someother article—that is, the demand of one quantity of wealthfor a certain thing determines the direction taken by the ownerof capital A. But, since the exchange is merely the form inwhich the demand manifests itself, it is clear that the demanddoes not add to production, and so of itself does not employ
labor. Of course, if there were no desires, there would be no
demand, and so no production and employment of labor. But
we may conclude by formulating the proposition, that wealth(Z) offered for commodities (A) necessitates the use of other
wealth (than Z) as capital to support the operation by whichthose commodities (A) are produced. It makes no difference
to the existing employment of labor what want is suppliedby the producers of A, whether it is velvet (intended forunproductive consumption) or plows (intended for productive
consumption). Even if Z is no longer offered in exchange forA, and if then A is no longer to be made, the laborers formerly
occupied in producing A—if warning is given of the comingchange; if not, loss results—having the plant, can produce
something else wanted by the owner of Z.
Now into a community, as here pictured, all laborers
supposed to be occupied, and all capital employed in
producing A, B, C, ... X, Y, Z, imagine the coming of a
shipwrecked crew. Instead of exchanging Z for A, as before,
the owner of Z may offer his wealth to the crew to dance forhim. The essential question is, Is more employment offered
to labor by this action than the former exchange for A? Thatis, it is a question merely of distribution of wealth among themembers of a community. The labor engaged on A is not§ 6. Demand for Commodities is not Demand for Labor.
thrown out of employment (if they have warning). There is no
more wealth in existence, but it is differently distributed than
before: the crew, instead of the former owner, now have 1,000of Z. So far as the question of employment is concerned, it
makes no difference on what terms the crew got it: they might
have been hired to stand in a row and admire the owner of
Z when he goes out. But yet it may naturally be assumed
that the crew were employed productively. In this case, after
they have consumed the wealth Z, they have brought into
existence articles in the place of those they consumed. But,
although this last operation is economically more desirable
for the future growth of wealth, yet no more laborers for thetime were employed than if the crew had merely danced. The
advantages or disadvantages of productive consumption are
not to be discussed here. It is intended, however, to establish
the proposition that wealth paid out in wages, or advanced to
producers, itself supports labor; that wealth offered directly
to laborers in this way employs more labor than when merely
offered in exchange for other goods, or, in other words,
by a demand for commodities; that an increased demandfor commodities does not involve an increased demand forlabor, since this can only be created by capital. The essential
difference is, that the owner of Z in one case, by exchanging
goods for A, did not forego his consuming power; in theother case, by giving Z to the unemployed crew, he actuallywent through the process of saving by foregoing his personal
consumption, and handing it over to the crew. If the crew use
it unproductively, it is in the end the same as if the ownerof Z had done it; but meanwhile the additional laborers were
employed. If the crew be employed productively, then thesaving once made will go on forever, as explained above,and the world will be the richer by the wealth this additional
capital can create.
It may now be objected that, if A is no longer in demand,the laborers in that industry will be thrown out of employment.
Out of that employment certainly, but not out of every other.

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One thousand of Z was able to purchase certain results oflabor and capital in industry A, when in the hands of its
former owner; and now when in the hands of the crew it willcontrol, as purchasing power, equivalent results of labor andcapital. The crew may not want the same articles as the former
owner of Z, but they will want the equivalents of 1,000 of Z in
something, and that something will be produced now insteadof A. The whole process may be represented by this diagram.

[090]

1. Z is exchanged against A, and the crew remain
unemployed.
2. Here the crew possess Z, and they themselves exchange
Z for whatever A may produce in satisfaction of their wants,
and the crew are then employed.
It is possible that the intervention of money blinds someminds to a proper understanding of the operations describedabove. The supposition, as given, applies to a condition ofbarter, but is equally true if money is used.110 Imagine adisplay of all the industries of the world, A, B, C, ... X, Y,
Z, presented within sight on one large field, and at the central
spot the producer of gold and silver. When Z is produced, it
is taken to the gold-counter, and exchanged for money; when
A is produced, the same is done. Then the former money isgiven for A, and the latter for Z, so that in truth A is exchanged
against Z through the medium of money, just as before money
was considered. Now, it may be said by an objector, “IfA is not wanted, after it is produced, and can not be sold,because the demand from Z has been withdrawn, then the110

The functions of money are discussed later in the volume, and it is notproposed to unfold them here.

§ 6. Demand for Commodities is not Demand for Labor.
capital used for A will not be returned, and the laborers in A
will be thrown out of employment.” The answer is, of course,that the state of things here contemplated is a permanent andnormal one wherein production is correctly adapted to humandesires. If A is found not to be wanted, after the productionof it, an industrial blunder has been committed, and wealth iswasted just as when burned up. It is ill-assorted production.
The trouble is not in a lack of demand for what A may
produce (of something else), but with the producers of A in
not making that for which there were desires, from ignorance
or lack of early information of the disposition of wealth Z. In
practice, however, it will be found that most goods are madeupon “orders,” and, except under peculiar circumstances, notactually produced unless a market is foreseen. Indeed, as
every man knows, the most important function of a successful
business man is the adaptation of production to the market,
that is, to the desires of consumers.
One other form of this question needs brief mention. It
is truly remarked that a large portion of industrial activity
is engaged to-day, not in supplying productive consumption,such as food, shelter, and clothing, but in supplying the
comforts and luxuries of low and high alike, or unproductive
consumption; now, if there were not a demand for luxuries
and comforts, many vast industries would cease to exist,
and labor would be thrown out of employment. Is not ademand for such commodities, then, a cause of the present
employment of labor? No, it is not. Luxuries and comforts
are of course the objects of human wants; but a desire alone,
without purchasing power, can not either buy or produce thesecommodities. To obtain a piano, one must produce goods,
and this implies the possession of capital, by which to bring
into existence goods, or purchasing power, to be offered for a
piano. Nor is this sufficient. Even after a man, A, for example,
offers purchasing power, he will not get a piano unless there
exists an accumulation of unemployed capital, together withlabor ready to manufacture the instrument. If capital were

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all previously occupied, no piano could be made, although A
stood offering an equivalent in valuable goods. It may be said
that A himself has the means. He has the wealth, and if he iswilling to forego the use of this wealth, or, in other words, saveit by devoting it to reproduction in the piano industry—that is,create the capital necessary for the purpose—then the piano
can be made. But this shows again that, not a mere desire,but the existence of capital, is necessary to the production,and so to the employment of labor. An increased demand forcommodities, therefore, does not give additional employment
to labor, unless there be capital to support the labor.
Some important corollaries result from this proposition:(a.) When a country by legislation creates a home demandfor commodities, that does not of itself give additional
employment to labor. If the goods had before been purchasedabroad, under free discretion, then if produced at home theymust require more capital and labor, or they would not havebeen brought from foreign countries. If produced at home, itwould require, to purchase them, more of what was formerly
sent abroad; or some must do without. The legislation cannot, ipso facto, create capital, and only by an increase ofcapital can more employment result. It is possible, however,that legislation might cause a more effective use of existing
capital; but that must be a question of fact, to be settled bycircumstances in each particular case. It is not a thing to be
governed by principles.
(b.) It follows from the above proposition also thattaxes levied on the rich, and paid by a saving from theirconsumption of luxuries, do not fall on the poor because of
a lessened demand for commodities; since, as we have seen,that demand does not create or diminish the demand for labor.
But, if the taxes levied on the rich are paid by savings fromwhat the rich would have expended in wages, then if theGovernment spends the amount of revenue thus taken in the
direct purchase of labor, as of soldiers and sailors, the tax
does not fall on the laboring-class taken as a whole. When§ 6. Demand for Commodities is not Demand for Labor.

107

the Government takes that wealth which was formerly capital,burns it up, or dissipates it in war, it ceases to exist any longer
as a means of again producing wealth, or of employing labor.
[093]

Chapter V. On Circulating And Fixed
Capital.

§ 1. Fixed and Circulating Capital.

[094]

Of the capital engaged in the production of any commodity, there
is a part which, after being once used, exists no longer as capital;
is no longer capable of rendering service to production, or atleast not the same service, nor to the same sort of production.
Such, for example, is the portion of capital which consists ofmaterials. The tallow and alkali of which soap is made, once
used in the manufacture, are destroyed as alkali and tallow. In
the same division must be placed the portion of capital which ispaid as the wages, or consumed as the subsistence, of laborers.
That part of the capital of a cotton-spinner which he pays away to
his work-people, once so paid, exists no longer as his capital, or
as a cotton-spinner's capital. Capital which in this manner fulfills
the whole of its office in the production in which it is engaged,
by a single use, is called Circulating Capital. The term, which is
not very appropriate, is derived from the circumstance that thisportion of capital requires to be constantly renewed by the saleof the finished product, and when renewed is perpetually parted
with in buying materials and paying wages; so that it does its
work, not by being kept, but by changing hands.
Another large portion of capital, however, consists in
instruments of production, of a more or less permanent character;which produce their effect not by being parted with, but by
being kept; and the efficacy of which is not exhausted bya single use. To this class belong buildings, machinery,
and all or most things known by the name of implements ortools. The durability of some of these is considerable, and§ 1. Fixed and Circulating Capital.

109

their function as productive instruments is prolonged throughmany repetitions of the productive operation. In this classmust likewise be included capital sunk (as the expression is) inpermanent improvements of land. So also the capital expended
once for all, in the commencement of an undertaking, to prepare
the way for subsequent operations: the expense of opening amine, for example; of cutting canals, of making roads or docks.
Other examples might be added, but these are sufficient. Capitalwhich exists in any of these durable shapes, and the return towhich is spread over a period of corresponding duration, is called
Fixed Capital.
Of fixed capital, some kinds require to be occasionally or
periodically renewed. Such are all implements and buildings:
they require, at intervals, partial renewal by means of repairs, andare at last entirely worn out. In other cases the capital does not,unless as a consequence of some unusual accident, require entire
renewal. A dock or a canal, once made, does not require, likea machine, to be made again, unless purposely destroyed. The
most permanent of all kinds of fixed capital is that employed ingiving increased productiveness to a natural agent, such as land.
To return to the theoretical distinction between fixed andcirculating capital. Since all wealth which is destined to be
employed for reproduction comes within the designation ofcapital, there are parts of capital which do not agree with thedefinition of either species of it; for instance, the stock offinished goods which a manufacturer or dealer at any timepossesses unsold in his warehouses. But this, though capital as
to its destination, is not yet capital in actual exercise; it is notengaged in production, but has first to be sold or exchanged, thatis, converted into an equivalent value of some other commodities,
and therefore is not yet either fixed or circulating capital, but will
become either one or the other, or be eventually divided between
them.
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Principles Of Political Economy§ 2. Increase of Fixed Capital, when, at the Expenseof Circulating, might be Detrimental to the Laborers.
There is a great difference between the effects of circulating
and those of fixed capital, on the amount of the gross produceof the country. Circulating capital being destroyed as such, theresult of a single use must be a reproduction equal to the wholeamount of the circulating capital used, and a profit besides. This,
however, is by no means necessary in the case of fixed capital.
Since machinery, for example, is not wholly consumed by one
use, it is not necessary that it should be wholly replaced fromthe product of that use. The machine answers the purpose of
its owner if it brings in, during each interval of time, enough tocover the expense of repairs, and the deterioration in value which
the machine has sustained during the same time, with a surplus
sufficient to yield the ordinary profit on the entire value of themachine.
From this it follows that all increase of fixed capital, when
taking place at the expense of circulating, must be, at least
temporarily, prejudicial to the interests of the laborers. This istrue, not of machinery alone, but of all improvements by which
capital is sunk; that is, rendered permanently incapable of being
applied to the maintenance and remuneration of labor.
It is highly probable that in the twenty-five years preceding
the panic of 1873, owing to the progress of invention, thoseindustries in the United States employing much machinery
were unduly stimulated in comparison with other industries,
and that the readjustment was a slow and painful process.
After the collapse vast numbers left the manufacturing toenter the extractive industries.

The argument relied on by most of those who contend thatmachinery can never be injurious to the laboring-class is, that bycheapening production it creates such an increased demand for

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the commodity as enables, ere long, a greater number of persons
than ever to find employment in producing it. The argument
does not seem to me to have the weight commonly ascribed to it.
The fact, though too broadly stated, is, no doubt, often true. The
copyists who were thrown out of employment by the invention of
printing were doubtless soon outnumbered by the compositors
and pressmen who took their place; and the number of laboring
persons now employed in the cotton manufacture is many times
greater than were so occupied previously to the inventionsof Hargreaves and Arkwright, which shows that, besides theenormous fixed capital now embarked in the manufacture, italso employs a far larger circulating capital than at any former
time. But if this capital was drawn from other employments,
if the funds which took the place of the capital sunk in costly
machinery were supplied not by any additional saving consequenton the improvements, but by drafts on the general capital of thecommunity, what better are the laboring-classes for the meretransfer?
There is a machine used for sizing the cotton yarn to prepare
it for weaving, by which it is dried over a steam cylinder, thewages for attendance on which were only two dollars per day,as compared with an expenditure for labor of fourteen dollars
per day to accomplish the same ends before the machine wasinvented.

All attempts to make out that the laboring-classes as acollective body can not suffer temporarily by the introductionof machinery, or by the sinking of capital in permanent
improvements, are, I conceive, necessarily fallacious.111 That
they would suffer in the particular department of industry to which
the change applies is generally admitted, and obvious to common
111

See, for the argument that machinery necessarily injures labor, “Land andLabor,” William Godwin Moody (1883); and for the answer, “North American
Review,” May, 1884, p. 510.

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sense; but it is often said that, though employment is withdrawn
from labor in one department, an exactly equivalent employment
is opened for it in others, because what the consumers save in
the increased cheapness of one particular article enables themto augment their consumption of others, thereby increasing thedemand for other kinds of labor. This is plausible, but, as
was shown in the last chapter, involves a fallacy; demand forcommodities being a totally different thing from demand forlabor. It is true, the consumers have now additional means ofbuying other things; but this will not create the other things,
unless there is capital to produce them, and the improvement has
not set at liberty any capital, even if it has not absorbed somefrom other employments.
If the improvement has lowered the cost of production, it hasoften required less capital (as well as less labor) to produce
the same quantity of goods; or, what is the same thing, anincreased product with the same capital.

§ 3. —This seldom, if ever, occurs.
Nevertheless, I do not believe that, as things are actuallytransacted, improvements in production are often, if ever,injurious, even temporarily, to the laboring-classes in theaggregate. They would be so if they took place suddenly to a greatamount, because much of the capital sunk must necessarily inthat case be provided from funds already employed as circulating
capital. But improvements are always introduced very gradually,
and are seldom or never made by withdrawing circulating capitalfrom actual production, but are made by the employment of theannual increase. I doubt if there would be found a single example
of a great increase of fixed capital, at a time and place wherecirculating capital was not rapidly increasing likewise.

§ 3. —This seldom, if ever, occurs.

113

In the United States, while the cost per yard of the
manufactured goods has decreased, and so made accessible
to poorer classes than before, the capital engaged in
manufactures has increased so as to allow a vastly greaternumber of persons to be employed, as will be seen by thefollowing comparison of 1860 with 1880 taken from the lastcensus returns. (Compendium, 1880, pp. 928, 930.)

Numberof establishments.

1860
1880

140,433
253,852

Total
amount
paid
in
wages
during theyear.
$1,009,855 1,311,246 $378,878,966
2,790,272 2,732,595 947,953,795

Capital(Thousands).

Averagenumberof hands
employed.

“A hundred years ago, one person in every family of five or
six must have been absolutely needed to spin and weave byhand the fabrics required for the scanty clothing of the people;
now one person in two hundred or two hundred and fifty only
need work in the factory to produce the cotton and woolen
fabrics of the most amply clothed nation of the world.”112

To these considerations must be added, that, even if
improvements did for a time decrease the aggregate produce
and the circulating capital of the community, they would not
the less tend in the long run to augment both. This tendency
of improvements in production to cause increased accumulation,and thereby ultimately to increase the gross produce, even if
temporarily diminishing it, will assume a still more decided
character if it should appear that there are assignable limits bothto the accumulation of capital and to the increase of production
112

Edward Atkinson, “Labor and Capital, Allies not Enemies,” p. 33.

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from the land, which limits once attained, all further increaseof produce must stop; but that improvements in production,
whatever may be their other effects, tend to throw one or both ofthese limits farther off. Now, these are truths which will appear in
the clearest light in a subsequent stage of our investigation. It will
be seen that the quantity of capital which will, or even which can,be accumulated in any country, and the amount of gross produce
which will, or even which can, be raised, bear a proportion to
the state of the arts of production there existing; and that every
improvement, even if for the time it diminish the circulating
capital and the gross produce, ultimately makes room for a larger
amount of both than could possibly have existed otherwise. It
is this which is the conclusive answer to the objections against
machinery; and the proof thence arising of the ultimate benefit
to laborers of mechanical inventions, even in the existing stateof society, will hereafter be seen to be conclusive.113
[099]

113

See book iv, chap. iv.

Chapter VI. Of Causes Affecting The
Efficiency Of Production.

§ 1. General Causes of Superior Productiveness.
The most evident cause of superior productiveness is what are
called natural advantages. These are various. Fertility of soil
is one of the principal. The influence of climate [is anotheradvantage, and] consists in lessening the physical requirementsof the producers.
In spinning very fine cotton thread, England's natural climate
gives in some parts of the country such advantages in proper
moisture and electric conditions that the operation can be
carried on out-of-doors; while in the United States it isgenerally necessary to create an artificial atmosphere. In
ordinary spinning in our country more is accomplished when
the wind is in one quarter than in another. The dry northwest
wind in New England reduces the amount of product, while
the dry northeast wind in England has a similar effect, and
it is said has practically driven the cotton-spinners from
Manchester to Oldham, where the climate is more equably
moist. The full reasons for these facts are not yet ascertained.
Experts in the woolen industry, also, explain that thequality and fiber of wool depend upon the soil and climate
where the sheep are pastured. When Ohio sheep are transferredto Texas, in a few years their wool loses the distinctive quality
it formerly possessed, and takes on a new character belonging
to the breeds of Texas. The wool produced by one set ofclimatic conditions is quite different from that of another set,
and is used by the manufacturers for different purposes.

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In hot regions, mankind can exist in comfort with less perfecthousing, less clothing; fuel, that absolute necessary of life in cold
climates, they can almost dispense with, except for industrialuses. They also require less aliment. Among natural advantages,
besides soil and climate, must be mentioned abundance ofmineral productions, in convenient situations, and capable ofbeing worked with moderate labor. Such are the coal-fields ofGreat Britain, which do so much to compensate its inhabitantsfor the disadvantages of climate; and the scarcely inferior
resource possessed by this country and the United States, ina copious supply of an easily reduced iron-ore, at no great depth
below the earth's surface, and in close proximity to coal-deposits
available for working it. But perhaps a greater advantage than
all these is a maritime situation, especially when accompaniedwith good natural harbors; and, next to it, great navigable rivers.
These advantages consist indeed wholly in saving of cost of
carriage. But few, who have not considered the subject, have any
adequate notion how great an extent of economical advantage
this comprises.

As the second of the [general] causes of superior
productiveness, we may rank the greater energy of labor. By
this is not to be understood occasional, but regular and habitualenergy. The third element which determines the productivenessof the labor of a community is the skill and knowledge therein
existing, whether it be the skill and knowledge of the laborers
themselves or of those who direct their labor. That the
productiveness of the labor of a people is limited by theirknowledge of the arts of life is self-evident, and that any progressin those arts, any improved application of the objects or powers ofnature to industrial uses, enables the same quantity and intensityof labor to raise a greater produce. One principal department ofthese improvements consists in the invention and use of tools

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and machinery.114
The deficiency of practical good sense, which renders the
majority of the laboring-class such bad calculators—whichmakes, for instance, their domestic economy so improvident,lax, and irregular—must disqualify them for any but a low gradeof intelligent labor, and render their industry far less productive
than with equal energy it otherwise might be.
The moral
qualities of the laborers are fully as important to the efficiency
and worth of their labor as the intellectual. Independently of theeffects of intemperance upon their bodily and mental faculties,
and of flighty, unsteady habits upon the energy and continuityof their work (points so easily understood as not to require being
insisted upon), it is well worthy of meditation how much of theaggregate effect of their labor depends on their trustworthiness.
Among the secondary causes which determine theproductiveness of productive agents, the most important isSecurity. By security I mean the completeness of the protection
which society affords to its members.

§ 2. Combination and Division of Labor Increase
Productiveness.
In the enumeration of the circumstances which promote theproductiveness of labor, we have left one untouched, whichis co-operation, or the combined action of numbers. Of thisgreat aid to production, a single department, known by thename of Division of Labor, has engaged a large share of theattention of political economists; most deservedly, indeed, but
to the exclusion of other cases and exemplifications of the same
comprehensive law. In the lifting of heavy weights, for example,
in the felling of trees, in the sawing of timber, in the gathering
114

See Mr. Babbage's “Economy of Machinery and Manufactures.”

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of much hay or corn during a short period of fine weather, indraining a large extent of land during the short season whensuch a work may be properly conducted, in the pulling of ropes
on board ship, in the rowing of large boats, in some mining
operations, in the erection of a scaffolding for building, and in
the breaking of stones for the repair of a road, so that the wholeof the road shall always be kept in good order: in all these simple
operations, and thousands more, it is absolutely necessary thatmany persons should work together, at the same time, in thesame place, and in the same way. [But] in the present state ofsociety, the breeding and feeding of sheep is the occupation of
one set of people; dressing the wool to prepare it for the spinneris that of another; spinning it into thread, of a third; weaving thethread into broadcloth, of a fourth; dyeing the cloth, of a fifth;making it into a coat, of a sixth; without counting the multitude
of carriers, merchants, factors, and retailers put in requisition at
the successive stages of this progress.
Without some separation of employments, very few things
would be produced at all. Suppose a set of persons, or a numberof families, all employed precisely in the same manner; eachfamily settled on a piece of its own land, on which it grows by its
labor the food required for its own sustenance, and, as there areno persons to buy any surplus produce where all are producers,
each family has to produce within itself whatever other articles
it consumes. In such circumstances, if the soil was tolerably
fertile, and population did not tread too closely on the heels ofsubsistence, there would be, no doubt, some kind of domestic
manufactures; clothing for the family might, perhaps, be spunand woven within it, by the labor, probably, of the women (a firststep in the separation of employments); and a dwelling of some
sort would be erected and kept in repair by their united labor. But
beyond simple food (precarious, too, from the variations of theseasons), coarse clothing, and very imperfect lodging, it would
be scarcely possible that the family should produce anything

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more.
Suppose that a company of artificers, provided with tools,
and with food sufficient to maintain them for a year, arrivein the country and establish themselves in the midst of the
population. These new settlers occupy themselves in producing
articles of use or ornament adapted to the taste of a simple
people; and before their food is exhausted they have produced
these in considerable quantity, and are ready to exchange themfor more food. The economical position of the landed population
is now most materially altered. They have an opportunity given
them of acquiring comforts and luxuries. Things which, while
they depended solely upon their own labor, they never could
have obtained, because they could not have produced, are now
accessible to them if they can succeed in producing an additional
quantity of food and necessaries. They are thus incited to increase
the productiveness of their industry. The new settlers constitute
what is called a market for surplus agricultural produce; and theirarrival has enriched the settlement, not only by the manufactured
articles which they produce, but by the food which would nothave been produced unless they had been there to consume it.
There is no inconsistency between this doctrine and the
proposition we before maintained,115 that a market forcommodities does not constitute employment for labor. The laborof the agriculturists was already provided with employment; they
are not indebted to the demand of the new-comers for being able
to maintain themselves. What that demand does for them is tocall their labor into increased vigor and efficiency; to stimulatethem, by new motives, to new exertions.
From these considerations it appears that a country will
seldom have a productive agriculture unless it has a large town
population, or, the only available substitute, a large export tradein agricultural produce to supply a population elsewhere. I use
115

Book i, chap. iv, § 6.

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the phrase “town population” for shortness, to imply a population
non-agricultural.
It is found that the productive power of labor is increased bycarrying the separation further and further; by breaking down
more and more every process of industry into parts, so that eachlaborer shall confine himself to an ever smaller number of simple
operations. And thus, in time, arise those remarkable cases ofwhat is called the division of labor, with which all readers on
subjects of this nature are familiar. Adam Smith's illustrationfrom pin-making, though so well known, is so much to the pointthat I will venture once more to transcribe it: “The business ofmaking a pin is divided into about eighteen distinct operations.
One man draws out the wire, another straights it, a third cuts it,a fourth points it, a fifth grinds it at the top for receiving thehead; to make the head requires two or three distinct operations;to put it on, is a peculiar business; to whiten the pins is another;
it is even a trade by itself to put them into the paper.... I haveseen a small manufactory where ten men only were employed,
and where some of them, consequently, performed two or three
distinct operations. But though they were very poor, and therefore
but indifferently accommodated with the necessary machinery,
they could, when they exerted themselves, make among them
about twelve pounds of pins in a day. There are in a pound
upward of four thousand pins of a middling size. Those ten
persons, therefore, could make among them upward of fortyeight thousand pins in a day. Each person, therefore, making
a tenth part of forty-eight thousand pins, might be considered
as making four thousand eight hundred pins in a day. But ifthey had all wrought separately and independently, and without
any of them having been educated to this peculiar business, theycertainly could not each of them have made twenty, perhaps not
one pin in a day.”§ 3. Advantages of Division of Labor.

121§ 3. Advantages of Division of Labor.
The causes of the increased efficiency given to labor by thedivision of employments are some of them too familiar torequire specification; but it is worth while to attempt a complete
enumeration of them. By Adam Smith they are reduced to three:“First, the increase of dexterity in every particular workman;
secondly, the saving of the time which is commonly lost in
passing from one species of work to another; and, lastly, theinvention of a great number of machines which facilitate andabridge labor, and enable one man to do the work of many.”(1.) Of these, the increase of dexterity of the individual
workman is the most obvious and universal. It does not followthat because a thing has been done oftener it will be done better.
That depends on the intelligence of the workman, and on the
degree in which his mind works along with his hands. But it
will be done more easily. This is as true of mental operations asof bodily. Even a child, after much practice, sums up a column
of figures with a rapidity which resembles intuition. The act of
speaking any language, of reading fluently, of playing musicat sight, are cases as remarkable as they are familiar. Among
bodily acts, dancing, gymnastic exercises, ease and brilliancy of
execution on a musical instrument, are examples of the rapidityand facility acquired by repetition. In simpler manual operations
the effect is, of course, still sooner produced.
(2.) The second advantage enumerated by Adam Smith asarising from the division of labor is one on which I can not
help thinking that more stress is laid by him and others than it
deserves. To do full justice to his opinion, I will quote his own
exposition of it: “It is impossible to pass very quickly from one
kind of work to another, that is carried on in a different place,and with quite different tools. A country weaver, who cultivatesa small farm, must lose a good deal of time in passing fromhis loom to the field, and from the field to his loom. When

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the two trades can be carried on in the same workhouse, theloss of time is no doubt much less. It is even in this case,however, very considerable. A man commonly saunters a little
in turning his hand from one sort of employment to another.” I
am very far from implying that these considerations are of noweight; but I think there are counter-considerations which areoverlooked. If one kind of muscular or mental labor is different
from another, for that very reason it is to some extent a rest fromthat other; and if the greatest vigor is not at once obtained in thesecond occupation, neither could the first have been indefinitely
prolonged without some relaxation of energy. It is a matter ofcommon experience that a change of occupation will often afford
relief where complete repose would otherwise be necessary, andthat a person can work many more hours without fatigue at a
succession of occupations, than if confined during the wholetime to one.116 Different occupations employ different muscles,or different energies of the mind, some of which rest and arerefreshed while others work. Bodily labor itself rests frommental, and conversely. The variety itself has an invigorating
effect on what, for want of a more philosophical appellation, wemust term the animal spirits—so important to the efficiency of
all work not mechanical, and not unimportant even to that.
(3.) The third advantage attributed by Adam Smith to thedivision of labor is, to a certain extent, real. Inventions tending
to save labor in a particular operation are more likely to occur
to any one in proportion as his thoughts are intensely directed tothat occupation, and continually employed upon it.
This also can not be wholly true. “The founder of the cotton
manufacture was a barber. The inventor of the power-loom
was a clergyman. A farmer devised the application of thescrew-propeller. A fancy-goods shopkeeper is one of the116

Constant use of the same muscles, as by gold-beaters or writers, very often
produces paralysis.

§ 3. Advantages of Division of Labor.

123

most enterprising experimentalists in agriculture. The mostremarkable architectural design of our day has been furnishedby a gardener. The first person who supplied London withwater was a goldsmith. The first extensive maker of English
roads was a blind man, bred to no trade. The father ofEnglish inland navigation was a duke, and his engineer wasa millwright. The first great builder of iron bridges was astone-mason, and the greatest railway engineer commenced
his life as a colliery engineer.”117(4.) The greatest advantage (next to the dexterity of theworkmen) derived from the minute division of labor which takes
place in modern manufacturing industry, is one not mentioned
by Adam Smith, but to which attention has been drawn by Mr.
Babbage: the more economical distribution of labor by classing
the work-people according to their capacity. Different parts ofthe same series of operations require unequal degrees of skill andbodily strength; and those who have skill enough for the mostdifficult, or strength enough for the hardest parts of the labor, aremade much more useful by being employed solely in them; theoperations which everybody is capable of being left to those who
are fit for no others.
The division of labor, as all writers on the subject haveremarked, is limited by the extent of the market. If, by theseparation of pin-making into ten distinct employments, fortyeight thousand pins can be made in a day, this separation will
only be advisable if the number of accessible consumers is suchas to require, every day, something like forty-eight thousand pins.
If there is only a demand for twenty-four thousand, the divisionof labor can only be advantageously carried to the extent which
will every day produce that smaller number. The increase of thegeneral riches of the world, when accompanied with freedomof commercial intercourse, improvements in navigation, and117

Hearn's “Plutology,” p. 279.

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inland communication by roads, canals, or railways, tends togive increased productiveness to the labor of every nation inparticular, by enabling each locality to supply with its special
products so much larger a market that a great extension of thedivision of labor in their production is an ordinary consequence.
The division of labor is also limited, in many cases, by the natureof the employment. Agriculture, for example, is not susceptibleof so great a division of occupations as many branches ofmanufactures, because its different operations can not possibly
be simultaneous.

[108](5.) “In the examples given above the advantage obtained wasderived from the mere fact of the separation of employments,
altogether independently of the mode in which the separated
employments were distributed among the persons carrying
them on, as well as of the places in which they were conducted.
But a further gain arises when the employments are of a kindwhich, in order to their effective performance, call for special
capacities in the workman, or special natural resources inthe scene of operation. There would be a manifest wasteof special power in compelling to a mere mechanical or
routine pursuit a man who is fitted to excel in a professional
career; and similarly, if a branch of industry were establishedon some site which offered greater facilities to an industryof another sort, a waste, analogous in character, would beincurred. In a word, while a great number of the occupations
in which men engage are such as, with proper preparation
for them, might equally well be carried on by any of thoseengaged in them, or in any of the localities in which they are
respectively established, there are others which demand fortheir effective performance special personal qualifications
and special local conditions; and the general effectivenessof productive industry will, other things being equal, be
proportioned to the completeness with which the adaptationis accomplished between occupation on the one hand and125
individuals and localities on the other.”118§ 4. Production on a Large and Production on a
Small Scale.
Whenever it is essential to the greatest efficiency of labor thatmany laborers should combine, the scale of the enterprise mustbe such as to bring many laborers together, and the capital mustbe large enough to maintain them. Still more needful is thiswhen the nature of the employment allows, and the extent of
the possible market encourages, a considerable division of labor.
The larger the enterprise the further the division of labor may be
carried. This is one of the principal causes of large manufactories.
Every increase of business would enable the whole to be carriedon with a proportionally smaller amount of labor.
As a general rule, the expenses of a business do not increase by
any means proportionally to the quantity of business. Let us takeas an example a set of operations which we are accustomed tosee carried on by one great establishment, that of the Post-Office.
Suppose that the business, let us say only of the letter-post,
instead of being centralized in a single concern, were divided
among five or six competing companies. Each of these would be
obliged to maintain almost as large an establishment as is now
sufficient for the whole. Since each must arrange for receiving
and delivering letters in all parts of the town, each must send
letter-carriers into every street, and almost every alley, and this,
too, as many times in the day as is now done by the Post-Office,if the service is to be as well performed. Each must have an office
for receiving letters in every neighborhood, with all subsidiaryarrangements for collecting the letters from the different offices
and redistributing them. To this must be added the much greater
118

Cairnes, “Leading Principles,” pp. 299, 300.

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number of superior officers who would be required to checkand control the subordinates, implying not only a greater cost insalaries for such responsible officers, but the necessity, perhaps,of being satisfied in many instances with an inferior standard of
qualification, and so failing in the object.
Whether or not the advantages obtained by operating on alarge scale preponderate in any particular case over the morewatchful attention and greater regard to minor gains and losses
usually found in small establishments, can be ascertained, ina state of free competition, by an unfailing test. Wherever
there are large and small establishments in the same business,that one of the two which in existing circumstances carries on
the production at greatest advantage will be able to undersell
the other. The power of permanently underselling can only,
generally speaking, be derived from increased effectiveness oflabor; and this, when obtained by a more extended division of
employment, or by a classification tending to a better economy
of skill, always implies a greater produce from the same labor,
and not merely the same produce from less labor; it increases
not the surplus only, but the gross produce of industry. If an
increased quantity of the particular article is not required, andpart of the laborers in consequence lose their employment, thecapital which maintained and employed them is also set at liberty,
and the general produce of the country is increased by some otherapplication of their labor.
A considerable part of the saving of labor effected bysubstituting the large system of production for the small, isthe saving in the labor of the capitalists themselves. If
a hundred producers with small capitals carry on separately
the same business, the superintendence of each concern willprobably require the whole attention of the person conducting
it, sufficiently, at least, to hinder his time or thoughts frombeing disposable for anything else; while a single manufacturer
possessing a capital equal to the sum of theirs, with ten or a dozen

127clerks, could conduct the whole of their amount of business, andhave leisure, too, for other occupations.
Production on a large scale is greatly promoted by the practiceof forming a large capital by the combination of many small
contributions; or, in other words, by the formation of stockcompanies. The advantages of the principle are important,[since] (1) many undertakings require an amount of capitalbeyond the means of the richest individual or private partnership.
[Of course] the Government can alone be looked to for any of
those works for which a great combination of means is requisite,
because it can obtain those means by compulsory taxation, andis already accustomed to the conduct of large operations. For
reasons, however, which are tolerably well known, government
agency for the conduct of industrial operations is generally oneof the least eligible of resources when any other is available. Of[the advantages referred to above] one of the most important is(2) that which relates to the intellectual and active qualificationsof the directing head. The stimulus of individual interest issome security for exertion, but exertion is of little avail if
the intelligence exerted is of an inferior order, which it mustnecessarily be in the majority of concerns carried on by the
persons chiefly interested in them. Where the concern is large,
and can afford a remuneration sufficient to attract a class ofcandidates superior to the common average, it is possible to selectfor the general management, and for all the skilled employmentsof a subordinate kind, persons of a degree of acquirement andcultivated intelligence which more than compensates for theirinferior interest in the result. It must be further remarked that
it is not a necessary consequence of joint-stock managementthat the persons employed, whether in superior or in subordinate
offices, should be paid wholly by fixed salaries. In the case of the
managers of joint-stock companies, and of the superintending
and controlling officers in many private establishments, it is
a common enough practice to connect their pecuniary interest

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with the interest of their employers, by giving them part of theirremuneration in the form of a percentage on the profits.
The possibility of substituting the large system of production
for the small depends, of course, in the first place, on the extent
of the market. The large system can only be advantageous whena large amount of business is to be done: it implies, therefore,
either a populous and flourishing community, or a great opening
for exportation.
In the countries in which there are the largest markets, thewidest diffusion of commercial confidence and enterprise, thegreatest annual increase of capital, and the greatest numberof large capitals owned by individuals, there is a tendency to
substitute more and more, in one branch of industry after another,large establishments for small ones. These are almost always
able to undersell the smaller tradesmen, partly, it is understood,by means of division of labor, and the economy occasioned bylimiting the employment of skilled agency to cases where skill
is required; and partly, no doubt, by the saving of labor arisingfrom the great scale of the transactions; as it costs no more time,and not much more exertion of mind, to make a large purchase,for example, than a small one, and very much less than to make anumber of small ones. With a view merely to production, and to
the greatest efficiency of labor, this change is wholly beneficial.
A single large company very often, instead of being amonopoly, is generally better than two large companies;
for there is little likelihood of competition and lower prices
when the competitors are so few as to be able to agree notto compete. As Mr. Mill says in regard to parallel railroads:“No one can desire to see the enormous waste of capitaland land (not to speak of increased nuisance) involved in theconstruction of a second railway to connect the same places
already united by an existing one; while the two would not do
the work better than it could be done by one, and after a shorttime would probably be amalgamated.” The actual tendency

129
of charges to diminish on the railways, before the matter ofparallel railways was suggested is clearly seen by reference
to Chart V (p. 137).
[112]

Chapter VII. Of The Law Of The Increase
Of Labor.

§ 1. The Law of the Increase of Production Depends
on those of Three Elements—Labor. Capital, andLand.
Production is not a fixed but an increasing thing. When not kept
back by bad institutions, or a low state of the arts of life, theproduce of industry has usually tended to increase; stimulated
not only by the desire of the producers to augment their meansof consumption, but by the increasing number of the consumers.
We have seen that the essential requisites of production
are three—labor, capital, and natural agents; the term capital
including all external and physical requisites which are productsof labor, the term natural agents all those which are not. The
increase of production, therefore, depends on the properties ofthese elements. It is a result of the increase either of the elements
themselves, or of their productiveness. We proceed to consider
the three elements successively, with reference to this effect; or,in other words, the law of the increase of production, viewed in
respect of its dependence, first on Labor, secondly on Capital,and lastly on Land.

§ 2. The Law of Population.
The increase of labor is the increase of mankind; of population.
The power of multiplication inherent in all organic life may be
regarded as infinite. There are many species of vegetables of§ 2. The Law of Population.

131

which a single plant will produce in one year the germs of athousand; if only two come to maturity, in fourteen years thetwo will have multiplied to sixteen thousand and more. It isbut a moderate case of fecundity in animals to be capable ofquadrupling their numbers in a single year; if they only do
as much in half a century, ten thousand will have swelledwithin two centuries to upward to two millions and a half. The
capacity of increase is necessarily in a geometrical progression:
the numerical ratio alone is different.
To this property of organized beings, the human species forms
no exception. Its power of increase is indefinite, and the actual
multiplication would be extraordinarily rapid, if the power were
exercised to the utmost. It never is exercised to the utmost,and yet, in the most favorable circumstances known to exist,
which are those of a fertile region colonized from an industrious
and civilized community, population has continued, for several
generations, independently of fresh immigration, to double itself
in not much more than twenty years.
Years.
25
25
25
25
25

Population.
11 mills
22 mills
44 mills
88 mills
176 mills

Food.
x
2x
3x
4x
5x

By this table it will be seen that if population can double itself
in twenty-five years, and if food can only be increased by asmuch as x (the subsistence of eleven millions) by additional
application of another equal quantity of labor on the sameland in each period, then at the end of one hundred years
there would be the disproportion of one hundred and seventysix millions of people, with subsistence for only fifty-fivemillions. Of course, this is prevented either by checking

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Principles Of Political Economy
population to the amount of the subsistence; by sending off
the surplus population; or by bringing in food from new lands.

In the United States to 1860 population has doubled itself
about every twenty years, while in France there is practicallyno increase of population. It is stated that the white populationof the United States between 1790 and 1840 increased 400.4
per cent, deducting immigration. The extraordinary advanceof population with us, where subsistence is easily attainable,
is to be seen in the chart on the next page (No. III), whichshows the striking rapidity of increase in the United States
when compared with the older countries of Europe. The
steady demand for land can be seen by the gradual westward
movement of the center of population, as seen in chart No.
IV (p. 116), and by the rapid settlement of the distant partsof our country, as shown by the two charts (frontispieces),
which represent to the eye by heavier colors the areas of themore densely settled districts in 1830 and in 1880.

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Chart III: Population of European Countries, XIXth Century.
[115]§ 3. By what Checks the Increase of Population is
Practically Limited.

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The obstacle to a just understanding of the subject arises from too
confused a notion of the causes which, at most times and places,
keep the actual increase of mankind so far behind the capacity.
The conduct of human creatures is more or less influenced
by foresight of consequences, and by some impulses superior tomere animal instincts; and they do not, therefore, propagate likeswine, but are capable, though in very unequal degrees, of being
withheld by prudence, or by the social affections, from giving
existence to beings born only to misery and premature death.

Malthus found an explanation of the anomaly that in the
Swiss villages, with the longest average duration of life, there
were the fewest births, by noting that no one married until a
cow-herd's cottage became vacant, and precisely because thetenants lived so long were the new-comers long kept out of aplace.

In proportion as mankind rise above the condition of the beast,
population is restrained by the fear of want, rather than by wantitself. Even where there is no question of starvation, many are
similarly acted upon by the apprehension of losing what havecome to be regarded as the decencies of their situation in life.
Among the middle classes, in many individual instances, there
is an additional restraint exercised from the desire of doing morethan maintaining their circumstances—of improving them; but
such a desire is rarely found, or rarely has that effect, in thelaboring-classes. If they can bring up a family as they werethemselves brought up, even the prudent among them are usuallysatisfied. Too often they do not think even of that, but rely on
fortune, or on the resources to be found in legal or voluntarycharity.

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Chart IV: Westward Movement of Center of Population.
This, in effect, is the well-known Malthusian doctrine. The
thorough reader will also consult the original “Essay” ofMalthus. Mr. Bowen119 and other writers oppose it, saying
it has “no relation to the times in which we live, or to any
which are near at hand.” He thinks the productive power ofthe whole world prevents the necessity of considering thepressure of population upon subsistence as an actuality now
or in the future. This, however, does not deny the existence ofMalthus's principles, but opposes them only on the methods oftheir action. Mr. Rickards120 holds that man's food—as, e.g.,
wheat—has the power to increase geometrically faster thanman; but he omits to consider that for the growth of this foodland is demanded; that land is not capable of such geometricalincrease; and that without it the food can not be grown. Of
course, any extension of the land area, as happened when
England abolished the corn laws and drew her food fromour prairies, removes the previous pressure of population
on subsistence. No believer in the Malthusian doctrine isso absurd as to hold that the growth of population actually
exceeds subsistence, but that there is a “constant tendency inall animated life to increase beyond the nourishment prepared
for it,” no one can possibly doubt. This is not inconsistent
with the fact that subsistence has at any time increased fasterthan population. It is as if a block of wood on the floor
119“American Political Economy,” p. 134. See also an article, “Malthusianism,
Darwinism, and Pessimism,” “North American Review,” November, 1879.
120
See Cairnes, “Logical Method,” pp. 170-177.

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were acted on by two opposing forces, one tending to moveit forward, one backward: if it moves backward, that does notprove the absence of any force working to move it forward,
but only that the other force is the stronger of the two, and thatthe final motion is the resultant of the two forces. It is only
near-sighted generalization to say that since the block moves
forward, there is therefore no opposing force to its advance.121
Mr. Doubleday maintains that, as people become better fed,
they become unprolific. Mr. Mill's answer, referring to thelarge families of the English peerage, is unfortunate.122 In
Sweden the increase of the peasantry is six times that of the
middle classes, and fourteen times that of the nobility. The
diminishing fertility of New England families gives a truer
explanation, when it is seen that with the progress in material
wealth later marriages are the rule. When New-Englanders
emigrate to the Western States, where labor is in demand andwhere it is less burdensome to have large families, there is noquestion as to their fertility.123[117](1.) In a very backward state of society, like that of Europe inthe middle ages, and many parts of Asia at present, population
is kept down by actual starvation. The starvation does not takeplace in ordinary years, but in seasons of scarcity, which in thosestates of society are much more frequent and more extreme than
Europe is now accustomed to. (2.) In a more improved state,few, even among the poorest of the people, are limited to actual
necessaries, and to a bare sufficiency of those: and the increaseis kept within bounds, not by excess of deaths, but by limitation
121

See also Walker's “Wages Question,” chap. vi, and Roscher, “Political
Economy,” book v, chaps. i, ii, iii.
122
See Galton's “Hereditary Genius,” p. 131-135.
123
See also Edward Jarvis, “Atlantic Monthly,” 1872, and F. A. Walker,“Social Science Journal,” vol. v, 1873, p. 71. For other literature, see “Sketchof the History of Political Economy,” p. 16.

137
of births.124 The limitation is brought about in various ways. In
some countries, it is the result of prudent or conscientious selfrestraint. There is a condition to which the laboring-people are
habituated; they perceive that, by having too numerous families,
they must sink below that condition, or fail to transmit it to theirchildren; and this they do not choose to submit to.
There are other cases in which the prudence and forethought,
which perhaps might not be exercised by the people themselves,are exercised by the state for their benefit; marriage not being
permitted until the contracting parties can show that they havethe prospect of a comfortable support. There are places, again, in
which the restraining cause seems to be not so much individual
prudence, as some general and perhaps even accidental habit of
the country. In the rural districts of England, during the lastcentury, the growth of population was very effectually repressedby the difficulty of obtaining a cottage to live in. It was thecustom for unmarried laborers to lodge and board with theiremployers; it was the custom for married laborers to have a
cottage: and the rule of the English poor-laws, by which a parish
was charged with the support of its unemployed poor, renderedland-owners averse to promote marriage. About the end of the
century, the great demand for men in war and manufactures madeit be thought a patriotic thing to encourage population: and about
the same time the growing inclination of farmers to live like richpeople, favored as it was by a long period of high prices, madethem desirous of keeping inferiors at a greater distance, and,pecuniary motives arising from abuses of the poor-laws being
superadded, they gradually drove their laborers into cottages,
which the landowners now no longer refused permission tobuild.
It is but rarely that improvements in the condition of thelaboring-classes do anything more than give a temporary margin,
124

This is the “preventive check” of Mr. Malthus, while the limitation throughwar, starvation, etc., is the “positive check.”

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speedily filled up by an increase of their numbers. Unless, either
by their general improvement in intellectual and moral culture,
or at least by raising their habitual standard of comfortableliving, they can be taught to make a better use of favorable
circumstances, nothing permanent can be done for them; themost promising schemes end only in having a more numerous
but not a happier people. There is no doubt that [the standard] isgradually, though slowly, rising in the more advanced countriesof Western Europe.125 Subsistence and employment in Englandhave never increased more rapidly than in the last forty years, butevery census since 1821 showed a smaller proportional increaseof population than that of the period preceding; and the produceof French agriculture and industry is increasing in a progressive
ratio, while the population exhibits, in every quinquennial census,
a smaller proportion of births to the population.
This brings forward the near connection between land-tenures
and population. France is pre-eminently a country of small
holdings, and it is undoubtedly true that the system haschecked the thoughtless increase of numbers. On his few
hectares, the French peasant sees in the size of his farm andthe amount of its produce the limit of subsistence for himself
and his family; as in no other way does he see beforehand
the results of any lack of food from his lack of prudence.126
From 1790 to 1815 the average yearly increase of population
was 120,000; from 1815 to 1846, the golden age of French
agriculture, 200,000; from 1846 to 1856, when agriculture
was not prosperous, 60,000; from 1856 to 1880 the increase
has been not more than 36,000 yearly. In France the question
shapes itself to the peasant proprietor, How many can be
subsisted by the amount of produce, not on an unlimited area
125This is fully confirmed by the inaugural address of Mr. Giffen as Presidentof the London Statistical Society, November 20, 1883, infra, book iv, chap. v,§ 1. (See the London “Statistical Journal,” 1883.)
126
See Lavergne's “Agriculture et Population,” pp. 305-316.

139
of land in other parts of the world, but on this particularproperty of a small size? While in England there are ten births
to six deaths, in France there are about ten births to every
nine deaths.127 In no country has the doctrine of Malthus been
more attacked than in France, and yet in no other country
has there been a more marked obedience to its principles in
actual practice. Since the French are practically not at allan emigrating people, population has strictly adapted itself
to subsistence. For the relative increase of population in
France and the United States, see also the movement of lines
indicating the increase of population in chart No. III (p. 114).
[120]

127

For tables of relative births and deaths, see “Statesman's Year-Book,” p.
253.

Chapter VIII. Of The Law Of The Increase
Of Capital.

§ 1. Means for Saving in the Surplus above
Necessaries.

[121]

The requisites of production being labor, capital, and land, it has
been seen from the preceding chapter that the impediments tothe increase of production do not arise from the first of theseelements. But production has other requisites, and, of these, theone which we shall next consider is Capital. There can not be
more people in any country, or in the world, than can be supported
from the produce of past labor until that of present labor comesin [although it is not to be supposed that capital consists whollyof food]. We have next, therefore, to inquire into the conditionsof the increase of capital: the causes by which the rapidity of
its increase is determined, and the necessary limitations of that
increase.
Since all capital is the product of saving, that is, of abstinencefrom present consumption for the sake of a future good, theincrease of capital must depend upon two things—the amount of
the fund from which saving can be made, and the strength of thedispositions which prompt to it.
(1.) The fund from which saving can be made is the surplusof the produce of labor, after supplying the necessaries of life
to all concerned in the production (including those employed inreplacing the materials, and keeping the fixed capital in repair).
More than this surplus can not be saved under any circumstances.
As much as this, though it never is saved, always might be. This
surplus is the fund from which the enjoyments, as distinguishedfrom the necessaries of the producers, are provided; it is the fund§ 2. Motive for Saving in the Surplus above Necessaries.

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from which all are subsisted who are not themselves engaged
in production, and from which all additions are made to capital.
The capital of the employer forms the revenue of the laborers,
and, if this exceeds the necessaries of life, it gives them a surplus
which they may either expend in enjoyments or save.
It is evident that the whole unproductive consumption of thelaborer can be saved. When it is considered how enormous
a sum is spent by the working-classes in drink alone (andalso in the great reserves of the Trades-Unions collected for
purposes of strikes), it is indisputable that the laborers have themargin from which savings can be made, and by which they
themselves may become capitalists. The great accumulationsin the savings-banks by small depositors in the United States
also show somewhat how much is actually saved. In 18821883 there were 2,876,438 persons who had deposited in
the savings-banks of the United States $1,024,856,787, withan average to each depositor of $356.29. The unproductive
consumption, however, of all classes—not merely that of
the working-men—is the possible fund which may be saved.
That being the amount which can be saved, how much will besaved depends on the strength of the desire to save.

The greater the produce of labor after supporting the laborers,
the more there is which can be saved. The same thing also partly
contributes to determine how much will be saved. A part of the
motive to saving consists in the prospect of deriving an income
from savings; in the fact that capital, employed in production, iscapable of not only reproducing itself but yielding an increase.
The greater the profit that can be made from capital, the stronger
is the motive to its accumulation.
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Principles Of Political Economy§ 2. Motive for Saving in the Surplus above
Necessaries.
But the disposition to save does not wholly depend on the external
inducement to it; on the amount of profit to be made fromsavings. With the same pecuniary inducement, the inclination isvery different, in different persons, and in different communities.
(2.) All accumulation involves the sacrifice of a present, forthe sake of a future good.
This is the fundamental motive underlying the effective desireof accumulation, and is far more important than any other.
It is, in short, the test of civilization. In order to induce thelaboring-classes to improve their condition and save capital,
it is absolutely necessary to excite in them (by education or
religion) a belief in a future gain greater than the present
sacrifice. It is, to be sure, the whole problem of creating
character, and belongs to sociology and ethics rather than topolitical economy.

In weighing the future against the present, the uncertaintyof all things future is a leading element; and that uncertainty
is of very different degrees. “All circumstances,” therefore,“increasing the probability of the provision we make for futurity
being enjoyed by ourselves or others, tend” justly and reasonably“to give strength to the effective desire of accumulation. Thusa healthy climate or occupation, by increasing the probability oflife, has a tendency to add to this desire. When engaged in safe
occupations and living in healthy countries, men are much more
apt to be frugal, than in unhealthy or hazardous occupations andin climates pernicious to human life. Sailors and soldiers are
prodigals. In the West Indies, New Orleans, the East Indies,
the expenditure of the inhabitants is profuse. The same people,
coming to reside in the healthy parts of Europe, and not getting
into the vortex of extravagant fashion, live economically. War§ 2. Motive for Saving in the Surplus above Necessaries.

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and pestilence have always waste and luxury among the otherevils that follow in their train. For similar reasons, whatever
gives security to the affairs of the community is favorable to thestrength of this principle. In this respect the general prevalenceof law and order and the prospect of the continuance of peace
and tranquillity have considerable influence.”128
It is asserted that the prevalence of homicide in certain partsof the United States has had a vital influence in retarding
the material growth of those sections. The Southern States
have received but a very small fraction (from ten to thirteen
per cent) of foreign immigration. “A country where law andorder prevail to perfection may find its material prosperity
checked by a deadly and fatal climate; or, on the other
hand, a people may destroy all the advantages accruing
from matchless natural resources and climate by persistentdisregard of life and property. A rather startling confirmationof this economic truth is afforded by the fact that homicide
has been as destructive of life in the South as yellow fever.
Although there have been forty thousand deaths from yellow
fever since the war, the deaths from homicide, for the same
period, have been even greater.”129 The influence of the oldslave régime, and its still existing influences, in checking
foreign immigration into the South can be seen by the colored
chart, No. VIII, showing the relative density of foreign-borninhabitants in the several parts of the United States. The
deeper color shows the greater foreign-born population.

The more perfect the security, the greater will be the effective
strength of the desire of accumulation. Where property is lesssafe, or the vicissitudes ruinous to fortunes are more frequentand severe, fewer persons will save at all, and, of those who do,
128
This and the subsequent quotations are taken by Mr. Mill from Rae's “NewPrinciples of Political Economy.”
129“International Review,” article “Colonization,” 1881, p. 88. See H. V.
Redfield, “Homicide North and South,” 1880.

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many will require the inducement of a higher rate of profit on
capital to make them prefer a doubtful future to the temptationof present enjoyment.
In the circumstances, for example, of a hunting tribe, “manmay be said to be necessarily improvident, and regardless of
futurity, because, in this state, the future presents nothing which
can be with certainty either foreseen or governed.... Besides awant of the motives exciting to provide for the needs of futurity
through means of the abilities of the present, there is a wantof the habits of perception and action, leading to a constantconnection in the mind of those distant points, and of the seriesof events serving to unite them. Even, therefore, if motives be
awakened capable of producing the exertion necessary to effectthis connection, there remains the task of training the mind to
think and act so as to establish it.”§ 3. Examples of Deficiency in the Strength of thisDesire.
For instance: “Upon the banks of the St. Lawrence there areseveral little Indian villages. The cleared land is rarely, I may
almost say never, cultivated, nor are any inroads made in theforest for such a purpose. The soil is, nevertheless, fertile, and,were it not, manure lies in heaps by their houses. Were every
family to inclose half an acre of ground, till it, and plant it inpotatoes and maize, it would yield a sufficiency to support them
one half the year. They suffer, too, every now and then, extreme
want, insomuch that, joined to occasional intemperance, it is
rapidly reducing their numbers. This, to us, so strange apathy
proceeds not, in any great degree, from repugnance to labor; on
the contrary, they apply very diligently to it when its reward isimmediate. It is evidently not the necessary labor that is the

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obstacle to more extended culture, but the distant return fromthat labor. I am assured, indeed, that among some of the more
remote tribes, the labor thus expended much exceeds that givenby the whites. On the Indian, succeeding years are too distantto make sufficient impression; though, to obtain what labor may
bring about in the course of a few months, he toils even moreassiduously than the white man.”This view of things is confirmed by the experience of theJesuits, in their interesting efforts to civilize the Indians ofParaguay. The real difficulty was the improvidence of thepeople; their inability to think for the future; and the necessity
accordingly of the most unremitting and minute superintendence
on the part of their instructors. “Thus at first, if these gave
up to them the care of the oxen with which they plowed, theirindolent thoughtlessness would probably leave them at evening
still yoked to the implement. Worse than this, instances occurred
where they cut them up for supper, thinking, when reprehended,that they sufficiently excused themselves by saying they were
hungry.”As an example intermediate, in the strength of the effective
desire of accumulation, between the state of things thus depicted
and that of modern Europe, the case of the Chinese deservesattention. “Durability is one of the chief qualities, marking a highdegree of the effective desire of accumulation. The testimonyof travelers ascribes to the instruments formed by the Chinese
a very inferior durability to similar instruments constructed by
Europeans. The houses, we are told, unless of the higher ranks,
are in general of unburnt bricks, of clay, or of hurdles plasteredwith earth; the roofs, of reeds fastened to laths. A greater degreeof strength in the effective desire of accumulation would cause
them to be constructed of materials requiring a greater present
expenditure, but being far more durable. From the same cause,much land, that in other countries would be cultivated, lies waste.
All travelers take notice of large tracts of lands, chiefly swamps,

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which continue in a state of nature. To bring a swamp into tillage
is generally a process to complete which requires several years. It
must be previously drained, the surface long exposed to the sun,and many operations performed, before it can be made capable ofbearing a crop. Though yielding, probably, a very considerable
return for the labor bestowed on it, that return is not made until
a long time has elapsed. The cultivation of such land implies
a greater strength of the effective desire of accumulation thanexists in the empire. The amount of self-denial would seem to besmall. It is their great deficiency in forethought and frugality inthis respect which is the cause of the scarcities and famines thatfrequently occur.”[126]

That it is defect of providence, not defect of industry, that
limits production among the Chinese, is still more obvious thanin the case of the semi-agriculturized Indians. “Where the returns
are quick, where the instruments formed require but little time
to bring the events for which they were formed to an issue,” itis well known that “the great progress which has been madein the knowledge of the arts suited to the nature of the country
and the wants of its inhabitants” makes industry energetic andeffective. “What marks the readiness with which labor is forced
to form the most difficult materials into instruments, where these
instruments soon bring to an issue the events for which they
are formed, is the frequent occurrence, on many of their lakes
and rivers, of structures resembling the floating gardens of the
Peruvians, rafts covered with vegetable soil and cultivated. Laborin this way draws from the materials on which it acts very speedy
returns. Nothing can exceed the luxuriance of vegetation whenthe quickening powers of a genial sun are ministered to by a richsoil and abundant moisture. It is otherwise, as we have seen,
in cases where the return, though copious, is distant. European
travelers are surprised at meeting these little floating farms by
the side of swamps which only require draining to render themtillable.”§ 4. Examples of Excess of this Desire.

147

When a country has carried production as far as in the existingstate of knowledge it can be carried with an amount of returncorresponding to the average strength of the effective desire ofaccumulation in that country, it has reached what is called thestationary state; the state in which no further addition will bemade to capital, unless there takes place either some improvementin the arts of production, or an increase in the strength of thedesire to accumulate. In the stationary state, though capitaldoes not on the whole increase, some persons grow richer andothers poorer. Those whose degree of providence is below theusual standard become impoverished, their capital perishes, andmakes room for the savings of those whose effective desire ofaccumulation exceeds the average. These become the naturalpurchasers of the lands, manufactories, and other instruments ofproduction owned by their less provident countrymen.
In China, if that country has really attained, as it is supposed tohave done, the stationary state, accumulation has stopped when
the returns to capital are still as high as is indicated by a rateof interest legally twelve per cent, and practically varying (itis said) between eighteen and thirty-six. It is to be presumed,
therefore, that no greater amount of capital than the country
already possesses can find employment at this high rate of profit,
and that any lower rate does not hold out to a Chinese sufficient
temptation to induce him to abstain from present enjoyment.
What a contrast with Holland, where, during the most flourishing
period of its history, the government was able habitually toborrow at two per cent, and private individuals, on good security,
at three!

§ 4. Examples of Excess of this Desire.
In [the United States and] the more prosperous countries ofEurope, there are to be found abundance of prodigals: still, in

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a very numerous portion of the community, the professional,
manufacturing, and trading classes, being those who, generally
speaking, unite more of the means with more of the motives
for saving than any other class, the spirit of accumulation is sostrong that the signs of rapidly increasing wealth meet every
eye: and the great amount of capital seeking investment excites
astonishment, whenever peculiar circumstances turning much of
it into some one channel, such as railway construction or foreign
speculative adventure, bring the largeness of the total amountinto evidence.
There are many circumstances which, in England, givea peculiar force to the accumulating propensity. The longexemption of the country from the ravages of war and the far
earlier period than elsewhere at which property was secure frommilitary violence or arbitrary spoliation have produced a longstanding and hereditary confidence in the safety of funds whentrusted out of the owner's hands, which in most other countries
is of much more recent origin, and less firmly established.

[128]

The growth of deposit-banking in Great Britain, therefore,
advances with enormous strides, while in Continental countries it makes very little headway. The disturbed conditionof the country in France, owing to wars, leads the thrifty tohoard instead of depositing their savings. But in the UnitedStates the same growth is seen as among the English. The
net deposits of the national banks of the United States in1871 were $636,000,000, but in 1883 they had increased
more than 83 per cent to $1,168,000,000. Deposit accounts
are the rule even with small tradesmen; and the savingsbanks of Massachusetts alone show deposits in 1882-1883 of$241,311,362, and those of New York of $412,147,213. The
United States also escapes from the heavy taxation which inEurope is imposed to maintain an extravagant army and navy
chest. The effect of institutions, moreover, in stimulating the
growth of material prosperity is far more true of the United§ 4. Examples of Excess of this Desire.

149

States than of England, for the barriers raised against the
movement from lower to higher social classes in the lattercountry are non-existent here, and consequently there is morestimulus toward acquiring the means of bettering a man'ssocial condition.

The geographical causes which have made industry rather than
war the natural source of power and importance to Great Britain[and the United States] have turned an unusual proportion of
the most enterprising and energetic characters into the directionof manufactures and commerce; into supplying their wants andgratifying their ambition by producing and saving, rather thanby appropriating what has been produced and saved. Muchalso depended on the better political institutions of this country,
which, by the scope they have allowed to individual freedomof action, have encouraged personal activity and self-reliance,
while, by the liberty they confer of association and combination,
they facilitate industrial enterprise on a large scale. The same
institutions, in another of their aspects, give a most direct andpotent stimulus to the desire of acquiring wealth. The earlier
decline of feudalism [in England] having removed or much
weakened invidious distinctions between the originally tradingclasses and those who had been accustomed to despise them, anda polity having grown up which made wealth the real source ofpolitical influence, its acquisition was invested with a factitious
value independent of its intrinsic utility. And, inasmuch as tobe rich without industry has always hitherto constituted a step inthe social scale above those who are rich by means of industry,
it becomes the object of ambition to save not merely as much as
will afford a large income while in business, but enough to retire
from business and live in affluence on realized gains.
In [the United States,] England, and Holland, then, for a longtime past, and now in most other countries in Europe, the second
requisite of increased production, increase of capital, shows no

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tendency to become deficient. So far as that element is concerned,
production is susceptible of an increase without any assignablebounds. The limitation to production, not consisting in any
necessary limit to the increase of the other two elements, laborand capital, must turn upon the properties of the only element
which is inherently, and in itself, limited in quantity. It must
depend on the properties of land.
[130]Chapter IX. Of The Law Of The Increase Of
Production From Land.

§ 1. The Law of Production from the Soil, a Law of
Diminishing Return in Proportion to the Increased
Application of Labor and Capital.
Land differs from the other elements of production, labor, andcapital, in not being susceptible of indefinite increase. Its extent
is limited, and the extent of the more productive kinds of it more
limited still. It is also evident that the quantity of produce capableof being raised on any given piece of land is not indefinite. This
limited quantity of land and limited productiveness of it are thereal limits to the increase of production.
The limitation to production from the properties of the soil is
not like the obstacle opposed by a wall, which stands immovable
in one particular spot, and offers no hindrance to motion short ofstopping it entirely. We may rather compare it to a highly elastic
and extensible band, which is hardly ever so violently stretchedthat it could not possibly be stretched any more, yet the pressureof which is felt long before the final limit is reached, and felt
more severely the nearer that limit is approached.
After a certain, and not very advanced, stage in the progress ofagriculture—as soon, in fact, as mankind have applied themselvesto cultivation with any energy, and have brought to it any tolerable
tools—from that time it is the law of production from the land,that in any given state of agricultural skill and knowledge, byincreasing the labor, the produce is not increased in an equal
degree; doubling the labor does not double the produce; or, toexpress the same thing in other words, every increase of produce

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is obtained by a more than proportional increase in the applicationof labor to the land. This general law of agricultural industry is
the most important proposition in political economy. Were thelaw different, nearly all the phenomena of the production anddistribution of wealth would be other than they are.
It is not generally considered that in the United States, wherein many sparsely settled parts of the country new land isconstantly being brought into cultivation, an additional population under existing conditions of agricultural skill can be
maintained with constantly increasing returns up to a certain
point before the law of diminishing returns begins to operate.
Where more laborers are necessary, and more capital wanted,
to co-operate in a new country before all the land can give its
maximum product, in such a stage of cultivation it can not be
said that the law of diminishing returns has yet practically set
in.

When, for the purpose of raising an increase of produce,
recourse is had to inferior land, it is evident that, so far, theproduce does not increase in the same proportion with the labor.
The very meaning of inferior land is land which with equal labor
returns a smaller amount of produce. Land may be inferior either
in fertility or in situation. The one requires a greater proportionalamount of labor for growing the produce, the other for carrying it
to market. If the land A yields a thousand quarters of wheat to agiven outlay in wages, manure, etc., and, in order to raise anotherthousand, recourse must be had to the land B, which is either
less fertile or more distant from the market, the two thousand
quarters will cost more than twice as much labor as the original
thousand, and the produce of agriculture will be increased in aless ratio than the labor employed in procuring it.
Instead of cultivating the land B, it would be possible, by
higher cultivation, to make the land A produce more. It might beplowed or harrowed twice instead of once, or three times instead

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of twice; it might be dug instead of being plowed; after plowing,
it might be gone over with a hoe instead of a harrow, and thesoil more completely pulverized; it might be oftener or morethoroughly weeded; the implements used might be of higher
finish, or more elaborate construction; a greater quantity or more
expensive kinds of manure might be applied, or, when applied,they might be more carefully mixed and incorporated with thesoil.
The example of market-gardens in the vicinity of great cities
and towns shows how the intensive culture permits an increaseof labor and capital with larger returns. These lands, by
their situation, are superior lands for this particular purpose,
although they might be inferior lands as regards absolute
productiveness when compared with the rich wheat-lands ofDakota. New England and New Jersey farms, generally
speaking, no longer attempt the culture of grains, but (whendriven out of that culture by the great railway lines whichhave opened up the West) they have arranged themselves in ascale of adaptability for stock, grass, fruit, dairy, or vegetable
farming; and have thereby given greater profits to their owners
than the same land did under the old régime. Even on lands
where any grain can still be grown, corn, buckwheat, barley,
oats, and rye, cover the cultivated areas instead of wheat.

Inferior lands, or lands at a greater distance from the market,of course yield an inferior return, and an increasing demand can
not be supplied from them unless at an augmentation of cost, andtherefore of price. If the additional demand could continue to besupplied from the superior lands, by applying additional laborand capital, at no greater proportional cost than that at which
they yield the quantity first demanded of them, the owners or
farmers of those lands could undersell all others, and engross thewhole market. Lands of a lower degree of fertility or in a more
remote situation might indeed be cultivated by their proprietors,

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for the sake of subsistence or independence; but it never could
be the interest of any one to farm them for profit. That a profit
can be made from them, sufficient to attract capital to such aninvestment, is a proof that cultivation on the more eligible lands
has reached a point beyond which any greater application of laborand capital would yield, at the best, no greater return than can beobtained at the same expense from less fertile or less favorably
situated lands.
“It is long,” says a late traveler in the United States,130 “before
an English eye becomes reconciled to the lightness of the crops
and the careless farming (as we should call it) which is apparent.
One forgets that, where land is so plentiful and labor so dear as
it is here, a totally different principle must be pursued from thatwhich prevails in populous countries, and that the consequence
will of course be a want of tidiness, as it were, and finish, about
everything which requires labor.” Of the two causes mentioned,
the plentifulness of land seems to me the true explanation, rather
than the dearness of labor; for, however dear labor may be, whenfood is wanted, labor will always be applied to producing it inpreference to anything else. But this labor is more effective forits end by being applied to fresh soil than if it were employed inbringing the soil already occupied into higher cultivation.
The Western movement of what might be called the “wheatcenter” is quite perceptible. Until recently Minnesota has beena great wheat-producing State, and vast tracts of land were
there planted with that grain when the soil was first broken.
The profits on the first few crops have been enormous, but it
is now said to be more desirable for wheat-growers to moveonward to newer lands, and to sell the land to cultivators ofa different class (of fruit and varied products), who produce
for a denser population. So that (in 1884) Dakota, instead
130“Letters from America,” by John Robert Godley, vol. i. p. 42. See also
Lyell's “Travels in America,” vol. ii, p. 83.—Mill.

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of Minnesota, has become the district of the greatest wheat
production.131

Only when no soils remain to be broken up, but such as
either from distance or inferior quality require a considerable riseof price to render their cultivation profitable, can it become
advantageous to apply the high farming of Europe to any
American lands; except, perhaps, in the immediate vicinity
of towns, where saving in cost of carriage may compensate forgreat inferiority in the return from the soil itself.
The principle which has now been stated must be received, no
doubt, with certain explanations and limitations. Even after theland is so highly cultivated that the mere application of additional
labor, or of an additional amount of ordinary dressing, would
yield no return proportioned to the expense, it may still happen
that the application of a much greater additional labor and capital
to improving the soil itself, by draining or permanent manures,
would be as liberally remunerated by the produce as any portionof the labor and capital already employed. It would sometimes
be much more amply remunerated. This could not be, if capitalalways sought and found the most advantageous employment.

§ 2. Antagonist Principle to the Law of Diminishing
Return; the Progress of Improvements in Production.
That the produce of land increases, cæteris paribus, in adiminishing ratio to the increase in the labor employed, is, as wehave said (allowing for occasional and temporary exceptions), theuniversal law of agricultural industry. This principle, however,has been denied. So much so, indeed, that (it is affirmed) the131

Cf. “American Agriculture,” “Princeton Review,” May, 1882, by F. A.
Walker.

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worst land now in cultivation produces as much food per acre,and even as much to a given amount of labor, as our ancestors
contrived to extract from the richest soils in England.
The law of diminishing returns is the physical fact uponwhich the economic doctrine of rent is based, and requires
careful attention. Carey asserts, instead, that there is a lawof increasing productiveness, since, as men grow in numbers
and intelligence, there arises an ability to get more from thesoil.132 Some objectors even deny that different grades ofland are cultivated, and that there is no need of taking inferiorsoils into cultivation. If this were true, why would not one
half an acre of land be as good as a whole State? Johnston133
says: “In a country and among poor settlers ... poor land
is a relative term. Land is called poor which is not suitable
to a poor man, which on mere clearing and burning will notyield good first crops. Thus that which is poor land for apoor man may prove rich land to a rich man.”134 Moreover,as is constantly the case in our country, it often happens that a
railway may bring new lands into competition with old lands
in a given market; of which the most conspicuous example
is the competition of Western grain-fields with the Eastern
farms. In these older districts, before the competition came,
there was a given series of grades in the cultivated land; after
the railway was built there was a disarrangement of the oldseries, some going out of cultivation, some remaining, andsome of the new lands entering the list. The result is a newseries of grades better suited to satisfy the wants of men.

[135]

This, however, does not prove that the law of which wehave been speaking does not exist, but only that there is someantagonizing principle at work, capable for a time of making headagainst the law. Such an agency there is, in habitual antagonism to132“Social Science,” vol. iii, p. 19.
“Notes on North America,” 1851, vol. ii, pp. 116, 117.
134
See also Cairnes, “Logical Method,” p. 35.
133

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the law of diminishing return from land; and to the considerationof this we shall now proceed. It is no other than the progressof civilization. The most obvious [part of it] is the progress ofagricultural knowledge, skill, and invention. Improved processesof agriculture are of two kinds: (1) some enable the land to yielda greater absolute produce, without an equivalent increase oflabor; (2) others have not the power of increasing the produce,
but have that of diminishing the labor and expense by which it isobtained. (1.) Among the first are to be reckoned the disuse of
fallows, by means of the rotation of crops; and the introductionof new articles of cultivation capable of entering advantageously
into the rotation. The change made in agriculture toward the closeof the last century, by the introduction of turnip-husbandry, isspoken of as amounting to a revolution. Next in order comes theintroduction of new articles of food, containing a greater amountof sustenance, like the potato, or more productive species orvarieties of the same plant, such as the Swedish turnip. In thesame class of improvements must be placed a better knowledgeof the properties of manures, and of the most effectual modesof applying them; the introduction of new and more powerfulfertilizing agents, such as guano, and the conversion to the same
purpose of substances previously wasted; inventions like subsoilplowing or tile-draining, by which the produce of some kindsof lands is so greatly multiplied; improvements in the breed or
feeding of laboring cattle; augmented stock, of the animals which
consume and convert into human food what would otherwise be
wasted; and the like. (2.) The other sort of improvements, thosewhich diminish labor, but without increasing the capacity of theland to produce, are such as the improved construction of tools;
the introduction of new instruments which spare manual labor,
as the winnowing and thrashing machines. These improvements
do not add to the productiveness of the land, but they are equallycalculated with the former to counteract the tendency in the costof production of agricultural produce, to rise with the progress

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of population and demand.

§ 3. —In Railways.
Analogous in effect to this second class of agricultural
improvements are improved means of communication. Good
roads are equivalent to good tools. It is of no consequence
whether the economy of labor takes place in extracting the
produce from the soil, or in conveying it to the place where it is
to be consumed.
The functions performed by railways in the system of production is highly important. They are among the most influential
causes affecting the cost of producing commodities, particularly those which satisfy the primary wants of man, of whichfood is the chief. The amount of tonnage carried is enormous;and the cost of this service to the producers and consumersof the United States is a question of very great magnitude.
The serious reduction in the cost of transportation on therailways will be a surprise to all who have not followed thematter very closely; the more so, that it has been brought
about by natural causes, and independent of legislation. Corn,meat, and dairy products form, it is said, at least 50 per
cent, and coal and timber about 30 per cent, of the tonnage
moved on all the railways of the United States. If a lowered
cost of transportation has come about, it has then cost lessto move the main articles of immediate necessity. Had thecharge in 1880 remained as high even as it was from 1866
to 1869, the number of tons carried in 1880 would have cost
the United States from $500,000,000 to $800,000,000 morethan the charge actually made, owing to the reductions by therailways. It seems, however, that this process of reduction
culminated about 1879. In order to show the facts of thisprocess, note the changes in the following chart, No. V. The§ 3. —In Railways.

159

railways of the State of New York are taken, but the same isalso true of those of Ohio:[137]

Chart V.
Cost of 20 Barrels of Flour, 10 Beef, 10 Pork, 100 Bushels
Wheat, 100 Corn, 100 Oats, 100 Pounds Butter, 100 Lard,and 100 Fleece Wool, in New York City, at the Average of eachYear, Compiled by Months, in Gold; Compared Graphicallywith the Decrease in the Charge per Ton per Mile, on all theRailroads of the State of New York, during the Same Period.
Year.

Price
in
gold
of
staple farm
products.
(Dollars)

Charge forcarrying one
ton one mile.
(Cents)Decrease in
the railroad
expenses per
ton. (Cents)

1870
1871
1872
1873
1874
1875
1876
1877
1878
1879
1880
1881
1882
1883

776.02735.33675.92662.50748.54696.40651.74751.95569.81568.34631.32703.10776.12662.111.70161.70051.66451.60001.44801.30391.16041.0590
.9994
.8082
.9220
.8390
.8170
.8990

1.14711.14501.14901.0864
.9730
.9587
.8561
.7740
.6900
.5847
.6030
.5880
.6010
.6490

Decrease in
the profits of
the railroads
for carrying
one
ton.
(Cents)
.5545
.5555
.5155
.5136
.4750
.3452
.3043
.2850
.3094
.2295
.3190
.2510
.2160
.2500

In 1855 the charge per ton per mile was 3.27 cents, ascompared with 0.89 in 1883.

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Principles Of Political Economy

Tons moved 1 m. in 1883 byrailroads of N.Y.
At rate of 1855, would cost
Actual cost in 1883
Saving to the State

9,286,216,628$303,659,283
83,464,919$220,194,364[138]

The explanation of this reduced cost is given by Mr.
Edward Atkinson135 as (1) the competition of water-ways,(2) the competition of one railway with another, and (3) thecompetition of other countries, which forces our railways totry to lay our staple products down in foreign markets at a
price which will warrant continued shipment. Besides thesereasons, much ought also (4) to be assigned to the progressof inventions and the reduced cost of steel and all appliances
necessary to the railways.
The large importance of the railways shows itself in an
influence on general business prosperity, and as a place forlarge investments of a rapidly growing capital. The buildingof railways, however, has been going on, at some times withgreater speed than at others. Instead of 33,908 miles ofrailways at the close of our war, we have now (1884) over
120,000 miles. How the additional mileage has been built
year by year, with two distinct eras of increased building—one
from 1869 to 1873, and another from 1879 to 1884—may beseen by the shorter lines of the subjoined chart, No. VI.
That speculation has been excited at different times by the
opening up of our Western country, there can be no doubt.
And if a comparison be made with Chart No. XVII (BookIV, Chap. III), which gives the total grain-crops of the UnitedStates, it will be seen that since 1879, although our population
135

I am indebted to Mr. Atkinson for advanced proofs of the annexed charts.
See his paper in the “Journal of the American Agricultural Association,” vol.
i, Nos. 3 and 4, p. 154, and a later discussion in the supplement of the Boston“Manufacturers' Gazette,” August 9, 1884, entitled “The Railway, the Farmer,
and the Public.” His figures are drawn mainly from Poor's “Railway Manual.”§ 3. —In Railways.

161

has increased from 12-½ per cent to 14 per cent, our graincrops only 5 per cent, yet our railway mileage has increased
40 per cent.
The extent to which the United States has carried railwaybuilding, as compared with European countries, although wehave a very much greater area, is distinctly shown by Chart
No. VII. This application of one form of improvement tooppose the law of diminishing returns in the United States has
produced extraordinary results, especially when we consider
that we are probably not yet using all our best lands, or, inother words, that we have not yet felt the law of diminishingreturns in some large districts.

Chart VI.
Miles of Railroad in Operation on the 1st January in eachYear, and the Miles added in the Year Ensuing.
Year.
1865
1866
1867
1868
1869
1870
1871
1872
1873
1874
1875
1876
1877
1878
1879
1880
1881

Miles of Railroad.
33,90835,08536,801
39,25042,22946,84452,91460,293
66,171
70,27872,38374,09676,80879,08981,77686,49793,545

Miles added.
1,177
1,716
2,449
2,979
4,615
6,070
7,379
5,878
4,107
2,105
1,713
2,712
2,281
2,687
4,721
7,048
9,789

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Principles Of Political Economy

1882
1883

[140]

103,334
114,925

11,591
6,618

Railways and canals are virtually a diminution of the cost of
production of all things sent to market by them; and literally so of
all those the appliances and aids for producing which they serveto transmit. By their means land can be cultivated, which would
not otherwise have remunerated the cultivators without a rise of
price. Improvements in navigation have, with respect to food ormaterials brought from beyond sea, a corresponding effect.

§ 4. —In Manufactures.
From similar considerations, it appears that many purely
mechanical improvements, which have, apparently, at least,
no peculiar connection with agriculture, nevertheless enable agiven amount of food to be obtained with a smaller expenditureof labor. A great improvement in the process of smelting ironwould tend to cheapen agricultural implements, diminish the costof railroads, of wagons and carts, ships, and perhaps buildings,
and many other things to which iron is not at present applied,because it is too costly; and would thence diminish the costof production of food. The same effect would follow froman improvement in those processes of what may be termed
manufacture, to which the material of food is subjected after it
is separated from the ground. The first application of wind or
water power to grind corn tended to cheapen bread as much asa very important discovery in agriculture would have done; andany great improvement in the construction of corn-mills would
have, in proportion, a similar influence.
Those manufacturing improvements which can not be madeinstrumental to facilitate, in any of its stages, the actual production§ 4. —In Manufactures.

163

of food, and therefore do not help to counteract or retard thediminution of the proportional return to labor from the soil, have,
however, another effect, which is practically equivalent. Whatthey do not prevent, they yet, in some degree, compensate for.136
Chart VII.
Ratio of Miles of Railroad to the Areas of States andCountries—United States and Europe. The relative proportionis 1 Mile Railroad to 4 Square Miles of Area.
No.

Name.

1
2
3

Massachusetts
Belgium
EnglandandWales
New Jersey
Connecticut
Rhode Island
Ohio
Illinois
Pennsylvania
DelawareIndiana
New Hampshire
Switzerland
New York
Iowa
German Empire
Scotland
MarylandVermont
Ireland
Michigan

4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
136

Cf. Book IV, Chap. I.

Rank
Size.
67
62
29
62
68
71
44
32
40
69
50
65
59
39
33
4
52
63
64
51
31

in

Relative.
98
96
88
81
80
65
60
59
55
53
52
45
44
41
39
38
37
36
35
29
28

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Principles Of Political Economy

22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53

FranceDenmark
Netherlands
Missouri
Wisconsin
Austrian Empire
Virginia
Italy
Georgia
KansasKentuckySouth Carolina
Tennessee
Minnesota
AlabamaWest Virginia
Roumania
North Carolina
Maine
Nebraska
Mississippi
Spain
Portugal
SwedenArkansas
Louisiana
Colorado
California
TurkeyTexas
Utah
Florida

5
60
57
26
34
3

27
26
25
24
23
21

45
13
30
22
46
49
42
21
36
55
41
37
48
23
38
6
47
7
35
43
16
8
27
2
20
28

19
18
17
16
15
14
14
13
13
12
12
12
12
10
9
9
9
9
8
8
8
7
7
7
6
6

§ 4. —In Manufactures.

54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72

DakotaRussia in Europe
NevadaNorwayOregonBulgaria
New Mexico
Wyoming
Indian Territory
Washington
Arizona
Idaho
GreeceMontanaBosniaandHerzegovina
ServiaEastern
Roumelia
Montenegro
Andorra

165

7
1

6
5

15
11
18
54
12
17
25
24
14
19
58
10
53

5
5
4
4
3
2
2
1
1
1
0
0
0

56
61

0
0

70
72

0
0

(The United States have substantially one mile of railway
to each 540 inhabitants. Europe has one mile to each 3,000
inhabitants, if Russia be included; about one mile to each 2,540,
exclusive of Russia.)
The materials of manufactures being all drawn from the land,
and many of them from agriculture, which supplies in particular
the entire material of clothing, the general law of production fromthe land, the law of diminishing return, must in the last resort beapplicable to manufacturing as well as to agricultural history. As
population increases, and the power of the land to yield increased

[142]

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Principles Of Political Economy

produce is strained harder and harder, any additional supply ofmaterial, as well as of food, must be obtained by a more thanproportionally increasing expenditure of labor. But the cost of
the material forming generally a very small portion of the entire
cost of the manufacture, the agricultural labor concerned in the
production of manufactured goods is but a small fraction of thewhole labor worked up in the commodity.
Mr. Babbage137 gives an interesting illustration of thisprinciple. Bar-iron of the value of £1 became worth, whenmanufactured into—

Slit-iron, for nails
Natural steel
Horseshoes
Gun-barrels, ordinary
Wood-saws
Scissors, best
Penknife-blades
Sword-handles,
polished
steel

£
1.10
1.42
2.55
9.10
14.28
446.94657.14972.82

It can not, however, be said of such manufactures as coarse
cotton cloth, wherein the increased cost of raw cotton causes
an immediate effect upon the price of the cloth, that the costof the materials forms but a small portion of the cost of the
manufacture.138

All the labor [not engaged in preparing materials] tends
constantly and strongly toward diminution, as the amount of
production increases. Manufactures are vastly more susceptible
than agriculture of mechanical improvements and contrivances
137
138“Economy of Manufactures,” pp. 163, 164.
Cf. Book IV, Chap. I, § 4.

§ 5. Law Holds True of Mining.

167

for saving labor. In manufactures, accordingly, the causes tending
to increase the productiveness of industry preponderate greatly
over the one cause which tends to diminish it; and the increase of
production, called forth by the progress of society, takes place,not at an increasing, but at a continually diminishing proportionalcost. This fact has manifested itself in the progressive fall of theprices and values of almost every kind of manufactured goods
during two centuries past; a fall accelerated by the mechanicalinventions of the last seventy or eighty years, and susceptible ofbeing prolonged and extended beyond any limit which it would
be safe to specify. The benefit might even extend to the poorestclass. The increased cheapness of clothing and lodging mightmake up to them for the augmented cost of their food.
There is, thus, no possible improvement in the arts ofproduction which does not in one or another mode exercise
an antagonistic influence to the law of diminishing return toagricultural labor. Nor is it only industrial improvements whichhave this effect. Improvements in government, and almost every
kind of moral and social advancement, operate in the samemanner. We may say the same of improvements in education.
The intelligence of the workman is a most important elementin the productiveness of labor. The carefulness, economy, andgeneral trustworthiness of laborers are as important as theirintelligence. Friendly relations and a community of interest andfeeling between laborers and employers are eminently so. In
the rich and idle classes, increased mental energy, more solid
instruction, and stronger feelings of conscience, public spirit, orphilanthropy, would qualify them to originate and promote themost valuable improvements, both in the economical resourcesof their country and in its institutions and customs.

§ 5. Law Holds True of Mining.

[143]

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[144]

Principles Of Political Economy

We must observe that what we have said of agriculture is true,
with little variation, of the other occupations which it represents;of all the arts which extract materials from the globe. Mining
industry, for example, usually yields an increase of produce at amore than proportional increase of expense.
It does worse, for even its customary annual produce requires
to be extracted by a greater and greater expenditure of laborand capital. As a mine does not reproduce the coal or ore
taken from it, not only are all mines at last exhausted, but evenwhen they as yet show no signs of exhaustion they must be
worked at a continually increasing cost; shafts must be sunk
deeper, galleries driven farther, greater power applied to keepthem clear of water; the produce must be lifted from a greater
depth, or conveyed a greater distance. The law of diminishingreturn applies therefore to mining in a still more unqualified
sense than to agriculture; but the antagonizing agency, thatof improvements in production, also applies in a still greater
degree. Mining operations are more susceptible of mechanicalimprovements than agricultural: the first great application of thesteam-engine was to mining; and there are unlimited possibilities
of improvement in the chemical processes by which the metals
are extracted. There is another contingency, of no unfrequent
occurrence, which avails to counterbalance the progress of allexisting mines toward exhaustion: this is, the discovery of newones, equal or superior in richness.
Professor Jevons has applied this economic law to the industrial situation of England.139 While explaining that the supplyof cheap coal is the basis of English manufacturing prosperity, yet he insists that, if the demand for coal is constantly
increasing, the point must inevitably be reached in the futurewhen the increased supply can be obtained only at a higher
cost. When coal costs England as much as it does any other
139“The Coal Question” (1866).

§ 5. Law Holds True of Mining.

169

nation, then her exclusive industrial advantage will cease toexist. In the United States the outlying iron deposits of Lake
Superior, Lake Champlain, and Pennsylvania, so geologists
tell us, will find competition arising from the new grades ofgreater productiveness in the richer deposits of States like
Alabama. In that case we shall be going from poorer to better
grades of iron-mines, but after the change is made a seriesof different grades of productiveness will be established as
before.

To resume: all natural agents which are limited in quantity
are not only limited in their ultimate productive power, but,long before that power is stretched to the utmost, they yield
to any additional demands on progressively harder terms. Thislaw may, however, be suspended, or temporarily controlled, bywhatever adds to the general power of mankind over nature,and especially by any extension of their knowledge, and theirconsequent command, of the properties and powers of natural
agents.
[145]

Chapter X. Consequences Of The ForegoingLaws.

§ 1. Remedies for Weakness of the Principle ofAccumulation.
From the preceding exposition it appears that the limit to theincrease of production is twofold: from deficiency of capital,
or of land. Production comes to a pause, either because theeffective desire of accumulation is not sufficient to give rise to
any further increase of capital, or because, however disposed thepossessors of surplus income may be to save a portion of it, thelimited land at the disposal of the community does not permit
additional capital to be employed with such a return as would be
an equivalent to them for their abstinence.
In countries where the principle of accumulation is as weak as
it is in the various nations of Asia, the desideratum economicallyconsidered is an increase of industry, and of the effective desireof accumulation. The means are, first, a better government: more
complete security of property; moderate taxes, and freedom fromarbitrary exaction under the name of taxes; a more permanentand more advantageous tenure of land, securing to the cultivator
as far as possible the undivided benefits of the industry, skill,and economy he may exert. Secondly, improvement of the
public intelligence. Thirdly, the introduction of foreign arts,
which raise the returns derivable from additional capital to a rate
corresponding to the low strength of the desire of accumulation.

[146]

An excellent example of what might be done by this process is
to be seen under our very eyes in the present development of
Mexico, to which American capital and enterprise have been

171
so prominently drawn of late. All these proposed remedies, if
put into use in Mexico, would undoubtedly result in a striking
increase of wealth.

§ 2. Even where the Desire to Accumulate is Strong,
Population must be Kept within the Limits ofPopulation from Land.
But there are other countries, and England [and the United Statesare] at the head of them, in which neither the spirit of industry nor
the effective desire of accumulation need any encouragement. In
these countries there would never be any deficiency of capital, if
its increase were never checked or brought to a stand by too greata diminution of its returns. It is the tendency of the returns to a
progressive diminution which causes the increase of production
to be often attended with a deterioration in the condition of the
producers; and this tendency, which would in time put an end toincrease of production altogether, is a result of the necessary andinherent conditions of production from the land.
This, of course, is based on the supposition that no newlands, such as those of the United States, can be opened for
cultivation. If there is no prohibition to the importation ofcheaper food, new and richer land in any part of the world,
within reach of the given country, is an influence which works
against the tendency. Yet the tendency, or economic law, isthere all the same, forever working.

In all countries which have passed beyond a very early stage
in the progress of agriculture, every increase in the demand forfood, occasioned by increased population, will always, unlessthere is a simultaneous improvement in production, diminish theshare which on a fair division would fall to each individual. An

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Principles Of Political Economy

increased production, in default of unoccupied tracts of fertile
land, or of fresh improvements tending to cheapen commodities,
can never be obtained but by increasing the labor in more than thesame proportion. The population must either work harder or eat
less, or obtain their usual food by sacrificing a part of their othercustomary comforts. Whenever this necessity is postponed, it isbecause the improvements which facilitate production continue
progressive; because the contrivances of mankind for making
their labor more effective keep up an equal struggle with Nature,and extort fresh resources from her reluctant powers as fast as
human necessities occupy and engross the old.
From this results the important corollary, that the necessity ofrestraining population is not, as many persons believe, peculiar toa condition of great inequality of property. A greater number ofpeople can not, in any given state of civilization, be collectively
so well provided for as a smaller. The niggardliness of nature,140
not the injustice of society, is the cause of the penalty attached toover-population. An unjust distribution of wealth does not evenaggravate the evil, but, at most, causes it to be somewhat earlier
felt. It is in vain to say that all mouths which the increase of
mankind calls into existence bring with them hands. The newmouths require as much food as the old ones, and the hands do
not produce as much.
After a degree of density has been attained, sufficient toallow the principal benefits of combination of labor, all further
increase tends in itself to mischief, so far as regards the average
condition of the people; but the progress of improvement hasa counteracting operation, and allows of increased numbers
without any deterioration, and even consistently with a higher
average of comfort. Improvement must here be understood ina wide sense, including not only new industrial inventions, or140Henry George, as well as the Socialists, thinks poverty arises from theinjustice of society, and here takes issue with the present teaching. But thequestion can be better discussed under Distribution.

173
an extended use of those already known, but improvements ininstitutions, education, opinions, and human affairs generally,
provided they tend, as almost all improvements do, to give new
motives or new facilities to production.
The increase in the population of the United States has beenenormous, as already seen, but the increase of production
has been still greater, owing to the fertility of our land, toimprovements in the arts, and to our great genius for invention,as may be seen by the following table (amounts in the second
column are given in millions).141 The steady increase of
the valuation of our wealth goes on faster than the increaseof population, so that it manifests itself in a larger average
wealth to each inhabitant.
Decades.

Valuation.

1800
1810
1820
1830
1840
1850
1860
1870
1880

$1,742
2,382
3,734
4,328
6,124
8,800
16,16030,06840,000Per
cent ofincrease.
..
37
57
16
41
44
84
86
33

Population. Per
cent ofincrease.
5,308,483..
7,239,881
36
9,633,882
33
12,866,020 34
17,069,453 33
23,191,876 36
31,443,321 35
38,558,371 23
50,155,783 30

Per capitalvaluation.
$328
329
386
336
359
379
514
780
798

If the productive powers of the country increase as rapidly as
advancing numbers call for an augmentation of produce, it is notnecessary to obtain that augmentation by the cultivation of soils
more sterile than the worst already under culture, or by applying
additional labor to the old soils at a diminished advantage; or141Henry Gannet, “International Review,” 1882, p. 503.

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Principles Of Political Economy

at all events this loss of power is compensated by the increased
efficiency with which, in the progress of improvement, labor isemployed in manufactures. In one way or the other, the increased
population is provided for, and all are as well off as before.
But if the growth of human power over nature is suspended orslackened, and population does not slacken its increase; if, with
only the existing command over natural agencies, those agencies
are called upon for an increased produce; this greater produce
will not be afforded to the increased population, without either
demanding on the average a greater effort from each, or on the
average reducing each to a smaller ration out of the aggregate
produce.

[149]

Ever since the great mechanical inventions of Watt, Arkwright,
and their contemporaries, the return to labor has probably
increased as fast as the population; and would even haveoutstripped it, if that very augmentation of return had not called
forth an additional portion of the inherent power of multiplicationin the human species. During the twenty or thirty years lastelapsed, so rapid has been the extension of improved processesof agriculture [in England], that even the land yields a greater
produce in proportion to the labor employed; the average priceof corn had become decidedly lower, even before the repealof the corn laws had so materially lightened, for the time
being, the pressure of population upon production. But though
improvement may during a certain space of time keep up with, oreven surpass, the actual increase of population, it assuredly nevercomes up to the rate of increase of which population is capable:
and nothing could have prevented a general deterioration in thecondition of the human race, were it not that population has infact been restrained. Had it been restrained still more, and thesame improvements taken place, there would have been a larger
dividend than there now is, for the nation or the species at large.
The new ground wrung from nature by the improvements would
not have been all tied up in the support of mere numbers. Though

175
the gross produce would not have been so great, there would
have been a greater produce per head of the population.

§ 3. Necessity of Restraining Population notsuperseded by Free Trade in Food.
When the growth of numbers outstrips the progress ofimprovement, and a country is driven to obtain the means ofsubsistence on terms more and more unfavorable, by the inabilityof its land to meet additional demands except on more onerous
conditions, there are two expedients, by which it may hope
to mitigate that disagreeable necessity, even though no change
should take place in the habits of the people with respect to theirrate of increase. One of these expedients is the importation offood from abroad. The other is emigration.
The admission of cheaper food from a foreign country isequivalent to an agricultural invention by which food could beraised at a similarly diminished cost at home. It equally increases
the productive power of labor. The return was before, so muchfood for so much labor employed in the growth of food: the returnis now, a greater quantity of food for the same labor employedin producing cottons or hardware, or some other commodity
to be given in exchange for food. The one improvement, likethe other, throws back the decline of the productive power oflabor by a certain distance: but in the one case, as in the other,it immediately resumes its course; the tide which has receded,
instantly begins to readvance. It might seem, indeed, that, whena country draws its supply of food from so wide a surface as thewhole habitable globe, so little impression can be produced onthat great expanse by any increase of mouths in one small cornerof it that the inhabitants of the country may double and treble
their numbers without feeling the effect in any increased tension

[150]

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[151]

Principles Of Political Economyof the springs of production, or any enhancement of the price offood throughout the world. But in this calculation several things
are overlooked.
In the first place, the foreign regions from which corn can beimported do not comprise the whole globe, but those parts of it
almost alone which are in the immediate neighborhood of coasts
or navigable rivers; and of such there is not, in the productive
regions of the earth, so great a multitude as to suffice during
an indefinite time for a rapidly growing demand, without anincreasing strain on the productive powers of the soil.
In the next place, even if the supply were drawn from the whole
instead of a small part of the surface of the exporting countries,
the quantity of food would still be limited, which could beobtained from them without an increase of the proportional cost.
The countries which export food may be divided into two classes:
those in which the effective desire of accumulation is strong, andthose in which it is weak. In Australia and the United States ofAmerica, the effective desire of accumulation is strong; capitalincreases fast, and the production of food might be very rapidly
extended. But in such countries population also increases withextraordinary rapidity. Their agriculture has to provide for theirown expanding numbers, as well as for those of the importing
countries. They must, therefore, from the nature of the case, be
rapidly driven, if not to less fertile, at least what is equivalent,to remoter and less accessible lands, and to modes of cultivation
like those of old countries, less productive in proportion to thelabor and expense.
The extraordinary resources of the United States are scarcely
understood even by Americans. Chart No. XVIII (seeBook IV, Chap. III) may give some idea of the agricultural
possibilities of our land. It will be seen from this that thequantity of fertile land in but one of our States—Texas—isgreater than that of Austria-Hungary.

§ 4. —Nor by Emigration.

177

But the countries which have at the same time cheap food andgreat industrial prosperity are few, being only those in which
the arts of civilized life have been transferred full-grown to arich and uncultivated soil. Among old countries, those which areable to export food, are able only because their industry is in avery backward state, because capital, and hence population, havenever increased sufficiently to make food rise to a higher price.
Such countries are Russia, Poland, and Hungary.
The law, therefore, of diminishing return to industry, wheneverpopulation makes a more rapid progress than improvement, is
not solely applicable to countries which are fed from their own
soil, but in substance applies quite as much to those which arewilling to draw their food from any accessible quarter that canafford it cheapest.

§ 4. —Nor by Emigration.
Besides the importation of corn, there is another resource which
can be invoked by a nation whose increasing numbers press
hard, not against their capital, but against the productive capacityof their land: I mean Emigration, especially in the form ofColonization. Of this remedy the efficacy as far as it goes isreal, since it consists in seeking elsewhere those unoccupied
tracts of fertile land which, if they existed at home, would enable
the demand of an increasing population to be met without any
falling off in the productiveness of labor. Accordingly, when theregion to be colonized is near at hand, and the habits and tastesof the people sufficiently migratory, this remedy is completely
effectual. The migration from the older parts of the American
Confederation to the new Territories, which is to all intents
and purposes colonization, is what enables population to go on
unchecked throughout the Union without having yet diminished

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Principles Of Political Economy

the return to industry, or increased the difficulty of earning a
subsistence.
How strictly true this is may be seen by examining the map
given in the last census returns,142 showing the residence ofthe natives of the State of New York. The greater or lessfrequency of natives of New York, residing in other States, isshown by different degrees of shading on the map. A large
district westward as far as the Mississippi shows a densityof natives of New York of from two to six to a square mile,
and a lesser density from Minnesota to Indian Territory, on
the other side of the Mississippi. The same is shown of other
older States. The explanation of the movement can not beanything else than the same as that for the larger movementfrom Europe to America.

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There is no probability that even under the most enlightenedarrangements (in older countries) a permanent stream ofemigration could be kept up, sufficient to take off, as in America,
all that portion of the annual increase (when proceeding at its
greatest rapidity) which, being in excess of the progress madeduring the same short period in the arts of life, tends to renderliving more difficult for every averagely situated individual in
the community. And, unless this can be done, emigration can not,even in an economical point of view, dispense with the necessityof checks to population.
The influence of immigration to the United States from
European countries, in lessening the tension in the relation
between food and numbers, is one of the most marked events inthis century. The United States has received about one fourth ofits total population in 1880 from abroad since the foundation of
the republic, as will be seen by this table:
Total Immigration Into The United States.
142

Volume on Population, p. 481.

§ 4. —Nor by Emigration.

Periods.
From 1789-1820
1820-1830
1831-1840
1841-1850
1851-1860
1861-1870
1871-1880
1881-1883
Total

179

Numbers.
250,000143
151,824599,125
1,713,251
2,598,214
2,491,451
2,812,191
2,061,745
12,677,801

Of this number, 5,333,991 came from the British Isles, ofwhich 3,367,624 were Irish.
There came 3,860,624 Germans, 593,021 Scandinavians, and334,064 French. (See United States “Statistical Abstract,” 1878,
1880, 1883.)
The causes operating on this movement of men—a movement
unequaled in history—are undoubtedly economic. Like themigration of the early Teutonic races from the Baltic to Southern
Europe, it is due to the pressure of numbers on subsistence.
A still more interesting study is that of the causes which attempt
to explain the direction of this stream after it has reached ourshores. It is a definite fact that the old slave States have hitherto
received practically none of this vast foreign immigration.144
The actual distribution of the foreign born in the United States
is to be seen in a most interesting way by aid of the coloredmap, Chart No. VIII, giving the different densities of foreignborn population in different parts of the Union. It seems almost
certain that the general belief hitherto in the insecurity of life and143
144

Estimated.
See article “Colonization,” “International Review,” 1881, p. 88.

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Principles Of Political Economy

property in the old slave States has worked against the material
prosperity of that section.
The different ages of the native- and foreign-born inhabitantsof the United States may be seen from the accompanying
diagrams145 comparing the aggregate population of the UnitedStates with the foreign-born. This may profitably be comparedwith a similar diagram relating to the Chinese in the United States(Book II, Chap. III, § 3).
Aggregate: 1870. The figures give the number of thousandsof each sex.
Decade
Life.
1
2
3
4
5
6
7
8
9

of

Males.

Females.

136
115
87
62
47
31
17
7
2

132
114
90
63
44
27
15
7
2

Males.

Females.

24
48
128
134
107
60

23
49
114
113
84
44

Foreign: 1870.
Decade
Life.
1
2
3
4
5
6
145

of

See F. A. Walker's “Statistical Atlas.”§ 4. —Nor by Emigration.

7
8
9

181

27
9
2

23
9
2
[155]

Book II. Distribution.

Chapter I. Of Property.

§ 1. Individual Property and its opponents.
The laws and conditions of the Production of Wealth partakeof the character of physical truths. There is nothing optional or
arbitrary in them. It is not so with the Distribution of Wealth.
That is a matter of human institution solely. The things once
there, mankind, individually or collectively, can do with them as
they like. They can place them at the disposal of whomsoever
they please, and on whatever terms. The Distribution of Wealthdepends on the laws and customs of society. The rules by which
it is determined are what the opinions and feelings of the ruling
portion of the community make them, and are very different indifferent ages and countries; and might be still more different, if
mankind so chose. We have here to consider, not the causes, but
the consequences, of the rules according to which wealth may
be distributed. Those, at least, are as little arbitrary, and have as
much the character of physical laws, as the laws of production.
We proceed, then, to the consideration of the different modesof distributing the produce of land and labor, which have been
adopted in practice, or may be conceived in theory. Among these,
our attention is first claimed by that primary and fundamental

§ 1. Individual Property and its opponents.

183

institution, on which, unless in some exceptional and very
limited cases, the economical arrangements of society havealways rested, though in its secondary features it has varied, andis liable to vary. I mean, of course, the institution of individual
property.
Private property, as an institution, did not owe its origin to anyof those considerations of utility which plead for the maintenanceof it when established. Enough is known of rude ages, both from
history and from analogous states of society in our own time, toshow that tribunals (which always precede laws) were originallyestablished, not to determine rights, but to repress violence andterminate quarrels. With this object chiefly in view, they naturally
enough gave legal effect to first occupancy, by treating as theaggressor the person who first commenced violence, by turning,or attempting to turn, another out of possession.
In considering the institution of property as a question in social
philosophy, we must leave out of consideration its actual origin
in any of the existing nations of Europe. We may suppose acommunity unhampered by any previous possession; a body ofcolonists, occupying for the first time an uninhabited country. (1.)
If private property were adopted, we must presume that it would
be accompanied by none of the initial inequalities and injusticewhich obstruct the beneficial operation of the principle in oldsociety. Every full-grown man or woman, we must suppose,
would be secured in the unfettered use and disposal of his or herbodily and mental faculties; and the instruments of production,
the land and tools, would be divided fairly among them, so that
all might start, in respect to outward appliances, on equal terms.
It is possible also to conceive that, in this original apportionment,compensation might be made for the injuries of nature, andthe balance redressed by assigning to the less robust membersof the community advantages in the distribution, sufficient to
put them on a par with the rest. But the division, once made,would not again be interfered with; individuals would be left to

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their own exertions and to the ordinary chances for making an
advantageous use of what was assigned to them. (2.) If individual
property, on the contrary, were excluded, the plan which must
be adopted would be to hold the land and all instruments ofproduction as the joint property of the community, and to carryon the operations of industry on the common account. The
direction of the labor of the community would devolve upon amagistrate or magistrates, whom we may suppose elected by thesuffrages of the community, and whom we must assume to be
voluntarily obeyed by them. The division of the produce wouldin like manner be a public act. The principle might either be thatof complete equality, or of apportionment to the necessities ordeserts of individuals, in whatever manner might be conformableto the ideas of justice or policy prevailing in the community.
The assailants of the principle of individual property may
be divided into two classes: (1) those whose scheme implies
absolute equality in the distribution of the physical means oflife and enjoyment, and (2) those who admit inequality, but
grounded on some principle, or supposed principle, of justice orgeneral expediency, and not, like so many of the existing social
inequalities, dependent on accident alone. The characteristicname for this [first] economical system is Communism, aword of Continental origin, only of late introduced into thiscountry. The word Socialism, which originated among theEnglish Communists, and was assumed by them as a name todesignate their own doctrine, is now, on the Continent, employed
in a larger sense; not necessarily implying Communism, or theentire abolition of private property, but applied to any system
which requires that the land and the instruments of production
should be the property, not of individuals, but of communities,
or associations, or of the government.
It should be said, moreover, that Socialism is to-day usedin the distinct sense of a system which abolishes private

185
property, and places the control of the capital, labor, andcombined industries of the country in the hands of the state.
The essence of modern socialism is the appeal to state-help
and the weakening of individual self-help. Collectivism is alsoa term now used by German and French writers to describe anorganization of the industries of a country under a collective
instead of an individual management. Collectivism is but the
French expression for the system of state socialism.

§ 2. The case for Communism against private
property presented.
The objection ordinarily made to a system of community ofproperty and equal distribution of the produce, that each person
would be incessantly occupied in evading his fair share of thework, points, undoubtedly, to a real difficulty. But those who urge
this objection forget to how great an extent the same difficulty
exists under the system on which nine tenths of the business ofsociety is now conducted. And though the “master's eye,” whenthe master is vigilant and intelligent, is of proverbial value, it
must be remembered that, in a Socialist farm or manufactory,each laborer would be under the eye, not of one master, but of thewhole community. If Communistic labor might be less vigorous
than that of a peasant proprietor, or a workman laboring on his
own account, it would probably be more energetic than that of alaborer for hire, who has no personal interest in the matter at all.
Another of the objections to Communism is that if every
member of the community were assured of subsistence forhimself and any number of children, on the sole condition ofwillingness to work, prudential restraint on the multiplicationof mankind would be at an end, and population would start
forward at a rate which would reduce the community throughsuccessive stages of increasing discomfort to actual starvation.

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Principles Of Political Economy

But Communism is precisely the state of things in which opinion
might be expected to declare itself with greatest intensity against
this kind of selfish intemperance. An augmentation of numbers
which diminished the comfort or increased the toil of themass would then cause (which now it does not) immediate
and unmistakable inconvenience to every individual in theassociation; inconvenience which could not then be imputed
to the avarice of employers, or the unjust privileges of the rich.
A more real difficulty is that of fairly apportioning the laborof the community among its members. There are many kindsof work, and by what standard are they to be measured one
against another? Who is to judge how much cotton-spinning, ordistributing goods from the stores, or brick-laying, or chimneysweeping, is equivalent to so much plowing? Besides, even in
the same kind of work, nominal equality of labor would be sogreat a real inequality that the feeling of justice would revolt
against its being enforced. All persons are not equally fit for alllabor; and the same quantity of labor is an unequal burden on the
weak and the strong, the hardy and the delicate, the quick andthe slow, the dull and the intelligent.146
If, therefore, the choice were to be made between Communism
with all its chances and the present state of society with all its
sufferings and injustices, all the difficulties, great or small, ofCommunism, would be but as dust in the balance. But, tomake the comparison applicable, we must compare Communism
at its best with the régime of individual property, not as it is,but as it might be made. The laws of property have never
yet conformed to the principles on which the justification ofprivate property rests. They have made property of things
which never ought to be property, and absolute property where
only a qualified property ought to exist. Private property, in
146

For a further discussion of the difference between the motive powers under
private property and under Communism, see Mr. Mill's posthumous “Chapterson Socialism,” “Fortnightly Review,” 1879 (vol. xxxi).

187
every defense made of it, is supposed to mean the guarantee
to individuals of the fruits of their own labor and abstinence.
The guarantee to them of the fruits of the labor and abstinenceof others, transmitted to them without any merit or exertion of
their own, is not of the essence of the institution, but a mere
incidental consequence, which, when it reaches a certain height,
does not promote, but conflicts with the ends which renderprivate property legitimate. To judge of the final destination of
the institution of property, we must suppose everything rectified
which causes the institution to work in a manner opposed tothat equitable principle, of proportion between remuneration andexertion, on which, in every vindication of it that will bear thelight, it is assumed to be grounded. We must also suppose two
conditions realized, without which neither Communism nor any
other laws or institutions could make the condition of the massof mankind other than degraded and miserable. One of these
conditions is, universal education; the other, a due limitation of
the numbers of the community. With these, there could be nopoverty, even under the present social institutions: and, thesebeing supposed, the question of socialism is not, as generally
stated by Socialists, a question of flying to the sole refuge against
the evils which now bear down humanity, but a mere questionof comparative advantages, which futurity must determine. We
are too ignorant either of what individual agency in its best form,or socialism in its best form, can accomplish, to be qualified
to decide which of the two will be the ultimate form of humansociety.
If a conjecture may be hazarded, the decision will probably
depend mainly on one consideration, viz., which of the twosystems is consistent with the greatest amount of human liberty
and spontaneity. It is yet to be ascertained whether thecommunistic scheme would be consistent with that multiform
development of human nature, those manifold unlikenesses, thatdiversity of tastes and talents, and variety of intellectual points of

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view, which not only form a great part of the interest of human
life, but, by bringing intellects into stimulating collision and bypresenting to each innumerable notions that he would not haveconceived of himself, are the mainspring of mental and moral
progression.

§ 3. The Socialists who appeal to state-help.
For general purposes, a clearer understanding of the various
schemes may be gained by observing that (1) one class ofsocialists intend to include the state itself within their plan,and (2) another class aim to form separate communities inside
the state, and under its protection.
Of this first system there are no present examples; but theobject of most of the socialistic organizations in the UnitedStates and Europe is to strive for the assumption by the stateof the production and distribution of wealth.147 At present themost active Socialists are to be found in Germany. The originof this influence, however, is to be traced to France.148 LouisBlanc,149 in his “Organisation du Travail,” considers property
the great scourge of society. The Government, he asserts,

[161]

147

For an exposition of the varying forms of modern state socialism, andthat form of it which advocates the nationalization of land (in H. George's“Progress and Poverty,” and Alfred Russel Wallace's “Land Nationalization, its
Necessity and its Aims”) see a chapter in Henry Fawcett's last (sixth) edition of
his “Manual” (1884). For a general and valuable treatise on Socialism, but one
which does not describe schemes much later than Owen's, see Louis Reybaud's“Études sur les reformateurs, ou socialistes modernes” (seventh edition, 1864).
An excellent bibliography is given, vol. ii, pp. 453-470.
148
Pierre Joseph Proudhon (born 1809) made a well-known attack on private
property in his “Qu'est-ce que la Propriété,” “What is Property?” (1840). His
answer was, “It is robbery.” See also Ely, “French and German Socialism”(1883), p. 140.
149
Louis Blanc (born 1813, died 1882). His chief book, the “Organization ofLabor,” appeared in 1840, in the columns of the “Revue du Progrès.”§ 3. The Socialists who appeal to state-help.

189

should regulate production; raise money to be appropriatedwithout interest for creating state workshops, in which theworkmen should elect their own overseers, and all receive
the same wages; and the sums needed should be raised fromthe abolition of collateral inheritance. The important practicalpart of his scheme was that the great state workshops, aided
by the Government, would make private competition in thoseindustries impossible, and thus bring about the change fromthe private to the socialistic system.
The founder of modern German socialism was KarlMarx,150 and almost the only Socialist who pretended toeconomic knowledge. He aimed his attack on the present
social system against the question of value, by asserting thatthe amount of labor necessary for the production of an article
is the sole measure of its exchange value. It follows fromthis that the right of property in the article vests wholly inthe laborer, while the capitalist, if he claims a share of the
product, is nothing less than a robber. No just system, heavers, can properly exist so long as the rate of wages is fixedby free contract between the employer and laborer; therefore
the only remedy is the nationalization of all the elements ofproduction, land, tools, materials, and all existing appliances,which involves, of course, the destruction of the institution ofprivate property. An obvious weakness in this scheme is theprovision that the Government should determine what goods
are to be produced, and that every one is bound to performthat work which is assigned by the state. In this there is150

Karl Marx (born 1818, died 1883) published “The Criticism of Political
Economy” (1859); and an extension of the same book under the new title of“Capital” (1867), of which only the first volume has appeared, on “The Processof the Production of Capital.” This was again enlarged in 1872 to 822 pages.
A large part of the work is filled with extracts from parliamentary reports on
the condition of English workmen. Before the Revolution of 1848 he edited acommunistic journal, and was obliged to leave the country afterward, by which
he was led to London. He was an able writer on history and politics. Marx
was assisted by Friedrich Engels, who wrote “The Condition of the Working
Classes in England” (1845). See Ely, ibid., chap. x.

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no choice of work, and the tyranny of one master would be
supplanted by the tyranny of a greater multiplex master inthe officers of Government. Moreover, it can not be admitted
that exchange value is determined by the quantity of laboralone. Every one knows that the result of ten days' laborof a skilled watch-maker does not exchange for the result often days' labor of an unskilled hodman. Of two men making
shoes, one may produce a good the other a poor article,
although both may work the same length of time; so that
their exchange value ought not to be determined by the mere
quantity of labor expended. Above all, Marx would extend
the equality of wages for the same time to the manager andsuperintendent also. In other words, he proposes to take away
all the incentives to the acquirement or exercise of superiorand signal ability in every work of life, the result of which
would inevitably lead to a deadening extension of mediocrity.
This system gained an undue attention because it was madethe instrument of a socialist propaganda under the leadershipof Ferdinand Lassalle.151 This active leader, in 1863, founded
the German “Workingmen's Union,” a year earlier than the“International152 Association.” In 1869 Liebknecht and his
friends established the “Social Democratic Workingmen's
Party,” which after some difficulties absorbed the followersof Lassalle in a congress at Gotha in 1875, and form thepresent Socialist party in Germany. Their programme,153 as
announced at Gotha, is as follows:
I. Labor is the source of all riches and of all culture.

[163]

151

Born 1825, the son of a rich Jewish merchant. In philosophy andjurisprudence he won the praise of Humboldt and Boeckh. But vanity and wild
ambition checked the success due to great abilities and energy of character. He
was finally shot in a duel in 1864. He appears as the antagonist of Schultze (ofDelitzsch), advocating state-help against the self-help of the originator of thePeople's Banks.
152
For an account of this society see Theodore D. Woolsey's “Communismand Socialism” (1880); “Nineteenth Century,” July, 1878; and Ely, ibid., chap.
xi.
153
See New York “Nation,” Nos. 684, 686.

§ 3. The Socialists who appeal to state-help.
As general profitable labor can only be done by the humansociety, the whole product of labor belongs to society—i.e.,
to all its members—who have the same duties and the sameright to work, each according to his reasonable wants.
In the present society the means of work are the monopolyof the class of capitalists. The class of workingmen thus
become dependent on them, and consequently are given overto all degrees of misery and servitude.
In order to emancipate labor it is requisite that the meansof work be transformed into the common property of society,that all production be regulated by associations, and that theentire product of labor be turned over to society and justly
distributed for the benefit of all.
None but the working-class itself can emancipate labor, as
in relation to it all other classes are only a reactionary mass.
II. Led by these principles, the German Social
Workingmen's party, by all legal means, strives for a freestate and society, the breaking down of the iron laws of wages
by abolishing the system of hired workingmen, by abolishing
exploitation in every shape, and doing away with all socialand political inequality.
The German Social Workingmen's party, although firstworking within its national confines, is fully consciousof the international character of the general workingmen's
movement, and is resolved to fulfill all duties which it imposeson each workingman in order to realize the fraternity of allmen.
The German Social Workingmen's party, for the purpose of
preparing the way, and for the solution of the social problem,
demands the creation of social productive associations, to besupported by the state government, and under the control of
the working-people. The productive associations are to befounded in such numbers that the social organization of thewhole production can be effected by them.
The German Social Workingmen's party requires as thebasis of state government:

191

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1. Universal, equal, direct, and secret suffrage, which,beginning with the twentieth year, obliges all citizens to votein all State, county, and town elections. Election-day must be
a Sunday or a holiday.
2. Direct legislation by the people; decision as to war andpeace by the people.
3. General capability of bearing arms; popular defense inplace of standing armies.
4. Abolition of all exceptional laws, especially thoserelating to the press, public meetings, and associations—in
short, of all laws which hinder the free expression of ideas
and thought.
5. Gratuitous administration of justice by the people.
6. General and equal, popular and gratuitous educationby the Government in all classes and institutes of learning;
general duty to attend school; religion to be declared a private
affair.
The German Social Workingmen's party insists onrealizing in the present state of society:
1. The largest possible extension of political rights andfreedom in conformity to the above six demands.
2. A single progressive income-tax for State, counties,
and towns, instead of those which are imposed at present, andin place of indirect taxes, which unequally burden the people.
3. Unlimited right of combination.
4. A normal working-day corresponding with the wantsof society; prohibition of Sunday labor.
5. Prohibition of children's work and of women's work, so
far as it injures their health and morality.
6. Protective laws for the life and health of workingmen;
sanitary control of their dwellings; superintendence of mines,
factories, industry, and home work by officers chosen by theworkingmen; an effectual law guaranteeing the responsibilityof employers.
7. Regulation of prison-work.

§ 3. The Socialists who appeal to state-help.

193

8. Unrestricted self-government of all banks established
for the mutual assistance of workingmen.
The above scheme also represents very well the characterof the Socialist agitators in the United States, who arethemselves chiefly foreigners, and have foreign conceptionsof socialism. On this form of socialism it is interesting to have
Mr. Mill's later opinions154 in his own words.

“Among those who call themselves Socialists, two kinds of
persons may be distinguished. There are, in the first place,(1) those whose plans for a new order of society, in which
private property and individual competition are to be superseded
and other motives to action substituted, are on the scale of avillage community or township, and would be applied to an
entire country by the multiplication of such self-acting units;of this character are the systems of Owen, of Fourier, and themore thoughtful and philosophic Socialists generally. The otherclass (2) who are more a product of the Continent than ofGreat Britain, and may be called the revolutionary Socialists,
propose to themselves a much bolder stroke. Their scheme is the
management of the whole productive resources of the country
by one central authority, the general Government. And withthis view some of them avow as their purpose that the workingclasses, or somebody in their behalf, should take possession of
all the property of the country, and administer it for the generalbenefit. The aim of that is to substitute the new rule for the old at asingle stroke, and to exchange the amount of good realized under
the present system, and its large possibilities of improvement, fora plunge without any preparation into the most extreme form of
the problem of carrying on the whole round of the operations ofsocial life without the motive power which has always hitherto
worked the social machinery. It must be acknowledged that those154

From his posthumous “Chapters on Socialism,” “Fortnightly Review,”
1879, p. 513 (vol. xxxi), and written in 1869.

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who would play this game on the strength of their own private
opinion, unconfirmed as yet by any experimental verification,must have a serene confidence in their own wisdom on the one
hand, and a recklessness of people's sufferings on the other,which Robespierre and St. Just, hitherto the typical instances of
those united attributes, scarcely came up to.”§ 4. Of various minor schemes, Communistic andSocialistic.

[166][Of the schemes to be tried within a state], the two elaborate
forms of non-communistic Socialism known as Saint-Simonism
and Fourierism are totally free from the objections usually urged
against Communism. The Saint-Simonian155 scheme does notcontemplate an equal, but an unequal division of the produce; itdoes not propose that all should be occupied alike, but differently,
according to their vocation or capacity; the function of each being
assigned, like grades in a regiment, by the choice of the directing
authority, and the remuneration being by salary, proportioned
to the importance, in the eyes of that authority, of the function
itself, and the merits of the person who fulfills it. But to supposethat one or a few human beings, howsoever selected, could, bywhatever machinery of subordinate agency, be qualified to adapt
each person's work to his capacity, and proportion each person's
155

The Count de Saint-Simon served in our Revolutionary War in the Frencharmy, while very young, and ended a life of misfortune and poverty in 1825,a month after the publication of his “Nouveau Christianisme” (Woolsey's“Communism and Socialism,” p. 107). For a fuller account, see R. T. Ely's“French and German Socialism,” p. 53; A. J. Booth's “Saint-Simon andSaint-Simonism” (London, 1871); and Reybaud, ibid.

195
remuneration to his merits, is a supposition almost too chimericalto be reasoned against.156
The most skillfully combined, and with the greatest foresightof objections, of all the forms of Socialism is that commonly
known as Fourierism.157 This system does not contemplate theabolition of private property, nor even of inheritance: on thecontrary, it avowedly takes into consideration, as an elementin the distribution of the produce, capital as well as labor. It
proposes that the operations of industry should be carried on by
associations of about two thousand members, combining theirlabor on a district of about a square league in extent, under theguidance of chiefs selected by themselves (the “phalanstery”).
In the distribution a certain minimum is first assigned for thesubsistence of every member of the community, whether capableor not of labor. The remainder of the produce is shared incertain proportions, to be determined beforehand, among thethree elements, Labor, Capital, and Talent.
The capital of
the community may be owned in unequal shares by different
members, who would in that case receive, as in any otherjoint-stock company, proportional dividends. The claim of each
person on the share of the produce apportioned to talent isestimated by the grade or rank which the individual occupies
in the several groups of laborers to which he or she belongs,
these grades being in all cases conferred by the choice of his or
her companions. The remuneration, when received, would notof necessity be expended or enjoyed in common; there would
156

This experiment when put on trial in France first brought up the question of
the legal justice of giving an absolute right to inherited property, and numberedamong its disciples the economists, Michel Chevalier and Adolphe Blanqui,and the philosopher, Auguste Comte.
157
Fourier was born at Besançon in 1772. He wrote the “Theory of the Four
Movements” (1808); “A Treatise on Domestic and Agricultural Association”(1822); “The Theory of Universal Unity” (1841). Died 1837. See Ely, ibid.,
p. 81; Victor Considérant's “La Destinée Sociale” (fourth edition, 1851); andReybaud, ibid.

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be separate ménages for all who preferred them, and no othercommunity of living is contemplated than that all the membersof the association should reside in the same pile of buildings; forsaving of labor and expense, not only in building, but in every
branch of domestic economy; and in order that, the whole buying
and selling operations of the community being performed by asingle agent, the enormous portion of the produce of industry
now carried off by the profits of mere distributors might be
reduced to the smallest amount possible.
Fourierism was tried in West Virginia by American disciples,and it was advocated by Horace Greeley. A modified
form appeared in the famous community at Brook Farm
(near Dedham, Massachusetts), which drew there George
Ripley, Margaret Fuller, and even George William Curtis andNathaniel Hawthorne.
There have been many smaller communities establishedin the United States, but it can not be said that they havebeen successful from the point of view either of numbers ormaterial prosperity. The followers of Rapp, or the Harmonists,
in Pennsylvania and Indiana; the Owenites,158 in Indiana; thecommunity of Zoar, in Ohio; the Inspirationists, in New Yorkand Iowa; the Perfectionists, at Oneida and Wallingford—are
all evidently suffering from the difficulties due to theabsence of family life, from the increasing spirit of personal
independence which carries away the younger members of theorganizations,159 and the want of that executive ability which

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158

Robert Owen (father of Robert Dale Owen), born 1771, in 1799 wasengaged in the famous New Lanark Mills, of which Jeremy Bentham was oneof the partners. In 1825 he purchased Harmony, in Indiana, from Mr. Rapp.
He believed in a full community of property; that the Government should
employ the surplus of labor for which there was no demand; and that, until themembers became fully trained, affairs should be managed by one head (as inSaint-Simonism).
159
For Brook Farm, see Noyes's “History of American Socialism,” chapter xi,
and the life of “George Ripley,” by O. B. Frothingham (1882). In general,

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distinguishes the successful manager in private enterprises.

§ 5. The Socialist objections to the present order ofSociety examined.
“The attacks160 on the present social order are vigorous andearnest, but open to the charge of exaggeration.
“In the first place, it is unhappily true that the wages ofordinary labor, in all the countries of Europe, are wretchedly
insufficient to supply the physical and moral necessities of the
population in any tolerable measure. But when it is further
alleged that even this insufficient remuneration has a tendency
to diminish; that there is, in the words of M. Louis Blanc, unebaisse continue des salaires; the assertion is in opposition to
all accurate information, and to many notorious facts. It has
yet to be proved that there is any country in the civilized world
where the ordinary wages of labor, estimated either in moneyor in articles of consumption, are declining; while in many they
are, on the whole, on the increase; and an increase which is
becoming, not slower, but more rapid. There are, occasionally,branches of industry which are being gradually superseded bysomething else, and in those, until production accommodates
itself to demand, wages are depressed.
“M. Louis Blanc appears to have fallen into the same error
which was at first committed by Malthus and his followers, that
also, for American experiments see Charles Nordhoff's “The CommunisticSocieties of the United States”; W. A. Hinds's “American Communists” (1878);
Woolsey's “Communism and Socialism” (1880); and Noyes's “American
Socialism” (1870).
160
The extracts in large type in this section are taken from Mr. Mill's “Chapterson Socialism” (“Fortnightly Review,” 1879), being only the beginning of alarger work begun in 1869, and given to the public since his death. They areof interest because they give his conclusions twenty years after his “Political
Economy” was written.

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of supposing because population has a greater power of increase
than subsistence, its pressure upon subsistence must be always
growing more severe. It is a great point gained for truth whenit comes to be seen that the tendency to over-population is afact which Communism, as well as the existing order of society,would have to deal with. However this may be, experience showsthat in the existing state of society the pressure of population on
subsistence, which is the principal cause of low wages, thougha great, is not an increasing evil; on the contrary, the progressof all that is called civilization has a tendency to diminish it,
partly by the more rapid increase of the means of employing
and maintaining labor, partly by the increased facilities opened
to labor for transporting itself to new countries and unoccupied
fields of employment, and partly by a general improvementin the intelligence and prudence of the population. It is, ofcourse, open to discussion what form of society has the greatest
power of dealing successfully with the pressure of population on
subsistence, and on this question there is much to be said forSocialism; but it has no just claim to be considered as the solemeans of preventing the general and growing degradation of themass of mankind through the peculiar tendency of poverty to
produce over-population.
“Next, it must be observed that Socialists generally, and eventhe most enlightened of them, have a very imperfect and onesided notion of the operation of competition. They see half its
effects, and overlook the other half. They forget that competition
is a cause of high prices and values as well as of low; that thebuyers of labor and of commodities compete with one anotheras well as the sellers; and that, if it is competition which keeps
the prices of labor and commodities as low as they are, it iscompetition which keeps them from falling still lower. To meetthis consideration, Socialists are reduced to affirm that, when
the richest competitor has got rid of all his rivals, he commands
the market and can demand any price he pleases. But in the

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ordinary branches of industry no one rich competitor has it inhis power to drive out all the smaller ones. Some businesses
show a tendency to pass out of the hands of small producers or
dealers into a smaller number of larger ones; but the cases inwhich this happens are those in which the possession of a larger
capital permits the adoption of more powerful machinery, more
efficient by more expensive processes, or a better organized
and more economical mode of carrying on business, and thisenables the large dealer legitimately and permanently to supply
the commodity cheaper than can be done on the small scale;to the great advantage of the consumers, and therefore of thelaboring-classes, and diminishing, pro tanto, that waste of theresources of the community so much complained of by Socialists,
the unnecessary multiplication of mere distributors, and of thevarious other classes whom Fourier calls the parasites of industry.
“Another point on which there is much misapprehension on
the part of Socialists, as well as of trades-unionists and otherpartisans of labor against capital, relates to the proportion inwhich the produce of the country is really shared and the amountof what is actually diverted from those who produce it, to enrichother persons. When, for instance, a capitalist invests £20,000 in
his business, and draws from it an income of (suppose) £2,000
a year, the common impression is as if he were the beneficial
owner both of the £20,000 and of the £2,000, while the laborers
own nothing but their wages. The truth, however, is that heonly obtains the £2,000 on condition of applying no part of the£20,000 to his own use. He has the legal control over it, andmight squander it if he chose, but if he did he would not havethe £2,000 a year also. For all personal purposes they have thecapital and he has but the profits, which it only yields to him on
condition that the capital itself is employed in satisfying not his
own wants, but those of laborers. Even of his own share a smallpart only belongs to him as the owner of capital. The portion of
the produce which falls to capital merely as capital is measured

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by the interest of money, since that is all that the owner of capitalobtains when he contributes to production nothing except thecapital itself.
“The result of our review of the various difficulties ofSocialism has led us to the conclusion that the various schemes
for managing the productive resources of the country by publicinstead of private agency have a case for a trial, and some ofthem may eventually establish their claims to preference overthe existing order of things, but that they are at present workable
only by the élite of mankind, and have yet to prove their powerof training mankind at large to the state of improvement which
they presuppose.”§ 6. Property in land different from property inMovables.
It is next to be considered what is included in the idea ofprivate property and by what considerations the application of
the principle should be bounded.
The institution of property, when limited to its essential
elements, consists in the recognition, in each person, of a rightto the exclusive disposal of what he or she have producedby their own exertions, or received either by gift or by fairagreement, without force or fraud, from those who produced it.
The foundation of the whole is, the right of producers to what
they themselves have produced. Nothing is implied in property
but the right of each to his (or her) own faculties, to what he canproduce by them, and to whatever he can get for them in a fairmarket: together with his right to give this to any other person if
he chooses, and the right of that other to receive and enjoy it.
It follows, therefore, that although the right of bequest, or gift
after death, forms part of the idea of private property, the right201
of inheritance, as distinguished from bequest, does not. That theproperty of persons who have made no disposition of it during
their lifetime should pass first to their children, and, failing them,to the nearest relations, may be a proper arrangement or not,but is no consequence of the principle of private property. I
see no reason why collateral inheritance should exist at all. Mr.
Bentham long ago proposed, and other high authorities haveagreed in the opinion, that, if there are no heirs either in thedescending or in the ascending line, the property, in case ofintestacy, should escheat to the state. The parent owes to society
to endeavor to make the child a good and valuable member of
it, and owes to the children to provide, so far as depends onhim, such education, and such appliances and means, as will
enable them to start with a fair chance of achieving by their own
exertions a successful life. To this every child has a claim; and I
can not admit that as a child he has a claim to more.
The essential principle of property being to assure to all
persons what they have produced by their labor and accumulatedby their abstinence, this principle can not apply to what is not
the produce of labor, the raw material of the earth. If the land
derived its productive power wholly from nature, and not at allfrom industry, or if there were any means of discriminating whatis derived from each source, it not only would not be necessary,
but it would be the height of injustice, to let the gift of nature be
engrossed by individuals. [But] the use of the land in agriculture
must indeed, for the time being, be of necessity exclusive; thesame person who has plowed and sown must be permitted toreap.
But though land is not the produce of industry, most of its
valuable qualities are so. Labor is not only requisite for using, butalmost equally so for fashioning, the instrument. Considerable
labor is often required at the commencement, to clear the land for
cultivation. In many cases, even when cleared, its productivenessis wholly the effect of labor and art. One of the barrenest soils in

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the world, composed of the material of the Goodwin Sands, thePays de Waes in Flanders, has been so fertilized by industry as tohave become one of the most productive in Europe. Cultivation
also requires buildings and fences, which are wholly the produceof labor. The fruits of this industry can not be reaped in a shortperiod. The labor and outlay are immediate, the benefit is spreadover many years, perhaps over all future time. A holder will notincur this labor and outlay when strangers and not himself will
be benefited by it. If he undertakes such improvements, he musthave a sufficient period before him in which to profit by them;and he is in no way so sure of having always a sufficient period
as when his tenure is perpetual.
These are the reasons which form the justification, in an
economical point of view, of property in land. It is seen that they
are only valid in so far as the proprietor of land is its improver.
Whenever, in any country, the proprietor, generally speaking,ceases to be the improver, political economy has nothing to say
in defense of landed property, as there established.
When the “sacredness of property” is talked of, it should
always be remembered that any such sacredness does not belong
in the same degree to landed property. No man made the land. It is
the original inheritance of the whole species. Its appropriation iswholly a question of general expediency. When private property
in land is not expedient, it is unjust. The reverse is the case withproperty in movables, and in all things the product of labor: overthese, the owner's power both of use and of exclusion should be
absolute, except where positive evil to others would result fromit; but, in the case of land, no exclusive right should be permitted
in any individual which can not be shown to be productive ofpositive good. To be allowed any exclusive right at all, over a
portion of the common inheritance, while there are others who
have no portion, is already a privilege. No quantity of movable
goods which a person can acquire by his labor prevents othersfrom acquiring the like by the same means; but, from the very

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nature of the case, whoever owns land keeps others out of theenjoyment of it. When land is not intended to be cultivated, nogood reason can in general be given for its being private property
at all. Even in the case of cultivated land, a man whom, though
only one among millions, the law permits to hold thousands ofacres as his single share, is not entitled to think that all this isgiven to him to use and abuse, and deal with as if it concerned
nobody but himself. The rents or profits which he can obtainfrom it are at his sole disposal; but with regard to the land, ineverything which he does with it, and in everything which heabstains from doing, he is morally bound, and should, wheneverthe case admits, be legally compelled to make his interest andpleasure consistent with the public good.

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Chapter II. Of Wages.

§ 1. Of Competition and Custom.

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Political economists generally, and English political economists
above others, have been accustomed to lay almost exclusive
stress upon the first of [two] agencies [competition and custom];
to exaggerate the effect of competition, and to take into little
account the other and conflicting principle. They are apt to
express themselves as if they thought that competition actually
does, in all cases, whatever it can be shown to be the tendencyof competition to do. This is partly intelligible, if we consider
that only through the principle of competition has political
economy any pretension to the character of a science. So far
as rents, profits, wages, prices, are determined by competition,
laws may be assigned for them. Assume competition to be
their exclusive regulator, and principles of broad generality andscientific precision may be laid down, according to which they
will be regulated. The political economist justly deems this his
proper business: and, as an abstract or hypothetical science,
political economy can not be required to do, and indeed can not
do, anything more. But it would be a great misconception of
the actual course of human affairs to suppose that competition
exercises in fact this unlimited sway. I am not speaking ofmonopolies, either natural or artificial, or of any interferencesof authority with the liberty of production or exchange. Such
disturbing causes have always been allowed for by political
economists. I speak of cases in which there is nothing to restrain
competition; no hindrance to it either in the nature of the case orin artificial obstacles; yet in which the result is not determinedby competition, but by custom or usage; competition either not§ 1. Of Competition and Custom.

205

taking place at all, or producing its effect in quite a different
manner from that which is ordinarily assumed to be natural to it.
As stated by Mr. Cairnes,161 political economy is a science just
as is any recognized physical science—astronomy, chemistry,
physiology. The economic “facts we find existing are theresults of causes, between which and them the connection
is constant and invariable. It is, then, the constant relations
exhibited in economic phenomena that we have in view when
we speak of the laws of the phenomena of wealth; and in
the exposition of these laws consists the science of political
economy.” It is to be remembered that economic laws aretendencies, not actual descriptions of any given conditions inthis or that place.

Competition, in fact, has only become in any considerable
degree the governing principle of contracts, at a comparatively
modern period. The further we look back into history, the more
we see all transactions and engagements under the influenceof fixed customs. The relations, more especially between theland-owner and the cultivator, and the payments made by thelatter to the former, are, in all states of society but the mostmodern, determined by the usage of the country. The customof the country is the universal rule; nobody thinks of raising or
lowering rents, or of letting land, on other than the customary
conditions. Competition, as a regulator of rent, has no existence.
Prices, whenever there was no monopoly, came earlier under
the influence of competition, and are much more universally
subject to it, than rents. The wholesale trade, in the great articles
of commerce, is really under the dominion of competition. But
retail price, the price paid by the actual consumer, seems tofeel very slowly and imperfectly the effect of competition; and,
when competition does exist, it often, instead of lowering prices,
merely divides the gains of the high price among a greater
161“Logical Method,” pp. 34, 36.

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number of dealers. The influence of competition is making itself
felt more and more through the principal branches of retail tradein the large towns.
All professional remuneration is regulated by custom. The
fees of physicians, surgeons, and barristers, the charges ofattorneys, are nearly invariable. Not certainly for want ofabundant competition in those professions, but because thecompetition operates by diminishing each competitor's chance offees, not by lowering the fees themselves.
These observations must be received as a general correction
to be applied whenever relevant, whether expressly mentioned
or not, to the conclusions contained in the subsequent portionsof this treatise. Our reasonings must, in general, proceed as if the
known and natural effects of competition were actually produced
by it, in all cases in which it is not restrained by some positive
obstacle. Where competition, though free to exist, does not exist,
or where it exists, but has its natural consequences overruledby any other agency, the conclusions will fail more or less of
being applicable. To escape error, we ought, in applying theconclusions of political economy to the actual affairs of life, toconsider not only what will happen supposing the maximum ofcompetition, but how far the result will be affected if competition
falls short of the maximum.

§ 2. The Wages-fund, and the Objections to it
Considered.
Under the head of Wages are to be considered, first, the causes
which determine or influence the wages of labor generally,and secondly, the differences that exist between the wages ofdifferent employments. It is convenient to keep these two classesof considerations separate; and in discussing the law of wages,

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to proceed in the first instance as if there were no other kindof labor than common unskilled labor, of the average degree of
hardness and disagreeableness.
Competition, however, must be regarded, in the present stateof society, as the principal regulator of wages, and custom orindividual character only as a modifying circumstance, and thatin a comparatively slight degree.
Wages, then, depend mainly upon the demand and supply oflabor; or, as it is often expressed, on the proportion between
population and capital. By population is here meant the number
only of the laboring-class, or rather of those who work for hire;
and by capital, only circulating capital, and not even the wholeof that, but the part which is expended in the direct purchaseof labor. To this, however, must be added all funds which,without forming a part of capital, are paid in exchange forlabor, such as the wages of soldiers, domestic servants, and allother unproductive laborers. There is unfortunately no mode ofexpressing, by one familiar term, the aggregate of what may
be called the wages-fund of a country: and, as the wages of
productive labor form nearly the whole of that fund, it is usual
to overlook the smaller and less important part, and to say thatwages depend on population and capital. It will be convenient toemploy this expression, remembering, however, to consider it aselliptical, and not as a literal statement of the entire truth.
With these limitations of the terms, wages not only depend
upon the relative amount of capital and population, but can not,under the rule of competition, be affected by anything else.
Wages (meaning, of course, the general rate) can not rise, but by
an increase of the aggregate funds employed in hiring laborers,
or a diminution in the number of the competitors for hire; norfall, except either by a diminution of the funds devoted to paying
labor, or by an increase in the number of laborers to be paid.

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This is the simple statement of the well-known WagesFund Theory, which has given rise to no little animateddiscussion. Few economists now assent to this doctrine
when stated as above, and without changes. The first attackon this explanation of the rate of wages came from what
is now a very scarce pamphlet, written by F. D. Longe,
entitled “A Refutation of the Wage-Fund Theory of Modern
Political Economy” (1866). Because laborers do not reallycompete with each other, he regarded the idea of average
wages as absurd as the idea of an average price of ships andcloth; he declared that there was no predetermined wagesfund necessarily expended on labor; and that “demand forcommodities” determined the amount of wealth devoted to
paying wages (p. 46). While the so-called wages-fund limits
the total amount which the laborers can receive, the employer
would try to get his workmen at as much less than that amountas possible, so that the aggregate fund would have no bearing
on the actual amount paid in wages. The quantity of work
to be done, he asserts, determines the quantity of labor to be
employed. About the same time (but unknown to Mr. Longe),
W. T. Thornton was studying the same subject, and attracted
considerable attention by his publication, “On Labor” (1868),
which in Book II, Chap. I, contained an extended argument
to show that demand and supply (i.e., the proportion between
wages-fund and laborers) did not regulate wages, and denied
the existence of a predetermined wages-fund fixed in amount.
His attack, however, assumes a very different conception ofan economic law from that which we think right to insist upon.

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The character of mankind being what it is, it will be for theirinterest to invest so much and no more in labor, and we mustbelieve that in this sense there is a predetermination of wealthto be paid in wages. In order to make good investments, acertain amount must, if capitalists follow their best interests,
go to the payment of labor.162 Mr. Thornton's argument
attracted the more attention because Mr. Mill163 admitted that
Mr. Thornton had induced him to abandon his Wages-Fund
Theory. The subject was, however, taken up, re-examined by
Mr. Cairnes,164 and stated in a truer form. (1.) The total wealthof a country (circle A in the diagram) is the outside limit of its
capital. How much capital will be saved out of this depends
upon the effective desire of accumulation in the community(as set forth in Book I, Chap. VIII). The size of circle B withincircle A, therefore, depends on the character of the people.
The wages-fund, then, depends ultimately on the extent of A,
and proximately on the extent of B. It can never be larger
than B. So far, at least, its amount is “predetermined” in theeconomic sense by general laws regarding the accumulationof capital and the expectation of profit. Circle B contracts
and expands under influences which have nothing to do with
the immediate bargains between capitalists and laborers. (2.)
Another influence now comes in to affect the amount of capitalactually paid as wages, one also governed by general causes
outside the reach of laborer or capitalist, that is, the state of
the arts of production. In production, the particular conditionsof each industry will determine how much capital is to be set
apart for raw material, how much for machinery, buildings,
and all forms of fixed capital, and how many laborers will beassigned to a given machine for a given amount of material.
With some kinds of hand-made goods the largest share ofcapital goes to wages, a less amount for materials, and avery small proportion for machinery and tools. In many162

Cf. Cairnes, “Leading Principles,” pp. 180-188.
In the “Fortnightly Review,” May 1, 1869.
164“Leading Principles,” pp. 149-189.

163

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branches of agriculture and small farming this holds true.
The converse, however, is true in many manufactures, wheremachinery is largely used. No two industries will maintainthe same proportion between the three elements. The natureof the industry, therefore, will determine whether a greater ora less share of capital will be spent in wages. It is needless to
say that this condition of things is not one to be changed at thedemand of either of the two parties to production, Labor andCapital; it responds only to the advance of mechanical scienceor general intelligence. It is impossible, then, to escape theconclusion that general causes restrict the amount which will,
under any normal investment, go to the payment of wages.
Only within the limits set by these forces can any further
expansion or contraction take place. (3.) Within these limits,of course, minor changes may take place, so that the fundcan not be said to be “fixed” or “absolutely predetermined”;
but these changes must take place within such narrow limits
that they do not much affect the practical side of the question.
How these changes act, may be seen in a part of the following
illustration of the above principles:[181]

Suppose a cotton-mill established in one of the valleys
of Vermont, for the management of which the owner has$140,000 of capital. Of this, $100,000 is given for buildings,
machinery, and plant. If he turns over his remaining capital($40,000) each month, we will suppose that $28,000 spent
in raw materials will keep five hundred men occupied ata monthly expenditure of $12,000. The present state ofcotton-manufacture itself settles the relation between a given
quantity of raw cotton and a certain amount of machinery.
A fixed amount of cotton, no more, no less, can be spun byeach spindle and woven by each loom; and the nature of theprocess determines the number of laborers to each machine.
This proportion is something which an owner must obey, if he
expects to compete with other manufacturers: the relationshipis fixed for, not by, him. Now, each of the five hundredlaborers being supposed to receive on an average $1.00 a day,

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imagine an influx of a body of French Canadians who offer
to work, on an average, for eighty cents a day.165 The five
hundred men will now receive but $9,600 monthly instead of$12,000, as before, as a wages-fund; the monthly payment
for wages now is nearly seven per cent, while formerly it was
nearly nine per cent of the total capital invested ($140,000).
Thus it will be seen that the wages-fund can change with achange in the supply of labor: but the point to be noticed isthat it is a change in the subdivision, $12,000, of the total$140,000. That is, this alteration can take place only within
the limits set by the nature of the industry. Now, if this $2,400(i.e., $12,000 less $9,600) saved out of the wages-fund were
to be reinvested, it must necessarily be divided between raw
materials, fixed capital, and wages in the existing relations,that is, only seven per cent of the new $2,400 would be added
to the wages-fund. It is worth while calling attention to this,
if for no other reason than to show that in this way a change
can be readily made in the wages-fund by natural movements;
and that no one can be so absurd as to say that it is absolutely
fixed in amount. But it certainly is “predetermined” in theeconomic sense, in that any reinvestments, as well as former
funds, must necessarily be distributed according to the above
general principles, independent of the “higgling” in the labormarket. The following is Mr. Cairnes's statement of theamount and “predetermination” of the wages-fund:“I believe that, in the existing state of the national wealth,
the character of Englishmen being what it is, a certain prospectof profit will ‘determine’ a certain proportion of this wealthto productive investment; that the amount thus ‘determined’
will increase as the field for investment is extended, and that it
will not increase beyond what this field can find employment
for at that rate of profit which satisfies English commercial
expectation. Further, I believe that, investment thus taking
place, the form which it shall assume will be ‘determined’ by
165

Counting six days to a week and four weeks to a month.

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the nature of the national industries—‘determined,’ not underacts of Parliament, or in virtue of any physical law, but throughthe influence of the investor's interests; while this, the form of
the investment, will again ‘determine’ the proportion of thewhole capital which shall be paid as wages to laborers.”166
In this excellent and masterly conception, the doctrine of awages-fund is not open to the objections usually urged against
it. Indeed, with the exception of Professor Fawcett, scarcely
any economist believes in an absolutely fixed wages-fund. In
this sense, then, and in view of the above explanation, it will
be understood what is meant by saying that wages depend
upon the proportion of the wages-fund to the number of thewage-receivers.167[182]

In applying these principles to the question of strikes, it
is evident enough that if they result in an actual expansionof the whole circle B, by forcing saving from unproductive
expenditure, a real addition, of some extent, may be madeto the wages-fund; but only by increasing the total capital.
If, however, they attempt to increase one of the elementsof capital, the wages-fund, without also adding to the otherelements, fixed capital and materials, in the proportion fixedby the nature of the industry, they will destroy all possibilityof continuing that production in the normal way, and thecapitalist must withdraw from the enterprise.
Francis A. Walker168 has also offered a solution of thisproblem in his “Wages Question” (1876), in which he holds
that “wages are, in a philosophical view of the subject,paid out of the product of present industry, and hence that
166

“Leading Principles,” p. 185.
Mr. Thornton replied to Mr. Cairnes (“Nineteenth Century,” August, 1879).
A succinct statement of the condition of the wages-fund controversy has been
made by Henry Sidgwick, “Fortnightly Review,” September 1, 1879. See also
W. G. Sumner, “Princeton Review,” “Wages,” November, 1882.
168
He advanced the same view in the “North American Review,” vol. cxx,
January, 1875. In his “Political Economy” (1883) he advances a more extensive
theory of distribution. See “Atlantic Monthly,” July, 1883, p. 129.
167

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production furnishes the true measure of wages” (p. 128).
“It is the prospect of a profit in production which determines
the employer to hire laborers; it is the anticipated value ofthe product which determines how much he can pay him”
(p. 144). No doubt wages can be (and often are) paid out of
the current product; but what amount? What is the principleof distribution? Wherever the incoming product is a moral
certainty (and, unless this is true, in no case could wages be
paid out of the future product), saving is as effective upon it as
upon the actual accumulations of the past; and the amount of
the coming product which will be saved and used as capital isdetermined by the same principles which govern the saving ofpast products. An increase of circle A by a larger production
makes possible an increase of circle B, but whether it will beenlarged or not depends on the principle of accumulation. The
larger the total production of wealth, the greater the possible
wages, all must admit; but it does not seem clear that General
Walker has given us a solution of the real question at issue.
The larger the house you build, the larger the rooms may
be; but it does not follow that the rooms will be necessarily
large—as any inmate of a summer hotel will testify.

§ 3. Examination of some popular Opinions
respecting Wages.
There are, however, some facts in apparent contradiction tothis [the Wages-Fund] doctrine, which it is incumbent on us toconsider and explain.
1. For instance, it is a common saying that wages are highwhen trade is good. The demand for labor in any particular
employment is more pressing, and higher wages are paid, when
there is a brisk demand for the commodity produced; and thecontrary when there is what is called a stagnation: then workpeople are dismissed, and those who are retained must submit

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to a reduction of wages; though in these cases there is neither
more nor less capital than before. This is true; and is one ofthose complications in the concrete phenomena which obscureand disguise the operation of general causes; but it is not reallyinconsistent with the principles laid down. Capital which theowner does not employ in purchasing labor, but keeps idle inhis hands, is the same thing to the laborers, for the time being,as if it did not exist. All capital is, from the variations oftrade, occasionally in this state. A manufacturer, finding aslack demand for his commodity, forbears to employ laborers inincreasing a stock which he finds it difficult to dispose of; orif he goes on until all his capital is locked up in unsold goods,
then at least he must of necessity pause until he can get paid forsome of them. But no one expects either of these states to bepermanent; if he did, he would at the first opportunity remove his
capital to some other occupation, in which it would still continue
to employ labor. The capital remains unemployed for a time,
during which the labor market is overstocked, and wages fall.
Afterward the demand revives, and perhaps becomes unusuallybrisk, enabling the manufacturer to sell his commodity evenfaster than he can produce it; his whole capital is then brought
into complete efficiency, and, if he is able, he borrows capitalin addition, which would otherwise have gone into some other
employment. These, however, are but temporary fluctuations:the capital now lying idle will next year be in active employment,that which is this year unable to keep up with the demand willin its turn be locked up in crowded warehouses; and wages inthese several departments will ebb and flow accordingly: but
nothing can permanently alter general wages, except an increaseor a diminution of capital itself (always meaning by the term, thefunds of all sorts, destined for the payment of labor) comparedwith the quantity of labor offering itself to be hired.
2. Again, it is another common notion that high prices makehigh wages; because the producers and dealers, being better off,

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can afford to pay more to their laborers. I have already said thata brisk demand, which causes temporary high prices, causes also
temporary high wages. But high prices, in themselves, can only
raise wages if the dealers, receiving more, are induced to savemore, and make an addition to their capital, or at least to theirpurchases of labor. Wages will probably be temporarily higher inthe employment in which prices have risen, and somewhat lower
in other employments: in which case, while the first half of thephenomenon excites notice, the other is generally overlooked,or, if observed, is not ascribed to the cause which really produced
it. Nor will the partial rise of wages last long: for, though thedealers in that one employment gain more, it does not follow that
there is room to employ a greater amount of savings in their own
business: their increasing capital will probably flow over into
other employments, and there counterbalance the diminution
previously made in the demand for labor by the diminishedsavings of other classes.
A clear distinction must be made between real wages andmoney wages; the former is of importance to the laborer
as being his real receipts. The quantity of commodities
satisfying his desires which the laborer receives for hisexertion constitutes his real wages. The mere amount ofmoney he receives for his exertions, irrespective of what themoney will exchange for, forms his money wages. Since thefunctions of money have not yet been explained, it is difficult
to discuss the relation between prices and money wages here.
But, as the total value of the products in a certain industry
is the sum out of which both money wages and profits arepaid, this total will rise or fall (efficiency of labor remaining
the same) with the price of the particular article. If the pricerises, profits will be greater than elsewhere, and more capitalwill be invested in that one business; that is, the capitalwill be a demand for more labor, and, until equalization isaccomplished in all trades between wages and profits, money

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wages will be higher in some trades than in others.169
When reference is had to the connection between real
wages and prices, the question is a different one. Generalhigh prices would not change general real wages. But if highprices cause higher money wages in particular branches oftrade, then, because the movement is not general, there willaccrue, to those receiving more money, the means to buy moreof real wages. And, as in practice, changes in prices whicharise from an increased demand are partial, and not general,
it often happens that high prices produce high real wages (notgeneral high wages) in some, not in all employments. (Fora further study of this relation between prices and wages thereader is advised to recall this discussion in connection withthat in a later part of the volume, Book III, Chaps. XX and
XXI.)

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3. Another opinion often maintained is, that wages (meaningof course money wages) vary with the price of food; rising when
it rises, and falling when it falls. This opinion is, I conceive,
only partially true; and, in so far as true, in no way affects
the dependence of wages on the proportion between capital andlabor: since the price of food, when it affects wages at all, affects
them through that law. Dear or cheap food caused by variety
of seasons does not affect wages (unless they are artificiallyadjusted to it by law or charity): or rather, it has some tendency
to affect them in the contrary way to that supposed; since intimes of scarcity people generally compete more violently for
employment, and lower the labor market against themselves. But
dearness or cheapness of food, when of a permanent character,and capable of being calculated on beforehand, may affect wages.
(1.) In the first place, if the laborers have, as is often the case, nomore than enough to keep them in working condition and enable
them barely to support the ordinary number of children, it follows
that, if food grows permanently dearer without a rise of wages,
169

See Cairnes, “Leading Principles,” p. 209.

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a greater number of the children will prematurely die; and thus
wages will ultimately be higher, but only because the numberof people will be smaller, than if food had remained cheap. (2.)
But, secondly, even though wages were high enough to admit offood's becoming more costly without depriving the laborers andtheir families of necessaries; though they could bear, physicallyspeaking, to be worse off, perhaps they would not consent to be
so. They might have habits of comfort which were to them asnecessaries, and sooner than forego which, they would put anadditional restraint on their power of multiplication; so that wages
would rise, not by increase of deaths but by diminution of births.
In these cases, then, wages do adapt themselves to the price offood, though after an interval of almost a generation.170 If wages
were previously so high that they could bear reduction, to which
the obstacle was a high standard of comfort habitual among thelaborers, a rise of the price of food, or any other disadvantageouschange in their circumstances, may operate in two ways: (a) it
may correct itself by a rise of wages, brought about through a
gradual effect on the prudential check to population; or (b) it may
permanently lower the standard of living of the class, in casetheir previous habits in respect of population prove stronger thantheir previous habits in respect of comfort. In that case the injury
done to them will be permanent, and their deteriorated condition
will become a new minimum, tending to perpetuate itself as
the more ample minimum did before. It is to be feared that, of
the two modes in which the cause may operate, the last (b) is
the most frequent, or at all events sufficiently so to render all
propositions, ascribing a self-repairing quality to the calamities
which befall the laboring-classes, practically of no validity.
The converse case occurs when, by improvements inagriculture, the repeal of corn laws, or other such causes, the170This proposition needs to be kept in mind for the future discussion of thecost of production of food and its relation to cost of labor. Book II, Chap. V, §
5.

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necessaries of the laborers are cheapened, and they are enabledwith the same [money] wages to command greater comforts than
before. Wages will not fall immediately: it is even possible thatthey may rise; but they will fall at last, so as to leave the laborers
no better off than before, unless during this interval of prosperity
the standard of comfort regarded as indispensable by the classis permanently raised. Unfortunately this salutary effect is by
no means to be counted upon: it is a much more difficult thing
to raise, than to lower, the scale of living which the laborers
will consider as more indispensable than marrying and having afamily. According to all experience, a great increase invariably
takes place in the number of marriages in seasons of cheap foodand full employment.
This is to be seen by some brief statistics of marriages in
Vermont and Massachusetts.
Year.
1860
1861
1862
1863
1864
1865
1866
1867

Vermont
2,179
2,188
1,962
2,007
1,804
2,569
3,001
2,857

Massachusetts
12,404
10,972
11,014
10,873
12,513
13,052
14,42814,451In Vermont, while the average number of marriages wasreached in 1860 and 1861, it fell off on the breaking outof the war; rose in 1863, under the fair progress of theNorthern arms; again fell off in 1864, during the period of
discouragement; and since 1865 has kept a steadily higher
average. In manufacturing Massachusetts the number fellearlier than in agricultural Vermont, at the beginning of the
difficulties.

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1856, July to Jan.
1857, Jan. to July
1857, July to Jan.
1858, Jan. to July
1858, July to Jan.

6,418
5,803
5,936
4,917
5,610

The effects of the financial panic of 1857, in
Massachusetts, show a similar movement in the numberof marriages. The crisis came in October, 1857. In the threemonths following that date there were 400 less marriages.

To produce permanent advantage, the temporary cause
operating upon them must be sufficient to make a great change
in their condition—a change such as will be felt for many
years, notwithstanding any stimulus which it may give during
one generation to the increase of people. When, indeed, theimprovement is of this signal character, and a generation grows
up which has always been used to an improved scale of comfort,
the habits of this new generation in respect to population become
formed upon a higher minimum, and the improvement in theircondition becomes permanent.

§ 4. Certain rare Circumstances excepted, HighWages imply Restraints on Population.
Wages depend, then, on the proportion between the number ofthe laboring population and the capital or other funds devoted
to the purchase of labor; we will say, for shortness, the capital.
If wages are higher at one time or place than at another, if thesubsistence and comfort of the class of hired laborers are more
ample, it is for no other reason than because capital bears agreater proportion to population. It is not the absolute amount

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Principles Of Political Economyof accumulation or of production that is of importance to thelaboring-class; it is not the amount even of the funds destinedfor distribution among the laborers; it is the proportion between
those funds and the numbers among whom they are shared. The
condition of the class can be bettered in no other way than byaltering that proportion to their advantage: and every scheme for
their benefit which does not proceed on this as its foundation is,for all permanent purposes, a delusion.

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In countries like North America and the Australian colonies,
where the knowledge and arts of civilized life and a higheffective desire of accumulation coexist with a boundless extent
of unoccupied land, the growth of capital easily keeps pacewith the utmost possible increase of population, and is chiefly
retarded by the impracticability of obtaining laborers enough.
All, therefore, who can possibly be born can find employment
without overstocking the market: every laboring family enjoys inabundance the necessaries, many of the comforts, and some of theluxuries of life; and, unless in case of individual misconduct, or
actual inability to work, poverty does not, and dependence neednot, exist. [In England] so gigantic has been the progress of thecotton manufacture since the inventions of Watt and Arkwright,that the capital engaged in it has probably quadrupled in thetime which population requires for doubling. While, therefore,
it has attracted from other employments nearly all the hands
which geographical circumstances and the habits or inclinationsof the people rendered available; and while the demand it createdfor infant labor has enlisted the immediate pecuniary interest of
the operatives in favor of promoting, instead of restraining, theincrease of population; nevertheless wages in the great seats ofthe manufacture are still so high that the collective earnings ofa family amount, on an average of years, to a very satisfactorysum; and there is as yet no sign of decrease, while the effecthas also been felt in raising the general standard of agricultural
wages in the counties adjoining.

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But those circumstances of a country, or of an occupation, in
which population can with impunity increase at its utmost rate,
are rare and transitory. Very few are the countries presenting
the needful union of conditions. Either the industrial arts arebackward and stationary, and capital therefore increases slowly,
or, the effective desire of accumulation being low, the increase
soon reaches its limit; or, even though both these elements areat their highest known degree, the increase of capital is checked,
because there is not fresh land to be resorted to of as goodquality as that already occupied. Though capital should fora time double itself simultaneously with population, if all thiscapital and population are to find employment on the same land,
they can not, without an unexampled succession of agricultural
inventions, continue doubling the produce; therefore, if wages do
not fall, profits must; and, when profits fall, increase of capital isslackened.
Except, therefore, in the very peculiar cases which I havejust noticed, of which the only one of any practical importanceis that of a new colony, or a country in circumstances equivalent
to it, it is impossible that population should increase at its
utmost rate without lowering wages. In no old country does
population increase at anything like its utmost rate; in most, at
a very moderate rate: in some countries, not at all. These facts
are only to be accounted for in two ways. Either the whole
number of births which nature admits of, and which happen insome circumstances, do not take place; or, if they do, a large
proportion of those who are born, die. The retardation of increase
results either from mortality or prudence; from Mr. Malthus's
positive, or from his preventive check: and one or the other ofthese must and does exist, and very powerfully too, in all oldsocieties. Wherever population is not kept down by the prudence
either of individuals or of the state, it is kept down by starvation
or disease.

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Principles Of Political Economy§ 5. Due Restriction of Population the only
Safeguard of a Laboring-Class.

[191]

Where a laboring-class who have no property but their daily
wages, and no hope of acquiring it, refrain from over-rapid
multiplication, the cause, I believe, has always hitherto been,
either actual legal restraint, or a custom of some sort which,without intention on their part, insensibly molds their conduct, oraffords immediate inducements not to marry. It is not generally
known in how many countries of Europe direct legal obstacles
are opposed to improvident marriages.
Where there is no general law restrictive of marriage, there
are often customs equivalent to it. When the guilds or tradecorporations of the middle ages were in vigor, their by-laws
or regulations were conceived with a very vigilant eye to theadvantage which the trade derived from limiting competition;and they made it very effectually the interest of artisans not tomarry until after passing through the two stages of apprenticeand journeyman, and attaining the rank of master.
Unhappily, sentimentality rather than common sense usuallypresides over the discussions of these subjects. Discussions on
the condition of the laborers, lamentations over its wretchedness,denunciations of all who are supposed to be indifferent to it,
projects of one kind or another for improving it, were in nocountry and in no time of the world so rife as in the present
generation; but there is a tacit agreement to ignore totally the lawof wages, or to dismiss it in a parenthesis, with such terms as“hard-hearted Malthusianism”; as if it were not a thousand times
more hard-hearted to tell human beings that they may, than thatthey may not, call into existence swarms of creatures who are
sure to be miserable, and most likely to be depraved!
I ask, then, is it true or not, that if their numbers were fewer theywould obtain higher wages? This is the question, and no other:and it is idle to divert attention from it, by attacking any incidental

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position of Malthus or some other writer, and pretending that torefute that is to disprove the principle of population. Some, forinstance, have achieved an easy victory over a passing remarkof Mr. Malthus, hazarded chiefly by way of illustration, that theincrease of food may perhaps be assumed to take place in anarithmetical ratio, while population increases in a geometrical:
when every candid reader knows that Mr. Malthus laid no stresson this unlucky attempt to give numerical precision to things
which do not admit of it, and every person capable of reasoning
must see that it is wholly superfluous to his argument. Others
have attached immense importance to a correction which more
recent political economists have made in the mere language ofthe earlier followers of Mr. Malthus. Several writers had said that
it is the tendency of population to increase faster than the meansof subsistence. The assertion was true in the sense in which they
meant it, namely, that population would in most circumstances
increase faster than the means of subsistence, if it were notchecked either by mortality or by prudence. But inasmuch asthese checks act with unequal force at different times and places,
it was possible to interpret the language of these writers as if
they had meant that population is usually gaining ground upon
subsistence, and the poverty of the people becoming greater.
Under this interpretation of their meaning, it was urged that thereverse is the truth: that as civilization advances, the prudential
check tends to become stronger, and population to slacken its
rate of increase, relatively to subsistence; and that it is an error tomaintain that population, in any improving community, tends toincrease faster than, or even so fast as, subsistence.171 The word
tendency172 is here used in a totally different sense from that of
the writers who affirmed the proposition; but waiving the verbal
question, is it not allowed, on both sides, that in old countries
population presses too closely upon the means of subsistence?
171
172

Mr. Carey takes this ground.
See the explanation of an economic law, Book II, Chap. II, § 1.

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Principles Of Political EconomyChapter III. Of Remedies For Low Wages.

§ 1. A Legal or Customary Minimum of Wages, witha Guarantee of Employment.
The simplest expedient which can be imagined for keeping thewages of labor up to the desirable point would be to fix themby law; and this is virtually the object aimed at in a variety ofplans which have at different times been, or still are, current,
for remodeling the relation between laborers and employers. No
one, probably, ever suggested that wages should be absolutely
fixed, since the interests of all concerned often require that theyshould be variable; but some have proposed to fix a minimumof wages, leaving the variations above that point to be adjusted
by competition. Another plan, which has found many advocatesamong the leaders of the operatives, is that councils should
be formed, which in England have been called local boards oftrade, in France “conseils de prud'hommes,” and other names;
consisting of delegates from the work-people and from theemployers, who, meeting in conference, should agree upon arate of wages, and promulgate it from authority, to be binding
generally on employers and workmen; the ground of decision
being, not the state of the labor market, but natural equity; toprovide that the workmen shall have reasonable wages, and thecapitalist reasonable profits.
The one expedient most suggested by politicians and laborreformers in the United States is an eight-hour law, mandatory
upon all employers. It is to be remembered, however, that invery many industries piece-work exists, and if a diminutionof hours is enforced, that will mean a serious reduction in
the amount of wages which can be possibly earned in a day.

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Principles Of Political Economy
Even if all industries were alike in the matter of arranging
their work, this plan means higher wages for the same work,or the same wages for less work, and so an increased costof labor. This would, then, take its effect on profits at once;
and the effects would be probably seen in a withdrawal of
capital from many industries, where, as now, the profits arevery low. It must be recalled, however, that in the UnitedStates there has been, under the influence of natural causes,
unaided by legislation, a very marked reduction in the hoursof labor, accompanied by an increase of wages. For example,
in 1840, Rhode Island operatives in the carding-room of thecotton-mills worked fourteen hours a day for $3.28 a week,
while in 1884 they work eleven hours and receive $5.40 a
week. This result is most probably due to the gain arisingfrom the invention of labor-saving machinery.

Others again (but these are rather philanthropists interestingthemselves for the laboring-classes, than the laboring people
themselves) are shy of admitting the interference of authority
in contracts for labor: they fear that if law intervened, itwould intervene rashly and ignorantly; they are convincedthat two parties, with opposite interests, attempting to adjust
those interests by negotiation through their representatives on
principles of equity, when no rule could be laid down to determine
what was equitable, would merely exasperate their differences
instead of healing them; but what it is useless to attempt by thelegal sanction, these persons desire to compass by the moral.
Every employer, they think, ought to give sufficient wages; andif he does it not willingly, should be compelled to it by general
opinion; the test of sufficient wages being their own feelings, orwhat they suppose to be those of the public. This is, I think, afair representation of a considerable body of existing opinion on
the subject.
I desire to confine my remarks to the principle involved
in all these suggestions, without taking into account practical

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difficulties, serious as these must at once be seen to be.
I shall suppose that by one or other of these contrivances
wages could be kept above the point to which they would
be brought by competition. This is as much as to say, above
the highest rate which can be afforded by the existing capitalconsistently with employing all the laborers. For it is a mistaketo suppose that competition merely keeps down wages. It isequally the means by which they are kept up. When there are
any laborers unemployed, these, unless maintained by charity,
become competitors for hire, and wages fall; but when all who
were out of work have found employment, wages will not, under
the freest system of competition, fall lower. There are strange
notions afloat concerning the nature of competition. Some people
seem to imagine that its effect is something indefinite; that thecompetition of sellers may lower prices, and the competition oflaborers may lower wages, down to zero, or some unassignable
minimum. Nothing can be more unfounded. Goods can only belowered in price by competition to the point which calls forthbuyers sufficient to take them off; and wages can only be loweredby competition until room is made to admit all the laborers to ashare in the distribution of the wages-fund. If they fell below thispoint, a portion of capital would remain unemployed for want oflaborers; a counter-competition would commence on the side ofcapitalists, and wages would rise.
The assumption in the last chapter in regard to competitionand custom should be kept in mind in all this reasoning. As amatter of fact, there is not that mobility of labor which insures
so free an operation of competition that equality of payment
always exists. In reality there is no competition at all between
the lower grades of laborers and the higher classes of skilledlabor. Of course, the tendency is as explained by Mr. Mill,and as time goes on there is a distinctly greater mobility oflabor visible. Vast numbers pass from Scandinavia and othercountries of Europe to the United States, or from England to

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Principles Of Political Economy
Australia, urged by the desire to go from a community of low
to one of higher wages.

[196]

Since, therefore, the rate of wages which results fromcompetition distributes the whole wages-fund among the wholelaboring population, if law or opinion succeeds in fixing wages
above this rate, some laborers are kept out of employment;
and as it is not the intention of the philanthropists that theseshould starve, they must be provided for by a forced increaseof the wages-fund—by a compulsory saving. It is nothing tofix a minimum of wages unless there be a provision that work,or wages at least, be found for all who apply for it. This,accordingly, is always part of the scheme, and is consistent with
the ideas of more people than would approve of either a legal ora moral minimum of wages. Popular sentiment looks upon it as
the duty of the rich, or of the state, to find employment for all
the poor. If the moral influence of opinion does not induce therich to spare from their consumption enough to set all the poor
at work at “reasonable wages,” it is supposed to be incumbent
on the state to lay on taxes for the purpose, either by local rates
or votes of public money. The proportion between labor andthe wages-fund would thus be modified to the advantage of thelaborers, not by restriction of population, but by an increase ofcapital.

§ 2. —Would Require as a Condition Legal
Measures for Repression of Population.
If this claim on society could be limited to the existing generation;
if nothing more were necessary than a compulsory accumulation,
sufficient to provide permanent employment at ample wages forthe existing numbers of the people; such a proposition would
have no more strenuous supporter than myself. Society mainly229
consists of those who live by bodily labor; and if society, thatis, if the laborers, lend their physical force to protect individuals
in the enjoyment of superfluities, they are entitled to do so, andhave always done so, with the reservation of a power to tax
those superfluities for purposes of public utility; among which
purposes the subsistence of the people is the foremost. Since noone is responsible for having been born, no pecuniary sacrifice is
too great to be made by those who have more than enough, for the
purpose of securing enough to all persons already in existence.
But it is another thing altogether when those who haveproduced and accumulated are called upon to abstain fromconsuming until they have given food and clothing, not only to
all who now exist, but to all whom these or their descendants may
think fit to call into existence. Such an obligation acknowledged
and acted upon, would suspend all checks, both positive andpreventive; there would be nothing to hinder population fromstarting forward at its rapidest rate; and as the natural increaseof capital would, at the best, not be more rapid than before,
taxation, to make up the growing deficiency, must advance withthe same gigantic strides. But let them work ever so efficiently,
the increasing population could not, as we have so often shown,increase the produce proportionally; the surplus, after all werefed, would bear a less and less proportion to the whole produce
and to the population: and the increase of people going on ina constant ratio, while the increase of produce went on in adiminishing ratio, the surplus would in time be wholly absorbed;
taxation for the support of the poor would engross the wholeincome of the country; the payers and the receivers would be
melted down into one mass.
It would be possible for the state to guarantee employment
at ample wages to all who are born. But if it does this, itis bound in self-protection, and for the sake of every purpose
for which government exists, to provide that no person shallbe born without its consent. To give profusely to the people,

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whether under the name of charity or of employment, without
placing them under such influences that prudential motives shallact powerfully upon them, is to lavish the means of benefiting
mankind without attaining the object. But remove the regulationof their wages from their own control; guarantee to them a certain
payment, either by law or by the feeding of the community; andno amount of comfort that you can give them will make either
them or their descendants look to their own self-restraint as theproper means for preserving them in that state.
The famous poor-laws of Elizabeth, enacted in 1601, wereat first intended to relieve the destitute poor, sick, aged, andimpotent, but in their administration a share was given to all
who begged it. Employers, of course, found it cheaper tohire labor partly paid for by the parish, and the independent
farm-laborer who would not go on the parish found his own
wages lowered by this kind of competition. This continued acrying evil until it reached the proportions described by May:
“As the cost of pauperism, thus encouraged, was increasing,
the poorer rate-payers were themselves reduced to poverty.
The soil was ill-cultivated by pauper labor, and its rental
consumed by parish rates. In a period of fifty years, thepoor-rates were quadrupled, and had reached, in 1833, theenormous amount of £8,600,000. In many parishes they wereapproaching the annual value of the land itself.”173 The oldpoor-laws were repealed, and there went into effect in 1834
the workhouse system, which, while not denying subsistence
to all those born, required that the giving of aid should be madeas disagreeable as possible, in order to stimulate among thepoor a feeling of repugnance to all aid from the community.
This is also the general idea of poor-relief in the United States.
The cultivation of the principle of self-help in each laborer
is certainly the right object at which to aim. In the United States

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173

“Constitutional History of England,” vol. ii, p. 563. See also Nicholls's“History of the Poor Laws,” vol. ii, p. 303.

231
voluntary charitable organizations have associated together,in some cities, in order to scrutinize all cases of poverty
through a number of visitors in each district, who advise andcounsel the unfortunate, but never give money. This system
has been very successful, and, by basing its operations on theprinciple of self-help, has given the best proof of its right toan increasing influence.

§ 3. Allowances in Aid of Wages and the Standard of
Living.
Next to the attempts to regulate wages, and provide artificiallythat all who are willing to work shall receive an adequate pricefor their labor, we have to consider another class of popular
remedies, which do not profess to interfere with freedom ofcontract; which leave wages to be fixed by the competition of
the market, but, when they are considered insufficient, endeavor
by some subsidiary resource to make up to the laborers forthe insufficiency. Of this nature was the allowance system.
The principle of this scheme being avowedly that of adapting
the means of every family to its necessities, it was a naturalconsequence that more should be given to the married than to thesingle, and to those who had large families than to those who had
not: in fact, an allowance was usually granted for every child. It
is obvious that this is merely another mode of fixing a minimumof wages.
There is a rate of wages, either the lowest on which thepeople can, or the lowest on which they will consent, to live. We
will suppose this to be seven shillings a week. Shocked at the
wretchedness of this pittance, the parish authorities humanely
make it up to ten. But the laborers are accustomed to seven,and though they would gladly have more, will live on that (asthe fact proves) rather than restrain the instinct of multiplication.

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Their habits will not be altered for the better by giving themparish pay. Receiving three shillings from the parish, they will
be as well off as before, though they should increase sufficiently
to bring down wages to four shillings. They will accordingly
people down to that point; or, perhaps, without waiting for an
increase of numbers, there are unemployed laborers enough inthe workhouse to produce the effect at once. It is well known
that the allowance system did practically operate in the mode
described, and that under its influence wages sank to a lower rate
than had been known in England before.
The operation of a low standard upon the wages of thosein the community who have a higher one, has been seenin the United States to a certain extent by the landing on
our shores of Chinese laborers, who maintain a decidedly
lower standard of living than either their American or Irish
competitors. If they come in such numbers as to retain theirlower standard by forming a group by themselves, and are
thereby not assimilated into the body of laborers who havea higher standard of comfort, they can, to the extent of theirability to do work, drive other laborers out of employment.
This, moreover, is exactly what was done by the Irish, whodrove Americans out of the mills of New England, and who
are now being driven out, probably, by the French Canadians,
with a standard lower than the Irish. The Chinese comehere now without their families, as may be seen by theaccompanying diagram, in which the shaded side represents
the males on the left, and the unshaded the females on theright, of the perpendicular line.
Decade.
12345Males.
6
106
351
283
139

Females.
4
12
37
15
3

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6
7
8
9

32
10
1
0

1
0
0
0
[200]

The horizontal lines show the ages, the largest number
being about thirty years of age. It will be noted how many
come in the prime of life, and how few children and females
there are.
It need hardly be said that the economic side of a questionis here discussed, which requires for its solution many ethicaland political considerations besides.

§ 4. Grounds for Expecting Improvement in Public
Opinion on the Subject of Population.
By what means, then, is poverty to be contended against? How
is the evil of low wages to be remedied? If the expedientsusually recommended for the purpose are not adapted to it, canno others be thought of? Is the problem incapable of solution?
Can political economy do nothing, but only object to everything,and demonstrate that nothing can be done? Those who think it
hopeless that the laboring-classes should be induced to practicea sufficient degree of prudence in regard to the increase of theirfamilies, because they have hitherto stopped short of that point,
show an inability to estimate the ordinary principles of humanaction. Nothing more would probably be necessary to secure that
result, than an opinion generally diffused that it was desirable.
But let us try to imagine what would happen if the idea became
general among the laboring-class that the competition of too great
numbers was the principal cause of their poverty. We are often
told that the most thorough perception of the dependence of

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wages on population will not influence the conduct of a laboringman, because it is not the children he himself can have thatwill produce any effect in generally depressing the labor market.
True, and it is also true that one soldier's running away will not
lose the battle; accordingly, it is not that consideration whichkeeps each soldier in his rank: it is the disgrace which naturally
and inevitably attends on conduct by any one individual which,if pursued by a majority, everybody can see would be fatal. Men
are seldom found to brave the general opinion of their class,unless supported either by some principle higher than regard for
opinion, or by some strong body of opinion elsewhere.
If the opinion were once generally established among thelaboring-class that their welfare required a due regulation of
the numbers of families, the respectable and well-conducted of
the body would conform to the prescription, and only thosewould exempt themselves from it who were in the habit ofmaking light of social obligations generally; and there would bethen an evident justification for converting the moral obligation
against bringing children into the world, who are a burden to
the community, into a legal one; just as in many other casesof the progress of opinion, the law ends by enforcing against
recalcitrant minorities obligations which, to be useful, must be
general, and which, from a sense of their utility, a large majority
have voluntarily consented to take upon themselves.
The dependence of wages on the number of the competitors
for employment is so far from hard of comprehension, or
unintelligible to the laboring-classes, that by great bodies ofthem it is already recognized and habitually acted on. It isfamiliar to all trades-unions: every successful combination tokeep up wages owes its success to contrivances for restricting
the number of competitors; all skilled trades are anxious tokeep down their own numbers, and many impose, or endeavor
to impose, as a condition upon employers, that they shall nottake more than a prescribed number of apprentices. There is,235
of course, a great difference between limiting their numbers by
excluding other people, and doing the same thing by a restraint
imposed on themselves; but the one as much as the other shows aclear perception of the relation between their numbers and theirremuneration. The principle is understood in its application to
any one employment, but not to the general mass of employment.
For this there are several reasons: first, the operation of causes
is more easily and distinctly seen in the more circumscribedfield; secondly, skilled artisans are a more intelligent class thanordinary manual laborers; and the habit of concert, and of passing
in review their general condition as a trade, keeps up a better
understanding of their collective interests; thirdly and lastly, they
are the most provident, because they are the best off, and havethe most to preserve.

§ 5. Twofold means of Elevating the Habits of theLaboring-People; by Education, and by Foreign andHome Colonization.
For the purpose, therefore, of altering the habits of the laboring
people, there is need of a twofold action, directed simultaneously
upon their intelligence and their poverty. An effective national
education of the children of the laboring-class is the first thing
needful; and, coincidently with this, a system of measures whichshall (as the Revolution did in France) extinguish extreme poverty
for one whole generation. Without entering into disputable points,
it may be asserted without scruple that the aim of all intellectual
training for the mass of the people should be to cultivate common
sense; to qualify them for forming a sound practical judgmentof the circumstances by which they are surrounded. [But]education is not compatible with extreme poverty. It is impossible
effectually to teach an indigent population. Toward effecting this

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object there are two resources available, without wrong to any
one, without any of the liabilities of mischief attendant on
voluntary or legal charity, and not only without weakening, buton the contrary strengthening, every incentive to industry, andevery motive to forethought.
The first is a great national measure of colonization. I mean, agrant of public money, sufficient to remove at once, and establish
in the colonies, a considerable fraction of the youthful agricultural
population. It has been shown by others that colonization on
an adequate scale might be so conducted as to cost the country
nothing, or nothing that would not be certainly repaid; andthat the funds required, even by way of advance, would not be
drawn from the capital employed in maintaining labor, but fromthat surplus which can not find employment at such profit asconstitutes an adequate remuneration for the abstinence of thepossessor, and which is therefore sent abroad for investment, or
wasted at home in reckless speculations.
The second resource would be to devote all common land,
hereafter brought into cultivation, to raising a class of small
proprietors. What I would propose is, that common land should
be divided into sections of five acres or thereabout, to be
conferred in absolute property on individuals of the laboringclass who would reclaim and bring them into cultivation by theirown labor.
This suggestion works to the same purpose as the proposalthat our Government should retain its public lands and aid in
the formation of a great number of small farmers, rather than,by huge grants, to foster large holdings in the Western States
and Territories.174

The preference should be given to such laborers, and there aremany of them, as had saved enough to maintain them until their174

For further discussion of the advantages of small holdings, see Book IV,
Chap. V, § 2.

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first crop was got in, or whose character was such as to induce
some responsible person to advance to them the requisite amounton their personal security. The tools, the manure, and in somecases the subsistence also, might be supplied by the parish, or by
the state; interest for the advance, at the rate yielded by the publicfunds, being laid on as a perpetual quitrent, with power to thepeasant to redeem it at any time for a moderate number of years'
purchase. These little landed estates might, if it were thought
necessary, be indivisible by law; though, if the plan worked in
the manner designed, I should not apprehend any objectionable
degree of subdivision. In case of intestacy, and in default ofamicable arrangement among the heirs, they might be bought bygovernment at their value, and re-granted to some other laborer
who could give security for the price. The desire to possess
one of these small properties would probably become, as on theContinent, an inducement to prudence and economy pervading
the whole laboring population; and that great desideratum among
a people of hired laborers would be provided, an intermediateclass between them and their employers; affording them the
double advantage of an object for their hopes, and, as there would
be good reason to anticipate, an example for their imitation.
It would, however, be of little avail that either or both of thesemeasures of relief should be adopted, unless on such a scale
as would enable the whole body of hired laborers remaining on
the soil to obtain not merely employment, but a large addition
to the present wages—such an addition as would enable themto live and bring up their children in a degree of comfort andindependence to which they have hitherto been strangers.

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Chapter IV. Of The Differences Of Wages
In Different Employments.

§ 1. Differences of Wages Arising from Different
Degrees of Attractiveness in Different Employments.

[206]

In treating of wages, we have hitherto confined ourselves to thecauses which operate on them generally, and en masse; the laws
which govern the remuneration of ordinary or average labor,
without reference to the existence of different kinds of work
which are habitually paid at different rates, depending in somedegree on different laws. We will now take into considerationthese differences, and examine in what manner they affect or are
affected by the conclusions already established.
The differences, says [Adam Smith], arise partly “from certain
circumstances in the employments themselves, which either
really, or at least in the imaginations of men, make up for a small
pecuniary gain in some, and counterbalance a great one in others.”
These circumstances he considers to be: “First, the agreeablenessor disagreeableness of the employments themselves; secondly,
the easiness and cheapness, or the difficulty and expenseof learning them; thirdly, the constancy or inconstancy of
employment in them; fourthly, the small or great trust whichmust be reposed in those who exercise them; and, fifthly, theprobability or improbability of success in them.”(1.) “The wages of labor vary with the ease or hardship, thecleanliness or dirtiness, the honorableness or dishonorableness ofthe employment. A journeyman blacksmith, though an artificer,
seldom earns so much in twelve hours as a collier, who is only
a laborer, does in eight. His work is not quite so dirty, is lessdangerous, and is carried on in daylight and above ground. Honor

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makes a great part of the reward of all honorable professions. In
point of pecuniary gain, all things considered,” their recompense
is, in his opinion, below the average. “Disgrace has the contraryeffect. The trade of a butcher is a brutal and an odious business;but it is in most places more profitable than the greater part ofcommon trades. The most detestable of all employments, that ofthe public executioner, is, in proportion to the quantity of work
done, better paid than any common trade whatever.”(2.) “Employment is much more constant,” continues Adam
Smith, “in some trades than in others. In the greater part ofmanufactures, a journeyman may be pretty sure of employment
almost every day in the year that he is able to work. A mason or
brick-layer, on the contrary, can work neither in hard frost nor infoul weather, and his employment at all other times depends upon
the occasional calls of his customers. He is liable, in consequence,
to be frequently without any. What he earns, therefore, while heis employed, must not only maintain him while he is idle, butmake him some compensation for those anxious and desponding
moments which the thought of so precarious a situation must
sometimes occasion.”“When (1) the inconstancy of the employment is combinedwith (2) the hardship, disagreeableness, and dirtiness of thework, it sometimes raises the wages of the most common labor
above those of the most skillful artificers. A collier working by
the piece is supposed, at Newcastle, to earn commonly about
double, and in many parts of Scotland about three times, thewages of common labor. His high wages arise altogether fromthe hardship, disagreeableness, and dirtiness of his work. His
employment may, upon most occasions, be as constant as hepleases. The coal-heavers in London exercise a trade which inhardship, dirtiness, and disagreeableness almost equals that ofcolliers; and from the unavoidable irregularity in the arrivalsof coal-ships, the employment of the greater part of them isnecessarily very inconstant. If colliers, therefore, commonly

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earn double and triple the wages of common labor, it ought not
to seem unreasonable that coal-heavers should sometimes earn
four or five times those wages. In the inquiry made into theircondition a few years ago, it was found that, at the rate at which
they were then paid, they could earn about four times the wagesof common labor in London.”These inequalities of remuneration, which are supposed tocompensate for the disagreeable circumstances of particular
employments, would, under certain conditions, be naturalconsequences of perfectly free competition: and as between
employments of about the same grade, and filled by nearly thesame description of people, they are, no doubt, for the most part,
realized in practice.
But it is altogether a false view of the state of facts to present
this as the relation which generally exists between agreeableand disagreeable employments. The really exhausting and thereally repulsive labors, instead of being better paid than others,
are almost invariably paid the worst of all, because performedby those who have no choice. If the laborers in the aggregate,
instead of exceeding, fell short of the amount of employment,
work which was generally disliked would not be undertaken,
except for more than ordinary wages. But when the supplyof labor so far exceeds the demand that to find employment
at all is an uncertainty, and to be offered it on any terms afavor, the case is totally the reverse. Partly from this cause, andpartly from the natural and artificial monopolies, which will be
spoken of presently, the inequalities of wages are generally inan opposite direction to the equitable principle of compensation,erroneously represented by Adam Smith as the general law of
the remuneration of labor.
(3.) One of the points best illustrated by Adam Smith is theinfluence exercised on the remuneration of an employment by
the uncertainty of success in it. If the chances are great of total
failure, the reward in case of success must be sufficient to make§ 2. Differences arising from Natural Monopolies.

241

up, in the general estimation, for those adverse chances. Put yourson apprentice to a shoemaker, there is little doubt of his learning
to make a pair of shoes; but send him to study the law, it is at least
twenty to one if ever he makes such proficiency as will enable
him to live by the business. In a perfectly fair lottery, those
who draw the prizes ought to gain all that is lost by those who
draw the blanks. In a profession where twenty fail for one thatsucceeds, that one ought to gain all that should have been gainedby the unsuccessful twenty. How extravagant soever the fees ofcounselors-at-law may sometimes appear, their real retribution
is never equal to this.

§ 2. Differences arising from Natural Monopolies.
The preceding are cases in which inequality of remuneration isnecessary to produce equality of attractiveness, and are examplesof the equalizing effect of free competition. The following arecases of real inequality, and arise from a different principle.
(4.) “The wages of labor vary according to the small or
great trust which must be reposed in the workmen. The
wages of goldsmiths and jewelers are everywhere superior tothose of many other workmen, not only of equal but of muchsuperior ingenuity, on account of the precious materials withwhich they are intrusted.” The superiority of reward is nothere the consequence of competition, but of its absence: not acompensation for disadvantages inherent in the employment, but
an extra advantage; a kind of monopoly price, the effect not ofa legal, but of what has been termed a natural monopoly. If
all laborers were trustworthy, it would not be necessary to give
extra pay to working goldsmiths on account of the trust. The
degree of integrity required being supposed to be uncommon,
those who can make it appear that they possess it are able to take

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advantage of the peculiarity, and obtain higher pay in proportion
to its rarity.

[209]

This same explanation of a natural monopoly applies exactly
to the causes which give able executive managers, whowatch over productive operations, the usually high rewards
for labor under the name of “wages of superintendence.”
If successful managers of cotton or woolen mills were asplentiful, in proportion to the demand for them, as ordinary
artisans, in proportion to the demand for them, then theformer would get no higher rewards than the latter. Able
executive and business managers secure high wages solely
on the ground—as explained above—of monopoly; that is,because their numbers, owing to natural causes, are few
relatively to the demand for them in every industry in theland.

(5.) Some employments require a much longer time to learn,
and a much more expensive course of instruction, than others;
and to this extent there is, as explained by Adam Smith, aninherent reason for their being more highly remunerated. Wages,
consequently, must yield, over and above the ordinary amount,an annuity sufficient to repay these sums, with the common rateof profit, within the number of years [the laborer] can expect tolive and be in working condition.
But, independently of these or any other artificial monopolies,
there is a natural monopoly in favor of skilled laborers against
the unskilled, which makes the difference of reward exceed,
sometimes in a manifold proportion, what is sufficient merely
to equalize their advantages. But the fact that a course of
instruction is required, of even a low degree of costliness, orthat the laborer must be maintained for a considerable time fromother sources, suffices everywhere to exclude the great body ofthe laboring people from the possibility of any such competition.
Until lately, all employments which required even the humble

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education of reading and writing could be recruited only from aselect class, the majority having had no opportunity of acquiring
those attainments.
Here is found the germ of the idea, which has been elaborately
worked out by Mr. Cairnes175 in his theory of non-competinggroups of laborers: “What we find, in effect, is not a whole
population competing indiscriminately for all occupations,but a series of industrial layers superposed on one another,
within each of which the various candidates for employment
possess a real and effective power of selection, while those
occupying the several strata are, for all purposes of effective
competition, practically isolated from each other.” (Mr. Millcertainly understood this fully, and stated it clearly again inBook III, Chap. II, § 2.)

The changes, however, now so rapidly taking place in usages
and ideas, are undermining all these distinctions; the habits or
disabilities which chained people to their hereditary condition
are fast wearing away, and every class is exposed to increased
and increasing competition from at least the class immediately
below it. The general relaxation of conventional barriers, and theincreased facilities of education which already are, and will bein a much greater degree, brought within the reach of all, tend to
produce, among many excellent effects, one which is the reverse:they tend to bring down the wages of skilled labor.

§ 3. Effect on Wages of the Competition of Persons
having other Means of Support.
A modifying circumstance still remains to be noticed, whichinterferes to some extent with the operation of the principles
175“Leading Principles,” pp. 64-69.

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thus far brought to view. While it is true, as a general rule,that the earnings of skilled labor, and especially of any laborwhich requires school education, are at a monopoly rate, fromthe impossibility, to the mass of the people, of obtaining that
education, it is also true that the policy of nations, or the bountyof individuals, formerly did much to counteract the effect of thislimitation of competition, by offering eleemosynary instruction
to a much larger class of persons than could have obtained thesame advantages by paying their price.
[Adam Smith has pointed out that] “whenever the law has
attempted to regulate the wages of workmen, it has always beenrather to lower them than to raise them. But the law has upon
many occasions attempted to raise the wages of curates, and,for the dignity of the Church, to oblige the rectors of parishes
to give them more than the wretched maintenance which they
themselves might be willing to accept of. And in both cases
the law seems to have been equally ineffectual, and has neverbeen either able to raise the wages of curates or to sink thoseof laborers to the degree that was intended, because it has neverbeen able to hinder either the one from being willing to accept ofless than the legal allowance, on account of the indigence of theirsituation and the multitude of their competitors, or the other fromreceiving more, on account of the contrary competition of those
who expected to derive either profit or pleasure from employing
them.”
Although the highest pecuniary prizes of successful authorship
are incomparably greater than at any former period, yet on any
rational calculation of the chances, in the existing competition,
scarcely any writer can hope to gain a living by books, and to do soby magazines and reviews becomes daily more difficult. It is only
the more troublesome and disagreeable kinds of literary labor,
and those which confer no personal celebrity, such as most of
those connected with newspapers, or with the smaller periodicals,
on which an educated person can now rely for subsistence. Of

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these, the remuneration is, on the whole, decidedly high; because,though exposed to the competition of what used to be called “poorscholars” (persons who have received a learned education fromsome public or private charity), they are exempt from that ofamateurs, those who have other means of support being seldom
candidates for such employments.
When an occupation is carried on chiefly by persons who
derive the main portion of their subsistence from other sources, its
remuneration may be lower almost to any extent than the wagesof equally severe labor in other employments. The principal
example of the kind is domestic manufactures. When spinningand knitting were carried on in every cottage, by families deriving
their principal support from agriculture, the price at which theirproduce was sold (which constituted the remuneration of theirlabor) was often so low that there would have been required
great perfection of machinery to undersell it. The amount of the
remuneration in such a case depends chiefly upon whether thequantity of the commodity produced by this description of labor
suffices to supply the whole of the demand. If it does not, andthere is consequently a necessity for some laborers who devote
themselves entirely to the employment, the price of the article
must be sufficient to pay those laborers at the ordinary rate, andto reward, therefore, very handsomely the domestic producers.
But if the demand is so limited that the domestic manufacture
can do more than satisfy it, the price is naturally kept down to
the lowest rate at which peasant families think it worth while tocontinue the production. Thus far, as to the remuneration of thesubsidiary employment; but the effect to the laborers of having
this additional resource is almost certain to be (unless peculiar
counteracting causes intervene) a proportional diminution of thewages of their main occupation.
For the same reason it is found that, cæteris paribus, those
trades are generally the worst paid in which the wife and childrenof the artisan aid in the work. The income which the habits of

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the class demand, and down to which they are almost sure to
multiply, is made up in those trades by the earnings of the wholefamily, while in others the same income must be obtained by thelabor of the man alone. It is even probable that their collective
earnings will amount to a smaller sum than those of the man
alone in other trades, because the prudential restraint on marriage
is unusually weak when the only consequence immediately felt
is an improvement of circumstances, the joint earnings of thetwo going further in their domestic economy after marriage than
before.
This statement seems to be borne out by the statistics ofwages176 both in England and the United States. In our
cotton-mills, where women do certain kinds of work equallywell with men, the wages of the men are lower than in outside
employments into which women can not enter.
Blacksmiths, per week: $16.74
Family of four: Drawers-in, cotton-mill—man, per week:$5.50
Family of four: Drawers-in, cotton-mill—woman, per week:$5.50
Family of four: Tenders, two boys: $4.50
Total: $15.50
In this case the family of four all together receive only
about the same as the wages of the single blacksmith alone.

[213]§ 4. Wages of Women, why Lower than those of
Men.
Where men and women work at the same employment, if it be one
for which they are equally fitted in point of physical power, they
are not always unequally paid. Women in factories sometimes
176

See Young, “Labor in Europe.”§ 4. Wages of Women, why Lower than those of Men.

247

earn as much as men; and so they do in hand-loom weaving,which, being paid by the piece, brings their efficiency to a suretest. When the efficiency is equal, but the pay unequal, theonly explanation that can be given is custom. But the principal
question relates to the peculiar employments of women. The
remuneration of these is always, I believe, greatly below that of
employments of equal skill and equal disagreeableness carriedon by men. In some of these cases the explanation is evidently
that already given: as in the case of domestic servants, whose
wages, speaking generally, are not determined by competition,
but are greatly in excess of the market value of the labor, and in
this excess, as in almost all things which are regulated by custom,
the male sex obtains by far the largest share. In the occupations
in which employers take full advantage of competition, the low
wages of women, as compared with the ordinary earnings ofmen, are a proof that the employments are overstocked: that
although so much smaller a number of women than of men
support themselves by wages, the occupations which law andusage make accessible to them are comparatively so few that thefield of their employment is still more overcrowded.
Yet within the employments open to women, such as millineryand dress-making, certain women are able to charge excessively high prices for work, because, having obtained areputation for especial skill and taste, they can exact in thehigh prices of their articles what is really their high wages.
Within these employments women are unable to earn a living
not so much by the lack of work, as by not bringing to theiroccupation that amount of skill and those business qualities(owing, of course, to their being brought up unaccustomed tobusiness methods) which are requisite for the success of any
one, either man or woman.
[214]

It must be observed that, as matters now stand, a sufficientdegree of overcrowding may depress the wages of women to a

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much lower minimum than those of men. The wages, at least of
single women, must be equal to their support, but need not be
more than equal to it; the minimum, in their case, is the pittanceabsolutely requisite for the sustenance of one human being. Now
the lowest point to which the most superabundant competition
can permanently depress the wages of a man is always somewhat
more than this. Where the wife of a laboring-man does not bygeneral custom contribute to his earnings, the man's wages mustbe at least sufficient to support himself, a wife, and a numberof children adequate to keep up the population, since, if it wereless, the population would not be kept up.

§ 5. Differences of Wages Arising from Laws,
Combinations, or Customs.
Thus far we have, throughout this discussion, proceeded on the
supposition that competition is free, so far as regards humaninterference; being limited only by natural causes, or by theunintended effect of general social circumstances. But law
or custom may interfere to limit competition. If apprentice
laws, or the regulations of corporate bodies, make the access to aparticular employment slow, costly, or difficult, the wages of that
employment may be kept much above their natural proportion
to the wages of common labor. In some trades, however, andto some extent, the combinations of workmen produce a similareffect. Those combinations always fail to uphold wages at an
artificial rate unless they also limit the number of competitors.
Putting aside the atrocities sometimes committed by workmen
in the way of personal outrage or intimidation, which can not
be too rigidly repressed, if the present state of the general habitsof the people were to remain forever unimproved, these partial
combinations, in so far as they do succeed in keeping up the249
wages of any trade by limiting its numbers, might be looked
upon as simply intrenching round a particular spot against theinroads of over-population, and making the wages of the classdepend upon their own rate of increase, instead of depending onthat of a more reckless and improvident class than themselves.
To conclude this subject, I must repeat an observation alreadymade, that there are kinds of labor of which the wages are fixedby custom, and not by competition. Such are the fees or charges
of professional persons—of physicians, surgeons, barristers, andeven attorneys.

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[216]

Chapter V. Of Profits.

§ 1. Profits include Interest and Risk; but, correctly
speaking, do not include Wages of Superintendence.

[217]

Having treated of the laborer's share of the produce, we next
proceed to the share of the capitalist; the profits of capital orstock; the gains of the person who advances the expenses of
production—who, from funds in his possession, pays the wagesof the laborers, or supports them during the work; who supplies
the requisite buildings, materials, and tools or machinery; and towhom, by the usual terms of the contract, the produce belongs,
to be disposed of at his pleasure. After indemnifying him for his
outlay, there commonly remains a surplus, which is his profit;
the net income from his capital [and skill]; the amount which hecan afford to expend in necessaries or pleasures, or from which
by further saving he can add to his wealth.
As the wages of the laborer are the remuneration of labor, so[a part of] the profits of the capitalist are properly, according
to Mr. Senior's well-chosen expression, the remuneration ofabstinence. They are what he gains by forbearing to consume
his capital for his own uses, and allowing it to be consumed
by productive laborers for their uses. For this forbearance herequires a recompense.
Of the gains, however, which the possession of a capitalenables a person to make, (1) a part only is properly an equivalent
for the use of the capital itself; namely, as much as a solvent
person would be willing to pay for the loan of it. This, which as
everybody knows is called interest, is all that a person is enabled
to get by merely abstaining from the immediate consumption of
his capital, and allowing it to be used for productive purposes

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by others. The remuneration which is obtained in any country
for mere abstinence is measured by the current rate of intereston the best security; such security as precludes any appreciablechance of losing the principal. What a person expects to gain,
who superintends the employment of his own capital, is always
more, and generally much more, than this. The rate of profit
greatly exceeds the rate of interest. (2.) The surplus is partly
compensation for risk. By lending his capital on unexceptionablesecurity he runs little or no risk. But if he embarks in businesson his own account, he always exposes his capital to some, andin many cases to very great, danger of partial or total loss. For
this danger he must be compensated, otherwise he will not incurit. (3.) He must likewise be remunerated for the devotion of
his time and labor. The control of the operations of industry
usually belongs to the person who supplies the whole or thegreatest part of the funds by which they are carried on, and who,
according to the ordinary arrangement, is either alone interested,or is the person most interested (at least directly), in the result.
To exercise this control with efficiency, if the concern is large
and complicated, requires great assiduity, and often no ordinary
skill. This assiduity and skill must be remunerated.
The gross profits from capital, the gains returned to those
who supply the funds for production, must suffice for these three
purposes; and the three parts into which profit may be considered
as resolving itself may be described respectively as interest,
insurance, and wages of superintendence.
Inasmuch as risk is the cause affecting the rate of interest,
it would be much simpler to consider the whole reward for
abstinence as interest, the rate of which is affected by therisk; and to carefully exclude from the profits of capital
the payment for “assiduity and skill,” which is distinctly
wages of labor. The “wages of superintendence,” as every
one on a moment's reflection must admit, have no necessaryconnection whatever with the possession of capital. The thing

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with which the laborer is occupied does not give the reason for
associating his wages with the name of that thing; because ahighly-qualified manager supervises the operations of capital,
it does not follow that he has capital, or should be regarded
as being paid for the possession of capital. The man who
shovels ashes is not paid wages of ashes, any more than a man
who superintends other people's capital is paid the reward ofcapital. The payment for services, in the one case as in theother, depends upon the skill of the manager, just as it doeswith an ordinary mechanic, rising or falling with his fitness
for the peculiar work. Skill as a manager is the cause; theamount of the remuneration is the consequence. If so, then thewages of superintendence have no logical connection, in theeconomic sense, with capital as the thing which determines
the amount of its reward, any more than it affects the wages ofany and all labor. The payment for the use of capital, simply
as capital, may be seen by the amount which a widow who
is not engaged in active business receives from her property
invested as trust funds. Moreover, it is less and less truethat the manager of the operations of industry is necessarily
the capitalist. To see this, mark the executive managers(called “treasurers” by custom) of cotton and woolen mills,
who receive a remuneration entirely distinct from any capital
they may have invested in the shares of the corporation;and the officials of the great mutual insurance companies,
who receive the wages of managers, but for managing thecapital of others. A large—by far the largest—part of what
is usually called profit, therefore, should be treated as wages,
and the forces which govern its amount are the same as thoseaffecting the amounts of all other kinds of wages, such as
are discussed in the preceding chapter. The acknowledgmentof this distinction is of extreme importance, and affects, ina profound way, the whole question of distribution. To
include “wages of superintendence” in profits of capital is to
unnecessarily complicate one of the most serious economic
questions—namely, the relations of capital and labor.

253§ 2. The Minimum of Profits; what produces
Variations in the Amount of Profits.
The lowest rate of profit that can permanently exist is that which
is barely adequate, at the given place and time, to afford anequivalent for the abstinence, risk, and exertion implied in theemployment of capital. From the gross profit has first to be
deducted as much as will form a fund sufficient on the average tocover all losses incident to the employment. Next, it must afford
such an equivalent to the owner of the capital for forbearing toconsume it as is then and there a sufficient motive to him topersist in his abstinence. How much will be required to form thisequivalent depends on the comparative value placed, in the given
society, upon the present and the future (in the words formerlyused): on the strength of the effective desire of accumulation.
Further, after covering all losses, and remunerating the ownerfor forbearing to consume, there must be something left torecompense the labor and skill of the person who devotes histime to the business.
Such, then, is the minimum of profits: but that minimum isexceedingly variable, and at some times and places extremely
low, on account of the great variableness of two out of its threeelements. That the rate of necessary remuneration for abstinence,or in other words the effective desire of accumulation, differs
widely in different states of society and civilization, has been
seen in a former chapter. There is a still wider difference in theelement which consists in compensation for risk.
The remuneration of capital in different employments, much
more than the remuneration of labor, varies according to thecircumstances which render one employment more attractive
or more repulsive than another. The profits, for example,of retail trade, in proportion to the capital employed, exceed
those of wholesale dealers or manufacturers, for this reason
among others, that there is less consideration attached to the

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employment. The greatest, however, of these differences, isthat caused by difference of risk. The profits of a gunpowdermanufacturer must be considerably greater than the average, tomake up for the peculiar risks to which he and his property are
constantly exposed. When, however, as in the case of marine
adventure, the peculiar risks are capable of being, and commonly
are, commuted for a fixed payment, the premium of insurance
takes its regular place among the charges of production, and thecompensation which the owner of the ship or cargo receives forthat payment does not appear in the estimate of his profits, but is
included in the replacement of his capital.

[220]

The minimum of profits can not properly include wages ofsuperintendence, nor is it so included, practically, in Mr.
Mill's discussions on the minimum of profits in a later partof this volume. The operation of the various elements inchanging the amount of profits might be expressed as follows:
As between different countries and communities, who havea different effective desire of accumulation, profits may varywith the element of interest and risk; within the same district,
where interest is generally the same on the same security,
profits may vary with the risk attached to different industries;
and, within the same occupations, interest and risk being
given, the wages of superintendence may make a greater
variation than either of the other two causes—since a skillfulmanager may make a large return, a poor one none at all. Or
between two employments, interest and risk remaining thesame, wages of superintendence sometimes produce a wide
difference.

The portion, too, of the gross profit, which forms the
remuneration for the labor and skill of the dealer or producer, isvery different in different employments. This is the explanation
always given of the extraordinary rate of apothecaries' profit.
There are cases, again, in which a considerable amount of labor§ 3. General Tendency of Profits to an Equality.

255

and skill is required to conduct a business necessarily of limited
extent. In such cases a higher than common rate of profit isnecessary to yield only the common rate of remuneration.
All the natural monopolies (meaning thereby those which are
created by circumstances, and not by law) which produce oraggravate the disparities in the remuneration of different kindsof labor, operate similarly between different employments ofcapital.
In this passage Mr. Mill points out distinctly that the movement up and down in the wages of a manager are governedby the same laws as those which regulate differences in the
different rewards of labor, but yet he connects it improperlywith capital. It will be seen that Mr. Mill uses the term “grossprofit” on the next page in order to avoid the difficulty, whichrises unconsciously in his mind, of the anomalous presenceof the wages of the manager in the question of profit.

§ 3. General Tendency of Profits to an Equality.
After due allowance is made for these various causes ofinequality, namely, difference in the risk or agreeableness ofdifferent employments, and natural or artificial monopolies[which give greater or less wages of superintendence], therate of profit on capital in all employments tends to an equality.
That portion of profit which is properly interest, and which forms
the real remuneration for abstinence, is strictly the same at thesame time and place, whatever be the employment. The rate ofinterest, on equally good security, does not vary according to thedestination of the principal, though it does vary from time to timevery much, according to the circumstances of the market.
It is far otherwise with gross profit, which, though (as will
presently be seen) it does not vary much from employment to

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employment, varies very greatly from individual to individual,
and can scarcely be in any two cases the same. It depends on
the knowledge, talents, economy, and energy of the capitalist
himself, or of the agents whom he employs; on the accidents ofpersonal connection; and even on chance. Hardly any two dealers
in the same trade, even if their commodities are equally goodand equally cheap, carry on their business at the same expense,
or turn over their capital in the same time. That equal capitals
give equal profits, as a general maxim of trade, would be as
false as that equal age or size gives equal bodily strength, or that
equal reading or experience gives equal knowledge. The effectdepends as much upon twenty other things as upon the single
cause specified. On an average (whatever may be the occasional
fluctuations) the various employments of capital are on such afooting as to hold out, not equal profits, but equal expectationsof profit, to persons of average abilities and advantages. Byequal, I mean after making compensation for any inferiority inthe agreeableness or safety of an employment. If the case were
not so; if there were, evidently, and to common experience, morefavorable chances of pecuniary success in one business than inothers, more persons would engage their capital in the business.
If, on the contrary, a business is not considered thriving; if thechances of profit in it are thought to be inferior to those inother employments; capital gradually leaves it, or at least newcapital is not attracted to it; and by this change in the distributionof capital between the less profitable and the more profitable
employments, a sort of balance is restored.

§ 3. General Tendency of Profits to an Equality.

This may be easily shown by a diagram in which the capitalin one employment is represented by A B, and which exceeds

257

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Principles Of Political Economy
C D, that in another employment, by the amount of A F. It
is not necessary that the whole of the excess, A F should betransferred to C D to make the two capitals equal, but only A
E, which, added to C D, brings C D to an equality with E B.

This equalizing process, commonly described as the transfer
of capital from one employment to another, is not necessarily the
onerous, slow, and almost impracticable operation which it is very
often represented to be. In the first place, it does not always imply
the actual removal of capital already embarked in an employment.
In a rapidly progressive state of capital, the adjustment often
takes place by means of the new accumulations of each year,
which direct themselves in preference toward the more thriving
trades. Even when a real transfer of capital is necessary, it
is by no means implied that any of those who are engaged in
the unprofitable employment relinquish business and break up
their establishments. The numerous and multifarious channelsof credit through which, in commercial nations, unemployed
capital diffuses itself over the field of employment, flowing overin greater abundance to the lower levels, are the means by which
the equalization is accomplished. The process consists in alimitation by one class of dealers or producers and an extension
by the other of that portion of their business which is carried onwith borrowed capital.

[223]“Political economists say that capital sets toward the mostprofitable trades, and that it rapidly leaves the less profitable
and non-paying trades. But in ordinary countries this is aslow process, and some persons, who want to have oculardemonstrations of abstract truths, have been inclined to doubt
it because they could not see it. The process would be visible
enough if you could only see the books of the bill-brokers andthe bankers. If the iron-trade ceases to be as profitable asusual, less iron is sold; the fewer the sales the fewer the bills;
and in consequence the number of iron bills [at the banks]§ 3. General Tendency of Profits to an Equality.

259

is diminished. On the other hand, if, in consequence of abad harvest, the corn trade becomes on a sudden profitable,
immediately ‘corn bills’ are created in large numbers, and,if good, are discounted [at the banks]. Thus capital runs as
surely and instantly where it is most wanted, and where there
is most to be made of it, as water runs to find its level.”177

In the case of an altogether declining trade, in which it isnecessary that the production should be, not occasionally varied,
but greatly and permanently diminished, or perhaps stopped
altogether, the process of extricating the capital is, no doubt, tardy
and difficult, and almost always attended with considerable loss;
much of the capital fixed in machinery, buildings, permanent
works, etc., being either not applicable to any other purpose,or only applicable after expensive alterations; and time being
seldom given for effecting the change in the mode in which it
would be effected with least loss, namely, by not replacing the
fixed capital as it wears out. There is besides, in totally changing
the destination of a capital, so great a sacrifice of establishedconnection, and of acquired skill and experience, that people arealways very slow in resolving upon it, and hardly ever do so untillong after a change of fortune has become hopeless.
In general, then, although profits are very different to different
individuals, and to the same individual in different years, there
can not be much diversity at the same time and place inthe average profits of different employments (other than thestanding differences necessary to compensate for difference of
attractiveness), except for short periods, or when some great
permanent revulsion has overtaken a particular trade. It is true
that, to persons with the same amount of original means, there ismore chance of making a large fortune in some employments thanin others. But it would be found that in those same employments
bankruptcies also are more frequent, and that the chance of177

Walter Bagehot, “Lombard Street,” p. 13.

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greater success is balanced by a greater probability of complete
failure.
[224]§ 4. The Cause of the Existence of any Profit; theAdvances of Capitalists consist of Wages of Labor.
The preceding remarks have, I hope, sufficiently elucidated what
is meant by the common phrase, “the ordinary rate of profit,” andthe sense in which, and the limitations under which, this ordinaryrate has a real existence. It now remains to consider what causes
determine its amount.
The cause of profit is, that labor produces more than isrequired for its support; the reason why capital yields a profit
is, because food, clothing, materials, and tools last longer than
the time which is required to produce them; so that if a capitalist
supplies a party of laborers with these things, on condition ofreceiving all they produce, they will, in addition to reproducing
their own necessaries and instruments, have a portion of theirtime remaining, to work for the capitalist. We thus see thatprofit arises, not from the incident of exchange, but from theproductive power of labor; and the general profit of the country
is always what the productive power of labor makes it, whether
any exchange takes place or not. I proceed, in expansion of theconsiderations thus briefly indicated, to exhibit more minutely
the mode in which the rate of profit is determined.
I assume, throughout, the state of things which, where thelaborers and capitalists are separate classes, prevails, with few
exceptions, universally; namely, that the capitalist advances thewhole expenses, including the entire remuneration of the laborer.
That he should do so is not a matter of inherent necessity; thelaborer might wait until the production is complete for all that261
part of his wages which exceeds mere necessaries, and even for
the whole, if he has funds in hand sufficient for his temporary
support. But in the latter case the laborer is to that extent really acapitalist, investing capital in the concern, by supplying a portionof the funds necessary for carrying it on; and even in the formercase he may be looked upon in the same light, since, contributing
his labor at less than the market price, he may be regarded as
lending the difference to his employer, and receiving it back withinterest (on whatever principle computed) from the proceeds ofthe enterprise.
The capitalist, then, may be assumed to make all the advancesand receive all the produce. His profit consists of the excess ofthe produce above the advances; his rate of profit is the ratio
which that excess bears to the amount advanced.
For example, if A advances 8,000 bushels of corn to laborers
in return for 10,000 yards of cloth (and if one bushel of cornsells for the same sum as one yard of cloth), his profit consistsof 2,000 yards of cloth. The ratio of the excess, 2,000, to
8,000, the outlay, or 25 per cent, is the rate of profit. It is not
the ratio of 2,000 to 10,000.

But what do the advances consist of? It is, for the present,
necessary to suppose that the capitalist does not pay any rent; has
not to purchase the use of any appropriated natural agent. The
nature of rent, however, we have not yet taken into consideration;and it will hereafter appear that no practical error, on the question
we are now examining, is produced by disregarding it.
If, then, leaving rent out of the question, we inquire in what itis that the advances of the capitalist, for purposes of production,
consist, we shall find that they consist of wages of labor.
A large portion of the expenditure of every capitalist consistsin the direct payment of wages. What does not consist of thisis composed of materials and implements, including buildings.
But materials and implements are produced by labor; and as our

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supposed capitalist is not meant to represent a single employment,
but to be a type of the productive industry of the whole country,
we may suppose that he makes his own tools and raises his own
materials. He does this by means of previous advances, which,again, consist wholly of wages. If we suppose him to buy thematerials and tools instead of producing them, the case is notaltered: he then repays to a previous producer the wages whichthat previous producer has paid. It is true he repays it to him
with a profit; and, if he had produced the things himself, hehimself must have had that profit on this part of his outlay as
well as on every other part. The fact, however, remains, that in
the whole process of production, beginning with the materials
and tools and ending with the finished product, all the advances
have consisted of nothing but wages, except that certain of thecapitalists concerned have, for the sake of general convenience,
had their share of profit paid to them before the operation wascompleted.
This idea may be more clear, perhaps, if we imagine alarge corporation, not only making woolen cloth, but owningsheep-ranches, where the raw materials are produced; theshops where all machinery is made; and who even produce
on their own property all the food, clothing, shelter, andconsumption of the laborers employed by them. A lineof division may be passed through the returns in all thesebranches of the industry, separating what is wages from what
is profit. Then it can be easily imagined that all the returns
on one side, representing profits, go to capitalists, no matter
whether they are thousands in number, or only one capitalist
typifying the rest, or a single corporation acting for manysmall capitalists.

§ 5. The Rate of Profit depends on the Cost of Labor.

§ 5. The Rate of Profit depends on the Cost of Labor.

263

It thus appears that the two elements on which, and which alone,
the gains of the capitalists depend, are, first, the magnitude of
the produce, in other words, the productive power of labor; andsecondly, the proportion of that produce obtained by the laborers
themselves; the ratio which the remuneration of the laborers
bears to the amount they produce.
We thus arrive at the conclusion of Ricardo and others, thatthe rate of profits depends upon wages; rising as wages fall, andfalling as wages rise. In adopting, however, this doctrine, I mustinsist upon making a most necessary alteration in its wording.
Instead of saying that profits depend on wages, let us say (whatRicardo really meant) that they depend on the cost of labor.
This is an entirely different question from that concerning therate of wages before discussed (Book II, Chap. II). That had
to do with the amount of the capital which each laborer, on
an average, received as real wages, and this average rate wasaffected by the number of competitors for labor, as comparedwith the existing capital, taking into account the nature of theindustries in a country. An increase of population, bringing
more laborers to compete for employment, will lower the
average amount of real wages received by each one; and adecrease of population will bring about the reverse. The rateof wages, however, now that we are considering the matterfrom the point of view of the capitalist, is but one of the things
to be considered affecting cost of labor. The former question
was one as to the distribution of capital; the latter is one as tothe amount by which the total production is greater than the
total capital advanced. Since all capital consists of advances
to labor, the present inquiry is one in regard to the quantityof advances compared with the quantity returned; that is, therelation of the total capital to the total production arising fromthe use of that capital. In the diagram before used (p. 179)
the question is not how the contents of circle B are to be
distributed, but the relative size of circle B to circle A. In

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Principles Of Political Economy
order to produce circle A, it is necessary to advance what isrepresented by circle B.

Wages and the cost of labor; what labor brings in to the laborer
and what it costs to the capitalist are ideas quite distinct, andwhich it is of the utmost importance to keep so. For this purpose
it is essential not to designate them, as is almost always done,by the same name. Wages, in public discussions, both oral andprinted, being looked upon from the same point of view of thepayers, much oftener than from that of the receivers, nothing ismore common than to say that wages are high or low, meaning
only that the cost of labor [to the capitalist] is high or low. The
reverse of this would be oftener the truth: the cost of labor isfrequently at its highest where wages are lowest. This may arise
from two causes. (1.) In the first place, the labor, though cheap,
may be inefficient.
The facts presented by Mr. Brassey178 very fully illustrate
this principle. Although French workmen in their ship-yards
receive less wages for the same kind of work than the English
workmen in English yards, yet it costs less per ton to build
ships in England than in France. The same correspondence
between high wages and efficient work was found to be trueof railway construction in different parts of the world. Withdifferent character, varying amounts of industrial energy,
varying intelligence, and endurance, different people do nothave the same efficiency of labor. It is ascertained thatinefficiency is, as a rule, accompanied by low wages. Even
though wages paid for ordinary labor in constructing railways
were in India only from nine to twelve cents a day, andin England from seventy-five to eighty-seven cents a day,yet it cost as much to build a mile of railway in India as inEngland. The English laborer gave a full equivalent for hishigher wages. Moreover, while an English weaver tends from

[228]

178

“Work and Wages.”§ 5. The Rate of Profit depends on the Cost of Labor.

265

two to three times as many looms as his Russian competitor,
the workman in the United States, it is said, will tend evenmore than the Englishman. In American sailing-vessels, also,
a less number of sailors, relatively to the tonnage, is required
than in English sailing-ships. Mr. Brassey, besides, cameto the conclusion that the working power, or efficiency, of
ordinary English laborers was to the French as five to three.

(2.) The other cause which renders wages and the cost of labor
no real criteria of one another is the varying costliness of thearticles which the laborer consumes. If these are cheap, wages,
in the sense which is of importance to the laborer, may be high,and yet the cost of labor may be low; if dear, the laborer may be
wretchedly off, though his labor may cost much to the capitalist.
This last is the condition of a country over-peopled in relation to
its land; in which, food being dear, the poorness of the laborer's
real reward does not prevent labor from costing much to thepurchaser, and low wages and low profits coexist. The opposite
case is exemplified in the United States of America. The laborer
there enjoys a greater abundance of comforts than in any othercountry of the world, except some of the newest colonies; but
owing to the cheap price at which these comforts can be obtained(combined with the great efficiency of the labor), the cost oflabor to the capitalist is considerably lower than in Europe. It
must be so, since the rate of profit is higher; as indicated by therate of interest, which is six per cent at New York when it is threeor three and a quarter per cent in London.
The cost of labor, then, is, in the language of mathematics,
a function of three variables: (1) the efficiency of labor; (2)the wages of labor (meaning thereby the real reward [or real
wages] of the laborer); and (3) the greater or less cost179 at
which the articles composing that real reward can be produced
179

The reader is advised to consider, in connection with this, the former
discussion on the relation between wages and the price of food (pp. 185, 186).

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or purchased. It is plain that the cost of labor to the capitalist
must be influenced by each of these three circumstances, and by
no others. These, therefore, are also the circumstances which
determine the rate of profit; and it can not be in any way affected
except through one or other of them.

The efficiency of labor, in this connection, is highly importantin its practical aspects, and as affecting the labor question,
because as a function of cost of labor, that is, as an element
affecting the quantity of things advanced to the laborers
in comparison with the quantity of things returned to theemployer, it includes the whole influence of machinery,labor-saving devices, and the results of invention. The
quantity of produce depends, for a given advance, on thekind of machinery, the speed with which it is run, and on thegeneral state of the arts and industrial inventions. The extent
to which the productive capacity of a single laborer has been
increased in the United States has been almost incredible.
Instead of weaving cloth by hand, as was done a hundredyears ago, “one operative in Lowell, working one year, canproduce the cotton fabric needed for the year's supply of 1,500
to 1,800 Chinese.” Moreover, there is no question as to thefact that no nation in the world compares with ours in the
power to invent, construct, and manage the most ingenious
and complicated machinery. The inventive faculty belongs toevery class in our country; and, in studying cost of labor, it
must be well borne in mind that the efficiency of American
labor, particularly as combined with mechanical appliances,is one of the great causes of our enormous production. The
result of this, for instance, has been that, without loweringprofits, although the price of cloth has been greatly reduced,
employers have been able to raise the wages of operatives,and shorten their hours of labor, because machinery has sovastly increased the production for a given outlay. As oneof a few facts showing this tendency in the last fifty years,§ 5. The Rate of Profit depends on the Cost of Labor.

267

note the following table, taken from the books of the Namquit
cotton-mill in Bristol, Rhode Island:
Kind Of Labor.
Card-room help, per
week
Card-strippers, per
week
Weavers, per week
Carding-room overseer, per week

1841.
$3.28

1884.
$5.40

4.98

6.00

4.75
7.00

6.00
13.50

The hours per week have decreased in the same time from84 to 66, while the product of the mill in pounds has increased
25 per cent. It may be unnecessary, perhaps, to say that thesefigures represent the current wages in other mills at the same
periods; and that these facts can be sustained by the records
of other mills.
In its economic effect we must also consider, underefficiency, the whole question of natural advantages of soil,
climate, and natural resources. Laborers of the same skill,
paid the same real wages, of the same cost, will produce avastly greater amount of wheat in Dakota than in Vermont orEngland. This is the chief reason why profits are so high in
the United States. In many industries we have very marked
natural advantages, which permits a high reward to labor,
and yet yields a high profit to the capitalist. This applies not
merely to agriculture, but to all the extractive industries, suchas the production of petroleum, wood, copper, etc.
In short, the whole matter of ease and difficulty of
production, of high or low cost of production, taking it in thesense of great or little sacrifice (compare carefully Book III,
Chap. II, § 4), comes in under the element of efficiency, in
cost of labor. The reader can not be too strongly urged toconnect different parts of the economic system together. And
the questions of Cost of Labor and Cost of Production are of

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paramount importance to a proper understanding of political
economy.

If labor generally became more efficient, without being more
highly rewarded; if, without its becoming less efficient, its
remuneration fell, no increase taking place in the cost of thearticles composing that remuneration; or if those articles becameless costly, without the laborers obtaining more of them; in any
one of these three cases, profits would rise. If, on the contrary,labor became less efficient (as it might do from diminished bodily
vigor in the people, destruction of fixed capital, or deteriorated
education); or if the laborer obtained a higher remuneration,
without any increased cheapness in the things composing it; orif, without his obtaining more, that which he did obtain became
more costly; profits, in all these cases, would suffer a diminution.
And there is no other combination of circumstances in which
the general rate of profit of a country, in all employments
indifferently, can either fall or rise.

[231]

The connection of profit with the three constituents of costof labor may probably be better seen by aid of the following
illustration; it being premised that as yet money is not used,
and that the laborers are paid in the articles which theirmoney wages would have bought had money been used.
For simplicity we will suppose that all articles of the laborer's
consumption are represented by corn. Imagine a large woolenmill employing 500 men, and paying them in corn; andsuppose that one yard of woolen cloth exchanges for one
bushel of corn in the open market. In the beginning, with agiven condition of efficiency, suppose that each man produceson an average 1,200 yards of cloth, for which he is paid 1,000
bushels of corn:
500 men, each producing 1,200 yards, give a total productof 600,000 yards.
500 men, each paid 1,000 bushels, cause an outlay of 500,000

§ 5. The Rate of Profit depends on the Cost of Labor.

269

yards.
Profit: 100,000 yards.
(1.) Now suppose a change increasing the efficiencyof labor to such an extent that each laborer produces 1,300
instead of 1,200 yards, then the account will stand, if the otherelements remain unchanged:
500 men, each producing 1,300 yards, give a total productof 650,000 yards.
500 men, each paid 1,000 bushels, cause an outlay of 500,000
yards.
Profit: 150,000 yards.
(2.) If efficiency and the cost of producing food remain
the same as at first, suppose a change to occur which raises
the quantity of corn each laborer receives from 1,000 to 1,100,or, as it is called, increases his real wages—then the accountwill be:500 men, each producing 1,200 yards, give a total productof 600,000 yards.
500 men, each paid 1,100 bushels, cause an outlay of 550,000
yards.
Profit: 50,000 yards.
(3.) If efficiency and real wages remain the same, suppose
such an increase in the cost to the employers of obtaining cornthat they are obliged to give one and one tenth yard of theirgoods for one bushel of corn (1,000 bushels of corn costingthem 1,100 yards of cloth), then the statement will read:
500 men, each producing 1,200 yards, give a total productof 600,000 yards.
500 men, each paid 1,000 bushels, cause an outlay of 550,000
yards.
Profit: 50,000 yards.
[232]Chapter VI. Of Rent.

§ 1. Rent the Effect of a Natural Monopoly.
The requisites of production being labor, capital, and natural
agents, the only person, besides the laborer and the capitalist,
whose consent is necessary to production, and who can claim ashare of the produce as the price of that consent, is the person who,by the arrangements of society, possesses exclusive power oversome natural agent. The land is the principal of the natural agents
which are capable of being appropriated, and the consideration
paid for its use is called rent. Landed proprietors are the onlyclass, of any numbers or importance, who have a claim to a sharein the distribution of the produce, through their ownership ofsomething which neither they nor any one else have produced. If
there be any other cases of a similar nature, they will be easily
understood, when the nature and laws of rent are comprehended.
It is at once evident that rent is the effect of a monopoly. The
reason why land-owners are able to require rent for their landis, that it is a commodity which many want, and which no one
can obtain but from them. If all the land of the country belonged
to one person, he could fix the rent at his pleasure. This case,however, is nowhere known to exist; and the only remaining
supposition is that of free competition; the land-owners being
supposed to be, as in fact they are, too numerous to combine.
The ratio of the land to the cultivators shows the limited
quantity of land. It is very desirable to keep the connectionof one part of the subject with another wherever possible.
“Agricultural rent, as it actually exists,” says Mr. Cairnes,180
truly, “is not a consequence of the monopoly of the soil,

[233]

180

“Logical Method,” p. 206.

271
but of its diminishing productiveness.” The doctrine of rent
depends upon the law of diminishing returns; and it is onlyby the pressure of population upon land that the lessened
productiveness of land, whether because of poorer qualities orpoorer situations, is made apparent. Or, to take things in theirnatural sequence, an increase of population necessitates more
food; and this implies a resort to more expensive methods,
or poorer soils, so soon as land is pushed to the extent that
it will not yield an increased crop for the same applicationof labor and capital as formerly. Different qualities of land,
then, being in cultivation at the same time, the better qualities
must, of course, yield a greater return than the poorer, andthe conditions then exist under which land pays rent. Those,
therefore, who admit the law of diminishing returns areinevitably led to the doctrine of rent.

§ 2. No Land can pay Rent except Land of such
Quality or Situation as exists in less Quantity thanthe Demand.
A thing which is limited in quantity, even though its possessors
do not act in concert, is still a monopolized article. But even whenmonopolized, a thing which is the gift of nature, and requires nolabor or outlay as the condition of its existence, will, if there becompetition among the holders of it, command a price only if itexist in less quantity than the demand.
If the whole land of a country were required for cultivation,
all of it might yield a rent. But in no country of any extent do
the wants of the population require that all the land, which iscapable of cultivation, should be cultivated. The food and otheragricultural produce which the people need, and which they arewilling and able to pay for at a price which remunerates thegrower, may always be obtained without cultivating all the land;

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sometimes without cultivating more than a small part of it; themore fertile lands, or those in the more convenient situations,being of course preferred. There is always, therefore, someland which can not, in existing circumstances, pay any rent; andno land ever pays rent unless, in point of fertility or situation,
it belongs to those superior kinds which exist in less quantity
than the demand—which can not be made to yield all the
produce required for the community, unless on terms still lessadvantageous than the resort to less favored soils. (1.) The
worst land which can be cultivated as a means of subsistenceis that which will just replace the seed and the food of thelaborers employed on it, together with what Dr. Chalmers calls
their secondaries; that is, the laborers required for supplying
them with tools, and with the remaining necessaries of life.
Whether any given land is capable of doing more than thisis not a question of political economy, but of physical fact.
The supposition leaves nothing for profits, nor anything for thelaborers except necessaries: the land, therefore, can only becultivated by the laborers themselves, or else at a pecuniary loss;
and, a fortiori, can not in any contingency afford a rent. (2.)
The worst land which can be cultivated as an investment forcapital is that which, after replacing the seed, not only feeds
the agricultural laborers and their secondaries, but affords themthe current rate of wages, which may extend to much more thanmere necessaries, and leaves, for those who have advanced thewages of these two classes of laborers, a surplus equal to the
profit they could have expected from any other employment of
their capital. (3.) Whether any given land can do more than
this is not merely a physical question, but depends partly on themarket value of agricultural produce. What the land can do forthe laborers and for the capitalist, beyond feeding all whom it
directly or indirectly employs, of course depends upon what theremainder of the produce can be sold for. The higher the market
value of produce, the lower are the soils to which cultivation can273
descend, consistently with affording to the capital employed theordinary rate of profit.
As, however, differences of fertility slide into one another byinsensible gradations; and differences of accessibility, that is, of
distance from markets do the same; and since there is land sobarren that it could not pay for its cultivation at any price; itis evident that, whatever the price may be, there must in any
extensive region be some land which at that price will just pay
the wages of the cultivators, and yield to the capital employed
the ordinary profit, and no more. Until, therefore, the price rises
higher, or until some improvement raises that particular land to ahigher place in the scale of fertility, it can not pay any rent. It isevident, however, that the community needs the produce of thisquality of land; since, if the lands more fertile or better situatedthan it could have sufficed to supply the wants of society, theprice would not have risen so high as to render its cultivation
profitable. This land, therefore, will be cultivated; and we may
lay it down as a principle that, so long as any of the land of acountry which is fit for cultivation, and not withheld from it bylegal or other factitious obstacles, is not cultivated, the worst landin actual cultivation (in point of fertility and situation together)pays no rent.

§ 3. The Rent of Land is the Excess of its Return
above the Return to the worst Land in Cultivation.
If, then, of the land in cultivation, the part which yields least
return to the labor and capital employed on it gives only theordinary profit of capital, without leaving anything for rent,a standard [i.e., the “margin of cultivation”] is afforded for
estimating the amount of rent which will be yielded by all otherland. Any land yields just as much more than the ordinary profits

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of stock as it yields more than what is returned by the worst landin cultivation. The surplus is what the farmer can afford to pay
as rent to the landlord; and since, if he did not so pay it, he would
receive more than the ordinary rate of profit, the competition ofother capitalists, that competition which equalizes the profits ofdifferent capitals, will enable the landlord to appropriate it. The
rent, therefore, which any land will yield, is the excess of its
produce, beyond what would be returned to the same capital if
employed on the worst land in cultivation.
It has been denied that there can be any land in cultivation
which pays no rent, because landlords (it is contended) would
not allow their land to be occupied without payment. Inferiorland, however, does not usually occupy, without interruption,
many square miles of ground; it is dispersed here and there,with patches of better land intermixed, and the same person who
rents the better land obtains along with it the inferior soils whichalternate with it. He pays a rent, nominally for the whole farm,
but calculated on the produce of those parts alone (however small
a portion of the whole) which are capable of returning more thanthe common rate of profit. It is thus scientifically true that theremaining parts pay no rent.
This point seems to need some illustration. Suppose that
all the lands in a community are of five different grades of
productiveness. When the price of agricultural produce wassuch that grades one, two, and three all came into cultivation,
lands of poorer quality would not be cultivated. When a man
rents a farm, he always gets land of varying degrees of fertility
within its limits. Now, in determining what he ought to pay
as rent, the farmer will agree to give that which will still leave
him a profit on his working capital; if in his fields he finds
land which would not enter into the question of rental, because
it did not yield more than the profit on working it, after herented the farm he would find it to his interest to cultivate it,
simply because it yielded him a profit, and because he was

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not obliged to pay rent upon it; if required to pay rent forit, he would lose the ordinary rate of profit, would have noreason for cultivating it, of course, and would throw it out ofcultivation. Moreover, suppose that lands down to grade threepaid rent when A took the farm; now, if the price of produce
rises slightly, grade four may pay something, but possibly notenough to warrant any rent going to a landlord. A will put
capital on it for this return, but certainly not until the pricewarrants it; that is, not until the price will return him at least
the cost of working the land, plus the profit on his outlay. But
the community needed this land, or the price would not havegone up to the point which makes possible its cultivation evenfor a profit, without rent. There must always be somewheresome land affected in just this way.

§ 4. —Or to the Capital employed in the least
advantageous Circumstances.
Let us, however, suppose that there were a validity in thisobjection, which can by no means be conceded to it; that, when
the demand of the community had forced up food to such a
price as would remunerate the expense of producing it from acertain quality of soil, it happened nevertheless that all the soilof that quality was withheld from cultivation, the increase of
produce, which the wants of society required, would for the time
be obtained wholly (as it always is partially), not by an extensionof cultivation, but by an increased application of labor and capitalto land already cultivated.
Now we have already seen that this increased application ofcapital, other things being unaltered, is always attended with asmaller proportional return. The rise of price enables measures tobe taken for increasing the produce, which could not have beentaken with profit at the previous price. The farmer uses more

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expensive manures, or manures land which he formerly left tonature; or procures lime or marl from a distance, as a dressing
for the soil; or pulverizes or weeds it more thoroughly; or drains,
irrigates, or subsoils portions of it, which at former prices would
not have paid the cost of the operation; and so forth. The farmer
or improver will only consider whether the outlay he makes forthe purpose will be returned to him with the ordinary profit, andnot whether any surplus will remain for rent. Even, therefore, if
it were the fact that there is never any land taken into cultivation,
for which rent, and that too of an amount worth taking into
consideration, was not paid, it would be true, nevertheless, that
there is always some agricultural capital which pays no rent,
because it returns nothing beyond the ordinary rate of profit:
this capital being the portion of capital last applied—that towhich the last addition to the produce was due; or (to express
the essentials of the case in one phrase) that which is appliedin the least favorable circumstances. But the same amount ofdemand and the same price, which enable this least productive
portion of capital barely to replace itself with the ordinary profit,
enable every other portion to yield a surplus proportioned to theadvantage it possesses. And this surplus it is which competition
enables the landlord to appropriate.

[238]

If land were all occupied, and of only one grade, the first
installment of labor and capital produced, we will say, twenty
bushels of wheat; when the price of wheat rose, and it became
profitable to resort to greater expense on the soil, a second
installment of the same amount of labor and capital whenapplied, however, only yielded fifteen bushels more; a third,
ten bushels more; and a fourth, five bushels more. The soil
now gives fifty bushels only under the highest pressure. But,
if it was profitable to invest the same installment of labor andcapital simply for the five bushels that at first had received
a return of twenty bushels, the price must have gone up sothat five bushels should sell for as much as the twenty did

277
formerly; so, mutatis mutandis, of installments second andthird. So that if the demand is such as to require all of
the fifty bushels, the agricultural capital which produced thefive bushels will be the standard according to which the rentof the capital, which grew twenty, fifteen, and ten bushels
respectively, is measured. The principle is exactly the sameas if equal installments of capital and labor were invested onfour different grades of land returning twenty, fifteen, ten, andfive bushels for each installment. Or, as if in the table on page
240, A, B, C, and D each represented different installmentsof the same amount of labor and capital put upon the same
spot of ground, instead of being, as there, put upon different
grades of land.

The rent of all land is measured by the excess of the returnto the whole capital employed on it above what is necessary
to replace the capital with the ordinary rate of profit, or, inother words, above what the same capital would yield if it were
all employed in as disadvantageous circumstances as the least
productive portion of it: whether that least productive portion ofcapital is rendered so by being employed on the worst soil, orby being expended in extorting more produce from land which
already yielded as much as it could be made to part with on easierterms.
It will be true that the farmer requires the ordinary rate ofprofit on the whole of his capital; that whatever it returns to him
beyond this he is obliged to pay to the landlord, but will notconsent to pay more; that there is a portion of capital applied toagriculture in such circumstances of productiveness as to yield
only the ordinary profits; and that the difference between the
produce of this and of any other capital of similar amount is
the measure of the tribute which that other capital can and will
pay, under the name of rent, to the landlord. This constitutes
a law of rent, as near the truth as such a law can possibly be;though of course modified or disturbed, in individual cases, by

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pending contracts, individual miscalculations, the influence ofhabit, and even the particular feelings and dispositions of thepersons concerned.
The law of rent, in the economic sense, operates in the UnitedStates as truly as elsewhere, although there is no separate
class of landlords here. With us, almost all land is ownedby the cultivator; so that two functions, those of the landlord
and farmer, are both united in one person. Although one
payment is made, it is still just as distinctly made up of twoparts, one of which is a payment to the owner for the superior
quality of his soil, and the other a payment (to the same
person, if the owner is the cultivator) of profit on the farmer's
working capital. Land which in the United States will only
return enough to pay a profit on this capital can not pay any
rent. And land which can pay more than a profit on thisworking capital, returns that excess as rent, even if the farmer
is also the owner and landlord. The principle which regulates
the amount of that excess—which is the essential point—is
the principle which determines the amount of economic rent,
and it holds true in the United States or Finland, provided
only that different grades of land are called into cultivation.
The governing principle is the same, no matter whether apayment is made to one man as profit and to another as rent,or whether the two payments are made to the same man in
two capacities. It has been urged that the law of rent does
not hold in the United States, because “the price of grain andother agricultural produce has not risen in proportion to theincrease of our numbers, as it ought to have done if Ricardo's
theory were true, but has fallen, since 1830, though sincethat time our population has been more than tripled.”181 Thisoverlooks the fact that we have not even yet taken up all
our best agricultural lands, so that for some products the lawof diminishing productiveness has not yet shown itself. The
181“American Political Economy,” p. 164.

§ 5. Opposing Views of the Law of Rent.
reason is, that the extension of our railway system has only oflate years brought the really good grain-lands into cultivation.
The fact that there has been no rise in agricultural products isdue to the enormous extent of marvelously fertile grain-landsin the West, and to the cheapness of transportation from those
districts to the seaboard.
For a general understanding of the law of rent the following
table will show how, under constant increase of population(represented by four different advances of population, in thefirst column), first the best and then the poorer lands arebrought into cultivation. We will suppose (1) that the mostfertile land, A, at first pays no rent; then (2), when more foodis wanted than land A can supply, it will be profitable to tillland B, but which, as yet, pays no rent. But if eighteen bushels
are a sufficient return to a given amount of labor and capital,
then when an equal amount of labor and capital engaged on
A returns twenty-four bushels, six of that are beyond theordinary profit, and form the rent on land A, and so on; C will
next be the line of comparison, and then D; as the poorer soils
are cultivated, the rent of A increases:

279

[240]

Population A
BCD
Increase.
24
18
12
6
bushels
bushels
bushels
bushels
Total Rent
Total Rent
Total Rent
Total Rent
prod- inprod- inprod- inprod- inBushels uct
Bushelsuct
Bushels uct
Bushels uct
I.
24
0
..
..
..
..
..
..
II.
24
6
18
0
..
..
..
..
III.
24
12
18
6
12
0
..
..
IV.
24
18
18
12
12
6
6
0

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Principles Of Political Economy§ 5. Opposing Views of the Law of Rent.

[241]

Under the name of rent, many payments are commonly included,
which are not a remuneration for the original powers of the land
itself, but for capital expended on it. The buildings are as distinct
a thing from the farm as the stock or the timber on it; and what is
paid for them can no more be called rent of land than a payment
for cattle would be, if it were the custom that the landlord shouldstock the farm for the tenant. The buildings, like the cattle, are
not land, but capital, regularly consumed and reproduced; and all
payments made in consideration for them are properly interest.
But with regard to capital actually sunk in improvements, andnot requiring periodical renewal, but spent once for all in giving
the land a permanent increase of productiveness, it appears tome that the return made to such capital loses altogether thecharacter of profits, and is governed by the principles of rent.
It is true that a landlord will not expend capital in improving
his estate unless he expects from the improvement an increaseof income surpassing the interest of his outlay. Prospectively,
this increase of income may be regarded as profit; but, when the
expense has been incurred and the improvement made, the rentof the improved land is governed by the same rules as that of theunimproved.
Mr. Carey (as well as Bastiat) has declared that there is a lawof increasing returns from land. He points out that everything
now existing could be reproduced to-day at a less cost thanthat involved in its original production, owing to our advancein skill, knowledge, and all the arts of production; that, forexample, it costs less to make an axe now than it did five
hundred years ago; so also with a farm, since a farm of a given
amount of productiveness can be brought into cultivation atless cost to-day than that originally spent upon it. The gain ofsociety has, we all admit, been such that we produce almost
everything at a less cost now than long ago; but to class a§ 5. Opposing Views of the Law of Rent.

281

farm and an axe together overlooks, in the most remarkableway, the fact that land can not be created by labor and capital,
while axes can, and that too indefinitely. Nor can the produce
from the land be increased indefinitely at a diminishing cost.
This is sometimes denied by the appeal to facts: “It can beabundantly proved that, if we take any two periods sufficiently
distant to afford a fair test, whether fifty or one hundred or
five hundred years, the production of the land relatively to thelabor employed upon it has progressively become greater andgreater.”182 But this does not prove that an existing tendency
to diminishing returns has not been more than offset by the
progress of the arts and improvements. “The advance of aship against wind and tide is [no] proof that there is no wind
and tide.”

In a work entitled “The Past, the Present, and the Future,”
Mr. Carey takes [a] ground of objection to the Ricardo theoryof rent, namely, that in point of historical fact the lands firstbrought under cultivation are not the most fertile, but the barren
lands. “We find the settler invariably occupying the high andthin lands requiring little clearing and no drainage. With thegrowth of population and wealth, other soils yielding a larger
return to labor are always brought into activity, with a constantly
increasing return to the labor expended upon them.”
In whatever order the lands come into cultivation, thosewhich when cultivated yield the least return, in proportion to thelabor required for their culture, will always regulate the price ofagricultural produce; and all other lands will pay a rent simply
equivalent to the excess of their produce over this minimum.
Whatever unguarded expressions may have been occasionallyused in describing the law of rent, these two propositions are
all that was ever intended by it. If, indeed, Mr. Carey could
show that the return to labor from the land, agricultural skill and182

Rickards, “Population and Capital,” p. 135.

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science being supposed the same, is not a diminishing return, hewould overthrow a principle much more fundamental than any
law of rent. But in this he has wholly failed.
Another objection taken against the law of diminishing returns, and so against the law of rent, is that the potential
increase of food, e.g., of a grain of wheat, is far greater thanthat of man.183 No one disputes the fact that one grain of
wheat can reproduce itself more times than man, and that too
in a geometric increase; but not without land. A grain of wheat
needs land in which it can multiply itself, and this necessary
element of its increase is limited; and it is the very thing which
limits the multiplication of the grains of wheat. On the same
piece of land, one can not get more than what comes fromone act of reproduction in the grain. If one grain produces
100 of its kind, doubling the capital will not repeatedly cause
a geometric increase in the ratio of reproduction of each grainon this same land, so that one grain, by one process, producesof its kind 200, 400, 800, or 1,600, because you can notmultiply the land in any such ratio as would accompany thispotential reduplication of the grain. This objection would
not seem worth answering, were it not that it furnishes somedifficulty to really honest inquirers.

[243]

Others, again, allege as an objection against Ricardo, that if
all land were of equal fertility it might still yield a rent. But
Ricardo says precisely the same. It is also distinctly a portion ofRicardo's doctrine that, even apart from differences of situation,
the land of a country supposed to be of uniform fertility would,
all of it, on a certain supposition, pay rent, namely, if the demandof the community required that it should all be cultivated, andcultivated beyond the point at which a further application ofcapital begins to be attended with a smaller proportional return.
183

Rickards, ibid., p. 75.

§ 5. Opposing Views of the Law of Rent.
This is simply the question, before discussed, whether, if only
one class of land were cultivated, some agricultural capitalwould pay rent or not. It all depends on the fact whether
population—and so the demand for food—has increased tothe point where it calls out a recognition of the diminishingproductiveness of the soil. In that case different capitals would
be invested, so that there would be different returns to thesame amount of capital; and the prior or more advantageous
investments of capital on the land would yield more than theordinary rate of profit, which could be claimed as rent.
A. L. Perry184 admits the law of diminishing returns, butholds that, “as land is capital, and as every form of capital
may be loaned or rented, and thus become fruitful in thehands of another, the rent of land does not differ essentiallyin its nature from the rent of buildings in cities, or from theinterest of money.” Henry George admits Ricardo's law ofrent to its full extent, but very curiously says: “Irrespectiveof the increase of population, the effect of improvements inmethods of production and exchange is to increase rent....
The effect of labor-saving improvements will be to increase
the production of wealth. Now, for the production of wealth,two things are required, labor and land. Therefore, the effectof labor-saving improvements will be to extend the demand
for land, and, wherever the limit of the quality of land inuse is reached, to bring into cultivation lands of less natural
productiveness, or to extend cultivation on the same lands toa point of lower natural productiveness. And thus, while theprimary effect of labor-saving improvements is to increase thepower of labor, the secondary effect is to extend cultivation,
and, where this lowers the margin of cultivation, to increase
rent.”185 Francis Bowen186 rejects Ricardo's law, and says,“Rent depends, not on the increase, but on the distribution, ofthe population”—asserting that the existence of large cities
184“Political Economy,” p. 288.
“Progress and Poverty,” pp. 220, 221.
186
“American Political Economy,” p. 164.

185

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and towns determines the amount of rent paid by neighboring
land.187[244]§ 6. Rent does not enter into the Cost of Productionof Agricultural Produce.
Rent does not really form any part of the expenses of [agricultural]
production, or of the advances of the capitalist. The grounds onwhich this assertion was made are now apparent. It is true that all
tenant-farmers, and many other classes of producers, pay rent.
But we have now seen that whoever cultivates land, paying a rent
for it, gets in return for his rent an instrument of superior power
to other instruments of the same kind for which no rent is paid.
The superiority of the instrument is in exact proportion to therent paid for it. If a few persons had steam-engines of superior
power to all others in existence, but limited by physical laws to
a number short of the demand, the rent which a manufacturer
would be willing to pay for one of these steam-engines could
not be looked upon as an addition to his outlay, because by theuse of it he would save in his other expenses the equivalent ofwhat it cost him: without it he could not do the same quantityof work, unless at an additional expense equal to the rent. The
same thing is true of land. The real expenses of production arethose incurred on the worst land, or by the capital employed in
the least favorable circumstances. This land or capital pays, as
we have seen, no rent, but the expenses to which it is subject
cause all other land or agricultural capital to be subjected to an
187
For other writers opposed to the doctrine of Rent as maintained by Ricardo
and Mill, see Bonamy Price, “Practical Political Economy,” chap. x; McLeod,“Principles of Economic Philosophy,” chap. x; and J. E. T. Rogers, “Manualof Political Economy,” chap. xii.

285
equivalent expense in the form of rent. Whoever does pay rent
gets back its full value in extra advantages, and the rent which
he pays does not place him in a worse position than, but only inthe same position as, his fellow-producer who pays no rent, butwhose instrument is one of inferior efficiency.
Soils are of every grade: some, which if cultivated, might
replace the capital, but give no profit; some give a slight but
not an ordinary profit; some, the ordinary profit. That is,“there is a point up to which it is profitable to cultivate, andbeyond which it is not profitable to cultivate. The price ofcorn will not, for any long time, remain at a higher rate than issufficient to cover with ordinary profit the cost of that portionof the general crop which is raised at greatest expense.”188 For
similar reasons the price will not remain at a lower rate. If,then, the cost of production of grain is determined by that land
which replaces the capital, yields only the ordinary profit, andpays no rent, rent forms no part of this cost, since that land
does not and can not pay any rent. McLeod,189 however, says
it is not the cost of production which regulates the value ofagricultural produce, but the value which regulates the cost.

[245]

[249]

188

Cairnes, “Logical Method,” p. 199.
“Theory and Practice of Banking,” vol. i, p. 13. Cf. Cairnes, “Logical
Method,” p. 106.
189

Book III. Exchange.

Chapter I. Of Value.

§ 1. Definitions of Value in Use, Exchange Value,
and Price.
It is evident that, of the two great departments of Political
Economy, the production of wealth and its distribution, theconsideration of Value has to do with the latter alone; and withthat only so far as competition, and not usage or custom, is the
distributing agency.
The use of a thing, in political economy, means its capacity tosatisfy a desire, or serve a purpose. Diamonds have this capacity
in a high degree, and, unless they had it, would not bear any price.
Value in use, or, as Mr. De Quincey calls it, teleologic value,is the extreme limit of value in exchange. The exchange valueof a thing may fall short, to any amount, of its value in use; butthat it can ever exceed the value in use implies a contradiction;
it supposes that persons will give, to possess a thing, more thanthe utmost value which they themselves put upon it, as a meansof gratifying their inclinations.
The word Value, when used without adjunct, always means,in political economy, value in exchange.

287
Exchange value requires to be distinguished from Price.
Writers have employed Price to express the value of a thing
in relation to money—the quantity of money for which it will
exchange. By the price of a thing, therefore, we shall henceforth
understand its value in money; by the value, or exchange value ofa thing, its general power of purchasing; the command which its
possession gives over purchasable commodities in general. Whatis meant by command over commodities in general? The samething exchanges for a greater quantity of some commodities, andfor a very small quantity of others. A coat may exchange for lessbread this year than last, if the harvest has been bad, but for moreglass or iron, if a tax has been taken off those commodities, oran improvement made in their manufacture. Has the value of thecoat, under these circumstances, fallen or risen? It is impossible
to say: all that can be said is, that it has fallen in relation to one
thing, and risen in respect to another. Suppose, for example, thatan invention has been made in machinery, by which broadcloth
could be woven at half the former cost. The effect of this would
be to lower the value of a coat, and, if lowered by this cause,
it would be lowered not in relation to bread only or to glass
only, but to all purchasable things, except such as happened tobe affected at the very time by a similar depressing cause. Those[changes] which originate in the commodities with which wecompare it affect its value in relation to those commodities; butthose which originate in itself affect its value in relation to allcommodities.
There is such a thing as a general rise of prices. All
commodities may rise in their money price. But there can
not be a general rise of values. It is a contradiction in terms. A
can only rise in value by exchanging for a greater quantity of B
and C; in which case these must exchange for a smaller quantityof A. All things can not rise relatively to one another. If one
half of the commodities in the market rise in exchange value, thevery terms imply a fall of the other half; and, reciprocally, the

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fall implies a rise. Things which are exchanged for one anothercan no more all fall, or all rise, than a dozen runners can each
outrun all the rest, or a hundred trees all overtop one another. A
general rise or a general fall of prices is merely tantamount toan alteration in the value of money, and is a matter of complete
indifference, save in so far as it affects existing contracts forreceiving and paying fixed pecuniary amounts.
Before commencing the inquiry into the laws of value andprice, I have one further observation to make. I must givewarning, once for all, that the cases I contemplate are those inwhich values and prices are determined by competition alone. In
so far only as they are thus determined, can they be reduced toany assignable law. The buyers must be supposed as studious tobuy cheap as the sellers to sell dear.
The reader is advised to study the definitions of value given
by other writers. Cairnes190 defines value as “the ratio in
which commodities in open market are exchanged against
each other.” F. A. Walker191 holds that “value is the power
which an article confers upon its possessor, irrespective oflegal authority or personal sentiments, of commanding, in
exchange for itself, the labor, or the products of the labor, ofothers.” Carey192 says, “Value is the measure of the resistanceto be overcome in obtaining those commodities or things
required for our purposes—of the power of nature over man.”
Value is thus, with him, the antithesis of wealth, which is(according to Carey) the power of man over nature. In thisschool, value is the service rendered by any one who supplies
the article for the use of another. This is also Bastiat's idea,193“le rapport de deux services échangés.” Following Bastiat,
A. L. Perry194 defines value as “always and everywhere the190“Leading Principles,” p. 11.
“Political Economy,” p. 5.
192“Social Science,” vol. i, p. 158.
193
“Harmonies,” p. 171.
194
“Political Economy,” p. 126.

191

289
relation of mutual purchase established between two services
by their exchange.” Roscher195 explains exchange value as“the quality which makes them exchangeable against othergoods.” He also makes a distinction between utility and value
in use: “Utility is a quality of things themselves, in relation, it
is true, to human wants. Value in use is a quality imputed tothem, the result of man's thought, or his view of them. Thus,
for instance, in a beleaguered city, the stores of food do notincrease in utility, but their value in use does.” Levasseur196
regards value as “the relation resulting from exchange”—lerapport resultant de l'échange. Cherbuliez197 asserts that “thevalue of a product or of a service can be expressed only as
the products or services which it obtains in exchange.... If
I exchange the thing A against B, A is the value of B, B is
the value of A.” Jevons198 defines value as “proportion in
exchange.”§ 2. Conditions of Value: Utility, Difficulty ofAttainment, and Transferableness.
That a thing may have any value in exchange, two conditions
are necessary. 1. It must be of some use; that is (as alreadyexplained), it must conduce to some purpose, satisfy some desire.
No one will pay a price, or part with anything which serves someof his purposes, to obtain a thing which serves none of them. 2.
But, secondly, the thing must not only have some utility, there
must also be some difficulty in its attainment.
The question is one as to the conditions essential to theexistence of any value. Very justly Cairnes199 adds also a third
195“Political Economy,” Introduction, Chap. I, § 5.
“Précis d'Économie politique,” p. 175.
197
“Précis de la Science économique,” vol. i, p. 202.
198
“Political Economy Primer,” p. 98.
199“Leading Principles,” p. 15.

196

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condition, “the possibility of transferring the possession of thearticles which are the subject of the exchange.” For instance,
a cargo of wheat at the bottom of the sea has value in use
and difficulty of attainment, but it is not transferable. Jevons(following J. B. Say) maintains that “value depends entirely on
utility.” If utility means the power to satisfy a desire, things
which merely have utility and no difficulty of attainment
could have no exchange value.200 F. A. Walker201 believes
that “value depends wholly on the relation between demandand supply.” Carey202 holds that value depends merely on thecost of reproduction of the given article. Roscher203 findsthat exchange value is “based on a combination of value in
use with cost value.” Cherbuliez204 calls the conditions ofvalue two, “the ability to give satisfaction, and inability of
attainment without effort. The first element is subjective; it isdetermined wholly by the needs or desires of the parties to theexchange. The second is objective; it depends upon material
considerations, which are the conditions of the existence ofthe thing, and upon which the needs of the persons exchanging
have no influence whatever.” It is, as usual, one of Cherbuliez's
clear expositions. A. L. Perry205 states that, “while value
always takes its rise in the desires of men, it is never realized
except through the efforts of men, and through these efforts
as mutually exchanged.”[253]

The difficulty of attainment which determines value is notalways the same kind of difficulty: (1.) It sometimes consists inan absolute limitation of the supply. There are things of which itis physically impossible to increase the quantity beyond certain
narrow limits. Such are those wines which can be grown only in
200“Theory of Political Economy,” pp. 82-91. See Cairnes, ibid., pp. 17-19.
“Political Economy,” p. 92.
202“Social Science,” vol. ii, p. 335.
203
“Political Economy,” Introduction, Chap. I, § 5.
204
“Précis,” p. 206.
205
“Political Economy,” p. 165.

201

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peculiar circumstances of soil, climate, and exposure. Such also
are ancient sculptures; pictures by the old masters; rare books
or coins, or other articles of antiquarian curiosity. Among suchmay also be reckoned houses and building-ground, in a town ofdefinite extent.

De Quincey206 has presented some ingenious diagrams torepresent the operations of the two constituents of value ineach of the three following cases: U represents the powerof the article to satisfy some desire, and D difficulty of
attainment. In the first case, exchange value is not hinderedby D from going up to any height, and so it rises and falls
entirely according to the force of U. D being practicallyinfinite, the horizontal line, exchange value, is not kept downby D, but it rises just as far as U, the desires of purchasers,
may carry it.

206“Logic of Political Economy.”292

Principles Of Political Economy(2.) But there is another category (embracing the majorityof all things that are bought and sold), in which the obstacle toattainment consists only in the labor and expense requisite toproduce the commodity. Without a certain labor and expense it
can not be had; but, when any one is willing to incur these, there
needs be no limit to the multiplication of the product. If there
were laborers enough and machinery enough, cottons, woolens,or linens might be produced by thousands of yards for every
single yard now manufactured.

[254]

In case (2) the horizontal line, representing exchange value,
follows the force of D entirely. The utility of the article isvery great, but the value is only limited by the difficulty ofobtaining it. So far as U is concerned, exchange value can go
up a great distance, but will go no higher than the point where
the article can be obtained. The dotted lines underneath the293horizontal line indicate that the exchange value of articles inthis class tend to fall in value.

(3.) There is a third case, intermediate between the two
preceding, and rather more complex, which I shall at present
merely indicate, but the importance of which in political economy
is extremely great. There are commodities which can be
multiplied to an indefinite extent by labor and expenditure,
but not by a fixed amount of labor and expenditure. Only alimited quantity can be produced at a given cost; if more iswanted, it must be produced at a greater cost. To this class, as has
been often repeated, agricultural produce belongs, and generally
all the rude produce of the earth; and this peculiarity is a sourceof very important consequences; one of which is the necessity ofa limit to population; and another, the payment of rent.
In case (3) articles like agricultural produce have a very great
power to satisfy desires, and if scarce would have a highvalue. So far as U is concerned, here also, as in case (2),exchange value might mount upward to almost any height,
but it can go no higher than D permits. In commodities of this294

Principles Of Political Economy
class, affected by the law of diminishing returns, the tendency
is for D to increase, and so for exchange value to rise, as
indicated by the dotted lines above that of the exchange value.

§ 3. Commodities limited in Quantity by the law of
Demand and Supply: General working of this Law.
These being the three classes, in one or other of which all things
that are bought and sold must take their place, we shall consider
them in their order. And first, of things absolutely limited inquantity, such as ancient sculptures or pictures.
Of such things it is commonly said that their value depends ontheir scarcity; others say that the value depends on the demandand supply. But this statement requires much explanation. The
supply of a commodity is an intelligible expression: it means the295quantity offered for sale; the quantity that is to be had, at a given
time and place, by those who wish to purchase it. But what ismeant by the demand? Not the mere desire for the commodity.
A beggar may desire a diamond; but his desire, however great,
will have no influence on the price. Writers have therefore
given a more limited sense to demand, and have defined it,
the wish to possess, combined with the power of purchasing.207
To distinguish demand in this technical sense from the demand
which is synonymous with desire, they call the former effectual
demand.
General supply consists in the commodities offered in
exchange for other commodities; general demand likewise,
if no money exists, consists in the commodities offered aspurchasing power in exchange for other commodities. Thatis, one can not increase the demand for certain things without
increasing the supply of some articles which will be received
in exchange for the desired commodities. Demand is based
upon the production of articles having exchange value, in
its economic sense; and the measure of this demand isnecessarily the quantity of commodities offered in exchange
for the desired goods. General demand and supply are thus
reciprocal to each other. But as soon as money, or generalpurchasing power, is introduced, Mr. Cairnes208 defines“demand as the desire for commodities or services, seeking
its end by an offer of general purchasing power; and supply,as the desire for general purchasing power, seeking its end
by an offer of specific commodities or services.” But many
persons find a difficulty because they insist upon separating
the idea of supply from that of demand, owing to the fact
207

Although here using demand in its proper sense, a little later Mr. Mill
defines it as the “quantity demanded.” As he again uses it in the proper sense
in discussing excess of money (Book III, Chap. V), supply (Book III, Chap.
XI), and foreign trade (Book III, Chap. XIV), I have omitted from his present
exposition his evidently inconsistent use of the word.
208“Leading Principles,” p. 25.

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that producers seem to be a distinct class in the community,
different from consumers. That they are in reality the same
persons can be easily explained by the following statement:“A certain number of people, A, B, C, D, E, F, etc., areengaged in industrial occupations—A produces for B, C, D,
E, F; B for A, C, D, E, F; C for A, B, D, E, F, and so on. In eachcase the producer and the consumers are distinct, and hence,by a very natural fallacy, it is concluded that the whole bodyof consumers is distinct from the whole body of producers,
whereas they consist of precisely the same persons.”
But in regard to demand and supply of particularcommodities (not general demand and supply), the increaseof the demand is not necessarily followed by an increased
supply, or vice versa. Out of the total production (whichconstitutes general demand) a varying amount, sometimes
more, sometimes less, may be directed by the desiresof men to the purchase of some given thing.
Thisshould be borne in mind, in connection with the future
discussion of over-production. The identity of general demandwith general supply shows there can be no general overproduction: but so long as there exists the possibility that thedemand for a particular commodity may diminish without acorresponding effect being thereby produced on the supply ofthat commodity, by a necessary connection, we see that there
may be over-production of particular commodities; that is, aproduction in excess of the demand.

The proper mathematical analogy [between demand andsupply] is that of an equation. If unequal at any moment,competition equalizes them, and the manner in which this is done
is by an adjustment of the value. If the demand increases, thevalue rises; if the demand diminishes, the value falls; again, if
the supply falls off, the value rises; and falls, if the supply is
increased. The rise or the fall continues until the demand andsupply are again equal to one another: and the value which a
commodity will bring in any market is no other than the value§ 4. Miscellaneous Cases falling under this Law.

297

which, in that market, gives a demand just sufficient to carry off
the existing or expected supply.
Mr. Cairnes209 finally defined market value as the price“which is sufficient, and no more than sufficient, to carry theexisting supply over, with such a surplus as circumstances may
render advisable, to meet the new supplies forthcoming,” which
is nothing more than a paraphrase of the words “existing or
expected supply” just used by Mr. Mill. It seems unnecessary,
therefore, that Mr. Cairnes should have added: “According to
Mr. Mill, the actual market price is the price which equalizes
supply and demand in a given market; as I view the case, the‘proper market price’ is the price which equalizes supply anddemand, not as existing in the particular market, but in the larger
sense which I have assigned to the terms. To this price theactual market price will, according to my view, approximate, in
proportion to the intelligence and knowledge of the dealers.”
Adam Smith, who introduced the expression “effectual
demand,” employed it to denote the demand of those who
are willing and able to give for the commodity what he calls
its natural price—that is, the price which will enable it to bepermanently produced and brought to market.210
This, then, is the Law of Value, with respect to all commodities
not susceptible of being multiplied at pleasure.

§ 4. Miscellaneous Cases falling under this Law.
There are but few commodities which are naturally andnecessarily limited in supply. But any commodity whatever
may be artificially so. The monopolist can fix the value as highas he pleases, short of what the consumer either could not or
209
210“Leading Principles,” p. 108.
See his chapter on “Natural and Market Price,” book i, chap. vii.

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would not pay; but he can only do so by limiting the supply.
Monopoly value, therefore, does not depend on any peculiar
principle, but is a mere variety of the ordinary case of demandand supply.
Again, though there are few commodities which are at all times
and forever unsusceptible of increase of supply, any commodity
whatever may be temporarily so; and with some commodities
this is habitually the case. Agricultural produce, for example,
can not be increased in quantity before the next harvest; thequantity of corn already existing in the world is all that can be
had for sometimes a year to come. During that interval, corn ispractically assimilated to things of which the quantity can not be
increased. In the case of most commodities, it requires a certain
time to increase their quantity; and if the demand increases, then,until a corresponding supply can be brought forward, that is,until the supply can accommodate itself to the demand, the value
will so rise as to accommodate the demand to the supply.
There is another case the exact converse of this. There aresome articles of which the supply may be indefinitely increased,
but can not be rapidly diminished. There are things so durable thatthe quantity in existence is at all times very great in comparison
with the annual produce. Gold and the more durable metals arethings of this sort, and also houses. The supply of such things
might be at once diminished by destroying them; but to do this
could only be the interest of the possessor if he had a monopolyof the article, and could repay himself for the destruction of a partby the increased value of the remainder. The value, therefore,of such things may continue for a long time so low, either fromexcess of supply or falling off in the demand, as to put a complete
stop to further production; the diminution of supply by wearingout being so slow a process that a long time is requisite, evenunder a total suspension of production, to restore the originalvalue. During that interval the value will be regulated solely bysupply and demand, and will rise very gradually as the existing

299
stock wears out, until there is again a remunerating value, andproduction resumes its course.
The total value of gold and silver in the world is variously
estimated at from $10,000,000,000 to $14,000,000,000; while
the annual production of both gold and silver in the world
during 1882211 was only $212,000,000. The loss of goldby abrasion is about 1/1000 annually, and of silver about
1/700, but much depends on the size of the coin. A change
in the annual production of the precious metals can have aperceptible effect on their value only after such a time aswill permit the change to affect the existing quantity in away somewhat comparable with its previous amount. The
quantity, however, of wheat produced is nearly all consumed
between harvests; and the annual supply bears a very large
ratio to the existing quantity. Consequently the price of wheat
will be very seriously affected by the quantity coming fromthe annual product.

Finally, there are commodities of which, though capable ofbeing increased or diminished to a great and even an unlimited
extent, the value never depends upon anything but demand andsupply. This is the case, in particular, with the commodity Labor,of the value of which we have treated copiously in the preceding
book; and there are many cases besides in which we shall find it
necessary to call in this principle to solve difficult questions of
exchange value. This will be particularly exemplified when wetreat of International Values; that is, of the terms of interchange
between things produced in different countries, or, to speak moregenerally, in distant places.

211“Report of the Director of the Mint,” 1883, p. 69.

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Principles Of Political Economy§ 5. Commodities which are Susceptible of Indefinite
Multiplication without Increase of Cost. Law of their
Value Cost of Production.

[260]

When the production of a commodity is the effect of labor andexpenditure, whether the commodity is susceptible of unlimited
multiplication or not, there is a minimum value which is theessential condition of its being permanently produced. The value
at any particular time is the result of supply and demand, andis always that which is necessary to create a market for the
existing supply. But unless that value is sufficient to repay
the Cost of Production, and to afford, besides, the ordinary
expectation of profit, the commodity will not continue to be
produced. Capitalists will not go on permanently producing ata loss. When such profit is evidently not to be had, if people
do not actually withdraw their capital, they at least abstain from
replacing it when consumed. The cost of production, together
with the ordinary profit, may, therefore, be called the necessary
price or value of all things made by labor and capital. Nobody
willingly produces in the prospect of loss.
When a commodity is not only made by labor and capital,
but can be made by them in indefinite quantity, this Necessary
Value, the minimum with which the producers will be content, isalso, if competition is free and active, the maximum which theycan expect. If the value of a commodity is such that it repays thecost of production not only with the customary but with a higher
rate of profit, capital rushes to share in this extra gain, and, byincreasing the supply of the article, reduces its value. This is
not a mere supposition or surmise, but a fact familiar to thoseconversant with commercial operations. Whenever a new lineof business presents itself, offering a hope of unusual profits,
and whenever any established trade or manufacture is believed
to be yielding a greater profit than customary, there is sure to
be in a short time so large a production or importation of the301
commodity as not only destroys the extra profit, but generally
goes beyond the mark, and sinks the value as much too low
as it had before been raised too high, until the over-supply iscorrected by a total or partial suspension of further production.
As already intimated,212 these variations in the quantity produced
do not presuppose or require that any person should change his
employment. Those whose business is thriving, increase theirproduce by availing themselves more largely of their credit,
while those who are not making the ordinary profit, restrict theiroperations, and (in manufacturing phrase) work short time. In
this mode is surely and speedily effected the equalization, notof profits, perhaps, but of the expectations of profit, in different
occupations.
As a general rule, then, things tend to exchange for one anotherat such values as will enable each producer to be repaid the costof production with the ordinary profit; in other words, such as
will give to all producers the same rate of profit on their outlay.
But in order that the profit may be equal where the outlay, thatis, the cost of production, is equal, things must on the averageexchange for one another in the ratio of their cost of production;
things of which the cost of production is the same, must be of thesame value.
Mr. Mill has here used cost of production almost exactly inthe sense of cost of labor, and as excluding profit (while in thenext chapter he includes some part of profit in the analysis). It
will be well, for the sake of definiteness, to collect the phrases
above in which he describes cost of production: “Unlessthat value is sufficient to repay the cost of production, andto afford, besides, the ordinary expectation of profit, thecommodity will not continue to be produced”; “the cost of
production, together with the ordinary profit, may therefore
be called the necessary price, or value”; “it repays the cost of212

Supra, p. 222.

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production, not only with the customary, but with a higher rateof profit”; “the cost of production with the ordinary profit—inother words, such as will give to all producers the same rate ofprofit on their outlay”; “that the profit may be equal where theoutlay, that is, the cost of production, is equal.” This is a viewwhich distinctly uses cost of production in the sense of theoutlay to the capitalist, or cost of labor. In no other way can
profit vary with “cost of production” than in the sense that it
is what a given article “costs to the capitalist”; but that is Mr.
Mill's definition of cost of labor (p. 227). It is, however, very
puzzling when in the next section he speaks of “the naturalvalue, that is, the cost of production.” Above, value included
cost of production and profit also. Having thus pointed out
what is Mr. Mill's conception of cost of production, it willremain for us in the next chapter to consider whether any
other view of it is more satisfactory.

Adam Smith and Ricardo have called that value of a thingwhich is proportional to its cost of production, its Natural Value(or its Natural Price). They meant by this, the point about which
the value oscillates, and to which it always tends to return;the center value, toward which, as Adam Smith expresses it,
the market value of a thing is constantly gravitating; and any
deviation from which is but a temporary irregularity which, themoment it exists, sets forces in motion tending to correct it.
On an average of years sufficient to enable the oscillations on
one side of the central line to be compensated by those on theother, the market value agrees with the natural value; but it very
seldom coincides exactly with it at any particular time. The sea
everywhere tends to a level, but it never is at an exact level;
its surface is always ruffled by waves, and often agitated bystorms. It is enough that no point, at least in the open sea,
is permanently higher than another. Each place is alternately
elevated and depressed; but the ocean preserves its level.

303§ 6. The Value of these Commodities confirm, in thelong run, to their Cost of Production through theoperation of Demand and Supply.
The latent influence by which the values of things are made toconform in the long run to the cost of production is the variationthat would otherwise take place in the supply of the commodity.
The supply would be increased if the thing continued to sell above
the ratio of its cost of production, and would be diminished if itfell below that ratio.
If one dollar covers the expense of making one spade, thenwhen a spade, by virtue of a sudden demand, rises in value
to one dollar and ten cents, the manufacturers get an extra
profit of ten cents. This could not long remain so, because
other capital would enter this industry, and so increase thesupply that one spade would sell for only one dollar; then
all would receive the average profit. If, owing to a cessationof demand for spades, the price fell to ninety cents, then the
manufacturers would lose ten cents on each one made andsold. Thereupon they would cease to do a losing business,
capital would be withdrawn, and spades would not be madeuntil the supply was suited to the necessary expense of making
them (one dollar). In this way, whenever there is a departureof the value from the normal cost, there is set in motion
ipso facto a series of forces which automatically restores thevalue to that cost. So here again we see the nature of an
economic law: the value may not often correspond exactlywith cost of production, but there is a tendency in all values toconform to that cost, and this tendency they irresistibly obey.
A body possessing weight does not move downward under all
circumstances (stones may be thrown upward), but the law ofgravitation holds true, nevertheless.

There is no need that there should be any actual alteration of
supply; and when there is, the alteration, if permanent, is not the

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cause but the consequence of the alteration in value. If, indeed,
the supply could not be increased, no diminution in the costof production would lower the value; but there is by no means
any necessity that it should. The mere possibility often suffices;the dealers are aware of what would happen, and their mutualcompetition makes them anticipate the result by lowering theprice.
Before the electric light was yet known as a feasible means oflighting (in 1878), the mere rumor of Edison's invention, before it was made public, and long before it became practicable,caused a serious fall in the price of gas stocks.

[263]

It is, therefore, strictly correct to say that the value of things
which can be increased in quantity at pleasure does not depend(except accidentally, and during the time necessary for production
to adjust itself) upon demand and supply; on the contrary, demandand supply depend upon it. There is a demand for a certain
quantity of the commodity at its natural or cost value, and to thatthe supply in the long run endeavors to conform.
Mr. Cairnes213 fitly says: “The supply of a commodity always
tends to adapt itself to the demand at the normal price. I may
here say briefly that by the normal price of a commodity I
mean that price which suffices, and no more than suffices, toyield to the producers what is considered to be the average
and usual remuneration on such sacrifices as they undergo.”

When at any time it fails of so conforming, it is either frommiscalculation, or from a change in some of the elements ofthe problem; either in the natural value, that is, in the cost of
production, or in the demand, from an alteration in public taste,
or in the number or wealth of the consumers. If a value different
from the natural value be necessary to make the demand equal to213“Leading Principles,” p. 41.

305
the supply, the market value will deviate from the natural value;
but only for a time, for the permanent tendency of supply is toconform itself to the demand which is found by experience toexist for the commodity when selling at its natural value. If the
supply is either more or less than this, it is so accidentally, andaffords either more or less than the ordinary rate of profit, which,under free and active competition, can not long continue to be
the case.
To recapitulate: demand and supply govern the value ofall things which can not be indefinitely increased; except thateven for them, when produced by industry, there is a minimum
value, determined by the cost of production. But in all things
which admit of indefinite multiplication, demand and supply only
determine the perturbations of value during a period which can
not exceed the length of time necessary for altering the supply.
While thus ruling the oscillations of value, they themselves obeya superior force, which makes value gravitate toward Cost of
Production, and which would settle it and keep it there, if fresh
disturbing influences were not continually arising to make itagain deviate.
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Chapter II. Ultimate Analysis Of Cost Of
Production.

§ 1. Of Labor, the principal Element in Cost of
Production.
The component elements of Cost of Production have been set
forth in the First Part of this inquiry.214 The principal of them,and so much the principal as to be nearly the sole, was found to
be Labor. What the production of a thing costs to its producer,
or its series of producers, is the labor expended in producing
it. If we consider as the producer the capitalist who makes theadvances, the word Labor may be replaced by the word Wages:
what the produce costs to him, is the wages which he has had
to pay. At the first glance, indeed, this seems to be only a partof his outlay, since he has not only paid wages to laborers, but
has likewise provided them with tools, materials, and perhaps
buildings. These tools, materials, and buildings, however, were
produced by labor and capital; and their value, like that of thearticle to the production of which they are subservient, depends
on cost of production, which again is resolvable into labor.
The cost of production of broadcloth does not wholly consist
in the wages of weavers; which alone are directly paid by thecloth-manufacturer. It consists also of the wages of spinners andwool-combers, and, it may be added, of shepherds, all of which
the clothier has paid for in the price of yarn. It consists, too, of
the wages of builders and brick-makers, which he has reimbursedin the contract price of erecting his factory. It partly consists of
the wages of machine-makers, iron-founders, and miners. And
214

Book I, Chap. I, § 2.

307
to these must be added the wages of the carriers who transported
any of the means and appliances of the production to the place
where they were to be used, and the product itself to the place
where it is to be sold.
Confirmation is here given, in the above words, of the opinion
that, in Mr. Mill's mind, Cost of Production was looked atwholly from the stand-point of the capitalist, and was identicalwith Cost of Labor to the capitalist.

The value of commodities, therefore, depends principally (weshall presently see whether it depends solely) on the quantityof labor required for their production, including in the idea of
production that of conveyance to the market. But since thecost of production to the capitalist is not labor but wages, andsince wages may be either greater or less, the quantity of labor
being the same, it would seem that the value of the product can
not be determined solely by the quantity of labor, but by thequantity together with the remuneration, and that values must
partly depend on wages.
Now the relation of one thing to another can not be altered byany cause which affects them both alike. A rise or fall of generalwages is a fact which affects all commodities in the same manner,and therefore affords no reason why they should exchange foreach other in one rather than in another proportion. Though there
is no such thing as a general rise of values, there is such a thing
as a general rise of prices. As soon as we form distinctly the idea
of values, we see that high or low wages can have nothing to dowith them; but that high wages make high prices, is a popularand widely spread opinion. The whole amount of error involvedin this proposition can only be seen thoroughly when we cometo the theory of money; at present we need only say that if it betrue, there can be no such thing as a real rise of wages; for if
wages could not rise without a proportional rise of the price ofeverything, they could not, for any substantial purpose, rise at

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all. It must be remembered, too, that general high prices, evensupposing them to exist, can be of no use to a producer or dealer,considered as such; for, if they increase his money returns, they
increase in the same degree all his expenses. There is no modein which capitalists can compensate themselves for a high costof labor, through any action on values or prices. It can not be
prevented from taking its effect in low profits. If the laborers
really get more, that is, get the produce of more labor, a smaller
percentage must remain for profit.

§ 2. Wages affect Values, only if different indifferent employments; “non-competing groups.”
Although, however, general wages, whether high or low, do notaffect values, yet if wages are higher in one employment thananother, or if they rise or fall permanently in one employment
without doing so in others, these inequalities do really operate
upon values. Things, for example, which are made by skilledlabor, exchange for the produce of a much greater quantity ofunskilled labor, for no reason but because the labor is more highly
paid. We have before remarked that the difficulty of passing
from one class of employments to a class greatly superior hashitherto caused the wages of all those classes of laborers who areseparated from one another by any very marked barrier to depend
more than might be supposed upon the increase of the populationof each class considered separately, and that the inequalities
in the remuneration of labor are much greater than could exist
if the competition of the laboring people generally could be
brought practically to bear on each particular employment. It
follows from this that wages in different employments do notrise or fall simultaneously, but are, for short and sometimes
even for long periods, nearly independent of one another. All§ 3. Profits an element in Cost of Production.

309

such disparities evidently alter the relative cost of productionof different commodities, and will therefore be completely
represented in their natural or average value.
This is again a clear recognition of the influence of Mr.
Cairnes's theory of “non-competing groups.”215

Wages do enter into value. The relative wages of the labornecessary for producing different commodities affect their value
just as much as the relative quantities of labor. It is true, theabsolute wages paid have no effect upon values; but neither has
the absolute quantity of labor. If that were to vary simultaneously
and equally in all commodities, values would not be affected. If,
for instance, the general efficiency of all labor were increased, sothat all things without exception could be produced in the same
quantity as before with a smaller amount of labor, no trace of
this general diminution of cost of production would show itself
in the values of commodities.

§ 3. Profits an element in Cost of Production.
Thus far of labor or wages as an element in cost of production. But
in our analysis, in the First Book, of the requisites of production,
we found that there is another necessary element in it besides
labor. There is also capital; and this being the result of abstinence,the produce, or its value, must be sufficient to remunerate, notonly all the labor required, but the abstinence of all the persons
by whom the remuneration of the different classes of laborers
was advanced. The return from abstinence is Profit. And profit,
we have also seen, is not exclusively the surplus remaining to
the capitalist after he has been compensated for his outlay, but
forms, in most cases, no unimportant part of the outlay itself. The
215

See supra, p. 210.

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flax-spinner, part of whose expenses consists of the purchase offlax and of machinery, has had to pay, in their price, not only
the wages of the labor by which the flax was grown and themachinery made, but the profits of the grower, the flax-dresser,
the miner, the iron-founder, and the machine-maker. All these
profits, together with those of the spinner himself, were again
advanced by the weaver, in the price of his material—linen yarn;
and along with them the profits of a fresh set of machine-makers,
and of the miners and iron-workers who supplied them with their
metallic material. All these advances form part of the cost of
production of linen. Profits, therefore, as well as wages, enter
into the cost of production which determines the value of the
produce.

§ 4. Cost of Production properly represented bysacrifice, or cost, to the Laborer as well as to theCapitalist; the relation of this conception to the Costof Labor.

[268]

In discussing Cost of Labor (supra, pp. 225, 226), Mr. Mill
found that the advances of the immediate producer consisted
not only of wages, but also of tools, materials, etc., in theprice of which he was including the profits of an auxiliary
capitalist who advanced the capital for making these tools,
etc. But, then, if a line of division were to be passed down
through all these advances, separating wages from profits,
he urged that, if all the capitalists (auxiliary and immediateboth) were one, all the advances of the capitalist might beconsidered as wages. Profits did not form a part of the outlay
to the capitalists in the former analysis. And this seems
correct enough. Now, however, he suggests that the outlayof the immediate producers should include the profit of the311
auxiliary capitalist. More than this, Mr. Mill now includes incost to the capitalist the profit of the immediate capitalist. For
example, in his illustration of the manufacture of linen, he
includes not merely the profit of the auxiliary capital engaged
in spinning and weaving, but the profit of the immediate andlast capitalist, the linen-manufacturer, also. This includes in
the cost of producing an article a profit not realized until after
the commodity is produced.
It is now time to give a more correct idea of cost of
production. Every one admits, for example, that the “costof production” of wheat is less in the United States than in
England. If, for instance, three men with a capital of one
hundred dollars may on a plot of ground, A, in the UnitedStates produce one hundred bushels of wheat, it will happen
that the same men and capital will only produce sixty bushelson ground, B, in England.

In ordinary language, then, we say that the cost of
production is greater in England than in the United States,
because the same labor and capital here produce one hundred
bushels for sixty in England; or, what amounts to the samething, that less labor and capital could produce sixty bushelsin the United States than sixty bushels in England. If we
suppose that one fourth of the crop is profit, and three fourths
is assigned to wages in both countries, then in the UnitedStates the one hundred dollars of capital receives twenty-fivebushels of profit, while in England it receives only fifteen;
and the three men receive as wages in the United States
twenty-five bushels each, while in England they receive only
fifteen bushels each. The first important induction to be madeis that where cost of production is low, wages and profits arehigh. The high productiveness of extractive industries in the

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United States is the reason why wages and profits are higher
here than in older countries.
Now the second important question is, Is cost of production
made up of wages and profits, and is it true that the cost rises
with a rise of wages and profits? Certainly not. Wages andprofits are both higher in the United States than in England,
but no one is so absurd as to say that the cost of productionof wheat (as above explained) is higher here than there. It is
exactly because cost of production of wheat is lower in the
United States that wages and profits measured in wheat are
higher here than in England. Therefore, it can not be granted,
as Mr. Mill expounds the doctrine, that cost of production
is made up of wages and profits. When we speak of anincreased cost of production of a given article, we mean thatits production requires more labor and capital than before;
and of a decrease in cost of production, that it requires lesslabor and capital than before; meaning by “more labor” that agiven quality of labor is exerted for a longer or shorter time,and by “more capital” that a greater or less quantity of wealthabstained from is employed for a longer or shorter time; or, inother words, that laborers and capitalists undergo more or lesssacrifice in exertion and abstinence, respectively, to attain agiven result. This is the contribution to cost of production
made by Mr. Cairnes, and briefly defined as follows: “In thecase of labor, the cost of producing a given commodity will be
represented by the number of average laborers employed in its
production—regard at the same time being had to the severityof the work and the degree of risk it involves—multiplied by
the duration of their labors. In that of abstinence, the principle
is analogous; the sacrifice will be measured by the quantityof wealth abstained from, taken in connection with the risk
incurred, and multiplied by the duration of the abstinence.”216
This view of cost of production takes into consideration,in the act of production, what Mr. Mill does not include,

216“Leading Principles,” part i, chap. iii, p. 87.

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the cost, or real sacrifice, to the laborer as well as to thecapitalist. It may, then, be well to state the relations of cost of
production, taken in this better sense, to value.
Within competing groups, where there is free choice forlabor and capital to select the most remunerative occupations,the hardest and most disagreeable employments will be best
paid, and the wages and profits will be in proportion to thesacrifice involved in each case. If so, the amount paid inwages and profits represents the sacrifices in each case.
Now, the aggregate product of an industry is the source fromwhich is drawn its wages and profits: the aggregate wages
and profits, therefore, must vary with the value of the total
product. If the total value depart from the sum hitherto
sufficient to pay the given wages and profits, then some will
be paid proportionally less than their sacrifice. The value ofa commodity, therefore, within the competing group, must
conform to the costs of production. If, for example (a), thevalue at any time were such as not to give the laborer the usual
equivalent for his sacrifice, he would change his employment
to another within the group where he could get it; if (b) the
share of the capitalist were at any time insufficient to give
him the usual reward for his abstinence, he would change
the investment of his capital. Therefore, within such limits
as allow a free competition of labor and capital, value must
conform itself to cost of production.
Not so, however, with the products of non-competing
industrial groups. As shown by Mr. Mill, labor does notpass freely from one employment to another; and it must be
said that capital does not either, although vastly more readyto move than labor. In a large and thinly settled country
capital does not move freely over the whole area of industry;
if it did, different rates of profit would not prevail, as we
all know they do, in the United States. Now, as before
stated, the total value of the commodities resulting from theexertions of each group of producers is the source from which
wages and profits are drawn. The aggregate wages and profits

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in each industry will vary with the value of the aggregate
products. But this total value depends upon what it will
exchange for of the products of other groups; that is, thisvalue depends on the reciprocal demand of one group forthe commodities of the other groups, as compared with thedemand of the other groups for its products. For example,
although cost of production is low in group A, if the demand
from outside groups were to be strong, the exchange valueof A's products would rise, and A would get more of othergoods in exchange; that is, the total produce is large, but asecond increment, arising from a higher exchange value, isto be shared among A's laborers and capitalists. A few years
ago, about 1878-1879, the value of wheat in the United Statesrose because of the increased demand from Europe, where
the harvests had been unusually deficient. There had been no
falling off in the productiveness of the farming industry of
the United States to cause the increased price; but the relative
demand of other industrial groups for wheat, the product of the
farming industry, raised the exchange value of wheat, and soincreased the industrial rewards of those engaged as laborers
and capitalists in farming. So it is to be concluded that since
there is no free movement of labor and capital between noncompeting groups, wages and profits may constantly remain at
rates which are not in correspondence with the actual sacrifice,or cost, to labor and capital in different groups; hence, theirproducts do not exchange for each other in proportion to theircosts of production. Reciprocal demand is the law of theirvalue.
It will be said, at once, that the foregoing conceptionof cost of production is entirely opposed to the language ofpractical men of affairs. They constantly speak of higher
or lower wages as increasing their cost of production, or asaffecting their ability to compete with foreigners. So universal
a usage implies a foundation of truth which demands attention.
Wages do represent cost to the capitalist, that is, the chiefpart of the outlay he makes in order to get a given return; but

315
we have already seen this, and, in the language of Political
Economy, termed it “cost of labor” to the capitalist. When thebusiness world use the phrase cost of production, they use it
in the sense of cost of labor, as hitherto explained. When they
are obliged by strikers to pay more wages, they say that it
increases their “cost of production,” meaning the cost to themof getting their product, and that it affects their profits. This,
then, will show that there is no objection to be urged, in its
true sense, against the phrase cost of production, arising fromits misuse in the common language of business.
The real connection between the proper conception of costof production and cost of labor is, however, worth attention.
It touches cost of labor through that one of its elements called“efficiency of labor.” The more productive an industry is, thehigher its wages and profits may be, and it is exactly at thispoint that more attention should be given to the relations oflabor and capital. If productiveness can be increased, higher
wages as well as higher profits are possible. The proper
understanding of the idea that where cost of production is
low wages and profits are high, throws a flood of lighton many industrial questions in the United States. In theconnection in which it stands, as I have shown, to cost oflabor, it means that if commodities can be produced at a lesssacrifice to labor and capital by the use of machinery and newprocesses, higher wages are consistent with a lower price ofthe given product. It explains the fact that, owing to skill
or natural resources, labor, although paid much higher rates,
can produce articles cheaper than laborers who are less highly
paid. Mr. Brassey217 has pointed out that English wages arehigher than on the Continent; and yet England, through low
cost of production, owing to skill, natural resources, etc.,
can produce so much more of commodities for a given outlay
that (while keeping her usual rate of profit) she can generally
undersell her competitors who employ cheaper labor. The
217“Work and Wages.”

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same observations apply to the United States; but the questionof foreign competition will be further discussed (Book III,
Chap. XX) after we have studied international trade andvalues.
“And here it may be well to state precisely what is to beunderstood by a ‘fluctuation of the market,’ as distinguishedfrom those changes of normal price which we have been
considering. Normal price, as we have seen, is governed,
according to the circumstances of the case [as to whether
there is free industrial competition or not], by one or otherof two causes—cost of production and reciprocal demand.
A change in normal price, therefore, is a change which isthe consequence of an alteration in one or other of these
conditions. So long as the determining condition—be it costof production or reciprocal demand—remains constant, thenormal price must be considered as remaining constant; but,
the normal price remaining constant, the market price (which,as we have seen, depends on the opinion of dealers respecting
the state of supply and demand in relation to the particular
article) may undergo a change—may deviate, that is to say,either upward or downward from the normal level. Suchchanges of price, occurring while the permanent conditions of
production remain unaffected, can only be temporary, calling
into action, as they do, forces which at once tend to restore
the normal state of things: they may therefore be properly
described as ‘fluctuations of the market.’ ”218

§ 5. When profits vary from Employment to
Employment, or are spread over unequal lengths ofTime, they affect Values accordingly.
218“Leading Principles,” p. 136.

317
Value, however, being purely relative, can not depend uponabsolute profits, no more than upon absolute wages, but upon
relative profits only. High general profits can not, any morethan high general wages, be a cause of high values, because highgeneral values are an absurdity and a contradiction. In so far as
profits enter into the cost of production of all things, they can notaffect the value of any. It is only by entering in a greater degree
into the cost of production of some things than of others, thatthey can have any influence on value.
Profits, however, may enter more largely into the conditionsof production of one commodity than of another, even though
there be no difference in the rate of profit between the two
employments. The one commodity may be called upon to yielda profit during a longer period of time than the other. The
example by which this case is usually illustrated is that of wine.
Suppose a quantity of wine and a quantity of cloth, made byequal amounts of labor, and that labor paid at the same rate. The
cloth does not improve by keeping; the wine does. Suppose that,to attain the desired quality, the wine requires to be kept five
years. The producer or dealer will not keep it, unless at the endof five years he can sell it for as much more than the cloth asamounts to five years' profit, accumulated at compound interest.
The wine and the cloth were made by the same original outlay.
Here, then, is a case in which the natural values, relatively to
one another, of two commodities, do not conform to their cost of
production alone, but to their cost of production plus somethingelse—unless, indeed, for the sake of generality in the expression,
we include the profit which the wine-merchant foregoes during
the five years, in the cost of production of the wine, looking
upon it as a kind of additional outlay, over and above his otheradvances, for which outlay he must be indemnified at last.
Regarding cost of production as the amounts of labor andabstinence required in production, and not as Mr. Mill regards

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it, as the amounts of wages and profits, the above is simply
a case where, in the production of wine, there is a longer
duration of the abstinence than in the production of cloth.
If there is a free movement of labor and capital between
the two industries, they will exchange for each other inproportion to the sacrifices involved; so that the wine would
exchange for more of cloth, because there was more sacrificeundergone. The same explanation also holds good in thefollowing illustration:[274]

All commodities made by machinery are assimilated, atleast approximately, to the wine in the preceding example. In
comparison with things made wholly by immediate labor, profits
enter more largely into their cost of production. Suppose two
commodities, A and B, each requiring a year for its production,by means of a capital which we will on this occasion denoteby money, and suppose it to be £1,000. A is made wholly byimmediate labor, the whole £1,000 being expended directly inwages. B is made by means of labor which cost £500 and amachine which cost £500, and the machine is worn out by one
year's use. The two commodities will be of exactly the samevalue, which, if computed in money, and if profits are 20 per
cent per annum, will be £1,200. But of this £1,200, in the caseof A, only £200, or one sixth, is profit; while in the case of B
there is not only the £200, but as much of £500 (the price ofthe machine) as consisted of the profits of the machine-maker;
which, if we suppose the machine also to have taken a year for
its production, is again one sixth. So that in the case of A only
one sixth of the entire return is profit, while in B the element of
profit comprises not only a sixth of the whole, but an additional
sixth of a large part.
From the unequal proportion in which, in different
employments, profits enter into the advances of the capitalist,
and therefore into the returns required by him, two consequences
follow in regard to value. (1). One is, that commodities do not319
exchange in the ratio simply of the quantities of labor required
to produce them; not even if we allow for the unequal rates atwhich different kinds of labor are permanently remunerated.
(2.) A second consequence is, that every rise or fall of generalprofits will have an effect on values. Not, indeed, by raising or
lowering them generally (which, as we have so often said, is acontradiction and an impossibility), but by altering the proportionin which the values of things are affected by the unequal lengthsof time for which profit is due. When two things, though madeby equal labor, are of unequal value because the one is called
upon to yield profit for a greater number of years or months thanthe other, this difference of value will be greater when profits are
greater, and less when they are less. The wine which has to yield
five years' profit more than the cloth will surpass it in value much
more if profits are forty per cent than if they are only twenty.
It follows from this that even a general rise of wages, when it
involves a real increase in the cost of labor, does in some degree
influence values. It does not affect them in the manner vulgarlysupposed, by raising them universally; but an increase in the costof labor lowers profits, and therefore lowers in natural values thethings into which profits enter in a greater proportion than the
average, and raises those into which they enter in a less proportion
than the average. All commodities in the production of whichmachinery bears a large part, especially if the machinery is very
durable, are lowered in their relative value when profits fall; or,what is equivalent, other things are raised in value relatively tothem. This truth is sometimes expressed in a phraseology moreplausible than sound, by saying that a rise of wages raises thevalue of things made by labor in comparison with those made bymachinery. But things made by machinery, just as much as anyother things, are made by labor—namely, the labor which madethe machinery itself—the only difference being that profits enter
somewhat more largely into the production of things for whichmachinery is used, though the principal item of the outlay is still

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labor.

§ 6. Occasional Elements in Cost of Production;
taxes and ground-rent.

[276]

Cost of Production consists of several elements, some of which
are constant and universal, others occasional. The universal
elements of cost of production are the wages of the labor, andthe profits of the capital. The occasional elements are taxes,
and any extra cost occasioned by a scarcity value of some of
the requisites. Besides the natural and necessary elements incost of production—labor and profits—there are others which
are artificial and casual, as, for instance, a tax. The taxes on hops
and malt are as much a part of the cost of production of thosearticles as the wages of the laborers. The expenses which the law
imposes, as well as those which the nature of things imposes,
must be reimbursed with the ordinary profit from the value of the
produce, or the things will not continue to be produced. But the
influence of taxation on value is subject to the same conditions
as the influence of wages and of profits. It is not generaltaxation, but differential taxation, that produces the effect. If all
productions were taxed so as to take an equal percentage from all
profits, relative values would be in no way disturbed. If only a
few commodities were taxed, their value would rise; and if only
a few were left untaxed, their value would fall.
But the case in which scarcity value chiefly operates in adding
to cost of production is the case of natural agents. These, whenunappropriated, and to be had for the taking, do not enter into
the cost of production, save to the extent of the labor which may
be necessary to fit them for use. Even when appropriated, they
do not (as we have already seen) bear a value from the merefact of the appropriation, but only from scarcity—that is, from321
limitation of supply. But it is equally certain that they often dobear a scarcity value.
No one can deny that rent sometimes enters into cost of
production [of other than agricultural products]. If I buy or rent a
piece of ground, and build a cloth-manufactory on it, the groundrent forms legitimately a part of my expenses of production,
which must be repaid by the product. And since all factories
are built on ground, and most of them in places where ground ispeculiarly valuable, the rent paid for it must, on the average, becompensated in the values of all things made in factories. In what
sense it is true that rent does not enter into the cost of production
or affect the value of agricultural produce will be shown in the
succeeding chapter.
These occasional elements in cost of production, such as
taxes, insurance, ground-rent, etc., are to be considered asjust so much of an increase in the quantity of capital required
for the operation involved in the particular production, and,
consequently, result in an increased cost of production, because there is either more abstinence, or abstinence for alonger time, to be rewarded. These elements, therefore, ifthey are not universal (or common to all articles), will affectthe exchange value of commodities, wherever there is a freecompetition.
[277]

Chapter III. Of Rent, In Its Relation To
Value.

§ 1. Commodities which are susceptible of indefinite
Multiplication, but not without increase of Cost. Lawof their Value, Cost of Production in the mostunfavorable existing circumstances.
We have investigated the laws which determine the value of twoclasses of commodities—the small class which, being limited
to a definite quantity, have their value entirely determined bydemand and supply, save that their cost of production (if they
have any) constitutes a minimum below which they can not
permanently fall; and the large class, which can be multiplied ad
libitum by labor and capital, and of which the cost of production
fixes the maximum as well as the minimum at which they canpermanently exchange [if there be free competition]. But there is
still a third kind of commodities to be considered—those which
have, not one, but several costs of production; which can always
be increased in quantity by labor and capital, but not by thesame amount of labor and capital; of which so much may be
produced at a given cost, but a further quantity not without agreater cost. These commodities form an intermediate class,partaking of the character of both the others. The principal ofthem is agricultural produce. We have already made abundantreference to the fundamental truth that in agriculture, the stateof the art being given, doubling the labor does not double theproduce; that, if an increased quantity of produce is required,
the additional supply is obtained at a greater cost than the first.
Where a hundred quarters of corn are all that is at present required323
from the lands of a given village, if the growth of population
made it necessary to raise a hundred more, either by breaking up
worse land now uncultivated, or by a more elaborate cultivationof the land already under the plow, the additional hundred, orsome part of them, at least, might cost double or treble as muchper quarter as the former supply.
If the first hundred quarters were all raised at the same expense(only the best land being cultivated), and if that expense would
be remunerated with the ordinary profit by a price of 20s. thequarter, the natural price of wheat, so long as no more thanthat quantity was required, would be 20s.; and it could only rise
above or fall below that price from vicissitudes of seasons, orother casual variations in supply. But if the population of the
district advanced, a time would arrive when more than a hundred
quarters would be necessary to feed it. We must suppose that
there is no access to any foreign supply. By the hypothesis, nomore than a hundred quarters can be produced in the district,unless by either bringing worse land into cultivation, or altering
the system of culture to a more expensive one. Neither of thesethings will be done without a rise in price. This rise of pricewill gradually be brought about by the increasing demand. Solong as the price has risen, but not risen enough to repay withthe ordinary profit the cost of producing an additional quantity,
the increased value of the limited supply partakes of the natureof a scarcity value. Suppose that it will not answer to cultivate
the second best land, or land of the second degree of remoteness,for a less return than 25s. the quarter; and that this price is also
necessary to remunerate the expensive operations by which anincreased produce might be raised from land of the first quality.
If so, the price will rise, through the increased demand, until itreaches 25s. That will now be the natural price; being the pricewithout which the quantity, for which society has a demand atthat price, will not be produced. At that price, however, society
can go on for some time longer; could go on perhaps forever, if

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population did not increase. The price, having attained that point,
will not again permanently recede (though it may fall temporarily
from accidental abundance); nor will it advance further, so longas society can obtain the supply it requires without a second
increase of the cost of production.
In the case supposed, different portions of the supply of cornhave different costs of production. Though the twenty, or fifty,or one hundred and fifty quarters additional have been produced
at a cost proportional to 25s., the original hundred quarters perannum are still produced at a cost only proportional to 20s.
This is self-evident, if the original and the additional supply are
produced on different qualities of land. It is equally true if they
are produced on the same land. Suppose that land of the best
quality, which produced one hundred quarters at 20s., has been
made to produce one hundred and fifty by an expensive process,which it would not answer to undertake without a price of 25s.
The cost which requires 25s. is incurred for the sake of fifty
quarters alone: the first hundred might have continued forever
to be produced at the original cost, and with the benefit, onthat quantity, of the whole rise of price caused by the increased
demand: no one, therefore, will incur the additional expense forthe sake of the additional fifty, unless they alone will pay for
the whole of it. The fifty, therefore, will be produced at theirnatural price, proportioned to the cost of their production; while
the other hundred will now bring in 5s. a quarter more than theirnatural price—than the price corresponding to, and sufficing toremunerate, their lower cost of production.
If the production of any, even the smallest, portion of the
supply requires as a necessary condition a certain price, thatprice will be obtained for all the rest. We are not able to buy one
loaf cheaper than another because the corn from which it was
made, being grown on a richer soil, has cost less to the grower.
The value, therefore, of an article (meaning its natural, which isthe same with its average value) is determined by the cost of that

325
portion of the supply which is produced and brought to market
at the greatest expense. This is the Law of Value of the third of
the three classes into which all commodities are divided.

§ 2. Such commodities, when Produced incircumstances more favorable, yield a Rent equal tothe difference of Cost.
If the portion of produce raised in the most unfavorable
circumstances obtains a value proportioned to its costof production; all the portions raised in more favorable
circumstances, selling as they must do at the same value,
obtain a value more than proportioned to their cost of production.
The owners, however, of those portions of the produce enjoya privilege; they obtain a value which yields them more thanthe ordinary profit. The advantage depends on the possessionof a natural agent of peculiar quality, as, for instance, of more
fertile land than that which determines the general value ofthe commodity; and when this natural agent is not owned bythemselves, the person who does own it is able to exact fromthem, in the form of rent, the whole extra gain derived from its
use. We are thus brought by another road to the Law of Rent,
investigated in the concluding chapter of the Second Book. Rent,
we again see, is the difference between the unequal returns todifferent parts of the capital employed on the soil. Whateversurplus any portion of agricultural capital produces, beyond what
is produced by the same amount of capital on the worst soil,
or under the most expensive mode of cultivation, which theexisting demands of society compel a recourse to, that surplus
will naturally be paid as rent from that capital, to the owner ofthe land on which it is employed.

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The discussion of rent is here followed wholly from the pointof view of value, while before (Book II, Chap. VI) the law ofrent was reached through a limitation of the quantity of land
due to the influence of population. In the former case the rent
and produce were stated in bushels. By introducing price now(as the convenient symbol of value), instead of the separate
increased demands of population in our illustration than used
(p. 240), it will be seen how the same operation, looking at itsolely in respect to value, brings us to the same law:

Price
per
Bushel.

$1.00
$1.33
$2.00
$4.00

A

B

C

D

24
18
12
6
bushels
bushels
bushels
bushels
Total Rent. Total Rent. Total Rent. Total
value
value
value
value
of
of
of
of
prodprodprodproduct.
uct.
uct.
uct.
$24.00 $0.00 ....
....
....
....
....
$32.00 $8.00 $24.00 $0.00 ....
....
....
$48.00 $24.00 $36.00 $12.00 $24.00 $0.00 ....
$96.00 $72.00 $72.00 $48.00 $48.00 $24.00 $24.00[281]

It was long thought by political economists, among the rest
even by Adam Smith, that the produce of land is always at amonopoly value, because (they said), in addition to the ordinaryrate of profit, it always yields something further for rent. This we
now see to be erroneous. A thing can not be at a monopoly value
when its supply can be increased to an indefinite extent if we are
only willing to incur the cost. As long as there is any land fit
for cultivation, which at the existing price can not be profitably
cultivated at all, there must be some land a little better, which

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will yield the ordinary profit, but allow nothing for rent: and that
land, if within the boundary of a farm, will be cultivated by thefarmer; if not so, probably by the proprietor, or by some otherperson on sufferance. Some such land at least, under cultivation,
there can scarcely fail to be.
Rent, therefore, forms no part of the cost of production which
determines the value of agricultural produce. The land or thecapital most unfavorably circumstanced among those actuallyemployed, pays no rent, and that land or capital determines
the cost of production which regulates the value of the whole
produce. Thus rent is, as we have already seen, no cause of value,
but the price of the privilege which the inequality of the returns
to different portions of agricultural produce confers on all except
the least favored portion.
Rent, in short, merely equalizes the profits of different farming
capitals, by enabling the landlord to appropriate all extra gains
occasioned by superiority of natural advantages. If all landlords
were unanimously to forego their rent, they would but transfer itto the farmers, without benefiting the consumer; for the existing
price of corn would still be an indispensable condition of the
production of part of the existing supply, and if a part obtainedthat price the whole would obtain it. Rent, therefore, unlessartificially increased by restrictive laws, is no burden on the
consumer: it does not raise the price of corn, and is no otherwise
a detriment to the public than inasmuch as if the state hadretained it, or imposed an equivalent in the shape of a land-tax,
it would then have been a fund applicable to general instead ofprivate advantage.
The nationalization of the land, consequently, would notbenefit the laboring-classes a whit through lowering the priceto them, or any consumer, of food or agricultural produce.

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Principles Of Political Economy§ 3. Rent of Mines and Fisheries and ground-rent of
Buildings, and cases of gain analogous to Rent.

[283]

Agricultural productions are not the only commodities whichhave several different costs of production at once, and which, inconsequence of that difference, and in proportion to it, afford arent. Mines are also an instance. Almost all kinds of raw material
extracted from the interior of the earth—metals, coals, precious
stones, etc.—are obtained from mines differing considerably infertility—that is, yielding very different quantities of the productto the same quantity of labor and capital. There are, perhaps,cases in which it is impossible to extract from a particular vein,in a given time, more than a certain quantity of ore, because
there is only a limited surface of the vein exposed, on whichmore than a certain number of laborers can not be simultaneously
employed. But this is not true of all mines. In collieries, forexample, some other cause of limitation must be sought for. In
some instances the owners limit the quantity raised, in order not
too rapidly to exhaust the mine; in others there are said to be
combinations of owners, to keep up a monopoly price by limiting
the production. Whatever be the causes, it is a fact that mines ofdifferent degrees of richness are in operation, and since the valueof the produce must be proportional to the cost of production
at the worst mine (fertility and situation taken together), it ismore than proportional to that of the best. All mines superior inproduce to the worst actually worked will yield, therefore, a rent
equal to the excess. They may yield more; and the worst mine
may itself yield a rent. Mines being comparatively few, their
qualities do not graduate gently into one another, as the qualitiesof land do; and the demand may be such as to keep the valueof the produce considerably above the cost of production at theworst mine now worked, without being sufficient to bring into
operation a still worse. During the interval, the produce is reallyat a scarcity value.

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Fisheries are another example. Fisheries in the open sea are
not appropriated, but fisheries in lakes or rivers almost always are
so, and likewise oyster-beds or other particular fishing-grounds
on coasts. We may take salmon-fisheries as an example of thewhole class. Some rivers are far more productive in salmon thanothers. None, however, without being exhausted, can supply
more than a very limited demand. All others, therefore, will, if
appropriated, afford a rent equal to the value of their superiority.
Both in the case of mines and of fisheries, the natural order of
events is liable to be interrupted by the opening of a new mine,or a new fishery, of superior quality to some of those alreadyin use. In this case, when things have permanently adjusted
themselves, the result will be that the scale of qualities which
supply the market will have been cut short at the lower end, while
a new insertion will have been made in the scale at some point
higher up; and the worst mine or fishery in use—the one which
regulates the rents of the superior qualities and the value of thecommodity—will be a mine or fishery of better quality than thatby which they were previously regulated.
The ground-rent of a building, and the rent of a garden or park
attached to it, will not be less than the rent which the same land
would afford in agriculture, but may be greater than this to anindefinite amount; the surplus being either in consideration of
beauty or of convenience, the convenience often consisting insuperior facilities for pecuniary gain. Sites of remarkable beauty
are generally limited in supply, and therefore, if in great demand,
are at a scarcity value. Sites superior only in convenience aregoverned as to their value by the ordinary principles of rent. The
ground-rent of a house in a small village is but little higher than
the rent of a similar patch of ground in the open fields.
Suppose the various kinds of land to be represented by thealphabet; that those below O pay no agricultural rent, and that
all lands increase in fertility and situation as we approach the

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Principles Of Political Economy
beginning of the alphabet, but which, as far up as K, are usedin agriculture; that higher than K all are more profitably used
for building purposes, viz.:
A, B, C, ... K, L, M, N, O, ... X, Y, Z.
Now it will happen that land is chosen for building
purposes irrespective of its fertility for agricultural purposes.
It will not be true, as some may think, that no land will be
used for building until it will pay a ground-rent greater than
the greatest agricultural rent paid by any piece of land. It is
not true, for example, if N be selected for a building-lot, thatit must pay a ground-rent as high as the agricultural rent of K,
the most fertile land cultivated in agriculture. It must pay aground-rent higher only than it itself would pay, if cultivated.
It is only necessary that it pay more than the same (not better)land would pay as rent if used only in agriculture.

The rents of wharfage, dock, and harbor room, water-power,
and many other privileges, may be analyzed on similar principles.
Take the case, for example, of a patent or exclusive privilege forthe use of a process by which the cost of production is lessened.
If the value of the product continues to be regulated by what it
costs to those who are obliged to persist in the old process, thepatentee will make an extra profit equal to the advantage which
his process possesses over theirs. This extra profit is essentiallysimilar to rent, and sometimes even assumes the form of it, thepatentee allowing to other producers the use of his privilege inconsideration of an annual payment.
The extra gains which any producer or dealer obtains throughsuperior talents for business, or superior business arrangements,
are very much of a similar kind. If all his competitors had
the same advantages, and used them, the benefit would betransferred to their customers through the diminished value ofthe article; he only retains it for himself because he is able tobring his commodity to market at a lower cost, while its value is331determined by a higher.219[285]§ 4. Résumé of the laws of value of each of the threeclasses of commodities.
A general résumé of the laws of value, where a free movementof labor and capital exists, may now be briefly made in thefollowing form:
Exchange value has three conditions, viz.:
1. Utility, or ability to satisfy a desire (U).
2. Difficulty of attainment (D), according to which there arethree classes of commodities.
3. Transferableness.
Of the second condition, there are three classes:
1. Those limited in supply—e.g., ancient pictures or monopolized
articles.
2. Those whose supply is capable of indefinite increase by theuse of labor and capital.
3. Those whose supply is gained at a gradually increasing cost,
under the law of diminishing returns.
Of those limited in supply, their value is regulated by Demandand Supply. The only limit is U.
Of those whose supply is capable of indefinite increase, theirnormal and permanent value is regulated by Cost of Production,and their temporary or market value is regulated by Demand andSupply, oscillating around Cost of Production (which consists of
the amount of labor and abstinence required).
219

F. A. Walker (“Political Economy,” pp. 248-259) expands this idea, andmakes it the pivotal part of his whole theory of distribution among laborers,
capitalists, and landlords.

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Of those whose supply is gained at a gradually increasing cost,
their normal value is regulated by the Cost of Production of that
portion of the whole amount of the whole amount needed, whichis brought to market at the greatest expense, and their market
value is regulated by Demand and Supply (as in class 2).
If there be no free competition between industries, then thevalue of those commodities which has been said, in the above
classification, to depend on cost of production, will be governedby the law of Reciprocal Demand.
[286]

Chapter IV. Of Money.

§ 1. The three functions of Money—a Common
Denominator of Value, a Medium of Exchange, a“Standard of Value”.
Having proceeded thus far in ascertaining the general lawsof Value, without introducing the idea of Money (except
occasionally for illustration), it is time that we should now
superadd that idea, and consider in what manner the principlesof the mutual interchange of commodities are affected by the useof what is termed a Medium of Exchange.
As Professor Jevons220 has pointed out, money performs three
distinct services, capable of being separated by the mind, andworthy of separate definition and explanation:
1. A Common Measure, or Common Denominator, ofValue.
2. A Medium of Exchange.
3. A Standard of Value.
F. A. Walker,221 however, says: “Money is the medium of
exchange. Whatever performs this function, does this work,
is money, no matter what it is made of.... That which does themoney-work is the money-thing.”(1.) [If we had no money] the first and most obvious[inconvenience] would be the want of a common measure forvalues of different sorts. If a tailor had only coats, and wanted tobuy bread or a horse, it would be very troublesome to ascertain
how much bread he ought to obtain for a coat, or how many coats
220
221“Money and the Mechanism of Exchange,” chap. iii.
“Political Economy,” p. 127.

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he should give for a horse. The calculation must be recommenced
on different data every time he bartered his coats for a different
kind of article, and there could be no current price or regularquotations of value. As it is much easier to compare different
lengths by expressing them in a common language of feet andinches, so it is much easier to compare values by means of acommon language of [dollars and cents].
The need of a common denominator of values (an excellent
term, introduced by Storch), to whose terms the values ofall other commodities may be reduced, and so compared, is
as great as that the inhabitants of the different States of theUnited States should have a common language as a means bywhich ideas could be communicated to the whole nation. A
man may have a horse, whose value he wishes to compare
in some common term with the value of his house, although
he might not wish to sell either. A valuation by the State fortaxation could not exist but for this common denominator, or
register, of value.
(2.) The second function is that of a medium of
exchange. The distinction between this function and thecommon denominator of value is that the latter measuresvalue, the former transfers value. The man owning the horse,
after having measured its value by comparison with a given
thing, may now wish to exchange it for other things. This
discloses the need of another quality in money.

The inconveniences of barter are so great that, without somemore commodious means of effecting exchanges, the division of
employments could hardly have been carried to any considerable
extent. A tailor, who had nothing but coats, might starve before
he could find any person having bread to sell who wanted a coat:besides, he would not want as much bread at a time as would be
worth a coat, and the coat could not be divided. Every person,
therefore, would at all times hasten to dispose of his commodity
in exchange for anything which, though it might not be fitted

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to his own immediate wants, was in great and general demand,and easily divisible, so that he might be sure of being able topurchase with it whatever was offered for sale. The thing whichpeople would select to keep by them for making purchases must
be one which, besides being divisible and generally desired, does
not deteriorate by keeping. This reduces the choice to a small
number of articles.
This need is well explained by the following facts furnishedby Professor Jevons: “Some years since, Mademoiselle Zélie,a singer of the Théâtre Lyrique at Paris, made a professional
tour round the world, and gave a concert in the Society
Islands. In exchange for an air from ‘Norma’ and a few othersongs, she was to receive a third part of the receipts. Whencounted, her share was found to consist of three pigs, twentythree turkeys, forty-four chickens, five thousand cocoanuts,
besides considerable quantities of bananas, lemons, andoranges. In the Society Islands, however, pieces of money
were very scarce; and, as mademoiselle could not consume
any considerable portion of the receipts herself, it became
necessary in the mean time to feed the pigs and poultry withthe fruit.”222(3.) The third function desired of money is what is
usually termed a “standard of value.” It is, perhaps, better
expressed by F. A. Walker223 as a “standard of deferredpayments.” Its existence is due to the desire to have a meansof comparing the purchasing power of a commodity at one
time with its purchasing power at another distant time; thatis, that for long contracts, exchanges may be in unchanged
ratios at the beginning and at the end of the contracts. Thereis no distinction between this function and the first, except
one arising from the introduction of time. At the same timeand place, the “standard of value” is given in the common
denominator of value.
222
223“Money and the Mechanism of Exchange,” p. 1.
“Political Economy,” p. 144.

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A Measure of Value,224 in the ordinary sense of the word
measure, would mean something by comparison with which we
may ascertain what is the value of any other thing. When we
consider, further, that value itself is relative, and that two things
are necessary to constitute it, independently of the third thingwhich is to measure it, we may define a Measure of Value to besomething, by comparing with which any two other things, we
may infer their value in relation to one another.
In this sense, any commodity will serve as a measure ofvalue at a given time and place; since we can always infer the
proportion in which things exchange for one another, when weknow the proportion in which each exchanges for any third thing.
To serve as a convenient measure of value is one of the functionsof the commodity selected as a medium of exchange. It is inthat commodity that the values of all other things are habituallyestimated.
But the desideratum sought by political economists is not ameasure of the value of things at the same time and place, but
a measure of the value of the same thing at different times andplaces: something by comparison with which it may be known
whether any given thing is of greater or less value now than acentury ago, or in this country than in America or China. To
enable the money price of a thing at two different periods tomeasure the quantity of things in general which it will exchange
for, the same sum of money must correspond at both periods to thesame quantity of things in general—that is, money must always
have the same exchange value, the same general purchasing
power. Now, not only is this not true of money, or of any
other commodity, but we can not even suppose any state of
circumstances in which it would be true.
It being very clear that money, or the precious metals, do not224

The substance of Mr. Mill's former chapter, XV (Book III), is here inserted
in its direct connection with the functions of money.

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themselves remain absolutely stable in value for long periods,
the only way in which a “standard of value” can be properly
established is by the proposed “multiple standard of value,”stated as follows:“A number of articles in general use—corn, beef, potatoes,
wool, cotton, silk, tea, sugar, coffee, indigo, timber, iron, coal,and others—shall be taken, in a definite quantity of each, somany pounds, or bushels, or cords, or yards, to form astandard required. The value of these articles, in the quantities
specified, and all of standard quality, shall be ascertainedmonthly or weekly by Government, and the total sum [inmoney] which would then purchase this bill of goods shallbe, thereupon, officially promulgated. Persons may then,if they choose, make their contracts for future payments interms of this multiple or tabular standard.”225 A, who hadborrowed $1,000 of B in 1870 for ten years, would make noteof the total money value of all these articles composing themultiple standard, which we will suppose is $125 in 1870.
Consequently, A would promise to pay B eight multiple units
in ten years (that is, eight times $125, or $1,000). But, if
other things change in value relatively to money during theseten years, the same sum of money—$1,000—in 1880 will not
return to B the same just amount of purchasing power which
he parted with in 1870. Now, if, in 1880, when his note fallsdue, the government list is examined, and it is found that
commodities in general have fallen in value relatively to gold,
the multiple unit will not amount to as much gold as it did in
1870; perhaps each unit may be rated only at $100. In thatcase, A is obliged to pay back but eight multiple units, whichcosts him only $800 in money, while B receives from A thesame amount of purchasing power over other commodities
which he loaned to him. B had no just claim to ten units, since
the fall of all commodities relatively to gold was not due to225

F. A. Walker, “Political Economy,” p. 363. A German, Count Soden (1805),
Joseph Lowe (1822), and G. Poulett Scrope (1833), proposed this scheme. See
Jevons, “Money and the Mechanism of Exchange,” chap. xxv.

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his exertions. On the other hand, if, between 1870 and 1880,
prices had risen, mutatis mutandis, the eight units would havecost A more than $1,000 in gold; but he would have been
justly obliged to return the same amount of purchasing power
to B which he received from him.

§ 2. Gold and Silver, why fitted for those purposes.
By a tacit concurrence, almost all nations, at a very early period,
fixed upon certain metals, and especially gold and silver, to serve
this purpose. No other substances unite the necessary qualities inso great a degree, with so many subordinate advantages. These
were the things which it most pleased every one to possess,
and which there was most certainty of finding others willing toreceive in exchange for any kind of produce. They were among
the most imperishable of all substances. They were also portable,
and, containing great value in small bulk, were easily hid; aconsideration of much importance in an age of insecurity. Jewels
are inferior to gold and silver in the quality of divisibility; andare of very various qualities, not to be accurately discriminatedwithout great trouble. Gold and silver are eminently divisible,
and, when pure, always of the same quality; and their purity may
be ascertained and certified by a public authority.
Jevons226 has more fully stated the requisites for a perfectmoney as—1. Value.
2. Portability.
3. Indestructibility.
4. Homogeneity.
5. Divisibility.
6. Stability of value.
226“Money and the Mechanism of Exchange,” p. 31.

§ 2. Gold and Silver, why fitted for those purposes.

339

7. Cognizability.
[291]

Accordingly, though furs have been employed as money insome countries, cattle in others, in Chinese Tartary cubes of tea
closely pressed together, the shells called cowries on the coastof Western Africa, and in Abyssinia at this day blocks of rocksalt, gold and silver have been generally preferred by nations
which were able to obtain them, either by industry, commerce, orconquest. To the qualities which originally recommended them,another came to be added, the importance of which only unfolded
itself by degrees. Of all commodities, they are among the least
influenced by any of the causes which produce fluctuations ofvalue. No commodity is quite free from such fluctuations. Goldand silver have sustained, since the beginning of history, one
great permanent alteration of value, from the discovery of theAmerican mines.
In the present age the opening of new sources of supply, soabundant as the Ural Mountains, California, and Australia, may
be the commencement of another period of decline, on the limitsof which it would be useless at present to speculate. But, on
the whole, no commodities are so little exposed to causes ofvariation. They fluctuate less than almost any other things intheir cost of production. And, from their durability, the total
quantity in existence is at all times so great in proportion to theannual supply, that the effect on value even of a change in thecost of production is not sudden: a very long time being required
to diminish materially the quantity in existence, and even toincrease it very greatly not being a rapid process. Gold andsilver, therefore, are more fit than any other commodity to be thesubject of engagements for receiving or paying a given quantity
at some distant period.
Since Mr. Mill wrote, two great changes in the production of
the precious metals have occurred. The discoveries of gold,
briefly referred to by him, have led to an enormous increase

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Principles Of Political Economyof the existing fund of gold (see chart No. IX, Chap. VI),
and a fall in the value of gold within twenty years after the
discoveries, according to Mr. Jevons's celebrated study,227 offrom nine to fifteen per cent. Another change took place, achange in the value, of silver, in 1876, which has resulted ina permanent fall of its value since that time (see chart No. X,
Chap. VII). Before that date, silver sold at about 60d. per
ounce in the central market of the world, London; and now itremains about 52d. per ounce, although it once fell to 47d., in
July, 1876. In spite of Mr. Mill's expressions of confidence intheir stability of value—although certainly more stable thanother commodities—the events of the last thirty-five years
have fully shown that neither gold nor silver—silver far lessthan gold—can successfully serve as a perfect “standard ofvalue” for any considerable length of time.

[292]

When gold and silver had become virtually a medium of
exchange, by becoming the things for which people generally
sold, and with which they generally bought, whatever they had
to sell or to buy, the contrivance of coining obviously suggested
itself. By this process the metal was divided into convenient
portions, of any degree of smallness, and bearing a recognizedproportion to one another; and the trouble was saved of weighing
and assaying at every change of possessors—an inconvenience
which, on the occasion of small purchases, would soon havebecome insupportable. Governments found it their interest to
take the operation into their own hands, and to interdict allcoining by private persons.

§ 3. Money a mere contrivance for facilitatingexchanges, which does not affect the laws of value.
227“A Serious Fall in the Value of Gold” (1863).

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It must be evident, however, that the mere introduction of aparticular mode of exchanging things for one another, by firstexchanging a thing for money, and then exchanging the money
for something else, makes no difference in the essential characterof transactions. It is not with money that things are reallypurchased. Nobody's income (except that of the gold or silver
miner) is derived from the precious metals. The [dollars orcents] which a person receives weekly or yearly are not what
constitutes his income; they are a sort of tickets or orders which
he can present for payment at any shop he pleases, and which
entitle him to receive a certain value of any commodity that hemakes choice of. The farmer pays his laborers and his landlord inthese tickets, as the most convenient plan for himself and them;but their real income is their share of his corn, cattle, and hay,
and it makes no essential difference whether he distributes it tothem directly, or sells it for them and gives them the price. There
can not, in short, be intrinsically a more insignificant thing, inthe economy of society, than money; except in the character ofa contrivance for sparing time and labor. It is a machine fordoing quickly and commodiously what would be done, thoughless quickly and commodiously, without it; and, like many otherkinds of machinery, it only exerts a distinct and independent
influence of its own when it gets out of order.
The introduction of money does not interfere with the operationof any of the Laws of Value laid down in the preceding chapters.
The reasons which make the temporary or market value ofthings depend on the demand and supply, and their averageand permanent values upon their cost of production, are asapplicable to a money system as to a system of barter. Things
which by barter would exchange for one another will, if sold formoney, sell for an equal amount of it, and so will exchange for
one another still, though the process of exchanging them willconsist of two operations instead of only one. The relations ofcommodities to one another remain unaltered by money; the only

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new relation introduced is their relation to money itself; howmuch or how little money they will exchange for; in other words,
how the Exchange Value of money itself is determined. Moneyis a commodity, and its value is determined like that of othercommodities, temporarily by demand and supply, permanently
and on the average by cost of production.
[294]

Chapter V. Of The Value Of Money, As
Dependent On Demand And Supply.

§ 1. Value of Money, an ambiguous expression.
The Value of Money is to appearance an expression as precise, as
free from possibility of misunderstanding, as any in science. The
value of a thing is what it will exchange for; the value of money iswhat money will exchange for, the purchasing power of money.
If prices are low, money will buy much of other things, and isof high value; if prices are high, it will buy little of other things,
and is of low value. The value of money is inversely as generalprices; falling as they rise, and rising as they fall. When one
person lends to another, as well as when he pays wages or rent
to another, what he transfers is not the mere money, but a rightto a certain value of the produce of the country, to be selected
at pleasure; the lender having first bought this right, by giving
for it a portion of his capital. What he really lends is so muchcapital; the money is the mere instrument of transfer. But thecapital usually passes from the lender to the receiver through themeans either of money, or of an order to receive money, and at
any rate it is in money that the capital is computed and estimated.
Hence, borrowing capital is universally called borrowing money;
the loan market is called the money market; those who have theircapital disposable for investment on loan are called the moneyedclass; and the equivalent given for the use of capital, or, in otherwords, interest, is not only called the interest of money, but, bya grosser perversion of terms, the value of money.

§ 2. The Value of Money depends on its quantity.

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The value or purchasing power of money depends, in the first
instance, on demand and supply. But demand and supply, in
relation to money, present themselves in a somewhat different
shape from the demand and supply of other things.
The supply of a commodity means the quantity offered forsale. But it is not usual to speak of offering money for sale.
People are not usually said to buy or sell money. This, however,is merely an accident of language. In point of fact, money isbought and sold like other things, whenever other things arebought and sold for money. Whoever sells corn, or tallow, or
cotton, buys money. Whoever buys bread, or wine, or clothes,sells money to the dealer in those articles. The money with whichpeople are offering to buy, is money offered for sale. The supplyof money, then, is the quantity of it which people are wanting
to lay out; that is, all the money they have in their possession,
except what they are hoarding, or at least keeping by them as areserve for future contingencies. The supply of money, in short,is all the money in circulation at the time.
The demand for money, again, consists of all the goods offered
for sale. Every seller of goods is a buyer of money, and thegoods he brings with him constitute his demand. The demand formoney differs from the demand for other things in this, that it islimited only by the means of the purchaser.
In this last statement Mr. Mill is misled by his former
definition of demand as “quantity demanded.” He has the true
idea of demand in this case regarding money; but the demand
for money does not, as he thinks, differ from the demand forother things, inasmuch as, in our corrected view of demandfor other things (p. 255), it was found that the demand forother things than money was also limited by the means of thepurchaser.228

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228

F. A. Walker defines the demand for money as “the occasion for the use ofmoney in effecting exchanges; in other words, it is the amount of money-work§ 2. The Value of Money depends on its quantity.

345

As the whole of the goods in the market compose the demand
for money, so the whole of the money constitutes the demand forgoods. The money and the goods are seeking each other for the
purpose of being exchanged. They are reciprocally supply anddemand to one another. It is indifferent whether, in characterizing
the phenomena, we speak of the demand and supply of goods,
or the supply and the demand of money. They are equivalent
expressions.
Supposing the money in the hands of individuals to be
increased, the wants and inclinations of the community
collectively in respect to consumption remaining exactly thesame, the increase of demand would reach all things equally,
and there would be a universal rise of prices. Let us rather
suppose, therefore, that to every pound, or shilling, or penny inthe possession of any one, another pound, shilling, or penny weresuddenly added. There would be an increased money demand,and consequently an increased money value, or price, for thingsof all sorts. This increased value would do no good to any
one; would make no difference, except that of having to reckon[dollars and cents] in higher numbers. It would be an increase ofvalues only as estimated in money, a thing only wanted to buy
other things with; and would not enable any one to buy more ofthem than before. Prices would have risen in a certain ratio, andthe value of money would have fallen in the same ratio.
It is to be remarked that this ratio would be precisely that inwhich the quantity of money had been increased. If the wholemoney in circulation was doubled, prices would be doubled. If
it was only increased one fourth, prices would rise one fourth.
There would be one fourth more money, all of which would be
to be done” (“Political Economy,” p. 133); and the supply of money as “themoney-force available to do the money-work which the demand for money
indicates as required to be done, in the given community, at the given time.
The supply of money is measured by ... the amount of money and the rapidityof circulation” (ibid., p. 136).

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used to purchase goods of some description. When there had
been time for the increased supply of money to reach all markets,or (according to the conventional metaphor) to permeate all thechannels of circulation, all prices would have risen one fourth.
But the general rise of price is independent of this diffusing
and equalizing process. Even if some prices were raised more,
and others less, the average rise would be one fourth. This isa necessary consequence of the fact that a fourth more money
would have been given for only the same quantity of goods.
General prices, therefore, would in any case be a fourth higher.
So that the value of money, other things being the same, varies
inversely as its quantity; every increase of quantity lowering
the value, and every diminution raising it, in a ratio exactly
equivalent. This, it must be observed, is a property peculiar tomoney. We did not find it to be true of commodities generally,that every diminution of supply raised the value exactly inproportion to the deficiency, or that every increase lowered it in
the precise ratio of the excess. Some things are usually affected
in a greater ratio than that of the excess or deficiency, others
usually in a less; because, in ordinary cases of demand, thedesire, being for the thing itself, may be stronger or weaker; andthe amount of what people are willing to expend on it, being
in any case a limited quantity, may be affected in very unequal
degrees by difficulty or facility of attainment. But in the case ofmoney, which is desired as the means of universal purchase, thedemand consists of everything which people have to sell; andthe only limit to what they are willing to give, is the limit set by
their having nothing more to offer. The whole of the goods being
in any case exchanged for the whole of the money which comes
into the market to be laid out, they will sell for less or more of it,
exactly according as less or more is brought.

§ 3. —Together with the Rapidity of Circulation.

§ 3. —Together with the Rapidity of Circulation.

347

It might be supposed that there is always in circulation in acountry a quantity of money equal in value to the whole of thegoods then and there on sale. But this would be a complete
misapprehension. The money laid out is equal in value to thegoods it purchases; but the quantity of money laid out is not thesame thing with the quantity in circulation. As the money passes
from hand to hand, the same piece of money is laid out manytimes before all the things on sale at one time are purchased andfinally removed from the market; and each pound or dollar must
be counted for as many pounds or dollars as the number of times
it changes hands in order to effect this object.
If we assume the quantity of goods on sale, and the number oftimes those goods are resold, to be fixed quantities, the value ofmoney will depend upon its quantity, together with the average
number of times that each piece changes hands in the process.
The whole of the goods sold (counting each resale of the same
goods as so much added to the goods) have been exchanged forthe whole of the money, multiplied by the number of purchases
made on the average by each piece. Consequently, the amount ofgoods and of transactions being the same, the value of money isinversely as its quantity multiplied by what is called the rapidityof circulation. And the quantity of money in circulation is equal
to the money value of all the goods sold, divided by the number
which expresses the rapidity of circulation.
This may be expressed in mathematical language, where V isthe value of money, Q is the quantity in circulation, and R thenumber expressing the rapidity of circulation, as follows:
V = 1 / (Q × R).

The phrase, rapidity of circulation, requires some comment. It
must not be understood to mean the number of purchases madeby each piece of money in a given time. Time is not the thing to
be considered. The state of society may be such that each pieceof money hardly performs more than one purchase in a year; but

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if this arises from the small number of transactions—from thesmall amount of business done, the want of activity in traffic,
or because what traffic there is mostly takes place by barter—it
constitutes no reason why prices should be lower, or the valueof money higher. The essential point is, not how often thesame money changes hands in a given time, but how often it
changes hands in order to perform a given amount of traffic. We
must compare the number of purchases made by the money in agiven time, not with the time itself, but with the goods sold inthat same time. If each piece of money changes hands on anaverage ten times while goods are sold to the value of a million
sterling, it is evident that the money required to circulate those
goods is £100,000. And, conversely, if the money in circulationis £100,000, and each piece changes hands, by the purchaseof goods, ten times in a month, the sales of goods for money
which take place every month must amount, on the average, to£1,000,000. [The essential point to be considered is] the average
number of purchases made by each piece in order to affect agiven pecuniary amount of transactions.
“There is no doubt that the rapidity of circulation varies verymuch between one country and another. A thrifty people withslight banking facilities, like the French, Swiss, Belgians, andDutch, hoard coin much more than an improvident people likethe English, or even a careful people, with a perfect banking
system, like the Scotch. Many circumstances, too, affectthe rapidity of circulation. Railways and rapid steamboats
enable coin and bullion to be more swiftly remitted thanof old; telegraphs prevent its needless removal, and theacceleration of the mails has a like effect.” “So different
are the commercial habits of different peoples, that there
evidently exists no proportion whatever between the amountof currency in a country and the aggregate of the exchanges
which can be effected by it.”229
229

Jevons, “Money and the Mechanism of Exchange,” pp. 336, 339.

§ 4. Explanations and Limitations of this Principle.

349§ 4. Explanations and Limitations of this Principle.
The proposition which we have laid down respecting thedependence of general prices upon the quantity of money incirculation must be understood as applying only to a state ofthings in which money—that is, gold or silver—is the exclusive
instrument of exchange, and actually passes from hand to handat every purchase, credit in any of its shapes being unknown.
When credit comes into play as a means of purchasing, distinct
from money in hand, we shall hereafter find that the connection
between prices and the amount of the circulating medium is muchless direct and intimate, and that such connection as does exist
no longer admits of so simple a mode of expression. That anincrease of the quantity of money raises prices, and a diminution
lowers them, is the most elementary proposition in the theory of
currency, and without it we should have no key to any of theothers. In any state of things, however, except the simple andprimitive one which we have supposed, the proposition is only
true, other things being the same.
It is habitually assumed that whenever there is a greater
amount of money in the country, or in existence, a rise of prices
must necessarily follow. But this is by no means an inevitableconsequence. In no commodity is it the quantity in existence, but
the quantity offered for sale, that determines the value. Whatever
may be the quantity of money in the country, only that part of it
will affect prices which goes into the market of commodities, andis there actually exchanged against goods. Whatever increases
the amount of this portion of the money in the country tends toraise prices.
This statement needs modification, since the change in theamounts of specie in the bank reserves, particularly of Englandand the United States, determines the amount of credit andpurchasing power granted, and so affects prices in that way;

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but prices are affected not by this specie being actually
exchanged against goods.

It frequently happens that money to a considerable amount isbrought into the country, is there actually invested as capital, andagain flows out, without having ever once acted upon the markets
of commodities, but only upon the market of securities, or, as it
is commonly though improperly called, the money market.

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A foreigner landing in the country with a treasure mightvery probably prefer to invest his fortune at interest; which weshall suppose him to do in the most obvious way by becoming
a competitor for a portion of the stock, railway debentures,
mercantile bills, mortgages, etc., which are at all times in thehands of the public. By doing this he would raise the prices of
those different securities, or in other words would lower the rateof interest; and since this would disturb the relation previously
existing between the rate of interest on capital in the country
itself and that in foreign countries, it would probably induce
some of those who had floating capital seeking employment tosend it abroad for foreign investment, rather than buy securities
at home at the advanced price. As much money might thus goout as had previously come in, while the prices of commodities
would have shown no trace of its temporary presence. This is acase highly deserving of attention; and it is a fact now beginningto be recognized that the passage of the precious metals fromcountry to country is determined much more than was formerly
supposed by the state of the loan market in different countries,
and much less by the state of prices.
If there be, at any time, an increase in the number of moneytransactions, a thing continually liable to happen from differencesin the activity of speculation, and even in the time of year (sincecertain kinds of business are transacted only at particular seasons),
an increase of the currency which is only proportional to this§ 4. Explanations and Limitations of this Principle.

351

increase of transactions, and is of no longer duration, has notendency to raise prices.
For example, bankers in Eastern cities each year send in theautumn to the West, as the crops are gathered, very large sumsof money, to settle transactions in the buying and selling ofgrain, wool, etc., but it again flows back to the great centersof business in a short time, in payment of purchases from
Eastern merchants.
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Chapter VI. Of The Value Of Money, As
Dependent On Cost Of Production.

§ 1. The value of Money, in a state of Freedom,
conforms to the value of the Bullion contained in it.

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But money, no more than commodities in general, has its value
definitely determined by demand and supply. The ultimate
regulator of its value is Cost of Production.
We are supposing, of course, that things are left to themselves.
Governments have not always left things to themselves. It
was, until lately, the policy of all governments to interdict theexportation and the melting of money; while, by encouraging
the exportation and impeding the importation of other things,
they endeavored to have a stream of money constantly flowing
in. By this course they gratified two prejudices: they drew, or
thought that they drew, more money into the country, which they
believed to be tantamount to more wealth; and they gave, or
thought that they gave, to all producers and dealers, high prices,which, though no real advantage, people are always inclined tosuppose to be one.
We are, however, to suppose a state, not of artificial regulation,but of freedom. In that state, and assuming no charge to be madefor coinage, the value of money will conform to the value ofthe bullion of which it is made. A pound-weight of gold or
silver in coin, and the same weight in an ingot, will precisely
exchange for one another. On the supposition of freedom, themetal can not be worth more in the state of bullion than of coin;for as it can be melted without any loss of time, and with hardly
any expense, this would of course be done until the quantity incirculation was so much diminished as to equalize its value with§ 2. —Which is determined by the cost of production.

353

that of the same weight in bullion. It may be thought, however,that the coin, though it can not be of less, may be, and beinga manufactured article will naturally be, of greater value thanthe bullion contained in it, on the same principle on which linen
cloth is of more value than an equal weight of linen yarn. This
would be true, were it not that Government, in this country andin some others, coins money gratis for any one who furnishes themetal. If Government, however, throws the expense of coinage,
as is reasonable, upon the holder, by making a charge to cover
the expense (which is done by giving back rather less in coin thanhas been received in bullion, and is called levying a seigniorage),the coin will rise, to the extent of the seigniorage, above thevalue of the bullion. If the mint kept back one per cent, to pay the
expense of coinage, it would be against the interest of the holdersof bullion to have it coined, until the coin was more valuable
than the bullion by at least that fraction. The coin, therefore,
would be kept one per cent higher in value, which could only
be by keeping it one per cent less in quantity, than if its coinage
were gratuitous.
In the United States there was no charge for seigniorage ongold and silver to 1853, when one half of one per cent was
charged as interest on the delay if coin was immediately
delivered on the deposit of bullion; in 1873 it was reduced
to one fifth of one per cent; and in 1875, by a provision of
the Resumption Act, it was wholly abolished (the depositor,
however, paying for the copper alloy). For the trade-dollars,
as was consistent with their being only coined ingots and notlegal money, a seigniorage was charged equal simply to theexpense of coinage, which was one and a quarter per cent at
Philadelphia, and one and a half per cent at San Francisco on
the tale value.

§ 2. —Which is determined by the cost of production.

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The value of money, then, conforms permanently, and in a stateof freedom almost immediately, to the value of the metal ofwhich it is made; with the addition, or not, of the expenses ofcoinage, according as those expenses are borne by the individual
or by the state.
To the majority of civilized countries gold and silver are
foreign products: and the circumstances which govern the valuesof foreign products present some questions which we are not yet
ready to examine. For the present, therefore, we must suppose
the country which is the subject of our inquiries to be suppliedwith gold and silver by its own mines [as in the case of theUnited States], reserving for future consideration how far ourconclusions require modification to adapt them to the more usualcase.
Of the three classes into which commodities are
divided—those absolutely limited in supply, those which may be
had in unlimited quantity at a given cost of production, and thosewhich may be had in unlimited quantity, but at an increasing
cost of production—the precious metals, being the produce ofmines, belong to the third class. Their natural value, therefore,
is in the long run proportional to their cost of production in themost unfavorable existing circumstances, that is, at the worst
mine which it is necessary to work in order to obtain the required
supply. A pound weight of gold will, in the gold-producing
countries, ultimately tend to exchange for as much of every
other commodity as is produced at a cost equal to its own;
meaning by its own cost the cost in labor and expense at the least
productive sources of supply which the then existing demand
makes it necessary to work. The average value of gold ismade to conform to its natural value in the same manner as
the values of other things are made to conform to their naturalvalue. Suppose that it were selling above its natural value; that is,above the value which is an equivalent for the labor and expenseof mining, and for the risks attending a branch of industry in§ 2. —Which is determined by the cost of production.

355

which nine out of ten experiments have usually been failures.
A part of the mass of floating capital which is on the lookout
for investment would take the direction of mining enterprise; thesupply would thus be increased, and the value would fall. If, on
the contrary, it were selling below its natural value, miners would
not be obtaining the ordinary profit; they would slacken theirworks; if the depreciation was great, some of the inferior mines
would perhaps stop working altogether: and a falling off in theannual supply, preventing the annual wear and tear from being
completely compensated, would by degrees reduce the quantity,
and restore the value.
When examined more closely, the following are the details of
the process: If gold is above its natural or cost value—the coin,
as we have seen, conforming in its value to the bullion—money
will be of high value, and the prices of all things, labor included,
will be low. These low prices will lower the expenses of all
producers; but, as their returns will also be lowered, no advantage
will be obtained by any producer, except the producer of gold;
whose returns from his mine, not depending on price, will be
the same as before, and, his expenses being less, he will obtain
extra profits, and will be stimulated to increase his production. E
converso, if the metal is below its natural value; since this is as
much as to say that prices are high, and the money expenses of all
producers unusually great; for this, however, all other producers
will be compensated by increased money returns; the miner alone
will extract from his mine no more metal than before, while his
expenses will be greater: his profits, therefore, being diminishedor annihilated, he will diminish his production, if not abandon
his employment.
In this manner it is that the value of money is made to conformto the cost of production of the metal of which it is made. It may
be well, however, to repeat (what has been said before) that theadjustment takes a long time to effect, in the case of a commodity
so generally desired and at the same time so durable as the

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precious metals. Being so largely used, not only as money but forplate and ornament, there is at all times a very large quantity ofthese metals in existence: while they are so slowly worn out thata comparatively small annual production is sufficient to keep up
the supply, and to make any addition to it which may be requiredby the increase of goods to be circulated, or by the increased
demand for gold and silver articles by wealthy consumers. Even
if this small annual supply were stopped entirely, it would
require many years to reduce the quantity so much as to makeany very material difference in prices. The quantity may be
increased much more rapidly than it can be diminished; but theincrease must be very great before it can make itself much felt
over such a mass of the precious metals as exists in the wholecommercial world. And hence the effects of all changes in theconditions of production of the precious metals are at first, andcontinue to be for many years, questions of quantity only, withlittle reference to cost of production. More especially is this thecase when, as at the present time, many new sources of supply
have been simultaneously opened, most of them practicable bylabor alone, without any capital in advance beyond a pickaxe
and a week's food, and when the operations are as yet wholly
experimental, the comparative permanent productiveness of thedifferent sources being entirely unascertained.
For the facts in regard to the production of the precious
metals, see the investigation by Dr. Adolf Soetbeer,230 fromwhich Chart IX has been taken. It is worthy of careful
study. The figures in each period, at the top of the respective
spaces, give the average annual production during those years.
The last period has been added by me from figures takenfrom the reports of the Director of the United States Mint.
Other accessible sources, for the production of the precious
230“Edelmetall-Production,” in Petermann's “Mittheilungen,” Ergänzungsheft,
No. 57.

§ 2. —Which is determined by the cost of production.

357

metals, are the tables in the appendices to the Report of theCommittee to the House of Commons on the “Depreciationof Silver” (1876); the French official Procès-Verbaux of
the International Monetary Conference of 1881, which give
Soetbeer's figures to a later date than his publication above
mentioned; the various papers in the British parliamentary
documents; and the reports of the director of our mint. Since
1850 more gold has been produced than in the whole period
preceding, from 1492 to 1850. Previous to 1849 the annual
average product of gold, out of the total product of both goldand silver, was thirty-six per cent; for the twenty-six years
ending in 1875, it has been seventy and one half per cent. The
result has been a rise in gold prices certainly down to 1862,231
as shown by the following chart. It will be observed how
much higher the prices rose during the depression after 1858
than it was during a period of similar conditions after 1848.
The result, it may be said, was predicted by Chevalier.232

Chart IX.
Chart showing the Production of the Precious Metals,
according to Value, from 1493 to 1879.
Years.
1493-1520
1521-1544
1545-1560
231

Silver.
$2,115,000
4,059,000
14,022,000Gold.
$4,045,500
4,994,000
5,935,500

Total.
$6,160,500
9,053,000
19,957,500

See Jevons's “A Serious Fall in the Value of Gold.”
In his book “De la Baisse probable de l'Or” (1859). See also Cairnes's“Essays.” For authorities on the new gold, see Robinson's “California” (Larkin's
and Mason's Reports, pp. 17, 33); Executive Documents of United States,
1848, I, 1; Westgarth's “Colony of Victoria,” pp. 122, 315; Wood, “Sixteen
Months in the Gold Diggings,” p. 125; Lalor's “Cyclopædia,” II, p. 851;
Walker, “Money,” part i, chaps. vii, viii. For the probable effects, see “North
American Review,” October, 1852; Tooke's “History of Prices,” vi, p. 224;
“Statistical Journal,” 1878, p. 230; Levasseur, “Question de l'Or.” As to how
far the value of gold was lowered, Jevons, “Serious Fall,” etc.; “Statistical
Journal,” 1865; ibid., 1869, p. 445; and Giffen's “Essays in Finance,” p. 82.
232

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1561-1580
1581-1600
1601-1620
1621-1640
1641-1660
1661-1680
1681-1700
1701-1720
1721-1740
1741-1760
1761-1780
1781-1800
1801-1810
1811-1820
1821-1830
1831-1840
1841-1850
1851-1855
1856-1860
1861-1865
1866-1870
1871-1875
1876-1879

13,477,500
18,850,500
19,030,500
17,712,000
16,483,500
15,165,000
15,385,500
16,002,000
19,404,000
23,991,500
29,373,250
39,557,750
40,236,750
24,334,750
20,725,250
26,840,250
35,118,750
39,875,250
40,724,500
49,551,750
60,258,750
88,624,000
110,575,000

4,770,750
5,147,500
5,942,750
5,789,250
6,117,000
6,458,750
7,508,500
8,942,000
13,308,250
17,165,500
14,441,750
12,408,500
12,400,000
7,983,000
9,915,750
14,151,500
38,194,250
137,766,750
143,725,250
129,123,250
133,850,000
119,045,750
119,710,000

18,248,250
23,998,000
24,973,250
23,501,250
22,600,500
21,623,750
22,894,000
24,944,000
32,712,250
41,157,000
43,815,000
51,966,250
52,636,750
32,317,750
30,641,000
40,991,750
73,313,000
177,642,000
184,449,750
178,675,000
194,108,750
207,669,750
230,285,000

§ 2. —Which is determined by the cost of production.

Chart showing rise of average gold prices after the gold
discoveries of 1849 to 1862.
The fall of prices from 1873 to 1879, owing to the commercial
panic in the former year, however, is regarded, somewhat
unjustly, in my opinion, as an evidence of an appreciationof gold. Mr. Giffen's paper in the “Statistical Journal,” vol.
xlii, is the basis on which Mr. Goschen founded an argumentin the “Journal of the Institute of Bankers” (London), May,
1883, and which attracted considerable attention. On theother side, see Bourne, “Statistical Journal,” vol. xlii. The
claim that the value of gold has risen seems particularly hasty,
especially when we consider that after the panics of 1857 and1866 the value of money rose, for reasons not affecting gold,
respectively fifteen and twenty-five per cent.
The very thing for which the precious metals are mostrecommended for use as the materials of money—their
durability—is also the very thing which has, for all practical

359

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purposes, excepted them from the law of cost of production,and caused their value to depend practically upon the lawof demand and supply. Their durability is the reason of thevast accumulations in existence, and this it is which makes
the annual product very small in relation to the whole existing
supply, and so prevents its value from conforming, except
after a long term of years, to the cost of production of theannual supply.

§ 3. This law, how related to the principle laid downin the preceding chapter.
Since, however, the value of money really conforms, like that ofother things, though more slowly, to its cost of production, somepolitical economists have objected altogether to the statementthat the value of money depends on its quantity combined withthe rapidity of circulation, which, they think, is assuming a law
for money that does not exist for any other commodity, when thetruth is that it is governed by the very same laws. To this we may
answer, in the first place, that the statement in question assumes
no peculiar law. It is simply the law of demand and supply, whichis acknowledged to be applicable to all commodities, and which,in the case of money, as of most other things, is controlled, but
not set aside, by the law of cost of production, since cost of
production would have no effect on value if it could have noneon supply. But, secondly, there really is, in one respect, a closer
connection between the value of money and its quantity thanbetween the values of other things and their quantity. The valueof other things conforms to the changes in the cost of production,
without requiring, as a condition, that there should be any actual
alteration of the supply: the potential alteration is sufficient; and,if there even be an actual alteration, it is but a temporary one,
except in so far as the altered value may make a difference in the361
demand, and so require an increase or diminution of supply, as aconsequence, not a cause, of the alteration in value. Now, this isalso true of gold and silver, considered as articles of expenditure
for ornament and luxury; but it is not true of money. If thepermanent cost of production of gold were reduced one fourth, it
might happen that there would not be more of it bought for plate,gilding, or jewelry, than before; and if so, though the value would
fall, the quantity extracted from the mines for these purposes
would be no greater than previously. Not so with the portion
used as money: that portion could not fall in value one fourth
unless actually increased one fourth; for, at prices one fourthhigher, one fourth more money would be required to make theaccustomed purchases; and, if this were not forthcoming, some of
the commodities would be without purchasers, and prices could
not be kept up. Alterations, therefore, in the cost of productionof the precious metals do not act upon the value of money except
just in proportion as they increase or diminish its quantity; which
can not be said of any other commodity. It would, therefore,
I conceive, be an error, both scientifically and practically, todiscard the proposition which asserts a connection between thevalue of money and its quantity.

There are cases, however, in which the potential change ofthe precious metals affects their value as money in the same
way that it affects the value of other things. Such a case wasthe change in the value of silver in 1876. The usual causes
assigned for that serious fall in value were the greatly increased
production from the mines of Nevada; the demonetization ofsilver by Germany; and the decreased demand for export toIndia. It is true that the exports of silver from England to
India fell off from about $32,000,000 in 1871-1872 to about$23,000,000 in 1874-1875; but none of the increased Nevada
silver was exported from the United States to London, nor
had Germany put more than $30,000,000 of her silver on

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the market;233 and yet the price of silver so fell that the
depreciation amounted to 20-¼ per cent as compared with theaverage price between 1867 and 1872. The change in value,
however, took place without any corresponding change in theactual quantity in circulation. The relation between prices andthe quantities of the precious metals is, therefore, not so exact,
certainly as regards silver, as Mr. Mill would have us believe;
and thus their values conform more nearly to the general lawof Demand and Supply in the same way that it affects thingsother than money.

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It is evident, however, that the cost of production, in the longrun, regulates the quantity; and that every country (temporary
fluctuation excepted) will possess, and have in circulation, justthat quantity of money which will perform all the exchanges
required of it, consistently with maintaining a value conformable
to its cost of production. The prices of things will, on the average,
be such that money will exchange for its own cost in all othergoods: and, precisely because the quantity can not be prevented
from affecting the value, the quantity itself will (by a sort ofself-acting machinery) be kept at the amount consistent with thatstandard of prices—at the amount necessary for performing, at
those prices, all the business required of it.

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233

“Report of the House of Commons on Depreciation of Silver,” 1876, p. v.

Chapter VII. Of A Double Standard And
Subsidiary Coins.

§ 1. Objections to a Double Standard.
Though the qualities necessary to fit any commodity for being
used as money are rarely united in any considerable perfection,
there are two commodities which possess them in an eminentand nearly an equal degree—the two precious metals, as they
are called—gold and silver. Some nations have accordingly
attempted to compose their circulating medium of these two
metals indiscriminately.
There is an obvious convenience in making use of the morecostly metal for larger payments, and the cheaper one for smaller;
and the only question relates to the mode in which this can best
be done. The mode most frequently adopted has been to establish
between the two metals a fixed proportion [to decide by law,for example, that sixteen grains of silver should be equivalent to
one grain of gold]; and it being left free to every one who has a[dollar] to pay, either to pay it in the one metal or in the other.
If [their] natural or cost values always continued to bear
the same ratio to one another, the arrangement would be
unobjectionable. This, however, is far from being the fact. Goldand silver, though the least variable in value of all commodities,
are not invariable, and do not always vary simultaneously. Silver,
for example, was lowered in permanent value more than gold by
the discovery of the American mines; and those small variationsof value which take place occasionally do not affect both metals
alike. Suppose such a variation to take place—the value of thetwo metals relatively to one another no longer agreeing with theirrated proportion—one or other of them will now be rated below

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its bullion value, and there will be a profit to be made by meltingit.
Suppose, for example, that gold rises in value relatively
to silver, so that the quantity of gold in a sovereign is now
worth more than the quantity of silver in twenty shillings. Twoconsequences will ensue. No debtor will any longer find it his
interest to pay in gold. He will always pay in silver, because
twenty shillings are a legal tender for a debt of one pound, andhe can procure silver convertible into twenty shillings for lessgold than that contained in a sovereign. The other consequence
will be that, unless a sovereign can be sold for more than twenty
shillings, all the sovereigns will be melted, since as bullion they
will purchase a greater number of shillings than they exchange
for as coin. The converse of all this would happen if silver,
instead of gold, were the metal which had risen in comparativevalue. A sovereign would not now be worth so much as twenty
shillings, and whoever had a pound to pay would prefer paying
it by a sovereign; while the silver coins would be collected forthe purpose of being melted, and sold as bullion for gold at theirreal value—that is, above the legal valuation. The money of thecommunity, therefore, would never really consist of both metals,
but of the one only which, at the particular time, best suited theinterest of debtors; and the standard of the currency would beconstantly liable to change from the one metal to the other, ata loss, on each change, of the expense of coinage on the metal
which fell out of use.
This is the operation by which is carried into effect the law of
Sir Thomas Gresham (a merchant of the time of Elizabeth) tothe purport that “money of less value drives out money of morevalue,” where both are legal payments among individuals. A
celebrated instance is that where the clipped coins of England
were received by the state on equal terms with new andperfect coin before 1695. They hanged men and women, butthey did not prevent the operation of Gresham's law and the§ 1. Objections to a Double Standard.

365

disappearance of the perfect coins. When the state refused
the clipped coins at legal value, by no longer receiving themin payment of taxes, the trouble ceased.234 Jevons gives
a striking illustration of the same law: “At the time of thetreaty of 1858 between Great Britain, the United States, andJapan, which partially opened up the last country to European
traders, a very curious system of currency existed in Japan.
The most valuable Japanese coin was the kobang, consistingof a thin oval disk of gold about two inches long, and one
and a quarter inch wide, weighing two hundred grains, andornamented in a very primitive manner. It was passing current
in the towns of Japan for four silver itzebus, but was worth
in English money about 18s. 5d., whereas the silver itzebu
was equal only to about 1s. 4d. [four itzebus being worth
in English money 5s. 4d.]. The earliest European traders
enjoyed a rare opportunity for making profit. By buying up
the kobangs at the native rating they trebled their money, until
the natives, perceiving what was being done, withdrew fromcirculation the remainder of the gold.”235

It appears, therefore, that the value of money is liable tomore frequent fluctuations when both metals are a legal tenderat a fixed valuation than when the exclusive standard of thecurrency is either gold or silver. Instead of being only affected byvariations in the cost of production of one metal, it is subject toderangement from those of two. The particular kind of variation
to which a currency is rendered more liable by having two
legal standards is a fall of value, or what is commonly calleda depreciation, since practically that one of the two metals will
always be the standard of which the real has fallen below the
rated value. If the tendency of the metals be to rise in value, allpayments will be made in the one which has risen least; and, if
to fall, then in that which has fallen most.
234
235

See Macaulay, “History of England,” chap. xxi.
“Money and the Mechanism of Exchange,” p. 84.

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While liable to “more frequent fluctuations,” prices do notfollow the extreme fluctuations of both metals, as some
suppose, and as is shown by the following diagram.236
A represents the line of the value of gold, and B ofsilver, relatively to some third commodity represented by
the horizontal line. Superposing these curves, C would show
the line of extreme variations, while since prices would follow
the metal which falls in value, D would show the actual courseof variations. While the fluctuations are more frequent in D,they are less extreme than in C.

[315]

Chart showing the line of prices under a double standard.

§ 2. The use of the two metals as money, and the
management of Subsidiary Coins.
The plan of a double standard is still occasionally brought forward
by here and there a writer or orator as a great improvement incurrency.
It is probable that, with most of its adherents, its chief meritis its tendency to a sort of depreciation, there being at all
times abundance of supporters for any mode, either open or
covert, of lowering the standard. [But] the advantage without
the disadvantages of a double standard seems to be best obtainedby those nations with whom one only of the two metals is a
236

Jevons, ibid., p. 138.

367
legal tender, but the other also is coined, and allowed to pass forwhatever value the market assigns to it.
When this plan is adopted, it is naturally the more costly metal
which is left to be bought and sold as an article of commerce.
But nations which, like England, adopt the more costly of thetwo as their standard, resort to a different expedient for retaining
them both in circulation, namely (1), to make silver a legal
tender, but only for small payments. In England no one canbe compelled to receive silver in payment for a larger amountthan forty shillings. With this regulation there is necessarily
combined another, namely (2), that silver coin should be rated,in comparison with gold, somewhat above its intrinsic value;that there should not be, in twenty shillings, as much silver
as is worth a sovereign; for, if there were, a very slight turnof the market in its favor would make it worth more than asovereign, and it would be profitable to melt the silver coin. The
overvaluation of the silver coin creates an inducement to buy
silver and send it to the mint to be coined, since it is given backat a higher value than properly belongs to it; this, however, hasbeen guarded against (3) by limiting the quantity of the silver
coinage, which is not left, like that of gold, to the discretion ofindividuals, but is determined by the Government, and restricted
to the amount supposed to be required for small payments. The
only precaution necessary is, not to put so high a valuation upon
the silver as to hold out a strong temptation to private coining.

§ 3. The experience of the United States with adouble standard from 1792 to 1883.
The experience of the United States with a double standard,
extending as it does from 1792 to 1873 without a break, andfrom 1878 to the present time, is a most valuable source of

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instruction in regard to the practical working of bimetallism.
While we have nominally had a double standard, in reality wehave either had one alone, or been in a transition from one tothe other standard; and the history of our coinage strikingly
illustrates the truth that the natural values of the two metals,
in spite of all legislation, so vary relatively to each other thata constant ratio can not be maintained for any length of time;
and that “the poor money drives out the good,” according
to Gresham's statement. For clearness, the period may be
divided, in accordance with the changes of legislation, into
four divisions:I. 1792-1834. Transition from gold to silver.
II. 1834-1853. Transition from silver to gold.
III. 1853-1878. Single gold currency (except 1862-1879,
the paper period).
IV. 1878-1884. Transition from gold to silver.
I. With the establishment of the mint, Hamilton agreed
upon the use of both gold and silver in our money, at a ratioof 15 to 1: that is, that the amount of pure silver in a dollar
should be fifteen times the weight of gold in a dollar. So,
while the various Spanish dollars then in circulation in the
United States seemed to contain on the average about 371-¼
grains of pure silver, and since Hamilton believed the relative
market value of gold and silver to be about 1 to 15, he put
1/15 of 371-¼ grains, or 24-¾ grains of pure gold, into thegold dollar. It was the best possible example of the bimetallic
system to be found, and the mint ratio was intended toconform to the market ratio. If this conformity could havebeen maintained, there would have been no disturbance. But
a cause was already in operation affecting the supply of oneof the metals—silver—wholly independent of legislation, andwithout correspondingly affecting gold.
Two periods of production of silver, in which the
production of silver was great relatively to gold, stand out
prominently in the history of that metal. (1) One was theenormous yield from the mines of the New World, continuing

369from 1545 to about 1640, and (2) the only other period ofgreat production at all comparable with it (that is, as regards
the production of silver relatively to gold) was that lastingfrom 1780 to 1820, due to the richness of the Mexican silvermines. The first period of ninety-five years was longer than
the second, which was only forty years; yet while about
forty-seven times as much silver as gold was produced on anaverage during the first period, the average annual amount ofsilver produced relatively to gold was probably a little greaterfrom 1780 to 1820. The effect of the first period in lowering
the relation of silver to gold is well recognized in the historyof the precious metals (see Chart X for the fall in the value ofsilver relatively to gold); that the effect of the second periodon the value of silver has not been greater than was actuallycaused—it has not been small—is explicable only by the lawsof the value of money. If you let the same amount of water
into a small reservoir which you let into a large one, the levelof the former will be raised more than the level of the latter.
The great production of the first period was added to a verysmall existing stock of silver; that of the second period wasadded to a stock increased by the great previous production
just mentioned. The smallness of the annual product relatively
to the total quantity existing in the world requires some time,even for a production of silver forty-seven times greater than
the gold production, to take its effect on the value of thetotal silver stock in existence. The effect of this process was
beginning to be felt soon after the United States decided ona double standard. For this reason the value of silver was
declining about 1800, and, although the annual silver productfell off seriously after 1820, the value of silver continued to
decline even after that time, because the increased production,
dating back to 1780, was just beginning to make itself felt.
Thus we have the phenomenon—which seems very difficult
for some persons to understand—of a falling off in the annual
production of silver, accompanied by a decrease in its value
relatively to gold.

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Principles Of Political Economy
This diminishing value of silver began to affect thecoinage of the United States as early as 1811, and by 1820 thedisappearance of gold was everywhere commented upon. The
process by which this result is produced is a simple one, andis adopted as soon as a margin of profit is seen arising froma divergence between the mint and market ratios. In 1820
the market ratio of gold to silver was 1 to 15.7—that is, theamount of gold in a dollar (24-¾ grains) would exchange for15.7 times as many grains of silver in the market, in the formof bullion; while at the mint, in the form of coin, it would
exchange for only 15 times as many grains of silver. A broker
having 1,000 gold dollars could buy with them in the market
silver bullion enough (1,000 × 15.7 grains) to have coined,
when presented at the mint, 1,000 dollars in silver pieces,and yet have left over as a profit by the operation 700 grainsof silver. So long as this can be done, silver (the cheapest
money) will be presented at the mint, and gold (the dearest
money) will become an article of merchandise too valuable tobe used as money when the cheaper silver is legally as good.
The best money, therefore, disappears from circulation, as it
did in the United States before 1820, owing to the fall in thevalue of silver. It is to be said, that it has been seriously urged
by some writers that silver did not fall, but that gold rose,in value, owing to the demand of England for resumption in
1819.237 Chronology kills this view; for the change in thevalue of silver began too early to have been due to English
measures, even if conclusive reasons have not been given
above why silver should naturally have fallen in value.

[319]

237

See S. Dana Horton, “Gold and Silver,” 1877, p. 84, et seq.

371

Chart X. Chart showing the Changes in the Relative Valuesof Gold and Silver from 1501 to 1880. From 1501 to 1680 a
space is allotted to each 20 years; from 1681 to 1871, to each
10 years; from 1876 to 1880, to each year.
II. The change in the relative values of gold and silver
finally forced the United States to change their mint ratio in
1834. Two courses were open to us: (1) either to increase thequantity of silver in the dollar until the dollar of silver was
intrinsically worth the gold in the gold dollar; or (2) debase thegold dollar-piece until it was reduced in value proportionate
to the depreciation of silver since 1792. The latter expedient,
without any seeming regard to the effect on contracts and theintegrity of our monetary standard, was adopted: 6.589 percent was taken out of the gold dollar, leaving it containing
23.22 grains of pure gold; and as the silver dollar remained
unchanged (371-¼ grains) the mint ratio established was 1 to
15.988, or, as commonly stated, 1 to 16. Did this correspondwith the market ratio then existing? No. Having seen
the former steady fall in silver, and believing that it would
continue, Congress hoped to anticipate any further fall bymaking the mint ratio of gold to silver a little larger than themarket ratio. This was done by establishing the mint ratio of
1 to 15.988, while the market ratio in 1834 was 1 to 15.73.
Here, again, appeared the difficulty arising from the attempt
to balance a ratio on a movable fulcrum. It will be seen thatthe act of 1834 set at work forces for another change in thecoinage—forces of a similar kind, but working in exactly the

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opposite direction to those previous to 1834. A dollar of goldcoin would now exchange for more grains of silver at the mint
(15.98) than it would in the form of bullion in the market(15.73). Therefore it would be more profitable to put gold
into coin than exchange it as bullion. Gold was sent to themint, while silver began to be withdrawn from circulation,
silver now being more valuable as bullion than as coin. By
1840 a silver dollar was worth 102 cents in gold.238 This
movement, which was displacing silver with gold, received asurprising and unexpected impetus by the gold discoveries ofCalifornia and Australia in 1849, before mentioned, and madegold less valuable relatively to silver, by lowering the valueof gold. Here, again, was another natural cause, independentof legislation, and not to be foreseen, altering the value of oneof the precious metals, and in exactly the opposite direction
from that in the previous period, when silver was lowered by
the increase from the Mexican mines. In 1853 a silver dollar
was worth 104 cents in gold (i.e., of a gold dollar containing
23.22 grains); but, some years before, all silver dollars had
disappeared from use, and only gold was in circulation. For alarge part of this period we had in reality a single standard ofgold, the other metal not being able to stay in the currency.
III. After our previous experience, the impossibility ofretaining both metals in the coinage together, on equal terms,
now came to be generally recognized, and was accepted by
Congress in the legislation of 1853. This act made no further
changes intended to adapt the mint to the market ratios, but
remained satisfied with the gold circulation. But hitherto no
regard had been paid to the principles on which a subsidiarycoinage is based, as explained by Mr. Mill in the last section(§ 2). The act of 1853, while acquiescing in the single gold
standard, had for its purpose the readjustment of the subsidiarycoins, which, together with silver dollar-pieces, had all goneout of circulation. Before this, two halves, four quarters, or ten

238

See Linderman, “Money and Legal Tender,” p. 161.

373
dimes contained the same quantity of pure silver as the dollarpiece (371-¼ grains); therefore, when it became profitable towithdraw the dollar-pieces and substitute gold, it gave exactly
the same profit to withdraw two halves or four quarters insilver. For this reason all the subsidiary silver had gone out ofcirculation, and there was no “small change” in the country.
The legislation of 1853 rectified this error: (1) by reducing
the quantity of pure silver in a dollar's worth of subsidiarycoin to 345.6 grains. By making so much less an amount ofsilver equal to a dollar of small coins, it was more valuable inthat shape than as bullion, and there was no reason for melting
it, or withdrawing it (since even if gold and silver changed
considerably in their relative values, 345.6 grains of silver
could not easily rise sufficiently to become equal in value to agold dollar, when 371-¼ grains were worth only 104 cents ofthe gold dollar); (2) this over-valuation of silver in subsidiarycoin would cause a great flow of silver to the mint, since silver
would be more valuable in subsidiary coin than as bullion;
but this was prevented by the provision (section 4 of the act of1853) that the amount or the small coinage should be limited
according to the discretion of the Secretary of the Treasury;
and, (3) in order that the overvalued small coinage might
not be used for purposes other than for effecting change, itslegal-tender power was restricted to payments not exceeding
five dollars. This system, a single gold standard for large, andsilver for small, payments, continued without question, andwith great convenience, until the days of the war, when paper
money (1862-1879) drove out (by its cheapness, again) bothgold and silver. Paper was far cheaper than the cheapest of
the two metals.

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Relative values of gold and silver, by months, in 1876.

[322]

The mere fact that the silver dollar-piece had not circulated
since even long before 1853 led the authorities to drop out
the provisions for the coinage of silver dollars and in 1873
remove it from the list of legal coins (at the ratio of 1 to 15.98,
the obsolete ratio fixed as far back as 1834). This is what
is known as the “demonetization” of silver. It had no effecton the circulation of silver dollars, since none were in use,and had not been for more than twenty-five years. There had
been no desire up to this time to use silver, since it was more
expensive than gold; indeed, it is somewhat humiliating to oursense of national honor to reflect that it was not until silver
fell so surprisingly in value (in 1876) that the agitation for
its use in the coinage arose. When a silver dollar was worth
104 cents, no one wanted it as a means of liquidating debts;
when it came to be worth 86 cents, it was capable of serving
debtors even better than the then appreciating greenbacks.
Thus, while from 1853 (and even before) we had legally two
standards, of both gold and silver, but really only one, that ofgold, from 1873 to 1878 we had both legally and really only
one standard, that of gold.
It might be here added, that I have spoken of the silver
dollar as containing 371-¼ grains of pure silver. Of course,
alloy is mixed with the pure silver, sufficient, in 1792, tomake the original dollar weigh 416 grains in all, its “standard”

375
weight. In 1837 the amount of alloy was changed from 1/12
to 1/10 of the standard weight, which (as the 371-¼ grainsof pure silver were unchanged) gave the total weight of thedollar as 412-½ grains, whence the familiar name assigned
to this piece. In 1873, moreover, the mint was permitted to
put its stamp and devices—to what was not money at all, but
a “coined ingot”—on 378 grains of pure silver (420 grains,
standard), known as the “trade-dollar.” It was intended bythis means to make United States silver more serviceable in
the Asiatic trade. Oriental nations care almost exclusively
for silver in payments. The Mexican silver dollar contained
377-¼ grains of pure silver; the Japanese yen, 374-4/10; andthe United States dollar, 371-¼. By making the “trade-dollar”
slightly heavier than any coin used in the Eastern world, itwould give our silver a new market; and the United States
Government was simply asked to certify to the fineness andweight by coining it, provided the owners of silver paid
the expenses of coinage. Inadvertently the trade-dollar was
included in the list of coins in the act of 1873 which werelegal tender for payments of five dollars, but, when this was
discovered, it was repealed in 1876. So that the trade-dollar
was not a legal coin, in any sense (although it contained moresilver than the 412-½-grains dollar). They ceased to be coinedin 1878, to which time there had been made $35,959,360.
IV. In February, 1878, an indiscreet and unreasonable
movement induced Congress to authorize the recoinage of thesilver dollar-piece at the obsolete ratio of 1834 (1 to 15.98),
while the market ratio was 1 to 17.87. So extraordinary
a reversal of all sound principles and such blindness to ourprevious experience could be explained only by a desire toforce this country to use a silver coinage only, and had its
origin with the owners of silver-mines, aided by the desiresof debtors for a cheap unit in which to absolve themselvesfrom their indebtedness. There was no pretense of setting
up a double standard about it; for it was evident to the mostignorant that so great a disproportion between the mint and

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market ratios must inevitably lead to the disappearance ofgold entirely. This would happen, if owners could bring theirsilver freely, in any amounts, to the mint for coinage (“FreeCoinage”), and so exchange silver against gold coin for the
purpose of withdrawing gold, since gold would exchange
for less as coin than as bullion. This immediate result wasprevented by a provision in the law, which prevented the“free coinage” of silver, and required the Government itself
to buy silver and coin at least $2,000,000 in silver eachmonth. This retarded, but will not ultimately prevent, thechange from the present gold to a single silver standard. At
the rate of $24,000,000 a year, it is only a question of time
when the Treasury will be obliged to pay out, for its regular
disbursements on the public debt, silver in such amounts
as will drive gold out of circulation. In February, 1884, it
was feared that this was already at hand, and was practicallyreached in the August following. Unless a repeal of the law isreached very soon, the uncomfortable spectacle will be seenof a gradual disarrangement of prices, and consequently of
trade, arising from a change of the standard.
In order that the alternate movements of silver and gold
to the mint for coinage may be seen, there is appended astatement of the coinage239 during the above periods, which
well shows the effects of Gresham's law.
Ratio in themint and in themarket.
1:15 (silver
lower in market)
1:15.98 (goldlower in market)

239

Period.

Goldcoinage.

Silver dollars coined.

17921834$11,825,890 $36,275,077

18341853

224,965,730 42,936,294

Director of the Mint, Report, 1883, p. 49, and Linderman, ibid., p. 173.

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1:15.98 (goldlower in market)
Single gold
standard.
1:15.98 (silver
lower, but nofree coinage)

18531873

544,864,921 5,538,948

18731878
18781883

166,253,816 ........
354,019,865 147,255,899

From this it will be seen that there has been an enforced
coinage by the Treasury, of almost twice as many silver
dollars since 1878 as were coined in all the history of themint before, since the establishment of the Government.
It may, perhaps, be asked why the silver dollar of 412-½
grains, being worth intrinsically only from 86 to 89 cents,
does not depreciate to that value. The Government buys thesilver, owns the coin, and holds all that it can not induce
the public to receive voluntarily; so that but a part of thetotal coinage is out of the Treasury. And most of the coinsissued are returned for deposit and silver certificates received
in return. There being no free coinage, and no greater amountin circulation than satisfies the demand for change, instead ofsmall bills, the dollar-pieces will circulate at their full value,on the principle of subsidiary coin, even though overvalued.
And the silver certificates practically go through a processof constant redemption by being received for customs dues
equally with gold. When they become too great in quantity
to be needed for such purposes, then we may look for the
depreciation with good reason.240
There are, then, the following kinds of legal tender in the
United States in 1884: (1) Gold coins (if not below tolerance);(2) the silver dollar of 412-½ grains; (3) United States notes(except for customs and interest on the public debt); (4)240

See “Atlantic Monthly,” “The Silver Danger,” May, 1884.

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subsidiary silver coinage, to the amount of five dollars; and(5) minor coins, to the amount of twenty-five cents.
The question of a double standard has provoked nolittle vehement discussion and has called forth a considerable
literature since the fall of silver in 1876. A body of opinion
exists, best represented in this country by F. A. Walker and S.
D. Horton, that the relative values of gold and silver may be
kept unchanged, in spite of all natural causes, by the force oflaw, which, provided that enough countries join in the plan,
shall fix the ratio of exchange in the coinage for all greatcommercial countries, and by this means keep the coinage
ratio equivalent to the bullion ratio. The difficulty with thisscheme, even if it were wholly sufficient, has thus far beenin the obstacles to international agreement. After several
international monetary conferences, in 1867, 1878, and 1881,
the project seems now to have been practically abandoned by
all except the most sanguine. (For a fuller list of authorities
on bimetallism, see Appendix I.)[325]

Chapter VIII. Of Credit, As A Substitute
For Money.

§ 1. Credit not a creation but a Transfer of the meansof Production.
Credit has a great, but not, as many people seem to suppose, amagical power; it can not make something out of nothing. How
often is an extension of credit talked of as equivalent to a creationof capital, or as if credit actually were capital! It seems strangethat there should be any need to point out that, credit being
only permission to use the capital of another person, the meansof production can not be increased by it, but only transferred.
If the borrower's means of production and of employing labor
are increased by the credit given him, the lender's are as muchdiminished. The same sum can not be used as capital both by theowner and also by the person to whom it is lent; it can not supply
its entire value in wages, tools, and materials, to two sets oflaborers at once. It is true that the capital which A has borrowed
from B, and makes use of in his business, still forms a part of thewealth of B for other purposes; he can enter into arrangements inreliance on it, and can borrow, when needful, an equivalent sumon the security of it; so that to a superficial eye it might seem
as if both B and A had the use of it at once. But the smallest
consideration will show that, when B has parted with his capital
to A, the use of it as capital rests with A alone, and that B has
no other service from it than in so far as his ultimate claim upon
it serves him to obtain the use of another capital from a third
person, C.

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Principles Of Political Economy§ 2. In what manner it assists Production.

[326]

But, though credit is never anything more than a transfer ofcapital from hand to hand, it is generally, and naturally, atransfer to hands more competent to employ the capital efficiently
in production. If there were no such thing as credit, or if, fromgeneral insecurity and want of confidence, it were scantily
practiced, many persons who possess more or less of capital, but
who from their occupations, or for want of the necessary skill
and knowledge, can not personally superintend its employment,
would derive no benefit from it: their funds would either lie
idle, or would be, perhaps, wasted and annihilated in unskillfulattempts to make them yield a profit. All this capital is now
lent at interest, and made available for production. Capital thus
circumstanced forms a large portion of the productive resourcesof any commercial country, and is naturally attracted to those
producers or traders who, being in the greatest business, have themeans of employing it to most advantage, because such are boththe most desirous to obtain it and able to give the best security.
Although, therefore, the productive funds of the country are notincreased by credit, they are called into a more complete stateof productive activity. As the confidence on which credit isgrounded extends itself, means are developed by which even thesmallest portions of capital, the sums which each person keeps
by him to meet contingencies, are made available for productive
uses. The principal instruments for this purpose are banks ofdeposit. Where these do not exist, a prudent person must keepa sufficient sum unemployed in his own possession to meet
every demand which he has even a slight reason for thinking
himself liable to. When the practice, however, has grown up of
keeping this reserve not in his own custody, but with a banker,
many small sums, previously lying idle, become aggregated in
the banker's hands; and the banker, being taught by experience
what proportion of the amount is likely to be wanted in a given§ 3. Function of Credit in economizing the use of Money.

381

time, and knowing that, if one depositor happens to require morethan the average, another will require less, is able to lend theremainder, that is, the far greater part, to producers and dealers:
thereby adding the amount, not indeed to the capital in existence,but to that in employment, and making a corresponding addition
to the aggregate production of the community.
While credit is thus indispensable for rendering the whole
capital of the country productive, it is also a means by which
the industrial talent of the country is turned to better accountfor purposes of production. Many a person who has either nocapital of his own, or very little, but who has qualifications forbusiness which are known and appreciated by some possessors ofcapital, is enabled to obtain either advances in money, or, more
frequently, goods on credit, by which his industrial capacities are
made instrumental to the increase of the public wealth.
Such are, in the most general point of view, the uses of credit to
the productive resources of the world. But these considerations
only apply to the credit given to the industrious classes—to
producers and dealers. Credit given by dealers to unproductive
consumers is never an addition, but always a detriment, to thesources of public wealth. It makes over in temporary use, not thecapital of the unproductive classes to the productive, but that ofthe productive to the unproductive.

§ 3. Function of Credit in economizing the use of
Money.
But a more intricate portion of the theory of Credit is its influenceon prices; the chief cause of most of the mercantile phenomena
which perplex observers. In a state of commerce in which muchcredit is habitually given, general prices at any moment depend
much more upon the state of credit than upon the quantity

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of money. For credit, though it is not productive power, ispurchasing power; and a person who, having credit, avails
himself of it in the purchase of goods, creates just as muchdemand for the goods, and tends quite as much to raise theirprice, as if he made an equal amount of purchases with readymoney.
The credit which we are now called upon to consider, as a
distinct purchasing power, independent of money, is of course
not credit in its simplest form, that of money lent by one person toanother, and paid directly into his hands; for, when the borrower
expends this in purchases, he makes the purchases with money,
not credit, and exerts no purchasing power over and above that
conferred by the money. The forms of credit which createpurchasing power are those in which no money passes at thetime, and very often none passes at all, the transaction being
included with a mass of other transactions in an account, andnothing paid but a balance. This takes place in a variety of ways,
which we shall proceed to examine, beginning, as is our custom,with the simplest.
First: Suppose A and B to be two dealers, who havetransactions with each other both as buyers and as sellers. A buys
from B on credit. B does the like with respect to A. At the endof the year, the sum of A's debts to B is set against the sum of
B's debts to A, and it is ascertained to which side a balance isdue. This balance, which may be less than the amount of manyof the transactions singly, and is necessarily less than the sum of
the transactions, is all that is paid in money; and perhaps eventhis is not paid, but carried over in an account current to the next
year. A single payment of a hundred pounds may in this manner
suffice to liquidate a long series of transactions, some of them tothe value of thousands.
But, secondly: The debts of A to B may be paid without theintervention of money, even though there be no reciprocal debts
of B to A. A may satisfy B by making over to him a debt due

§ 4. Bills of Exchange.

383

to himself from a third person, C. This is conveniently done bymeans of a written instrument, called a bill of exchange, whichis, in fact, a transferable order by a creditor upon his debtor,
and when accepted by the debtor, that is, authenticated by hissignature, becomes an acknowledgment of debt.

§ 4. Bills of Exchange.
Bills of exchange were first introduced to save the expense andrisk of transporting the precious metals from place to place.
The trade between New York and Liverpool affords a constantillustration of the uses of a bill of exchange. Suppose that
A in New York ships a cargo of wheat, worth $100,000, or£20,000, to B in Liverpool; also suppose that C in Liverpool(independently of the negotiations of A and B) ships, about thesame time, a cargo of steel rails to D in New York, also worth£20,000. Without the use of bills of exchange, B would havebeen obliged to send £20,000 in gold across the Atlantic, and sowould D, at the risk of loss to both. By the device of bills of
exchange the goods are really bartered against each other, andall transmission of money saved.

A has money due to him in Liverpool, and he sells his
claim to this money to any one who wants to make a payment
in Liverpool. Going to his banker (the middle-man between
exporters and importers and the one who deals in such bills) hefinds there D, inquiring for some one who has a claim to money
in Liverpool, since D owes C in Liverpool for his cargo of steel
rails. A makes out a paper title to the £20,000 which B owes him

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Principles Of Political Economy(i.e., a bill of exchange) and by selling it to D gets immediately
his £20,000 there in New York. The form in which this is done
is as follows:
NEW YORK, January 1, 1884.
At sight [or sixty days after date] of this first bill of
exchange (second and third unpaid), pay to the order of D [theimporter of steel rails] £20,000, value received, and charge
the same to the account of[Signed] A [exporter of wheat].
To B [buyer of wheat],
Liverpool, Eng.

D has now paid $100,000, or £20,000, to A for a title to money
across the Atlantic in Liverpool, and with this title he can pay
his debt to C for the rails. D indorses the bill of exchange, as
follows:
Pay to the order of C [the seller of steel rails], Liverpool,value in account. D [importer of steel rails].
To B [the buyer of wheat].

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By this means D transfers his title to the £20,000 to C, sends thebill across by mail (“first” in one steamer, “second” in another,to insure certain transmission) to C, who then calls upon B to
pay him the £20,000 instead of B sending it across the Atlantic
to A; and all four persons have made their payments the moresafely by the use of this convenient device. This is the simplest
form of the transaction, and it does not change the principle onwhich it is based, when, as is the case, a banker buys the bills ofA, and sells the bills to D—since A typifies all exporters and D
all importers.
Bills of exchange having been found convenient as means of
paying debts at distant places without the expense of transporting
the precious metals, their use was afterward greatly extended
from another motive. It is usual in every trade to give a certain§ 4. Bills of Exchange.

385

length of credit for goods bought: three months, six months, ayear, even two years, according to the convenience or custom of
the particular trade. A dealer who has sold goods, for which heis to be paid in six months, but who desires to receive payment
sooner, draws a bill on his debtor payable in six months, andgets the bill discounted by a banker or other money-lender, thatis, transfers the bill to him, receiving the amount, minus interestfor the time it has still to run. It has become one of the chieffunctions of bills of exchange to serve as a means by which a debt
due from one person can thus be made available for obtaining
credit from another.
Bills of exchange are drawn between the various cities of
the United States. In the West, the factor who is purchasing
grain or wool for a New York firm draws on his New Yorkcorrespondents, and this bill (usually certified to by the bill of
lading) is presented for discount at the Western banks; and, if
there are many bills, funds are possibly sent westward to meetthese demands. But the purchases of the West in New Yorkwill serve, even if a little later in time, somewhat to offset
this drain; and the funds will again move eastward, as goods
move westward, practically bartered against each other by theuse of bills. There is, however, less movement of funds oflate, now that Western cities have accumulated more capitalof their own.

The notes given in consequence of a real sale of goods can
not be considered as on that account certainly representing any
actual property. Suppose that A sells £100 worth of goods to B
at six months' credit, and takes a bill at six months for it; and thatB, within a month after, sells the same goods, at a like credit, to
C, taking a like bill; and again, that C, after another month, sells
them to D, taking a like bill, and so on. There may then, at theend of six months, be six bills of £100 each existing at the same386

Principles Of Political Economy

time, and every one of these may possibly have been discounted.
Of all these bills, then, only one represents any actual property.
The extent of a man's actual sales forms some limit to theamount of his real notes; and, as it is highly desirable incommerce that credit should be dealt out to all persons in some
sort of regular and due proportion, the measure of a man's actual
sales, certified by the appearance of his bills drawn in virtue of
those sales, is some rule in the case, though a very imperfect one
in many respects. When a bill drawn upon one person is paid
to another (or even to the same person) in discharge of a debt
or a pecuniary claim, it does something for which, if the bill did
not exist, money would be required: it performs the functionsof currency. This is a use to which bills of exchange are often
applied.
Many bills, both domestic and foreign, are at last presented
for payment quite covered with indorsements, each of which
represents either a fresh discounting, or a pecuniary transactionin which the bill has performed the functions of money.

§ 5. Promissory Notes.
A third form in which credit is employed as a substitute forcurrency is that of promissory notes.
The difference between a bill of exchange and a promissory
note is, that the former is an order for the payment of money,
while the latter is a promise to pay money. In a note thepromissor is primarily liable; in a bill the drawer becomes
liable only after an ineffectual resort to the drawee.
In the United States a Western merchant who buys $1,000
worth of cotton goods, for instance, of a Boston commissionhouse on credit, customarily gives his note for the amount,and this note is put upon the market, or presented at a bank for[331]§ 5. Promissory Notes.

387

discount. This plan, however, puts all risk upon the one who
discounted the note. In the United States such promissory
notes are the forms of credit most used between merchants andbuyers. The custom, however, is quite different in Englandand Germany (and generally, it is stated, on the Continent),
where bills of exchange are employed in cases where we use
a promissory note. A house in London sells $1,000 worthof cotton goods to A, in Carlisle, on a credit of sixty days,
draws a bill of exchange on A, which is a demand upon A
to pay in a given time (e.g., sixty days), and if “accepted”
by him is a legal obligation. The London house takes thisbill (perhaps adding its own firm name as indorsers to thepaper), and presents it for discount at a London bank. Thisnow explains why it is that, when a particular industry isprosperous and many goods are sold, there is more “paper”
offered for discount at the banks (cf. p. 222), and why capital
flows readily in that direction.

It is chiefly in the latter form [promissory notes] that it has
become, in commercial countries, an express occupation to issue
such substitutes for money. Dealers in money wish to lend, nottheir capital merely, but their credit, and not only such portionof their credit as consists of funds actually deposited with them,but their power of obtaining credit from the public generally, so
far as they think they can safely employ it. This is done in avery convenient manner by lending their own promissory notes
payable to bearer on demand—the borrower being willing toaccept these as so much money, because the credit of the lendermakes other people willingly receive them on the same footing,in purchases or other payments. These notes, therefore, perform
all the functions of currency, and render an equivalent amountof money, which was previously in circulation, unnecessary. As,
however, being payable on demand, they may be at any time
returned on the issuer, and money demanded for them, he must,on pain of bankruptcy, keep by him as much money as will enable

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him to meet any claims of that sort which can be expected tooccur within the time necessary for providing himself with more;
and prudence also requires that he should not attempt to issue
notes beyond the amount which experience shows can remain in
circulation without being presented for payment.
The convenience of this mode of (as it were) coining
credit having once been discovered, governments have availed
themselves of the same expedient, and have issued their own
promissory notes in payment of their expenses; a resource themore useful, because it is the only mode in which they are able
to borrow money without paying interest.

§ 6. Deposits and Checks.
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A fourth mode of making credit answer the purposes of money, bywhich, when carried far enough, money may be very completely
superseded, consists in making payments by checks. The customof keeping the spare cash reserved for immediate use, or against
contingent demands, in the hands of a banker, and making all
payments, except small ones, by orders on bankers, is in thiscountry spreading to a continually larger portion of the public.
If the person making the payment and the person receiving it
keep their money with the same banker, the payment takes place
without any intervention of money, by the mere transfer of its
amount in the banker's books from the credit of the payer to thatof the receiver. If all persons in [New York] kept their cash
at the same banker's, and made all their payments by means ofchecks, no money would be required or used for any transactions
beginning and terminating in [New York]. This ideal limit isalmost attained, in fact, so far as regards transactions between[wholesale] dealers. It is chiefly in the retail transactions between
dealers and consumers, and in the payment of wages, that moneyor bank-notes now pass, and then only when the amounts are§ 6. Deposits and Checks.

389

small. As for the merchants and larger dealers, they habitually
make all payments in the course of their business by checks.
They do not, however, all deal with the same banker, and, when
A gives a check to B, B usually pays it not into the same but intosome other bank. But the convenience of business has given birth
to an arrangement which makes all the banking-houses of [a]city, for certain purposes, virtually one establishment. A banker
does not send the checks which are paid into his banking-houseto the banks on which they are drawn, and demand money forthem. There is a building called the Clearing-House, to which
every [member of the association] sends, each afternoon, all thechecks on other bankers which he has received during the day,and they are there exchanged for the checks on him which havecome into the hands of other bankers, the balances only being
paid in money; or even these not in money, but in checks.
A clearing-house is simply a circular railing containing as
many openings as there are banks in the association; a clerk
from each bank presents, in the form of a bundle of checks,
at his opening, all the claims of his bank against all others,
and notes the total amount; a clerk inside takes the checks,
distributes each check to the clerk of the bank against whom
it is drawn, and all that are left at his opening constitute thetotal demands of all the other banks against itself; and thissum total is set off against the given bank's demands upon theothers. The difference, for or against the bank, as the casemay be, may then be settled by a check.241
The total amount of exchanges made through the New
York Clearing-House in 1883 was $40,293,165,258 (or about
twenty-five times the total of our national debt in that year),and the balances paid in money were only 3.9 per cent of
the exchanges.242 For valuable explanations on this subject,
241

See “International Review,” September, 1876; and for some further
explanation of banks, see “Atlantic Monthly,” 1882, pp. 196, 695, 696.
242
“Report of the Comptroller of the Currency,” 1883, p. 34.

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Principles Of Political Economy
consult Jevons, “Money and the Mechanism of Exchange,”
Chapters XIX-XXIII. The explanation of the functions of abank, Chapter XX, is very good.

[335]

Chapter IX. Influence Of Credit On Prices.

§ 1. What acts on prices is Credit, in whatever shape
given.
Having now formed a general idea of the modes in which credit
is made available as a substitute for money, we have to consider
in what manner the use of these substitutes affects the value ofmoney, or, what is equivalent, the prices of commodities. It is
hardly necessary to say that the permanent value of money—thenatural and average prices of commodities—are not in question
here. These are determined by the cost of producing or of
obtaining the precious metals. An ounce of gold or silver will in
the long run exchange for as much of every other commodity as
can be produced or imported at the same cost with itself. And anorder, or note of hand, or bill payable at sight, for an ounce ofgold, while the credit of the giver is unimpaired, is worth neither
more nor less than the gold itself.
It is not, however, with ultimate or average, but with immediate
and temporary prices that we are now concerned. These, as wehave seen, may deviate very widely from the standard of costof production. Among other causes of fluctuation, one we havefound to be the quantity of money in circulation. Other things
being the same, an increase of the money in circulation raises
prices; a diminution lowers them. If more money is throwninto circulation than the quantity which can circulate at a value
conformable to its cost of production, the value of money, solong as the excess lasts, will remain below the standard of costof production, and general prices will be sustained above thenatural rate.
But we have now found that there are other things, such

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as bank-notes, bills of exchange, and checks, which circulate
as money, and perform all the functions of it, and the question
arises, Do these various substitutes operate on prices in the samemanner as money itself? I apprehend that bank-notes, bills, orchecks, as such, do not act on prices at all. What does act
on prices is Credit, in whatever shape given, and whether itgives rise to any transferable instruments capable of passing into
circulation or not.

§ 2. Credit a purchasing Power, similar to Money.
Money acts upon prices in no other way than by being tenderedin exchange for commodities. The demand which influences theprices of commodities consists of the money offered for them.
Money not in circulation has no effect on prices.
In the case, however, of payment by checks, the purchases
are, at any rate, made, though not with the money in the buyer's
possession, yet with money to which he has a right. But he may
make purchases with money which he only expects to have, oreven only pretends to expect. He may obtain goods in return for
his acceptances payable at a future time, or on his note of hand,or on a simple book-credit—that is, on a mere promise to pay.
All these purchases have exactly the same effect on price as if
they were made with ready money. The amount of purchasing
power which a person can exercise is composed of all the money
in his possession or due to him, and of all his credit. For
exercising the whole of this power he finds a sufficient motive
only under peculiar circumstances, but he always possesses it;
and the portion of it which he at any time does exercise is themeasure of the effect which he produces on price.
Suppose that, in the expectation that some commodity will risein price, he determines not only to invest in it all his ready money,
but to take up on credit, from the producers or importers, as much

393
of it as their opinion of his resources will enable him to obtain.
Every one must see that by thus acting he produces a greater
effect on price than if he limited his purchases to the money hehas actually in hand. He creates a demand for the article to thefull amount of his money and credit taken together, and raises theprice proportionally to both. And this effect is produced, thoughnone of the written instruments called substitutes for currency
may be called into existence; though the transaction may giverise to no bill of exchange, nor to the issue of a single bank-note.
The buyer, instead of taking a mere book-credit, might havegiven a bill for the amount, or might have paid for the goods withbank-notes borrowed for that purpose from a banker, thus making
the purchase not on his own credit with the seller, but on thebanker's credit with the seller, and his own with the banker. Had
he done so, he would have produced as great an effect on priceas by a simple purchase to the same amount on a book-credit,
but no greater effect. The credit itself, not the form and mode inwhich it is given, is the operating cause.

§ 3. Great extensions and contractions of Credit.
Phenomena of a commercial crisis analyzed.
The inclination of the mercantile public to increase their demandfor commodities by making use of all or much of their credit as apurchasing power depends on their expectation of profit. When
there is a general impression that the price of some commodity
is likely to rise from an extra demand, a short crop, obstructions
to importation, or any other cause, there is a disposition among
dealers to increase their stocks in order to profit by the expected
rise. This disposition tends in itself to produce the effect which it
looks forward to—a rise of price; and, if the rise is considerable
and progressive, other speculators are attracted, who, so long

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as the price has not begun to fall, are willing to believe that
it will continue rising. These, by further purchases, produce afurther advance, and thus a rise of price, for which there wereoriginally some rational grounds, is often heightened by merely
speculative purchases, until it greatly exceeds what the original
grounds will justify. After a time this begins to be perceived, theprice ceases to rise, and the holders, thinking it time to realize
their gains, are anxious to sell. Then the price begins to decline,
the holders rush into the market to avoid a still greater loss, and,few being willing to buy in a falling market, the price falls much
more suddenly than it rose. Those who have bought at a higher
price than reasonable calculation justified, and who have been
overtaken by the revulsion before they had realized, are losers inproportion to the greatness of the fall and to the quantity of thecommodity which they hold, or have bound themselves to pay
for.
This is the ideal extreme case of what is called a commercial
crisis. There is said to be a commercial crisis when a great numberof merchants and traders at once either have, or apprehend thatthey shall have, a difficulty in meeting their engagements. The
most usual cause of this general embarrassment is the recoilof prices after they have been raised by a spirit of speculation,
intense in degree, and extending to many commodities. When,after such a rise, the reaction comes and prices begin to fall,though at first perhaps only through the desire of the holders torealize, speculative purchases cease; but, were this all, prices
would only fall to the level from which they rose, or to that which
is justified by the state of the consumption and of the supply.
They fall, however, much lower; for as, when prices were rising,and everybody apparently making a fortune, it was easy to obtain
almost any amount of credit, so now, when everybody seems to
be losing, and many fail entirely, it is with difficulty that firmsof known solidity can obtain even the credit to which they areaccustomed, and which it is the greatest inconvenience to them395
to be without, because all dealers have engagements to fulfill,
and, nobody feeling sure that the portion of his means which hehas intrusted to others will be available in time, no one likes topart with ready money, or to postpone his claim to it. To theserational considerations there is superadded, in extreme cases, apanic as unreasoning as the previous over-confidence; money isborrowed for short periods at almost any rate of interest, andsales of goods for immediate payment are made at almost any
sacrifice. Thus general prices, during a commercial revulsion,
fall as much below the usual level as during the previous periodof speculation they have risen above it; the fall, as well as therise, originating not in anything affecting money, but in the stateof credit.
Professor Jevons seriously advanced a theory that, inasmuch
as the harvests of the world were the causes of good or bad
trade, and that their deficiency would regularly be followedby commercial distress, then a periodic cause of bad harvests,
if found, would explain the constant recurrence of commercial
crises. This cause he claimed to have found in the sun-spots,
which periodically deprive the crops of that source of growthwhich is usually furnished by the sun when no spots appear.243
It has not received general acceptance.
In the United States financial disasters have occurred in
1814, 1819, 1825, 1837-1839, 1857, and 1873. Those of 1837
and 1873 seem to have been the most serious in their effects;
but this field, so far as scientific study is concerned, has notbeen fully worked, and much remains to be learned about
these crises in the United States. The crisis of 1873 was due
to excessive railway-building. It was testified244 concerning
the New York banks in 1873 that “their capital needed for
legitimate purposes was practically lent out on certain ironrails, railroad-ties, bridges, and rolling-stock, called railroads,
243
244

See “Nature,” xix, 33, 588.
See Walker's “Money,” p. 473.

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many of them laid down in places where these materials werepractically useless.”
Under the effects due to swift communication by steam,but especially to the electric telegraph, modern credit is avery different thing from what it was fifty years ago. Now, ashock on the Bourse at Vienna is felt the same day at Paris,
London, and New York. A commercial crisis in one greatmoney-center is felt at every other point in the world which
has business connections with it. Moreover, as Cherbuliez245
says: “A country is more subject to crises the more advanced
is its economical development. There are certain maladies
which attack only grown-up persons who have reached acertain degree of vigor and maturity.”§ 4. Influence of the different forms of Credit on
Prices.

[340]

It does not, indeed, follow that credit will be more used because
it can be. When the state of trade holds out no particular
temptation to make large purchases on credit, dealers will use
only a small portion of the credit-power, and it will depend only
on convenience whether the portion which they use will be taken
in one form or in another. One single exertion of the credit-powerin the form of (1) book-credit, is only the foundation of a single
purchase; but, if (2) a bill is drawn, that same portion of credit
may serve for as many purchases as the number of times thebill changes hands; while (3) every bank-note issued renders thecredit of the banker a purchasing power to that amount in thehands of all the successive holders, without impairing any power
they may possess of effecting purchases on their own credit.
Credit, in short, has exactly the same purchasing power with
245

Vol. i, p. 302. See Sumner's “History of American Currency” and Walker's“Money” for much valuable material.

§ 4. Influence of the different forms of Credit on Prices.

397

money; and as money tells upon prices not simply in proportion
to its amount, but to its amount multiplied by the number of times
it changes hands, so also does credit; and credit transferable fromhand to hand is in that proportion more potent than credit which
only performs one purchase.
There is a form of credit transactions (4) by checks on bankers,
and transfers in a banker's books, which is exactly parallel inevery respect to bank-notes, giving equal facilities to an extensionof credit, and capable of acting on prices quite as powerfully. A
bank, instead of lending its notes to a merchant or dealer, might
open an account with him, and credit the account with the sum
it had agreed to advance, on an understanding that he should not
draw out that sum in any other mode than by drawing checks
against it in favor of those to whom he had occasion to makepayments. These checks might possibly even pass from hand
to hand like bank-notes; more commonly, however, the receiverwould pay them into the hands of his own banker, and when hewanted the money would draw a fresh check against it; and hence
an objector may urge that as the original check would very soon
be presented for payment, when it must be paid either in notes
or in coin, notes or coin to an equal amount must be provided
as the ultimate means of liquidation. It is not so, however. The
person to whom the check is transferred may perhaps deal withthe same banker, and the check may return to the very bank on
which it was drawn.
This is very often the case in country districts; if so, no payment
will be called for, but a simple transfer in the banker's books will
settle the transaction. If the check is paid into a different bank,
it will not be presented for payment, but liquidated by set-off
against other checks; and, in a state of circumstances favorable toa general extension of banking credits, a banker who has granted
more credit, and has therefore more checks drawn on him, will
also have more checks on other bankers paid to him, and will
only have to provide notes or cash for the payment of balances;

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for which purpose the ordinary reserve of prudent bankers, one
third of their liabilities, will abundantly suffice.

§ 5. On what the use of Credit depends.

[342]

The credit given to any one by those with whom he deals does notdepend on the quantity of bank-notes or coin in circulation at thetime, but on their opinion of his solvency. If any considerationof a more general character enters into their calculation, it is
only in a time of pressure on the loan market, when they are
not certain of being themselves able to obtain the credit onwhich they have been accustomed to rely; and even then, what
they look to is the general state of the loan market, and not(preconceived theory apart) the amount of bank-notes. So far, as
to the willingness to give credit. And the willingness of a dealer
to use his credit depends on his expectations of gain, that is, on
his opinion of the probable future price of his commodity; anopinion grounded either on the rise or fall already going on, oron his prospective judgment respecting the supply and the rateof consumption. When a dealer extends his purchases beyond
his immediate means of payment, engaging to pay at a specified
time, he does so in the expectation either that the transaction will
have terminated favorably before that time arrives, or that he shallthen be in possession of sufficient funds from the proceeds of hisother transactions. The fulfillment of these expectations depends
upon prices, but not specially upon the amount of bank-notes. It
is obvious, however, that prices do not depend on money, but
on purchases. Money left with a banker, and not drawn against,
or drawn against for other purposes than buying commodities,
has no effect on prices, any more than credit which is not used.
Credit which is used to purchase commodities affects prices inthe same manner as money. Money and credit are thus exactly
on a par in their effect on prices.

§ 6. What is essential to the idea of Money?

399

It is often seen, in our large cities, that money is very
plentiful, but no one seems to wish its use (that is, no one
with safe securities). Inability to find investments and to findindustries in which the rate of profit is satisfactory—all ofwhich depends on the business character and activity of thepeople—will prevent credit from being used, no matter how
many bank-notes, or greenbacks, or how much gold there isin the country. It is impossible to make people invest, simply
by increasing the number of counters by which commodities
are exchanged against each other; that is, by increasing themoney. The reason why more credit is wanted is because
men see that increased production is possible of a kind thatwill find other commodities ready to be offered (i.e., demand)in exchange for that production. Normal credit, therefore,
on a healthy basis, increases and slackens with the activity
or dullness of trade. Speculation, or the wild extension of
credit, on the other hand, is apt to be begotten by a plethoraof money, which has induced low rates for loans, and moves
with the uncertain waves of popular impression. By normal
credit we mean that the wealth represented by the credit isreally at the disposal of the borrowers; in a crisis, the quantityof wealth supposed to be represented by credit is very muchgreater than that at the disposal of the lenders.246§ 6. What is essential to the idea of Money?
There has been a great amount of discussion and argument on
the question whether several of these forms of credit, and inparticular whether bank-notes, ought to be considered as money.
It seems to be an essential part of the idea of money that it be legal
tender. An inconvertible paper which is legal tender is universally246

See Cherbuliez, vol. i, p. 299.

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admitted to be money; in the French language the phrase papiermonnaie actually means inconvertibility, convertible notes being
merely billets à porteur. An instrument which would be deprivedof all value by the insolvency of a corporation can not be money
in any sense in which money is opposed to credit. It either is notmoney, or it is money and credit too.
It would seem, from all study of the essentials of money(Book III, Chapter IV), that the necessary part of the idea ofmoney is that it should have value in itself. No one parts withvaluable commodities for a medium of exchange which does
not possess value; and we have seen that Legislatures can notcontrol the natural value of even the precious metals by giving
them legal-tender power. Much less could it be done for paper
money. Paper, therefore, may, as an instrument of credit,
be a substitute for money; but, in accordance with the above
test, it can not properly be considered as money in the full
sense. Of course, paper money, checks, etc., perform some of
the functions of money equally well with the precious metals.
F. A. Walker holds that anything is money which performs
money-work; but he excludes checks from his catalogue ofthings which may serve as money. It is practically of little
importance, however, what we include under money, so longas its functions are well understood; it is merely a question ofnomenclature, and need not disturb us.

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Chapter X. Of An Inconvertible Paper
Currency.

§ 1. What determines the value of an inconvertible
paper money?
After experience had shown that pieces of paper, of no intrinsic
value, by merely bearing upon them the written profession of
being equivalent to a certain number of francs, dollars, or pounds,
could be made to circulate as such, and to produce all the benefit
to the issuers which could have been produced by the coins which
they purported to represent, governments began to think that it
would be a happy device if they could appropriate to themselves
this benefit, free from the condition to which individuals issuingsuch paper substitutes for money were subject, of giving, whenrequired, for the sign, the thing signified. They determined
to try whether they could not emancipate themselves from thisunpleasant obligation, and make a piece of paper issued by thempass for a pound, by merely calling it a pound, and consenting toreceive it in payment of the taxes.
In the case supposed, the functions of money are performed
by a thing which derives its power of performing them solely
from convention; but convention is quite sufficient to confer the
power; since nothing more is needful to make a person accept
anything as money, and even at any arbitrary value, than thepersuasion that it will be taken from him on the same terms byothers. The only question is, what determines the value of such acurrency, since it can not be, as in the case of gold and silver (orpaper exchangeable for them at pleasure), the cost of production.
We have seen, however, that even in the case of metallic
currency, the immediate agency in determining its value is its

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quantity. If the quantity, instead of depending on the ordinary
mercantile motives of profit and loss, could be arbitrarily fixedby authority, the value would depend on the fiat of that authority,
not on cost of production. The quantity of a paper currency notconvertible into the metals at the option of the holder can bearbitrarily fixed, especially if the issuer is the sovereign powerof the state. The value, therefore, of such a currency is entirely
arbitrary.
The value of paper money is, of course, primarily and mainly
dependent on the quantity issued. The general level of value
depends on the quantity; but we also find that deviations fromthis general level, in the direction of further depreciation than
could be due to quantity alone, is caused by any event which
shakes the confidence of any one that he may get the existingvalue for his paper. The “convention” by which real value(the essential idea of money) was associated with this paperin the minds of all is thereby broken. Fiat money—that is, apiece of paper, not containing a promise to pay a dollar, but
a simple declaration that this is a dollar—therefore, separates
the paper from any connection with value. And yet we seethat fiat money has some, although a fluctuating, value atcertain times: if the State receives it for taxes, if it is a legal
acquittal of obligations, then, to that extent, a certain quantityof it is given a value equal to the wealth represented by thetaxes, or the debts. Jevons remarks on this point247 that, if“the quantity of notes issued was kept within such moderate
limits that any one wishing to realize the metallic value of thenotes could find some one wanting to pay taxes, and therefore
willing to give coin for notes,” stability of value might besecured. If there is more in circulation than performs thesefunctions, it will depreciate in the proportion of the quantity
to the extent of the uses assigned to it; so that the relationof quantity to uses is the only thing which can give value
247“Money and the Mechanism of Exchange,” p. 232.

403
to fiat money, but beyond a certain point in the issues otherforces than mere quantity begin to affect the value. Although
the paper is not even a promise to pay value, the form of
expression on its face, or the term used as its designation,
generally tends, under the force of convention and habit, togive a popular value to paper.
Although the State may not promise to pay a dollar, yet,wherever such paper money carries any purchasing powerwith it (which has very seldom happened, and then only forshort periods), it will be found that there is a vague popular
understanding that the State intends, at some time or other,to redeem the notes with value in coin to some amount. In
the early cases of irredeemable money in our colonies, theincome of taxes, or similar resources, were promised as ameans of redemption. To some—although a slight—extent,
the idea of value was associated with such paper. The actual
quantity issued did not measure the depreciation. The paper
did depreciate with increased issues. But only in so far as
the increased issues proved to the community that there wasless and less possibility of ever receiving value for them did
they depreciate. In other words, we come to the familiar
experience, known to many, of a paper money depending for
its value on the opinions of men in the country. This waspartially true, even of our own greenbacks, which were not fiatmoney, but promises to pay (although not then redeemable),
as may be seen by the movement of the line in Chart XII (p.
359), which represents the fluctuations of our paper money
during the civil war. The upward movement of the line,
which indicates the premium on gold during our late war,of course represents correspondingly the depreciation of thepaper. Every victory or defeat of the Union arms raised
or lowered the premium on gold; it was the register of theopinion of the people as to the value to be associated with thepaper. The second and third resorts to issues of greenbacks
were regarded as confessions of financial distress; it was thiswhich produced the effect on their value. It was not only the

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quantity but also that which caused the issue of the quantity.
It is, of course, clear that the value of a paper money like thegreenbacks, which were the promises to pay of a rich country,
would bear a definite relation to the actual quantity issued; andthis is to be seen by the generally higher level of the line on
the chart, showing a steadily diminishing purchasing power as
the issues increased. But the thing which weighed largely inpeople's minds was the possibility of ultimate redemption; andthe premium on gold was practically a register of the “betting”
on this possibility. In 1878, when Secretary Sherman's reserve
was seen to be increasing to an effective amount, and when it
became evident that he would have the means (i.e., the value
represented by all the paper that was likely to be presented)
to resume on the day set, January 1, 1879, the premium
gradually faded away. The general shifting of the level to alower stage in this later period was not due to any decreasein the quantity outstanding, because the contraction had been
stopped in 1868, and that consequent on the resumption act inMay, 1878.

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Suppose that, in a country of which the currency is wholly
metallic, a paper currency is suddenly issued, to the amount ofhalf the metallic circulation; not by a banking establishment,
or in the form of loans, but by the Government, in paymentof salaries and purchase of commodities. The currency being
suddenly increased by one half, all prices will rise, and, among
the rest, the prices of all things made of gold and silver. An
ounce of manufactured gold will become more valuable thanan ounce of gold coin, by more than that customary difference
which compensates for the value of the workmanship; and it
will be profitable to melt the coin for the purpose of being
manufactured, until as much has been taken from the currency
by the subtraction of gold as had been added to it by the issueof paper. Then prices will relapse to what they were at first, andthere will be nothing changed, except that a paper currency has

405
been substituted for half of the metallic currency which existed
before. Suppose, now, a second emission of paper; the sameseries of effects will be renewed; and so on, until the whole ofthe metallic money has disappeared [see Chart No. XIV, Chap.
XV, for the exportation of gold from the United States after theissue of our paper money in 1862]: that is, if paper be issued ofas low a denomination as the lowest coin; if not, as much willremain as convenience requires for the smaller payments. The
addition made to the quantity of gold and silver disposable forornamental purposes will somewhat reduce, for a time, the valueof the article; and as long as this is the case, even though paper
has been issued to the original amount of the metallic circulation,
as much coin will remain in circulation along with it as willkeep the value of the currency down to the reduced value ofthe metallic material; but the value having fallen below the costof production, a stoppage or diminution of the supply from themines will enable the surplus to be carried off by the ordinary
agents of destruction, after which the metals and the currency will
recover their natural value. We are here supposing, as we havesupposed throughout, that the country has mines of its own, andno commercial intercourse with other countries; for, in a country
having foreign trade, the coin which is rendered superfluous by
an issue of paper is carried off by a much prompter method.
Mr. Mill's statement, that, if paper be not issued of as low
a denomination as the lowest coin, “as much will remain asconvenience requires for the smaller payments,” will not holdtrue. During our recent experiment of depreciated paper, thedepreciation was such as to drive out the subsidiary silver
coins, by July, 1862, and we were forced to supply their place
by a fractional paper currency. By an amendment inserted
June 17, 1862, into the act authorizing a second issue of$150,000,000 of greenbacks, it was ordered “that no noteshall be issued for the fractional part of a dollar, and not
more than $35,000,000 shall be of lower denominations than

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five dollars” (act, finally passed July 11, 1862). Although
there were no fractional notes, yet one-dollar notes drove out
subsidiary silver, simply because the paper had depreciated toa value below that of the 345.6 grains of silver in two halves
or four quarters of a dollar. By July 2d the disappearanceof small coin was distinctly noted. Let the value of gold be
represented by 100; and a dollar of small silver coin (345.6
grains), relatively to a gold dollar, by 96. Now, if paper
depreciates to 90, relatively to gold, it will drive out thesubsidiary silver at 96, in accordance with Gresham's law.

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Up to this point the effects of a paper currency are substantiallythe same, whether it is convertible into specie or not. It iswhen the metals have been completely superseded and driven
from circulation that the difference between convertible andinconvertible paper begins to be operative. When the gold or
silver has all gone from circulation, and an equal amount of paper
has taken its place, suppose that a still further issue is superadded.
The same series of phenomena recommences: prices rise, among
the rest the prices of gold and silver articles, and it becomes
an object, as before, to procure coin, in order to convert it intobullion. There is no longer any coin in circulation; but, if thepaper currency is convertible, coin may still be obtained fromthe issuers in exchange for notes. All additional notes, therefore,
which are attempted to be forced into circulation after the metals
have been completely superseded, will return upon the issuersin exchange for coin; and they will not be able to maintain in
circulation such a quantity of convertible paper as to sink its value
below the metal which it represents. It is not so, however, withan inconvertible currency. To the increase of that (if permitted
by law) there is no check. The issuers may add to it indefinitely,
lowering its value and raising prices in proportion; they may, inother words, depreciate the currency without limit.
Such a power, in whomsoever vested, is an intolerable evil. Allvariations in the value of the circulating medium are mischievous:

407
they disturb existing contracts and expectations, and the liability
to such changes renders every pecuniary engagement of long dateentirely precarious. The person who buys for himself, or gives
to another, an annuity of one [hundred dollars], does not knowwhether it will be equivalent to [two hundred or to fifty dollars]a few years hence. Great as this evil would be if it depended
only on accident, it is still greater when placed at the arbitrarydisposal of an individual or a body of individuals, who may
have any kind or degree of interest to be served by an artificial
fluctuation in fortunes, and who have at any rate a strong interest
in issuing as much as possible, each issue being in itself a sourceof profit—not to add, that the issuers may have, and, in the caseof a government paper, always have, a direct interest in lowering
the value of the currency, because it is the medium in which theirown debts are computed.
The United States Supreme Court had decided in December,
1870, by the second legal-tender decision, that the issue ofgreenbacks (inconvertible from 1862 to 1879) was constitutional during a time of war; but it was thought that thereissue of these notes since the war, when no war emergency
could be pleaded, was unconstitutional. This view, however,was met by the unfortunate decision of the Supreme Court,
delivered by Justice Gray, March, 1884, which announced thedoctrine that the expediency of an issue of legal-tender paper
money was to be determined solely by Congress; and that, if
Congress judged the issue expedient, it was within the limitsof those provisions of the Constitution (section 8), whichgave Congress the means to do whatever was “necessary andproper” to carry out the powers expressly granted to it. Nothing now can prevent Congress, should it choose to do so, fromissuing paper money of any description whatever, even if ofabsolutely no value. The disaster that might be brought upon
the country by a rising tide of repudiation among debtors,
taking its effect through a facile and plastic Congress (as in

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the case of the silver coinage in 1878), is appalling to reflectupon.

§ 2. If regulated by the price of Bullion, as
inconvertible Currency might be safe, but not
Expedient.
In order that the value of the currency may be secure frombeing altered by design, and may be as little as possible liable tofluctuation from accident, the articles least liable of all known
commodities to vary in their value, the precious metals, havebeen made in all civilized countries the standard of value forthe circulating medium; and no paper currency ought to exist ofwhich the value can not be made to conform to theirs. Nor has
this fundamental maxim ever been entirely lost sight of, even by
the governments which have most abused the power of creating
inconvertible paper. If they have not (as they generally have)professed an intention of paying in specie at some indefinite
future time, they have at least, by giving to their paper issues thenames of their coins, made a virtual, though generally a false,
profession of intending to keep them at a value corresponding
to that of the coins. This is not impracticable, even with aninconvertible paper. There is not, indeed, the self-acting check
which convertibility brings with it. But there is a clear andunequivocal indication by which to judge whether the currency
is depreciated, and to what extent. That indication is the priceof the precious metals. When holders of paper can not demandcoin to be converted into bullion, and when there is none left incirculation, bullion rises and falls in price like other things; andif it is above the mint price—if an ounce of gold, which would becoined into the equivalent of [$18.60], is sold for [$20 or $25] inpaper—the value of the currency has sunk just that much below

409
what the value of a metallic currency would be. If, therefore, theissue of inconvertible paper were subjected to strict rules, one
rule being that, whenever bullion rose above the mint price, theissues should be contracted until the market price of bullion andthe mint price were again in accordance, such a currency would
not be subject to any of the evils usually deemed inherent in aninconvertible paper.
But, also, such a system of currency would have no advantages
sufficient to recommend it to adoption. An inconvertible
currency, regulated by the price of bullion, would conform
exactly, in all its variations, to a convertible one; and the only
advantage gained would be that of exemption from the necessityof keeping any reserve of the precious metals, which is not a very
important consideration, especially as a government, so long as
its good faith is not suspected, need not keep so large a reserve as
private issuers, being not so liable to great and sudden demands,
since there never can be any real doubt of its solvency.
The United States since 1879 finds that a reserve of from$130,000,000 to $140,000,000 is a sufficient reserve for outstanding notes to the amount of $346,000,000, and greenbacks
are now at a par with gold.

Against this small advantage is to be set, in the first place, thepossibility of fraudulent tampering with the price of bullion forthe sake of acting on the currency, in the manner of the fictitious
sales of corn, to influence the averages, so much and so justly
complained of while the corn laws were in force. But a still
stronger consideration is the importance of adhering to a simple
principle, intelligible to the most untaught capacity. Everybody
can understand convertibility; every one sees that what canbe at any moment exchanged for five [dollars] is worth five[dollars]. Regulation by the price of bullion is a more complex
idea, and does not recommend itself through the same familiar
associations. There would be nothing like the same confidence,

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by the public generally, in an inconvertible currency so regulated,
as in a convertible one: and the most instructed person mightreasonably doubt whether such a rule would be as likely to beinflexibly adhered to. The grounds of the rule not being so wellunderstood by the public, opinion would probably not enforce itwith as much rigidity, and, in any circumstances of difficulty,
would be likely to turn against it; while to the Government itself
a suspension of convertibility would appear a much stronger andmore extreme measure than a relaxation of what might possibly
be considered a somewhat artificial rule. There is therefore
a great preponderance of reasons in favor of a convertible, in
preference to even the best regulated inconvertible, currency.
The temptation to over-issue, in certain financial emergencies, is
so strong, that nothing is admissible which can tend, in howeverslight a degree, to weaken the barriers that restrain it.
The French Government, in the Franco-Prussian War (1870),
issued inconvertible paper on this plan, as explained by Mr.
Mill; but, acting through the Bank of France, they conducted
their issues so successfully that the notes never depreciatedmore than about one half of one per cent. But this was a veryrare management of inconvertible paper, since the issues wereactually limited as the price of gold in paper rose above par.

§ 3. Examination of the doctrine that an inconvertible
Current is safe, if representing actual Property.
Projectors every now and then start up, with plans for curing all
the economical evils of society by means of an unlimited issue ofinconvertible paper. There is, in truth, a great charm in the idea.
To be able to pay off the national debt, defray the expenses ofgovernment without taxation, and, in fine, to make the fortunesof the whole community, is a brilliant prospect, when once a man

411
is capable of believing that printing a few characters on bits ofpaper will do it. The philosopher's stone could not be expected
to do more.248
As these projects, however often slain, always resuscitate, it is
not superfluous to examine one or two of the fallacies by which
the schemers impose upon themselves. One of the commonest is,that a paper currency can not be issued in excess so long as every
note issued represents property, or has a foundation of actual
property to rest on. These phrases, of representing and resting,seldom convey any distinct or well-defined idea; when they do,their meaning is no more than this—that the issuers of the paper
must have property, either of their own, or intrusted to them, tothe value of all the notes they issue, though for what purpose does
not very clearly appear; for, if the property can not be claimed
in exchange for the notes, it is difficult to divine in what manner
its mere existence can serve to uphold their value. I presume,
however, it is intended as a guarantee that the holders would be
finally reimbursed, in case any untoward event should cause thewhole concern to be wound up. On this theory there have been
many schemes for “coining the whole land of the country intomoney” and the like.
In so far as this notion has any connection at all with reason,
it seems to originate in confounding two entirely distinct evils,
to which a paper currency is liable. One is, the insolvency of
the issuers; which, if the paper is grounded on their credit—if itmakes any promise of payment in cash, either on demand or atany future time—of course deprives the paper of any value which
it derives from the promise. To this evil paper credit is equally
liable, however moderately used; and against it, a proviso that248

For John Law's famous scheme (1718-1720) in France, called the“Mississippi Bubble,” the best authority is Levasseur's “Système de Law”
(1854). Also consult M. Thiers's “The Mississippi Bubble” (translated by F. F.
Fiske, 1859); Steuart's “Political Economy” (1767); and McLeod's “Dictionaryof Political Economy,” article on “Banking in France.”

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all issues should be “founded on property,” as for instance that
notes should only be issued on the security of some valuable
thing, expressly pledged for their redemption, would really beefficacious as a precaution. But the theory takes no account ofanother evil, which is incident to the notes of the most solvent
firm, company, or government; that of being depreciated in value
from being issued in excessive quantity. The assignats, during the
French Revolution, were an example of a currency grounded onthese principles. The assignats “represented” an immense amountof highly valuable property, namely, the lands of the crown, thechurch, the monasteries, and the emigrants; amounting possibly
to half the territory of France. They were, in fact, orders or
assignments on this mass of land. The revolutionary government
had the idea of “coining” these lands into money; but, to dothem justice, they did not originally contemplate the immense
multiplication of issues to which they were eventually driven by
the failure of all other financial resources. They imagined thatthe assignats would come rapidly back to the issuers in exchange
for land, and that they should be able to reissue them continually
until the lands were all disposed of, without having at any time
more than a very moderate quantity in circulation. Their hope
was frustrated: the land did not sell so quickly as they expected;
buyers were not inclined to invest their money in possessions
which were likely to be resumed without compensation if therevolution succumbed; the bits of paper which represented land,
becoming prodigiously multiplied, could no more keep up theirvalue than the land itself would have done if it had all beenbrought to market at once; and the result was that it at lastrequired an assignat of five hundred francs to pay for a cup ofcoffee.
The example of the assignats has been said not to be conclusive,
because an assignat only represented land in general, but not adefinite quantity of land. To have prevented their depreciation,
the proper course, it is affirmed, would have been to have made a413
valuation of all the confiscated property at its metallic value, andto have issued assignats up to, but not beyond, that limit; giving
to the holders a right to demand any piece of land, at its registeredvaluation, in exchange for assignats to the same amount. Therecan be no question about the superiority of this plan over the one
actually adopted. Had this course been followed, the assignats
could never have been depreciated to the inordinate degree they
were; for—as they would have retained all their purchasing
power in relation to land, however much they might have fallen
in respect to other things—before they had lost very much of theirmarket value, they would probably have been brought in to beexchanged for land. It must be remembered, however, that their
not being depreciated would presuppose that no greater numberof them continued in circulation than would have circulated
if they had been convertible into cash. However convenient,
therefore, in a time of revolution, this currency convertible into
land on demand might have been, as a contrivance for selling
rapidly a great quantity of land with the least possible sacrifice, it
is difficult to see what advantage it would have, as the permanentsystem of a country, over a currency convertible into coin; while
it is not at all difficult to see what would be its disadvantages,
since land is far more variable in value than gold and silver; andbesides, land, to most persons, being rather an incumbrance thana desirable possession, except to be converted into money, people
would submit to a much greater depreciation before demanding
land, than they will before demanding gold or silver.249
It has been said that the assignats circulated without legaltender power. They were received by the French treasury,
and a law was passed condemning a man to six years in irons
for exchanging gold or silver for assignats at a greater than249
For the best brief account of the issues of assignats, see President A. D.
White's “Paper Money Inflation in France.” See also F. A. Walker, “Money,”pp. 336-347; Bazot's “Assignats”; and Alison's “History of the French
Revolution,” vol. ii, p. 606.

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the nominal or face value of the latter. The subsequent issues,
called mandats, did not represent land, but were directly
exchangeable for the land. Even that kind of money is no
more valuable than a proportional amount of tax receipts forland. In a very short time mandats were worth 1/1000 of
their face value, and assignats very much less. The assignats,
moreover, were not limited in quantity to the money value ofthe lands they represented. By 1796, 45,000,000,000 francs
of assignats had been issued.

§ 4. Experiments with paper Money in the UnitedStates.
The experience of the colonies before our Revolution is richin warning examples of the over-issue of inconvertible paper
money. Those of Rhode Island250 and the Province of
Massachusetts251 are the most conspicuous, perhaps, because
we have better knowledge of them, but other colonies sufferedin as great a degree. The experience of the latter illustrates
as well as any, perhaps, not only the general theory ofinconvertible paper, but the device of supporting the paperby paying interest upon the notes. Although the issues since1690 had depreciated, in 1702 £10,000 more notes were
issued, because, as it was said, there was a scarcity of money.
It is always noticeable that the more issues of paper money
there are made, the more there is a cry of scarcity, much

[356]

250

See “Some Account of the Bills of Credit or Paper Money of Rhode Island,
1710-1786,” in “Rhode Island Historical Tracts,” No. 8 (1880), by E. S. Potter
and S. S. Rider.
251
See Felt's “History of Massachusetts Currency.” Consult also Minot,
Hutchinson, and Gouge. Walker, “Money,” and Sumner, “History of American
Currency,” have given considerable accounts of paper experiments in the
United States, and should be well studied.

§ 4. Experiments with paper Money in the United States.
like the thirst of a hard drinker after the first exhilaration
has passed off. On the new issues five per cent interest waspaid, and even excises and imposts were set aside as security
for their payment. The year 1709 saw a new expedition to
Canada, and saw also the broken promises of the province,
when £20,000 more notes were put out; the collection of thetaxes with which to pay the notes was deferred in 1707 for
two years; in 1709 deferred for four years; in 1710 for five
years; in 1711 for six years. By 1712 they had depreciatedthirty per cent, when the charm of legal tender was thrownaround them, but to no purpose. The idea of value was not
associated with them in people's minds, and they put no faithin promises. The usual result took place. People divided
politically on the money question, and parties began to agitate
for banks which should issue notes based on real estate, orfor loans from the state to private persons at interest to be
paid annually. Such facts show the train of evils following thefirst innocent departure from the maintenance of a currency
equivalent to coin. The people forgot, or did not know, thenature of money, or the offices it performed. They did notunderstand that creating paper money did not create wealth.
This experiment closed only in 1750 (March 31st), when theprovince had courage enough to resume specie payments. The
effect was to transfer the West India trade from paper-issuingcolonies to Massachusetts, and to produce a steady prosperityin her business interests.

415

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Chart XI. Continental Currency, Issue and Depreciation.
The issue of paper money as a means of making a forced
loan from the people, when there seem to be no other means ofgetting funds, has been fully illustrated in our country by theContinental currency issued during our Revolution. It is not,however, considered that this is also accompanied by a process
by which every debtor takes “a forced contribution from his
creditor.” Congress had no power to tax, and the separate
States would not do it; and this has been considered as theexcuse for making issues of that well-known paper money,
which has given rise to the familiar by-word for absenceof value, “not worth a Continental.” Without going into
details,252 in one year, 1779, Congress issued $140,000,000,
worth in coin only $7,000,000. They, however, bravely
declared that paper had not depreciated, but that the price of

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252

See Walker, “Money,” p. 329.

§ 4. Experiments with paper Money in the United States.

417

coin had gone up! Legal attempts were made to repress thepremium on silver; but resolutions do not create wealth as
fast as money can be printed. The depreciation went on more
rapidly than the issues (see Chart No. XI, in which the blackline represents the amounts of issues, and the broken line thedepreciation of paper, starting at 100); and, finally, March 18,
1780, Congress decided to admit a depreciation, and resumed
in silver at the rate of one dollar in silver for forty in paper.
The question of government issues253 of paper money
again came up in the United States in 1862, during the civil
war, and part of our present currency is the result of thepolicy then adopted. The first step—the one that generally
costs—however, was taken July 17, 1861, when the Treasury
issued $50,000,000 of “demand notes,” not bearing interest.
These notes, however, were not made legal tender. They
could be used in payment of salaries and other dues fromthe United States. It may be well to state that the Treasury
balanced the arguments for and against the issues of paper
at the beginning of the experiment, and we can see howthese views were realized as we go along. In favor of paperissues it was urged that we could borrow a large amountwithout interest, as in the case of the Continental currency;that there would be no expense beyond the coin necessary
for keeping the paper at par; and that the country would
gain a uniform currency. On the other hand, it was seenthat there might be temptations to issue without provisions
for redemption; that even if a fund were kept, a disturbance253

See J. J. Knox's “United States Notes” (1884); the Finance Reports during
and since the war to 1879; Spaulding's “Financial History of the War” (1869);
Bowen's “American Political Economy,” chap. xv; “Chapters of Erie,” by H.
Adams and F. A. Walker; and the voluminous pages of the “Congressional
Globe.” For the decisions in the legal-tender cases, see “Banker's Magazine,”
1869-1870, p. 712, and 1871-1872, pp. 752, 780. A collection of statutes
affecting United States finance, especially since 1860, has been made in asmall pamphlet, by Professor C. F. Dunbar (published by Sever, Cambridge,
Massachusetts).

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Principles Of Political Economyof the money market would precipitate a demand for coin,and all upon this single fund; and, lastly, that there were all
the dangers of over-issue. Secretary Chase254 then decided
against paper issues. Government bonds, however, did notsell, and the attempt of the banks toward the end of 1861
to carry $150,000,000 of bonds brought on a suspension of
specie payments, December 31, 1861. Without any taxation
policy, the country drifted along, until in a spasm of dread atseeing an empty Treasury, Congress passed the legal-tenderact (February 25, 1862), issuing $150,000,000 of paper in theform of promises to pay. A committee of bankers showed thatthe issue could have been avoided by selling bonds at theirmarket price; but Congress would not sell them below par.
No necessity for the issues of paper need have arrived. In fourmonths another issue of $150,000,000 was authorized (July11, 1862); and a third issue of a like amount (March 3, 1863),
in all $450,000,000. The depreciation took place (see Chart
No. XII), for, as Secretary Chase anticipated, no provision
was made for redemption. They were made legal tender, but
this “essential idea” did not preserve their value; nor did theprovision that they be received for taxes (except customs),
avail for this purpose.

[359]

The effects of the depreciation were as evil as can wellbe imagined. (1) The expenses of the Government wereincreased by the rise in prices, so that (2) our national debt
became hundreds of millions larger than it need have been; (3)a vicious speculation in gold began, leading to the unsettlingof legitimate trade and to greater variations in prices; (4)the existence of depreciated paper later gave rise to all thedishonest schemes for paying the coin obligations of theUnited States in cheap issues, to the ruin of its credit andhonor; and (5) it has practically become a settled part of ourcirculation, and a possible source of danger.
Of the whole $450,000,000, $50,000,000 were set aside
254

Report of 1861.

§ 4. Experiments with paper Money in the United States.
as a reserve for temporary deposits; but in July, 1864,$431,000,000 were in circulation. At this time (June 30,
1864) Congress, retaining distinctly the feeling that the issueof paper was but a temporary measure, forbade any further
issues. Secretary McCulloch, immediately on the close of thewar, began to contract, and, by a resolution of the lower branchin Congress (December 18, 1865), a cordial concurrence in themeasures for contraction was manifested. Of course, the returnfrom the path of inflated credit and high prices was painful,
and Congress began to feel the pressure of its constituents.
Had they not yielded, much of the severity of the crisis of 1873
might have been avoided; but (April 12, 1866) they forbade
any greater contraction than $4,000,000 a month. Here wasa lack of courage not foreseen by Secretary Chase. This wasagain shown (February 4, 1868) by a law which absolutely
forbade the Secretary to further reduce the currency, which
now stood at $356,000,000. This marks an important change
in the attitude of the Government, as compared with 1862.
After the panic of 1873, the paper evil produced its usual
effect in the cry for more money, and, as in the Provinceof Massachusetts in 1712, parties divided on the question of
inflation or contraction. A bill to expand the Government
issues to $400,000,000 (and the national-bank notes also to$400,000,000) actually passed both Houses of Congress, andwe were fortunately saved from it only by the veto of President
Grant (April 22, 1874). This was another landmark in thehistory of our paper money. Secretary Richardson, however,
had already, without authority, reissued $26,000,000 of the$44,000,000 withdrawn by Secretary McCulloch, and theamount outstanding was thus $382,000,000. A compromise
measure was passed (June 20, 1874), which retained thisamount in the circulation.
When the resumption act was passed (January 14, 1875),
the provision that, for every $100 of new national-bank notes
issued, $80 of United States notes should be retired, resulted ina contraction of the latter from $382,000,000 to $346,000,000.

419

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The reason of this was, that there was no provision for theincrease of United States notes when national banks withdrew
their own issues; and after the crisis many banks naturally
did so. The culmination of the policy of Congress came ina law (May 31, 1878) which absolutely forbade all further
retirement of United States notes, and we are now left at
the present time with an inelastic limit of $346,000,000.
Finally, in 1877 and 1878, Secretary Sherman, aided by amost fortunate state of foreign trade, began to accumulate
gold in order to carry out the provisions of the resumption act,
which required him to resume specie payments on January 1,
1879. He successfully collected $133,000,000 of gold, and on
December 17, 1878, the premium on gold disappeared, andresumption was accomplished quietly on the day appointed,
without a jar to business.
But it is a significant fact that even after all the evils
inflicted on our country by over-issues, in spite of thetemptation to misuse paper money if it is in any way permitted,
in spite of all the warnings of history, there seems to be adangerous acquiescence in the presence of government paper
money in our currency. It is an open pitfall, tempting toevils whenever sudden emergencies arise. It ought not to beallowed to remain any longer.

§ 5. Examination of the gain arising from theincrease and issue of paper Currency.

[361]

Another of the fallacies from which the advocates of aninconvertible currency derive support is the notion that anincrease of the currency quickens industry. Mr. Attwood
maintained that a rise of prices produced by an increase of paper
currency stimulates every producer to his utmost exertions, andbrings all the capital and labor of the country into complete
employment; and that this has invariably happened in all periods

421
of rising prices, when the rise was on a sufficiently great scale.
I presume, however, that the inducement which, according to
Mr. Attwood, excited this unusual ardor in all persons engaged
in production must have been the expectation of getting moreof commodities generally, more real wealth, in exchange for the
produce of their labor, and not merely more pieces of paper. This
expectation, however, must have been, by the very terms of the
supposition, disappointed, since, all prices being supposed to riseequally, no one was really better paid for his goods than before.
It calculates on finding the whole world persisting forever inthe belief that more pieces of paper are more riches, and neverdiscovering that, with all their paper, they can not buy moreof anything than they could before. At the periods which Mr.
Attwood mistook for times of prosperity, and which were simply(as all periods of high prices, under a convertible currency, mustbe) times of speculation, the speculators did not think they weregrowing rich because the high prices would last, but because theywould not last, and because whoever contrived to realize while
they did last would find himself, after the recoil, in possessionof a greater number of [dollars], without their having become ofless value.
Hume's version of the doctrine differed in a slight degree from
Mr. Attwood's. He thought that all commodities would not risein price simultaneously, and that some persons therefore would
obtain a real gain, by getting more money for what they had tosell, while the things which they wished to buy might not yet
have risen. And those who would reap this gain would always be(he seems to think) the first comers. It seems obvious, however,
that, for every person who thus gains more than usual, thereis necessarily some other person who gains less. The loser, if
things took place as Hume supposes, would be the seller of thecommodities which are slowest to rise; who, by the supposition,
parts with his goods at the old prices, to purchasers who havealready benefited by the new. This seller has obtained for his

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commodity only the accustomed quantity of money, while there
are already some things of which that money will no longer
purchase as much as before. If, therefore, he knows what isgoing on, he will raise his price, and then the buyer will not havethe gain, which is supposed to stimulate his industry. But if,
on the contrary, the seller does not know the state of the case,and only discovers it when he finds, in laying his money out,that it does not go so far, he then obtains less than the ordinary
remuneration for his labor and capital; and, if the other dealer's
industry is encouraged, it should seem that his must, from the
opposite cause, be impaired.
An issue of notes is a manifest gain to the issuers, who,
until the notes are returned for payment, obtain the use of themas if they were a real capital; and, so long as the notes areno permanent addition to the currency, but merely supersede
gold or silver to the same amount, the gain of the issuer is aloss to no one; it is obtained by saving to the community the
expense of the more costly material. But, if there is no gold or
silver to be superseded—if the notes are added to the currency,
instead of being substituted for the metallic part of it—all holdersof currency lose, by the depreciation of its value, the exact
equivalent of what the issuer gains. A tax is virtually levied onthem for his benefit.
But besides the benefit reaped by the issuers, or by others
through them, at the expense of the public generally, there isanother unjust gain obtained by a larger class—namely, by those
who are under fixed pecuniary obligations. All such persons
are freed, by a depreciation of the currency, from a portion of
the burden of their debts or other engagements; in other words,
part of the property of their creditors is gratuitously transferredto them. On a superficial view it may be imagined that this isan advantage to industry; since the productive classes are greatborrowers, and generally owe larger debts to the unproductive (ifwe include among the latter all persons not actually in business)§ 6. Résumé of the subject of money.

423

than the unproductive classes owe to them, especially if thenational debt be included. It is only thus that a general rise of
prices can be a source of benefit to producers and dealers, bydiminishing the pressure of their fixed burdens. And this might
be accounted an advantage, if integrity and good faith were of
no importance to the world, and to industry and commerce inparticular.

§ 6. Résumé of the subject of money.

Before passing on to another branch of our subject, it may
be a gain to clearer ideas to collect in the form of thefollowing classification the main points discussed (in Chaps.
IV to X) under money and credit, in continuance of a similarclassification of value:
Money measures and transfers value.:(1.) Hence best served by the precious metals, on account of
their peculiar qualities.
(2.) Depends for its value, in the long run, on the cost of
production at the worst mine worked (Class
III); but practically on demand and supply(Class I). And (if no credit exists) its valuechanges exactly with the supply, which isexpressed by V = 1/(Q × R)
(3.) Under two legal standards, obeys Gresham's law—e.g.,experience of Japan and the United States.
(4.) Substitutes for money, called credit (which is not capital,
but calls out inactive capital).

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Of these substitutes for money, (1) Use of credit depends
not on quality of coin and notes, and (2) Various kinds ofcredit.
Of those various kinds of credit, there are (1) Book credits,(2) Bills of exchange, (3) Promissory notes, and (4) checks
processed via clearing-house.
Of the promissory notes, they are of either (1) Individuals,(2) Banks (Coin Banks or Land Banks, etc.), or (3)Governments.
Of Government notes, there are (1) Convertible or (2)Inconvertible.

[365]Chapter XI. Of Excess Of Supply.

§ 1. The theory of a general Over-Supply ofCommodities stated.
After the elementary exposition of the theory of money containedin the last few chapters, we shall return to a question in the general
theory of Value which could not be satisfactorily discussed until
the nature and operations of Money were in some measure
understood, because the errors against which we have to contend
mainly originate in a misunderstanding of those operations.
Because the phenomenon of over-supply and consequent
inconvenience or loss to the producer or dealer may exist in thecase of any one commodity whatever, many persons, including
some distinguished political economists,255 have thought that it
may exist with regard to all commodities; that there may be a
general over-production of wealth; a supply of commodities in
the aggregate surpassing the demand; and a consequent depressed
condition of all classes of producers.
The doctrine appears to me to involve so much inconsistency
in its very conception that I feel considerable difficulty in giving
any statement of it which shall be at once clear and satisfactory
to its supporters. They agree in maintaining that there may be,
and sometimes is, an excess of productions in general beyond
the demand for them; that when this happens, purchasers can not
be found at prices which will repay the cost of production with aprofit; that there ensues a general depression of prices or values(they are seldom accurate in discriminating between the two),255

Mr. Malthus, Dr. Chalmers, M. de Sismondi, and various minor writers. It
is especially likely that, in times of commercial depression, the journals of the
day will contain arguments to show a general over-production.

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so that producers, the more they produce, find themselves thepoorer instead of richer; and Dr. Chalmers accordingly inculcateson capitalists the practice of a moral restraint in reference to the
pursuit of gain, while Sismondi deprecates machinery and thevarious inventions which increase productive power. They bothmaintain that accumulation of capital may proceed too fast, notmerely for the moral but for the material interest of those who
produce and accumulate; and they enjoin the rich to guard against
this evil by an ample unproductive consumption.

§ 2. The supply of commodities in general can notexceed the power of Purchase.
When these writers speak of the supply of commodities as
outrunning the demand, it is not clear which of the two elementsof demand they have in view—the desire to possess, or the meansof purchase; whether their meaning is that there are, in such cases,
more consumable products in existence than the public desires
to consume, or merely more than it is able to pay for. In thisuncertainty, it is necessary to examine both suppositions.
It will be here noticed that Mr. Mill uses demand in the sense
for which we contended it should be used (Book III, Chap. I,§ 3), and not as “quantity demanded.” The present discussionof over-production should also be connected by the studentwith the former reference to it, Book I, Chap. IV, § 2.

First, let us suppose that the quantity of commodities produced
is not greater than the community would be glad to consume;is it, in that case, possible that there should be a deficiency ofdemand for all commodities for want of the means of payment?
Those who think so can not have considered what it is whichconstitutes the means of payment for commodities. It is simply

427
commodities. Each person's means of paying for the productionsof other people consists of those which he himself possesses. Allsellers are inevitably and ex vi termini buyers. Could we suddenly
double the productive powers of the country, we should double
the supply of commodities in every market; but we should, by
the same stroke, double the purchasing power.
Everybody would bring a double demand as well as supply;
everybody would be able to buy twice as much, because every
one would have twice as much to offer in exchange. It is
probable, indeed, that there would now be a superfluity ofcertain things. Although the community would willingly double
its aggregate consumption, it may already have as much as it
desires of some commodities, and it may prefer to do more thandouble its consumption of others, or to exercise its increased
purchasing power on some new thing. If so, the supply will
adapt itself accordingly, and the values of things will continue
to conform to their cost of production. At any rate, it is a sheer
absurdity that all things should fall in value, and that all producers
should, in consequence, be insufficiently remunerated. If values
remain the same, what becomes of prices is immaterial, since theremuneration of producers does not depend on how much money,but on how much of consumable articles, they obtain for theirgoods. Besides, money is a commodity; and, if all commodities
are supposed to be doubled in quantity, we must suppose money
to be doubled too, and then prices would no more fall than values
would.

§ 3. There can never be a lack of Demand arisingfrom lack of Desire to Consume.
A general over-supply, or excess of all commodities above thedemand, so far as demand consists in means of payment, is thus

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shown to be an impossibility. But it may, perhaps, be supposedthat it is not the ability to purchase, but the desire to possess,that falls short, and that the general produce of industry may
be greater than the community desires to consume—the part, atleast, of the community which has an equivalent to give.

[368]This is much the most plausible form of the doctrine, and does
not, like that which we first examined, involve a contradiction.
There may easily be a greater quantity of any particularcommodity than is desired by those who have the ability topurchase, and it is abstractedly conceivable that this might be
the case with all commodities. The error is in not perceiving
that, though all who have an equivalent to give might be fully
provided with every consumable article which they desire, thefact that they go on adding to the production proves that this is
not actually the case. Assume the most favorable hypothesis forthe purpose, that of a limited community, every member of which
possesses as much of necessaries and of all known luxuries as
he desires, and, since it is not conceivable that persons whose
wants were completely satisfied would labor and economize toobtain what they did not desire, suppose that a foreigner arrives
and produces an additional quantity of something of which there
was already enough. Here, it will be said, is over-production.
True, I reply; over-production of that particular article. The
community wanted no more of that, but it wanted something.
The old inhabitants, indeed, wanted nothing; but did not theforeigner himself want something? When he produced thesuperfluous article, was he laboring without a motive? He has
produced—but the wrong thing instead of the right. He wanted,
perhaps, food, and has produced watches, with which everybody
was sufficiently supplied. The new-comer brought with him into
the country a demand for commodities equal to all that he could
produce by his industry, and it was his business to see that the
supply he brought should be suitable to that demand. If he could
not produce something capable of exciting a new want or desire

429
in the community, for the satisfaction of which some one wouldgrow more food and give it to him in exchange, he had thealternative of growing food for himself, either on fresh land, if
there was any unoccupied, or as a tenant, or partner, or servantof some former occupier, willing to be partially relieved fromlabor. He has produced a thing not wanted, instead of what waswanted, and he himself, perhaps, is not the kind of producer who
is wanted—but there is no over-production; production is notexcessive, but merely ill-assorted. We saw before that whoeverbrings additional commodities to the market brings an additional
power of purchase; we now see that he brings also an additionaldesire to consume, since if he had not that desire he would nothave troubled himself to produce. Neither of the elements ofdemand, therefore, can be wanting when there is an additional
supply, though it is perfectly possible that the demand may be for
one thing, and the supply may, unfortunately, consist of another.

It is not sufficiently borne in mind, also, that the whole
progress of civilization results in a differentiation of new
wants and desires. To take but a single instance, with thegrowth of the artistic sense the articles of common use change
their entire form; and the advances in the arts disclose newcommodities which satisfy the world's desires, and for these
new satisfactions people are willing to work and produce inorder to attain them. With education also comes a wider
horizon and a more refined perception of taste, which createswants for new things for which the mind before had no desires.
A little reflection, therefore, must inevitably lead us to seethat no person, no community, ever had, or probably everwill have, all its wants satisfied. So far as we know man, it
does not seem possible that there will ever be a falling off indemand, because of a satiety of all material satisfactions.

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Principles Of Political Economy§ 4. Origin and Explanation of the notion of general
Over-Supply.

[370]

I have already described the state of the markets for commodities
which accompanies what is termed a commercial crisis. At
such times there is really an excess of all commodities above
the money demand: in other words, there is an under-supplyof money. From the sudden annihilation of a great mass ofcredit, every one dislikes to part with ready money, and many
are anxious to procure it at any sacrifice. Almost everybody,therefore, is a seller, and there are scarcely any buyers: so that
there may really be, though only while the crisis lasts, an extreme
depression of general prices, from what may be indiscriminately
called a glut of commodities or a dearth of money. But it is agreat error to suppose, with Sismondi, that a commercial crisis
is the effect of a general excess of production. It is simply theconsequence of an excess of speculative purchases. It is not a
gradual advent of low prices, but a sudden recoil from prices
extravagantly high: its immediate cause is a contraction of credit,
and the remedy is, not a diminution of supply, but the restorationof confidence. It is also evident that this temporary derangementof markets is an evil only because it is temporary. The fall being
solely of money prices, if prices did not rise again no dealer
would lose, since the smaller price would be worth as muchto him as the larger price was before. In no matter does thisphenomenon answer to the description which these celebrated
economists have given of the evil of over-production. That
permanent decline in the circumstances of producers, for wantof markets, which those writers contemplate, is a conception towhich the nature of a commercial crisis gives no support.
The other phenomenon from which the notion of a generalexcess of wealth and superfluity of accumulation seems to derivecountenance is one of a more permanent nature, namely, thefall of profits and interest which naturally takes place with431
the progress of population and production. The cause of thisdecline of profit is the increased cost of maintaining labor,
which results from an increase of population and of the demand
for food, outstripping the advance of agricultural improvement.
This important feature in the economical progress of nations
will receive full consideration and discussion in the succeeding
book.256 It is obviously a totally different thing from a wantof market for commodities, though often confounded with it in
the complaints of the producing and trading classes. The true
interpretation of the modern or present state of industrial economy
is, that there is hardly any amount of business which may not
be done, if people will be content to do it on small profits; andthis all active and intelligent persons in business perfectly wellknow: but even those who comply with the necessities of theirtime grumble at what they comply with, and wish that there wereless capital,257 or, as they express it, less competition, in orderthat there might be greater profits. Low profits, however, are adifferent thing from deficiency of demand, and the production
and accumulation which merely reduce profits can not be called
excess of supply or of production. What the phenomenon reallyis, and its effects and necessary limits, will be seen when we treatof that express subject.

[371]

[372]

256

Book IV, Chap. II.
This is practically the argument of a little book, “Excessive Saving a Causeof Commercial Distress” (1884), by Uriel H. Crocker.
257

Chapter XII. Of Some Peculiar Cases Of
Value.

§ 1. Values of commodities which have a joint costof production.

[373]

The general laws of value, in all the more important cases of
the interchange of commodities in the same country, have now
been investigated. We examined, first, the case of monopoly, inwhich the value is determined by either a natural or an artificial
limitation of quantity, that is, by demand and supply: secondly,
the case of free competition, when the article can be produced inindefinite quantity at the same cost; in which case the permanent
value is determined by the cost of production, and only thefluctuations by supply and demand: thirdly, a mixed case, that of
the articles which can be produced in indefinite quantity, but not
at the same cost; in which case the permanent value is determinedby the greatest cost which it is necessary to incur in order toobtain the required supply: and, lastly, we have found that money
itself is a commodity of the third class; that its value, in a stateof freedom, is governed by the same laws as the values of othercommodities of its class; and that prices, therefore, follow thesame laws as values.
From this it appears that demand and supply govern thefluctuations of values and prices in all cases, and the permanent
values and prices of all things of which the supply is determinedby any agency other than that of free competition: but that, under
the régime of competition, things are, on the average, exchanged
for each other at such values, and sold at such prices, as afford
equal expectation of advantage to all classes of producers; which
can only be when things exchange for one another in the ratio of

433
their cost of production.
Here, again, is a distinct recognition of the true meaning of
cost of production, and its ruling influence within a competinggroup, which has been seen in its full significance by Mr.
Cairnes.

It sometimes happens [however] that two different
commodities have what may be termed a joint cost of production.
They are both products of the same operation, or set of operations,and the outlay is incurred for the sake of both together, not partfor one and part for the other. The same outlay would have to
be incurred for either of the two, if the other were not wanted
or used at all. There are not a few instances of commodities
thus associated in their production. For example, coke andcoal-gas are both produced from the same material, and by thesame operation. In a more partial sense, mutton and wool are
an example; beef, hides, and tallow; calves and dairy produce;chickens and eggs. Cost of production can have nothing to dowith deciding the value of the associated commodities relatively
to each other. It only decides their joint value. Cost of production
does not determine their prices, but the sum of their prices. A
principle is wanting to apportion the expenses of production
between the two.
Since cost of production here fails us, we must revert to a lawof value anterior to cost of production, and more fundamental,
the law of demand and supply. The law is, that the demand for acommodity varies with its value, and that the value adjusts itself
so that the demand shall be equal to the supply. This supplies theprinciple of repartition which we are in quest of.
Suppose that a certain quantity of gas is produced and soldat a certain price, and that the residuum of coke is offered at a
price which, together with that of the gas, repays the expenses
with the ordinary rate of profit. Suppose, too, that, at the priceput upon the gas and coke respectively, the whole of the gas

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finds an easy market, without either surplus or deficiency, butthat purchasers can not be found for all the coke corresponding
to it. The coke will be offered at a lower price in order to force
a market. But this lower price, together with the price of thegas, will not be remunerating; the manufacture, as a whole, will
not pay its expenses with the ordinary profit, and will not, onthese terms, continue to be carried on. The gas, therefore, must
be sold at a higher price, to make up for the deficiency on thecoke. The demand consequently contracting, the production will
be somewhat reduced; and prices will become stationary when,by the joint effect of the rise of gas and the fall of coke, so muchless of the first is sold, and so much more of the second, that
there is now a market for all the coke which results from theexisting extent of the gas-manufacture.
Or suppose the reverse case; that more coke is wanted at thepresent prices than can be supplied by the operations requiredby the existing demand for gas. Coke, being now in deficiency,
will rise in price. The whole operation will yield more than theusual rate of profit, and additional capital will be attracted to the
manufacture. The unsatisfied demand for coke will be supplied;but this can not be done without increasing the supply of gas
too; and, as the existing demand was fully supplied already, an
increased quantity can only find a market by lowering the price.
Equilibrium will be attained when the demand for each article
fits so well with the demand for the other, that the quantity
required of each is exactly as much as is generated in producing
the quantity required of the other.
When, therefore, two or more commodities have a joint costof production, their natural values relatively to each other are
those which will create a demand for each, in the ratio of thequantities in which they are sent forth by the productive process.

§ 2. Values of the different kinds of agricultural produce.

435§ 2. Values of the different kinds of agricultural
produce.
Another case of value which merits attention is that of thedifferent kinds of agricultural produce. The case would present
nothing peculiar, if different agricultural products were eithergrown indiscriminately and with equal advantage on the same
soils, or wholly on different soils. The difficulty arises from twothings: first, that most soils are fitter for one kind of produce thananother, without being absolutely unfit for any; and, secondly,
the rotation of crops.
For simplicity, we will confine our supposition to two kindsof agricultural produce; for instance, wheat and oats. If allsoils were equally adapted for wheat and for oats, both would
be grown indiscriminately on all soils, and their relative costof production, being the same everywhere, would govern theirrelative value. If the same labor which grows three quarters ofwheat on any given soil would always grow on that soil fivequarters of oats, the three and the five quarters would be of thesame value. The fact is, that both wheat and oats can be grownon almost any soil which is capable of producing either.
It is evident that each grain will be cultivated in preference
on the soils which are better adapted for it than for the other;and, if the demand is supplied from these alone, the values of
the two grains will have no reference to one another. But when
the demand for both is such as to require that each should begrown not only on the soils peculiarly fitted for it, but on themedium soils which, without being specifically adapted to either,
are about equally suited for both, the cost of production on thosemedium soils will determine the relative value of the two grains;while the rent of the soils specifically adapted to each will be
regulated by their productive power, considered with reference
to that one [grain] alone to which they are peculiarly applicable.

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Thus far the question presents no difficulty, to any one to whom
the general principles of value are familiar.

[376]This may be easily shown by a diagram, in which A represents
the grade of land best adapted for oats; B, C, D, respectively,
lands of diminishing productiveness for oats, until E isreached, which is, perhaps, equally good for oats or wheat;a, b, c, d, and E likewise represent the wheat-lands, the best
beginning with a. The rent of A, or B, is determined by acomparison with whatever grade of land planted in oats is
cultivated at the least return, as E, for example. So, if all thewheat-lands are cultivated, land a, or b, is compared with E,
but in regard to the capacity of E to produce wheat.

It may happen, however, that the demand for one of thetwo, as for example wheat, may so outstrip the demand for the§ 2. Values of the different kinds of agricultural produce.

437

other, as not only to occupy the soils specially suited for wheat,but to engross entirely those equally suitable to both, and evenencroach upon those which are better adapted to oats. To create
an inducement for this unequal apportionment of the cultivation,
wheat must be relatively dearer, and oats cheaper, than according
to the cost of their production on the medium land. Their relativevalue must be in proportion to the cost on that quality of land,
whatever it may be, on which the comparative demand for thetwo grains requires that both of them should be grown. If, fromthe state of the demand, the two cultivations meet on land morefavorable to one than to the other, that one will be cheaper andthe other dearer, in relation to each other and to things in general,than if the proportional demand were as we at first supposed.
As in the diagram just mentioned, if the demand for wheat
forces its cultivation downward not only on to land E, suited
to either indifferently, but, still farther on, to lands still lessadapted for wheat (although good land for oats), wheat may
be pushed down one stem of the V and up the other to D, oreven to C. Then the value of wheat will be regulated by thecost of production on C, and the rent will be determined by acomparison between the productiveness of a, b, etc. (running
downward through E), with C. The price of wheat will be highrelatively to oats, which are now cultivated only on lands, A,
B, better suited to growing oats, and whose cost of production
on C is much less than on D or E.

Here, then, we obtain a fresh illustration, in a somewhat
different manner, of the operation of demand, not as an occasional
disturber of value, but as a permanent regulator of it, conjoined
with, or supplementary to, cost of production.
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Chapter XIII. Of International Trade.

§ 1. Cost of Production not a regulator ofinternational values. Extension of the word
“international.”
Some things it is physically impossible to produce, except inparticular circumstances of heat, soil, water, or atmosphere. But
there are many things which, though they could be produced athome without difficulty, and in any quantity, are yet imported
from a distance. The explanation which would be popularly givenof this would be, that it is cheaper to import than to produce
them: and this is the true reason. But this reason itself requiresthat a reason be given for it. Of two things produced in the sameplace, if one is cheaper than the other, the reason is that it can beproduced with less labor and capital, or, in a word, at less cost.
Is this also the reason as between things produced in different
places? Are things never imported but from places where they
can be produced with less labor (or less of the other element ofcost, time) than in the place to which they are brought? Does thelaw, that permanent value is proportioned to cost of production,
hold good between commodities produced in distant places, as it
does between those produced in adjacent places?
We shall find that it does not. A thing may sometimes besold cheapest, by being produced in some other place than that at
which it can be produced with the smallest amount of labor andabstinence.
This could not happen between adjacent places. If the northbank of the Thames possessed an advantage over the southbank in the production of shoes, no shoes would be producedon the south side; the shoemakers would remove themselves

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and their capitals to the north bank, or would have establishedthemselves there originally; for, being competitors in the same
market with those on the north side, they could not compensate
themselves for their disadvantage at the expense of the consumer;
the amount of it would fall entirely on their profits; and theywould not long content themselves with a smaller profit, when,by simply crossing a river, they could increase it. But between
distant places, and especially between different countries, profits
may continue different; because persons do not usually remove
themselves or their capitals to a distant place without a verystrong motive. If capital removed to remote parts of the world
as readily, and for as small an inducement, as it moves toanother quarter of the same town—if people would transport
their manufactories to America or China whenever they could
save a small percentage in their expenses by it—profits would
be alike (or equivalent) all over the world, and all things would
be produced in the places where the same labor and capitalwould produce them in greatest quantity and of best quality. A
tendency may, even now, be observed toward such a state ofthings: capital is becoming more and more cosmopolitan; there
is so much greater similarity of manners and institutions thanformerly, and so much less alienation of feeling, among the morecivilized countries, that both population and capital now movefrom one of those countries to another on much less temptation
than heretofore. But there are still extraordinary differences, bothof wages and of profits, between different parts of the world.
Between all distant places, therefore, in some degree, but
especially between different countries (whether under the same
supreme government or not), there may exist great inequalities
in the return to labor and capital, without causing them tomove from one place to the other in such quantity as to level
those inequalities. The capital belonging to a country will, to agreat extent, remain in the country, even if there be no mode of
employing it in which it would not be more productive elsewhere.

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Yet even a country thus circumstanced might, and probably
would, carry on trade with other countries. It would export
articles of some sort, even to places which could make them withless labor than itself; because those countries, supposing themto have an advantage over it in all productions, would have agreater advantage in some things than in others, and would find it
their interest to import the articles in which their advantage wassmallest, that they might employ more of their labor and capitalon those in which it was greatest.
It might seem that a special theory of value is required forinternational trade, as compared with domestic trade, for theparticular reason that in the former there exists no free movement of labor and capital from one trading country to another.
But we shall see that no new theory is necessary. As before
pointed out,258 commodities exchange for each other at theirrelative costs wherever there is that free competition which
insures perfect facility of movement for labor and capital. It
has been usually assumed that capital and labor move freely as
between different parts of the same country, but not between
different countries. This, however, is not consistent withthe facts. We saw that there were non-competing industrial
groups within the same nation. Mr. Mill here, in a pointed
way, suggests this, when he speaks of “distant places.” Theaddition, therefore, made to Mr. Mill's exposition by Mr.
Cairnes259 is, that the word “international” (in default of abetter term) should be applied to those conditions either withina country, or between two countries, which, because of theactual immobility of labor and capital from one occupation
to another, furnishes a substantial interference with industrial
competition. The obstacles to the free movement of labor andcapital which produce the conditions called “international”
are: 1. “Geographical distance; 2. Difference in political
258
259

Book III, Chap. II, § 4.
“Leading Principles,” pp. 302-307.

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institutions; 3. Difference in language, religion, and social
customs—in a word, in forms of civilization.” These differences exist between Maine and Montana; or even between
two adjoining States, Ohio and Kentucky, one a free and theother an old slave State. Labor and capital have not in thepast moved freely even across Mason and Dixon's line. Thereis, therefore, no treatment of international trade and values
separate from the laws of value already laid down concerning
non-competing groups, since there is also no free competition
between all the industrial groups within a country.
[380]§ 2. Interchange of commodities between distanceplaces determined by differences not in theirabsolute, but in the comparative, costs of production.
As I have said elsewhere260 after Ricardo (the thinker who
has done most toward clearing up this subject),261 “it is not adifference in the absolute cost of production which determines
the interchange, but a difference in the comparative cost. It may
be to our advantage to procure iron from Sweden in exchange
for cottons, even although the mines of England as well as her
manufactories should be more productive than those of Sweden;
for if we have an advantage of one half in cottons, and only
an advantage of a quarter in iron, and could sell our cottons
to Sweden at the price which Sweden must pay for them if
260“Essays on some Unsettled Questions of Political Economy,” Essay I.
I at one time believed Mr. Ricardo to have been the sole author of thedoctrine now universally received by political economists, on the nature andmeasure of the benefit which a country derives from foreign trade. But Colonel
Torrens, by the republication of one of his early writings, “The Economists
refuted,” has established at least a joint claim with Mr. Ricardo to the originationof the doctrine, and an exclusive one to its earliest publication.—MILL{FNS.
261

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she produced them herself, we should obtain our iron with anadvantage [over Sweden] of one half, as well as our cottons. We
may often, by trading with foreigners, obtain their commodities
at a smaller expense of labor and capital than they cost to theforeigners themselves. The bargain is still advantageous to theforeigner, because the commodity which he receives in exchange,
though it has cost us less, would have cost him more.”This may be illustrated as follows:

Articles England.
interchanged.
Cotton. 10 days' laborproduces x yds.
Iron.
12 days' laborproduces y cwts.

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Sweden.

15 days' laborproduces x yds.
15 days' laborproduces y cwts.

Here England has the advantage over Sweden in both cotton
and iron, since she can produce x yards of cotton in ten days'
labor to fifteen days in Sweden, and y cwts. of iron in twelve
days' labor to fifteen days in Sweden. The ship which takes x
yards of cotton to Sweden, and there exchanges it, as may bedone, for y cwts. of iron, brings back to England that whichcost Sweden fifteen days' labor, while the cotton with which
the iron was bought cost England only ten days' labor. So
that England also got her iron at an advantage over Sweden of
one half of ten days' labor; and yet England had an absoluteadvantage over Sweden in iron of a less amount (i.e., of one
fourth of twelve days' labor). It is to be distinctly understoodthat by difference in comparative cost we mean a differencein the comparative cost of producing two or more articles inthe same country, and not the difference of cost of the same
article in the different trading countries. In this example,
for instance, it is the difference in the comparative costs in443
England of both cotton and iron (not the different costs ofcotton in England and Sweden) which gives the reason for the
existence of the foreign trade.

To illustrate the cases in which interchange of commodities
will not, and those in which it will, take place between two
countries, the supposition may be made that the United States
has an advantage over England in the production both of iron andof corn. It may first be supposed that the advantage is of equalamount in both commodities; the iron and the corn, each of which
required 100 days' labor in the United States, requiring each 150
days' labor in England. It would follow that the iron of 150 days'
labor in England, if sent to the United States, would be equal tothe iron of 100 days' labor in the United States; if exchanged for
corn, therefore, it would exchange for the corn of only 100 days'
labor. But the corn of 100 days' labor in the United States was
supposed to be the same quantity with that of 150 days' labor in
England. With 150 days' labor in iron, therefore, England would
only get as much corn in the United States as she could raise with150 days' labor at home; and she would, in importing it, havethe cost of carriage besides. In these circumstances no exchange
would take place. In this case the comparative costs of the two
articles in England and in the United States were supposed tobe the same, though the absolute costs were different; on which
supposition we see that there would be no labor saved to either
country by confining its industry to one of the two productions
and importing the other.
It is otherwise when the comparative and not merely theabsolute costs of the two articles are different in the two countries.
If, while the iron produced with 100 days' labor in the UnitedStates was produced with 150 days' labor in England, the cornwhich was produced in the United States with 100 days' labor
could not be produced in England with less than 200 days' labor,an adequate motive to exchange would immediately arise. With

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a quantity of iron which England produced with 150 days' labor,
she would be able to purchase as much corn in the United States
as was there produced with 100 days' labor; but the quantity
which was there produced with 100 days' labor would be as great
as the quantity produced in England with 200 days' labor. By
importing corn, therefore, from the United States, and paying forit with iron, England would obtain for 150 days' labor what would
otherwise cost her 200, being a saving of 50 days' labor on each
repetition of the transaction; and not merely a saving to England,
but a saving absolutely; for it is not obtained at the expense of
the United States, who, with corn that cost her 100 days' labor,
has purchased iron which, if produced at home, would have cost
her the same. The United States, therefore, on this supposition,
loses nothing; but also she derives no advantage from the trade,the imported iron costing her as much as if it were made at home.
To enable the United States to gain anything by the interchange,something must be abated from the gain of England: the corn
produced in the United States by 100 days' labor must be able topurchase from England more iron than the United States could
produce by that amount of labor; more, therefore, than England
could produce by 150 days' labor, England thus obtaining thecorn which would have cost her 200 days at a cost exceeding
150, though short of 200. England, therefore, no longer gains thewhole of the labor which is saved to the two jointly by tradingwith one another.262
The case in which both England and the United States would
gain from the trade may be thus briefly shown:

262
I have in this illustration retained almost the exact words quoted by Mr.
Mill from his father's book, James Mill's “Elements of Political Economy,”
but altered it by changing the trade from Poland to the United States, and by
speaking of iron instead of cloth.

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Articles United States.
interchanged.
Corn.
100 days' laborproduces x bus.
Iron.
125 days' laborproduces y tons.

England.

200 days' laborproduces x bus.
150 days' laborproduces y tons.

The ship which carries x bushels of corn from the UnitedStates to England can there exchange it for at least y tonsof iron (costing England 150 days' labor, since x bushels
in England would cost 200 days' labor), and bring it home,
gaining for the United States the difference between the 100
days' labor in corn, paid for the y tons of iron, and the 125
days which the iron would have cost here if produced athome. In this case the United States has an advantage overEngland in both corn and iron, but still an international trade
will spring up, because the United States will derive a gain
owing to the less cost of corn as compared with the cost ofiron. Our comparative advantage is in corn. England, also, bysending to the United States y tons of iron, gets in return forit x bushels of corn. To produce the corn herself would havecost her 200 days' labor, but she bought that corn by only 150
days' labor spent on iron. England's comparative advantage isin iron. Then both countries will gain.
Mr.
Bowen263 gives an instance of international
trade where one country has the advantage in both of thecommodities entering into the exchange: “The inhabitantsof Barbadoes, favored by their tropical climate and fertile
soil, can raise provisions cheaper than we can in the UnitedStates. And yet Barbadoes buys nearly all her provisions fromthis country. Why is this so? Because, though Barbadoes
has the advantage over us in the ability to raise provisions
263“American Political Economy,” p. 481.

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cheaply, she has a still greater advantage over us in her power
to produce sugar and molasses. If she has an advantage of
one fourth in raising provisions, she has an advantage of one
half in regard to products exclusively tropical; and it is betterfor her to employ all her labor and capital in that branchof production in which her advantage is greatest. She canthus, by trading with us, obtain our breadstuffs and meat at asmaller expense of labor and capital than they cost ourselves.
If, for instance, a barrel of flour costs ten days' labor in the
United States and only eight days' labor in Barbadoes, thepeople of Barbadoes can still profitably buy the flour fromthis country, if they can pay for it with sugar which costthem only six days' labor; and the people of this country can
profitably sell them the flour, or buy from them the sugar,
provided the sugar, if raised in the United States, would costeleven days' labor.... The United States receive sugar, which
would have cost them eleven days' labor, by paying for itwith flour which costs them but ten days. Barbadoes receives
flour, which would have cost her eight days' labor, by paying
for it with sugar which costs her but six days. If Barbadoes
produced both commodities with greater facility, but greaterin precisely the same degree, there would be no motive forinterchange.”

It may be said, however, that in practice no businessman considers the question of “comparative cost” in making
shipments of goods abroad; that all he thinks of is whether
the price here, for example, is less than it is in London.
And yet the very fact that the prices are less here implies
that gold is of high value relatively to the given commodity;
while in London, if money is to be sent back in payment,
and if prices are high there, that implies that gold is there ofless comparative value than commodities, and consequently
that gold is the cheapest article to send to the United States.
The doctrine, then, is as true of gold, or the precious metals,

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as it is of other commodities.264 It may be stated in thefollowing language of Mr. Cairnes: “The proximate condition
determining international exchange is the state of comparative
prices in the exchanging countries as regards the commodities
which form the subject of the trade. But comparative prices
within the limits of each country are determined by two
distinct principles—within the range of effective industrial
competition, by cost of production; outside that range, byreciprocal demand.”265§ 3. The direct benefits of commerce consist inincreased Efficiency of the productive powers of theWorld.
From this exposition we perceive in what consists the benefit ofinternational exchange, or, in other words, foreign commerce.
Setting aside its enabling countries to obtain commodities which
they could not themselves produce at all, its advantage consists
in a more efficient employment of the productive forces of theworld. If two countries which traded together attempted, as far
as was physically possible, to produce for themselves what they
now import from one another, the labor and capital of the twocountries would not be so productive, the two together would
not obtain from their industry so great a quantity of commodities,
as when each employs itself in producing, both for itself and forthe other, the things in which its labor is relatively most efficient.
The addition thus made to the produce of the two combined
constitutes the advantage of the trade. It is possible that oneof the two countries may be altogether inferior to the other in
264

For a fuller discussion of this question see Cairnes, “Leading Principles,”
p. 319, ff.
265“Leading Principles,” p. 323.

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productive capacities, and that its labor and capital could be
employed to greatest advantage by being removed bodily to theother. The labor and capital which have been sunk in rendering
Holland habitable would have produced a much greater return
if transported to America or Ireland. The produce of the wholeworld would be greater, or the labor less, than it is, if everything
were produced where there is the greatest absolute facility for its
production. But nations do not, at least in modern times, emigrateen masse; and, while the labor and capital of a country remain in
the country, they are most beneficially employed in producing,for foreign markets as well as for its own, the things in which
it lies under the least disadvantage, if there be none in which it
possesses an advantage.
The fundamental ground on which all trade, or all exchangeof commodities, rests, is division of labor, or separationof employments. Beyond the ordinary gain from divisionof labor, arising from increased dexterity, there exist gains
arising from the development of “the special capacities orresources possessed by particular individuals or localities.”
International exchanges call out chiefly the special advantages
offered by particular localities for the prosecution of particularindustries.
“The only case, indeed, in which personal aptitudes
go for much in the commerce of nations is where thenations concerned occupy different grades in the scale ofcivilization.... The most striking example which the world
has ever seen of a foreign trade determined by the peculiar
personal qualities of those engaged in ministering to it is thatwhich was furnished by the Southern States of the American
Union previous to the abolition of slavery. The effect ofthat institution was to give a very distinct industrial characterto the laboring population of those States which unfitted
them for all but a very limited number of occupations, but
gave them a certain special fitness for these. Almost the449
entire industry of the country was consequently turned tothe production of two or three crude commodities, in raisingwhich the industry of slaves was found to be effective; andthese were used, through an exchange with foreign countries,
as the means of supplying the inhabitants with all otherrequisites.... In the main, however, it would seem that thiscause [personal aptitudes] does not go for very much ininternational commerce.”266
In brief, then, international trade is but an extension of
the principle of division of labor; and the gains to increased
productiveness, arising from the latter, are exactly the sameas those from the former.

§ 4. —Not in a Vent for exports, nor in the gains ofMerchants.
According to the doctrine now stated, the only direct advantageof foreign commerce consists in the imports. A country obtains
things which it either could not have produced at all, or which
it must have produced at a greater expense of capital and laborthan the cost of the things which it exports to pay for them. It
thus obtains a more ample supply of the commodities it wants,
for the same labor and capital; or the same supply, for lesslabor and capital, leaving the surplus disposable to produce
other things. The vulgar theory disregards this benefit anddeems the advantage of commerce to reside in the exports: as
if not what a country obtains, but what it parts with, by its
foreign trade, was supposed to constitute the gain to it. An
extended market for its produce—an abundant consumption for
its goods—a vent for its surplus—are the phrases by which it
has been customary to designate the uses and recommendations
266

Cairnes, “Leading Principles,” p. 301.

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of commerce with foreign countries. This notion is intelligible,
when we consider that the authors and leaders of opinion on
mercantile questions have always hitherto been the selling class.
It is in truth a surviving relic of the Mercantile Theory, according
to which, money being the only wealth, selling, or, in other words,
exchanging goods for money, was (to countries without minesof their own) the only way of growing rich—and importation of
goods, that is to say, parting with money, was so much subtracted
from the benefit.
The notion that money alone is wealth has been long defunct,but it has left many of its progeny behind it. Adam Smith's
theory of the benefit of foreign trade was, that it afforded anoutlet for the surplus produce of a country, and enabled a portionof the capital of the country to replace itself with a profit. The
expression, surplus produce, seems to imply that a country isunder some kind of necessity of producing the corn or cloth
which it exports; so that the portion which it does not itself
consume, if not wanted and consumed elsewhere, would either
be produced in sheer waste, or, if it were not produced, thecorresponding portion of capital would remain idle, and themass of productions in the country would be diminished by somuch. Either of these suppositions would be entirely erroneous.
The country produces an exportable article in excess of its own
wants from no inherent necessity, but as the cheapest mode of
supplying itself with other things. If prevented from exporting
this surplus, it would cease to produce it, and would no longer
import anything, being unable to give an equivalent; but the laborand capital which had been employed in producing with a view toexportation would find employment in producing those desirable
objects which were previously brought from abroad; or, if someof them could not be produced, in producing substitutes for them.
These articles would, of course, be produced at a greater cost thanthat of the things with which they had previously been purchasedfrom foreign countries. But the value and price of the articles

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would rise in proportion; and the capital would just as much be
replaced, with the ordinary profit, from the returns, as it waswhen employed in producing for the foreign market. The only
losers (after the temporary inconvenience of the change) would
be the consumers of the heretofore imported articles, who would
be obliged either to do without them, consuming in lieu of themsomething which they did not like as well, or to pay a higher
price for them than before.
If it be said that the capital now employed in foreign trade
could not find employment in supplying the home market, I might
reply that this is the fallacy of general over-production, discussed
in a former chapter; but the thing is in this particular case too
evident to require an appeal to any general theory. We not only
see that the capital of the merchant would find employment, but
we see what employment. There would be employment created,equal to that which would be taken away. Exportation ceasing,importation to an equal value would cease also, and all thatpart of the income of the country which had been expended inimported commodities would be ready to expend itself on thesame things produced at home, or on others instead of them.
Commerce is virtually a mode of cheapening production; and inall such cases the consumer is the person ultimately benefited;the dealer, in the end, is sure to get his profit, whether the buyer
obtains much or little for his money.
E converso, if for any reason, such as a removal of duties,
capital should be withdrawn from the production of articles
consumed at home, and imported commodities should entirely
take their place, the very importation of the foreign commodities would imply that an increased corresponding production
was going on in this country with which to pay for the imported goods. The capital thus thrown out of employment in
an industry in which we had no comparative advantage (whencompetition became free) would necessarily be employed in
the industries in which we had an advantage, and would

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supply—and the transferred capital would be the only meansof supplying—the commodities which would be sent abroad
to pay for those, which by the supposition are now imported,
but were formerly produced at home. The result is a greater
productiveness of industry, and so a greater sum from which
both labor and capital may be rewarded. Whenever capital,
unrestrained by artificial support, leaves one employment asunprofitable, it means that that employment is naturally, andin itself, less productive than the usual run of other industries
in the country, and so less profitable to both labor and capitalthan the majority of other occupations.

§ 5. Indirect benefits of Commerce, Economical and
Moral; still greater than the Direct.

[389]

Such, then, is the direct economical advantage of foreign trade.
But there are, besides, indirect effects, which must be counted
as benefits of a high order. (1) One is, the tendency of every
extension of the market to improve the processes of production.
A country which produces for a larger market than its own
can introduce a more extended division of labor, can makegreater use of machinery, and is more likely to make inventions
and improvements in the processes of production. Whatevercauses a greater quantity of anything to be produced in the sameplace tends to the general increase of the productive powersof the world.267 There is (2) another consideration, principally
applicable to an early stage of industrial advancement. The
opening of a foreign trade, by making them acquainted withnew objects, or tempting them by the easier acquisition of things
which they had not previously thought attainable, sometimes
works a sort of industrial revolution in a country whose resources
267

Book I, chap. VI, § 4.

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were previously undeveloped for want of energy and ambitionin the people; inducing those who were satisfied with scanty
comforts and little work to work harder for the gratification of
their new tastes, and even to save, and accumulate capital, for thestill more complete satisfaction of those tastes at a future time.
But (3) the economical advantages of commerce are surpassed
in importance by those of its effects which are intellectual andmoral. It is hardly possible to overrate the value, in the present low
state of human improvement, of placing human beings in contact
with persons dissimilar to themselves, and with modes of thought
and action unlike those with which they are familiar. Commerce
is now, what war once was, the principal source of this contact.
Such communication has always been, and is peculiarly in thepresent age, one of the primary sources of progress. Finally, (4)commerce first taught nations to see with goodwill the wealth andprosperity of one another. Before, the patriot, unless sufficiently
advanced in culture to feel the world his country, wished all
countries weak, poor, and ill-governed but his own: he now
sees in their wealth and progress a direct source of wealth andprogress to his own country. It is commerce which is rapidly
rendering war obsolete, by strengthening and multiplying thepersonal interests which are in natural opposition to it. And it
may be said without exaggeration that the great extent and rapid
increase of international trade, in being the principal guaranteeof the peace of the world, is the great permanent security forthe uninterrupted progress of the ideas, the institutions, and thecharacter of the human race.

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Chapter XIV. Of International Values.

§ 1. The values of imported commodities depend on
the Terms of international interchange.

[392]

The values of commodities produced at the same place, or inplaces sufficiently adjacent for capital to move freely between
them—let us say, for simplicity, of commodities produced in thesame country—depend (temporary fluctuations apart) upon theircost of production. But the value of a commodity brought from a
distant place, especially from a foreign country, does not dependon its cost of production in the place from whence it comes. On
what, then, does it depend? The value of a thing in any place
depends on the cost of its acquisition in that place; which, in thecase of an imported article, means the cost of production of thething which is exported to pay for it.
If, then, the United States imports wine from Spain, giving
for every pipe of wine a bale of cloth, the exchange value ofa pipe of wine in the United States will not depend upon what
the production of the wine may have cost in Spain, but upon
what the production of the cloth has cost in the United States.
Though the wine may have cost in Spain the equivalent of only
ten days' labor, yet, if the cloth costs in the United States twenty
days' labor, the wine, when brought to the United States, will
exchange for the produce of twenty days' American labor, plus
the cost of carriage, including the usual profit on the importer's
capital during the time it is locked up and withheld from other
employment.268
The value, then, in any country, of a foreign commodity,268

I have changed the illustration from England to the United States in thisexample.

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depends on the quantity of home produce which must be given to
the foreign country in exchange for it. In other words, the valuesof foreign commodities depend on the terms of international
exchange. What, then, do these depend upon? What is it which,in the case supposed, causes a pipe of wine from Spain to beexchanged with the United States for exactly that quantity ofcloth? We have seen that it is not their cost of production. If
the cloth and the wine were both made in Spain, they would
exchange at their cost of production in Spain; if they were bothmade in the United States, they would [possibly] exchange attheir cost of production in the United States: but all the cloth
being made in the United States, and all the wine in Spain,
they are in circumstances to which we have already determinedthat the law of cost of production is not applicable. We must
accordingly, as we have done before in a similar embarrassment,
fall back upon an antecedent law, that of supply and demand;and in this we shall again find the solution of our difficulty.

§ 2. The values of foreign commodities depend, notupon Cost of Production, but upon Reciprocal
Demand and Supply.
It has been previously explained that the conditions called.
“international” are those, either within a nation, or thoseexisting between two separate nations, which are such as toprevent the free movement of labor and capital from one
group of industries to another, or from one locality to anotherdistant one. Even if woolen cloth could be made cheaper inEngland than in the United States, we know that neither capital
nor labor would easily leave the United States for England,
although it might go from Rhode Island to Massachusetts
under similar inducements. If shoes can be made with less

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advantage in Providence than in Lynn, the shoe industry will
come to Lynn; but it does not follow that the English shoeindustry would come to Lynn, even if the advantages of thelatter were greater than those in England. If there be no
obstacle to the free movement of labor and capital between
places or occupations, and if some place or occupation can
produce at a less cost than another place or occupation, thenthere will be a migration of the instruments of production.
Since there is no free movement of labor and capital between
one country and another, then two countries stand in the same
relation as that of two “non-competing groups” within thesame country, as before explained. When this fact is once
fully grasped, the subject of international values becomesvery simple. It does not differ from the question of those
domestic values for which we found269 that the dependence
on cost of production would not hold, but that their values
were governed by reciprocal demand and supply.

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Attention should be drawn to the real nature of thepresent inquiry. It is not here a question as to what causesinternational trade between two countries: that has beentreated in the preceding chapter, and has been found to be adifference in the comparative cost. The question now is one ofexchange value, that is, for how much of other commodities
a given commodity will exchange. The reasons for the tradeare supposed to exist; but we now want to know what the law
is which determines the proportions of the exchange. Why
does one article exchange for more or less of another? Not, as
we have seen, because one costs more or less to produce thanthe other.
In the trade between the United States and England iniron and corn, formerly referred to (p. 383), it was seenthat a 100 days' labor of corn buys from England iron which
would have cost the United States 125 days' labor. Englandsends 150 days' labor of iron and buys from the United
269

Book III, Chap. II, § 4.

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States corn which would have cost her 200 days' labor. But
what rule fixes the proportions between 100 and 125 for
the United States, and between 150 and 200 for England, atwhich the exchanges will take place? The trade increases the
productiveness of both countries, but in what ratio will thetwo countries share this gain? The answer is, briefly, in theratio set by reciprocal demand and supply, that is, the relative
strength, as compared with each other, of the demands of thetwo countries respectively for iron and corn. This, however,may be capable of explanation in a simple form.
A has spades, and B has oats, to dispose of; and each
wishes to get the article belonging to the other. Will A give
one spade for one bushel of oats, or for two? Will B give
two bushels of oats for one spade? That depends upon how
strong a desire A has for oats; the intensity of his demand
may induce him to give two spades for one bushel. But theexchange also depends upon B. If he has no great need for
spades, and A has a strong desire for oats, B will get more
spades for oats than otherwise, possibly two spades for one
bushel of oats; that is, oats will have a larger exchange value.
If, on the other hand, A cares less for oats than B does for
spades, then the exchange will result in an increased value of
spades relatively to oats. When two commodities exchange
against each other, their exchange values will depend entirely
upon the relative intensity of the demand on each side for theother commodity. And this simple form of the statement ofreciprocal demand and supply is also the law of international
values.
If instead of spades and oats we substitute iron and corn,
and let the trade be between England and the United States,
the quantity of corn required to buy a given quantity of iron
will depend upon the relative demands of England for cornand of the United States for iron. Something may cut off
England's demand for our breadstuffs, and they will then havea less exchange value relatively to iron (if we keep up ourdemand), and their prices will fall. But if, on the other hand,

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England has poor harvests, and consequently a great demandfor corn, and if our demand for iron is not excessive at thesame time, then our breadstuffs will rise in value. And thiswas precisely what happened from 1877 to 1879. Now, in theabove illustration of corn and iron, how can we know whether
or not x bushels of corn (the produce of 100 days' labor in
the United States) will exchange for exactly y tons of English
iron? That, again, will depend upon the reciprocal demands ofthe two countries for corn and iron respectively. Moreover, it
will have been already observed that the ratio of exchange is
not capable of being ascertained exactly, since it varies withchanging conditions, namely, the desires of the people of thetwo countries, together with their means of purchase.
But yet these variations are capable of ascertainment as
regards their extreme limits. The reciprocal demand can notcarry the exchange value in either country beyond the line set
by the cost of production of the article. For instance, an urgent
need in England for corn (if the United States has a lightdemand for English iron) can not carry the ratio of exchange
to a point such that England will offer so much more than 150
days' labor in iron for x bushels of American corn that it will
go beyond 200 days' labor in iron. It will be seen at once,
then, if that were the case, that England would produce thecorn herself; and that she would then have no gain whateverfrom the trade. The ratio of exchange will thus be limited by
the reciprocal demand on one side to the cost of production(200 days' labor) of English corn. On the other hand, if the
supposition were reversed, and the United States had a great
demand for iron, but England had little need for our corn,then we would not offer more than 125 days' labor of corn fory tons of iron, because for that expenditure of labor we could
produce the iron ourselves.
In the above examples we have considered the case of a
trade in corn and iron only. If corn were to typify all ourgoods wanted by England, and iron all English goods wantedby the United States, the conclusions would be exactly the459
same. The ratios of a myriad of things, each governed by its
particular reciprocal demand, exchanging against each other,
give a general result by which the goods sent out exchange
against the goods brought back at such rates as are fixedby the reciprocal demands acting on all the goods. Goods
are payments for goods; the ratio of exchange depends onreciprocal demand and supply. If we now add more countries
to the example, we simply increase the number of persons(although in different countries) wanting our goods, as set
off against our demands for the goods of this greater numberof persons. If France, Germany, and England all want ourcorn, we must have some demand for the goods of France,
Germany, and England also; and the same law of reciprocal
demand gives the ratio of interchange. That this explanationis consistent with the facts is to be seen when we notice
how eagerly the exporters of American staples watch theconditions which increase or diminish the foreign demand
for these commodities, looking at them as the causes which
directly affect their exchange value, or price.

When cost of carriage is added, it will increase the price ofcorn to England and of iron to the United States. But, as every
one knows, an increase of price affects the demand; and, as thedemand on each side is affected, a new ratio of exchange will
finally be reached consistent with the strength of desires on eachside. Who, therefore, will pay the most of the cost of carriage
England or the United States? That will, again, depend onwhether England has the greatest relative demand for American
goods, as compared with the demand of the United States forEnglish goods.
No absolute rule, therefore, can be laid down for the divisionof the cost, no more than for the division of the advantage; andit does not follow that, in whatever ratio the one is divided, theother will be divided in the same. It is impossible to say, if
the cost of carriage could be annihilated, whether the producing

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or the importing country would be most benefited. This would
depend on the play of international demand.
Cost of carriage has one effect more. But for it, every
commodity would (if trade be supposed free) be either regularly
imported or regularly exported. A country would make nothingfor itself which it did not also make for other countries. But inconsequence of cost of carriage there are many things, especiallybulky articles, which every, or almost every, country produces
within itself. After exporting the things in which it can employ
itself most advantageously, and importing those in which it isunder the greatest disadvantage, there are many lying between, of
which the relative cost of production in that and in other countries
differs so little that the cost of carriage would absorb more than
the whole saving in cost of production which would be obtainedby importing one and exporting another. This is the case withnumerous commodities of common consumption, including thecoarser qualities of many articles of food and manufacture, of
which the finer kinds are the subject of extensive internationaltraffic.

§ 3. —As illustrated by trade in cloth and linen
between England and Germany.
Mr. Mill still further illustrates the operation of the law ofreciprocal demand by the case of a trade between Englandand Germany in cloth and linen, as follows:“Suppose that ten yards of broadcloth cost in England as muchlabor as fifteen yards of linen, and in Germany as muchas twenty.” This supposition then being made, it would be
the interest of England to import linen from Germany, andof Germany to import cloth from England. “When each461
country produced both commodities for itself, ten yards of clothexchanged for fifteen yards of linen in England, and for twenty inGermany. They will now exchange for the same number of yardsof linen in both. For what number? If for fifteen yards, England
will be just as she was, and Germany will gain all. If for twenty
yards, Germany will be as before, and England will derive thewhole of the benefit. If for any number intermediate between
fifteen and twenty, the advantage will be shared between thetwo countries. If, for example, ten yards of cloth exchange foreighteen of linen, England will gain an advantage of three yards
on every fifteen, Germany will save two out of every twenty. The
problem is, what are the causes which determine the proportionin which the cloth of England and the linen of Germany will
exchange for each other? Let us suppose, then, that by the effectof what Adam Smith calls the higgling of the market, ten yardsof cloth, in both countries, exchange for seventeen yards of linen.
“The demand for a commodity, that is, the quantity of it
which can find a purchaser, varies, as we have before remarked,
according to the price. In Germany the price of ten yards of clothis now seventeen yards of linen, or whatever quantity of money
is equivalent in Germany to seventeen yards of linen. Now, thatbeing the price, there is some particular number of yards of cloth,
which will be in demand, or will find purchasers, at that price.
There is some given quantity of cloth, more than which could not
be disposed of at that price; less than which, at that price, would
not fully satisfy the demand. Let us suppose this quantity to be
1,000 times ten yards.
“Let us now turn our attention to England. There the priceof seventeen yards of linen is ten yards of cloth, or whatever
quantity of money is equivalent in England to ten yards of cloth.
There is some particular number of yards of linen which, at thatprice, will exactly satisfy the demand, and no more. Let us
suppose that this number is 1,000 times seventeen yards.
“As seventeen yards of linen are to ten yards of cloth, so

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are 1,000 times seventeen yards to 1,000 times ten yards. At
the existing exchange value, the linen which England requires
will exactly pay for the quantity of cloth which, on the sameterms of interchange, Germany requires. The demand on eachside is precisely sufficient to carry off the supply on the other.
The conditions required by the principle of demand and supply
are fulfilled, and the two commodities will continue to beinterchanged, as we supposed them to be, in the ratio of seventeen
yards of linen for ten yards of cloth.
“But our suppositions might have been different. Suppose that,at the assumed rate of interchange, England had been disposed
to consume no greater quantity of linen than 800 times seventeen
yards; it is evident that, at the rate supposed, this would not havesufficed to pay for the 1,000 times ten yards of cloth which
we have supposed Germany to require at the assumed value.
Germany would be able to procure no more than 800 times ten
yards at that price. To procure the remaining 200, which shewould have no means of doing but by bidding higher for them,
she would offer more than seventeen yards of linen in exchange
for ten yards of cloth; let us suppose her to offer eighteen. At
this price, perhaps, England would be inclined to purchase agreater quantity of linen. She would consume, possibly, at thatprice, 900 times eighteen yards. On the other hand, cloth having
risen in price, the demand of Germany for it would probably
have diminished. If, instead of 1,000 times ten yards, she is now
contented with 900 times ten yards, these will exactly pay forthe 900 times eighteen yards of linen which England is willingto take at the altered price; the demand on each side will again
exactly suffice to take off the corresponding supply; and ten
yards for eighteen will be the rate at which, in both countries,
cloth will exchange for linen.
“The converse of all this would have happened if, instead of
800 times seventeen yards, we had supposed that England, at therate of ten for seventeen, would have taken 1,200 times seventeen

463
yards of linen. In this case, it is England whose demand is not
fully supplied; it is England who, by bidding for more linen,
will alter the rate of interchange to her own disadvantage; andten yards of cloth will fall, in both countries, below the value ofseventeen yards of linen. By this fall of cloth, or, what is thesame thing, this rise of linen, the demand of Germany for cloth
will increase, and the demand of England for linen will diminish,till the rate of interchange has so adjusted itself that the cloth andthe linen will exactly pay for one another; and, when once thispoint is attained, values will remain without further alteration.”§ 4. The conclusion states in the Equation ofInternational Demand.
“It may be considered, therefore, as established, that when two
countries trade together in two commodities, the exchange valueof these commodities relatively to each other will adjust itself
to the inclinations and circumstances of the consumers on bothsides, in such manner that the quantities required by eachcountry, of the articles which it imports from its neighbor, shallbe exactly sufficient to pay for one another. As the inclinations
and circumstances of consumers can not be reduced to any rule,so neither can the proportions in which the two commodities
will be interchanged. We know that the limits within which
the variation is confined are the ratio between their costs ofproduction in the one country and the ratio between their costsof production in the other. Ten yards of cloth can not exchange
for more than twenty yards of linen, nor for less than fifteen.
But they may exchange for any intermediate number. The ratios,
therefore, in which the advantage of the trade may be divided
between the two nations are various. The circumstances on which
the proportionate share of each country more remotely depends
admit only of a very general indication.”

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If, therefore, it be asked what country draws to itself thegreatest share of the advantage of any trade it carries on, theanswer is, the country for whose productions there is in othercountries the greatest demand, and a demand the most susceptibleof increase from additional cheapness. In so far as the productionsof any country possess this property, the country obtains all
foreign commodities at less cost. It gets its imports cheaper, thegreater the intensity of the demand in foreign countries for its
exports. It also gets its imports cheaper, the less the extent andintensity of its own demand for them. The market is cheapest
to those whose demand is small. A country which desires few
foreign productions, and only a limited quantity of them, while
its own commodities are in great request in foreign countries,
will obtain its limited imports at extremely small cost, that is, inexchange for the produce of a very small quantity of its labor andcapital.

[400]

The law which we have now illustrated may be appropriately
named the Equation of International Demand. It may be concisely
stated as follows: The produce of a country exchanges for the
produce of other countries at such values as are required in orderthat the whole of her exports may exactly pay for the whole ofher imports. This law of International Values is but an extensionof the more general law of Value, which we called the Equationof Supply and Demand.270 We have seen that the value of acommodity always so adjusts itself as to bring the demand to theexact level of the supply. But all trade, either between nations
or individuals, is an interchange of commodities, in which thethings that they respectively have to sell constitute also theirmeans of purchase: the supply brought by the one constitutes
his demand for what is brought by the other. So that supply anddemand are but another expression for reciprocal demand; andto say that value will adjust itself so as to equalize demand with
270

Book III, Chap. I, § 3.

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supply, is, in fact, to say that it will adjust itself so as to equalize
the demand on one side with the demand on the other.

The tendency of imports to balance exports may be seen from
Chart No. XIII, on the next page, which shows the relation
between the exports and imports solely of merchandise, andexclusive of specie, to and from the United States. From 1850
to 1860, after the discoveries of the precious metals in thiscountry, we sent great quantities of gold and silver out of thecountry, purely as merchandise, so that, if we should include
the precious metals among the exports in those years, thetotal exports would more nearly equal the total imports. The
transmission of gold at that time was effected exactly as thatof other merchandise; so that to the date of the civil war there
was a very evident equilibrium between exports and imports.
Then came the war, with the period of extravagance andspeculation following, which led to great purchases abroad,and which was closed only by the panic of 1873. Since
then more exports than imports were needed to pay for thegreat purchases of the former period; and the epoch of great
exports, from 1875 to 1883, balanced the opposite conditionsin the period preceding. It would seem, therefore, that we
had reached a normal period about the year 1882.271 A fuller
statement as to the fluctuations of exports and imports about
the equilibrium will be given when the introduction of money
in international trade is made. The full statement must also
include the financial account.

[401]

271

See “Statistical Abstract,” 1883, pp. 32, 33.

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Chart XIII. Value of Merchandise IMPORTED into (dotted line)
and EXPORTED from (black line) the United States from 1835 to
1883.
[402]

§ 5. The cost to a country of its imports depends not
only on the ratio of exchange, but on the efficiency
of its labor.
We now pass to another essential part of the theory of the subject.
There are two senses in which a country obtains commodities
cheaper by foreign trade: in the sense of value and in the senseof cost: (1.) It gets them cheaper in the first sense, by theirfalling in value relatively to other things; the same quantity ofthem exchanging, in the country, for a smaller quantity than
before of the other produce of the country. To revert to our
original figures [of the trade with Germany in cloth and linen]:in England, all consumers of linen obtained, after the trade
was opened, seventeen or some greater number of yards forthe same quantity of all other things for which they before
obtained only fifteen. The degree of cheapness, in this sense

467
of the term, depends on the laws of International Demand, so
copiously illustrated in the preceding sections. (2.) But, in theother sense, that of cost, a country gets a commodity cheaper
when it obtains a greater quantity of the commodity with thesame expenditure of labor and capital. In this sense of the term,
cheapness in a great measure depends upon a cause of a different
nature: a country gets its imports cheaper, in proportion to thegeneral productiveness of its domestic industry; to the generalefficiency of its labor. The labor of one country may be, as awhole, much more efficient than that of another: all or mostof the commodities capable of being produced in both may be
produced in one at less absolute cost than in the other; which, as
we have seen, will not necessarily prevent the two countries fromexchanging commodities. The things which the more favoredcountry will import from others are, of course, those in which
it is least superior; but, by importing them, it acquires, even in
those commodities, the same advantage which it possesses in thearticles it gives in exchange for them. What her imports cost to
her is a function of two variables: (1) the quantity of her own
commodities which she gives for them, and (2) the cost of thosecommodities. Of these, the last alone depends on the efficiencyof her labor; the first depends on the law of international values;that is, on the intensity and extensibility of the foreign demandfor her commodities, compared with her demand for foreigncommodities.
The great productiveness of any industry in our country has
thus two results: (1) it gives a larger total out of whichlabor and capital at home can receive greater rewards; and(2) the commodities being cheaper in comparison than othercommodities not so easily produced, furnish the very articles
which are most likely to be sent abroad, in accordance withthe doctrine of comparative cost. In the United States, those
things in the production of which labor and capital are mostefficient, and so earn the largest rewards, are precisely the

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articles entering most largely into our foreign trade. Thatis, we get foreign articles cheaper precisely because theseexports cost us less in labor and capital. These, of course,
since we inhabit a country whose natural resources are notyet fully worked, are largely the products of the extractive
industries, as may be seen by the following table of the valueof goods entering to the greatest extent into our foreign export
trade in 1883:
Raw cotton
Breadstuffs
Provisions and animals
Mineral oils
Wood
Tobacco$247,328,721
208,040,850
118,177,555
40,555,492
26,793,708
22,095,229

These six classes of commodities are arranged in the orderin which they enter into our export trade, and are the six whichcome first and highest in the list.
[404]

Chapter XV. Of Money Considered As An
Imported Commodity.

§ 1. Money imported on two modes; as aCommodity, and as a medium of Exchange.
The degree of progress which we have now made in the theory of
foreign trade puts it in our power to supply what was previously
deficient in our view of the theory of money; and this, whencompleted, will in its turn enable us to conclude the subject offoreign trade.
Money, or the material of which it is composed, is, in GreatBritain, and in most other countries, a foreign commodity. Itsvalue and distribution must therefore be regulated, not by thelaw of value which obtains in adjacent places, but by that which
is applicable to imported commodities—the law of international
values.
In the discussion into which we are now about to enter, I shalluse the terms money and the precious metals indiscriminately.
This may be done without leading to any error; it having beenshown that the value of money, when it consists of the precious
metals, or of a paper currency convertible into them on demand,is entirely governed by the value of the metals themselves: fromwhich it never permanently differs, except by the expense ofcoinage, when this is paid by the individual and not by the state.
Money is brought into a country in two different ways. It
is imported (chiefly in the form of bullion) like any othermerchandise, as being an advantageous article of commerce. It isalso imported in its other character of a medium of exchange, topay some debt due to the country, either for goods exported or on
any other account. The existence of these two distinct modes in

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which money flows into a country, while other commodities arehabitually introduced only in the first of these modes, occasions
somewhat more of complexity and obscurity than exists in thecase of other commodities, and for this reason only is any special
and minute exposition necessary.

§ 2. As a commodity, it obeys the same laws ofValue as other imported Commodities.
In so far as the precious metals are imported in the ordinary
way of commerce, their value must depend on the same causes,
and conform to the same laws, as the value of any other foreign
production. It is in this mode chiefly that gold and silver diffuse
themselves from the mining countries into all other parts of thecommercial world. They are the staple commodities of thosecountries, or at least are among their great articles of regular
export; and are shipped on speculation, in the same manner asother exportable commodities. The quantity, therefore, which a
country (say England) will give of its own produce, for a certain
quantity of bullion, will depend, if we suppose only two countries
and two commodities, upon the demand in England for bullion,
compared with the demand in the mining country (which we willcall the United States272 ) for what England has to give.
The bullion required by England must exactly pay for thecottons or other English commodities required by the UnitedStates. If, however, we substitute for this simplicity the degreeof complication which really exists, the equation of international
demand must be established not between the bullion wanted inEngland and the cottons or broadcloth wanted in the UnitedStates, but between the whole of the imports of England andthe whole of her exports. The demand in foreign countries
272

This substitution has been made for Brazil.

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for English products must be brought into equilibrium with thedemand in England for the products of foreign countries; and all
foreign commodities, bullion among the rest, must be exchanged
against English products in such proportions as will, by the effectthey produce on the demand, establish this equilibrium.
There is nothing in the peculiar nature or uses of the precious
metals which should make them an exception to the generalprinciples of demand. So far as they are wanted for purposes ofluxury or the arts, the demand increases with the cheapness, inthe same irregular way as the demand for any other commodity.
So far as they are required for money, the demand increases withthe cheapness in a perfectly regular way, the quantity needed
being always in inverse proportion to the value. This is the only
real difference, in respect to demand, between money and otherthings.
Money, then, if imported solely as a merchandise, will, likeother imported commodities, be of lowest value in the countries
for whose exports there is the greatest foreign demand, and whichhave themselves the least demand for foreign commodities. To
these two circumstances it is, however, necessary to add twoothers, which produce their effect through cost of carriage. The
cost of obtaining bullion is compounded of two elements; thegoods given to purchase it and the expense of transport; ofwhich last, the bullion countries will bear a part (though anuncertain part) in the adjustment of international values. The
expense of transport is partly that of carrying the goods to thebullion countries, and partly that of bringing back the bullion;
both these items are influenced by the distance from the mines;
and the former is also much affected by the bulkiness of thegoods. Countries whose exportable produce consists of the finer
manufactures obtain bullion, as well as all other foreign articles,cæteris paribus, at less expense than countries which export
nothing but bulky raw produce.
To be quite accurate, therefore, we must say: The countries

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whose exportable productions (1) are most in demand abroad,and (2) contain greatest value in smallest bulk, (3) which arenearest to the mines, and (4) which have least demand for foreign
productions, are those in which money will be of lowest value,or, in other words, in which prices will habitually range thehighest. If we are speaking not of the value of money, but of its
cost (that is, the quantity of the country's labor which must be
expended to obtain it), we must add (5) to these four conditions ofcheapness a fifth condition, namely, “whose productive industry
is the most efficient.” This last, however, does not at all affectthe value of money, estimated in commodities; it affects thegeneral abundance and facility with which all things, money andcommodities together, can be obtained.273

The accompanying Chart, No. XIV, on the next page, gives
the excess of exports from the United States of gold and silvercoin and bullion over imports, and the excess of imports
over exports. The movement of the line above the horizontal
baseline shows distinctly how largely we have been sending
the precious metals abroad from our mines, simply as aregular article of export, like merchandise. From 1850 to1879 the exports are clearly not in the nature of payments for
trade balances; since it indicates a steady movement out of
the country (with the exception of the first year of the war,
when gold came to this country). The phenomenal increase of
specie exports during the war, and until 1879, was due to thefact that we had a depreciated paper currency, which sent themetals out of the country as merchandise. This chart should
be studied in connection with Chart No. XIII.

273

See close of last chapter.

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Chart XIV. Chart showing the Excess of Exports and Imports ofGold and Silver Coin and Bullion, from and into the UnitedStates, from 1835 to 1883. The line when above the base-line
shows the excess of exports; when below, the excess of imports.
From the preceding considerations, it appears that those are
greatly in error who contend that the value of money, in countries
where it is an imported commodity, must be entirely regulated
by its value in the countries which produce it; and can not beraised or lowered in any permanent manner unless some change
has taken place in the cost of production at the mines. On
the contrary, any circumstance which disturbs the equation ofinternational demand with respect to a particular country not only
may, but must, affect the value of money in that country—its
value at the mines remaining the same. The opening of a new
branch of export trade from England; an increase in the foreign
demand for English products, either by the natural course of
events or by the abrogation of duties; a check to the demandin England for foreign commodities, by the laying on of importduties in England or of export duties elsewhere; these and allother events of similar tendency would make the imports ofEngland (bullion and other things taken together) no longer anequivalent for the exports; and the countries which take her
exports would be obliged to offer their commodities, and bullion
among the rest, on cheaper terms, in order to re-establish the

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equation of demand; and thus England would obtain money
cheaper, and would acquire a generally higher range of prices. A
country which, from any of the causes mentioned, gets money
cheaper, obtains all its other imports cheaper likewise.
It is by no means necessary that the increased demand forEnglish commodities, which enables England to supply herself
with bullion at a cheaper rate, should be a demand in the mining
countries. England might export nothing whatever to thosecountries, and yet might be the country which obtained bullion
from them on the lowest terms, provided there were a sufficient
intensity of demand in other foreign countries for English goods,
which would be paid for circuitously, with gold and silver fromthe mining countries. The whole of its exports are what a country
exchanges against the whole of its imports, and not its exports
and imports to and from any one country.
[410]

Chapter XVI. Of The Foreign Exchanges.

§ 1. Money passes from country to country as a
Medium of Exchange, through the Exchanges.
We have thus far considered the precious metals as a commodity,
imported like other commodities in the common course of trade,and have examined what are the circumstances which wouldin that case determine their value. But those metals are also
imported in another character, that which belongs to them as a
medium of exchange; not as an article of commerce, to be soldfor money, but as themselves money, to pay a debt, or effect atransfer of property.
Money is sent from one country to another for various
purposes: the most usual purpose, however, is that of payment
for goods. To show in what circumstances money actually passes
from country to country for this or any of the other purposes
mentioned, it is necessary briefly to state the nature of themechanism by which international trade is carried on, when it
takes place not by barter but through the medium of money.
In practice, the exports and imports of a country not only are
not exchanged directly against each other, but often do not evenpass through the same hands. Each is separately bought andpaid for with money. We have seen, however, that, even in thesame country, money does not actually pass from hand to handeach time that purchases are made with it, and still less does
this happen between different countries. The habitual mode ofpaying and receiving payment for commodities, between country
and country, is by bills of exchange.
A merchant in the United States, A, has exported Americancommodities, consigning them to his correspondent, B, in

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England. Another merchant in England, C, has exported English
commodities, suppose of equivalent value, to a merchant, D, in
the United States. It is evidently unnecessary that B in Englandshould send money to A in the United States, and that D in
the United States should send an equal sum of money to C in
England. The one debt may be applied to the payment of theother, and the double cost and risk of carriage be thus saved. A
draws a bill on B for the amount which B owes to him: D, having
an equal amount to pay in England, buys this bill from A, andsends it to C, who, at the expiration of the number of days which
the bill has to run, presents it to B for payment. Thus the debt
due from England to the United States, and the debt due fromthe United States to England, are both paid without sending anounce of gold or silver from one country to the other.274

This implies (if we exclude for the present any otherinternational payments than those occurring in the course ofcommerce) that the exports and imports exactly pay for one
another, or, in other words, that the equation of international
demand is established. When such is the fact, the internationaltransactions are liquidated without the passage of any moneyfrom one country to the other. But, if there is a greater sum
due from the United States to England than is due from Englandto the United States, or vice versa, the debts can not be simply
written off against one another. After the one has been applied,274

I have also changed the illustrations in this chapter so as to apply to theUnited States.

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as far as it will go, toward covering the other, the balance mustbe transmitted in the precious metals. In point of fact, themerchant who has the amount to pay will even then pay for it
by a bill. When a person has a remittance to make to a foreigncountry, he does not himself search for some one who has
money to receive from that country, and ask him for a bill of
exchange. In this, as in other branches of business, there is aclass of middle-men or brokers, who bring buyers and sellers
together, or stand between them, buying bills from those whohave money to receive, and selling bills to those who have money
to pay. When a customer comes to a broker for a bill on Parisor Amsterdam, the broker sells to him perhaps the bill he mayhimself have bought that morning from a merchant, perhaps abill on his own correspondent in the foreign city; and, to enable
his correspondent to pay, when due, all the bills he has granted,
he remits to him all those which he has bought and has not
resold. In this manner these brokers take upon themselves thewhole settlement of the pecuniary transactions between distantplaces, being remunerated by a small commission or percentage
on the amount of each bill which they either sell or buy. Now,
if the brokers find that they are asked for bills, on the one part,to a greater amount than bills are offered to them on the other,
they do not on this account refuse to give them; but since, inthat case, they have no means of enabling the correspondents onwhom their bills are drawn to pay them when due, except bytransmitting part of the amount in gold or silver, they requirefrom those to whom they sell bills an additional price, sufficient
to cover the freight and insurance of the gold and silver, with aprofit sufficient to compensate them for their trouble and for the
temporary occupation of a portion of their capital. This premium(as it is called) the buyers are willing to pay, because they mustotherwise go to the expense of remitting the precious metals
themselves, and it is done cheaper by those who make doing it apart of their especial business. But, though only some of those

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who have a debt to pay would have actually to remit money, allwill be obliged, by each other's competition, to pay the premium;and the brokers are for the same reason obliged to pay it to those
whose bills they buy. The reverse of all this happens, if, on
the comparison of exports and imports, the country, instead of
having a balance to pay, has a balance to receive. The brokers findmore bills offered to them than are sufficient to cover those which
they are required to grant. Bills on foreign countries consequently
fall to a discount; and the competition among the brokers, whichis exceedingly active, prevents them from retaining this discountas a profit for themselves, and obliges them to give the benefitof it to those who buy the bills for purposes of remittance.
When the United States had the same number of dollars to pay
to England which England had to pay to her, one set of merchantsin the United States would want bills, and another set would havebills to dispose of, for the very same number of dollars; andconsequently a bill on England for $1,000 would sell for exactly$1,000, or, in the phraseology of merchants, the exchange would
be at par. As England also, on this supposition, would have an
equal number of dollars to pay and to receive, bills on the UnitedStates would be at par in England, whenever bills on England
were at par in the United States.
If, however, the United States had a larger sum to pay
to England than to receive from her, there would be persons
requiring bills on England for a greater number of dollars thanthere were bills drawn by persons to whom money was due. A billon England for $1,000 would then sell for more than $1,000, andbills would be said to be at a premium. The premium, however,
could not exceed the cost and risk of making the remittance ingold, together with a trifling profit; because, if it did, the debtor
would send the gold itself, in preference to buying the bill.
If, on the contrary, the United States had more money toreceive from England than to pay, there would be bills offered
for a greater number of dollars than were wanted for remittance,

479
and the price of bills would fall below par: a bill for $1,000
might be bought for somewhat less than $1,000, and bills would
be said to be at a discount.
When the United States has more to pay than to receive,
England has more to receive than to pay, and vice versa. When,
therefore, in the United States, bills on England bear a premium,
then, in England, bills on the United States are at a discount; and,
when bills on England are at a discount in the United States, billson the United States are at a premium in England. If they areat par in either country, they are so, as we have already seen, in
both.275
Thus do matters stand between countries, or places which havethe same currency. So much of barbarism, however, still remains
in the transactions of the most civilized nations, that almost
all independent countries choose to assert their nationality byhaving, to their own inconvenience and that of their neighbors, apeculiar currency of their own. To our present purpose this makes
no other difference than that, instead of speaking of equal sumsof money, we have to speak of equivalent sums. By equivalentsums, when both currencies are composed of the same metal,
are meant sums which contain exactly the same quantity of themetal, in weight and fineness.
The quantity of gold in the English pound is equivalent to$4.8666+ of our gold coins. If the bills offered are about equal
to those wanted, a claim to a pound in England will sell for$4.86. If many are wanted, and but few to be had, their pricewill go up, of course; but it can not go more than a small
fraction beyond $4.90, since about 3-¼ cents is sufficient tocover the brokerage, insurance, and freight per pound sterlingin a shipment of gold to London. Therefore, in order to getmoney to a creditor in London, no one will pay more for a
275

The examples in this and the next section have been altered so as to apply
to the United States.

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pound in the form of a bill than he will be obliged to pay forsending it across in the form of bullion. Bills of exchange,
then, can not rise in price beyond the point ($4.90 +) since,
rather than pay a higher sum for a bill, gold will be sent.
This point is called the “shipping-point” of gold. When theexchanges are at $4.90, it will be found that gold is goingabroad. On the other hand, when the supply of bills is greaterthan the demand, their price will fall. A man having a billon London to sell—i.e., a claim to a pound in London—will
not sell it at a price here lower than $4.86, by more thanthe expense of bringing the gold itself across. Since thisexpense is about 3-¼ cents, bills can not fall below about$4.83. When exchange is at that price, it will be found thatgold is coming to the United States from England. This priceis the “shipping-point” for imports of gold. This, of course,
applies to sight-bills only.
Formerly, we computed exchange on a scale ofpercentages, the real par being about 109. This was given up
after the war.

When bills on foreign countries are at a premium, it iscustomary to say that the exchanges are against the country, or
unfavorable to it. In order to understand these phrases, we musttake notice of what “the exchange,” in the language of merchants,
really means. It means the power which the money of the country
has of purchasing the money of other countries. Supposing $4.86
to be the exact par of exchange, then when it requires morethan $1,000 to buy a bill of £205, $1,000 of American money
are worth less than their real equivalent of English money: andthis is called an exchange unfavorable to the United States. The
only persons in the United States, however, to whom it is reallyunfavorable are those who have money to pay in England, forthey come into the bill market as buyers, and have to pay a
premium; but to those who have money to receive in Englandthe same state of things is favorable; for they come as sellers

481
and receive the premium. The premium, however, indicates thata balance is due by the United States, which must be eventuallyliquidated in the precious metals; and since, according to the oldtheory, the benefit of a trade consisted in bringing money into
the country, this prejudice introduced the practice of calling theexchange favorable when it indicated a balance to receive, andunfavorable when it indicated one to pay; and the phrases in turntended to maintain the prejudice.

§ 2. Distinction between Variations in the Exchanges
which are self-adjusting and those which can only berectified through Prices.
It might be supposed at first sight that when the exchange isunfavorable, or, in other words, when bills are at a premium,the premium must always amount to a full equivalent for thecost of transmitting money. But a small excess of imports above
exports, or any other small amount of debt to be paid to foreigncountries, does not usually affect the exchanges to the full extent
of the cost and risk of transporting bullion. The length of credit
allowed generally permits, on the part of some of the debtors,
a postponement of payment, and in the mean time the balance
may turn the other way, and restore the equality of debts andcredits without any actual transmission of the metals. And thisis the more likely to happen, as there is a self-adjusting powerin the variations of the exchange itself. Bills are at a premium
because a greater money value has been imported than exported.
But the premium is itself an extra profit to those who export.
Besides the price they obtain for their goods, they draw for
the amount and gain the premium. It is, on the other hand, adiminution of profit to those who import. Besides the price ofthe goods, they have to pay a premium for remittance. So that

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what is called an unfavorable exchange is an encouragement toexport, and a discouragement to import. And if the balance
due is of small amount, and is the consequence of some merely
casual disturbance in the ordinary course of trade, it is soon
liquidated in commodities, and the account adjusted by means ofbills, without the transmission of any bullion. Not so, however,when the excess of imports above exports, which has made theexchange unfavorable, arises from a permanent cause. In thatcase, what disturbed the equilibrium must have been the stateof prices, and it can only be restored by acting on prices. It is
impossible that prices should be such as to invite to an excess ofimports, and yet that the exports should be kept permanently up
to the imports by the extra profit on exportation derived from thepremium on bills; for, if the exports were kept up to the imports,bills would not be at a premium, and the extra profit would notexist. It is through the prices of commodities that the correction
must be administered.
Disturbances, therefore, of the equilibrium of imports andexports, and consequent disturbances of the exchange, may beconsidered as of two classes: the one casual or accidental,
which, if not on too large a scale, correct themselves throughthe premium on bills, without any transmission of the precious
metals; the other arising from the general state of prices, which
can not be corrected without the subtraction of actual moneyfrom the circulation of one of the countries, or an annihilation of
credit equivalent to it.
It remains to observe that the exchanges do not depend on thebalance of debts and credits with each country separately, butwith all countries taken together. The United States may owe abalance of payments to England; but it does not follow that theexchange with England will be against the United States, and thatbills on England will be at a premium; because a balance may
be due to the United States from Holland or Hamburg, and she
may pay her debts to England with bills on those places; which

483
is technically called arbitration of exchange. There is some little
additional expense, partly commission and partly loss of interestin settling debts in this circuitous manner, and to the extent ofthat small difference the exchange with one country may vary
apart from that with others.
A common use of bills of exchange is that by which, whenthree countries are concerned, two of them may strike abalance through the third, if both countries have dealings withthat third country. New York merchants may buy of China,
but China may not be buying of New York, although both
may have dealings with London.

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A, we will suppose, is a buyer of £1,000 worth of tea
from F, in Hong-Kong; B is an exporter of wheat (£1,000)
to C in London; D has sent £1,000 worth of cotton goods to
E in Hong-Kong. A can now pay F through London without
the transmission of coin. A buys B's claim on C for £1,000,
and sends it to F. E wishes to pay D in London for the cotton
goods he bought of him; therefore, he buys from F for £1,000
the claim he now holds (i.e., a bill of exchange on London)
against C for £1,000. E sends it to D, and, when D collects itfrom C, the whole circle of exchanges is completed without
the transmission of the precious metals.

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Chapter XVII. Of The Distribution Of The
Precious Metals Through The Commercial
World.

§ 1. The substitution of money for barter makes nodifference in exports and imports, nor in the Law ofinternational Values.
Having now examined the mechanism by which the commercial
transactions between nations are actually conducted, we havenext to inquire whether this mode of conducting them makes
any difference in the conclusions respecting international values,
which we previously arrived at on the hypothesis of barter.
The nearest analogy would lead us to presume the negative.
We did not find that the intervention of money and its substitutes
made any difference in the law of value as applied to adjacentplaces. Things which would have been equal in value if themode of exchange had been by barter are worth equal sums ofmoney. The introduction of money is a mere addition of one
more commodity, of which the value is regulated by the samelaws as that of all other commodities. We shall not be surprised,
therefore, if we find that international values also are determinedby the same causes under a money and bill system as they would
be under a system of barter, and that money has little to do in
the matter, except to furnish a convenient mode of comparing
values.
All interchange is, in substance and effect, barter; whoever
sells commodities for money, and with that money buys othergoods, really buys those goods with his own commodities. And
so of nations: their trade is a mere exchange of exports for

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imports; and, whether money is employed or not, things are onlyin their permanent state when the exports and imports exactly
pay for each other. When this is the case, equal sums of money
are due from each country to the other, the debts are settled bybills, and there is no balance to be paid in the precious metals.
The trade is in a state like that which is called in mechanics a
condition of stable equilibrium.
But the process by which things are brought back to this state
when they happen to deviate from it is, at least outwardly, notthe same in a barter system and in a money system. Under
the first, the country which wants more imports than its exports
will pay for must offer its exports at a cheaper rate, as the solemeans of creating a demand for them sufficient to re-establish
the equilibrium. When money is used, the country seems to
do a thing totally different. She takes the additional imports atthe same price as before, and, as she exports no equivalent, thebalance of payments turns against her; the exchange becomes
unfavorable, and the difference has to be paid in money. This is,in appearance, a very distinct operation from the former. Let us
see if it differs in its essence, or only in its mechanism.
Let the country which has the balance to pay be the UnitedStates,276 and the country which receives it, England. By thistransmission of the precious metals, the quantity of the currency
is diminished in the United States, and increased in England.
This I am at liberty to assume. We are now supposing that there
is an excess of imports over exports, arising from the fact thatthe equation of international demand is not yet established: that
there is at the ordinary prices a permanent demand in the UnitedStates for more English goods than the American goods requiredin England at the ordinary prices will pay for. When this is
the case, if a change were not made in the prices, there would276

I have changed the names of the countries in the illustrations contained inthis chapter, but have not further altered the language beyond the occasionalchange of a pronoun.

487
be a perpetually renewed balance to be paid in money. The
imports require to be permanently diminished, or the exports to
be increased, which can only be accomplished through prices;and hence, even if the balances are at first paid from hoards, orby the exportation of bullion, they will reach the circulation atlast, for, until they do, nothing can stop the drain.
When, therefore, the state of prices is such that the equationof international demand can not establish itself, the country
requiring more imports than can be paid for by the exports, it isa sign that the country has more of the precious metals, or theirsubstitutes, in circulation, than can permanently circulate, andmust necessarily part with some of them before the balance canbe restored. The currency is accordingly contracted: prices fall,and, among the rest, the prices of exportable articles; for which,accordingly, there arises, in foreign countries, a greater demand:
while imported commodities have possibly risen in price, fromthe influx of money into foreign countries, and at all events
have not participated in the general fall. But, until the increased
cheapness of American goods induces foreign countries to take agreater pecuniary value, or until the increased dearness (positive
or comparative) of foreign goods makes the United States take aless pecuniary value, the exports of the United States will be nonearer to paying for the imports than before, and the stream of the
precious metals which had begun to flow out of the United States
will still flow on. This efflux will continue until the fall of prices
in the United States brings within reach of the foreign market
some commodity which the United States did not previously send
thither; or, until the reduced price of the things which she did
send has forced a demand abroad for a sufficient quantity to pay
for the imports, aided perhaps by a reduction of the American
demand for foreign goods, through their enhanced price, either
positive or comparative.
Now, this is the very process which took place on our original
supposition of barter. Not only, therefore, does the trade between

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nations tend to the same equilibrium between exports and imports,
whether money is employed or not, but the means by which thisequilibrium is established are essentially the same. The country
whose exports are not sufficient to pay for her imports offers
them on cheaper terms, until she succeeds in forcing the necessary
demand: in other words, the equation of international demand,
under a money system as well as under a barter system, is thelaw of international trade. Every country exports and imports thevery same things, and in the very same quantity, under the one
system as under the other. In a barter system, the trade gravitatesto the point at which the sum of the imports exactly exchanges
for the sum of the exports: in a money system, it gravitates to thepoint at which the sum of the imports and the sum of the exports
exchange for the same quantity of money. And, since things
which are equal to the same thing are equal to one another, theexports and imports which are equal in money price would, if
money were not used, precisely exchange for one another.277
277
The subjoined extract from the separate essay [“Some Unsettled Questionsof Political Economy”] previously referred to will give some assistance infollowing the course of the phenomena. It is adapted to the imaginary caseused for illustration throughout that essay, the case of a trade between Englandand Germany in cloth and linen.
“We may, at first, make whatever supposition we will with respect to thevalue of money. Let us suppose, therefore, that, before the opening of the trade,the price of cloth is the same in both countries, namely, six shillings per yard.
As ten yards of cloth were supposed to exchange in England for fifteen yardsof linen, in Germany for twenty, we must suppose that linen is sold in Englandat four shillings per yard, in Germany at three. Cost of carriage and importer's
profit are left, as before, out of consideration.
“In this state of prices, cloth, it is evident, can not yet be exported fromEngland into Germany; but linen can be imported from Germany into England.
It will be so; and, in the first instance, the linen will be paid for in money.
“The efflux of money from England and its influx into Germany will raisemoney prices in the latter country, and lower them in the former. Linen willrise in Germany above three shillings per yard, and cloth above six shillings.
Linen in England, being imported from Germany, will (since cost of carriage
is not reckoned) sink to the same price as in that country, while cloth will fall§ 2. The preceding Theorem further illustrated.

489

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§ 2. The preceding Theorem further illustrated.
Let us proceed to [examine] to what extent the benefit of
an improvement in the production of an exportable article isparticipated in by the countries importing it.
The improvement may either consist in the cheapening of somearticle which was already a staple production of the country, orin the establishment of some new branch of industry, or of someprocess rendering an article exportable which had not till thenbeen exported at all. It will be convenient to begin with the caseof a new export, as being somewhat the simpler of the two.
The first effect is that the article falls in price, and a demandarises for it abroad. This new exportation disturbs the balance,“In England, on the contrary, general money-prices have fallen. Linen,
however, has fallen more than the rest, having been lowered in price byimportation from a country where it was cheaper; whereas the others havefallen only from the consequent efflux of money. Notwithstanding, therefore,
the general fall of money-prices, the English producers will be exactly as they
were in all other respects, while they will gain as purchasers of linen.
“The greater the efflux of money required to restore the equilibrium, thegreater will be the gain of Germany, both by the fall of cloth and by the rise ofher general prices. The less the efflux of money requisite, the greater will be thegain of England; because the price of linen will continue lower, and her generalprices will not be reduced so much. It must not, however, be imagined thathigh money-prices are a good, and low money-prices an evil, in themselves.
But, the higher the general money-prices in any country, the greater will bethat country's means of purchasing those commodities, which, being imported
from abroad, are independent of the causes which keep prices high at home.”“In practice, the cloth and the linen would not, as here supposed, be at thesame price in England and in Germany: each would be dearer in money-pricein the country which imported than in that which produced it, by the amount of
the cost of carriage, together with the ordinary profit on the importer's capitalfor the average length of time which elapsed before the commodity could be
disposed of. But it does not follow that each country pays the cost of carriage of

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turns the exchanges, money flows into the country (which weshall suppose to be the United States), and continues to flow
until prices rise. This higher range of prices will somewhat checkthe demand in foreign countries for the new article of export;
and will diminish the demand which existed abroad for the otherthings which the United States was in the habit of exporting.
The exports will thus be diminished; while at the same time
the American public, having more money, will have a greater
power of purchasing foreign commodities. If they make use ofthis increased power of purchase, there will be an increase ofimports; and by this, and the check to exportation, the equilibriumof imports and exports will be restored. The result to foreigncountries will be, that they have to pay dearer than before for
their other imports, and obtain the new commodity cheaper than
before, but not so much cheaper as the United States herself does.
I say this, being well aware that the article would be actually at thelinen did not diminish very rapidly the demand for it in England, much money
must pass before the equilibrium is restored; cloth would fall very much, andlinen would rise, until England, perhaps, had to pay nearly as much for it as
when she produced it for herself. But, if, on the contrary, the fall of clothcaused a very rapid increase of the demand for it in Germany, and the rise oflinen in Germany reduced very rapidly the demand in England from what it
was under the influence of the first cheapness produced by the opening of the
trade, the cloth would very soon suffice to pay for the linen, little money would
pass between the two countries, and England would derive a large portion of
the benefit of the trade. We have thus arrived at precisely the same conclusion,in supposing the employment of money, which we found to hold under the
supposition of barter.
“In what shape the benefit accrues to the two nations from the trade is clear
enough. Germany, before the commencement of the trade, paid six shillings per
yard for broadcloth; she now obtains it at a lower price. This, however, is not
the whole of her advantage. As the money-prices of all her other commodities
have risen, the money-incomes of all her producers have increased. This is
no advantage to them in buying from each other, because the price of what
they buy has risen in the same ratio with their means of paying for it: but it isan advantage to them in buying anything which has not risen, and, still more,anything which has fallen. They, therefore, benefit as consumers of cloth, not§ 2. The preceding Theorem further illustrated.

491

very same price (cost of carriage excepted) in the United Statesand in other countries. The cheapness, however, of the article
is not measured solely by the money-price, but by that pricecompared with the money-incomes of the consumers. The priceis the same to the American and to the foreign consumers; but
the former pay that price from money-incomes which have been
increased by the new distribution of the precious metals; while thelatter have had their money-incomes probably diminished by thesame cause. The trade, therefore, has not imparted to the foreign
consumer the whole, but only a portion, of the benefit which theAmerican consumer has derived from the improvement; while
the United States has also benefited in the prices of foreigncommodities. Thus, then, any industrial improvement whichleads to the opening of a new branch of export trade benefitsa country not only by the cheapness of the article in which the
improvement has taken place, but by a general cheapening of allimported products.
merely to the extent to which cloth has fallen, but also to the extent to which
other prices have risen. Suppose that this is one tenth. The same proportion of
their money-incomes as before will suffice to supply their other wants; and theremainder, being increased one tenth in amount, will enable them to purchase
one tenth more cloth than before, even though cloth had not fallen: but it has
fallen; so that they are doubly gainers. They purchase the same quantity withless money, and have more to expend upon their other wants.
the commodity it imports; for the addition of this item to the price may operate
as a greater check to demand on one side than on the other; and the equationof international demand, and consequent equilibrium of payments, may not be
maintained. Money would then flow out of one country into the other, until,in the manner already illustrated, the equilibrium was restored: and, when thiswas effected, one country would be paying more than its own cost of carriage,
and the other less.”—MILL{FNS.
below six shillings. As soon as the price of cloth is lower in England than inGermany, it will begin to be exported, and the price of cloth in Germany will
fall to what it is in England. As long as the cloth exported does not suffice
to pay for the linen imported, money will continue to flow from England into
Germany, and prices generally will continue to fall in England and rise inGermany.
“By the fall, however, of cloth in England, cloth will fall in Germany also,

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Let us now change the hypothesis, and suppose that the
improvement, instead of creating a new export from the UnitedStates, cheapens an existing one. Let the commodity in which
there is an improvement be [cotton] cloth. The first effect of
the improvement is that its price falls, and there is an increased
demand for it in the foreign market. But this demand is of
uncertain amount. Suppose the foreign consumers to increase
their purchases in the exact ratio of the cheapness, or, in otherwords, to lay out in cloth the same sum of money as before;
the same aggregate payment as before will be due from foreigncountries to the United States; the equilibrium of exports andimports will remain undisturbed, and foreigners will obtain thefull advantage of the increased cheapness of cloth. But if theforeign demand for cloth is of such a character as to increase in agreater ratio than the cheapness, a larger sum than formerly will
be due to the United States for cloth, and when paid will raise
American prices, the price of cloth included; this rise, however,will affect only the foreign purchaser, American incomes being
raised in a corresponding proportion; and the foreign consumer
will thus derive a less advantage than the United States from theimprovement. If, on the contrary, the cheapening of cloth does
not extend the foreign demand for it in a proportional degree, aless sum of debts than before will be due to the United States
for cloth, while there will be the usual sum of debts due fromthe United States to foreign countries; the balance of trade willturn against the United States, money will be exported, prices(that of cloth included) will fall, and cloth will eventually be
and the demand for it will increase. By the rise of linen in Germany, linen mustrise in England also, and the demand for it will diminish. As cloth fell in priceand linen rose, there would be some particular price of both articles at which
the cloth exported and the linen imported would exactly pay for each other.
At this point prices would remain, because money would then cease to moveout of England into Germany. What this point might be would entirely depend
upon the circumstances and inclinations of the purchasers on both sides. If thefall of cloth did not much increase the demand for it in Germany, and the rise of§ 2. The preceding Theorem further illustrated.

493

cheapened to the foreign purchaser in a still greater ratio than the
improvement has cheapened it to the United States. These are thevery conclusions which [would be] deduced on the hypothesis ofbarter.278
The result of the preceding discussion can not be better
summed up than in the words of Ricardo.279 “Gold and silver
having been chosen for the general medium of circulation,
they are, by the competition of commerce, distributed in suchproportions among the different countries of the world as toaccommodate themselves to the natural traffic which would takeplace if no such metals existed, and the trade between countries
were purely a trade of barter.” Of this principle, so fertile inconsequences, previous to which the theory of foreign trade wasan unintelligible chaos, Mr. Ricardo, though he did not pursue
it into its ramifications, was the real originator.
On the principles of trade which we have before explained, thesame rule will apply to the distribution of money in different
parts of the same country, especially of a large country withvarious kinds of production, like the United States. The
medium of exchange will, by the competition of commerce,
be distributed in such proportions among the different partsof the United States, by natural laws, as to accommodate
itself to the number of transactions which would take place
if no such medium existed. For this reason, we find moremoney in the so-called great financial centers, because there
are more exchanges of goods there. In sparsely settled partsof the West there will be less money precisely because there
are fewer transactions than in the older and more settled
districts. So that there could be no worse folly than thefollowing legislation of Congress to distribute the nationalbank circulation: “That $150,000,000 of the entire amount ofcirculating notes authorized to be issued shall be apportioned
278
279

See Book III, Chap. XVIII, § 5, of Mill's original work.
“Principles of Political Economy and Taxation,” third edition, p. 143.

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to associations in the States, in the District of Columbia, andin the Territories, according to representative population”(act of March 3, 1865).

§ 3. The precious metals, as money, are of the same
Value, and distribute themselves according to thesame Law, with the precious metals as a Commodity.

[427]

It is now necessary to inquire in what manner this law of the
distribution of the precious metals by means of the exchanges
affects the exchange value of money itself; and how it tallies withthe law by which we found that the value of money is regulated
when imported as a mere article of merchandise.
The causes which bring money into or carry it out of a country(1) through the exchanges, to restore the equilibrium of trade,
and which thereby raise its value in some countries and lower it
in others, are the very same causes on which the local value ofmoney would depend, if it were never imported except (2) as amerchandise, and never except directly from the mines. Whenthe value of money in a country is permanently lowered (1) [asa medium of exchange] by an influx of it through the balanceof trade, the cause, if it is not diminished cost of production,must be one of those causes which compel a new adjustment,
more favorable to the country, of the equation of international
demand—namely, either an increased demand abroad for her
commodities, or a diminished demand on her part for thoseof foreign countries. Now, an increased foreign demand forthe commodities of a country, or a diminished demand in the
country for imported commodities, are the very causes which,on the general principles of trade, enable a country to purchaseall imports, and consequently (2) the precious metals, at a lower
value. There is, therefore, no contradiction, but the most perfect495
accordance, in the results of the two different modes [(1) asa medium of exchange; and (2) as merchandise] in which theprecious metals may be obtained. When money [as a medium
of exchange] flows from country to country in consequence ofchanges in the international demand for commodities, and by sodoing alters its own local value, it merely realizes, by a more
rapid process, the effect which would otherwise take place more
slowly by an alteration in the relative breadth of the streams bywhich the precious metals [as merchandise] flow into different
regions of the earth from the mining countries. As, therefore, we
before saw that the use of money as a medium of exchange does
not in the least alter the law on which the values of other things,
either in the same country or internationally, depend, so neither
does it alter the law of the value of the precious metals itself;
and there is in the whole doctrine of international values, as now
laid down, a unity and harmony which are a strong collateral
presumption of truth.

§ 4. International payments entering into the“financial account.”
Before closing this discussion, it is fitting to point out in whatmanner and degree the preceding conclusions are affected by theexistence of international payments not originating in commerce,
and for which no equivalent in either money or commodities
is expected or received—such as a tribute, or remittances, orinterest to foreign creditors, or a government expenditure abroad.
To begin with the case of barter. The supposed annual
remittances being made in commodities, and being exports forwhich there is to be no return, it is no longer requisite that theimports and exports should pay for one another; on the contrary,
there must be an annual excess of exports over imports, equal to

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the value of the remittance. If, before the country became liable tothe annual payment, foreign commerce was in its natural state ofequilibrium, it will now be necessary, for the purpose of effecting
the remittances, that foreign countries should be induced to takea greater quantity of exports than before, which can only be done
by offering those exports on cheaper terms, or, in other words,
by paying dearer for foreign commodities. The international
values will so adjust themselves that, either by greater exports
or smaller imports, or both, the requisite excess on the side ofexports will be brought about, and this excess will become thepermanent state. The result is, that a country which makes regular
payments to foreign countries, besides losing what it pays, loses
also something more, by the less advantageous terms on which
it is forced to exchange its productions for foreign commodities.

[429]

The same results follow on the supposition of money.
Commerce being supposed to be in a state of equilibrium
when the obligatory remittances begin, the first remittance isnecessarily made in money. This lowers prices in the remitting
country, and raises them in the receiving. The natural effectis, that more commodities are exported than before, and fewer
imported, and that, on the score of commerce alone, a balance ofmoney will be constantly due from the receiving to the paying
country. When the debt thus annually due to the tributary country
becomes equal to the annual tribute or other regular payment
due from it, no further transmission of money takes place; theequilibrium of exports and imports will no longer exist, but thatof payments will; the exchange will be at par, the two debts
will be set off against one another, and the tribute or remittancewill be virtually paid in goods. The result to the interests of thetwo countries will be as already pointed out—the paying country
will give a higher price for all that it buys from the receiving
country, while the latter, besides receiving the tribute, obtains
the exportable produce of the tributary country at a lower price.

497
It has been seen, as in Chart No. XIII, that, considering theexports and imports merely as merchandise, there is, in fact,
no actual equilibrium at any given time in accordance withthe equation of International Demand. Another element, the“financial account” between the United States and foreigncountries, must be considered before we can know all thefactors necessary to bring about the equation. If we had beenborrowing largely of England, Holland, and Germany, we
should owe a regular annual sum as interest, and our exports
must, as a rule, be exactly that much more (under right andnormal conditions) than the imports. Or, take another case, if
capital is borrowed in Europe for railways in the United States,
this capital generally comes over in the form of imports ofvarious kinds; but, if our exports are not sufficient at once tobalance the increased imports, we go in debt for a time—or,in other words, in order to establish the balance, we send
United States securities abroad instead of actual exports. This
shipment of securities is not seen and recorded as among theexports; and so we find a period, like that during and after thewar, from 1862 to 1873, of a vast excess of imports. Since
1873 the country has been practically paying the indebtedness
incurred in the former period; and there has been a vast excess
of exports over imports, and an apparent discrepancy in theequilibrium. But our government bonds and other securities
have been coming back to us, producing a return current tobalance the excessive exports.280 In brief, the use of securities
and various forms of indebtedness permits the period of actual
payment to be deferred, so that an excess of imports at one
time may be offset by an excess of exports at another, andgenerally a later, time. Moreover, the large expenses ofpeople traveling in Europe will require us to remit abroad in
the form of exports more than would ordinarily balance ourimports by the amount spent by the travelers. The financial
280

For an exceedingly good study on the conditions of our foreign trade down
to 1873, and a prophecy of the panic of 1873, see Cairnes, “Leading Principles,”pp. 364-374.

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operations, therefore, between the United States and foreigncountries, must be well considered in striking the equation
between our exports and imports. As formulated by Mr.
Cairnes,281 the Equation of International Demand should bestated more broadly, as follows: “The state of international
demand which results in commercial equilibrium is realized
when the reciprocal demand of trading countries producessuch a relation of exports and imports among them as enables
each country by means of her exports to discharge all her
foreign liabilities.” If we were a great lending instead ofa great borrowing country, we should have, as a rule, apermanent excess of imports.

[430]

281

“Leading Principles,” p. 357.

Chapter XVIII. Influence Of The Currency
On The Exchanges And On Foreign Trade.

§ 1. Variations in the exchange, which originate in
the Currency.
In our inquiry into the laws of international trade, we commenced
with the principles which determine international exchanges andinternational values on the hypothesis of barter. We next showedthat the introduction of money, as a medium of exchange,
makes no difference in the laws of exchanges and of values
between country and country, no more than between individual
and individual: since the precious metals, under the influenceof those same laws, distribute themselves in such proportions
among the different countries of the world as to allow the verysame exchanges to go on, and at the same values, as would be
the case under a system of barter. We lastly considered how thevalue of money itself is affected by those alterations in the stateof trade which arise from alterations either in the demand andsupply of commodities or in their cost of production. It remains
to consider the alterations in the state of trade which originate
not in commodities but in money.
Gold and silver may vary like other things, though they are
not so likely to vary as other things in their cost of production.
The demand for them in foreign countries may also vary. It may
increase by augmented employment of the metals for purposesof art and ornament, or because the increase of production
and of transactions has created a greater amount of business to
be done by the circulating medium. It may diminish, for the
opposite reasons; or, from the extension of the economizing
expedients by which the use of metallic money is partially

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dispensed with. These changes act upon the trade between othercountries and the mining countries, and upon the value of the
precious metals, according to the general laws of the value ofimported commodities: which have been set forth in the previous
chapters with sufficient fullness.
What I propose to examine in the present chapter is not
those circumstances affecting money which alter the permanentconditions of its value, but the effects produced on international
trade by casual or temporary variations in the value of money,
which have no connection with any causes affecting its permanent
value.

§ 2. Effect of a sudden increase of a metallic
Currency, or of the sudden creation of Bank-Notes orother substitutes for Money.
Let us suppose in any country a circulating medium purely
metallic, and a sudden casual increase made to it; for example,
by bringing into circulation hoards of treasure, which had been
concealed in a previous period of foreign invasion or internal
disorder. The natural effect would be a rise of prices. This
would check exports and encourage imports; the imports would
exceed the exports, the exchanges would become unfavorable,
and a newly acquired stock of money would diffuse itself over all
countries with which the supposed country carried on trade, andfrom them, progressively, through all parts of the commercial
world. The money which thus overflowed would spread itself
to an equal depth over all commercial countries. For it would
go on flowing until the exports and imports again balanced one
another; and this (as no change is supposed in the permanentcircumstances of international demand) could only be when themoney had diffused itself so equally that prices had risen in

501
the same ratio in all countries, so that the alteration of pricewould be for all practical purposes ineffective, and the exports
and imports, though at a higher money valuation, would be
exactly the same as they were originally. This diminished valueof money throughout the world (at least if the diminution wasconsiderable) would cause a suspension, or at least a diminution,of the annual supply from the mines, since the metal would
no longer command a value equivalent to its highest cost of
production. The annual waste would, therefore, not be fully madeup, and the usual causes of destruction would gradually reduce theaggregate quantity of the precious metals to its former amount;after which their production would recommence on its former
scale. The discovery of the treasure would thus produce only
temporary effects; namely, a brief disturbance of international
trade until the treasure had disseminated itself through the world,
and then a temporary depression in the value of the metal belowthat which corresponds to the cost of producing or of obtaining it;
which depression would gradually be corrected by a temporarily
diminished production in the producing countries and importationin the importing countries.
The same effects which would thus arise from the discovery
of a treasure accompany the process by which bank-notes, or
any of the other substitutes for money, take the place of the
precious metals. Suppose282 that the United States possessed acurrency, wholly metallic, of $200,000,000, and that suddenly$200,000,000 of bank-notes were sent into circulation. If thesewere issued by bankers, they would be employed in loans, or in
the purchase of securities, and would therefore create a sudden
fall in the rate of interest, which would probably send a greatpart of the $200,000,000 of gold out of the country as capital, toseek a higher rate of interest elsewhere, before there had beentime for any action on prices. But we will suppose that the notes
282

The illustrations in this chapter have also been changed, but only so far as
to make them apply to the United States.

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are not issued by bankers, or money-lenders of any kind, but
by manufacturers, in the payment of wages and the purchaseof materials, or by the Government [as, e.g., greenbacks] in its
ordinary expenses, so that the whole amount would be rapidly
carried into the markets for commodities. The following would
be the natural order of consequences: All prices would rise
greatly. Exportation would almost cease; importation would be
prodigiously stimulated. A great balance of payments would
become due, the exchanges would turn against the United States,to the full extent of the cost of exporting money; and the surplus
coin would pour itself rapidly forth, over the various countriesof the world, in the order of their proximity, geographically andcommercially, to the United States.
A study of Chart No. XIV will show how exactly thisdescription fits the case of our country, when the rise of prices
stimulated imports of merchandise (see Chart No. XIII) in
1862, and sent gold out of the country.

The efflux would continue until the currencies of all countries
had come to a level; by which I do not mean, until money
became of the same value everywhere, but until the differenceswere only those which existed before, and which corresponded
to permanent differences in the cost of obtaining it. When the riseof prices had extended itself in an equal degree to all countries,
exports and imports would everywhere revert to what they were atfirst, would balance one another, and the exchanges would return
to par. If such a sum of money as $200,000,000, when spreadover the whole surface of the commercial world, were sufficient
to raise the general level in a perceptible degree, the effect would
be of no long duration. No alteration having occurred in thegeneral conditions under which the metals were procured, either
in the world at large or in any part of it, the reduced value
would no longer be remunerating, and the supply from the mines

503
would cease partially or wholly, until the $200,000,000 wereabsorbed.283
Effects of another kind, however, will have been produced:$200,000,000, which formerly existed in the unproductive formof metallic money, have been converted into what is, or iscapable of becoming, productive capital. This gain is at firstmade by the United States at the expense of other countries,
who have taken her superfluity of this costly and unproductive
article off her hands, giving for it an equivalent value in othercommodities. By degrees the loss is made up to those countries
by diminished influx from the mines, and finally the world
has gained a virtual addition of $200,000,000 to its productive
resources. Adam Smith's illustration, though so well known,
deserves for its extreme aptness to be once more repeated. He
compares the substitution of paper in the room of the precious
metals to the construction of a highway through the air, by which
the ground now occupied by roads would become available for
agriculture. As in that case a portion of the soil, so in this a part of
the accumulated wealth of the country, would be relieved from afunction in which it was only employed in rendering other soils
and capitals productive, and would itself become applicable toproduction; the office it previously fulfilled being equally welldischarged by a medium which costs nothing.
The value saved to the community by thus dispensing withmetallic money is a clear gain to those who provide the substitute.
They have the use of $200,000,000 of circulating medium which283

I am here supposing a state of things in which gold and silver mining area permanent branch of industry, carried on under known conditions; and not
the present state of uncertainty, in which gold-gathering is a game of chance,
prosecuted (for the present) in the spirit of an adventure, not in that of aregular industrial pursuit.—MILL.{FNS It is, however, worth recalling thatgold and silver mining have not been—for large effects on the value of themetals—anything like a permanent branch of industry, but that, in the main,
great additions have been obtained suddenly and by chance discoveries.—J. L.
L.

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have cost them only the expense of an engraver's plate. If they
employ this accession to their fortunes as productive capital, theproduce of the country is increased and the community benefited,as much as by any other capital of equal amount. Whether it isso employed or not depends, in some degree, upon the mode ofissuing it. If issued by the Government, and employed in paying
off debt, it would probably become productive capital. The
Government, however, may prefer employing this extraordinary
resource in its ordinary expenses; may squander it uselessly, or
make it a mere temporary substitute for taxation to an equivalentamount; in which last case the amount is saved by the taxpayers at large, who either add it to their capital or spend it asincome. When [a part of the] paper currency is supplied, as inour own country, by banking companies, the amount is almost
wholly turned into productive capital; for the issuers, being at all
times liable to be called upon to refund the value, are under thestrongest inducements not to squander it, and the only cases inwhich it is not forthcoming are cases of fraud or mismanagement.
A banker's profession being that of a money-lender, his issue
of notes is a simple extension of his ordinary occupation. He
lends the amount to farmers, manufacturers, or dealers, who
employ it in their several businesses. So employed, it yields,
like any other capital, wages of labor, and profits of stock. The
profit is shared between the banker, who receives interest, anda succession of borrowers, mostly for short periods, who, after
paying the interest, gain a profit in addition, or a convenienceequivalent to profit. The capital itself in the long run becomesentirely wages, and, when replaced by the sale of the produce,
becomes wages again; thus affording a perpetual fund, of thevalue of $200,000,000, for the maintenance of productive labor,
and increasing the annual produce of the country by all that canbe produced through the means of a capital of that value. To thisgain must be added a further saving to the country, of the annual
supply of the precious metals necessary for repairing the wear

505
and tear, and other waste, of a metallic currency.
The substitution, therefore, of paper for the precious metals
should always be carried as far as is consistent with safety,
no greater amount of metallic currency being retained than isnecessary to maintain, both in fact and in public belief, theconvertibility of the paper.
But since gold wanted for exportation is almost invariably
drawn from the reserves of the banks, and is never likely to
be taken directly from the circulation while the banks remain
solvent, the only advantage which can be obtained from retaining
partially a metallic currency for daily purposes is, that the banks
may occasionally replenish their reserves from it.
[436]§ 3. Effect of the increase of an inconvertible paper
Currency. Real and nominal exchange.
When metallic money had been entirely superseded and expelledfrom circulation, by the substitution of an equal amount of banknotes, any attempt to keep a still further quantity of paper incirculation must, if the notes are convertible [into gold], be acomplete failure.
This brings up the whole question at issue between the“Currency Principle” and the “Banking Principle.” The latter,
maintained by Fullerton, Wilson, Price, and Tooke (in his
later writings), held that, if notes were convertible, the valueof notes could not differ from the value of the metal into
which they were convertible; while the former, advocated by
Lord Overstone, G. W. Norman, Colonel Torrens, Tooke (inhis earlier writings), and Sir Robert Peel, implied that even a

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convertible paper was liable to over-issues. This last school
brought about the Bank Act of 1844.284[437][A] new issue would again set in motion the same train of
consequences by which the gold coin had already been expelled.
The metals would, as before, be required for exportation, andwould be for that purpose demanded from the banks, to the full
extent of the superfluous notes, which thus could not possibly beretained in circulation. If, indeed, the notes were inconvertible,
there would be no such obstacle to the increase in their quantity.
An inconvertible paper acts in the same way as a convertible,
while there remains any coin for it to supersede; the difference
begins to manifest itself when all the coin is driven fromcirculation (except what may be retained for the convenienceof small change), and the issues still go on increasing. When thepaper begins to exceed in quantity the metallic currency which itsuperseded, prices of course rise; things which were worth $25
in metallic money become worth $30 in inconvertible paper, or
more, as the case may be. But this rise of price will not, as in thecases before examined, stimulate import and discourage export.
The imports and exports are determined by the metallic pricesof things, not by the paper prices; and it is only when the paper
is exchangeable at pleasure for the metals that paper prices andmetallic prices must correspond.
Let us suppose that the United States is the country which has
the depreciated paper. Suppose that some American production
could be bought, while the currency was still metallic, for $25,
and sold in England for $27.50, the difference covering theexpense and risk, and affording a profit to the merchant. On
account of the depreciation, this commodity will now cost in
the United States $30, and can not be sold in England formore than $27.50, and yet it will be exported as before. Why?
Because the $27.50 which the exporter can get for it in England
284

See Walker, “Money,” Chap. XIX.

507
is not depreciated paper, but gold or silver; and since in the
United States bullion has risen in the same proportion with otherthings—if the merchant brings the gold or silver to the UnitedStates, he can sell his $27.50 [in coin] for $33 [in paper], andobtain as before 10 per cent for profit and expenses.
It thus appears that a depreciation of the currency does notaffect the foreign trade of the country: this is carried on precisely
as if the currency maintained its value. But, though the trade is
not affected, the exchanges are. When the imports and exports
are in equilibrium, the exchange, in a metallic currency, would be
at par; a bill on England for the equivalent of $25 would be worth$25. But $25, or the quantity of gold contained in them, having
come to be worth in the United States $30, it follows that a billon England for $25 will be worth $30. When, therefore, the realexchange is at par, there will be a nominal exchange against thecountry of as much per cent as the amount of the depreciation. If
the currency is depreciated 10, 15, or 20 per cent, then in whatever
way the real exchange, arising from the variations of international
debts and credits, may vary, the quoted exchange will always
differ 10, 15, or 20 per cent from it. However high this nominal
premium may be, it has no tendency to send gold out of thecountry for the purpose of drawing a bill against it and profitingby the premium; because the gold so sent must be procured, notfrom the banks and at par, as in the case of a convertible currency,
but in the market, at an advance of price equal to the premium.
In such cases, instead of saying that the exchange is unfavorable,
it would be a more correct representation to say that the par hasaltered, since there is now required a larger quantity of American
currency to be equivalent to the same quantity of foreign. The
exchanges, however, continue to be computed according to themetallic par. The quoted exchanges, therefore, when there isa depreciated currency, are compounded of two elements orfactors: (1) the real exchange, which follows the variations ofinternational payments, and (2) the nominal exchange, which

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varies with the depreciation of the currency, but which, while
there is any depreciation at all, must always be unfavorable.
Since the amount of depreciation is exactly measured by the
degree in which the market price of bullion exceeds the mint
valuation, we have a sure criterion to determine what portionof the quoted exchange, being referable to depreciation, may be
struck off as nominal, the result so corrected expressing the realexchange.

[439]

The same disturbance of the exchanges and of international
trade which is produced by an increased issue of convertiblebank-notes is in like manner produced by those extensions ofcredit which, as was so fully shown in a preceding chapter,
have the same effect on prices as an increase of the currency.
Whenever circumstances have given such an impulse to the spiritof speculation as to occasion a great increase of purchases on
credit, money prices rise, just as much as they would have risen
if each person who so buys on credit had bought with money.
All the effects, therefore, must be similar. As a consequence ofhigh prices, exportation is checked and importation stimulated;though in fact the increase of importation seldom waits for therise of prices which is the consequence of speculation, inasmuch
as some of the great articles of import are usually among thethings in which speculative overtrading first shows itself. Thereis, therefore, in such periods, usually a great excess of imports
over exports; and, when the time comes at which these mustbe paid for, the exchanges become unfavorable and gold flows
out of the country. This efflux of gold takes effect on prices[by withdrawing gold from the reserves of the banks, and so
by stopping loans and the use of credit, or purchasing power]:its effect is to make them recoil downward. The recoil once
begun, generally becomes a total rout, and the unusual extensionof credit is rapidly exchanged for an unusual contraction of it.
Accordingly, when credit has been imprudently stretched, and thespeculative spirit carried to excess, the turn of the exchanges and509
consequent pressure on the banks to obtain gold for exportation
are generally the proximate cause of the catastrophe.
A glance at Chart No. XIII will give illustration to thesituation here described. After the war, and until 1873, while
the United States was under the influence of high prices anda speculation which has been seldom equaled in our history,
the resulting great excess of imports became very striking.
It was an unhealthy and abnormal condition of trade. The
sudden reversal of the trade by the crisis in 1873 is equallystriking, and, as prices fell, exports began to increase. The
effect on international trade of a collapse of credit is thus
clearly marked by the lines on the chart.
[440]

Chapter XIX. Of The Rate Of Interest.

§ 1. The Rate of Interest depends on the Demand andSupply of Loans.

[441]

The two topics of Currency and Loans, though in themselves
distinct, are so intimately blended in the phenomena of what iscalled the money market, that it is impossible to understand theone without the other, and in many minds the two subjects are
mixed up in the most inextricable confusion.
In the preceding book285 we defined the relation in whichinterest stands to profit. We found that the gross profit of capitalmight be distinguished into three parts, which are respectively
the remuneration for risk, for trouble, and for the capital itself,
and may be termed insurance, wages of superintendence, andinterest. After making compensation for risk, that is, after
covering the average losses to which capital is exposed either
by the general circumstances of society or by the hazards ofthe particular employment, there remains a surplus, which partly
goes to repay the owner of the capital for his abstinence, andpartly the employer of it for his time and trouble. How muchgoes to the one and how much to the other is shown by theamount of the remuneration which, when the two functions are
separated, the owner of capital can obtain from the employer for
its use. This is evidently a question of demand and supply. Nor
have demand and supply any different meaning or effect in thiscase from what they have in all others. The rate of interest will
be such as to equalize the demand for loans with the supply ofthem. It will be such that, exactly as much as some people aredesirous to borrow at that rate, others shall be willing to lend. If
285

Book II, Chap. V, § 1.

511
there is more offered than demanded, interest will fall; if more isdemanded than offered, it will rise; and in both cases, to the point
at which the equation of supply and demand is re-established.
The desire to borrow and the willingness to lend are more orless influenced by every circumstance which affects the state orprospects of industry or commerce, either generally or in any of
their branches. The rate of interest, therefore, on good security,
which alone we have here to consider (for interest in which
considerations of risk bear a part may swell to any amount), is
seldom, in the great centers of money transactions, precisely thesame for two days together; as is shown by the never-ceasing
variations in the quoted prices of the funds and other negotiablesecurities. Nevertheless, there must be, as in other cases ofvalue, some rate which (in the language of Adam Smith andRicardo) may be called the natural rate; some rate about which
the market rate oscillates, and to which it always tends to return.
This rate partly depends on the amount of accumulation goingon in the hands of persons who can not themselves attend to theemployment of their savings, and partly on the comparative taste
existing in the community for the active pursuits of industry, orfor the leisure, ease, and independence of an annuitant.

§ 2. Circumstances which Determine the Permanent
Demand and Supply of Loans.
In [ordinary] circumstances, the more thriving producers andtraders have their capital fully employed, and many are able totransact business to a considerably greater extent than they havecapital for. These are naturally borrowers: and the amount which
they desire to borrow, and can give security for, constitutes thedemand for loans on account of productive employment. To
these must be added the loans required by Government, and by

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land-owners, or other unproductive consumers who have good
security to give. This constitutes the mass of loans for which
there is an habitual demand.
Now, it is conceivable that there might exist, in the handsof persons disinclined or disqualified for engaging personally inbusiness, (1) a mass of capital equal to, and even exceeding,this demand. In that case there would be an habitual excess ofcompetition on the part of lenders, and the rate of interest would
bear a low proportion to the rate of profit. Interest would beforced down to the point which would either tempt borrowers
to take a greater amount of loans than they had a reasonable
expectation of being able to employ in their business, or would
so discourage a portion of the lenders as to make them either
forbear to accumulate or endeavor to increase their income byengaging in business on their own account, and incurring therisks, if not the labors, of industrial employment.
The low rates of interest, rather, tempt people to take some
additional risk, and enter into investments which offer a higher
rate of dividends; so that a period of low interest is a time
when speculative enterprises find victims, and then by bad andworthless investments much of the loanable funds is actually
lost; thereby reducing the total quantity of loans more nearly
to that demand which will give an ordinary rate of interest.

(2.) On the other hand, the capital owned by persons who
prefer lending it at interest, or whose avocations prevent themfrom personally superintending its employment, may be short of
the habitual demand for loans. It may be in great part absorbedby the investments afforded by the public debt and by mortgages,
and the remainder may not be sufficient to supply the wants ofcommerce. If so, the rate of interest will be raised so high as
in some way to re-establish the equilibrium. When there is onlya small difference between interest and profit, many borrowers
may no longer be willing to increase their responsibilities and513
involve their credit for so small a remuneration: or some, who
would otherwise have engaged in business, may prefer leisure,and become lenders instead of borrowers: or others, under the
inducement of high interest and easy investment for their capital,
may retire from business earlier, and with smaller fortunes, thanthey otherwise would have done.
Or, lastly, instead of [capital] being afforded by persons notin business, the affording it may itself become a business. A
portion of the capital employed in trade may be supplied bya class of professional money-lenders. These money-lenders,
however, must have more than a mere interest; they must havethe ordinary rate of profit on their capital, risk and all othercircumstances being allowed for. [For] it can never answer, toany one who borrows for the purposes of his business, to pay afull profit for capital from which he will only derive a full profit:and money-lending, as an employment, for the regular supplyof trade, can not, therefore, be carried on except by persons
who, in addition to their own capital, can lend their credit, or, inother words, the capital of other people. A bank which lends its
notes lends capital which it borrows from the community, andfor which it pays no interest.
Of late years, however, banks are generally not permitted toissue notes on their simple credit. That privilege has been so
often abused in this country that now, in the national banking
system, a separate part of the resources are set aside for the
security of the circulating notes (as is also true of the Bankof England since 1844). It is not generally true, then, thatbanks now create the means to make loans by issuing notesby which they borrow capital from the community without
paying interest. They do, however, depend almost entirely on
deposits.

A bank of deposit lends capital which it collects from thecommunity in small parcels, sometimes without paying any

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interest, and, if it does pay interest, it still pays much less thanit receives; for the depositors, who in any other way could
mostly obtain for such small balances no interest worth taking
any trouble for, are glad to receive even a little. Having thissubsidiary resource, bankers are enabled to obtain, by lendingat interest, the ordinary rate of profit on their own capital. The
disposable capital deposited in banks, together with the funds
belonging to those who, either from necessity or preference, live
upon the interest of their property, constitute the general loan
fund of the country; and the amount of this aggregate fund,when set against the habitual demands of producers and dealers,
and those of the Government and of unproductive consumers,
determines the permanent or average rate of interest, which must
always be such as to adjust these two amounts to one another.286
But, while the whole of this mass of lent capital takes effect upon
the permanent rate of interest, the fluctuations depend almost
entirely upon the portion which is in the hands of bankers; for it isthat portion almost exclusively which, being lent for short times
only, is continually in the market seeking an investment. The
capital of those who live on the interest of their own fortunes has
generally sought and found some fixed investment, such as the
public funds, mortgages, or the bonds of public companies, whichinvestment, except under peculiar temptations or necessities, is
not changed.

§ 3. Circumstances which Determine theFluctuations.
Fluctuations in the rate of interest arise from variations either inthe demand for loans or in the supply. The supply is liable to286

I do not include in the general loan fund of the country the capitals, large
as they sometimes are, which are habitually employed in speculatively buying
and selling the public funds and other securities.—MILL.{FNS§ 3. Circumstances which Determine the Fluctuations.

515

variation, though less so than the demand. The willingness tolend is greater than usual at the commencement of a period of
speculation, and much less than usual during the revulsion which
follows. In speculative times, money-lenders as well as otherpeople are inclined to extend their business by stretching their
credit; they lend more than usual (just as other classes of dealers
and producers employ more than usual) of capital which does notbelong to them. Accordingly, these are the times when the rateof interest is low; though for this too (as we shall immediatelysee) there are other causes. During the revulsion, on the contrary,interest always rises inordinately, because, while there is a mostpressing need on the part of many persons to borrow, there is a
general disinclination to lend.287
This disinclination, when at its extreme point, is called a panic.
It occurs when a succession of unexpected failures has created in
the mercantile, and sometimes also in the non-mercantile public, ageneral distrust in each other's solvency; disposing every one not
only to refuse fresh credit, except on very onerous terms, but tocall in, if possible, all credit which he has already given. Deposits
are withdrawn from banks; notes are returned on the issuers in
exchange for specie; bankers raise their rate of discount, andwithhold their customary advances; merchants refuse to renew
mercantile bills. At such times the most calamitous consequenceswere formerly experienced from the attempt of the law to prevent
more than a certain limited rate of interest from being given or
taken. Persons who could not borrow at five per cent had to pay,
not six or seven, but ten or fifteen per cent, to compensate thelender for risking the penalties of the law; or had to sell securities
or goods for ready money at a still greater sacrifice.
The pernicious and hurtful custom exists in various Statesin this country of making any interest beyond a certain rate
287

The rate of interest at such crises in New York has several times risen to
400 or 500 per cent per annum.

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illegal. When it is remembered that legitimate business isoften largely done on credit—until the proceeds of goods soldon credit are collected—the rate of interest from day to day isvery important to trade. So, when there is a sudden demand
for loans, a rate higher than the legal one will certainly be
paid, and the law violated, if the getting of a loan is absolutely
necessary to save the borrower from commercial ruin. The
effect of a legal rate is to stop loans at the very time when loans
are most essential to the business public. It would be far betterto adopt such a sliding scale as exists at great European banks,
which allows the rate of interest to rise with the demand. No
one, then, with good security, need want loans if he is willingto pay the high rates; and those not really in need will defer
their demand until the sudden emergency is past. Already in
New York the legal penalty has been removed for loaningat higher than the legal rates when charged upon call-loans;and it has mitigated the extreme fluctuations of the rate ina market when financial necessity is contending against the
law.

[446]

Except at such periods, the amount of capital disposable on
loan is subject to little other variation than that which arises fromthe gradual process of accumulation; which process, however,in the great commercial countries, is sufficiently rapid to accountfor the almost periodical recurrence of these fits of speculation;
since, when a few years have elapsed without a crisis, and no
new and tempting channel for investment has been opened in themean time, there is always found to have occurred in those few
years so large an increase of capital seeking investment as tohave lowered considerably the rate of interest, whether indicatedby the prices of securities or by the rate of discount on bills; andthis diminution of interest tempts the possessors to incur hazards
in hopes of a more considerable return.
The demand for loans varies much more largely than the
supply, and embraces longer cycles of years in its aberrations. A§ 3. Circumstances which Determine the Fluctuations.

517

time of war, for example, is a period of unusual draughts on theloan market. The Government, at such times, generally incurs
new loans, and, as these usually succeed each other rapidly as
long as the war lasts, the general rate of interest is kept higher
in war than in peace, without reference to the rate of profit, andproductive industry is stinted of its usual supplies.
The United States during the late war found that it could notborrow at even six or seven per cent. By receiving depreciatedpaper at par for its bonds it really agreed to pay six gold dollars
on each loan of one hundred dollars in paper (worth, perhaps,at the worst only forty gold dollars), which was equivalent
to fifteen per cent. This high rate was largely due to theweakened credit of the Government; but still it remains truethat the rate was higher because the United States was in themarket as a competitor for large loans. Now the Government
can refund its bonds at three per cent.

Nor does the influence of these loans altogether cease when
the Government ceases to contract others; for those alreadycontracted continue to afford an investment for a greatly increased
amount of the disposable capital of the country, which, if thenational debt were paid off, would be added to the mass ofcapital seeking investment, and (independently of temporary
disturbance) could not but, to some extent, permanently lower
the rate of interest.
The rapid payment of the public debt by the United States,$137,823,253 in 1882-1883, and more than $100,000,000
in 1883-1884, has taken away the former investment forenormous sums of loanable funds, and to the same extent
increased the supply in the market. Without doubt this aids inmaking the present rate of interest a very low one. Whether therate will remain “permanently lower,” however, will depend
upon whether the field of investment in the United States isalready practically occupied. We believe it is not.

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The same effect on interest which is produced by government
loans for war expenditure is produced by the sudden opening of
any new and generally attractive mode of permanent investment.
The only instance of the kind in recent history, on a scalecomparable to that of the war loans, is the absorption of capitalin the construction of railways. This capital must have been
principally drawn from the deposits in banks, or from savings
which would have gone into deposit, and which were destined tobe ultimately employed in buying securities from persons who
would have employed the purchase-money in discounts or otherloans at interest: in either case, it was a draft on the generalloan fund. It is, in fact, evident that, unless savings were madeexpressly to be employed in railway adventure, the amount thus
employed must have been derived either from the actual capitalof persons in business or from capital which would have been
lent to persons in business.

§ 4. The Rate of Interest not really Connected withthe value of Money, but often confounded with it.

[448]

From the preceding considerations it would be seen, even if itwere not otherwise evident, how great an error it is to imagine
that the rate of interest bears any necessary relation to the quantity
or value of the money in circulation. An increase of the currency
has in itself no effect, and is incapable of having any effect, on
the rate of interest. A paper currency issued by Government in
the payment of its ordinary expenses, in however great excess it
may be issued, affects the rate of interest in no manner whatever.
It diminishes, indeed, the power of money to buy commodities,
but not the power of money to buy money. If a hundred dollars
will buy a perpetual annuity of four dollars a year, a depreciation
which makes the hundred dollars worth only half as much as519
before has precisely the same effect on the four dollars, andtherefore can not alter the relation between the two. Unless,indeed, it is known and reckoned upon that the depreciation will
only be temporary; for people certainly might be willing to lend
the depreciated currency on cheaper terms if they expected to be
repaid in money of full value.
In considering the effect produced by the proceedings ofbanks in encouraging the excesses of speculation, an immense
effect is usually attributed to their issues of notes, but until oflate hardly any attention was paid to the management of theirdeposits, though nothing is more certain than that their imprudent
extensions of credit take place more frequently by means of theirdeposits than of their issues. Says Mr. Tooke: “Supposing all thedeposits received by a banker to be in coin, is he not, just as muchas the issuing banker, exposed to the importunity of customers,
whom it may be impolitic to refuse, for loans or discounts, orto be tempted by a high interest; and may he not be induced to
encroach so much upon his deposits as to leave him, under not
improbable circumstances, unable to meet the demands of his
depositors?”
In truth, the most difficult questions of banking center aroundthe functions of discount and deposit. The separation of
the Issue from the Banking Department by the act of 1844,
which renewed the charter of the Bank of England, makes
this perfectly clear. After entirely removing from their effecton credit all influences due to issues, England has had thesame difficulties to encounter as before, which shows that thereal question is concerned with the two essential functions ofbanking—discount and deposit. Since 1844, there have been
the commercial disturbances of 1847, 1857, 1866, and 1873.
Although no expansion of notes, without a corresponding
deposit of specie, is possible.

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Principles Of Political Economy§ 5. The Rate of Interest determines the price of landand of Securities.

[449]

Before quitting the general subject of this chapter, I will make theobvious remark that the rate of interest determines the value andprice of all those salable articles which are desired and bought,
not for themselves, but for the income which they are capableof yielding. The public funds, shares in joint-stock companies,
and all descriptions of securities, are at a high price in proportion
as the rate of interest is low. They are sold at the price which
will give the market rate of interest on the purchase-money,
with allowance for all differences in the risk incurred, or in any
circumstance of convenience.
The price of land, mines, and all other fixed sources of income,depends in like manner on the rate of interest. Land usually sells
at a higher price, in proportion to the income afforded by it,
than the public funds, not only because it is thought, even in[England], to be somewhat more secure, but because ideas ofpower and dignity are associated with its possession. But thesedifferences are constant, or nearly so; and, in the variations ofprice, land follows, cæteris paribus, the permanent (though, ofcourse, not the daily) variations of the rate of interest. Wheninterest is low, land will naturally be dear; when interest is high,land will be cheap.
A lot of land, which fifty years ago gave an annual return of$100, if ten per cent was then the common rate of interest,
would sell for $1,000. If the return from the land remains thesame ($100) to-day, and if the usual rate of interest is now
five per cent, the same piece of land, therefore, would sell for$2,000, since $100 is five per cent of $2,000.
The price of a bond, it may be said, also varies withthe time it has to run. At the same rate of interest, a bondrunning for a long term of years is better for an investment
than one for a short term. The lumberman, who looks at two

521
trees of equal diameter at the base, estimates the total valueof each according to the height of the tree. Then, again, abond running for a short term may be worth less than one
for a long term, even though the first bears a higher rate ofinterest. That is, to resume the illustration, one tree, not risingvery high, although larger at the bottom, may not contain somany square feet as another, with perhaps a less diameter atthe bottom, but which stretches much higher up into the air.
[450]

Chapter XX. Of The Competition Of
Different Countries In The Same Market.

§ 1. Causes which enable one Country to undersell
another.
In the phraseology of the Mercantile System, there is no word of
more frequent recurrence or more perilous import than the wordunderselling. To undersell other countries—not to be undersold
by other countries—were spoken of, and are still very often
spoken of, almost as if they were the sole purposes for which
production and commodities exist.
Nations may, like individual dealers, be competitors, with
opposite interests, in the markets of some commodities, whilein others they are in the more fortunate relation of reciprocal
customers. The benefit of commerce does not consist, as it
was once thought to do, in the commodities sold; but, since
the commodities sold are the means of obtaining those which
are bought, a nation would be cut off from the real advantage
of commerce, the imports, if it could not induce other nations
to take any of its commodities in exchange; and in proportion
as the competition of other countries compels it to offer its
commodities on cheaper terms, on pain of not selling themat all, the imports which it obtains by its foreign trade areprocured at greater cost.

One country (A) can only undersell another (B) in a given
market, to the extent of entirely expelling her from it, on two
conditions: (1) In the first place, she (A) must have a greater
advantage than the second country (B) in the production of thearticle exported by both; meaning by a greater advantage (as523
has been already so fully explained) not absolutely, but incomparison with other commodities; and (2) in the second place,such must be her (A's) relation with the customer-country inrespect to the demand for each other's products, and such theconsequent state of international values, as to give away to thecustomer-country more than the whole advantage possessed by
the rival country (B); otherwise the rival will still be able to holdher ground in the market.
Let us suppose a trade between England and the United States,
in iron and wheat. England being capable of producing ten
cwts. of iron at the same cost as fifteen bushels of wheat,
the United States at the same cost as twenty bushels, and thetwo commodities being exchanged between the two countries(cost of carriage apart) at some intermediate rate, say ten
for seventeen. The United States could not be permanently
undersold in the English market, and expelled from it, unlessby a country (such as India) which offered not merely morethan seventeen, but more than twenty bushels of wheat for ten
cwts. of iron. Short of that, the competition would only oblige
the United States to pay dearer for iron, but would not disable
her from exporting wheat. The country, therefore, which
could undersell the United States, must, in the first place, beable to produce wheat at less cost, compared with iron, thanthe United States herself; and, in the next place, must havesuch a demand for iron, or other English commodities, as
would compel her, even when she became sole occupant of
the market, to give a greater advantage to England than the
United States could give by resigning the whole of hers; togive, for example, twenty-one bushels for ten cwts. For if
not—if, for example, the equation of international demand,
after the United States was excluded, gave a ratio of eighteen
for ten—the United States would be now the underselling
nation; and there would be a point, perhaps nineteen forten, at which both countries would be able to maintain their
ground, and to sell in England enough wheat to pay for the524

Principles Of Political Economy
iron, or other English commodities, for which, on these newly
adjusted terms of interchange, they had a demand. In likemanner, England, as an exporter of iron, could only be driven
from the American market by some rival whose superioradvantages in the production of iron enabled her, and theintensity of whose demand for American produce compelled
her, to offer ten cwts. of iron, not merely for less thanseventeen bushels of wheat, but for less than fifteen. In thatcase, England could no longer carry on the trade without loss;
but, in any case short of this, she would merely be obliged
to give to the United States more iron for less wheat than she
had previously given.288[452]

It thus appears that the alarm of being permanently undersold
may be taken much too easily; may be taken when the thing
really to be anticipated is not the loss of the trade, but theminor inconvenience of carrying it on at a diminished advantage;
an inconvenience chiefly falling on the consumers of foreigncommodities, and not on the producers or sellers of the exported
article. It is no sufficient ground of apprehension to the[American] producers, to find that some other country cansell [wheat] in foreign markets, at some particular time, a trifle
cheaper than they can themselves afford to do in the existing stateof prices in [the United States]. Suppose them to be temporarily
unsold, and their exports diminished; the imports will exceed theexports, there will be a new distribution of the precious metals,
prices will fall, and, as all the money expenses of the [American]
producers will be diminished, they will be able (if the case falls
short of that stated in the preceding paragraph) again to competewith their rivals.
The loss which [the United States] will incur will not fallupon the exporters, but upon those who consume imported
288

In this illustration I have retained as nearly as possible the form of thatgiven by Mr. Mill for the trade between England and Germany in cloth andlinen.

525
commodities; who, with money incomes reduced in amount, will
have to pay the same or even an increased price for all things
produced in foreign countries.
But the business world would regard what was going on under
economic laws as a great and dreaded disaster, if it meantthat prices were to fall, and gold leave the country. Thoseholding large stocks of goods would for that time suffer; andso, at first, it might really happen that “exporters,” in thesense of exporting agents (not the producers, perhaps, of theexportable article), would incur a loss. In the end, of course,
the consumers of imports suffer. But, temporarily, and on theface of it, exporters do lose.

§ 2. High wages do not prevent one Country fromunderselling another.
According to the preceding doctrine, a country can not be
undersold in any commodity, unless the rival country has astronger inducement than itself for devoting its labor and capitalto the production of the commodity; arising from the fact thatby doing so it occasions a greater saving of labor and capital, tobe shared between itself and its customers—a greater increase of
the aggregate produce of the world. The underselling, therefore,
though a loss to the undersold country, is an advantage tothe world at large; the substituted commerce being one which
economizes more of the labor and capital of mankind, and adds
more to their collective wealth, than the commerce supersededby it. The advantage, of course, consists in being able to produce
the commodity of better quality, or with less labor (comparedwith other things); or perhaps not with less labor, but in lesstime; with a less prolonged detention of the capital employed.
This may arise from greater natural advantages (such as soil,

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climate, richness of mines); superior capability, either natural or
acquired, in the laborers; better division of labor, and better tools,
or machinery. But there is no place left in this theory for thecase of lower wages. This, however, in the theories commonly
current, is a favorite cause of underselling. We continually hearof the disadvantage under which the [American] producer labors,
both in foreign markets and even in his own, through the lower
wages paid by his foreign rivals. These lower wages, we are told,
enable, or are always on the point of enabling, them to sell at
lower prices, and to dislodge the [American] manufacturer fromall markets in which he is not artificially protected.

[454]

It will be remembered that, as we have before seen,international trade, in actual practice, depends on comparative
prices within the same country (even though the exporter may
not consciously make a comparison). We send wheat abroad,because it is low in price relatively to certain manufactured
goods; that is, we send the wheat, but we do not send the
manufactured goods. But, so far, this is considering only
the comparative prices in the same country. Yet we shall
fail to realize in actual practice the application of the above
principles, when we use the terms prices and money, if we
do not admit that there is in the matter of underselling acomparison, also, between the absolute price of the goods
in one country and the absolute price of the same goods inthe competing country. For example, wheat is not shipped
to England unless the price is lower here than there. If India
or Morocco were to send wheat into the English market inclose competition with the United States, and the price were
to fall in London, it would mean that, if we continued our
shipments of wheat to England, we must part with our wheat
at a less advantage in the international exchange. In theillustration already used, we must, for example, offer morethan seventeen bushels of wheat for ten cwts. of iron. The
fall in the price of wheat, without any change in that of iron,
implies the necessity of offering a greater quantity of wheat

527
for the same quantity of iron, perhaps nineteen or twenty
bushels for ten cwts. of iron. If the price went so low as
to require twenty-one bushels to pay for ten cwts. of iron,then we should be entirely undersold; and the price here ascompared with the price in London would be an indicationof the fact. So that the comparison of prices here withprices abroad is merely a register of the terms at which ourinternational exchanges are performed; but not the cause of
the existence of the international trade. If the price falls so
low in a foreign market that we can not sell wheat there, it
simply means that we have reached in the exchange ratios thelimit of our comparative advantages in wheat and iron; so that
we are obliged to offer twenty or more bushels of wheat forten cwts. of iron.
But in all this it must be noted that this price must include
the return to capital also, and that it must be equal to the usual
reward for capital in other competing industries, that is, theordinary rate of profit. In exporting wheat from the UnitedStates the capital engaged will insist on getting the rate ofprofit to be found in other occupations to which the capitalcan go, in the United States. Now, the price, if it stands
for the value (which is supposed to be governed by cost of
production in this case), is the sum out of which wages andprofits are paid. If the price were to fall in the foreign market,
then there might not be the means with which to pay the usual
rate of wages and the usual rate of profit also. Then we should
probably hear of complaints by the shippers that there is no
profit in the exportation of wheat, and of a falling off in the
trade. In other words, as the capitalist is the one who manages
the operation, and is the one first affected, the diminution ofadvantage in foreign trade arising from competition, generallyshows itself first in lessened profits. The price, then, is themeans by which we determine whether a certain article gives
us that comparative advantage which will insure a gain frominternational trade.
An exportable article whose price in this country is

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Principles Of Political Economy
low—since it is for this reason selected as an export—is
one whose cost is low. If the cost be low, it means that theindustry is very productive; that the same capital and laborproduce more for their exertion in this than in other industries.
And yet it is precisely in the most productive industries thathigher wages and profits can be, and are, paid. Althougheach article is sold at a low price, the great quantity produced
makes the total sum, or value, out of which the industrial
rewards, profits, and wages, are paid, large. That is, theprice may be very low (lower, also, in direct comparison
with prices abroad) and yet pay the rate of wages and profits
current in this country. Consequently, although wages andprofits may be very high (relatively to older countries) in
those industries of the United States whose productiveness isgreat, yet the very fact of this low cost, and consequently thislow price (where competition is effective), is that which fits
the commodity for exportation. We are, therefore, inevitably
led to a position in which we see that high wages and low
prices naturally go together in an exportable commodity. In
practice, certainly, the high wages do not, by raising the price,
prevent us, by comparing our price with English prices, fromsending goods abroad—because we send goods abroad fromour most productive employments. As an illustration of thisprinciple, it is found that the leading exports of the UnitedStates, in 1883, were cotton, breadstuffs, provisions, tobacco,mineral oils, and wood.
But, since a direct comparison is in practice made between
prices here and prices in England (for example), in orderto determine whether the trade can be a profitable one, weconstantly hear it said that we can not send goods abroad
because our labor is so dear. It need scarcely be observedthat we do not hear this from those engaged in any ofthe extractive industries just mentioned as furnishing large
exports, which are admittedly very productive; it is generally
heard in regard to certain kinds of manufactured goods. The
difficulty arises not with regard to articles in which we have529
the greatest advantage in productiveness, but those in which
we have a less advantage. If the majority of occupations are
so productive as to assure a generally high reward to laborand capital throughout the country, these less advantageously
situated industries—not being so productive as others (either
from lack of skill or good management, or high cost ofmachinery and materials, or peculiarities of climate, or heavy
taxation)—can not pay the usual high reward to labor, and at
the same time get for the capitalist the same high reward he caneverywhere else receive at home. For, at a price low enough towarrant an exportation, the quantity made by a given amountof labor and capital does not yield a total value so great
as is given in the majority of other occupations to the sameamount of labor and capital, and out of which the usual highwages and profits can be paid. The less productiveness of anindustry, compared with other industries in the same country,
then, is the real cause which prevents it from competing withforeign countries consistently with receiving the ordinary rateof profit. It is the high rate of profits as well as the highrate of wages common in the country which prevents sellingabroad. It is absurd to say that it is only high wages: it isjust as much high profits. Of course, if the less productive
industries wish to compete with England, and if they pay—as
we know they must—the high rate of wages due to the generalproductiveness of our country's industries, they must submit
to less profits for the pleasure of having that particular desire.
It is not possible that we should produce everything equallywell here; nor is it possible that England should produce
everything equally well. If we wish to send any goods at
all to England, we must receive some goods from her. In
order to get the gain arising from our productiveness, we must
earnestly wish that England should have some commodity
also in which she has a comparative advantage, in order thatany trade whatever may exist. It is not, however, worth while,in my opinion, to go on in this discussion to consider the
position of those who would shut us off from any and all

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foreign trade.
Our present high wages should be a cause forcongratulation, because they are due to the generally highproductiveness of our resources, or, in other words, due tolow cost; and it is to be hoped that they may long continue
high. We do not seem to be in imminent danger of not having
goods which we can export in quantities which will buy for us
all we may wish to import from abroad. (See Chart No. XIII,
and note the vast increase of exports at the same time thatwages are known to be higher in this country than abroad.) So
long as wages continue high, we may possibly be unwilling tosee gratified that false and ignorant desire which leads somepeople to think that we ought to produce, equally well withany competitor in the world, everything that is made. If, as
was pointed out under the discussion on cost of labor,289 wemust necessarily connect with efficiency of labor all naturaladvantages under which labor works, it is easy to see thathigh wages are entirely consistent with low prices; and thathigh wages do not prevent us to-day from having an hitherto
unequaled export trade. Even if all wages and all profits werelower, it would, however, affect all industries alike, and somewould still be more productive relatively to others, and thesame inequality would remain. If, however, we learn to use
our materials better, use machinery with more effect on thequantity produced, adapt our industries to our climate, get
the raw products more cheaply, free ourselves from excessive
and unreasonable taxation, it would be difficult to say what
commodities we might not be able eventually to manufacture
in competition with the rest of the world. For we have scarcely
ever, as a country, had the advantage of such conditions to
aid us in our foreign trade.

[457]

Mr. Mill now goes on to consider the suggestive factthat wages are higher in England than on the Continent, andyet that the English have no difficulty in underselling their289

Book II, Chap. V, § 5.

531
Continental rivals.

Before examining this opinion on grounds of principle, it isworth while to bestow a moment's consideration upon it as aquestion of fact. Is it true that the wages of manufacturing labor
are lower in foreign countries than in England, in any sense inwhich low wages are an advantage to the capitalist? The artisan
of Ghent or Lyons may earn less wages in a day, but does he
not do less work? Degrees of efficiency considered, does hislabor cost less to his employer? Though wages may be lower
on the Continent, is not the Cost of Labor, which is the realelement in the competition, very nearly the same? That it is so
seems the opinion of competent judges, and is confirmed by thevery little difference in the rate of profit between England andthe Continental countries. But, if so, the opinion is absurd that
English producers can be undersold by their Continental rivals
from this cause. It is only in America that the supposition is
prima facie admissible. In America wages are much higher thanin England, if we mean by wages the daily earnings of a laborer;
but the productive power of American labor is so great—its
efficiency, combined with the favorable circumstances in which
it is exerted, makes it worth so much to the purchaser—that the
Cost of Labor is lower in America than in England; as is provedby the fact that the general rate of profits and of interest is verymuch higher.

§ 3. Low wages enable a Country to undersell
another, when Peculiar to certain branches ofIndustry.
But is it true that low wages, even in the sense of low Cost ofLabor, enable a country to sell cheaper in the foreign market?

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I mean, of course, low wages which are common to the whole
productive industry of the country.

If wages, in any of the departments of industry which supply
exports, are kept, artificially or by some accidental cause, below
the general rate of wages in the country, this is a real advantage inthe foreign market. It lessens the comparative cost of productionof those articles in relation to others, and has the same effect as if
their production required so much less labor. Take, for instance,
the case of the United States in respect to certain commodities. In
that country tobacco and cotton, two great articles of export, areproduced by slave-labor, while food and manufactures generally
are produced by free laborers, who either work on their own
account or are paid by wages. In spite of the inferior efficiency
of slave-labor, there can be no reasonable doubt that, in a country
where the wages of free labor are so high, the work executed byslaves is a better bargain to the capitalist. To whatever extent it
is so, this smaller cost of labor, being not general, but limited
to those employments, is just as much a cause of cheapness inthe products, both in the home and in the foreign market, as if
they had been made by a less quantity of labor. If the slavesin the Southern States were emancipated, and their wages roseto the general level of the earnings of free labor in America,that country might be obliged to erase some of the slave-grownarticles from the catalogue of its exports, and would certainly beunable to sell any of them in the foreign market at the present
price. Their cheapness is partly an artificial cheapness, which
may be compared to that produced by a bounty on production
or on exportation; or, considering the means by which it isobtained, an apter comparison would be with the cheapness ofstolen goods.

533

Chart XV.
How far Mr. Mill was in error may be seen by Chart No.
XV, which shows the enormous increase of cotton production
under the régime of free labor as compared with that of slavelabor in the United States. The abolition of slavery has beenan economic gain to the South. Moreover, the exports of
raw cotton have increased from 644,327,921 pounds in 1869,
to 2,288,075,062 pounds in 1883; while for corresponding
years the exports of tobacco increased from 181,527,630 to
235,628,360 pounds. In other words, exports of tobacco wereincreased by 30 per cent, and those of raw cotton by no lessthan 255 per cent. Besides, the prices of cotton and tobacco
are no higher now than before 1850.

An advantage of a similar economical, though of a very
different moral character, is that possessed by domestic
manufactures; fabrics produced in the leisure hours of families
partially occupied in other pursuits, who, not depending for
subsistence on the produce of the manufacture, can afford tosell it at any price, however low, for which they think it worth
while to take the trouble of producing. The workman of Zürich
is to-day a manufacturer, to-morrow again an agriculturist, andchanges his occupations with the seasons in a continual round.
Manufacturing industry and tillage advance hand in hand, in
inseparable alliance, and in this union of the two occupations

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Principles Of Political Economy

the secret may be found why the simple and unlearned Swiss
manufacturer can always go on competing and increasing inprosperity in the face of those extensive establishments fitted out
with great economic and (what is still more important) intellectual
resources.
In the case of these domestic manufactures, the comparative
cost of production, on which the interchange between countries
depends, is much lower than in proportion to the quantity of labor
employed. The work-people, looking to the earnings of theirloom for a part only, if for any part, of their actual maintenance,
can afford to work for a less remuneration than the lowest rateof wages which can permanently exist in the employments bywhich the laborer has to support the whole expense of a family.
Working, as they do, not for an employer but for themselves,
they may be said to carry on the manufacture at no cost at all,except the small expense of a loom and of the material; and thelimit of possible cheapness is not the necessity of living by theirtrade, but that of earning enough by the work to make that social
employment of their leisure hours not disagreeable.

§ 4. —But not when common to All.
[461]

These two cases, of slave-labor and of domestic manufactures,
exemplify the conditions under which low wages enable a
country to sell its commodities cheaper in foreign markets, andconsequently to undersell its rivals, or to avoid being undersold
by them. But no such advantage is conferred by low wages whencommon to all branches of industry. General low wages nevercaused any country to undersell its rivals, nor did general highwages ever hinder it from doing so.
To demonstrate this, we must turn to an elementary principle
which was discussed in a former chapter.290 General low wages
290

Book II, Chap. II, § 3.

§ 4. —But not when common to All.

535

do not cause low prices, nor high wages high prices, within
the country itself. General prices are not raised by a rise ofwages, any more than they would be raised by an increase of
the quantity of labor required in all production. Expenses which
affect all commodities equally have no influence on prices. If
the maker of broadcloth or cutlery, and nobody else, had to pay
higher wages, the price of his commodity would rise, just as it
would if he had to employ more labor; because otherwise hewould gain less profit than other producers, and nobody would
engage in the employment. But if everybody has to pay higher
wages, or everybody to employ more labor, the loss must be
submitted to; as it affects everybody alike, no one can hope to
get rid of it by a change of employment; each, therefore, resigns
himself to a diminution of profits, and prices remain as they
were. In like manner, general low wages, or a general increasein the productiveness of labor, does not make prices low, but
profits high. If wages fall (meaning here by wages the costof labor), why, on that account, should the producer lower his
price? He will be forced, it may be said, by the competition ofother capitalists who will crowd into his employment. But othercapitalists are also paying lower wages, and by entering into
competition with him they would gain nothing but what they are
gaining already. The rate, then, at which labor is paid, as well as
the quantity of it which is employed, affects neither the value
nor the price of the commodity produced, except in so far as itis peculiar to that commodity, and not common to commodities
generally.
However, without there being any change in the productiveness of any industry, if the price of the article should rise,for instance, from an increased demand, that would make thetotal value arising from the products of the industry larger in
its purchasing power, and so there would be a larger sum to be
divided among labor and capital. If there be free competition,
more capital would move into this one industry under the hope

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of larger profits, and so wages would rise. Therefore, it ispossible that high wages and high prices may go together, but
not as cause and effect. In fact, the change in price generally
precedes the change in wages. On the other hand, while low
wages are not the cause of low prices nor high wages of highprices, yet the two may be found together, as both due toa common cause, viz., the small or great value of the total
product.291[463]

Since low wages are not a cause of low prices in the country
itself, so neither do they cause it to offer its commodities inforeign markets at a lower price. It is quite true that, if the costof labor is lower in America than in England, America could
sell her cottons to Cuba at a lower price than England, and still
gain as high a profit as the English manufacturer. But it is notwith the profit of the English manufacturer that the American
cotton-spinner will make his comparison; it is with the profits
of other American capitalists. These enjoy, in common withhimself, the benefit of a low cost of labor, and have accordingly
a high rate of profit. This high profit the cotton-spinner mustalso have: he will not content himself with the English profit.
It is true he may go on for a time at that lower rate, rather
than change his employment; and a trade may be carried on,sometimes for a long period, at a much lower profit than that for
which it would have been originally engaged in. Countries whichhave a low cost of labor and high profits do not for that reason
undersell others, but they do oppose a more obstinate resistanceto being undersold, because the producers can often submit toa diminution of profit without being unable to live, and even to
thrive, by their business. But this is all which their advantage
does for them; and in this resistance they will not long persevere
when a change of times which may give them equal profits withthe rest of their countrymen has become manifestly hopeless.
291

Cf. Cairnes, “Leading Principles,” p. 209.

§ 5. Low profits as affecting the carrying Trade.

537§ 5. Low profits as affecting the carrying Trade.
It is worth while also to notice a third class of small, but in thiscase mostly independent communities, which have supported andenriched themselves almost without any productions of their own(except ships and marine equipments), by a mere carrying-trade,and commerce of entrepot; by buying the produce of one country,
to sell it at a profit in another. Such were Venice and the Hanse
Towns.
When the Venetians became the agents of the generalcommerce of Southern Europe, they had scarcely any
competitors: the thing would not have been done at all withoutthem, and there was really no limit to their profits except the limit
to what the ignorant feudal nobility could and would give for the
unknown luxuries then first presented to their sight. At a later
period competition arose, and the profit of this operation, like thatof others, became amenable to natural laws. The carrying-trade
was taken up by Holland, a country with productions of its own
and a large accumulated capital. The other nations of Europe
also had now capital to spare, and were capable of conducting
their foreign trade for themselves: but Holland, having, from thevariety of circumstances, a lower rate of profit at home, could
afford to carry for other countries at a smaller advance on theoriginal cost of the goods than would have been required by theirown capitalists; and Holland, therefore, engrossed the greatest
part of the carrying-trade of all those countries which did not
keep it to themselves by navigation laws,292 constructed, likethose of England, for the express purpose.
In the United States, early in the century, a retaliatory policy
against England gave us a body of navigation laws copied
after the mediæval statutes of England and the Continent,
292

For a brief bibliography on our own Navigation Laws and the Shipping
Question, see Appendix I.

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Principles Of Political Economy
which still remain on the statute-book. They do not permit
an American to buy a vessel abroad and sail it under our flagwithout paying enormous duties; a provision which is intended
to foster ship-building in the United States. Even with thislegislation, ships, as a fact, are not built here for the foreign
trade; and our ship-builders practically supply the coastingtrade only (which is not open to foreigners). The ability to
buy ships anywhere, and enter them to registry under our flag
free of duty, is what is meant by the demand for “free ships.”
This, however, has to do with ship-building. But ship-owningor ship-sailing, is quite distinct from it. The ability to get as
great a return from capital and labor invested in a ship as fromother occupations open to Americans is another thing. Even
if we had “free ships,” the higher returns in other industries
in our country, particularly as regards profits, might cause
capitalists naturally to neglect a less for a more productive
business. In 1884 Congress has very properly taken away
many vexatious restrictions upon ships, which diminished thereturns from ship-sailing, and it remains to be seen whether
we can thereby regain any of our foreign carrying-trade. At
present we have a very small tonnage even in that part of theshipping engaged in carrying our own goods.

[465]

Chapter XXI. Of Distribution, As Affected
By Exchange.

§ 1. Exchange and money make no Difference in thelaw of Wages.
The division of the produce among the three classes, laborers,
capitalists, and landlords, when considered without any reference
to exchange, appeared to depend on certain general laws. It is
fit that we should now consider whether these same laws still
operate, when the distribution takes place through the complex
mechanism of exchange and money; or whether the properties ofthe mechanism interfere with and modify the presiding principles.
The primary division of the produce of human exertion andfrugality is, as we have seen, into three shares—wages, profits,
and rents; and these shares are portioned out, to the persons
entitled to them, in the form of money and by a process of
exchange; or, rather, the capitalist, with whom in the usual
arrangements of society the produce remains, pays in money, tothe other two sharers, the market value of their labor and land.
If we examine on what the pecuniary value of labor and thepecuniary value of the use of land depend, we shall find that it ison the very same causes by which we found that wages and rent
would be regulated if there were no money and no exchange ofcommodities.
It is evident, in the first place, that the law of wages is notaffected by the existence or non-existence of exchange or money.
Wages depend on the ratio between population and capital [taking
into account the nature of a country's industries]; and would do so
if all the capital in the world were the property of one association,or if the capitalists among whom it is shared maintained each

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an establishment for the production of every article consumed in
the community, exchange of commodities having no existence.
As the ratio between capital and population, everywhere but innew colonies, depends on the strength of the checks by which
the too rapid increase of population is restrained, it may besaid, popularly speaking, that wages depend on the checks topopulation; that, when the check is not death by starvation ordisease, wages depend on the prudence of the laboring people;
and that wages in any country are habitually at the lowest rate towhich in that country the laborer will suffer them to be depressedrather than put a restraint upon multiplication.
What is here meant, however, by wages, is the laborer's real
scale of comfort; the quantity he obtains of the things which
nature or habit has made necessary or agreeable to him: wages
in the sense in which they are of importance to the receiver. In
the sense in which they are of importance to the payer, they do
not depend exclusively on such simple principles. Wages in thefirst sense, the wages on which the laborer's comfort depends,
we will call real wages, or wages in kind. Wages in the second
sense we may be permitted to call, for the present, money wages;
assuming, as it is allowable to do, that money remains for thetime an invariable standard, no alteration taking place in theconditions under which the circulating medium itself is producedor obtained. If money itself undergoes no variation in cost, themoney price of labor is an exact measure of the cost of labor, andmay be made use of as a convenient symbol to express it [if theefficiency of labor also be supposed to remain the same].
The money wages of labor are a compound result of twoelements: first, real wages, or wages in kind, or, in otherwords, the quantity which the laborer obtains of the ordinary
articles of consumption; and, secondly, the money prices of
those articles. In all old countries—all countries in which theincrease of population is in any degree checked by the difficultyof obtaining subsistence—the habitual money price of labor is541that which will just enable the laborers, one with another, topurchase the commodities without which they either can not orwill not keep up the population at its customary rate of increase.
Their standard of comfort being given (and by the standard of
comfort in a laboring class is meant that rather than forego which
they will abstain from multiplication), money wages depend on
the money price, and therefore on the cost of production, of thevarious articles which the laborers habitually consume: because,
if their wages can not procure them a given quantity of these,
their increase will slacken and their wages rise. Of these articles,
food and other agricultural produce are so much the principal as
to leave little influence to anything else.
It is at this point that we are enabled to invoke the aid of theprinciples which have been laid down in this Third Part. The costof production of food and agricultural produce has been analyzed
in a preceding chapter. It depends on the productiveness of theleast fertile land, or of the least productively employed portionof capital, which the necessities of society have as yet put inrequisition for agricultural purposes. The cost of productionof the food grown in these least advantageous circumstances
determines, as we have seen, the exchange value and money
price of the whole. In any given state, therefore, of the laborers'
habits, their money wages depend on the productiveness of theleast fertile land, or least productive agricultural capital: on the
point which cultivation has reached in its downward progress—in
its encroachments on the barren lands, and its gradually increased
strain upon the powers of the more fertile. Now, the force whichurges cultivation in this downward course is the increase ofpeople; while the counter-force, which checks the descent, is the
improvement of agricultural science and practice, enabling thesame soil to yield to the same labor more ample returns. The
costliness of the most costly part of the produce of cultivation
is an exact expression of the state, at any given moment, of therace which population and agricultural skill are always running

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Principles Of Political Economy

against each other.
It will be noted, in this exposition, that Mr. Mill has in view
an old country, with a population so dense that numbers arealways pressing close upon subsistence; that their wages are
so low as to give the laborers little more than the necessary
wants of life. That these are not the economic conditions in
the United States goes without saying. First of all, the marginof cultivation is high: only soils of high productivenessare in cultivation, and the returns to labor and capital are,consequently, very large. High wages are found together withlow prices of food. The existing population is not so numerous
as to require for the cultivation of food any but lands of a very
high grade of fertility. The ability to command a high reward
for labor (as compared with European industries), owing to
the general prevalence of high returns in the United States,
has resulted in the establishment of a higher standard for ourlaborers. The standard being relatively so high, there is no
intimate connection between the increase of population here
and the price of food; for, as a rule, wages are not so lowthat any change in the cost of producing food would require
checks upon population. There is a considerable margin abovenecessaries, in the laborer's real wages in the United States,
which may go for comforts, decencies, and amusements.

§ 2. In the law of Rent.
The degree of productiveness of this extreme margin is an index
to the existing state of the distribution of the produce among
the three classes, of laborers, capitalists, and landlords. Whenthe demand of an increasing population for more food can not
be satisfied without extending cultivation to less fertile land, or
incurring additional outlay, with a less proportional return, on
land already in cultivation, it is a necessary condition of this§ 3. —Nor in the law of Profits.

543

increase of agricultural produce that the value and price of that
produce must first rise. The price of food will always on the
average be such that the worst land, and the least productive
installment of the capital employed on the better lands, shalljust replace the expenses with the ordinary profit. If the least
favored land and capital just do thus much, all other land andcapital will yield an extra profit, equal to the proceeds of the extra
produce due to their superior productiveness; and this extra profit
becomes, by competition, the prize of the landlords. Exchange
and money, therefore, make no difference in the law of rent:
it is the same as we originally293 found it. Rent is the extra
return made to agricultural capital when employed with peculiar
advantages; the exact equivalent of what those advantages enable
the producers to economize in the cost of production: the value
and price of the produce being regulated by the cost of production
to those producers who have no advantages; by the return to that
portion of agricultural capital the circumstances of which are theleast favorable.

§ 3. —Nor in the law of Profits.
Wages and rent being thus regulated by the same principles when
paid in money, as they would be if apportioned in kind, it follows
that Profits are so likewise. For the surplus, after replacing wages
and paying rent, constitutes Profits.
We found, in the last chapter of the Second Book, thatthe advances of the capitalist, when analyzed to their ultimate
elements, consist either in the purchase or maintenance of labor,
or in the profits of former capitalists; and that, therefore, profits
in the last resort depend upon the Cost of Labor, falling as that
293

Book III, Chap. III, § 1.

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Principles Of Political Economy

rises, and rising as it falls. Let us endeavor to trace more minutely
the operation of this law.
There are two modes in which the Cost of Labor, whichis correctly represented (money being supposed invariable aswell as efficiency) by the money wages of the laborer, may
be increased. The laborer may obtain greater comforts; wages
in kind—real wages—may rise. Or the progress of population
may force down cultivation to inferior soils and more costly
processes; thus raising the cost of production, the value, and theprice, of the chief articles of the laborer's consumption. On eitherof these suppositions the rate of profit will fall.
If the laborer obtains more abundant commodities only byreason of their greater cheapness, if he obtains a greater quantity,
but not on the whole a greater cost, real wages will be increased,
but not money wages, and there will be nothing to affect the rateof profit. But, if he obtains a greater quantity of commoditiesof which the cost of production is not lowered, he obtains agreater cost; his money wages are higher. The expense of theseincreased money wages falls wholly on the capitalist. There areno conceivable means by which he can shake it off. It may besaid—it used formerly to be said—that he will get rid of it byraising his price. But this opinion we have already, and morethan once, fully refuted.294
The doctrine, indeed, that a rise of wages causes an equivalentrise of prices, is, as we formerly observed, self-contradictory:
for, if it did so, it would not be a rise of wages; the laborer
would get no more of any commodity than he had before, let hismoney wages rise ever so much; a rise of real wages would be an
impossibility. This being equally contrary to reason and to fact,
it is evident that a rise of money wages does not raise prices;that high wages are not a cause of high prices. A rise of generalwages falls on profits. There is no possible alternative.
294

Supra, Book III, Chap. II, § 2, and Chap. XX, § 4.

§ 3. —Nor in the law of Profits.

545

Having disposed of the case in which the increase of money
wages, and of the Cost of Labor, arises from the laborer's
obtaining more ample wages in kind, let us now suppose it toarise from the increased cost of production of the things which
he consumes, owing to an increase of population unaccompanied
by an equivalent increase of agricultural skill. The augmented
supply required by the population would not be obtained, unlessthe price of food rose sufficiently to remunerate the farmer for
the increased cost of production. The farmer, however, in thiscase sustains a twofold disadvantage. He has to carry on his
cultivation under less favorable conditions of productivenessthan before. For this, as it is a disadvantage belonging to him
only as a farmer, and not shared by other employers, he will, on
the general principles of value, be compensated by a rise of theprice of his commodity; indeed, until this rise has taken place,
he will not bring to market the required increase of produce.
But this very rise of price involves him in another necessity, forwhich he is not compensated. He must pay higher money wages
to his laborers [if they retain the same quantity of real wages].
This necessity, being common to him with all other capitalists,
forms no ground for a rise of price. The price will rise, until
it has placed him in as good a situation, in respect of profits,
as other employers of labor; it will rise so as to indemnify him
for the increased labor which he must now employ in order toproduce a given quantity of food; but the increased wages of thatlabor are a burden common to all, and for which no one can beindemnified. It will be paid wholly from profits.
Thus we see that increased wages, when common to all
descriptions of productive laborers, and when really representing
a greater Cost of Labor, are always and necessarily at theexpense of profits. And by reversing the cases, we should find inlike manner that diminished wages, when representing a reallydiminished Cost of Labor, are equivalent to a rise of profits. But
the opposition of pecuniary interest thus indicated between the

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class of capitalists and that of laborers is to a great extent only
apparent. Real wages are a very different thing from the Cost ofLabor, and are generally highest at the times and places where,
from the easy terms on which the land yields all the produce as yet
required from it, the value and price of food being low, the cost oflabor to the employer, notwithstanding its ample remuneration, is
comparatively cheap, and the rate of profit consequently high, as
at present in the United States. We thus obtain a full confirmationof our original theorem that Profits depend on the Cost of Labor:or, to express the meaning with still greater accuracy, the rate ofprofit and the cost of labor vary inversely as one another, and arejoint effects of the same agencies or causes.
[475]

Book IV. Influence Of The Progress
Of Society On Production And
Distribution.

Chapter I. Influence Of The Progress Of
Industry And Population On Values And
Prices.

§ 1. Tendency of the progress of society toward
increased Command over the powers of Nature;
increased Security, and increased Capacity of
Co-Operation.
In the leading countries of the world, and in all others as they comewithin the influence of those leading countries, there is at least one
progressive movement which continues with little interruption
from year to year and from generation to generation—a progress
in wealth; an advancement in what is called material prosperity.
All the nations which we are accustomed to call civilized increase
gradually in production and in population: and there is no reason
to doubt that not only these nations will for some time continue
so to increase, but that most of the other nations of the world,

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including some not yet founded, will successively enter upon thesame career. It will, therefore, be our first object to examine thenature and consequences of this progressive change, the elements
which constitute it, and the effects it produces on the various
economical facts of which we have been tracing the laws, andespecially on wages, profits, rents, values, and prices.
Of the features which characterize this progressive economical
movement of civilized nations, that which first excites attention,
through its intimate connection with the phenomena of
Production, is the perpetual, and, so far as human foresightcan extend (1), the unlimited, growth of man's power overnature. Our knowledge of the properties and laws of physicalobjects shows no sign of approaching its ultimate boundaries: it
is advancing more rapidly, and in a greater number of directions
at once, than in any previous age or generation, and affording
such frequent glimpses of unexplored fields beyond as to justify
the belief that our acquaintance with nature is still almost in its
infancy.
Another change, which has always hitherto characterized,
and will assuredly continue to characterize, the progress ofcivilized society, is (2) a continual increase of the security of
person and property. Of this increased security, one of the most
unfailing effects is a great increase both of production and ofaccumulation. Industry and frugality can not exist where there
is not a preponderant probability that those who labor and spare
will be permitted to enjoy.
One of the changes which most infallibly attend the progress ofmodern society is, (3) an improvement in the business capacitiesof the general mass of mankind. I do not mean that the practicalsagacity of an individual human being is greater than formerly.
What is lost in the separate efficiency of each is far more thanmade up by the greater capacity of united action. Works ofall sorts, impracticable to the savage or the half-civilized, aredaily accomplished by civilized nations, not by any greatness of549
faculties in the actual agents, but through the fact that each is able
to rely with certainty on the others for the portion of the work
which they respectively undertake. The peculiar characteristic, inshort, of civilized beings, is the capacity of co-operation; and this,like other faculties, tends to improve by practice, and becomescapable of assuming a constantly wider sphere of action.
[This progress affords] space and scope for an indefinite
increase of capital and production, and for the increase of
population which is its ordinary accompaniment. That the growthof population will overpass the increase of production, there is
not much reason to apprehend. It is, however, quite possible that
there might be a great progress in industrial improvement, and in
the signs of what is commonly called national prosperity; a great
increase of aggregate wealth, and even, in some respects, a better
distribution of it; that not only the rich might grow richer, butmany of the poor might grow rich, that the intermediate classes
might become more numerous and powerful, and the means ofenjoyable existence be more and more largely diffused, while yet
the great class at the base of the whole might increase in numbers
only, and not in comfort nor in cultivation. We must, therefore,in considering the effects of the progress of industry, admit as asupposition, however greatly we deprecate as a fact, an increaseof population as long-continued, as indefinite, and possibly evenas rapid, as the increase of production and accumulation.

§ 2. Tendency to a Decline of the Value and Cost of
Production of all Commodities.
The changes which the progress of industry causes or presupposesin the circumstances of production are necessarily attended withchanges in the values of commodities.
The permanent values of all things which are neither undera natural nor under an artificial monopoly depend, as we have

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seen, on their cost of production. (1.) But the increasing power
which mankind are constantly acquiring over nature increases
more and more the efficiency of human exertion, or, in otherwords, diminishes cost of production. All inventions by which agreater quantity of any commodity can be produced with the samelabor, or the same quantity with less labor, or which abridge theprocess, so that the capital employed needs not be advanced forso long a time, lessen the cost of production of the commodity.
As, however, value is relative, if inventions and improvements
in production were made in all commodities, and all in the same
degree, there would be no alteration in values.
As for prices, in these circumstances they would be affected
or not, according as the improvements in production did or did
not extend to the precious metals. If the materials of money werean exception to the general diminution of cost of production, thevalues of all other things would fall in relation to money—that
is, there would be a fall of general prices throughout the world.
But if money, like other things, and in the same degree as otherthings, were obtained in greater abundance and cheapness, prices
would be no more affected than values would.
As regards the precious metals, it is to be said that since1850 there has been a vast increase in their amount, andprobably in greater proportion than the need arising fromincreased transactions. This is certainly true of silver; and it
is admitted to be true of gold as late as about 1865. It has
been asserted by Mr. Goschen that since then, especially since
1873, gold has not existed in a quantity that would permit it
to keep its former proportions to commodities, and that it had
appreciated. An appreciation, of course, would show itself inlower gold prices. On the other hand, gold has, as I think,
not appreciated. Prices, even in the collapse of credit after
the panic of 1873 down to 1879, were not quite so low as in
1845-1850, as is seen by the following table taken from theLondon “Economist”—2,200 indicating the price of a given

551
number of articles in 1845-1850, as the basis of the table withwhich the prices of other years are compared:Year.
1845-1850
1857, July 11858, January 1
1865
1866
1867
1868
1869
1870
1871
1872
1873
1874 (Depression)
1875 (Depression)
1876 (Depression)
1877 (Depression)
1878 (Depression)
1879 (Depression)
1880
1881
1882
1883

Index numbers.
2,200
2,996
2,612
3,575
3,564
3,024
2,682
2,666
2,689
2,590
2,835
2,947
2,891
2,778
2,711
2,723
2,529
2,202
2,538
2,376
2,435
2,343

But the progress of society, particularly in the directionof improved and cheapened processes of manufacturing, has
vastly lowered the cost of a great number of articles ofcommon consumption. The process has been already seen in
the diminished charge for railway transportation (see Chart
No. V). Moreover, the years of a depression are exactly thosein which there is always a forced economy, and generally
form a period in which cheapening goes on at its best. Hence,
if prices have had a tendency to fall, owing to the lowered cost

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of production consequent on improvements—and if they are
not, as a rule, lower than in 1850—it shows that they are still
supported by the high tide of the great gold production of thiscentury. And even the access to more fertile land in the world
has acted to prevent an increase in the prices of agricultural
products such as would offset the fall of manufactured goods.
That is, the fact that prices have not fallen as much as might
be expected, indicates that the gold has prevented the lower
costs due to the progress of industry from being fully seen.

Improvements in production are not the only circumstanceaccompanying the progress of industry, which tends to diminish
the cost of producing, or at least of obtaining, commodities.
(2.) Another circumstance is the increase of intercourse between
different parts of the world. As commerce extends, and theignorant attempts to restrain it by tariffs become obsolete,commodities tend more and more to be produced in the places inwhich their production can be carried on at the least expense oflabor and capital to mankind. (3.) Much will also depend on theincreasing migration of labor and capital to unoccupied parts ofthe earth, of which the soil, climate, and situation are found, by
the ample means of exploration now possessed, to promise not
only a large return to industry, but great facilities of producing
commodities suited to the markets of old countries. Much as
the collective industry of the earth is likely to be increased inefficiency by the extension of science and of the industrial arts,
a still more active source of increased cheapness of production
will be found, probably, for some time to come, in the graduallyunfolding consequences of Free Trade, and in the increasing
scale on which Emigration and Colonization will be carried on.
From the causes now enumerated, unless counteracted byothers, the progress of things enables a country to obtain, at lessand less of real cost, not only its own productions but those offoreign countries. Indeed, whatever diminishes the cost of its

553
own productions, when of an exportable character, enables it, as
we have already seen, to obtain its imports at less real cost.

§ 3. —except the products of Agriculture andMining, which have a tendency to Rise.
Are no causes of an opposite character, brought into operation by
the same progress, sufficient in some cases not only to neutralize
but to overcome the former, and convert the descending
movement of cost of production into an ascending movement?
We are already aware that there are such causes, and that, in thecase of the most important classes of commodities, food, andmaterials, there is a tendency diametrically opposite to that ofwhich we have been speaking. The cost of production of thesecommodities tends to increase.
This is not a property inherent in the commodities themselves.
If population were stationary, and the produce of the earth neverneeded to be augmented in quantity, there would be no cause
for greater cost of production.295 The only products of industry
which, if population did not increase, would be liable to a realincrease of cost of production, are those which, depending on
a material which is not renewed, are either wholly or partiallyexhaustible, such as coal, and most if not all metals; for even iron,the most abundant as well as most useful of metallic products,
which forms an ingredient of most minerals and of almost all
rocks, is susceptible of exhaustion so far as regards its richestand most tractable ores.
When, however, population increases, as it has never yet
failed to do, then comes into effect that fundamental law of
295

Henry George, however, asserts that, “irrespective of the increase of
population, the effect of improvements in methods of production and exchange
is to increase rent” (“Progress and Poverty,” p. 220).

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production from the soil on which we have so frequently had
occasion to expatiate, the law that increased labor, in any given
state of agricultural skill, is attended with a less than proportional
increase of produce. The cost of production of the fruits ofthe earth increases, cæteris paribus, with every increase of thedemand.
Mr. Cairnes has made some essential contributions to thediscussion of changes of value arising from the progress ofsociety:296 “When a colony establishes itself in a new country,
the course of its industrial development naturally follows thecharacter of the opportunities offered to industrial enterpriseby the environment. These will, of course, vary a good deal,
according to the part of the world in which the new society
happens to be placed; but, speaking broadly, they will be suchas to draw the bulk of the industrial activity of the new people
into some one or more of those branches of industry whichhave been conveniently designated ‘extractive.’ Agriculture,
pastoral and mining pursuits, and the cutting of lumber, areamong the principal of such industries.” To these pursuits
apply “that law of Political Economy, or, more properly, ofphysical nature, which Mr. Mill has rightly characterized as
the most important proposition in economic science—the law,as he phrased it, of ‘diminishing productiveness.’ It may bethus briefly stated: In any given state of the arts of production,
the returns to human industry employed upon natural agents
will, up to a certain point, be the maximum which thosenatural agents, cultivated with the degree of skill brought tobear upon them, are capable of yielding; but, after this point
has been passed, though an increased application of labor andcapital will obtain an increased return, it will not obtain aproportionally increased return; on the contrary, every further
increase of outlay—always assuming that the skill employed
in applying it continues the same as before—will be attended

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296

“Leading Principles,” Part I, chap. v.

555with a return constantly diminishing.... What I am now
concerned to show is the manner in which, with the progressof society, the law in question affects the course of normal297
values in all commodities coming under its influence.
“The class of commodities in the production of which
the facilities possessed by new communities, as comparedwith old, attain their greatest height, are those of whichtimber and meat may be taken as the type, and comprises
such articles as wool, game, furs, hides, horns, pitch, resin,
etc. The circumstance which most powerfully affects thecourse of values in the products of extractive industry, andin the commodities just referred to among the rest, is thedegree in which they admit of being transported from place
to place—that is to say, their portableness—depending, as it
does, partly on their durability and partly on their bulk.” It isfound that, taking timber and meat as a type—one possessing
portableness in a vastly greater degree than the other—inthe early settlement of a new country, the portable article,
like timber, at once rises in price “to a level lower than thatprevailing in old countries only by the cost of transport”; on
the other hand, perishable articles like meat are “confinedfor a market, if not to the immediate locality where it isproduced, at least to the bordering countries; and, being
raised in new countries at very low cost, their value during
the early stages of their growth is necessarily low. But,as population advances, and agriculture encroaches on thenatural pasture-lands originally available for the rearing of
cattle, still more as it becomes necessary to cultivate land
for the purpose of pasture, the cost of meat constantly rises.”
As population increases there will be an increased demandfor dairy-products, eggs, small fruits, fresh vegetables, milk,
etc., and thereby it becomes more profitable to employ landnear populous centers for such perishable products than for297

For the distinction between normal and market values, see supra, Book III,
Chap. II, § 4, and p. 269.

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the products of large farming. Almost every one, who
knows the high prices of butter, eggs, and vegetables in large
cities as compared with their prices in country districts, isfamiliar with the phenomena which illustrate this principle.
Moreover, as a denser population settles on our Western
prairies, now given over to ranches and vast pasturing-grounds
for cattle—since cattle in general require a large extent ofland—the cost of meat will rise. The prices of perishable
articles, therefore, will rise without any limit except that set
by increasing numbers, and can not be kept down by the force
of competition from other distant places, as is the case withsuch easily transportable things as timber and wool. What
has been said of the transportableness of meat, however, is
to be modified somewhat by the introduction of improved
processes of transporting meat in refrigerator-cars; but there
still exist commodities of which meat was only taken as a
type.

[483]

No tendency of a like kind exists with respect to manufactured
articles. The tendency is in the contrary direction. The larger
the scale on which manufacturing operations are carried on, themore cheaply they can in general be performed. As manufactures,
however, depend for their materials either upon agriculture, or
mining, or the spontaneous produce of the earth, manufacturingindustry is subject, in respect of one of its essentials, to thesame law as agriculture. But the crude material generally forms
so small a portion of the total cost that any tendency which
may exist to a progressive increase in that single item is muchoverbalanced by the diminution continually taking place in all theother elements; to which diminution it is impossible at present toassign any limit.
It follows that the exchange values of manufactured articles,
compared with the products of agriculture and of mines, have, as
population and industry advance, a certain and decided tendency
to fall. Money being a product of mines, it may also be laid down

557
as a rule that manufactured articles tend, as society advances, tofall in money price. The industrial history of modern nations,especially during the last hundred years, fully bears out thisassertion.
In regard to manufactures, as opposed to raw products, it
is to be remarked “that, as the course of price in the fieldof raw products is, on the whole, upward, so in that ofmanufactured goods the course is, not less strikingly, inthe opposite direction. The reasons of this are exceedingly
plain. In the first place, division of labor—the first andmost powerful of all cheapeners of production, but for which
there is in extractive industry but very limited scope—finds
in manufacturing industry an almost unbounded range for its
application; and, secondly, it is in manufacturing industry
also that machinery, the other great cheapener of production,
admits of being employed on the largest scale, and has, infact, been employed with the most signal success. It follows
at once from these facts, taken in connection with the further
fact that industrial invention does not take place per saltum,
but gradually—one invention ever treading on the heels of
another—and that its advance seems to be subject to nolimitation; it follows, I say, from these considerations, thatthat portion of the cost of manufactured goods which properly
belongs to the manufacturing process must, with the progressof society, undergo constant diminution.... In all the greatbranches of manufacturing industry the portion of the cost
incurred in the manufacturing process bears in general a large
proportion to that represented by the raw material, while theinfluence of industrial invention, in reducing this portion of
the cost, is, as every one knows, great and unremitting in its
action.”As has been said, “the two great cheapeners of production
are division of labor and machinery, and the degree inwhich these admit of being applied to manufacture is mainly
dependent upon the scale on which the manufacturing process

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is carried on. Those manufactures, therefore, that are produced
upon a large scale are the sort of manufactures in which we
may expect the greatest reduction in cost; in which, therefore,
the fall in price, with the progress of society, will be mostmarked. But the manufactures which are produced upon
the largest scale are those for which there exists the largest
demand—that is to say, are those which enter most extensively
into the consumption of the great mass of people. They are
also, I may add, those in which a fall in price is apt tostimulate a great increase of demand. All the common kindsof clothing, furniture, and utensils fall within the scope of
this remark; and it is in these, rather than in the commodities
consumed exclusively or mainly by the richer classes, that
we should, accordingly, expect to find the greatest marvelsof cheapening.” But the articles of common consumption
are those in which “the amount of manufacture bestowed
upon them bears a smaller proportion to the raw material
than is the case with the more elaborate manufactures. Suchcoarser manufactures, therefore, would feel the effects of
the advancing cost of the raw material more sensibly than
the refined sorts. Nevertheless, it can not be supposed tocompensate the advantages due to the causes I have pointed
out which fall to the share of the commoner sorts. It is in
this class of goods that the most remarkable reductions inprice have been accomplished in the past, and it is in them,probably, that we shall witness in the future the greatest resultsof the same kind.”§ 4. —that tendency from time to time Counteracted
by Improvements in Production.
Whether agricultural produce increases in absolute as well ascomparative cost of production depends on the conflict of the twoantagonist agencies—increase of population and improvement in559
agricultural skill. In some, perhaps in most, states of society(looking at the whole surface of the earth), both agricultural skill
and population are either stationary, or increase very slowly, andthe cost of production of food, therefore, is nearly stationary.
In a society which is advancing in wealth, population generally
increases faster than agricultural skill, and food consequently
tends to become more costly; but there are times when astrong impulse sets in toward agricultural improvement. Suchan impulse has shown itself in Great Britain during the lastfifteen or twenty years [before 1847]. In England and Scotland
agricultural skill has of late increased considerably faster than
population, insomuch that food and other agricultural produce,
notwithstanding the increase of people, can be grown at lesscost than they were thirty years ago; and the abolition of theCorn Laws has given an additional stimulus to the spirit of
improvement. In some other countries, and particularly inFrance, the improvement of agriculture gains ground still moredecidedly upon population, because though agriculture, except
in a few provinces, advances slowly, population advances still
more slowly, and even with increasing slowness, its growth
being kept down, not by poverty, which is diminishing, but by
prudence.
Moreover, the cheapened cost of transportation has admitted
to England and the Continent the wheat supplies of ourWestern States at a low price even after having been carried totransatlantic markets. New methods of getting food-supplies
from foreign countries act equally with improvements at
home.

§ 5. Effect of the Progress of Society in moderating
fluctuations of Value.

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Thus far, of the effect of the progress of society on the permanent
or average values and prices of commodities. It remains to
be considered in what manner the same progress affects theirfluctuations. Concerning the answer to this question there can be
no doubt. It tends in a very high degree to diminish them.
In poor and backward societies, as in the East, and in Europe
during the middle ages, extraordinary differences in the price ofthe same commodity might exist in places not very distant fromeach other, because the want of roads and canals, the imperfectionof marine navigation, and the insecurity of communications
generally, prevented things from being transported from theplaces where they were cheap to those where they were dear.
The things most liable to fluctuations in value, those directly
influenced by the seasons, and especially food, were seldom
carried to any great distances. In most years, accordingly, there
was, in some part or other of any large country, a real dearth;while a deficiency at all considerable, extending to the wholeworld, is [now] a thing almost unknown. In modern times,
therefore, there is only dearth, where there formerly would havebeen famine, and sufficiency everywhere when anciently there
would have been scarcity in some places and superfluity inothers.
The same change has taken place with respect to allother articles of commerce. The safety and cheapness ofcommunications, which enable a deficiency in one place tobe supplied from the surplus of another, at a moderate or evena small advance on the ordinary price, render the fluctuationsof prices much less extreme than formerly. This effect is muchpromoted by the existence of large capitals, belonging to what are
called speculative merchants, whose business it is to buy goods
in order to resell them at a profit. These dealers naturally buying
things when they are cheapest, and storing them up to be brought
again into the market when the price has become unusually high,the tendency of their operations is to equalize price, or at least

561
to moderate its inequalities. The prices of things are neither somuch depressed at one time, nor so much raised at another, as
they would be if speculative dealers did not exist.
Mr. Mill uses the term “speculative” in a different sense fromthat which is customary in this country. Merchants who buy
outright and store up grain are not speculators in the sensein which the word is used with us; but those gamblers whopurchase, “for future delivery,” grain which they never see,
and which they sell in the same way, are here known as
speculators.

It appears, then, that the fluctuations of values and prices
arising from variations of supply, or from alterations in real(as distinguished from speculative) demand, may be expected
to become more moderate as society advances. With regard to
those which arise from miscalculation, and especially from thealternations of undue expansion and excessive contraction of
credit, which occupy so conspicuous a place among commercial
phenomena, the same thing can not be affirmed with equal
confidence.
Such vicissitudes, beginning with irrational
speculation and ending with a commercial crisis, have nothitherto become either less frequent or less violent with thegrowth of capital and extension of industry. Rather they may besaid to have become more so, in consequence, as is often said,of increased competition, but, as I prefer to say, of a lower rateof profits and interest, which makes capitalists dissatisfied withthe ordinary course of safe mercantile gains. The connectionof this low rate of profit with the advance of population andaccumulation is one of the points to be illustrated in the ensuingchapters.
Mr. Cairnes also adds some investigations as to thefluctuations of value: “Hitherto I have examined the derivative
laws of value in so far only as they are exemplified in the

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movements of normal prices. It will be interesting now to
consider whether it is possible to discover in the movementsof market prices any corresponding phenomena.
“Taking manufactures first, it is evident at once that, asregards conditions of protection, the circumstances of the caseare such as to secure, in general, (1.) great rapidity and great
certainty in bringing commodities to market. A deal table may
be made in a few hours, a piece of cloth in a few weeks, and amoderate-sized house in a month or little more. Tables, cloth,and houses may be produced with certainty in any quantity
required. It results from this that it is scarcely possible that,
under ordinary circumstances, the selling price of a product ofmanufacture should for any long time much exceed its normal
price. (2.) The nature of manufactures is, in general, such as
to fit them admirably for distant transport. Any considerable
elevation of price, therefore, is pretty certain to attract supplies
from remote sources. (3.) Further, considered in their relation
to human needs, I think it may be said of manufactured goods,that either the need for them is not very urgent, or, where it
happens to be so, substitutes ... may easily be found. From
all these circumstances it results that an advance in the price... either attracts supplies, or deters purchasers, ... preventing
any great departure from the usual terms of the market.
“Turning now to the products of agricultural, pastoral,
or, more generally, ‘extractive’ industry, we find thecircumstances under which this class of goods is brought
to market in all respects extremely different from those which
we have just examined, and such as to permit a much wider
margin of deviation for the market from the normal price.
Here the period of production is longer, the result of theprocess much more uncertain, the commodity at once moreperishable and less portable, and human requirements inrelation to it are mostly of a more urgent kind: (1.) The
shortest period within which additions can be made to the
supply of food and raw material of the vegetable kind is in
general a year, and, if the commodity be of animal origin,563
the minimum is considerably larger. (2.) Again, the farmer
may decide upon the breadth of ground to be devoted to aparticular crop, or upon the number of cattle he will maintain;
but the actual returns will vary according to the season, andmay prove far in excess or far in defect of his calculations.
These circumstances all present obstacles to the adjustmentof supply and demand, and consequently tend to produce
frequent and extensive deviations of the market from thenormal price. Nor are the other conditions of the case suchas to neutralize the influence of such disturbing agencies.
(3.) The nature, indeed, of some of the principal agricultural
products fits them sufficiently well for distant transport, andso far tends to correct fluctuations of price. But, on the other
hand, (4.) the relation of these products to human wants issuch as greatly to enhance that tendency to violent fluctuation
incident to the conditions of their production. More especiallyis this the case with the commodity, whatever it may be,which forms the staple food of a people. For observe thepeculiar nature of human requirements with reference to sucha commodity. They are of this kind, that, given the number ofa population, the quantity of the staple food required is nearlya fixed quantity, and this almost irrespective of price. Except
among the poorest, increased cheapness will not stimulate alarger consumption; while, on the other hand, all, at any costwithin the range of their means, will obtain their usual supply.
The consequence is that, when even a moderate deficiency
or excess occurs in the supply of the staple food of a people,
in the one case (a), the competition of consumers for theirusual quantum of food rapidly forces up the price far out of
proportion to the diminution in the supply; in the other (b),no one being inclined to increase his usual consumption, thecompetition of sellers, in their eagerness to find a market forthe superfluous portion of the supply, is equally powerful todepress it.”

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Chapter II. Influence Of The Progress Of
Industry And Population On Rents, Profits,
And Wages.

§ 1. Characteristic features of industrial Progress.
Continuing the inquiry into the nature of the economical changes
taking place in a society which is in a state of industrial progress,
we shall next consider what is the effect of that progress on the
distribution of the produce among the various classes who sharein it. We may confine our attention to the system of distribution
which is the most complex, and which virtually includes allothers—that in which the produce of manufactures is shared
between two classes, laborers and capitalists, and the produce ofagriculture among three, laborers, capitalists, and landlords.
The characteristic features of what is commonly meantby industrial progress resolve themselves mainly into three,increase of capital, increase of population, and improvements
in production; understanding the last expression, in its widest
sense, to include the process of procuring commodities from a
distance, as well as that of producing them. It will be convenient
to set out by considering each of the three causes, as operating
separately; after which we can suppose them combined in any
manner we think fit.298

298

Before beginning this discussion the reader is advised to review the relationof profits to cost of labor, and the dependence of the latter on its three factors,
Book II, Chap. V, § 5.

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§ 2. First two cases, Population and Capitalincreasing, the arts of production stationary.

For the sake of clearness we will form two general groups ofthese causes:
A. The Influence of Population and Capital (Improvements
remaining stationary).
B. The Influence of Improvements (Population and Capitalremaining stationary).
We will first take up A, and under this division make forconvenience two separate suppositions:I. The first is that, while Population is advancing, Capitalis stationary. By this means we can study separately
the operation of one of the factors of societary progress,
Population, and see its influence on rents, profits, and wages.
There being only the same given quantity of wealth in theform of capital to be now distributed among more laborers(1), real wages must fall; whereupon, if the same capitalpurchases more labor, and obtains more produce (2), profitsrise. Now, if the laborers were so well off before as to suffer
the reduction of wages to take place not in their food, but
in their other comforts, then, if each laborer uses as muchfood as before, and if, as by the supposition, there are morelaborers, an increased quantity of food will be required fromthe soil. This supply can be produced only at a greater cost,and, as inferior soils are called into cultivation (3), rents willrise. This last action (3), however, will have an influence on
the rise of profits (2). For it was only by a reduction of real
wages that profits rose; but if the cost of food, that is, the real
wages, have since risen, then one of the elements entering
into cost of labor has risen, and in so far will offset the fallof real wages; so that profits will not gain so much as if rents
had not risen. The result of this first supposition, then, is, thatthe landlord is the chief gainer:

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I. (1.) Wages fall.
(2.) Profits rise (less if rents rise).
(3.) Rents rise.
II. We will now take up the second supposition under A,
that while Capital is advancing Population remains stationary.
Then, of course (1), wages will rise; and, as there is no
improvement to cheapen the cost of their real wages, there
will be an increase in cost of labor to the capitalist, and (2)profits will fall. If, now, the laborers, being better off, demand
more food, the new food would cost more, as the margin of
cultivation was pushed down, and (3) rents would inevitably
rise. But not only have the laborers received more real wages,
but since that change the cost, as just described, of thesereal wages has increased. Therefore (2), profits would fall
still more than by the rise of real wages. In this supposition,consequently, while the laborer gains, so does the landlord:
II. (1.) Wages rise.
(2.) Profits fall (more if rents rise).
(3.) Rents rise.
A. It is easy for us now to take into our view the total effects
under A, and see what the combined action of I and II would
be. That is, if both Capital and Population (improvements
remaining stationary) increase, what will be the effect on
Wages, Profits, and Rent? Of course, we must suppose that
Capital and Population just keep pace with each other; andin that case (1) real wages remain the same, each laborer
receiving the same quantity and same quality of commodities
as before. Hence, if each laborer receives the same quantity
as before, and there are many more laborers, there will be anincreased demand put upon the soil for food, poorer soils will
be cultivated, and the cost of the products will rise. So (3)rents rise. But if each laborer receives the same quantity ofreal wages as before, and the cost of them has risen, as justexplained, an increased cost of labor will result which mustcome out of profits. (2) Profits will fall. So that the resultsof A upon distribution, taken separately from B, are that the567
owner of capital loses; but the owner of land again gains.
A. (1.) Wages the same.
(2.) Profits fall.
(3.) Rents rise.

§ 3. The arts of production advancing, capital andpopulation stationary.
Now, let us go back to our first general group of causes, B—anadvance in the arts of production (while capital and population
remain stationary). We can now study by themselves theeffect of improvements on wages, profits, and rent. The
general effects arising from the extended introduction ofmachinery into agriculture and manufactures, the lowered
cost of transportation by steam, have been to lessen the valueof articles consumed chiefly by the laboring-classes. For
the sake of clearness, imagine that the improvement comessuddenly. The first effect will be to lower the value and priceof articles entering into the real wages of the laborers; and, if
those consist mostly of food, there will be a rise in the marginof cultivation and a fall in rents (3). It has been previously
shown299 that improvements retard, or put back, the law ofdiminishing returns from land (or in manufactures compensate
for it), and so lower rents. The poorest soil cultivated is now
of a better grade than before, and the produce is yielded at
a less cost and value; so that the land with which the best
grades are compared, to determine the rent, is not separated
from the best grades by so wide a gap. It would at first blush
seem, then, that the interests of the landlord were antagonistic
to improvements, since they lower rents; but, in practice, it is
not so, as we shall soon see.
299

Book I, Chap. IX

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We have seen that improvements cheapen the price ofarticles entering into the real wages of the laborer. Having
had a given sum as money wages before the change, then,when the sudden change of improvements came, it lowered
prices to the laborer, and the same money wages bought more
(1) real wages. If nothing more happened, we could see that
improvements raised real wages—without lowering (2) profits(because cost of labor remains the same, since the lowered
cost of the articles consumed was exactly in proportion to
the increase of real wages). And, if the laborers chose toretain this higher standard, this would be the situation. Sadly
enough, however, in practice they are apt to be satisfied withthe old standard; and the amount of real wages to give theold standard of living can be had now for less money wages.
While only the same number, without any increase, can liveat the new (higher) standard, a larger number can live at theold (lower) standard. In short, the obstacles to an increaseof population will be removed by the possession of higher
money wages. After a generation, it is very probable that alarger number of laborers will be in existence living at thesame (or possibly a slightly higher) standard of real wages,
and money wages will have fallen.
Now we can understand better than before what would
be the practical result of the causes under B. (3.) Rent has
fallen; money wages have fallen (even if (2) real wages havenot); and, since real wages have not fallen in the proportion
that their cost has been reduced, (2) profits will have risen.
The general result of the causes under B alone, acting as justdescribed, will then be:
B. (1.) Real wages remain the same; money wages less.
(2.) Profits rise.
(3.) Rents fall.

§ 5. Practical Results.

569§ 4. Theoretical results, if all three Elements
progressive.
We have considered, on the one hand, under A, the mannerin which the distribution of the produce into rent, profits,
and wages is affected by the ordinary increase of Population
and Capital; and on the other, under B, how it is affectedby improvements in production, and more especially inagriculture, as follows:
A. (1.) Wages the same. B. (1.) Real wages the same,money wages less.
A. (2.) Profits fall. B. (2.) Profits rise.
A. (3.) Rents rise. B. (3.) Rents fall.
The effects are clearly contrasted. Under A, we see atendency to a rise of rents (3), an increased cost of labor, anda fall of profits (2); under B, a fall of rents (3), a diminishedcost of labor, and a rise of profits (2). We have, therefore,
analyzed the forces belonging to the progress of industry, andfound two distinct and antagonistic forces, working against
each other. If, at any period, improvements (B) advance fasterthan population and capital (A), rent and money wages willtend downward and profits upward. If, on the other hand,
population advances faster than improvements (B) either thelaborers will submit to a reduction in the quantity or quality of
their food, or, if not, rent and money wages will progressively
rise, and profits will fall.

§ 5. Practical Results.
This, however, is not the final and practical result. We have
hitherto supposed that improvements, B, come suddenly. In
point of fact, agricultural skill is slowly diffused, and inventions and discoveries are, in general, only occasional, not

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continuous in their action, as is the increase of capital and population. Inasmuch as it seldom happens that improvement has
so much the start of population and capital as actually to lower
rent, or raise the rate of profits, population almost everywhere“treads close on the heels of agricultural improvement,” andeffaces its effects as fast as they are produced.

[494]

The reason why agricultural improvement seldom lowers rent is,that it seldom cheapens food, but only prevents it from growing
dearer; and seldom, if ever, throws land out of cultivation,but only enables worse and worse land to be taken in for the
supply of an increasing demand. What is sometimes called thenatural state of a country which is but half cultivated, namely,that the land is highly productive, and food obtained in greatabundance by little labor, is only true of unoccupied countries
colonized by a civilized people. In the United States the worst
land in cultivation is of a high quality (except sometimes in theimmediate vicinity of markets or means of conveyance, where abad quality is compensated by a good situation); and even if nofurther improvements were made in agriculture or locomotion,cultivation would have many steps yet to descend, before theincrease of population and capital would be brought to a stand;but in Europe five hundred years ago, though so thinly peopled
in comparison to the present population, it is probable that theworst land under the plow was, from the rude state of agriculture,quite as unproductive as the worst land now cultivated, andthat cultivation had approached as near to the ultimate limit ofprofitable tillage in those times as in the present. What theagricultural improvements since made have really done is, byincreasing the capacity of production of land in general, to enable
tillage to extend downward to a much worse natural quality ofland than the worst which at that time would have admitted ofcultivation by a capitalist for profit; thus rendering a much greater
increase of capital and population possible, and removing always
a little and a little further off the barrier which restrains them;§ 5. Practical Results.

571

population meanwhile always pressing so hard against the barrierthat there is never any visible margin left for it to seize, every inchof ground made vacant for it by improvement being at once filled
up by its advancing columns. Agricultural improvement may
thus be considered to be not so much a counter-force conflictingwith increase of population as a partial relaxation of the bonds
which confine that increase.
Now, since improvements enable a much poorer quality ofland to be ultimately cultivated, under the constant pressure of
the increase of population and capital, improvements enable
rent (3) in the end to rise gradually to a much higher limit
than it could otherwise have attained.

If a great agricultural improvement were suddenly introduced,
it might throw back rent for a considerable space, leaving it
to regain its lost ground by the progress of population andcapital, and afterward to go on further. But taking place, as such
improvement always does, very gradually, it causes no retrograde
movement of either rent or cultivation; it merely enables the one
to go on rising, and the other extending, long after they mustotherwise have stopped.
Inasmuch as, in point of fact, B never gets the start of A, butfollows along with A, the general result will be that which
we found true under A—a rise of rents (3), and increased
cost of labor to the capitalist, arising from an increased costof laborers' subsistence and a fall of profits (2). The effectof a more rapid advance of improvements, at any one time,
will temporarily better the condition of the laborers and also
raise profits; but, if it is followed immediately by an increaseof population, the land-owners will reap the benefits of the
improvement in the rise of rent. The final result, then, is asfollows:

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[496]

Principles Of Political Economy(1.) Real wages, probably higher.
(2.) Profits fall.
(3.) Rents rise.
It is possible that a different combination from theabove may sometimes occur in the causes which underlie
the progress of society: (1.) There may be a period inwhich capital is increasing more rapidly than population, andwhen there seems to be an era of industrial improvements
also. Then both wages and profits will be high, and it will
be a period of general satisfaction. (2.) If capital goes on
increasing, but improvements are few, wages will rise; but
profits must suffer a fall. In this country, where population has
not yet increased so as to press seriously against subsistence,
and where capital increases with incredible swiftness, thesecases are often exemplified. The extraordinary resources of
the newer States have permitted an unlimited increase of
population, and capital has found no difficulty in finding an
investment. But yet those States which have been burdenedwith the disabilities of the old slave régime are far behind theothers. The changes in the rank of the States, in respect of
population, at each decade, as seen in Chart No. XVI, aresuggestive.

Chart XVI. Changes of the Rank of the States in the Scale ofRelative Population, from 1790 to 1880.
[497]

Chapter III. Of The Tendency Of Profits To
A Minimum.

§ 1. Different Theories as to the fall of Profits.
The tendency of profits to fall as society advances, which has
been brought to notice in the preceding chapter, was earlyrecognized by writers on industry and commerce; but, the laws
which govern profits not being then understood, the phenomenon
was ascribed to a wrong cause. Adam Smith considered profits
to be determined by what he called the competition of capital.
In Adam Smith's opinion, the manner in which the competitionof capital lowers profits is by lowering prices; that being usually
the mode in which an increased investment of capital in any
particular trade lowers the profits of that trade. But, if this was
his meaning, he overlooked the circumstance that the fall of
price, which, if confined to one commodity, really does lower
the profits of the producer, ceases to have that effect as soon as it
extends to all commodities; because, when all things have fallen,
nothing has really fallen, except nominally; and, even computedin money, the expenses of every producer have diminished asmuch as his returns. Unless, indeed, labor be the one commodity
which has not fallen in money price, when all other things have:
if so, what has really taken place is a rise of wages; and it isthat, and not the fall of prices, which has lowered the profits
of capital. There is another thing which escaped the notice ofAdam Smith; that the supposed universal fall of prices, throughincreased competition of capitals, is a thing which can not takeplace. Prices are not determined by the competition of the sellers
only, but also by that of the buyers; by demand as well as
supply. The demand which affects money prices consists of all574

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the money in the hands of the community destined to be laidout in commodities; and, as long as the proportion of this tothe commodities is not diminished, there is no fall of generalprices. Now, howsoever capital may increase, and give rise to anincreased production of commodities, a full share of the capitalwill be drawn to the business of producing or importing money,
and the quantity of money will be augmented in an equal ratiowith the quantity of commodities. For, if this were not the case,and if money, therefore, were, as the theory supposes, perpetuallyacquiring increased purchasing power, those who produced orimported it would obtain constantly increasing profits; and this
could not happen without attracting labor and capital to thatoccupation from other employments. If a general fall of prices
and increased value of money were really to occur, it could only
be as a consequence of increased cost of production, from thegradual exhaustion of the mines.
It is not tenable, therefore, in theory, that the increase ofcapital produces, or tends to produce, a general decline of money
prices. Neither is it true that any general decline of prices, as
capital increased, has manifested itself in fact. The only things
observed to fall in price with the progress of society are those inwhich there have been improvements in production, greater thanhave taken place in the production of the precious metals; as, forexample, all spun and woven fabrics. Other things, again, insteadof falling, have risen in price, because their cost of production,compared with that of gold and silver, has increased. Amongthese are all kinds of food, comparison being made with a muchearlier period of history. The doctrine, therefore, that competitionof capital lowers profits by lowering prices, is incorrect in fact,
as well as unsound in principle.
Mr. Wakefield, in his Commentary on Adam Smith, and his
important writings on Colonization, takes a much clearer viewof the subject, and arrives, through a substantially correct seriesof deductions, at practical conclusions which appear to me just[498]

§ 2. What determines the minimum rate of Profit?

575

and important. Mr. Wakefield's explanation of the fall of profits
is briefly this: Production is limited not solely by the quantityof capital and of labor, but also by the extent of the “field of
employment.” The field of employment for capital is twofold:the land of the country, and the capacity of foreign markets totake its manufactured commodities. On a limited extent of land,
only a limited quantity of capital can find employment at a profit.
As the quantity of capital approaches this limit, profit falls; when
the limit is attained, profit is annihilated, and can only be restored
through an extension of the field of employment, either by theacquisition of fertile land, or by opening new markets in foreigncountries, from which food and materials can be purchased withthe products of domestic capital.300§ 2. What determines the minimum rate of Profit?
There is at every time and place some particular rate of profit
which is the lowest that will induce the people of that country
and time to accumulate savings, and to employ those savings
productively. This minimum rate of profit varies according tocircumstances. It depends on two elements: One is the strength ofthe effective desire of accumulation; the comparative estimate,made by the people of that place and era, of future interests
when weighed against present. This element chiefly affects
the inclination to save. The other element, which affects not
so much the willingness to save as the disposition to employ
savings productively, is the degree of security of capital engaged
in industrial operations. In employing any funds which a person
may possess as capital on his own account, or in lending it
300

Mr. Mill commended, as the most scientific treatment of the subject withwhich he had met, an “Essay on the Effects of Machinery,” by William Ellis,“Westminster Review,” January, 1826.

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to others to be so employed, there is always some additionalrisk over and above that incurred by keeping it idle in his own
custody. This extra risk is great in proportion as the general stateof society is insecure: it may be equivalent to twenty, thirty, or
fifty per cent, or to no more than one or two; something however,it must always be; and for this the expectation of profit must be
sufficient to compensate.
There would be adequate motives for a certain amount ofsaving, even if capital yielded no profit. There would be an
inducement to lay by in good times a provision for bad; toreserve something for sickness and infirmity, or as a means ofleisure and independence in the latter part of life, or a help
to children in the outset of it. Savings, however, which have
only these ends in view, have not much tendency to increase
the amount of capital permanently in existence. The savings
by which an addition is made to the national capital usually
emanate from the desire of persons to improve what is termed
their condition in life, or to make a provision for children orothers, independent of their exertions. Now, to the strength ofthese inclinations it makes a very material difference how muchof the desired object can be effected by a given amount andduration of self-denial; which again depends on the rate of profit.
And there is in every country some rate of profit below which
persons in general will not find sufficient motive to save forthe mere purpose of growing richer, or of leaving others betteroff than themselves. Any accumulation, therefore, by which thegeneral capital is increased, requires as its necessary conditiona certain rate of profit—a rate which an average person willdeem to be an equivalent for abstinence, with the addition of a
sufficient insurance against risk.
I have already observed that this minimum rate of profit, lessthan which is not consistent with the further increase of capital,
is lower in some states of society than in others; and I may
add that the kind of social progress characteristic of our present

577
civilization tends to diminish it: (1.) In the first place, oneof the acknowledged effects of that progress is an increase ofgeneral security. Destruction by wars and spoliation by private
or public violence are less and less to be apprehended. The risks
attending the investment of savings in productive employment
require, therefore, a smaller rate of profit to compensate forthem than was required a century ago, and will hereafter requireless than at present. (2.) In the second place, it is also oneof the consequences of civilization that mankind become lessthe slaves of the moment, and more habituated to carry their
desires and purposes forward into a distant future. This increaseof providence is a natural result of the increased assurance withwhich futurity can be looked forward to; and is, besides, favoredby most of the influences which an industrial life exercises overthe passions and inclinations of human nature. In proportion as
life has fewer vicissitudes, as habits become more fixed, and great
prizes are less and less to be hoped for by any other means thanlong perseverance, mankind become more willing to sacrificepresent indulgence for future objects. But, though the minimum
rate of profit is liable to vary, and though to specify exactly what
it is would at any given time be impossible, such a minimum
always exists; and, whether it be high or low, when once it isreached, no further increase of capital can for the present takeplace. The country has then attained what is known to political
economists under the name of the stationary state.

§ 3. In old and opulent countries, profits habituallynear to the minimum.
We now arrive at the fundamental proposition which this chapter
is intended to inculcate. When a country has long possessed alarge production, and a large net income to make savings from,

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and when, therefore, the means have long existed of making
a great annual addition to capital (the country not having, like
America, a large reserve of fertile land still unused), it is oneof the characteristics of such a country that the rate of profit ishabitually within, as it were, a hand's breadth of the minimum,
and the country, therefore, on the very verge of the stationary
state. My meaning is, that it would require but a short time to
reduce profits to the minimum, if capital continued to increase atits present rate, and no circumstances having a tendency to raise
the rate of profit occurred in the mean time.
In England, the ordinary rate of interest on government
securities, in which the risk is next to nothing, may be estimatedat a little more than three per cent: in all other investments,
therefore, the interest or profit calculated upon (exclusively ofwhat is properly a remuneration for talent or exertion) must be
as much more than this amount as is equivalent to the degreeof risk to which the capital is thought to be exposed. Let us
suppose that in England even so small a net profit as one percent, exclusive of insurance against risk, would constitute a
sufficient inducement to save, but that less than this would not
be a sufficient inducement. I now say that the mere continuanceof the present annual increase of capital, if no circumstanceoccurred to counteract its effect, would suffice in a small numberof years to reduce the rate of net profit to one per cent.
To fulfill the conditions of the hypothesis, we must suppose
an entire cessation of the exportation of capital for foreign
investment. We must suppose the entire savings of the community
to be annually invested in really productive employment within
the country itself, and no new channels opened by industrial
inventions, or by a more extensive substitution of the best-known
processes for inferior ones.
The difficulty in finding remunerative employment every year
for so much new capital would not consist in any want ofa market. If the new capital were duly shared among many579
varieties of employment, it would raise up a demand for its
own produce, and there would be no cause why any part ofthat produce should remain longer on hand than formerly. Whatwould really be, not merely difficult, but impossible, would beto employ this capital without submitting to a rapid reduction of
the rate of profit.
As capital increased, population either would also increase,or it would not. If it did not, wages would rise, and a greater
capital would be distributed in wages among the same numberof laborers. There being no more labor than before, and no
improvements to render the labor more efficient, there would
not be any increase of the produce; and, as the capital, howeverlargely increased, would only obtain the same gross return, thewhole savings of each year would be exactly so much subtracted
from the profits of the next and of every following year.

This can be illustrated by supposing that the whole capitalis handed out to the producers in a vessel which is returned
full at the end of the period of production with the original
outlay, plus an advance called profit. B C represents the total

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Principles Of Political Economy
outlay, A C the total produce, and A B the profit on B C.
Now, since the conditions of production remain the same, thesame number of laborers can produce, as before, no morethan A C; even though in the second year some of last year's
profit, represented by D B, is saved and added to the outlay
by the capitalist. If D C is now the outlay of capital, the profit
can only be A C, minus D C, or A D; that is, the profit of
the second year is diminished by D B, exactly the amount ofsavings of the year before. And this would be repeated eachsuccessive year, each saving added to B C being “exactly somuch subtracted from the profits of the next and of every
following year.”[504]

It is hardly necessary to say that in such circumstances profits
would very soon fall to the point at which further increase ofcapital would cease. An augmentation of capital, much more
rapid than that of population, must soon reach its extreme
limit, unless accompanied by increased efficiency of labor(through inventions and discoveries, or improved mental andphysical education), or unless some of the idle people, or of theunproductive laborers, became productive.
If population did increase with the increase of capital andin proportion to it, the fall of profits would still be inevitable.
Increased population implies increased demand for agricultural
produce. In the absence of industrial improvements, this demandcan only be supplied at an increased cost of production, either
by cultivating worse land, or by a more elaborate and costly
cultivation of the land already under tillage. The cost of thelaborer's subsistence is therefore increased, and, unless thelaborer submits to a deterioration of his condition, profits must
fall. In an old country like England, if, in addition to supposing
all improvement in domestic agriculture suspended, we supposethat there is no increased production in foreign countries for the
English market, the fall of profits would be very rapid. If boththese avenues to an increased supply of food were closed, and581
population continued to increase, as it is said to do, at the rate ofa thousand a day, all waste land which admits of cultivation in
the existing state of knowledge would soon be cultivated, and thecost of production and price of food would be so increased that,
if the laborers received the increased money wages necessary
to compensate for their increased expenses, profits would verysoon reach the minimum. The fall of profits would be retarded
if money wages did not rise, or rose in a less degree; but themargin which can be gained by a deterioration of the laborers'
condition is a very narrow one: in general, they can not bearmuch reduction; when they can, they have also a higher standardof necessary requirements, and will not. On the whole, therefore,
we may assume that in such a country as England, if the present
annual amount of savings were to continue, without any of thecounteracting circumstances which now keep in check the natural
influence of those savings in reducing profit, the rate of profit
would speedily attain the minimum, and all further accumulationof capital would for the present cease.
Mr. Carey, on the other hand, asserts the existence of alaw of increasing returns from land, and that, while wages
are constantly increasing with the progress of society, there
is a diminution in the rate of profit, although the increasing
returns permit an increase of absolute, if not of proportional,
profit. That is, although wages increase more in proportion
than profit, there is still a larger gross amount to be divided
among capitalists as profit, out of a larger product.

§ 4. —prevented from reaching it by commercial
revulsions.
What, then, are these counteracting circumstances which, inthe existing state of things, maintain a tolerably equal struggle

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against the downward tendency of profits, and prevent the great
annual savings which take place in this country from depressing
the rate of profit much nearer to that lowest point to which it isalways tending, and which, left to itself, it would so promptly
attain? The resisting agencies are of several kinds.

[505]

First among them is the waste of capital in periods ofovertrading and rash speculation, and in the commercial
revulsions by which such times are always followed. Mines
are opened, railways or bridges made, and many other works
of uncertain profit commenced, and in these enterprises muchcapital is sunk which yields either no return, or none adequate
to the outlay. Factories are built and machinery erected beyond
what the market requires, or can keep in employment. Even if
they are kept in employment, the capital is no less sunk; it has
been converted from circulating into fixed capital, and has ceased
to have any influence on wages or profits. Besides this, there is agreat unproductive consumption of capital during the stagnation
which follows a period of general overtrading. Establishments areshut up, or kept working without any profit. Such are the effects
of a commercial revulsion; and that such revulsions are almost
periodical is a consequence of the very tendency of profits which
we are considering. By the time a few years have passed overwithout a crisis, so much additional capital has been accumulated
that it is no longer possible to invest it at the accustomed profit; all
public securities rise to a high price, the rate of interest on the best
mercantile security falls very low, and the complaint is generalamong persons in business that no money is to be made. But thediminished scale of all safe gains inclines persons to give a readyear to any projects which hold out, though at the risk of loss, thehope of a higher rate of profit; and speculations ensue, which,with the subsequent revulsions, destroy, or transfer to foreigners,
a considerable amount of capital, produce a temporary rise ofinterest and profit, make room for fresh accumulations, and thesame round is recommenced.

§ 5. —by improvements in Production.

583

This, doubtless, is one considerable cause which arrests profits
in their descent to the minimum, by sweeping away from time
to time a part of the accumulated mass by which they areforced down. But this is not, as might be inferred from thelanguage of some writers, the principal cause. If it were, thecapital of the country would not increase; but in England it does
increase greatly and rapidly. This is shown by the increasing
productiveness of almost all taxes, by the continual growth of
all the signs of national wealth, and by the rapid increase of
population, while the condition of the laborers certainly is not on
the whole declining.301§ 5. —by improvements in Production.
This brings us to the second of the counter-agencies, namely,
improvements in production. These evidently have the effect ofextending what Mr. Wakefield terms the field of employment,that is, they enable a greater amount of capital to be accumulated
and employed without depressing the rate of profit; provided
always that they do not raise, to a proportional extent, the habits
and requirements of the laborer. If the laboring-class gain thefull advantage of the increased cheapness, in other words, if
money wages do not fall, profits are not raised, nor their fall
retarded. But, if the laborers people up to the improvement intheir condition, and so relapse to their previous state, profits willrise. All inventions which cheapen any of the things consumed by
the laborers, unless their requirements are raised in an equivalentdegree, in time lower money wages, and, by doing so, enable a301

Although their needs now attract more attention through the extension ofnewspapers and cheap books, the condition of the laboring-class is certainly
better than it was fifty years ago. See Mr. Robert Giffen's “Progress of theWorking-Classes in the Last Half-Century” (1884), referred to in Book IV,
Chap. V, § 1.

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greater capital to be accumulated and employed, before profits
fall back to what they were previously.
Improvements which only affect things consumed exclusively
by the richer classes do not operate precisely in the same manner.
The cheapening of lace or velvet has no effect in diminishing thecost of labor; and no mode can be pointed out in which it canraise the rate of profit, so as to make room for a larger capital
before the minimum is attained. It, however, produces an effectwhich is virtually equivalent; it lowers, or tends to lower, theminimum itself. In the first place, increased cheapness of articles
of consumption promotes the inclination to save, by affording to
all consumers a surplus which they may lay by, consistently with
their accustomed manner of living. In the next place, whateverenables people to live equally well on a smaller income inclines
them to lay by capital for a lower rate of profit. If people can liveon an independence of [$1,000] a year in the same manner as they
formerly could on one of [$2,000], some persons will be induced
to save in hopes of the one, who would have been deterred by themore remote prospect of the other. All improvements, therefore,
in the production of almost any commodity tend in some degree
to widen the interval which has to be passed before arriving at
the stationary state.

§ 6. —by the importation of cheap Necessaries and
Implements.
Equivalent in effect to improvements in production is theacquisition of any new power of obtaining cheap commodities
from foreign countries. If necessaries are cheapened, whether
they are so by improvements at home or importation from abroad,is exactly the same thing to wages and profits. Unless the laborer
obtains and, by an improvement of his habitual standard, keeps

585
the whole benefit, the cost of labor is lowered and the rate ofprofit raised. As long as food can continue to be imported for an
increasing population without any diminution of cheapness, solong the declension of profits through the increase of populationand capital is arrested, and accumulation may go on without
making the rate of profit draw nearer to the minimum. And on
this ground it is believed by some that the repeal of the corn laws
has opened to [England] a long era of rapid increase of capitalwith an undiminished rate of profit.
Before inquiring whether this expectation is reasonable, one
remark must be made, which is much at variance with commonlyreceived notions. Foreign trade does not necessarily increase thefield of employment for capital. When foreign trade makes room
for more capital at the same profit, it is by enabling the necessaries
of life, or the habitual articles of the laborer's consumption, tobe obtained at smaller cost. It may do this in two ways: by
the importation either of those commodities themselves, or of
the means and appliances for producing them. Cheap iron has,in a certain measure, the same effect on profits and the costof labor as cheap corn, because cheap iron makes cheap tools
for agriculture and cheap machinery for clothing. But a foreign
trade, which neither directly nor by any indirect consequenceincreases the cheapness of anything consumed by the laborers,
does not, any more than an invention or discovery in the like
case, tend to raise profits or retard their fall; it merely substitutes
the production of goods for foreign markets in the room of thehome production of luxuries, leaving the employment for capitalneither greater nor less than before.
It must, of course, be supposed that, with the increase ofcapital, population also increases; for, if it did not, the consequent
rise of wages would bring down profits, in spite of any cheapnessof food. Suppose, then, that the population of Great Britain goeson increasing at its present rate, and demands every year a supplyof imported food considerably beyond that of the year preceding.

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This annual increase in the food demanded from the exporting
countries can only be obtained either by great improvementsin their agriculture, or by the application of a great additional
capital to the growth of food. The former is likely to be a very
slow process, from the rudeness and ignorance of the agriculturalclasses in the food-exporting countries of Europe, while the
British colonies and the United States are already in possessionof most of the improvements yet made, so far as suitable to theircircumstances. There remains, as a resource, the extension ofcultivation. And on this it is to be remarked that the capitalby which any such extension can take place is mostly still tobe created. In Poland, Russia, Hungary, Spain, the increase ofcapital is extremely slow. In America it is rapid, but not more
rapid than the population. The principal fund at present available
for supplying this country with a yearly increasing importationof food is that portion of the annual savings of America which
has heretofore been applied to increasing the manufacturing
establishments of the United States, and which free trade in corn
may possibly divert from that purpose to growing food for ourmarket. This limited source of supply, unless great improvements
take place in agriculture, can not be expected to keep pace withthe growing demand of so rapidly increasing a population as thatof Great Britain; and, if our population and capital continue toincrease with their present rapidity, the only mode in which foodcan continue to be supplied cheaply to the one is by sending theother abroad to produce it.
Chart XVII. Grain-Crops of the United States.
Year.
1865
1866
1867
1868
1869

Bushels.
1,127,499,187
1,343,027,868
1,329,729,400
1,450,789,000
1,491,412,100

587

1870
1871
1872
1873
1874
1875
1876
1877
1878
1879
1880
1881
1882
1883

1,629,027,600
1,528,776,100
1,664,331,600
1,538,892,891
1,455,180,200
2,032,235,300
1,962,821,600
2,178,934,646
2,302,254,950
2,434,884,541
2,448,079,181
2,699,394,496
2,699,394,496
2,623,319,089

Not even Americans have any adequate knowledge of the
productive capacity of the United States. The grain-fields
are not yet all occupied; and we can easily produce thetotal cotton consumption of the world on that quantity ofland in Texas alone by which the whole cultivable area ofthat State exceeds the corresponding area of the empire ofAustria-Hungary (see Chart No. XVIII, which shows theremarkable proportion of land possessed by the United States
as compared with European countries); and the exports ofagricultural food from the United States are now six times
what they were in 1850, about the time when Mr. Mill madethe above statements. Immense areas of our soil have not yet
been broken by the plow, and the quantities of cereals grownin the United States seem to be steadily increasing. In fact, thegreatest grain-crop yet grown in this country was that of 1882.
The comparison of the crops of late years with those justsucceeding the war (as seen in Chart No. XVII) shows a verysuggestive increase; since it indicates where employment has
been given to vast numbers of laborers, and where investment

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has been found for our rapidly growing capital.302§ 7. —by the emigration of Capital.
This brings us to the last of the counter-forces which checkthe downward tendency of profits in a country whose capitalincreases faster than that of its neighbors, and whose profits are
therefore nearer to the minimum. This is, the perpetual overflow
of capital into colonies or foreign countries, to seek higher profits
than can be obtained at home. I believe this to have been for many
years one of the principal causes by which the decline of profits
in England has been arrested. It has a twofold operation: In thefirst place, it does what a fire, or an inundation, or a commercial
crisis would have done—it carries off a part of the increase ofcapital from which the reduction of profits proceeds; secondly,
the capital so carried off is not lost, but is chiefly employed either
in founding colonies, which become large exporters of cheap
agricultural produce, or in extending and perhaps improving the
agriculture of older communities.
In countries which are further advanced in industry andpopulation, and have therefore a lower rate of profit, than others,
there is always, long before the actual minimum is reached,a practical minimum, viz., when profits have fallen so much
below what they are elsewhere that, were they to fall lower, allfurther accumulations would go abroad. As long as there are oldcountries where capital increases very rapidly, and new countries
where profit is still high, profits in the old countries will not sinkto the rate which would put a stop to accumulation: the fall is
stopped at the point which sends capital abroad.
[511]
302

A comparison of Chart No. XVII with Chart No. VI will furnish somemeans of learning whether the building of railways has gone on faster than iswarranted by the increase of our crops (see supra, pp. 138).

Chapter IV. Consequences Of The
Tendency Of Profits To A Minimum, And
The Stationary State.

§ 1. Abstraction of Capital not necessarily a nationalloss.
The theory of the effect of accumulation on profits must greatly
abate, or rather, altogether destroy, in countries where profits
are low, the immense importance which used to be attached bypolitical economists to the effects which an event or a measureof government might have in adding to or subtracting from thecapital of the country. We have now seen that the lowness of
profits is a proof that the spirit of accumulation is so active, andthat the increase of capital has proceeded at so rapid a rate, as tooutstrip the two counter-agencies, improvements in production
and increased supply of cheap necessaries from abroad. A sudden
abstraction of capital, unless of inordinate amount, [would not]have any real effect in impoverishing the country. After a few
months or years, there would exist in the country just as muchcapital as if none had been taken away. The abstraction, by
raising profits and interest, would give a fresh stimulus to theaccumulative principle, which would speedily fill up the vacuum.
Probably, indeed, the only effect that would ensue would be thatfor some time afterward less capital would be exported, and lessthrown away in hazardous speculation.
In the first place, then, this view of things greatly weakens, ina wealthy and industrious country, the force of the economicalargument against the expenditure of public money for reallyvaluable, even though industriously unproductive, purposes. In

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poor countries, the capital of the country requires the legislator's
sedulous care; he is bound to be most cautious of encroaching
upon it, and should favor to the utmost its accumulation at home,
and its introduction from abroad. But in rich, populous, andhighly cultivated countries, it is not capital which is the deficientelement, but fertile land; and what the legislator should desire
and promote, is not a greater aggregate saving, but a greater
return to savings, either by improved cultivation, or by access tothe produce of more fertile lands in other parts of the globe.
The same considerations enable us to throw aside as unworthyof regard one of the common arguments against emigration asa means of relief for the laboring-class. Emigration, it is said,
can do no good to the laborers, if, in order to defray the cost,
as much must be taken away from the capital of the country
as from its population. If one tenth of the laboring people ofEngland were transferred to the colonies, and along with them
one tenth of the circulating capital of the country, either wages,
or profits, or both, would be greatly benefited, by the diminishedpressure of capital and population upon the fertility of the land.
The landlords alone would sustain some loss of income; andeven they, only if colonization went to the length of actuallydiminishing capital and population, but not if it merely carried
off the annual increase.

§ 2. In opulent countries, the extension of machinery
not detrimental but beneficial to Laborers.
From the same principles we are now able to arrive at a final
conclusion respecting the effects which machinery, and generally
the sinking of capital for a productive purpose, produce upon
the immediate and ultimate interests of the laboring-class. The
characteristic property of this class of industrial improvements is591
the conversion of circulating capital into fixed: and it was shownin the first book303 that, in a country where capital accumulates
slowly, the introduction of machinery, permanent improvementsof land, and the like, might be, for the time, extremely injurious;
since the capital so employed might be directly taken from thewages fund, the subsistence of the people and the employment
for labor curtailed, and the gross annual produce of the country
actually diminished. But in a country of great annual savingsand low profits no such effects need be apprehended. It merely
draws off at one orifice what was already flowing out at another;or, if not, the greater vacant space left in the reservoir does butcause a greater quantity to flow in. Accordingly, in spite of
the mischievous derangements of the money market which havebeen occasioned by the great sums in process of being sunk inrailways, I can not agree with those who apprehend any mischief,from this source, to the productive resources of the country.
Not on the absurd ground (which to any one acquainted withthe elements of the subject needs no confutation) that railway
expenditure is a mere transfer of capital from hand to hand, bywhich nothing is lost or destroyed. This is true of what is spentin the purchase of the land; a portion too of what is paid toagents, counsels, engineers, and surveyors, is saved by those
who receive it, and becomes capital again: but what is laid out inthe bona fide construction of the railway itself is lost and gone;
when once expended, it is incapable of ever being paid in wages
or applied to the maintenance of laborers again; as a matter ofaccount, the result is, that so much food and clothing and tools
have been consumed, and the country has got a railway instead.
It already appears, from these considerations, that theconversion of circulating capital into fixed, whether by railways,
or manufactories, or ships, or machinery, or canals, or mines, orworks of drainage and irrigation, is not likely, in any rich country,
303

Book I, Chap. V, § 2.

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to diminish the gross produce or the amount of employment forlabor. There is hardly any increase of fixed capital which does
not enable the country to contain eventually a larger circulating
capital than it otherwise could possess and employ within its own
limits; for there is hardly any creation of fixed capital which,when it proves successful, does not cheapen the articles on which
wages are habitually expended.
As regards the effects upon the material condition of thewages-receiving class, since it seems clear that capital increases faster than improvements, and probably faster eventhan population, it follows that in countries where the laboringclasses are evidently growing in intelligence, they gain inwages with the progress of society. Such certainly seems tobe the teaching of Mr. Giffen's late studies (see Book IV,
Chap. III, § 5).

§ 3. Stationary state of wealth and population
dreaded by some writers, but not in itself undesirable.
Toward what ultimate point is society tending by its industrial
progress? When the progress ceases, in what condition are we to
expect that it will leave mankind?
It must always have been seen, more or less distinctly, bypolitical economists, that the increase of wealth is not boundless;that at the end of what they term the progressive state lies thestationary state, that all progress in wealth is but a postponementof this, and that each step in advance is an approach to it. We
have now been led to recognize that this ultimate goal is at all
times near enough to be fully in view; that we are always on
the verge of it, and that, if we have not reached it long ago, it
is because the goal itself flies before us. The richest and mostprosperous countries would very soon attain the stationary state,593
if no further improvements were made in the productive arts,
and if there were a suspension of the overflow of capital fromthose countries into the uncultivated or ill-cultivated regions of
the earth. Adam Smith always assumes that the condition of themass of the people, though it may not be positively distressed,
must be pinched and stinted in a stationary condition of wealth,and can only be satisfactory in a progressive state. The doctrine
that, to however distant a time incessant struggling may put off
our doom, the progress of society must “end in shallows andin miseries,” far from being, as many people still believe, awicked invention of Mr. Malthus, was either expressly or tacitly
affirmed by his most distinguished predecessors, and can only
be successfully combated on his principles.
Even in a progressive state of capital, in old countries,
a conscientious or prudential restraint on population isindispensable, to prevent the increase of numbers fromoutstripping the increase of capital, and the condition of
the classes who are at the bottom of society from being
deteriorated.
Where there is not, in the people, or insome very large proportion of them, a resolute resistance tothis deterioration—a determination to preserve an establishedstandard of comfort—the condition of the poorest class sinks,
even in a progressive state, to the lowest point which they willconsent to endure. The same determination would be equallyeffectual to keep up their condition in the stationary state, andwould be quite as likely to exist.
I can not, therefore, regard the stationary state of capitaland wealth with the unaffected aversion so generally manifested
toward it by political economists of the old school. I am inclined
to believe that it would be, on the whole, a very considerable
improvement on our present condition.
It is only in the backward countries of the world that increased
production is still an important object; in those most advanced,
what is economically needed is a better distribution, of which

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one indispensable means is a stricter restraint on population.
On the other hand, we may suppose this better distribution ofproperty attained, by the joint effect of the prudence and frugalityof individuals, and of a system of legislation favoring equalityof fortunes, so far as is consistent with the just claim of theindividual to the fruits, whether great or small, of his or her
own industry. We may suppose, for instance (according to thesuggestion thrown out in a former chapter304 ), a limitation of thesum which any one person may acquire by gift or inheritance,
to the amount sufficient to constitute a moderate independence.
Under this twofold influence, society would exhibit these leading
features: a well-paid and affluent body of laborers; no enormous
fortunes, except what were earned and accumulated during asingle lifetime; but a much larger body of persons than at present,
not only exempt from the coarser toils, but with sufficient leisure,both physical and mental, from mechanical details, to cultivate
freely the graces of life, and afford examples of them to theclasses less favorably circumstanced for their growth. Thiscondition of society, so greatly preferable to the present, is not
only perfectly compatible with the stationary state, but, it would
seem, more naturally allied with that state than with any other.
There is room in the world, no doubt, and even in oldcountries, for a great increase of population, supposing the artsof life to go on improving, and capital to increase. But even if
innocuous, I confess I see very little reason for desiring it. The
density of population necessary to enable mankind to obtain, inthe greatest degree, all the advantages both of co-operation andof social intercourse, has, in all the most populous countries,
been attained. If the earth must lose that great portion of its
pleasantness which it owes to things that the unlimited increaseof wealth and population would extirpate from it, for the mere
purpose of enabling it to support a larger but not a better or a
304

Book II, Chap. I, § 6.

595
happier population, I sincerely hope, for the sake of posterity,that they will be content to be stationary, long before necessity
compels them to it.
It is scarcely necessary to remark that a stationary conditionof capital and population implies no stationary state of humanimprovement. Even the industrial arts might be as earnestly andas successfully cultivated, with this sole difference, that insteadof serving no purpose but the increase of wealth, industrial
improvements would produce their legitimate effect, that ofabridging labor. Hitherto it is questionable if all the mechanicalinventions yet made have lightened the day's toil of any humanbeing. They have enabled a greater population to live the same
life of drudgery and imprisonment, and an increased number ofmanufacturers and others to make fortunes. They have increased
the comforts of the middle classes.
The statement that inventions have not “lightened the day's
toil of any human being” has been persistently misquoted
by many persons and has been taken out of its connection.
Mr. Mill distinctly holds that the laborer's lot could have been
improved had there been any limitation of population; that
it is the constant growth of population as society progresses
which destroys the gains afforded to the laboring-classes byimprovements. But it is quite certain that the material factsof Mr. Mill's statement are no longer true. In the UnitedStates wages have risen, with an additional gain in lower
prices; and Mr. Giffen shows the same progress in England.
Moreover, travelers on the Continent speak of a similar
movement already noticeable there. Mr. Giffen's statement in
his comparison305 with fifty years ago, is as follows:“While the money wages have increased as we have seen,
the hours of labor have diminished. It is difficult to estimate
what the extent of this diminution has been, but collecting
305

8.

“Progress of the Working-Classes in the Last Half-Century” (1884), page

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one or two scattered notices I should be inclined to say very
nearly 20 per cent. There has been at least this reduction in the
textile, engineering, and house-building trades. The workman
gets from 50 to 100 per cent more money for 20 per cent lesswork; in round figures he has gained from 70 to 120 per centin fifty years in money return. It is just possible, of course,that the workman may do as much, or nearly as much, in the
shorter period as he did in his longer hours. Still, there is the
positive gain in his being less time at his task, which many of
the classes still tugging lengthily day by day at the oar would
appreciate.”[518]

Chapter V. On The Possible Futurity Of The
Laboring-Classes.

§ 1. The possibility of improvement while Laborers
remain merely receivers of Wages.
There has probably never been a time when more attention
has been called to the material and social conditions of theworking-classes than in the last few years. The great increaseof literature and the extension of the newspaper has brought
to every reader, even where public and private charities havenot sent eye-witnesses into direct contact with distress, amore explicit knowledge of the working-classes than everbefore. The revelation of existing poverty and misery is, often
wrongly, taken to be a proof of the increasing degradationof the working-men, and the cause has been ascribed to thegrasping cruelty of capitalists. Instances of injustice arisingfrom the relations of employers and employed will occur solong as human nature remains imperfect. But the world hopesthat some other relation than that of master and workman
may be evolved in which not only many admitted wrongs
may be avoided, but also new forces may be applied to raise
the laborer out of his dependence on other classes in thecommunity.
We are, at present, living under a régime of private
property and competition. But certainly the progress of thelaborer is not that which can excite enthusiastic hopes forthe future, so long as he remains a mere receiver of wages.
The progress of industrial improvements has resulted, says
Mr. Cairnes, in “a temporary improvement of the laborer's
condition, followed by an increase of population and an

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Principles Of Political Economy
enlarged demand for the cheapened commodity.... Laborers'
commodities, however, are for the most part commodities of
raw produce, or in which the raw material constitutes the chiefelement of the value (clothing is, in truth, the only important
exception); and of all such commodities it is the well-known
law that an augmentation of quantity can only be obtained,
other things being the same, at an increasing proportionalcost. Thus, it has happened that the gain in productivenessobtained by improved processes has, after a generation, to agreat extent been lost—lost, that is to say, for any benefit thatcan be derived from it in favor of wages and profits.... The
large addition to the wealth of the country has gone neither
to profits nor to wages, nor yet to the public at large [asconsumers], but to swell a fund ever growing even while its
proprietors sleep—the rent-roll of the owners of the soil....
The aggregate return from the land has immensely increased;
but the cost of the costliest portion of the produce, which isthat which determines the price of the whole, remains pretty
nearly as it was. Profits, therefore, have not risen at all, andthe real remuneration of the laborer, taking the whole field oflabor, in but a slight degree—at all events in a degree very far
from commensurate with the general progress of industry.”306[519]

Under these conditions, it seems that the only hope of
an improvement for the laboring-classes lies in the limitationof population—or at least in an increase of numbers lessthan the increase of capital and improvements. It is possible,
however, that Mr. Cairnes, with many others, has failed torecognize the full extent of the improvement which is taking
place in the wages of the laborer under the existing social
order. Although we hear much of the wrongs of the workingmen—and they no doubt exist—yet it is unquestionable that
their condition has vastly improved within the last fifty
years; largely, in my opinion, because improvements haveoutstripped population, and because wide areas of fertile land
306

“Leading Principles,” pp. 278-280.

599
in new and peaceful countries have drawn off the surplus
population in the older countries, and because the available
spots in the newer countries like the United States have notyet been covered over with a population sufficiently dense to
keep real wages anything below a relatively high standard.
The facts to substantiate this opinion, so far as regards GreatBritain, are to be found in a recent investigation307 by Mr.
Giffen, the statistician of the English Board of Trade. For
a very considerable reduction in hours of daily labor, theworkman now receives wages on an average about 70 per
cent higher than fifty years ago, as may be seen by thefollowing table:[520]

Occupation.

Carpenters
Bricklayers
MasonsMinersPattern-weavers
Wool-scourers
Mule-spinners
307

Place.

Wages
fifty
years
ago, perweek.
Manchester
24 0
Glasgow
14 0
Manchester308 24 0
Glasgow
15 0
309
Manchester
24 0
Glasgow
14 0
Staffordshire 2 8310
Huddersfield 16 0
"
17 0
"
25 6

Wages,
present
time,
per
week.
34 0
26 0
36 0
27 0
29 10
23 8
4 0311
25 0
22 0
30 0

Increase or
decrease,amount, percent.
10 0 (+) 42
12 0 (+) 85
12 0 (+) 50
12 0 (+) 80
5 10 (+) 24
9 8 (+) 69
1 4 (+) 50
9 0 (+) 55
5 0 (+) 30
4 6 (+) 20“Progress of the Working-Classes in the Last Half-Century” (1884), being
his inaugural address as President of the London Statistical Society, November
20, 1883.
0
1825.
0
1825.
0
Wages per day.
0
Wages per day.

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Principles Of Political Economy

Weavers
Warpersandbeamers
Windersandreelers
Weavers (men)Reeling
andwarping
Spinning (children)

"
"

12 0
17 0

26 0
27 0

14 0 (+) 115
10 0 (+) 58

"

60

11 0

5 0 (+) 83

Bradford
"

83
79

20 6
15 6

12 3 (+) 150
7 9 (+) 100

"

45

11 6

7 1 (+) 160

With increased wages, prices are not much higher than fifty
years ago. But the clearest evidence as to their betteredmaterial condition is to be found in the following table, whichshows the amount of food consumed per head by the total
population of Great Britain:
Articles.
Bacon and hams,
Pounds.
Butter, Pounds.
Cheese, Pounds.
Currants and raisins,
Pounds.
Eggs, No.
Potatoes, Pounds.
Rice, Pounds.
Cocoa, Pounds.
Coffee, Pounds.
Corn, wheat, andwheat-flour, Pounds.
Raw sugar, Pounds.
Refinedsugar,
Pounds.
Tea, Pounds.

1840.
0.01

1881.
13.93

1.05
0.92
1.45

6.36
5.77
4.34

3.63
0.01
0.90
0.08
1.08
42.47

21.65
12.5
16.32
0.31
0.89
216.92

15.20
Nil.

58.92
8.44

1.22

4.58

601

Tobacco, Pounds.
Wine, Gallons.
Spirits, Gallons.
Malt, Bushels.

0.86
0.25
0.97
1.59

1.41
0.45
1.08
1.91312The question then at once arises, whether capital has
been shown by the statistics to have gained accordingly, or
whether there has been a proportionally less increase thanin wages.
Says Mr. Giffen: “If the return to capital
had doubled, as the wages of the working-classes appear tohave doubled, the aggregate income of the capitalist classes
returned to the income-tax would now be £800,000,000
instead of £400,000,000.... The capitalist, as such, gets a lowinterest for his money, and the aggregate returns to capital is
not a third part of the aggregate income of the country, which
may be put at not less than £1,200,000,000.” It is found,moreover—as a suggestion that property is more generally
diffused—that while there were 25,368 estates entered toprobate in 1838, of an average value of £2,160 each, there
were 55,359 estates in 1882 of an average value of £2,500
each.
But yet the vast increase of wealth made possible byimprovements and the growth of capital would have bettered
the condition of all still more had population been somewhat
more limited. As it is, the material gain has been large in spiteof an increase in the population from 16,500,000 in 1831 tonearly 30,000,000 in 1881. In other words, the landlords havebeen great gainers, while the laborers have intercepted much
more than Mr. Cairnes supposed.
There are at hand some very striking data relating to theUnited States which point in the same direction as those of
Mr. Giffen. Charts No. XIX and XX show vividly how
far the increased productiveness of an industry, arising from0Year 1878.

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greater skill and greater efficiency of labor in the connectionof improved machinery, has enabled manufacturers to steadily
lower the price of their goods, and yet increase the wages paid
to their operatives. What was true of these two cotton-mills
was true of others within New England; for the rate of wages
paid by these mills was the rate current in the country in 1830
and in 1884. While each spindle and loom has become vastly
more effective, we see by Chart No. XIX that the average
production of each operative constantly increased from 4,321
yards per year in 1830, to 28,032 yards in 1884; and this it
was which made possible the corresponding increase in therate of wages from $164 in 1830, to $290 in 1884. The
sum of $290 a year as an average for each operative, is astipend too small to cause any general satisfaction; but hemust be gloomy indeed who does not see that $290 is acheerful possession as compared with $164. There is, then,abundant ground for believing that in the past fifty years thecondition of the working-classes in the United States has beenmaterially improved. The diminishing proportion of the pricewhich goes to the capital is a significant fact, and illustrates
the tendency of profits to fall with the increase of capital.313
The same truth seems to be seen in the table given in aprevious chapter,314 where the wages have been increased,
but the hours have fallen per day from thirteen to eleven since
1840.

[522]

§ 2.—through small holdings, by which thelandlord's gain is shared.
313

These mills have not been able to pay ten per cent regularly, as mentioned
in Chart No. XIX, but it has merely been supposed that ten per cent were
demanded by capital, in order to show that, for such a dividend, it required adiminishing proportion of the price to meet that estimate.
314
Book II, Chap. V, § 5; see also “North American Review,” May, 1884, p.
517.

603
So far we have considered the chances for improvement in anindustrial order in which the present separation of capitalists
from laborers is maintained. But this does not take into
account that future time when cultivation in the United Statesshall be forced down upon inferior land, and no more remains
to be occupied, and when capital may no longer increase as
fast as population. What must be the ultimate outlook forwages-receivers? Or, more practically, what is the outlook
now for those who are wages-receivers, and for whom amore equitable distribution of the product seems desirable?
How can they escape the thralldom of dependence on theaccumulations of others?
In this connection, and of primary importance, is theavenue opened to all holders of small properties to share in
the increase which goes to owners of land. It has been seenthat owners of the soil constantly gain from the inevitabletendencies of industrial progress. If one large owner gains,
why should not the increment be the same if ten owners held
the property instead of one? The more the land is subdivided,
the more the vast increase arising from rent will be shared by alarger number. This, in my opinion, is the strongest reason for
the encouragement of small holdings in every country. The
greater the extension of small properties among the workingclass, the more will they gain a share of that part of the productwhich goes to the owner of land by the persistent increase of
population. If, then, the gain arising from improvements islargely passed to the credit of land-owners, as Mr. Cairnes
believes, it should be absolutely necessary to spread among
the working-classes the doctrine that if they own their own
homes, and buy the land they live on, to that extent will
they “grow rich while they sleep,” independently of theirother exertions. Land worth $500 to-day when bought by thesavings of a laborer, besides the self-respect315 it gives him,
315

For the influences of small properties in restraining an undue increase of
population, see supra, p. 119. For a more general account of the benefits

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will increase in value with the density of population, andbecome worth $600 or more without other sacrifice of his.

§ 3. —through co-operation, by which the manager's
wages are shared.
It will be found, however, that, of the various industrial
rewards, profits tend to diminish, meaning by “profits” only
the interest and insurance given for abstinence and risk inthe use of capital; but that the manager's wages (wages ofsuperintendence) are larger than is commonly supposed inrelation to other industrial rewards, owing to the positionof monopoly practically held by such executive ability as iscompetent to successfully manage large business interests. To
the laborer this large payment to the manager seems to be paid
for the possession of capital. This we now know to be wrong.
The manager's wages are payments of exactly the same nature
as any laborer's wages. It makes no difference whether wages
are paid for manual or mental labor. The payment to capital,
purely as such, known as interest (with insurance for risk), is
unmistakably decreasing, even in the United States. And yet
we see men gain by industrial operations enormous rewards;
but these returns are in their essence solely manager's wages.
For in many instances, as hitherto discussed, we have seenthat the manager is not the owner of the capital he employs. To
what does this lead us? Inevitably to the conclusion that thelaborer, if he would become something more than a receiverof wages, in the ordinary sense, must himself move up in thescale of laborers until he reaches the skill and power also tocommand manager's wages. The importance of this principle
to the working-man can not be exaggerated, and there flows
arising from such holdings, consult Mill's original work, Book II, Chaps. VI
and VII, and T. E. Cliffe Leslie's “Land Systems.”§ 4. Distributive Co-operation.

605

from it important consequences to the whole social conditionof the lower classes. It leads us directly to the means bywhich the lower classes may raise themselves to a higher
position—the actual details of which, of course, are difficult,but, as they are not included in political economy, they mustbe left to sociology—and forms the essential basis of hopefor any proper extension of productive co-operation. In short,
co-operation owes its existence to the possibility of dividing
the manager's wages, to a greater or less degree, among theso-called wages-receivers, or the “laboring-class.” And it isfrom this point of view that co-operation is seen more truly
and fitly than in any other way. For it is to be said that in someof its forms co-operation gives the most promising economic
results as regards the condition of the laborer which have yet
been reached in the long discussion upon the relations of laborand capital.

§ 4. Distributive Co-operation.
It will be my object, then, to describe the chief forms in which
the co-operative principle has manifested itself. These may
be said, in general, to be four: (1) distributive co-operation,by which goods already produced are bought and sold tomembers without the aid of retail dealers; (2) productive cooperation, by which associations are formed for producing andmanufacturing goods for the market; (3) partial productive
co-operation in the form of industrial partnerships between
laborers and employers, without dispensing with the latter;and (4) co-operative, or People's, banks. There are, of course,many other forms in which the principle of co-operation
has been applied; but these four are probably the mostcharacteristic.
Distributive co-operation is at once the simplest and themost successful form, not merely because it requires less for

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capital than any other for its inception, but also because it
calls for less business and executive capacity. The numberof persons capable of managing a small retail store is vastly
greater than the class fit to assume control of the very complex
duties involved in the care of wholesale houses—or, at all
events, of mills and factories. Distributive co-operation has its
origin in the fact that the expenses of a middle-man between
the producer and consumer may be entirely dispensed with,and in the fact that more capital had collected in the businessof distribution than could economically be so employed. Its
educating power on the men concerned in teaching themto save, in showing the need of business methods, and ininstilling the elements of industrial management, is of no little
importance. It is, therefore, the best gateway to any further ormore difficult co-operative experiments—such experiments
as can be attempted only after the proper capital is saved, andthe necessary executive capacity is discovered, or developedby training. In England co-operation began its history in
distributive stores, and has finally led to such a stimulus ofself-help in the laborer, that now co-operative gymnasiums,
libraries, gardens, and other results have proved the wisdomof calling upon the laborers for their own exertions. Under
the system which separates employers and the employed,high wages are not found to be the only boon which thereceivers could wish; for it is sometimes found that thebest-paid workmen are the most unwise and intemperate.316
For the most ignorant and unskilled of the workmen in thelowest strata the object would seem to be to give not merely
more wages, but give more in such a way as might excite
new and better motives, a desire as well as a possibility of
improvement. Self-help must be stimulated, not deadened bystifling dependence on a class of superiors, or on the state.
The extraordinary growth of co-operation is one of the mostcheering signs of modern times. Distributive co-operation

316

Cf. E. L. Godkin, “North American Review,” 1868, p. 150.

§ 4. Distributive Co-operation.

607

originated in Rochdale, in England, about 1844, with a few
laborers desirous of saving themselves from the high prices
paid for poor provisions. By uniting, they purchased tea by
the chest, sugar by the hogshead, which they sold to eachmember at market prices. They were surprised to find a large
profit by the operation, which they divided proportionallyto the capital subscribed. Others soon joined them; they
took a store-room, and in 1882 there were 10,894 members,
with a share capital of $1,576,215, and with realized profits
in that year of $162,885. They have erected expensive
steam flour-mills, and the society occupies eighteen branchestablishments in Rochdale. Libraries containing more than
15,000 volumes, and classes in science, language, and thetechnical arts, attended by 500 students, have been maintained.
The extension of the Rochdale store led to the necessity of
a wholesale establishment of their own. It is now a large
institution with branches in London and Newcastle. “It owns
manufactories in London, Manchester, Newcastle, Leicester,
Durham, and Crumpsall; and it has depots in Cork, Limerick,
Kilmallock, Waterford, Tipperary, Tralee, and Armagh, forthe purchase of butter, potatoes, and eggs. It has buyers in
New York and Copenhagen, and it owns two steamships.
It has a banking department with a turn-over of more than
£12,000,000 annually.”317
The following figures for England and Wales tell theirown story as to the progress of co-operation:318

Number of members
Capital: Share
Capital: Loan
Sales
Net profit
317

1862.
90,000428,000
55,0002,333,000
165,000

1881.
525,000
5,881,000
1,267,000
20,901,000
1,617,000

Fawcett, “Manual of Political Economy” (last edition), chapter on Cooperation.
318
Giffen, “Progress of the Working-Classes in the Last Half-Century,” p. 19.

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Several persons each subscribe a sum to make up the sharecapital of a store, and a person is selected to take charge ofthe purchase and care of the goods. The advantages of theplan are: (1) A division among the co-operators of all thenet profits of the retail trade; (2) a saving in advertisements,
since members are always purchasers without solicitation; (3)no loss by bad debts, since only cash sales are permitted;
and (4) security against fraud as to the character of the goods,
because there is no inducement to make gains by adulterations.
It is often found that the capital is turned over ten times in
the course of a year; while the cost of management in thewholesale Rochdale stores does not amount to one per centon the returns.

[526]

The arrangement of obligations in due order of theirpriority, which has been recommended by Mr. Holyoake,319
is as follows: of funds in the store, payment should be made,(1) of the expenses of management; (2) of interest due on
all loans; (3) of an amount equivalent to ten per cent of thevalue of the fixed stock to cover the annual depreciation fromwear and tear; (4) of dividends on the subscribed capital ofthe members;320 (5) of such a sum as may be necessary foran extension of the business; (6) of two and a half per centof the remaining profit, after all the above items are provided
for, for educational purposes; (7) of the residue, and that only,
among all the persons employed, and members of the store, in
proportion to the amount of their wages, or of their respective
319“History of Co-operation in England” (2 vols., 1879), p. 105.
Mr. Holyoake (“History of Co-operation in England,” p. 99) quotes asfollows from another's experience: “My own pass-book shows that I paid on
November 3d, of last year (1860), £1 to become a member of a co-operative
store. I have paid nothing since, and I am now credited with £3 16s. 6d., nearly
three hundred per cent on my capital in a single year. Of course, that arises
from my purchases having been large in proportion to my investment. In a
co-operative store you get five per cent upon the money which you invest as ashareholder; and, if the store be well conducted, you will get seven and a half
per cent addition.”320§ 5. Productive Co-Operation.

609

purchases during the quarter.321 The payment of dividends tocustomers on their purchases seems now to be considered anessential element of success.

§ 5. Productive Co-Operation.
Productive co-operation presents many serious difficulties,
the chief of which is the need of managing ability. Someone in the association must know the wholesale markets well,the expectation of crops connected with his materials used,
the proper time to buy; he must know the processes of thespecial production thoroughly, the best machinery, the best
adaptation of labor to the given end; he must know thewhims of purchasers, and be ready to change his products
accordingly—in short, a man eminently fitted for success in
his own factory is essential to the profitable management of
one belonging to a body of co-operators. It has been alreadyseen how large a variation in profit is due to manager's wages;
and it is very often only his skill, prudence, and experiencethat make the difference between a failure and a success inbusiness. Unless co-operators are willing to pay as large asum for the services of a good manager as he could get in his
own establishment, they can not secure the talent which will
make their venture succeed.322
In France the national workshops of Louis Blanc,
established in 1848, were a failure. Nowhere has it been
more clearly seen that state help has been disastrous thanin France, where the Constituent Assembly voted 3,000,000
francs for co-operative experiments, all of which failed.
321
For a full account of the proper steps to be taken in establishing a store, withmany practical details, see Charles Barnard's “Co-operation as a Business,” p.
119.
322
Cf. Walker, “Wages Question,” p. 276.

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Curiously enough, distributive co-operation has not succeededin France, because, owing to a wide-spread dislike of thewages system, workmen will try nothing less than productive
schemes. And their success in this has been no greater thanmight be expected, when inexperience is put to a task beyond
its powers.323
In Great Britain and the United States there have been somesuccessful experiments in production; and Mr. Holyoake324
holds that, although workmen certainly do begrudge themanager's salary, productive associations are possible whenmanaged by a board of elected directors. He urges, moreover,that, as in distributive co-operation, if profits are sharedwith customers, there will be insured both popularity andcontinuity of custom without the cost of advertising, and such
expenses as those of travelers and commissions. The plan of
actual operations upon which successes have been reached inEngland seems to be briefly this: (1) To save capital, chiefly
through co-operative associations; (2) to purchase or leasepremises; (3) to engage managers, accountants, and officers
at the ordinary salaries which such men can command in themarket according to their ability; (4) to borrow capital on thecredit of the association; (5) to pay upon capital subscribedby members the same rate of interest as that upon borrowed
capital; (6) to regard as profit only that which remains after
making payment for rent, materials, wages, all businessoutlays, and interest on capital; and (7) to divide the profits
according to the salaries of all officers, wages of workmen,
and purchases of customers. Those mills and factories whichhave sprung out of the extension of distributive associations,as at Rochdale, seem, and naturally so, to have been mostsuccessful. They have gradually trained themselves somewhat
for the work, and their customers were beforehand secured.
That is, where the difficulties of the manager's function have

323
324

Godkin, “North American Review,” 1868.
“History of Co-operation,” vol. ii, chap. ix.

§ 5. Productive Co-Operation.
been lessened, they have a better chance of success. And yet
it must be said that productive associations will gain largely
from the efficiency of the labor when working for its own
interest; and this is an important consideration to be urged infavor of such associations.
325

The Sun Mill, at Oldham, England, was established forspinning cotton in 1861 by the exertions of some co-operative
bodies. Beginning with a share capital of $250,000, and a loan
capital of a like amount, it set 80,000 spindles in operation.
In 1874 they had a share capital of $375,000 (all subscribed
except $1,000), and an equal amount of loan capital, while
the whole plant was estimated as worth $615,000. Two and ahalf per cent per annum has been set apart for the depreciationin the value of the mill, and seven and a half per cent forthe machinery; so that in the first ten years a total sum of$160,000 was set aside for depreciation of the property. The
profits have varied from two to forty per cent; and, while
only five per cent interest was paid on the loan capital, large
dividends were made on the share capital. During the last
few years the Sun Mill has on an average realized a profit of
12-½ per cent, although it is known that the cotton trade has
suffered during this time from a serious depression.
Many experiments, however, have proved failures; andsometimes, when they are successful (as in the case of
the Hatters' Association in Newark, New Jersey326 ), theworkmen have no desire to share their benefits with others,
and practically form a corporation by themselves. The merefact that they do sometimes succeed is an important thing.
Then, too, they have an opportunity of securing by salaries
that executive ability in the community which exists separate
from the possession of capital. And in these days, in large
corporations, the manager is not necessarily (although heoften is) a large owner of capital. The last annual report of the325
326

Holyoake, “History of Co-operation,” p. 131.
Godkin, “North American Review,” 1868.

611

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Co-operative Congress (1882) shows the existence in Englandand Scotland of productive associations for the manufacture ofcloth, flannel, fustian, hosiery, quilts, worsted, nails, watches,linen, and silk, as well as those for engineering, printing, andquarrying; and these were but a few of them.327
In the United States there have been some successes aswell as failures. In January, 1872, a number of machinists andother working-men organized in the town of Beaver Falls,
Pennsylvania, a Co-operative Foundry Association for the
manufacture of stoves, hollow-ware, and fine castings. On
a small capital of only $4,000 they have steadily prospered,paid the market rate of wages, and also paid annual dividends,
over and above all expenses and interest on the plant, of fromtwelve to fifteen per cent. In 1867 thirty workmen started
a co-operative foundry in Somerset, Massachusetts, with acapital of about $14,000. In the years 1874-1875 the company
spent $5,400 for new flasks and patterns, and yet showed a
net gain of $11,914. In 1876 it had a capital of $30,000, anda surplus fund of $28,924.328[529]§ 6. Industrial Partnership.
The difficulties of productive co-operation arising from theneed of skilled management, together with the existing
unsatisfactory relation between employers and laborers whenwholly separate from each other, have led to a most promisingplan of industrial partnership by which the manager retains thecontrol of the business operations, but shares his profits withthe workmen. The gain through increased efficiency, greater
economy, and superior workmanship, recoups the manager forthe voluntary subtraction from his share, and yet the laborers
327
328

Pp. 27, 31, 32.
Barnard, “Co-operation as a Business,” pp. 150-152.

§ 6. Industrial Partnership.

613

receive an additional share; but more than this, it educatesthe laborer in industrial methods, discloses the difficulties ofmanagement, and stimulates him to saving habits and greater
regularity of work. This system is particularly adapted toreaching those laborers who would not themselves rise to thedemands of productive co-operation.
The principle was tried on one of the Belgian railways.
“Ninety-five kilogrammes of coke were consumed for every
league of distance run, but this was known to be more thannecessary; but how to remedy the evil was the problem.
A bonus of 3-½d. on every hectolitre of coke saved on
this average of ninety-five to the league was offered to themen concerned, and this trifling bonus worked the miracle.
The work was done equally well, or better, with forty-eight
kilogrammes of coke instead of ninety-five; just one half, ornearly, saved by careful work, at an expense of probably lessthan one tenth of the saving.”329
The experiment which has attracted most attention in thepast has been that of the Messrs. Briggs, at their collieries
in Yorkshire, England.330 The relations between the owners
and the laborers were as bad as they could well be. “Allcoal-masters is devils, and Briggs is the prince of devils,” ran
the talk of the miners, when they did not choose to send letters
threatening to shoot the owners. In 1865 Messrs. Briggs tried
the plan of an industrial partnership with their men, purely
from business considerations. Seventy per cent of the cost ofraising coal consisted of wages, and fully fifteen per cent ofmaterials which were habitually wasted. The whole property
was valued, and divided into shares of $50 each, of which
the owners retained two thirds, together with the control ofthe business. The remaining one third of the shares wasoffered to the employés. If any subscriber was too poor to
329

Holyoake, “History of Co-operation,” p. 235.
See Thornton, “On Labor,” p. 370. Also see “Parliamentary Documents,”
1868, 1869, xxxi; “Trades-Unions of England,” by the Count de Paris; Brassey's“Work and Wages,” chap. xiii.
330

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pay $50 for a share, the subsequent dividends and payments
were to be applied to purchasing the share. After reserving
a fair allowance for expenses, like the redemption of capital,
whenever the remaining profits exceeded ten per cent on thecapital, that excess was to be divided into two equal parts, oneof which was to be distributed among all persons employedby the company in proportion to their wages, and the otherwas to be retained by the capital. In previous years but once
had they made ten per cent profit on their capital, and twice
only five per cent. In the first year after the new system cameinto operation, the total profits were fourteen per cent, andthe four per cent of excess was divided, two to the laborers'
bonus, and two to the capital, so that capital received twelve
per cent. In the second year the profits were sixteen percent, in the third year seventeen per cent; the first year the
work-people received in addition to their wages $9,000, in
the second $13,500, in the third $15,750. The moral effectwas striking. Work was done regularly, forbearance was
exercised, habits improved, and the faces of the men were set
toward improvement in life. The scheme worked successfully
for years, but was finally ended by the pressure of the outsidetrades-unions, who compelled the workmen to give up thearrangement.
A similar experiment was tried by the Messrs. Brewster,
carriage-manufacturers, of New York. They offered to theirworkmen ten per cent of their profits, before any allowance
was made for interest on the capital invested, or before any
payment was made for the services of the firm as managers. In
one year as much as $11,000 was divided among the laborers.
Again, as in the case of the Briggs colliery, the experiment
was brought to an end by an unreasoning submission to thepressure of outside workmen during a strike.331
But, all in all, industrial partnership332 offers a great field

331

See Walker, “Wages Question,” p. 283. Also see Mill, Book IV, Chap. VII,
§ 5, for an account of M. Leclaire's experiments in France with house-painters.
332
See also Von Böhmert, “Gewinnbetheiligung,” second edition, 1878, and§ 7. People's Banks.

615

for that kind of improvement which is worth more than amere increase of wages, and seems to make it possible toreach the heavy weight of sluggishness among the lower andmore hopeless strata of society. And it is possible that it willstir in them the powers which may afterward find employment
in the harder problems of productive co-operation.333

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[532]

§ 7. People's Banks.
In Germany the struggle between the two theories—self-help
and state-help—was fought out by Schultze-Delitsch—that
is, Schultze of Delitsch, a town in Saxony—and Lasalle,
and the victory given to the former. Schultze-Delitsch, asa consequence, was successful in directing the co-operative
the requisite stock and implements. The laborers were, in fact, formed into a
company in which there were eleven shares, and no laborer was permitted tohold more than one share. The plan was so eminently successful that in a few
years sufficient had been saved out of the profits to repay all that had been
advanced, and the stock and implements became the property of the laborers.
Each share greatly increased in value. Mr. Gurdon was so much encouraged,
not only by the pecuniary advantages secured to the laborers, but also by thegeneral improvement effected in their condition, that some years afterward
he let another and a larger farm on similar terms. Although no statementof accounts has ever been published, the remarkable pecuniary advantages
secured to the laborers is proved by the fact that, after enjoying at least as highwages as were paid in the district, they were able in a few years to become theowners of a valuable property, consisting of the stock and implements on thefarms. One of the most significant and hopeful circumstances connected withthe experiment is, that it was not carried out by a picked body of men; and if somuch could be done by laborers who were probably among the worst educatedin the country, it maybe fairly concluded, that when the intelligence of our rural
population has been better developed, co-operation may be applied in a more
complete form to agriculture, and with even more striking results than wereobtained at Assington.... In the description which has been frequently given of
the system of peasant proprietorship, it is shown how powerfully the industry

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principle in Germany to giving workmen credit in purchasing
tools, etc., when he had no security but his character. This formof co-operation works to give the energetic and industrious
workmen a lever by which, through the possession of credit,
they can raise themselves to the position of small capitalists,
and thus widen the field of possible improvement. While theformer schemes of co-operation described above have given
the wages-receivers a share of the unearned increment fromland, and tend to give them a share of the manager's wages,
the plan of Schultze was to assist them to gain a share in theadvantages belonging to the possession of capital. The capital
was to be accumulated by their own exertions, and, in his
scheme depended on the principle of self-help. The following
is the plan of banks adopted:“Every member is obliged to make a certain weekly
payment into the common stock. As soon as it reaches
a certain sum he is allowed to raise a loan exceeding hisof the laborer is stimulated by the feeling of property. When he cultivates his
own plot of ground, he exerts himself to the utmost, because he knows that
he will enjoy all that is yielded by his labor. Each year, with the extended
use of machinery in agriculture, it is becoming more advantageous to carry on
farming on a large scale. When, therefore, co-operative agriculture becomespracticable, land may be cultivated by associations of laborers, and thus manyof the advantages associated with the system of peasant proprietorship may besecured, while at the same time the disadvantages of small farming may be
avoided. The progress toward co-operative agriculture will no doubt be slow
and gradual.”
Jevons's “Methods of Social Reform” (1883). Professor Jevons (“The Statein Relation to Labor,” pp. 146, 147) has given a brief bibliography, which I
reproduce here:
Charles Babbage, “Economy of Manufactures,” chap. xxvi; H. C. Briggs,“Social Science Association,” 1869; H. C. and A. Briggs, “Evidence before
the Trades-Union Commission,” March 4, 1868, Questions 12,485 to 12,753[Parliamentary Documents]; “The Industrial Partnerships Record”; Pare, “Cooperative Agriculture” (Longmans) 1870; Jean Billon, “Participation desOuvriers aux Bénéfices des Patrons,” Genève, 1877; Fougerousse, “Patrons etOuvriers de Paris” (Chaix), 1880; Sedley Taylor, “Society of Arts Journal,”
February 18, 1881, vol. xxix, pp. 260-270; also in “Nineteenth Century,” May,§ 7. People's Banks.

617

share in the inverse ratio of the amount of his deposit. For
instance, after he has deposited one dollar, he is allowed toborrow five or six; but, if he had deposited twenty dollars,
he is allowed only to borrow thirty. The security he iscompelled to offer is his own and that of two other membersof the association, who become jointly and severally liable.
He may have no assets whatever beyond the amount of his
deposits, nor may his guarantors; the bank relies simply on
the character of the three, and the two securities rely on thecharacter of their principal; and the remarkable fact is, thatthe security has been found sufficient, that the interest of themen in the institutions and the fear of the opinion of theirfellows has produced a display of honesty and punctuality
such as perhaps is not to be found in the history of any otherbanking institutions. Such is the confidence inspired by these
institutions that they hold on deposit, or as loans from third
parties, an amount exceeding by more than three fourths thetotal amount of their own capital. The monthly contributionsof the members may be as low as ten cents, but the amountwhich each member is allowed to have in some banks is not
more than seven or eight dollars, in none more than threehundred dollars. He has a right to borrow to the full amountof his deposit without giving security; if he desires to borrowa larger sum, he must furnish security in the manner wehave described. The liability of the members is unlimited.
The plan of limiting the liability to the amount of the capital
1881, pp. 802-811, “On Profit-Sharing”; J. C. Van Marken, “La Question
Ouvrière: Essai de Solution Pratique” (Chaix) 1881.
333
In his last edition of his “Manual,” Professor Fawcett thus describes a
co-operative experiment in agriculture: “The one that has attracted the mostattention was made nearly forty years since by Mr. Gurdon, on his estate at
Assington, near Sudbury, in Suffolk. Mr. Gurdon was so much impressedwith the miserable condition of the agricultural laborers who were employedon his estate, that he was prompted to do something on their behalf. When,
therefore, one of his farms became vacant, he offered to let it at the ordinary
rent, £150 a year, to the laborers who worked upon it. As they, of course,
had not sufficient capital to cultivate it, he in the first instance loaned them

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deposited was tried at first, but it inspired no confidence, andthe enterprise did not succeed till every member was madegenerally liable. Each member, on entering, is obliged to
pay a small fee, which goes toward forming or maintaining
a reserve fund, apart from the active capital. The profits arederived from the interest paid by borrowers, which amounts
to from eight to ten per cent, which may not sound verylarge in our ears, but in Germany is very high. Not over
five per cent is paid on capital borrowed from outsiders.
All profits are distributed in dividends among the membersof the association, in the proportion of the amount of theirdeposits—after the payment of the expenses of management,of course—and the apportionment of a certain percentage tothe reserve-fund. Every member, as we have said, has a rightto borrow to the extent of his deposit without security; but
then, if he seeks to borrow more, whether he shall obtain any
loan, and, if so, how large a one, is decided by the board ofmanagement, who are guided in making their decision just as
all bank officers are—by a consideration of the circumstancesof the bank as well as those of the borrower. All the affairsof the association are discussed and decided in the last resort
by a general assembly composed of all the members.”334 The
main part of the capital loaned by the banks is obtained fromoutside sources on the credit of the associations. In 1865 there
were 961 of these institutions in Germany; in 1877 there were1,827, with over 1,000,000 members, owning $40,000,000 of
capital, with $100,000,000 more on loan, and doing a businessof $550,000,000.335

[537]
334

Godkin, “North American Review,” 1868. Also see Hermann SchultzeDelitsch, “Die Entwickelung des Genossenschaftswesens in Deutschland”(1870). This eminent philanthropist died April 29, 1883. For other formsof co-operation, building associations, etc., see Barnard, “Co-operation as a
Business”; Pajot, “Du Progrès par les Sociétés de Secours Mutuels” (1878).
335
See “Economics of Industry,” by Mr. and Mrs. Marshall, p. 223.

Book V. On The Influence Of
Government.

Chapter I. On The General Principles Of
Taxation.

§ 1. Four fundamental rules of Taxation.
One of the most disputed questions, both in political science andin practical statesmanship at this particular period, relates to theproper limits of the functions and agency of governments.
We shall first consider the economical effects arising fromthe manner in which governments perform their necessary andacknowledged functions.
We shall then pass to certain governmental interferences ofwhat I have termed the optional kind (i.e., overstepping theboundaries of the universally acknowledged functions) whichhave heretofore taken place, and in some cases still take place,under the influence of false general theories.
The first of these divisions is of an extremely miscellaneous
character: since the necessary functions of government, and thosewhich are so manifestly expedient that they have never or very
rarely been objected to, are too various to be brought under any

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very simple classification. We commence, [under] the first head,with the theory of Taxation.
The qualities desirable, economically speaking, in a system oftaxation, have been embodied by Adam Smith in four maxims
or principles, which, having been generally concurred in by
subsequent writers, may be said to have become classical,
and this chapter can not be better commenced than by quoting
them:336“1. The subjects of every state ought to contribute to the
support of the government, as nearly as possible in proportion
to their respective abilities: that is, in proportion to the revenue
which they respectively enjoy under the protection of the state. In
the observation or neglect of this maxim consists what is called
the equality or inequality of taxation.
“2. The tax which each individual is bound to pay ought to becertain, and not arbitrary. The time of payment, the manner ofpayment, the quantity to be paid, ought all to be clear and plain
to the contributor, and to every other person. The certainty ofwhat each individual ought to pay is, in taxation, a matter of sogreat importance, that a very considerable degree of inequality,
it appears, I believe, from the experience of all nations, is notnear so great an evil as a very small degree of uncertainty.
“3. Every tax ought to be levied at the time, or in the manner,in which it is most likely to be convenient for the contributor
to pay it. Taxes upon such consumable goods as are articles ofluxury are all finally paid by the consumer, and generally in amanner that is very convenient to him. He pays them little bylittle, as he has occasion to buy the goods. As he is at liberty,
too, either to buy or not to buy, as he pleases, it must be his own
fault if he ever suffers any considerable inconvenience from suchtaxes.
“4. Every tax ought to be so contrived as both to take out and336“Wealth of Nations,” Book V, chap. ii.

§ 2. Grounds of the principle of Equality of Taxation.

621

to keep out of the pockets of the people as little as possible over
and above what it brings into the public treasury of the state. A
tax may either take out or keep out of the pockets of the people
a great deal more than it brings into the public treasury in thefour following ways: First, the levying of it may require a great
number of officers, whose salaries may eat up the greater partof the produce of the tax, and whose perquisites may impose
another additional tax upon the people.” Secondly, it may divert
a portion of the labor and capital of the community from a more
to a less productive employment. “Thirdly, by the forfeitures andother penalties which those unfortunate individuals incur who
attempt unsuccessfully to evade the tax it may frequently ruin
them, and thereby put an end to the benefit which the community
might have derived from the employment of their capitals. An
injudicious tax offers a great temptation to smuggling. Fourthly,by subjecting the people to the frequent visits and the odious
examination of the tax-gatherers it may expose them to much
unnecessary trouble, vexation, and oppression”: to which may
be added that the restrictive regulations to which trades andmanufactures are often subjected, to prevent evasion of a tax,
are not only in themselves troublesome and expensive, but often
oppose insuperable obstacles to making improvements in theprocesses.

§ 2. Grounds of the principle of Equality of Taxation.
The first of the four points, equality of taxation, requires to be
more fully examined, being a thing often imperfectly understood,
and on which many false notions have become to a certain degreeaccredited, through the absence of any definite principles of
judgment in the popular mind.
For what reason ought equality to be the rule in matters oftaxation? For the reason that it ought to be so in all affairs

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of government. A government ought to make no distinctionof persons or classes in the strength of their claims on it. If
any one bears less than his fair share of the burden, some otherperson must suffer more than his share. Equality of taxation,
therefore, as a maxim of politics, means equality of sacrifice.
It means apportioning the contribution of each person toward
the expenses of government, so that he shall feel neither more
nor less inconvenience from his share of the payment than every
other person experiences from his. There are persons, however,
who regard the taxes paid by each member of the community
as an equivalent for value received, in the shape of service
to himself; and they prefer to rest the justice of making eachcontribute in proportion to his means upon the ground that he
who has twice as much property to be protected receives, onan accurate calculation, twice as much protection, and ought, on
the principles of bargain and sale, to pay twice as much for it.
Since, however, the assumption that government exists solely forthe protection of property is not one to be deliberately adhered
to, some consistent adherents of the quid pro quo principle
go on to observe that protection being required for persons aswell as property, and everybody's person receiving the sameamount of protection, a poll-tax of a fixed sum per head is aproper equivalent for this part of the benefits of government,
while the remaining part, protection to property, should be paid
for in proportion to property. But, in the first place, it is notadmissible that the protection of persons and that of property
are the sole purposes of government. In the second place, thepractice of setting definite values on things essentially indefinite,and making them a ground of practical conclusions, is peculiarly
fertile in the false views of social questions. It can not be
admitted that to be protected in the ownership of ten times asmuch property is to be ten times as much protected. If we wanted
to estimate the degrees of benefit which different persons derivefrom the protection of government, we should have to consider

623
who would suffer most if that protection were withdrawn: towhich question, if any answer could be made, it must be, thatthose would suffer most who were weakest in mind or body,either by nature or by position.

§ 3. Should the same percentage be levied on allamounts of Income?
Setting out, then, from the maxim that equal sacrifices ought
to be demanded from all, we have next to inquire whether thisis in fact done, by making each contribute the same percentage
on his pecuniary means. Many persons maintain the negative,
saying that a tenth part taken from a small income is a heavier
burden than the same fraction deducted from one much larger;
and on this is grounded the very popular scheme of what iscalled a graduated property-tax, viz., an income-tax in which thepercentage rises with the amount of the income.
On the best consideration I am able to give to this question,
it appears to me that the portion of truth which the doctrine
contains arises principally from the difference between a tax
which can be saved from luxuries and one which trenches, inever so small a degree, upon the necessaries of life. To take athousand a year from the possessor of ten thousand would not
deprive him of anything really conducive either to the support orto the comfort of existence; and, if such would be the effect oftaking five pounds from one whose income is fifty, the sacrificerequired from the last is not only greater than, but entirely
incommensurable with, that imposed upon the first. The modeof adjusting these inequalities of pressure which seems to be themost equitable is that recommended by Bentham, of leaving acertain minimum of income, sufficient to provide the necessaries
of life, untaxed. Suppose [$250] a year to be sufficient to provide

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the number of persons ordinarily supported from a single income
with the requisites of life and health, and with protection against
habitual bodily suffering, but not with any indulgence. This thenshould be made the minimum, and incomes exceeding it should
pay taxes not upon their whole amount, but upon the surplus. If
the tax be ten per cent, an income of [$300] should be considered
as a net income of [$50], and charged with [$5] a year, while an
income of [$5,000] should be charged as one of [$4,750]. An
income not exceeding [$250] should not be taxed at all, either
directly or by taxes on necessaries; for, as by supposition this is
the smallest income which labor ought to be able to command,
the government ought not to be a party to making it smaller.

[542]

Both in England and on the Continent a graduated property-tax(l'impôt progressif) has been advocated, on the avowed groundthat the state should use the instrument of taxation as a means of
mitigating the inequalities of wealth. I am as desirous as any one
that means should be taken to diminish those inequalities, but not
so as to relieve the prodigal at the expense of the prudent. To tax
the larger incomes at a higher percentage than the smaller is to lay
a tax on industry and economy; to impose a penalty on people forhaving worked harder and saved more than their neighbors. It is
not the fortunes which are earned, but those which are unearned,
that it is for the public good to place under limitation. With
respect to the large fortunes acquired by gift or inheritance, thepower of bequeathing is one of those privileges of property which
are fit subjects for regulation on grounds of general expediency;
and I have already suggested,337 as the most eligible mode ofrestraining the accumulation of large fortunes in the hands ofthose who have not earned them by exertion, a limitation of theamount which any one person should be permitted to acquireby gift, bequest, or inheritance. I conceive that inheritances andlegacies, exceeding a certain amount, are highly proper subjects
337

Book II, Chap. I, § 6.

625
for taxation; and that the revenue from them should be as great
as it can be made without giving rise to evasions, by donationinter vivos or concealment of property, such as it would be
impossible adequately to check. The principle of graduation (asit is called), that is, of levying a larger percentage on a largersum, though its application to general taxation would be in myopinion objectionable, seems to me both just and expedient as
applied to legacy and inheritance duties.
The objection to a graduated property-tax applies in an
aggravated degree to the proposition of an exclusive tax onwhat is called “realized property,” that is, property not forminga part of any capital engaged in business, or rather in businessunder the superintendence of the owner; as land, the publicfunds, money lent on mortgage, and shares in stock companies.
Except the proposal of applying a sponge to the national debt, nosuch palpable violation of common honesty has found sufficient
support in this country, during the present generation, to be
regarded as within the domain of discussion. It has not thepalliation of a graduated property-tax, that of laying the burden
on those best able to bear it; for “realized property” includes
the far larger portion of the provision made for those who areunable to work, and consists, in great part, of extremely small
fractions. I can hardly conceive a more shameless pretension
than that the major part of the property of the country, that ofmerchants, manufacturers, farmers, and shopkeepers, should be
exempted from its share of taxation; that these classes should
only begin to pay their proportion after retiring from business,and if they never retire should be excused from it altogether. But
even this does not give an adequate idea of the injustice of the
proposition. The burden thus exclusively thrown on the ownersof the smaller portion of the wealth of the community would noteven be a burden on that class of persons in perpetual succession,
but would fall exclusively on those who happened to compose it
when the tax was laid on. As land and those particular securities

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would thenceforth yield a smaller net income, relatively to thegeneral interest of capital and to the profits of trade, the balance
would rectify itself by a permanent depreciation of those kindsof property. Future buyers would acquire land and securities at
a reduction of price, equivalent to the peculiar tax, which tax
they would, therefore, escape from paying; while the original
possessors would remain burdened with it even after partingwith the property, since they would have sold their land or
securities at a loss of value equivalent to the fee-simple of thetax. Its imposition would thus be tantamount to the confiscation
for public uses of a percentage of their property equal to thepercentage laid on their income by the tax.

[544]

The above proposition has been extended, by those in the
United States who appeal to class prejudice, to a proposal to
tax the incomes of those who hold government bonds. It sohappened that, for example, the six dollars income on a onehundred-dollar bond of the United States was not, in the war
period, deemed a sufficient equivalent for the risk of loaning
one hundred dollars to the state; and Congress, therefore,
agreed to relieve them of taxation. It is the same thing to alender if he receive six per cent directly from the Government,
or if he receive seven per cent, and is obliged to pay backone per cent to the treasury in the form of taxation; but to
the Government it is another thing, because if it sell a taxed
bond at seven per cent interest, it does not receive back thewhole of the one per cent tax, but the one per cent tax less theexpense of levying it. In other words the Government, in thelatter case, pays six per cent interest plus the cost of levying
the tax; and consequently borrowed more cheaply in the formof an untaxed bond, as was the hope when the provision was
made. If, then, a tax were now to be put upon the bonds, itwould fall exclusively on the present holders of them; for,since it diminishes the net income from the bond, it lowers

627
the selling price of the bond itself, as before explained.338§ 4. Should the same percentage be levied on
Perpetual and on Terminable Incomes?
Whether the profits of trade may not rightfully be taxed at alower rate than incomes derived from interest or rent is part ofthe more comprehensive question whether life-incomes should
be subjected to the same rate of taxation as perpetual incomes;
whether salaries, for example, or annuities, or the gains ofprofessions, should pay the same percentage as the income frominheritable property.
The existing tax [in England] treats all kinds of incomesexactly alike,339 taking its [fivepence] in the pound as wellfrom the person whose income dies with him as from thelandholder, stockholder, or mortgagee, who can transmit his
fortune undiminished to his descendants. This is a visible
injustice; yet it does not arithmetically violate the rule that
taxation ought to be in proportion to means. When it is said thata temporary income ought to be taxed less than a permanent one,the reply is irresistible that it is taxed less: for the income whichlasts only ten years pays the tax only ten years, while that whichlasts forever pays forever. The claim in favor of terminable
incomes does not rest on grounds of arithmetic, but of humanwants and feelings. It is not because the temporary annuitant has
smaller means, but because he has greater necessities, that heought to be assessed at a lower rate.
In spite of the nominal equality of income, A, an annuitantof £1,000 a year, can not so well afford to pay £100 out of it
as B, who derives the same annual sum from heritable property;
A having usually a demand on his income which B has not,338
339

Book III, Chap. XIX, § 5.
A higher rate is now imposed on landed than on professional incomes.

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namely, to provide by saving for children or others; to which,in the case of salaries or professional gains, must generally be
added a provision for his own later years; while B may expend
his whole income without injury to his old age, and still have it
all to bestow on others after his death. If A, in order to meet these
exigencies, must lay by £300 of his income, to take £100 from
him as income-tax is to take £100 from £700, since it must be
retrenched from that part only of his means which he can afford
to spend on his own consumption. Were he to throw it ratably
on what he spends and on what he saves, abating £70 from his
consumption and £30 from his annual saving, then indeed his
immediate sacrifice would be proportionally the same as B's;
but then his children or his old age would be worse provided
for in consequence of the tax. The capital sum which would
be accumulated for them would be one tenth less, and on the
reduced income afforded by this reduced capital they would bea second time charged with income-tax; while B's heirs would
only be charged once.
The principle, therefore, of equality of taxation, interpreted in
its only just sense, equality of sacrifice, requires that a person
who has no means of providing for old age, or for those in whom
he is interested, except by saving from income, should have thetax remitted on all that part of his income which is really andbona fide applied to that purpose.
If, indeed, reliance could be placed on the conscience of thecontributors, or sufficient security taken for the correctness of
their statements by collateral precautions, the proper mode ofassessing an income-tax would be to tax only the part of income
devoted to expenditure, exempting that which is saved. For
when saved and invested (and all savings, speaking generally,
are invested) it thenceforth pays income-tax on the interest or
profit which it brings, notwithstanding that it has already beentaxed on the principal. Unless, therefore, savings are exemptedfrom income-tax, the contributors are twice taxed on what they

629
save, and only once on what they spend. To tax the sum invested,
and afterward tax also the proceeds of the investment, is to tax
the same portion of the contributor's means twice over.
No income-tax is really just from which savings are notexempted; and no income-tax ought to be voted without thatprovision, if the form of the returns and the nature of the evidence
required could be so arranged as to prevent the exemption frombeing taken fraudulent advantage of, by saving with one handand getting into debt with the other, or by spending in thefollowing year what had been passed tax-free as saving in theyear preceding. But, if no plan can be devised for the exemptionof actual savings, sufficiently free from liability to fraud, it isnecessary, as the next thing in point of justice, to take into
account, in assessing the tax, what the different classes ofcontributors ought to save. In fixing the proportion between thetwo rates, there must inevitably be something arbitrary; perhaps
a deduction of one fourth in favor of life-incomes would be as
little objectionable as any which could be made.
Of the net profits of persons in business, a part, as before
observed, may be considered as interest on capital, and of aperpetual character, and the remaining part as remuneration forthe skill and labor of superintendence. The surplus beyond
interest depends on the life of the individual, and even on his
continuance in business, and is entitled to the full amount of
exemption allowed to terminable incomes.

§ 5. The increase of the rent of land from naturalcauses a fit subject of peculiar Taxation.
Suppose that there is a kind of income which constantly tends
to increase, without any exertion or sacrifice on the part of theowners: those owners constituting a class in the community,

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whom the natural course of things progressively enriches,
consistently with complete passiveness on their own part. In
such a case it would be no violation of the principles on which
private property is grounded, if the state should appropriate thisincrease of wealth, or part of it, as it arises. This would notproperly be taking anything from anybody; it would merely beapplying an accession of wealth, created by circumstances, to thebenefit of society, instead of allowing it to become an unearned
appendage to the riches of a particular class.
Now, this is actually the case with rent. The ordinary progressof a society which increases in wealth is at all times tending toaugment the incomes of landlords; to give them both a greater
amount and a greater proportion of the wealth of the community,
independently of any trouble or outlay incurred by themselves.
They grow richer, as it were, in their sleep, without working,risking, or economizing. What claim have they, on the generalprinciple of social justice, to this accession of riches? In what
would they have been wronged if society had, from the beginning,reserved the right of taxing the spontaneous increase of rent, tothe highest amount required by financial exigencies? The only
admissible mode of proceeding would be by a general measure.
The first step should be a valuation of all the land in the country.
The present value of all land should be exempt from the tax; but
after an interval had elapsed, during which society had increasedin population and capital, a rough estimate might be made of
the spontaneous increase which had accrued to rent since thevaluation was made. Of this the average price of produce would
be some criterion: if that had risen, it would be certain that rent
had increased, and (as already shown) even in a greater ratio than
the rise of price. On this and other data, an approximate estimate
might be made how much value had been added to the land of thecountry by natural causes; and in laying on a general land-tax,
which for fear of miscalculation should be considerably within
the amount thus indicated, there would be an assurance of not631
touching any increase of income which might be the result ofcapital expended or industry exerted by the proprietor.
With reference to such a tax, perhaps a safer criterion thaneither a rise of rents or a rise of the price of corn, would be a
general rise in the price of land. It would be easy to keep the tax
within the amount which would reduce the market value of land
below the original valuation; and up to that point, whatever theamount of the tax might be, no injustice would be done to the
proprietors.
In 1870 Mr. Mill became President of the Land Tenure
Association, one of whose objects was: “To claim for the
benefit of the State the Interception by Taxation of the Future
Unearned Increase of the Rent of Land (so far as the samecan be ascertained), or a great part of that increase, whichis continually taking place, without any effort or outlay by
the proprietors, merely through the growth of population andwealth; reserving to owners the option of relinquishing theirproperty to the state at the market value which it may haveacquired at the time when this principle may be adopted
by the Legislature.” It is urged against this plan that, if theGovernment take for itself the increase from rent, it should
also make compensation for loss arising from declining rents,
whenever there happens to be any readjustment of values inland.340§ 6. Taxes falling on Capital not necessarily
objectionable.
In addition to the preceding rules, another general rule of taxation
is sometimes laid down—namely, that it should fall on income
and not on capital.
340

Cf. Walker, “Land and Rent,” page 134.

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To provide that taxation shall fall entirely on income, and not
at all on capital, is beyond the power of any system of fiscalarrangements. There is no tax which is not partly paid from what
would otherwise have been saved; no tax, the amount of which,if remitted, would be wholly employed in increased expenditure,and no part whatever laid by as an addition to capital. All taxes,
therefore, are in some sense partly paid out of capital; and in apoor country it is impossible to impose any tax which will not
impede the increase of the national wealth. But, in a country
where capital abounds and the spirit of accumulation is strong,
this effect of taxation is scarcely felt. To take from capital by
taxation what emigration would remove, or a commercial crisis
destroy, is only to do what either of those causes would havedone—namely, to make a clear space for further saving.
I can not, therefore, attach any importance, in a wealthy
country, to the objection made against taxes on legacies andinheritances, that they are taxes on capital. It is perfectly true thatthey are so. As Ricardo observes, if £100 are taken from any
one in a tax on houses or on wine, he will probably save it, or apart of it, by living in a cheaper house, consuming less wine, orretrenching from some other of his expenses; but, if the same sum
be taken from him because he has received a legacy of £1,000, he
considers the legacy as only £900, and feels no more inducement
than at any other time (probably feels rather less inducement)
to economize in his expenditure. The tax, therefore, is wholly
paid out of capital; and there are countries in which this would
be a serious objection. But, in the first place, the argument can
not apply to any country which has a national debt and devotes
any portion of revenue to paying it off, since the produce of thetax, thus applied, still remains capital, and is merely transferredfrom the tax-payer to the fund-holder. But the objection is neverapplicable in a country which increases rapidly in wealth.

Chapter II. Of Direct Taxes.

§ 1. Direct taxes either on income or expenditure.
Taxes are either direct or indirect. A direct tax is one which isdemanded from the very persons who, it is intended or desired,should pay it. Indirect taxes are those which are demandedfrom one person in the expectation and intention that he shallindemnify himself at the expense of another: such as the excise
or customs. The producer or importer of a commodity is called
upon to pay tax on it, not with the intention to levy a peculiar
contribution upon him, but to tax through him the consumers of
the commodity, from whom it is supposed that he will recover
the amount by means of an advance in price.
Direct taxes are either on income or on expenditure. Most taxes
on expenditure are indirect, but some are direct, being imposed,
not on the producer or seller of an article, but immediately on
the consumer. A house-tax, for example, is a direct tax on
expenditure, if levied, as it usually is, on the occupier of thehouse. If levied on the builder or owner, it would be an indirecttax. A window-tax is a direct tax on expenditure; so are the taxes
on horses and carriages.
The sources of income are rent, profits, and wages. This
includes every sort of income, except gift or plunder. Taxes may
be laid on any one of the three kinds of income, or a uniform tax
on all of them. We will consider these in their order.

§ 2. Taxes on rent.
A tax on rent falls wholly on the landlord. There are no means

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by which he can shift the burden upon any one else. It does
not affect the value or price of agricultural produce, for this isdetermined by the cost of production in the most unfavorable
circumstances, and in those circumstances, as we have so often
demonstrated, no rent is paid.
This, however, is, in strict exactness, only true of the rent
which is the result either of natural causes, or of improvements
made by tenants. When the landlord makes improvements which
increase the productive power of his land, he is remunerated forthem by an extra payment from the tenant; and this payment,
which to the landlord is properly a profit on capital, is blended andconfounded with rent. A tax on rent, if extending to this portion ofit, would discourage landlords from making improvements; butwhatever hinders improvements from being made in the mannerin which people prefer to make them, will often prevent themfrom being made at all; and on this account a tax on rent would
be inexpedient unless some means could be devised of excludingfrom its operation that portion of the nominal rent which may be
regarded as landlord's profit.

§ 3. —on profits.
A tax on profits, like a tax on rent, must, at least in its immediate
operation, fall wholly on the payer. All profits being alikeaffected, no relief can be obtained by a change of employment.
If a tax were laid on the profits of any one branch of productive
employment, the tax would be virtually an increase of the costof production, and the value and price of the article would
rise accordingly; by which the tax would be thrown upon the
consumers of the commodity, and would not affect profits. But
a general and equal tax on all profits would not affect generalprices, and would fall, at least in the first instance, on capitalists
alone.

§ 3. —on profits.

635

There is, however, an ulterior effect, which, in a rich andprosperous country, requires to be taken into account. It may
operate in two different ways: (1.) The curtailment of profit,
and the consequent increased difficulty in making a fortune or
obtaining a subsistence by the employment of capital, may act asa stimulus to inventions, and to the use of them when made. If
improvements in production are much accelerated, and if these
improvements cheapen, directly or indirectly, any of the things
habitually consumed by the laborer, profits may rise, and risesufficiently to make up for all that is taken from them by thetax. In that case the tax will have been realized without loss
to any one, the produce of the country being increased by anequal, or what would in that case be a far greater, amount. The
tax, however, must even in this case be considered as paid fromprofits, because the receivers of profits are those who would be
benefited if it were taken off.
But (2.) though the artificial abstraction of a portion of
profits would have a real tendency to accelerate improvements in
production, no considerable improvements might actually result,or only of such a kind as not to raise general profits at all, or not
to raise them so much as the tax had diminished them. If so, therate of profit would be brought closer to that practical minimum
to which it is constantly approaching. At its first imposition
the tax falls wholly on profits; but the amount of increase ofcapital, which the tax prevents, would, if it had been allowed tocontinue, have tended to reduce profits to the same level; andat every period of ten or twenty years there will be found lessdifference between profits as they are and profits as they wouldin that case have been, until at last there is no difference, andthe tax is thrown either upon the laborer or upon the landlord.
The real effect of a tax on profits is to make the country possessat any given period a smaller capital and a smaller aggregate
production, and to make the stationary state be attained earlier,
and with a smaller sum of national wealth.

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Even in countries which do not accumulate so fast as to bealways within a short interval of the stationary state, it seems
impossible that, if capital is accumulating at all, its accumulation
should not be in some degree retarded by the abstraction of
a portion of its profit; and, unless the effect in stimulating
improvements be a full counterbalance, it is inevitable that apart of the burden will be thrown off the capitalist, upon thelaborer or the landlord. One or other of these is always the loser
by a diminished rate of accumulation. If population continues
to increase as before, the laborer suffers; if not, cultivation ischecked in its advance, and the landlords lose the accession ofrent which would have accrued to them. The only countries inwhich a tax on profits seems likely to be permanently a burden
on capitalists exclusively are those in which capital is stationary,because there is no new accumulation. In such countries the tax
might not prevent the old capital from being kept up throughhabit, or from unwillingness to submit to impoverishment, andso the capitalists might continue to bear the whole of the tax.

§ 4. —on Wages.
We now turn to Taxes on Wages. The incidence of these isvery different, according as the wages taxed as those of ordinary
unskilled labor, or are the remuneration of such skilled or
privileged employments, whether manual or intellectual, as aretaken out of the sphere of competition by a natural or conferredmonopoly.
I have already remarked that, in the present low state of
popular education, all the higher grades of mental or educatedlabor are at a monopoly price, exceeding the wages of common
workmen in a degree very far beyond that which is due to theexpense, trouble, and loss of time required in qualifying for theemployment. Any tax levied on these gains, which still leaves§ 4. —on Wages.

637

them above (or not below) their just proportion, falls on those
who pay it; they have no means of relieving themselves at theexpense of any other class. The same thing is true of ordinary
wages, in cases like that of the United States, or of a new colony,
where, capital increasing as rapidly as population can increase,wages are kept up by the increase of capital, and not by theadherence of the laborers to a fixed standard of comforts. In
such a case, some deterioration of their condition, whether by a
tax or otherwise, might possibly take place without checking theincrease of population. The tax would in that case fall on thelaborers themselves, and would reduce them prematurely to thatlower state to which, on the same supposition with regard to theirhabits, they would in any case have been reduced ultimately,by the inevitable diminution in the rate of increase of capital,
through the occupation of all the fertile land.
Some will object that, even in this case, a tax on wages can
not be detrimental to the laborers, since the money raised byit, being expended in the country, comes back to the laborers
again through the demand for labor. Without, however, revertingto general principles, we may rely on an obvious reductio ad
absurdum. If to take money from the laborers and spend it incommodities is giving it back to the laborers, then, to take moneyfrom other classes, and spend it in the same manner, must be
giving it to the laborers; consequently, the more a government
takes in taxes, the greater will be the demand for labor, and themore opulent the condition of the laborers—a proposition theabsurdity of which no one can fail to see.
In the condition of most communities, wages are regulated by
the habitual standard of living to which the laborers adhere, andon less than which they will not multiply. Where there exists
such a standard, a tax on wages will indeed for a time be borneby the laborers themselves; but, unless this temporary depression
has the effect of lowering the standard itself, the increase of
population will receive a check, which will raise wages, and

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restore the laborers to their previous condition. On whom, inthis case, will the tax fall? A rise of wages occasioned by a tax
must, like any other increase of the cost of labor, be defrayedfrom profits. To attempt to tax day-laborers, in an old country,
is merely to impose an extra tax upon all employers of common
labor; unless the tax has the much worse effect of permanently
lowering the standard of comfortable subsistence in the minds ofthe poorest class.
We find in the preceding considerations an additional
argument for the opinion, already expressed, that direct taxation
should stop short of the class of incomes which do not exceed
what is necessary for healthful existence. These very small
incomes are mostly derived from manual labor; and, as we now
see, any tax imposed on these, either permanently degrades the
habits of the laboring-class, or falls on profits, and burdens
capitalists with an indirect tax, in addition to their share of thedirect taxes; which is doubly objectionable, both as a violationof the fundamental rule of equality, and for the reasons which,as already shown, render a peculiar tax on profits detrimental tothe public wealth, and consequently to the means which society
possesses of paying any taxes whatever.

§ 5. —on Income.
We now pass, from taxes on the separate kinds of income, to a
tax attempted to be assessed fairly upon all kinds; in other words,
an Income-Tax. The discussion of the conditions necessary formaking this tax consistent with justice has been anticipated in thelast chapter. We shall suppose, therefore, that these conditions
are complied with. They are, first, that incomes below a certain
amount should be altogether untaxed. This minimum should not
be higher than the amount which suffices for the necessaries ofthe existing population. The second condition is, that incomes§ 5. —on Income.

639

above the limit should be taxed only in proportion to the surplus
by which they exceed the limit. Thirdly, that all sums saved
from income and invested should be exempt from the tax; or,if this be found impracticable, that life-incomes and incomesfrom business and professions should be less heavily taxed thaninheritable incomes.
An income-tax, fairly assessed on these principles, would be,in point of justice, the least exceptionable of all taxes. The
objection to it, in the present state of public morality, is theimpossibility of ascertaining the real incomes of the contributors.
Notwithstanding, too, what is called the inquisitorial nature of thetax, no amount of inquisitorial power which would be tolerated
by a people the most disposed to submit to it could enable therevenue officers to assess the tax from actual knowledge of thecircumstances of contributors. Rents, salaries, annuities, and all
fixed incomes, can be exactly ascertained. But the variable
gains of professions, and still more the profits of business, which
the person interested can not always himself exactly ascertain,
can still less be estimated with any approach to fairness by atax-collector. The main reliance must be placed, and always has
been placed, on the returns made by the person himself. The tax,
therefore, on whatever principles of equality it may be imposed,
is in practice unequal in one of the worst ways, falling heaviest
on the most conscientious.
It is to be feared, therefore, that the fairness which belongs
to the principle of an income-tax can not be made to attach to
it in practice. This consideration would lead us to concur in theopinion which, until of late, has usually prevailed—that direct
taxes on income should be reserved as an extraordinary resourcefor great national emergencies, in which the necessity of a large
additional revenue overrules all objections.
The difficulties of a fair income-tax have elicited a proposition
for a direct tax of so much per cent, not on income but on
expenditure; the aggregate amount of each person's expenditure

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being ascertained as the amount of income now is, fromstatements furnished by the contributors themselves. The only
security would still be the veracity of individuals, and there is
no reason for supposing that their statements would be moretrustworthy on the subject of their expenses than on that of theirrevenues. The taxes on expenditure at present in force, either
in this or in other countries, fall only on particular kinds ofexpenditure, and differ no otherwise from taxes on commodities
than in being paid directly by the person who consumes or uses
the article, instead of being advanced by the producer or seller,
and reimbursed in the price. The taxes on horses and carriages,
on dogs, on servants, are of this nature. They evidently fallon the persons from whom they are levied—those who use thecommodity taxed. A tax of a similar description, and more
important, is a house-tax, which must be considered at somewhat
greater length.
[557]§ 6. A House-Tax.
The rent of a house consists of two parts, the ground-rent, andwhat Adam Smith calls the building-rent. The first is determinedby the ordinary principles of rent. It is the remuneration given
for the use of the portion of land occupied by the house and its
appurtenances; and varies from a mere equivalent for the rent
which the ground would afford in agriculture to the monopoly
rents paid for advantageous situations in populous thoroughfares.
The rent of the house itself, as distinguished from the ground,is the equivalent given for the labor and capital expended on
the building. The fact of its being received in quarterly or
half-yearly payments makes no difference in the principles bywhich it is regulated. It comprises the ordinary profit on the§ 6. A House-Tax.

641

builder's capital, and an annuity, sufficient at the current rate ofinterest, after paying for all repairs chargeable on the proprietor,
to replace the original capital by the time the house is worn out,
or by the expiration of the usual term of a building-lease.
A tax of so much per cent on the gross rent falls on both thoseportions alike. The more highly a house is rented, the more it
pays to the tax, whether the quality of the situation or that of thehouse itself is the cause. The incidence, however, of these two
portions of the tax must be considered separately.
As much of it as is a tax on building-rent must ultimately
fall on the consumer, in other words, the occupier. For, as the
profits of building are already not above the ordinary rate, theywould, if the tax fell on the owner and not on the occupier,become lower than the profits of untaxed employments, andhouses would not be built. It is probable, however, that forsome time after the tax was first imposed, a great part of it
would fall, not on the renter, but on the owner of the house.
A large proportion of the consumers either could not afford,
or would not choose, to pay their former rent with the tax
in addition, but would content themselves with a lower scale ofaccommodation. Houses, therefore, would be for a time in excessof the demand. The consequence of such excess, in the case of
most other articles, would be an almost immediate diminutionof the supply; but so durable a commodity as houses does not
rapidly diminish in amount. New buildings, indeed, of the classfor which the demand had decreased, would cease to be erected,
except for special reasons; but in the mean time the temporary
superfluity would lower rents, and the consumers would obtain,
perhaps, nearly the same accommodation as formerly, for thesame aggregate payment, rent and tax together. By degrees,
however, as the existing houses wore out, or as increase of
population demanded a greater supply, rents would again rise;
until it became profitable to recommence building, which would
not be until the tax was wholly transferred to the occupier. In

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the end, therefore, the occupier bears that portion of a tax on rent
which falls on the payment made for the house itself, exclusivelyof the ground it stands on.

[559]

The case is partly different with the portion which is a tax
on ground-rent. As taxes on rent, properly so called, fall on thelandlord, a tax on ground-rent, one would suppose, must fall on
the ground-landlord, at least after the expiration of the buildinglease. It will not, however, fall wholly on the landlord, unlesswith the tax on ground-rent there is combined an equivalent tax
on agricultural rent. The lowest rent of land let for building isvery little above the rent which the same ground would yield inagriculture: since it is reasonable to suppose that land, unlessin case of exceptional circumstances, is let or sold for building
as soon as it is decidedly worth more for that purpose than for
cultivation. If, therefore, a tax were laid on ground-rents without
being also laid on agricultural rents, it would, unless of triflingamount, reduce the return from the lowest ground-rents below theordinary return from land, and would check further building quite
as effectually as if it were a tax on building-rents, until either theincreased demand of a growing population, or a diminution of
supply by the ordinary causes of destruction, had raised the rent
by a full equivalent for the tax. But whatever raises the lowest
ground-rents raises all others, since each exceeds the lowest by
the market value of its peculiar advantages. If, therefore, thetax on ground-rents were a fixed sum per square foot, the morevaluable situations paying no more than those least in request,
this fixed payment would ultimately fall on the occupier. Suppose
the lowest ground-rent to be $50 per acre, and the highest $5,000,
a tax of $5 per acre on ground-rents would ultimately raise theformer to $55, and the latter consequently to $5,005, since thedifference of value between the two situations would be exactly
what it was before: the annual $5, therefore, would be paid by
the occupier. But a tax on ground-rent is supposed to be a portionof a house-tax which is not a fixed payment, but a percentage on§ 6. A House-Tax.

643

the rent. The cheapest site, therefore, being supposed as before
to pay $5, the dearest would pay $500, of which only the $5
could be thrown upon the occupier, since the rent would still be
only raised to $5,005. Consequently, $495 of the $500 leviedfrom the expensive site would fall on the ground-landlord.341 A
house-tax thus requires to be considered in a double aspect, as a
tax on all occupiers of houses, and a tax on ground-rents.
In the vast majority of houses the ground-rent forms but asmall proportion of the annual payment made for the house, andnearly all the tax falls on the occupier. It is only in exceptional
cases, like that of the favorite situations in large towns, that the
predominant element in the rent of the house is the ground-rent;
and, among the very few kinds of income which are fit subjects
for peculiar taxation, these ground-rents hold the principal place,
being the most gigantic example extant of enormous accessionsof riches acquired rapidly, and in many cases unexpectedly,
by a few families, from the mere accident of their possessing
certain tracts of land without their having themselves aided in
the acquisition by the smallest exertion, outlay, or risk. So far,therefore, as a house-tax falls on the ground-landlord, it is liable
to no valid objection.
In so far as it falls on the occupier, if justly proportioned
to the value of the house, it is one of the fairest and most
unobjectionable of all taxes. No part of a person's expenditureis a better criterion of his means, or bears, on the whole, morenearly the same proportion to them. The equality of this tax
can only be seriously questioned on two grounds. The first is,that a miser may escape it. This objection applies to all taxes
on expenditure; nothing but a direct tax on income can reach amiser. The second objection is, that a person may require a larger
and more expensive house, not from having greater means, butfrom having a larger family. Of this, however, he is not entitled341

I have changed the sums mentioned in this illustration into our own money.

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to complain, since having a large family is at a person's own
choice; and, so far as concerns the public interest, is a thingrather to be discouraged than promoted.342
A valuation should be made of the house, not at what it would
sell for, but at what would be the cost of rebuilding it, andthis valuation might be periodically corrected by an allowancefor what it had lost in value by time, or gained by repairs andimprovements. The amount of the amended valuation would
form a principal sum, the interest of which, at the current priceof the public funds, would form the annual value at which thebuilding should be assessed to the tax.
As incomes below a certain amount ought to be exempt fromincome-tax, so ought houses below a certain value from housetax, on the universal principle of sparing from all taxation theabsolute necessaries of healthful existence. In order that theoccupiers of lodgings, as well as of houses, might benefit, as injustice they ought, by this exemption, it might be optional withthe owners to have every portion of a house which is occupied
by a separate tenant valued and assessed separately.

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342
Another common objection is that large and expensive accommodation isoften required, not as a residence, but for business. But it is an admitted
principle that buildings, or portions of buildings, occupied exclusively forbusiness, such as shops, warehouses, or manufactories, ought to be exemptedfrom house-tax.
It has been also objected that house-rent in the rural districts is much lower
than in towns, and lower in some towns and in some rural districts than inothers; so that a tax proportioned to it would have a corresponding inequality ofpressure. To this, however, it may be answered that, in places where house-rent
is low, persons of the same amount of income usually live in larger and betterhouses, and thus expend in house-rent more nearly the same proportion of theirincomes than might at first sight appear. Or, if not, the probability will bethat many of them live in those places precisely because they are too poor tolive elsewhere, and have, therefore, the strongest claim to be taxed lightly. In
some cases it is precisely because the people are poor that house-rent remains
low.—MILL.{FNSChapter III. Of Taxes On Commodities, Or
Indirect Taxes.

§ 1. A Tax on all commodities would fall on Profits.
By taxes on commodities are commonly meant those which arelevied either on the producers, or on the carriers or dealers whointervene between them and the final purchasers for consumption;
the phrase being, by custom, confined to indirect taxes—thosewhich are advanced by one person, to be, as is expected andintended, reimbursed by another.
Taxes on commodities are either on production within the
country, or on importation into it, or on conveyance or salewithin it, and are classed respectively as excise, customs, or
tolls and transit duties. To whichever class they belong, andat whatever stage in the progress of the community they may
be imposed, they are equivalent to an increase of the cost of
production; using that term in its most enlarged sense, which
includes the cost of transport and distribution, or, in common
phrase, of bringing the commodity to market.
When the cost of production is increased artificially by a tax,
the effect is the same as when it is increased by natural causes.
If only one or a few commodities are affected, their value andprice rise, so as to compensate the producer or dealer for thepeculiar burden; but if there were a tax on all commodities,
exactly proportioned to their value, no such compensation would
be obtained; there would neither be a general rise of values,
which is an absurdity, nor of prices, which depend on causes
entirely different. There would, however, as Mr. McCulloch
has pointed out, be a disturbance of values, some falling, others
rising, owing to a circumstance, the effect of which on values

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and prices we formerly discussed—the different durability of thecapital employed in different occupations. The gross produce
of industry consists of two parts; one portion serving to replace
the capital consumed, while the other portion is profit. Now,
equal capital in two branches of production must have equal
expectations of profit; but if a greater portion of the one than of
the other is fixed capital, or if that fixed capital is more durable,
there will be a less consumption of capital in the year, and lesswill be required to replace it, so that the profit, if absolutely thesame, will form a greater proportion of the annual returns. To
derive from a capital of $1,000 a profit of $100, the one producer
may have to sell produce to the value of $1,100, the other only
to the value of $500. If on these two branches of industry a tax
be imposed of five per cent ad valorem, the last will be charged
only with $25, the first with $55; leaving to the one $75 profit,
to the other only $45. To equalize, therefore, their expectation of
profit, the one commodity must rise in price, or the other must
fall, or both.343 Commodities made chiefly by immediate labor
must rise in value, as compared with those which are chiefly
made by machinery. It is unnecessary to prosecute this branch of
the inquiry any further.

§ 2. Taxes on particular commodities fall on the
consumer.
A tax on any one commodity, whether laid on its production,
its importation, its carriage from place to place, or its sale, andwhether the tax be a fixed sum of money for a given quantity of
the commodity, or an ad valorem duty, will, as a general rule,
raise the value and price of the commodity by at least the amountof the tax. There are few cases in which it does not raise them343

I have here also changed the amounts into our own money.

647
by more than that amount. In the first place, there are few taxes
on production on account of which it is not found or deemednecessary to impose restrictive regulations on the manufacturers
or dealers, in order to check evasions of the tax. These regulations
are always sources of trouble and annoyance, and generally of
expense, for all of which, being peculiar disadvantages, theproducers or dealers must have compensation in the price of
their commodity. These restrictions also frequently interferewith the processes of manufacture, requiring the producer tocarry on his operations in the way most convenient to therevenue, though not the cheapest or most efficient for purposesof production. Any regulations whatever, enforced by law, makeit difficult for the producer to adopt new and improved processes.
Further, the necessity of advancing the tax obliges producers anddealers to carry on their business with larger capitals than would
otherwise be necessary, on the whole of which they must receive
the ordinary rate of profit, though a part only is employed indefraying the real expenses of production or importation. The
price of the article must be such as to afford a profit on morethan its natural value, instead of a profit on only its natural value.
Neither ought it to be forgotten that whatever renders a larger
capital necessary in any trade or business limits the competitionin that business, and, by giving something like a monopoly to afew dealers, may enable them either to keep up the price beyond
what would afford the ordinary rate of profit, or to obtain theordinary rate of profit with a less degree of exertion for improving
and cheapening their commodity. In these several modes, taxes
on commodities often cost to the consumer, through the increased
price of the article, much more than they bring into the treasuryof the state. There is still another consideration: the higher
price necessitated by the tax almost always checks the demand
for the commodity; and, since there are many improvements in
production which, to make them practicable, require a certain
extent of demand, such improvements are obstructed, and many

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Principles Of Political Economyof them prevented altogether. It is a well-known fact that thebranches of production in which fewest improvements are madeare those with which the revenue-officer interferes; and that
nothing, in general, gives a greater impulse to improvementsin the production of a commodity than taking off a tax whichnarrowed the market for it.

§ 3. Peculiar effects of taxes on Necessaries.
Such are the effects of taxes on commodities, considered
generally; but, as there are some commodities (those composing
the necessaries of the laborer) of which the values have an
influence on the distribution of wealth among different classesof the community, it is requisite to trace the effects of taxes on
those particular articles somewhat further. If a tax be laid, sayon corn, and the price rises in proportion to the tax, the rise of
price may operate in two ways: First, it may lower the conditionof the laboring-classes; temporarily, indeed, it can scarcely failto do so. If it diminishes their consumption of the produce ofthe earth, or makes them resort to a food which the soil produces
more abundantly, and therefore more cheaply, it to that extent
contributes to throw back agriculture upon more fertile lands
or less costly processes, and to lower the value and price ofcorn; which therefore ultimately settles at a price, increased
not by the whole amount of the tax, but by only a part of its
amount. Secondly, however, it may happen that the dearnessof the taxed food does not lower the habitual standard of thelaborer's requirements, but that wages, on the contrary, throughan action on population, rise, in shorter or longer periods, so
as to compensate the laborers for their portion of the tax, thecompensation being of course at the expense of profits. Taxeson necessaries must thus have one of two effects: either theylower the condition of the laboring-classes, or they exact from§ 3. Peculiar effects of taxes on Necessaries.

649

the owners of capital, in addition to the amount due to the stateon their own necessaries, the amount due on those consumed by
the laborers. In the last case, the tax on necessaries, like a tax on
wages, is equivalent to a peculiar tax on profits; which is, like allother partial taxation, unjust, and is specially prejudicial to theincrease of the national wealth.
It remains to speak of the effect on rent. Assuming (what is
usually the fact) that the consumption of food is not diminished,
the same cultivation as before will be necessary to supply thewants of the community; the margin of cultivation, to use Dr.
Chalmers's expression, remains where it was; and the same landor capital, which, as the least productive, already regulated thevalue and price of the whole produce, will continue to regulate
them. The effect which a tax on agricultural produce will haveon rent depends on its affecting or not affecting the difference
between the return to this least productive land or capital and thereturns to other lands and capitals. Now, this depends on themanner in which the tax is imposed. If it is an ad valorem tax,or, what is the same thing, a fixed proportion of the produce,such as tithe for example, it evidently lowers corn-rents. For
it takes more corn from the better lands than from the worse,and exactly in the degree in which they are better, land of twice
the productiveness paying twice as much to the tithe. Whatevertakes more from the greater of two quantities than from the less,diminishes the difference between them. The imposition of atithe on corn would take a tithe also from corn-rent: for, if
we reduce a series of numbers by a tenth each, the differences
between them are reduced one tenth.
For example, let there be five qualities of land, which
severally yield, on the same extent of ground and with thesame expenditure, 100, 90, 80, 70, and 60 bushels of wheat, thelast of these being the lowest quality which the demand for foodrenders it necessary to cultivate. The rent of these lands will be
as follows:

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The land producing 100 bushels will yield a rent of 100-60, or
40 bushels.
That producing 90 bushels, a rent of 90-60, or 30 bushels.
That producing 80 bushels, a rent of 80-60, or 20 bushels.
That producing 70 bushels, a rent of 70-60, or 10 bushels.
That producing 60 bushels, will yield no rent.
Now let a tithe be imposed, which takes from these five piecesof land 10, 9, 8, 7, and 6 bushels respectively, the fifth quality
still being the one which regulates the price, but returning to thefarmer, after payment of tithe, no more than 54 bushels:
The land producing 100 bushels reduced to 90 will yield a rentof 90-54, or 36 bushels.
That producing 90 bushels reduced to 81, a rent of 81-54, or 27
bushels.
That producing 80 bushels reduced to 72, a rent of 72-54, or 18
bushels.
That producing 70 bushels reduced to 63, a rent of 63-54, or 9
bushels.
and that producing 60 bushels, reduced to 54, will yield, as
before, no rent. So that the rent of the first quality of land has
lost four bushels; of the second, three; of the third, two; andof the fourth, one: that is, each has lost exactly one tenth. A
tax, therefore, of a fixed proportion of the produce lowers, in thesame proportion, corn-rent.
But it is only corn-rent that is lowered, and not rent estimated inmoney, or in any other commodity. For, in the same proportion
as corn-rent is reduced in quantity, the corn composing it israised in value. Under the tithe, 54 bushels will be worth in themarket what 60 were before; and nine tenths will in all cases
sell for as much as the whole ten tenths previously sold for.
The landlords will therefore be compensated in value and pricefor what they lose in quantity, and will suffer only so far as
they consume their rent in kind, or, after receiving it in money,
expend it in agricultural produce; that is, they only suffer as651
consumers of agricultural produce, and in common with all theother consumers. Considered as landlords, they have the same
income as before; the tithe, therefore, falls on the consumer, andnot on the landlord.
The same effect would be produced on rent if the tax, insteadof being a fixed proportion of the produce, were a fixed sum
per quarter or per bushel. A tax which takes a shilling for every
bushel takes more shillings from one field than from another, justin proportion as it produces more bushels; and operates exactly
like tithe, except that tithe is not only the same proportion on
all lands, but is also the same proportion at all times, while afixed sum of money per bushel will amount to a greater or lessproportion, according as corn is cheap or dear.
There are other modes of taxing agriculture, which would
affect rent differently. A tax proportioned to the rent would fall
wholly on the rent, and would not at all raise the price of corn,which is regulated by the portion of the produce that pays no rent.
A fixed tax of so much per cultivated acre, without distinction ofvalue, would have effects directly the reverse. Taking no morefrom the best qualities of land than from the worst, it would leave
the differences the same as before, and consequently the samecorn-rents, and the landlords would profit to the full extent of
the rise of price. To put the thing in another manner: the pricemust rise sufficiently to enable the worst land to pay the tax,
thus enabling all lands which produce more than the worst to
pay not only the tax, but also an increased rent to the landlords.
These, however, are not so much taxes on the produce of land
as taxes on the land itself. Taxes on the produce, properly socalled, whether fixed or ad valorem, do not affect rent, but fallon the consumer, profits, however, generally bearing either thewhole or the greatest part of the portion which is levied on the
consumption of the laboring-classes.

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Principles Of Political Economy§ 4. —how modified by the tendency of profits to aminimum.

[569]

The preceding is, I apprehend, a correct statement of the mannerin which taxes on agricultural produce operate when first laidon. When, however, they are of old standing, their effect may bedifferent. Now, the effect of accumulation, when attended by its
usual accompaniment, an increase of population, is to increase
the value and price of food, to raise rent, and to lower profits;that is, to do precisely what is done by a tax on agricultural
produce, except that this does not raise rent. The tax, therefore,
merely anticipates the rise of price and fall of profits which
would have taken place ultimately through the mere progressof accumulation, while it at the same time prevents, or at least
retards, that progress. If the rate of profit was such that the effectof the tithe reduces it to the practical minimum, after a lapse oftime which would have admitted of a rise of one tenth from thenatural progress of wealth, the consumer will be paying no morethan he would have paid if the tithe had never existed; he will
have ceased to pay any portion of it, and the person who will
really pay it is the landlord, whom it deprives of the increaseof rent which would by that time have accrued to him. At every
successive point in this interval of time, less of the burden will
rest on the consumer, and more of it on the landlord; and, inthe ultimate result, the minimum of profits will be reached witha smaller capital and population and a lower rental than if thecourse of things had not been disturbed by the imposition of thetax. If, on the other hand, the tithe or other tax on agricultural
produce does not reduce profits to the minimum, but to something
above the minimum, accumulation will not be stopped, but onlyslackened; and, if population also increases, the twofold increase
will continue to produce its effects—a rise of the price of corn
and an increase of rent. These consequences, however, will nottake place with the same rapidity as if the higher rate of profit§ 5. Effects of discriminating Duties.

653

had continued. At the end of twenty years the country will havea smaller population and capital than, but for the tax, it wouldby that time have had; the landlords will have a smaller rent,
and the price of corn, having increased less rapidly than it would
otherwise have done, will not be so much as a tenth higher thanwhat, if there had been no tax, it would by that time have become.
A part of the tax, therefore, will already have ceased to fall on
the consumer and devolved upon the landlord, and the proportion
will become greater and greater by lapse of time.
But though tithes and other taxes on agricultural produce,
when of long standing, either do not raise the price of food andlower profits at all, or, if at all, not in proportion to the tax,
yet the abrogation of such taxes, when they exist, does not theless diminish price, and, in general, raise the rate of profit. The
abolition of a tithe takes one tenth from the cost of production,and consequently from the price, of all agricultural produce; and,
unless it permanently raises the laborer's requirements, it lowers
the cost of labor and raises profits. Rent, estimated in moneyor in commodities, generally remains as before; estimated inagricultural produce, it is raised. The country adds as much, by
the repeal of a tithe, to the margin which intervenes between it
and the stationary state as was cut off from that margin by thetithe when first imposed. Accumulation is greatly accelerated,
and, if population also increases, the price of corn immediately
begins to recover itself and rent to rise, thus gradually transferring
the benefit of the remission from the consumer to the landlord.

§ 5. Effects of discriminating Duties.
We have hitherto inquired into the effects of taxes oncommodities, on the assumption that they are levied impartiallyon every mode in which the commodity can be produced or
brought to market. Another class of considerations is opened, if

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we suppose that this impartiality is not maintained, and that the
tax is imposed, not on the commodity, but on some particularmode of obtaining it.

[571]

Suppose that a commodity is capable of being made by
two different processes—as a manufactured commodity may be
produced either by hand or by steam-power—sugar may be madeeither from the sugar-cane or from beet-root, cattle fattened either
on hay and green crops or on oil-cake and the refuse of breweries.
It is the interest of the community that, of the two methods,
producers should adopt that which produces the best article at thelowest price. This being also the interest of the producers, unlessprotected against competition, and shielded from the penalties ofindolence, the process most advantageous to the community isthat which, if not interfered with by Government, they ultimately
find it to their advantage to adopt. Suppose, however, that a
tax is laid on one of the processes, and no tax at all, or one ofsmaller amount, on the other. If the taxed process is the one
which the producers would not have adopted, the measure issimply nugatory. But if the tax falls, as it is of course intended
to do, upon the one which they would have adopted, it creates
an artificial motive for preferring the untaxed process, though
the inferior of the two. If, therefore, it has any effect at all, it
causes the commodity to be produced of worse quality, or at agreater expense of labor; it causes so much of the labor of thecommunity to be wasted, and the capital employed in supporting
and remunerating that labor to be expended as uselessly as if
it were spent in hiring men to dig holes and fill them up again.
This waste of labor and capital constitutes an addition to the costof production of the commodity, which raises its value and pricein a corresponding ratio, and thus the owners of the capital are
indemnified. The loss falls on the consumers; though the capitalof the country is also eventually diminished, by the diminution of
their means of saving, and, in some degree, of their inducements
to save.

§ 5. Effects of discriminating Duties.

655

The kind of tax, therefore, which comes under the generaldenomination of a discriminating duty, transgresses the rule thattaxes should take as little as possible from the taxpayer beyond
what they bring into the treasury of the state. A discriminating
duty makes the consumer pay two distinct taxes, only one ofwhich is paid to the Government, and that frequently the lessonerous of the two. If a tax were laid on sugar produced fromthe cane, leaving the sugar from beet-root untaxed, then in so
far as cane-sugar continued to be used, the tax on it would be
paid to the treasury, and might be as unobjectionable as mostother taxes; but if cane-sugar, having previously been cheaper
than beet-root sugar, was now dearer, and beet-root sugar was
to any considerable amount substituted for it, and fields laid out
and manufactories established in consequence, the Government
would gain no revenue from the beet-root sugar, while theconsumers of it would pay a real tax. They would pay for beetroot sugar more than they had previously paid for cane-sugar,
and the difference would go to indemnify producers for a portionof the labor of the country actually thrown away, in producing
by the labor of (say) three hundred men what could be obtainedby the other process with the labor of two hundred.
An interesting illustration, in late years, of the operation ofa discriminating duty is to be found in the case of different
grades of sugar imported into the United States. Our tariff
levied certain duties on different grades of sugar classified
by color, on the theory that color was a test of saccharine
strength. Cargoes were examined and compared with gradedsugars hermetically sealed in glass bottles and distributed by
the Dutch authorities, whence came the name of “Dutch
standard.” Grades from No. 1 (melado) to No. 10 must go
to the refiner before consumption; but the grades to No. 13,
although some might have gone into immediate consumption,
were usually sent to be manufactured into the highest gradesof soft and hard sugars. So long as the sugar was secured

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by evaporation in open coppers, or by passing the molasses
through a layer of clay, saccharine strength and color went
fairly well together. But with the invention of the vacuum-pan
and the centrifugal wheel, by which the sugar is reduced
through a shorter and more effective process, sugar of acertain grade of color by the Dutch standard contained a muchgreater degree of sweetness than that produced by the oldmethods. Cuban planters, therefore, were permitted to sendsugar into this country at a duty which was really leviedon grades much inferior, and so paid a less duty than othersugars. The products of one country were discriminatedagainst in favor of another. The difficulty was settled by using
the polariscope, which gave an absolute chemical test of thesweetness, irrespective of color.

One of the commonest cases of discriminating duties is thatof a tax on the importation of a commodity capable of being
produced at home, unaccompanied by an equivalent tax on thehome production. A commodity is never permanently imported,
unless it can be obtained from abroad at a smaller cost of laborand capital, on the whole, than is necessary for producing it. If,
therefore, by a duty on the importation, it is rendered cheaper toproduce the article than to import it, an extra quantity of labor andcapital is expended, without any extra result. The labor is useless,and the capital is spent in paying people for laboriously doing
nothing. All custom duties which operate as an encouragement
to the home production of the taxed article are thus an eminently
wasteful mode of raising a revenue.
This character belongs in a peculiar degree to custom duties
on the produce of land, unless countervailed by excise duties
on the home production. Such taxes bring less into the publictreasury, compared with what they take from the consumers,
than any other imposts to which civilized nations are usuallysubject. If the wheat produced in a country is twenty millionsof quarters, and the consumption twenty-one millions, a million§ 5. Effects of discriminating Duties.

657

being annually imported, and if on this million a duty is laid
which raises the price ten shillings per quarter, the price which israised is not that of the million only, but of the whole twenty-one
millions. Taking the most favorable but extremely improbablesupposition, that the importation is not at all checked, nor thehome production enlarged, the state gains a revenue of only halfa million, while the consumers are taxed ten millions and a half,
the ten millions being a contribution to the home growers, who
are forced by competition to resign it all to the landlords. The
consumer thus pays to the owners of land an additional tax,
equal to twenty times that which he pays to the state. Let us
now suppose that the tax really checks importation. Suppose
importation stopped altogether in ordinary years; it being foundthat the million of quarters can be obtained, by a more elaborate
cultivation, or by breaking up inferior land, at a less advancethan ten shillings upon the previous price—say, for instance, fiveshillings a quarter. The revenue now obtains nothing, except
from the extraordinary imports which may happen to take place
in a season of scarcity. But the consumers pay every year a tax
of five shillings on the whole twenty-one millions of quarters,
amounting to £5,250,000 sterling. Of this the odd £250,000 goesto compensate the growers of the last million of quarters for thelabor and capital wasted under the compulsion of the law. The
remaining £5,000,000 go to enrich the landlords as before.
Such is the operation of what are technically termed corn laws,
when first laid on; and such continues to be their operation solong as they have any effect at all in raising the price of corn. The
difference between a country without corn laws and a country
which has long had corn laws is not so much that the last has ahigher price or a larger rental, but that it has the same price andthe same rental with a smaller aggregate capital and a smaller
population. The imposition of corn laws raises rents, but retards
that progress of accumulation which would in no long period
have raised them fully as much. The repeal of corn laws tends to

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lower rents, but it unchains a force which, in a progressive stateof capital and population, restores and even increases the former
amount.
What we have said of duties on importation generally is equallyapplicable to discriminating duties which favor importation fromone place, or in one particular manner, in contradistinction toothers; such as the preference given to the produce of a colony,
or of a country with which there is a commercial treaty; orthe higher duties formerly imposed by our navigation laws on
goods imported in other than British shipping. Whatever else
may be alleged in favor of such distinctions, whenever they are
not nugatory, they are economically wasteful. They induce a
resort to a more costly mode of obtaining a commodity in lieu of
one less costly, and thus cause a portion of the labor which thecountry employs in providing itself with foreign commodities tobe sacrificed without return.

§ 6. Effects produced on international Exchange by
Duties on Exports and on Imports.
There is one more point, relating to the operation of taxes
on commodities conveyed from one country to another, which
requires notice: the influences which they exert on international
exchanges. Every tax on a commodity tends to raise its price,and consequently to lessen the demand for it in the market inwhich it is sold. All taxes on international trade tend, therefore,
to produce a disturbance, and a readjustment of what we havetermed the equation of international demand.
Taxes on foreign trade are of two kinds—taxes on imports andon exports. On the first aspect of the matter it would seem thatboth these taxes are paid by the consumers of the commodity;
that taxes on exports consequently fall entirely on foreigners,

659
taxes on imports wholly on the home consumer. The true stateof the case, however, is much more complicated.
“By taxing exports we may, in certain circumstances, produce
a division of the advantage of the trade more favorable toourselves. In some cases we may draw into our coffers, at theexpense of foreigners, not only the whole tax, but more than thetax; in other cases we should gain exactly the tax; in others,
less than the tax. In this last case a part of the tax is borne byourselves; possibly the whole, possibly even, as we shall show,
more than the whole.”
Reverting to the supposititious case employed of a trade
between England and the United States in iron and corn, supposethat the United States taxes her export of corn, the tax not being
supposed high enough to induce England to produce corn forherself. The price at which corn can be sold in England isaugmented by the tax. This will probably diminish the quantity
consumed. It may diminish it so much that, even at the increased
price, there will not be required so great a money value as before.
Or it may not diminish it at all, or so little that, in consequenceof the higher price, a greater money value will be purchased
than before. In this last case, the United States will gain, atthe expense of England, not only the whole amount of the duty,
but more; for, the money value of her exports to England being
increased, while her imports remain the same, money will flow
into the United States from England. The price of corn willrise in the United States, and consequently in England; but theprice of iron will fall in England, and consequently in the UnitedStates. We shall export less corn and import more iron, till theequilibrium is restored. It thus appears (what is at first sightsomewhat remarkable) that, by taxing her exports, the UnitedStates would, in some conceivable circumstances, not only gainfrom her foreign customers the whole amount of the tax, butwould also get her imports cheaper. She would get them cheaperin two ways, for she would obtain them for less money, and

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would have more money to purchase them with. England, on
the other hand, would suffer doubly: she would have to pay
for her corn a price increased not only by the duty, but by the
influx of money into the United States, while the same change inthe distribution of the circulating medium would leave her lessmoney to purchase it with.344
This, however, is only one of three possible cases. If, after
the imposition of the duty, England requires so diminished aquantity of corn that its total value is exactly the same as before,
the balance of trade would be undisturbed; the United States will
gain the duty, England will lose it, and nothing more. If, again,
the imposition of the duty occasions such a falling off in the
demand that England requires a less pecuniary value than before,
our exports will no longer pay for our imports; money must passfrom the United States into England; and England's share of theadvantage of the trade will be increased. By the change in the
distribution of money, corn will fall in the United States, andtherefore it will, of course, fall in England. Thus England will
not pay the whole of the tax. From the same cause, iron willrise in England, and consequently in the United States. When
this alteration of prices has so adjusted the demand that the corn
and the iron again pay for one another, the result is that Englandhas paid only a part of the tax, and the remainder of what has
been received into our treasury has come indirectly out of thepockets of our own consumers of iron, who pay a higher pricefor that imported commodity in consequence of the tax on ourexports, while at the same time they, in consequence of the effluxof money and the fall of prices, have smaller money incomes
wherewith to pay for the iron at that advanced price.
It is not an impossible supposition that by taxing our exports
we might not only gain nothing from the foreigner, the tax being
paid out of our own pockets, but might even compel our own
344This illustration has also been changed, but only so far as to fit the trade
between England and the United States.

661
people to pay a second tax to the foreigner. Suppose, as before,that the demand of England for corn falls off so much on theimposition of the duty that she requires a smaller money value
than before, but that the case is so different with iron in the
United States that when the price rises the demand either does
not fall off at all, or so little that the money value required isgreater than before. The first effect of laying on the duty is, as
before, that the corn exported will no longer pay for the iron
imported.
Money will therefore flow out of the United States into
England. One effect is to raise the price of iron in England, andconsequently in the United States. But this, by the supposition,
instead of stopping the efflux of money, only makes it greater;
because, the higher the price, the greater the money value of theiron consumed. The balance, therefore, can only be restored by
the other effect, which is going on at the same time, namely,
the fall of corn in the American and consequently in the English
market. Even when corn has fallen so low that its price withthe duty is only equal to what its price without the duty was atfirst, it is not a necessary consequence that the fall will stop; forthe same amount of exportation as before will not now suffice
to pay the increased money value of the imports; and although
the English consumers have now not only corn at the old price,
but likewise increased money incomes, it is not certain thatthey will be inclined to employ the increase of their incomes inincreasing their purchases of corn. The price of corn, therefore,
must perhaps fall, to restore the equilibrium, more than the wholeamount of the duty; England may be enabled to import corn at alower price when it is taxed than when it was untaxed; and thisgain she will acquire at the expense of the American consumersof iron, who, in addition, will be the real payers of the whole ofwhat is received at their own custom-house under the name ofduties on the export of corn.
In general, however, there could be little doubt that a country

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which imposed such taxes would succeed in making foreigncountries contribute something to its revenue; but, unless thetaxed article be one for which their demand is extremely urgent,
they will seldom pay the whole of the amount which the tax
brings in.345
The result of this investigation may, then, be generally formulated as follows: That country which has the strongest
demand for the commodities of other countries as comparedwith the demand of other countries for its own commodities
will pay the burden of the export duty.

Thus far of duties on exports. We now proceed to the moreordinary case of duties on imports: “We have had an example of atax on exports, that is, on foreigners, falling in part on ourselves.
We shall therefore not be surprised if we find a tax on imports,that is, on ourselves, partly falling upon foreigners.
“Instead of taxing the corn which we export, suppose that
we tax the iron which we import. The duty which we are now
supposing must not be what is termed a protecting duty, that is,a duty sufficiently high to induce us to produce the article athome. If it had this effect, it would destroy entirely the trade
both in corn and in iron, and both countries would lose the wholeof the advantage which they previously gained by exchanging
those commodities with one another. We suppose a duty whichmight diminish the consumption of the article, but which would
not prevent us from continuing to import, as before, whateveriron we did consume.
345

Probably the strongest known instance of a large revenue raised fromforeigners by a tax on exports is the opium-trade with China. The high priceof the article under the Government monopoly (which is equivalent to a highexport duty) has so little effect in discouraging its consumption that it issaid to have been occasionally sold in China for as much as its weight insilver.—MILL.{FNS663“The equilibrium of trade would be disturbed if the impositionof the tax diminished, in the slightest degree, the quantity of ironconsumed. For, as the tax is levied at our own custom-house,
the English exporter only receives the same price as formerly,
though the American consumer pays a higher one. If, therefore,
there be any diminution of the quantity bought, although a larger
sum of money may be actually laid out in the article, a smaller
one will be due from the United States to England: this sum
will no longer be an equivalent for the sum due from Englandto the United States for corn, the balance therefore must be paidin money. Prices will fall in England and rise in the UnitedStates; iron will fall in the English market; corn will rise in theAmerican. The English will pay a higher price for corn, and will
have smaller money incomes to buy it with; while the Americans
will obtain iron cheaper, that is, its price will exceed what itpreviously was by less than the amount of the duty, while theirmeans of purchasing it will be increased by the increase of theirmoney incomes.
“If the imposition of the tax does not diminish the demand, it
will leave the trade exactly as it was before. We shall import asmuch, and export as much; the whole of the tax will be paid out
of our own pockets.
“But the imposition of a tax on a commodity almost always
diminishes the demand more or less; and it can never, or scarcely
ever, increase the demand. It may, therefore, be laid down asa principle that a tax on imported commodities, when it really
operates as a tax, and not as a prohibition either total or partial,
almost always falls in part upon the foreigners who consume
our goods; and that this is a mode in which a nation may
appropriate to itself, at the expense of foreigners, a larger sharethan would otherwise belong to it of the increase in the generalproductiveness of the labor and capital of the world, which resultsfrom the interchange of commodities among nations.”Those are, therefore, in the right who maintain that taxes on

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imports are partly paid by foreigners; but they are mistaken when
they say that it is by the foreign producer. It is not on the personfrom whom we buy, but on all those who buy from us, that a
portion of our custom duties spontaneously falls. It is the foreign
consumer of our exported commodities who is obliged to pay
a higher price for them because we maintain revenue duties on
foreign goods.
There are but two cases in which duties on commodities can in
any degree, or in any manner, fall on the producer. One is, when
the article is a strict monopoly, and at a scarcity price. The pricein this case being only limited by the desires of the buyer—thesum obtained for the restricted supply being the utmost which
the buyers would consent to give rather than go without it—if
the treasury intercepts a part of this, the price can not be further
raised to compensate for the tax, and it must be paid fromthe monopoly profits. A tax on rare and high-priced wines
will fall wholly on the growers, or rather, on the owners of thevineyards. The second case, in which the producer sometimes
bears a portion of the tax, is more important: the case of duties
on the produce of land or of mines. These might be so high as
to diminish materially the demand for the produce, and compel
the abandonment of some of the inferior qualities of land or
mines. Supposing this to be the effect, the consumers, both in the
country itself and in those which dealt with it, would obtain the
produce at smaller cost; and a part only, instead of the whole, ofthe duty would fall on the purchaser, who would be indemnified
chiefly at the expense of the land-owners or mine-owners in the
producing country.
Duties on importation may, then, be divided “into two classes:(1) those which have the effect of encouraging some particularbranch of domestic industry [protective duties], (2) and thosewhich have not [revenue duties]. The former are purely
mischievous, both to the country imposing them and to those withwhom it trades. They prevent a saving of labor and capital, which,665
if permitted to be made, would be divided in some proportionor other between the importing country and the countries which
buy what that country does or might export.
“The other class of duties are those which do not encourage
one mode of procuring an article at the expense of another,
but allow interchange to take place just as if the duty did notexist, and to produce the saving of labor which constitutes the
motive to international as to all other commerce. Of this kind are
duties on the importation of any commodity which could not byany possibility be produced at home, and duties not sufficiently
high to counterbalance the difference of expense between the
production of the article at home and its importation. Of themoney which is brought into the treasury of any country by taxesof this last description, a part only is paid by the people of thatcountry; the remainder by the foreign consumers of their goods.
“Nevertheless, this latter kind of taxes are in principle asineligible as the former, though not precisely on the same ground.
A protecting duty can never be a cause of gain, but always andnecessarily of loss, to the country imposing it, just so far as itis efficacious to its end. A non-protecting duty, on the contrary,would in most cases be a source of gain to the country imposing
it, in so far as throwing part of the weight of its taxes upon otherpeople is a gain; but it would be a means which it could seldom
be advisable to adopt, being so easily counteracted by a precisely
similar proceeding on the other side.
“If the United States, in the case already supposed, sought toobtain for herself more than her natural share of the advantage ofthe trade with England, by imposing a duty upon iron, England
would only have to impose a duty upon corn sufficient to diminish
the demand for that article about as much as the demand for iron
had been diminished in the United States by the tax. Things
would then be as before, and each country would pay its own
tax—unless, indeed, the sum of the two duties exceeded theentire advantage of the trade, for in that case the trade and its

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advantage would cease entirely.
“There would be no advantage, therefore, in imposing dutiesof this kind with a view to gain by them in the manner which
has been pointed out. But, when any part of the revenue isderived from taxes on commodities, these may often be as little
objectionable as the rest. It is evident, too, that considerationsof reciprocity, which are quite unessential when the matter indebate is a protecting duty, are of material importance when
the repeal of duties of this other description is discussed. A
country can not be expected to renounce the power of taxing
foreigners unless foreigners will in return practice toward itself
the same forbearance. The only mode in which a country cansave itself from being a loser by the revenue duties imposed byother countries on its commodities is, to impose corresponding
revenue duties on theirs. Only it must take care that those duties
be not so high as to exceed all that remains of the advantage ofthe trade, and put an end to importation altogether, causing thearticle to be either produced at home, or imported from anotherand a dearer market.”By “reciprocity” is meant that, when one country admits
goods free of duty from a second country, this latter country
will also admit the commodities of the former free of duty; or,as is often the case, if not free of duty, at a less than the usual
rate. Until the last few years we have had a reciprocity treaty
with Canada, but it is not now in force; and an arrangement
for closer commercial relations with Mexico is now underconsideration.

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Chapter IV. Comparison Between Direct
And Indirect Taxation.

§ 1. Arguments for and against direct Taxation.
Are direct or indirect taxes the most eligible? A man dislikes not
so much the payment as the act of paying. He dislikes seeing theface of the tax-collector, and being subjected to his peremptorydemand. Perhaps, too, the money which he is required to pay
directly out of his pocket is the only taxation which he is quite
sure that he pays at all. That a tax of two shillings per poundon tea, or of three shillings per bottle on wine, raises the priceof each pound of tea and bottle of wine which he consumes, bythat and more than that amount, can not, indeed, be denied; itis the fact, and is intended to be so, and he himself, at times,
is perfectly aware of it; but it makes hardly any impression on
his practical feelings and associations, serving to illustrate thedistinction between what is merely known to be true and what is
felt to be so. The unpopularity of direct taxation, contrasted withthe easy manner in which the public consent to let themselves
be fleeced in the prices of commodities, has generated in manyfriends of improvement a directly opposite mode of thinking to
the foregoing. They contend that the very reason which makes
direct taxation disagreeable makes it preferable. Under it every
one knows how much he really pays; and, if he votes for a war,or any other expensive national luxury, he does so with his eyes
open to what it costs him. If all taxes were direct, taxation would
be much more perceived than at present, and there would bea security, which now there is not, for economy in the public
expenditure.

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Although this argument is not without force, its weight islikely to be constantly diminishing. The real incidence of
indirect taxation is every day more generally understood andmore familiarly recognized. The mere distinction between paying
money directly to the tax-collector and contributing the same sum
through the intervention of the tea-dealer or the wine-merchant nolonger makes the whole difference between dislike or oppositionand passive acquiescence.
If our present revenue [of $400,000,000 in 1883] were allraised by direct taxes, an extreme dissatisfaction would certainly
arise at having to pay so much; but while men's minds are so
little guided by reason, as such a change of feeling from soirrelevant a cause would imply, so great an aversion to taxation
might not be an unqualified good. Of the [$400,000,000] inquestion, nearly [$60,000,000] are pledged, under the mostbinding obligations, to those whose property has been borrowed
and spent by the state; and, while this debt remains unredeemed,a greatly increased impatience of taxation would involve no little
danger of a breach of faith. That part, indeed, of the public
expenditure which is devoted to the maintenance of civil andmilitary establishments [$206,000,000] (that is, all except theinterest of the national debt), affords, in many of its details,
ample scope for retrenchment. If so great an addition were madeto the public dislike of taxation as might be the consequenceof confining it to the direct form, the classes who profit by
the misapplication of public money might probably succeed insaving that by which they profit, at the expense of that which
would only be useful to the public.
There is, however, a frequent plea in support of indirect
taxation, which must be altogether rejected as grounded on a
fallacy. We are often told that taxes on commodities are lessburdensome than other taxes, because the contributor can escapefrom them by ceasing to use the taxed commodity. He certainly
can, if that be his object, deprive the Government of the money;§ 1. Arguments for and against direct Taxation.

669

but he does so by a sacrifice of his own indulgences, which (ifhe chose to undergo it) would equally make up to him for thesame amount taken from him by direct taxation. Suppose a tax
laid on wine, sufficient to add [$25] to the price of the quantity ofwine which he consumes in a year. He has only (we are told) todiminish his consumption of wine by [$25], and he escapes theburden. True, but if the [$25], instead of being laid on wine, hadbeen taken from him by an income-tax, he could, by expending[$25] less in wine, equally save the amount of the tax, so thatthe difference between the two cases is really illusory. If theGovernment takes from the contributor [$25] a year, whether
in one way or another, exactly that amount must be retrenchedfrom his consumption to leave him as well off as before; and ineither way the same amount of sacrifice, neither more nor less,is imposed on him.
On the other hand, it is some advantage on the side of indirect
taxes that what they exact from the contributor is taken at atime and in a manner likely to be convenient to him. It is
paid at a time when he has at any rate a payment to make;it causes, therefore, no additional trouble, nor (unless the tax
be on necessaries) any inconvenience but what is inseparablefrom the payment of the amount. He can also, except in thecase of very perishable articles, select his own time for laying
in a stock of the commodity, and consequently for payment of
the tax. The producer or dealer who advances these taxes is,indeed, sometimes subjected to inconvenience; but, in the caseof imported goods, this inconvenience is reduced to a minimum
by what is called the Warehousing System, under which, insteadof paying the duty at the time of importation, he is only required
to do so when he takes out the goods for consumption, which
is seldom done until he has either actually found, or has theprospect of immediately finding, a purchaser.
The strongest objection, however, to raising the whole or thegreater part of a large revenue by direct taxes, is the impossibility

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of assessing them fairly without a conscientious co-operation on
the part of the contributors, not to be hoped for in the present low
state of public morality. In the case of an income-tax, we havealready seen that, unless it be found practicable to exempt savings
altogether from the tax, the burden can not be apportioned withany tolerable approach to fairness upon those whose incomes arederived from business or professions; and this is in fact admitted
by most of the advocates of direct taxation who, I am afraid,
generally get over the difficulty by leaving those classes untaxed,
and confining their projected income-tax to “realized property,”
in which form it certainly has the merit of being a very easy formof plunder. But enough has been said in condemnation of thisexpedient. We have seen, however, that a house-tax is a form of
direct taxation not liable to the same objections as an income-tax,
and indeed liable to as few objections of any kind as perhaps
any of our indirect taxes. But it would be impossible to raise,by a house-tax alone, the greatest part of the revenue, without
producing a very objectionable overcrowding of the population,
through the strong motive which all persons would have to avoid
the tax by restricting their house accommodation.
A certain amount of revenue may, as we have seen, be obtained
without injustice by a peculiar tax on rent. Besides (1) the landtax,346 and (2) an equivalent for the revenue derived from stamp
duties on the conveyance of land, some further taxation might, I
have contended, at some future period be imposed, (3) to enable
the state to participate in the progressive increase of the incomesof landlords from natural causes. (4) Legacies and inheritances,
we have also seen, ought to be subjected to taxation sufficient toyield a considerable revenue. With these taxes, and (5) a housetax of suitable amount, we should, I think, have reached the346
A land-tax is, to its extent, an evidence that the state claims a certain rightin the soil, and that it stands to the contributor, as it were, in the place of alandlord. This tax, however, is generally so small that it does not materiallydiminish the rent of land. So far as it goes, it is a tax on rent.

§ 2. What forms of indirect taxation are most eligible?

671

prudent limits of direct taxation. The remainder of the revenue
would have to be provided by taxes on consumption, and thequestion is, which of these are the least objectionable.

§ 2. What forms of indirect taxation are mosteligible?
There are some forms of indirect taxation which must be peremptorily excluded. (1.) Taxes on commodities, for revenue purposes, must not operate as protecting duties, but must be levied
impartially on every mode in which the articles can be obtained,
whether produced in the country itself, or imported. (2.) An exclusion must also be put upon all taxes on the necessaries of life,
or on the materials or instruments employed in producing thosenecessaries. Such taxes are always liable to encroach on whatshould be left untaxed, the incomes barely sufficient for healthfulexistence; and on the most favorable supposition, namely, thatwages rise to compensate the laborers for the tax, it operates as apeculiar tax on profits, which is at once unjust and detrimental tonational wealth.347 What remain are taxes on luxuries. And thesehave some properties which strongly recommend them. In thefirst place, they can never, by any possibility, touch those whose
whole income is expended on necessaries; while they do reachthose by whom what is required for necessaries is expended on
347

Some argue that the materials and instruments of all production should be
exempt from taxation; but these, when they do not enter into the productionof necessaries, seem as proper subjects of taxation as the finished article. It
is chiefly with reference to foreign trade that such taxes have been consideredinjurious. Internationally speaking, they may be looked upon as export duties,
and, unless in cases in which an export duty is advisable, they should beaccompanied with an equivalent drawback on exportation. But there is no
sufficient reason against taxing the materials and instruments used in the
production of anything which is itself a fit object of taxation.—MILL.{FNS

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indulgences. In the next place, they operate in some cases asa useful, and the only useful, kind of sumptuary law. A great
portion of the expense of the higher and middle classes in mostcountries is not incurred for the sake of the pleasure affordedby the things on which the money is spent, but from regard toopinion, and an idea that certain expenses are expected fromthem, as an appendage of station; and I can not but think that
expenditure of this sort is a most desirable subject of taxation.
When a thing is bought, not for its use but for its costliness,cheapness is no recommendation.

§ 3. Practical rules for indirect taxation.
In order to reduce as much as possible the inconveniences, andincrease the advantages, incident to taxes on commodities, thefollowing are the practical rules which suggest themselves: 1.
To raise as large a revenue as conveniently may be, from thoseclasses of luxuries which have most connection with vanity, andleast with positive enjoyment; such as the more costly qualitiesof all kinds of personal equipment and ornament. But with regard
to horses and carriages, as there are many persons to whom,from health or constitution, these are not so much luxuries asnecessaries, the tax paid by those who have but one riding-horse,
or but one carriage, especially of the cheaper descriptions, should
be low; while taxation should rise very rapidly with the numberof horses and carriages, and with their costliness. 2. Wheneverpossible, to demand the tax, not from the producer, but directlyfrom the consumer, since, when levied on the producer, it raises
the price always by more, and often by much more, than themere amount of the tax. 3. But as the only indirect taxes whichyield a large revenue are those which fall on articles of universal
or very general consumption, and as it is therefore necessary
to have some taxes on real luxuries, that is, on things which§ 3. Practical rules for indirect taxation.

673

afford pleasure in themselves, and are valued on that accountrather than for their cost, these taxes should, if possible, be so
adjusted as to fall with the same proportional weight on small, on
moderate, and on large incomes. This is not an easy matter; since
the things which are the subjects of the more productive taxes
are in proportion more largely consumed by the poorer membersof the community than by the rich. Tea, coffee, sugar, tobacco,
fermented drinks, can hardly be so taxed that the poor shall notbear more than their due share of the burden. Something might
be done by making the duty on the superior qualities, which areused by the richer consumers, much higher in proportion to thevalue; but in some cases the difficulty of at all adjusting the duty
to the value, so as to prevent evasion, is said, with what truth
I know not, to be insuperable; so that it is thought necessary tolevy the same fixed duty on all the qualities alike. 4. As far as
is consistent with the preceding rules, taxation should rather beconcentrated on a few articles than diffused over many, in orderthat the expenses of collection may be smaller, and that as few
employments as possible may be burdensomely and vexatiouslyinterfered with. 5. Among luxuries of general consumption,
taxation should by preference attach itself to stimulants, because
these, though in themselves as legitimate indulgences as anyothers, are more liable than most others to be used in excess, sothat the check to consumption, naturally arising from taxation, ison the whole better applied to them than to other things. 6. As
far as other considerations permit, taxation should be confined
to imported articles, since these can be taxed with a less degreeof vexatious interference, and with fewer incidental bad effects,
than when a tax is levied on the field or on the workshop.
Custom duties are, cæteris paribus, much less objectionable thanexcise: but they must be laid only on things which either can
not, or at least will not, be produced in the country itself; or else
their production there must be prohibited (as in England is thecase with tobacco), or subjected to an excise duty of equivalent

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amount. 7. No tax ought to be kept so high as to furnish a motive
to its evasion, too strong to be counteracted by ordinary meansof prevention; and especially no commodity should be taxed sohighly as to raise up a class of lawless characters—smugglers,
illicit distillers, and the like.
The experience of the United States is pregnant with lessons inthis direction. During the war we imposed an internal-revenue
tax on distilled spirits of so large an amount that it not only
produced less revenue than a smaller tax would have done,
but it created gigantic frauds, public corruption, and infinite
devices to escape the payment. The following table will show
how the production, as indicated by the tax, fell off when the
tax was excessive. It forced evasions by distillers. It has beenfound by various experiences that with a less rate the revenue
is largely increased.

[590]

Year.

1862-1863
1867-1868
1868-1869
1869-1870

Revenue.

$3,200,000
14,200,000
34,200,000
39,200,000

Production indicated by thetax (gallons).
16,000,000
7,000,000
16,000,000
18,000,000

Amount of tax.

July, 1862, 20 c. per gallon.
Jan., 1865, $2 per gallon.
July, 1868, 50 c. per gallon.

The actual amount reached by taxation is very much lessthan that known to be actually used by from ten to fifteen
millions of gallons, or nearly one half the product. The
openness of the frauds can be judged by the fact that proof
spirits were “openly sold in the market, and even quoted inprice-currents, at from five to fifteen cents less per gallon than
the rate of tax and the average cost of manufacture.”348

In what manner the finer articles of manufacture, consumed by
the rich, might most advantageously be taxed, I must leave to be
348

See Lalor's “Cyclopædia,” article “Distilled Spirits,” by David A. Wells.

675
decided by those who have the requisite practical knowledge. The
difficulty would be, to effect it without an inadmissible degreeof interference with production. In countries which, like theUnited States, import the principal part of the finer manufactures
which they consume, there is little difficulty in the matter; and,even where nothing is imported but the raw material, that may
be taxed, especially the qualities of it which are exclusively
employed for the fabrics used by the richer class of consumers.
Thus, in England a high custom duty on raw silk would beconsistent with principle; and it might perhaps be practicable totax the finer qualities of cotton or linen yarn, whether spun in the
country itself or imported.

§ 4. Taxation systems of the United States and otherCountries.
It will now well repay study to examine Chart No. XXI,
which shows in what manner the United States have raised
their revenues, and to consider how far the right rules oftaxation have been followed.
I. For means of comparison, I shall give the last annual
budget of the United States in order to make clear from whatsources the country derives its revenues:
Chart XXI.
United States Budget, Year Ending June 30, 1883.
[In millions and tenths of millions.]
Receipts:
Customs
Internal revenue
Direct tax
Sale of public lands
Miscellaneous
Net ordinary receipts$214.7
144.7
.1
7.9
30.8
$398.2

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Expenditures:
War Department
Navy Department
Indians
Pensions
Miscellaneous
Net ordinary expenditures
Interest on public debt
Total

$48.9
15.3
7.3
66.0
68.7
$206.259.2$265.4This leaves a surplus of $132,839,444 above all
expenditures, and our problem is now where to reduce
taxation. The annual interest charge is lessening with thepayment of the public debt, having fallen from its highest
figure of $143,781,591 in 1867, to $59,160,131 in 1883.349
Our national taxation is practically all indirect, that of internal
taxation being chiefly levied on tobacco and distilled spirits,
and our customs falling on almost all articles which can beimported, materials as well as manufactures.
In the United States direct taxation on real and personal
property is very generally levied for State, county, andmunicipal purposes. In fact, nearly all the perceptible taxationis the property tax, and, inasmuch as the State and county tax
is very light, the burden is almost always owing to municipal
and town expenditures. People do not seem to be aware of
the enormous national burden, because the taxes are indirect,
and only increase the prices of commodities. Other countries,
it will be seen, make a greater use of direct taxation than the
United States. In fact, the comparison of the ways by which
different countries collect their revenues may naturally show
us where we may gain by their experience.
II. The English system is especially interesting, because,
after having had an extended scheme of customs duties, they349

“United States Statistical Abstract,” 1883, pp. 2, 3.

677
abandoned it, and raised their revenue, some on imported
articles, it is true (generally on those which could not be
produced in England), but by the income-tax, and otherforms.350
In 1842 Sir Robert Peel found 1,200 articles subject tocustoms-duties. He began (1) by removing all prohibitions;(2) by reducing duties on raw materials to 5 per cent or less;(3) by limiting the rates on partially manufactured goods to12 per cent; and (4) those on wholly manufactured goods to20 per cent. Now customs-duties are levied only on beer,cards, chiccory, chocolate, cocoa, coffee, dried fruit, plate,spirits, tea, tobacco, and wine. The following budget gives
the sources of revenue for Great Britain:351
Budget Of Great Britain, 1883.
[In millions and tenths of millions.]
Receipts:
Customs$98.4

350
The old condition of things was well described by Sydney Smith: “We must
pay taxes upon every article which enters into the mouth or covers the back,or is placed under the foot. Taxes upon everything which is pleasant to see,hear, feel, smell, and taste. Taxes upon warmth, light, and locomotion. Taxes
upon everything upon earth and the waters under the earth. On everything thatcomes from abroad or is grown at home. Taxes on raw material. Taxes on
every value that is added to it by the industry of man. Taxes on the sauce
which pampers man's appetite and the drug which restores him to health. On
the ermine which decorates the judge and the rope which hangs the criminal.
On the brass nails of the coffin and on the ribbons of the bride. At bed orat board, couchant or levant, we must pay. The beardless youth manages his
taxed horse with a taxed bridle on a taxed road, and the dying Englishman,
pouring his medicine (which has paid 7 per cent) into a spoon (which has paid
30 per cent), throws himself back upon his chintz bed (which has paid 22 percent), makes his will, and expires in the arms of the apothecary (who has paid
£100 for the privilege of putting him to death). His whole property is thentaxed from 2 to 10 per cent; besides the probate, large fees are demanded forburying him in the chancel: his virtues are handed down to posterity on taxed
marble, and he is then gathered to his fathers to be taxed no more.”
351“Financial Reform Almanac,” 1883, pp. 107-109.

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Excise (such as on tobaccoand spirits)
StampsLand tax
House duty
Income tax
Post-Office
Telegraph
Crown lands
Interest (on loans, Suez
Canal, etc.)
Miscellaneous
Total

134.9
58.5
5.2
8.9
60.9
36.5
8.6
2.0
6.1
26.4
$446.4[593]

Expenditures:
Interest on national debt
Army, navy, etc.
Cost of revenue departments
Public works
Public departments, salaries,etc.
Law and justice
Education, science, and art
Colonial and consular
Civil list
Pensions
Miscellaneous
Total expenditures$148.4
157.1
45.1
9.1
12.5
35.7
22.9
3.4
2.0
2.0
6.8
$445.0From this it will be seen that in the land, income, andhouse taxes, Great Britain raises by direct taxation about$75,000,000, and in customs and excise, by indirect taxation,
about $233,000,000.
III. The following is the system adopted by Germany

679(Prussia):
German Budget, 1881-1882.
[In millions and tenths of millions.]
Receipts:(1.) Property income fromdomains and forests
From mines and salt-works
From railways
Miscellaneous(2.) Royal Lottery(3.) Bureau of Justice
Harbors and bridges(4.) Direct taxes(5.) Indirect taxes (for Prussia)
Total receipts

Expenditures:(1.) Civil list(2.) Debt(3.)
Various ministries,
schools, etc.
(4.) Pensions(5.) Miscellaneous
Total expenditures352

$11.7
2.5
22.5
5.0
$41.7
1.0
$12.7
.5
13.2
$35.5
12.3
$103.6

3.0
25.0
49.5
4.0
19.5
$101.0

The Prussian direct taxes include (1) a land-tax, (2) ahouse-tax, (3) an income-tax, (4) a class-tax, (5) a trade-tax,
and (6) miscellaneous taxes.
0“Handbuch der Verfassung und Verwaltung in Preussen und dem Deutschen
Reich,” by Graf Hue de Grais (second edition, 1882), p. 138.

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IV. How the French supply themselves may be seen by
the following statement:353
French Budget, 1881.
[In millions and tenths of millions.]
Receipts:
Direct taxes
Similar taxes
Registry, stamps, etc
Forests
Customs (and salt duty $3.5)
Indirect taxes (including tobacco)
Post-Office and telegraphMiscellaneous
Total receipts

Expenditures:
Public debt, etc.
General functions of the ministries
Administrative
expenses,cost of revenue collections,etc.
Miscellaneous
Total expenditures

$75.9
4.7
135.1
7.6
65.4
209.7
27.2
29.8
$555.4$249.0
243.7
58.5

3.5
$554.7The direct taxes are (1) on property; (2) one nearly likeour poll-tax together with a species of income-tax; (3) a tax
on doors and windows; and (4) one on licenses.

353“Le Budget. Revenus et Dépenses de la France,” by M. Block (1881), pp.
57, 82.

§ 5. A Résumé of the general principles of taxation.

681§ 5. A Résumé of the general principles of taxation.
After the manner of our classification and résumé of the subjectof value and money, it may be convenient to here insert arecapitulation of the various principles under the treatment oftaxation.354
Comparison Between Direct And Indirect Taxation.
Adam Smith's “Canons of Taxation.”—A tax should be: I.
Equal (in amount of sacrifice entailed). II. Certain. III. Timely.
IV. All for the state.
A Tax is either:
Direct.
Indirect (on commodities.)
Direct taxes are:On Income.
On Expenditure.
Taxes on Income are:General.
Special.
General income taxes. The best of taxes, if people were allhonest. As it is, it falls most heavily on the conscientious. Should
be reserved for emergency. All savings and a fixed amount in all
incomes should be exempt.
Special taxes are on:
Rent.
Wages.
Profits.
Taxes on Rent. Agricultural rent is meant. It falls entirely on
the landlord, and, if not balanced by taxes on other classes, isunjust. May be blended with a tax on profits, if on rent due tolandlord's improvements.
354

Taken, with modifications, from Milnes's “Problems in Political Economy,”p. 377.

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Taxes on Wages are:On Skilled.
On Unskilled.
Skilled wages are at a monopoly price, and taxes on them arepaid by the laborers, so long as wages are not reduced below
their just proportion.
Unskilled wages. (1) Population diminished by it. Paid byprofits. (2) Population left stationary. Shared between profits
and wages. (3) Population increasing in spite of it. Falls entirely
on wages.
Taxes on Profits. May possible stimulate production, and isthen a good all round, contributing to the state, and leaving no
one any poorer. If not, if profits are really diminished by thetax, capital may be diminished also. This (a) may, or (b) may
not diminish population. If (a), then the margin of cultivationceases to be extended, and part of the tax, pro tanto, falls on thelandlords. If (b), then wages fall, and part of the tax falls on thelaborer. Total result is a nearer approach to the stationary state.
Taxes on Expenditure are open to the same objections as thegeneral income-tax. They may be:
Assessed taxes.
House-tax.
Assessed taxes, such as on servants, dogs, etc. These are
rigidly direct.
House-taxes are:On building-rent.
On ground-rent.
House-taxes on building-rent are paid by occupier. This tax is
indirect.
House-taxes on ground-rent are (1.) with, or (2.) without
an equivalent tax on agricultural rent. (1.) Are paid by groundlandlord wholly, and therefore direct. (2.) Are part by occupier,and therefore indirect.

§ 5. A Résumé of the general principles of taxation.

683

Indirect taxes are: Excise,
Customs, orTolls.
Indirect taxes may be on (1.) Long or (2.) Short investmentsof capital.
Indirect taxes on Long investments are always unadvisable, inview of Canon IV.
Indirect taxes on Short investments are subject to the laws ofindirect taxation. 1. Tax vanities rather than positive enjoyments(e.g., liveries rather than servants). 2. The consumer and not the
producer should pay the tax collector (Canon IV). That is, collect
the tax as near the actual consumer as possible. 3. Taxes on realenjoyments to be kept as equal as possible for large and smallmeans. 4. Tax as few articles as possible. England taxes only
a very small number of imports. The United States taxes nearly
everything imported. 5. Tax stimulants freely. The United Statescollect $91,000,000 from spirits and liquors, and $42,000,000
from tobacco (1883). 6. Tax imports of commodities not madeat home, or whose home production is under an excise (internal
revenue) duty equal to the customs tax. 7. Keep the rate of tax
low, in order to get most revenue.
[596]

Chapter V. Of A National Debt.

§ 1. Is it desirable to defray extraordinary public
expenses by loans?

[597]

The question must now be considered, how far it is right or
expedient to raise money for the purposes of government, not bylaying on taxes to the amount required, but by taking a portionof the capital of the country in the form of a loan, and charging
the public revenue with only the interest.
This question has already been touched upon in the First
Book.355 We remarked, that if the capital taken in loans isabstracted from funds either engaged in production, or destined tobe employed in it, their diversion from that purpose is equivalent
to taking the amount from the wages of the laboring-classes.
Borrowing, in this case, is not a substitute for raising the supplies
within the year. A government which borrows does actually takethe amount within the year, and that too by a tax exclusively
on the laboring-classes, than which it could have done nothingworse, if it had supplied its wants by avowed taxation; and inthat case the transaction, and its evils, would have ended withthe emergency; while, by the circuitous mode adopted, the value
exacted from the laborers is gained, not by the state, but by theemployers of labor, the state remaining charged with the debt
besides, and with its interest in perpetuity. The system of public
loans, in such circumstances, may be pronounced the very worst
which, in the present state of civilization, is still included in the
catalogue of financial expedients.
We, however, remarked that there are other circumstancesin which loans are not chargeable with these pernicious
355

Book I, Chap. IV, § 5.

685
consequences: namely, first, when what is borrowed is foreign
capital, the overflowings of the general accumulation of theworld; or, secondly, when it is capital which either would not havebeen saved at all, unless this mode of investment had been open toit, or, after being saved, would have been wasted in unproductive
enterprises, or sent to seek employment in foreign countries.
When the progress of accumulation has reduced profits either tothe ultimate or to the practical minimum—to the rate less thanwhich would either put a stop to the increase of capital, or send
the whole of the new accumulations abroad—government may
annually intercept these new accumulations, without trenching on
the employment or wages of the laboring-classes in the country
itself, or perhaps in any other country. To this extent, therefore,
the loan system may be carried, without being liable to theutter and peremptory condemnation which is due to it when it
overpasses this limit. What is wanted is an index to determine
whether, in any given series of years, as during the last great war,for example, the limit has been exceeded or not.
Such an index exists, at once a certain and an obvious one.
Did the Government, by its loan operations, augment the rateof interest? If it only opened a channel for capital which would
not otherwise have been accumulated, or which, if accumulated,would not have been employed within the country, this implies
that the capital, which the Government took and expended, could
not have found employment at the existing rate of interest. So
long as the loans do no more than absorb this surplus, they
prevent any tendency to a fall of the rate of interest, but they
can not occasion any rise. [But] To the full extent to which theloans of government, during the war, caused the rate of interest
to exceed what it was before, and what it has been since, thoseloans are chargeable with all the evils which have been described.
If it be objected that interest only rose because profits rose, I
reply that this does not weaken, but strengthens, the argument.
If the Government loans produced the rise of profits by the great

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amount of capital which they absorbed, by what means can they
have had this effect, unless by lowering the wages of labor? It
will, perhaps, be said that what kept profits high during the war
was not the drafts made on the national capital by the loans, but
the rapid progress of industrial improvements. This, in a greatmeasure, was the fact; and it, no doubt, alleviated the hardshipto the laboring-classes, and made the financial system which
was pursued less actively mischievous, but not less contrary toprinciple. These very improvements in industry made room for alarger amount of capital; and the Government, by draining away
a great part of the annual accumulations, did not indeed preventthat capital from existing ultimately (for it started into existencewith great rapidity after the peace), but prevented it from existingat the time, and subtracted just so much, while the war lasted,from distribution among productive laborers. If the Government
had abstained from taking this capital by loan, and had allowed
it to reach the laborers, but had raised the supplies which it
required by a direct tax on the laboring-classes, it would haveproduced (in every respect but the expense and inconvenienceof collecting the tax) the very same economical effects which it
did produce, except that we should not now have had the debt.
The course it actually took was therefore worse than the very
worst mode which it could possibly have adopted of raising the
supplies within the year; and the only excuse, or justification,
which it admits of (so far as that excuse could be truly pleaded)
was hard necessity; the impossibility of raising so enormous anannual sum by taxation, without resorting to taxes which fromtheir odiousness, or from the facility of evasion, it would havebeen found impracticable to enforce.356
When government loans are limited to the overflowings ofthe national capital, or to those accumulations which would not
356

Although Mr. Mill had reference to the French wars in the beginning of
this century, his words apply also to the circumstances of our own late war,
1861-1865.

687
take place at all unless suffered to overflow, they are at least
not liable to this grave condemnation. In this case, therefore,
the question really is, what it is commonly supposed to be in
all cases—namely, a choice between a great sacrifice at once,
and a small one indefinitely prolonged. On this matter it seems
rational to think that the prudence of a nation will dictate the same
conduct as the prudence of an individual; to submit to as much of
the privation immediately as can easily be borne, and, only when
any further burden would distress or cripple them too much, toprovide for the remainder by mortgaging their future income.
It is an excellent maxim to make present resources suffice forpresent wants; the future will have its own wants to provide for.
On the other hand, it may reasonably be taken into consideration
that, in a country increasing in wealth, the necessary expensesof government do not increase in the same ratio as capital or
population; any burden, therefore, is always less and less felt;
and, since those extraordinary expenses of government which are
fit to be incurred at all are mostly beneficial beyond the existing
generation, there is no injustice in making posterity pay a partof the price, if the inconvenience would be extreme of defraying
the whole of it by the exertions and sacrifices of the generation
which first incurred it.

§ 2. Not desirable to redeem a national Debt by ageneral Contribution.
When a country, wisely or unwisely, has burdened itself with adebt, is it expedient to take steps for redeeming that debt? In
principle it is impossible not to maintain the affirmative.
Two modes have been contemplated of paying off a national
debt: either at once by a general contribution, or gradually bya surplus revenue. The first would be incomparably the best, if

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it were practicable; and it would be practicable if it could justly
be done by assessment on property alone. If property bore thewhole interest of the debt, property might, with great advantage
to itself, pay it off; since this would be merely surrendering
to a creditor the principal sum, the whole annual proceeds ofwhich were already his by law, and would be equivalent to whata land-owner does when he sells part of his estate, to free theremainder from a mortgage. But property, it need hardly be said,
does not pay, and can not justly be required to pay, the wholeinterest of the debt. Whatever is the fitting contribution fromproperty to the general expenses of the state, in the same, andin no greater proportion, should it contribute toward either theinterest or the repayment of the national debt. This, however,
if admitted, is fatal to any scheme for the extinction of the debt
by a general assessment on the community. Persons of property
could pay their share of the amount by a sacrifice of property,
and have the same net income as before.

If a person owns a property, A B, which returns him $1,000
income, and if he pays $10 a year in taxes as his share ofinterest on the public debt, suppose that part of his estate
represented by X, which returns him annually $10 (and which
return he has annually handed over to the state), to be carved
out of it, and that he is to be hereafter relieved of his share oftaxes. He would then, after having paid the capitalized value(X) of that which was his share of the annual tax to the stateon account of the public debt, have the same net income as
before; for he was never able to enjoy the income of X.

If those who have no accumulations, but only incomes, were689
required to make up by a single payment the equivalent of theannual charge laid on them by the taxes maintained to pay theinterest of the debt, they could only do so by incurring a private
debt equal to their share of the public debt; while, from theinsufficiency, in most cases, of the security which they could
give, the interest would amount to a much larger annual sum thantheir share of that now paid by the state. Besides, a collective
debt defrayed by taxes has, over the same debt parceled out
among individuals, the immense advantage that it is virtually amutual insurance among the contributors. If the fortune of acontributor diminishes, his taxes diminish; if he is ruined, theycease altogether, and his portion of the debt is wholly transferredto the solvent members of the community. If it were laid on him
as a private obligation, he would still be liable to it, even when
penniless.
When the state possesses property, in land or otherwise, which
there are not strong reasons of public utility for its retaining at
its disposal, this should be employed, as far as it will go, in
extinguishing debt. Any casual gain, or god-send, is naturally
devoted to the same purpose. Beyond this, the only mode which
is both just and feasible, of extinguishing or reducing a national
debt, is by means of a surplus revenue.

§ 3. In what cases desirable to maintain a surplus
revenue for the redemption of Debt.
The desirableness, per se, of maintaining a surplus for thispurpose does not, I think, admit of a doubt.
It is not, however, advisable in all cases to maintain a surplus
revenue for the extinction of debt. The advantage of paying off
the national debt is, that it would enable us to get rid of the worst
half of our taxation. But of this worst half some portions must

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be worse than others, and to get rid of those would be a greater
benefit proportionally than to get rid of the rest. If renouncing
a surplus revenue would enable us to dispense with a tax, we
ought to consider the very worst of all our taxes as precisely
the one which we are keeping up for the sake of ultimately
abolishing taxes not so bad as itself. In a country advancing in
wealth, whose increasing revenue gives it the power of ridding
itself from time to time of the most inconvenient portions of its
taxation, I conceive that the increase of revenue should rather be
disposed of by taking off taxes, than by liquidating debt, as longas any very objectionable imposts remain. In the present state ofEngland, therefore, I hold it to be good policy in the Government,
when it has a surplus of an apparently permanent character, totake off taxes, provided these are rightly selected. Even when notaxes remain but such as are not unfit to form part of a permanentsystem, it is wise to continue the same policy by experimental
reductions of those taxes, until the point is discovered at which agiven amount of revenue can be raised with the smallest pressure
on the contributors. After this, such surplus revenue as mightarise from any further increase of the produce of the taxes should
not, I conceive, be remitted, but applied to the redemption ofdebt. Eventually, it might be expedient to appropriate the entire
produce of particular taxes to this purpose; since there would
be more assurance that the liquidation would be persisted in, if
the fund destined to it were kept apart, and not blended withthe general revenues of the state. The succession duties would
be peculiarly suited to such a purpose, since taxes paid as they
are, out of capital, would be better employed in reimbursing
capital than in defraying current expenditure. If this separate
appropriation were made, any surplus afterward arising from theincreasing produce of the other taxes, and from the saving ofinterest on the successive portions of debt paid off, might form aground for a remission of taxation.

691
The relative amount of the United States public debt may
be seen, by Chart No. XXII, from an early date down to1880. Since the war, the surplus revenue of the UnitedStates has been constantly appropriated for the payment of the
public debt incurred during the late war, until, what with the
reduction of debt and the fall in the interest charge, our income
is now so much greater than expenditure that we are (1884)
actually in difficulties owing to the surplus. To the present
time the Treasury has been able to use its excess of receipts inredeeming matured debt; but the rapidity of the payment has
been such that in two years or more no matured debt will exist
to be redeemed: $250,000,000 of 4-½ per cent bonds remain,
but they do not fall due until 1891; and the 4 per cent bonds tothe amount of $737,620,700 do not mature until 1907. Having
once raised a large revenue under war pressure, it seems very
difficult for people to understand now why heavy duties wereoriginally levied, and the extraordinary suggestion is often
made that the surplus should remain, and new channels of
expenditure should be made (such as enormous pensions),
simply in order to keep up the heavy taxation. The difficultyis, however, that the unnecessary surplus exists because ofcustoms duties levied for war purposes. But the heavy
burden of war taxation ought not to be continued, adding
to the cost of production in all industries, without doing agreater wrong than would be done by the passing—and only
possible—trouble of a redistribution of capital in a few cases;
especially since that distribution of capital will be one fromless productive to more productive industries; otherwise, nochange would be made.
The condition of foreign debts, and the progress made in
their reduction, may be studied in Chart No. XXIII. That of
the United States is exceptional. The interest-bearing debt,
as given by the last report of the Secretary of the Treasury,
1883, has been reduced to $1,312,446,050, and the reduction
is more striking than is indicated in the chart for the year
1880.

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Chart XXIII. Reduction of National Debts in Various
Countries.
[605]

Chapter VI. Of An Interference Of
Government Grounded On Erroneous
Theories.

§ 1. The doctrine of Protection to Native Industry.
We proceed to the functions of government which belong towhat I have termed, for want of a better designation, the optionalclass; those which are sometimes assumed by governments andsometimes not, and which it is not unanimously admitted thatthey ought to exercise. We will begin by passing in review false
theories which have from time to time formed the ground of actsof government more or less economically injurious.
Of these false theories, the most notable is the doctrine ofProtection to Native Industry—a phrase meaning the prohibition,or the discouragement by heavy duties, of such foreigncommodities as are capable of being produced at home. If
the theory involved in this system had been correct, the practicalconclusions grounded on it would not have been unreasonable.
The theory was that, to buy things produced at home was anational benefit, and the introduction of foreign commodities
generally a national loss. It being at the same time evident
that the interest of the consumer is to buy foreign commodities
in preference to domestic whenever they are either cheaper or
better, the interest of the consumer appeared in this respect to becontrary to the public interest; he was certain, if left to his own
inclinations, to do what according to the theory was injurious to
the public.
It was shown, however, in our analysis of the effects ofinternational trade, as it had been often shown by former

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writers, that the importation of foreign commodities, in thecommon course of traffic, never takes place except when it is,
economically speaking, a national good, by causing the sameamount of commodities to be obtained at a smaller cost oflabor and capital to the country. To prohibit, therefore, thisimportation, or impose duties which prevent it, is to render thelabor and capital of the country less efficient in production thanthey would otherwise be, and compel a waste of the difference
between the labor and capital necessary for the home productionof the commodity and that which is required for producing thethings with which it can be purchased from abroad. The amountof national loss thus occasioned is measured by the excess of theprice at which the commodity is produced over that at which it
could be imported. In the case of manufactured goods the whole
difference between the two prices is absorbed in indemnifying
the producers for waste of labor, or of the capital which supportsthat labor. Those who are supposed to be benefited, namely, themakers of the protected articles (unless they form an exclusivecompany, and have a monopoly against their own countrymen
as well as against foreigners), do not obtain higher profits thanother people. All is sheer loss to the country as well as to theconsumer.
Of the industries in a country some are said to “need protection” and others not—that is, those industries which arecarried on at a relative disadvantage are the only ones which
need protection in order that they may continue in operation.
By relative disadvantage is meant a greater relative cost, or
sacrifice, to the same amount of labor and capital. Those industries which can not yield so great a value for the labor andcapital engaged in them as other more profitable industries
are those which are said to “need protection.” Wherever protective duties exist it is implied by those who lay them on that
there production is carried on under more onerous conditions
than in other competing places or occupations. After duties

§ 2. —had its origin in the Mercantile System.

695

are thus supposed to have protected the less advantageously
situated occupations, it may be said that all industries will thenhave an equal chance. “No doubt,” as Mr. Cairnes says, “theywould be equalized just as by compelling every one to move
about with a weight attached to his leg. The weight would,
indeed, be an impediment to locomotion, but, provided it
were in each case exactly proportioned to the strength of thelimb which drew it, no one ... would have any reason tocomplain. No one would walk as fast as if his limbs were
free, but then his neighbor would be equally fettered, and, if
it took him twice as long to reach his destination as before, hewould at least have company on his journey.”357§ 2. —had its origin in the Mercantile System.
The restrictive and prohibitory policy was originally grounded
on what is called the Mercantile System, which, representing theadvantage of foreign trade to consist solely in bringing money
into the country, gave artificial encouragement to exportationof goods, and discountenanced their importation. The only
exceptions to the system were those required by the system itself.
The materials and instruments of production were the subject ofa contrary policy, directed, however, to the same end; they were
freely imported, and not permitted to be exported, in order that
manufacturers, being more cheaply supplied with the requisitesof manufacture, might be able to sell cheaper, and therefore
to export more largely. For a similar reason importation wasallowed and even favored, when confined to the productions ofcountries which were supposed to take from the country still morethan it took from them, thus enriching it by a favorable balance oftrade. As part of the same system colonies were founded, for the
supposed advantage of compelling them to buy our commodities,
357

Cairnes, “Leading Principles,” pp. 381, 382.

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or at all events not to buy those of any other country: in returnfor which restriction we were generally willing to come underan equivalent obligation with respect to the staple productions of
the colonists. The consequences of the theory were pushed so farthat it was not unusual even to give bounties on exportation, andinduce foreigners to buy from [England] rather than from othercountries by a cheapness which [England] artificially produced,
by paying part of the price for them out of [their] own taxes. Thisis a stretch beyond the point yet reached by any private tradesmanin his competition for business. No shopkeeper, I should think,ever made a practice of bribing customers by selling goods tothem at a permanent loss, making it up to himself from otherfunds in his possession.
The principle of the Mercantile Theory is now given up even by
writers and governments who still cling to the restrictive system.
Whatever hold that system has over men's minds, independentlyof the private interests exposed to real or apprehended loss by its
abandonment, is derived from fallacies other than the old notionof the benefits of heaping up money in the country. The mosteffective of these is the specious plea of employing our own
countrymen and our national industry, instead of feeding andsupporting the industry of foreigners. The answer to this, fromthe principles laid down in former chapters, is evident. Without
reverting to the fundamental theorem discussed in an early partof the present treatise,358 respecting the nature and sources of
employment for labor, it is sufficient to say, what has usually
been said by the advocates of free trade, that the alternative
is not between employing our own people and foreigners, but
between employing one class and another of our own people. The
imported commodity is always paid for, directly or indirectly,with the produce of our own industry: that industry being, atthe same time, rendered more productive, since, with the same
358

Book I, Chap. IV.

§ 2. —had its origin in the Mercantile System.

697

labor and outlay, we are enabled to possess ourselves of a greater
quantity of the article. Those who have not well considered thesubject are apt to suppose that our exporting an equivalent inour own produce, for the foreign articles we consume, depends
on contingencies—on the consent of foreign countries to makesome corresponding relaxation of their own restrictions, or on
the question whether those from whom we buy are inducedby that circumstance to buy more from us; and that, if thesethings, or things equivalent to them, do not happen, the payment
must be made in money. Now, in the first place, there isnothing more objectionable in a money payment than in payment
by any other medium, if the state of the market makes it themost advantageous remittance; and the money itself was firstacquired, and would again be replenished, by the export of anequivalent value of our own products. But, in the next place,a very short interval of paying in money would so lower prices
as either to stop a part of the importation, or raise up a foreign
demand for our produce, sufficient to pay for the imports. I grantthat this disturbance of the equation of international demand
would be in some degree to our disadvantage, in the purchase ofother imported articles; and that a country which prohibits someforeign commodities, does, cæteris paribus, obtain those which
it does not prohibit at a less price than it would otherwise haveto pay. To express the same thing in other words: a country
which destroys or prevents altogether certain branches of foreign
trade, thereby annihilating a general gain to the world, which
would be shared in some proportion between itself and othercountries, does, in some circumstances, draw to itself, at theexpense of foreigners, a larger share than would else belong to itof the gain arising from that portion of its foreign trade which it
suffers to subsist. But even this it can only be enabled to do, if
foreigners do not maintain equivalent prohibitions or restrictions
against its commodities. In any case, the justice or expediency
of destroying one of two gains, in order to engross a rather larger

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share of the other, does not require much discussion; the gain,
too, which is destroyed, being, in proportion to the magnitude of
the transactions, the larger of the two, since it is the one which
capital, left to itself, is supposed to seek by preference.

§ 3. —supported by pleas of national subsistence andnational defense.

[610]

Defeated as a general theory, the Protectionist doctrine finds
support in some particular cases from considerations which,when really in point, involve greater interests than mere savingof labor—the interests of national subsistence and of national
defense.359 The discussions on the Corn Laws have familiarized
everybody with the plea that we ought to be independent offoreigners for the food of the people; and the Navigation Laws
were grounded, in theory and profession, on the necessity ofkeeping up a “nursery of seamen” for the navy. On this last
subject I at once admit that the object is worth the sacrifice; andthat a country exposed to invasion by sea, if it can not otherwise
have sufficient ships and sailors of its own to secure the meansof manning on an emergency an adequate fleet, is quite rightin obtaining those means, even at an economical sacrifice inpoint of cheapness of transport. When the English navigation
laws were enacted, the Dutch, from their maritime skill andtheir low rate of profit at home, were able to carry for othernations, England included, at cheaper rates than those nations
could carry for themselves: which placed all other countries
at a great comparative disadvantage in obtaining experienced
seamen for their ships of war. The navigation laws, by which
this deficiency was remedied, and at the same time a blow struck
359

Mr. Mill here takes up political considerations, which are not properly to
be included in a purely economic treatment. (See the beginning of § 6.)

699
against the maritime power of a nation with which England
was then frequently engaged in hostilities, were probably,
though economically disadvantageous, politically expedient. But
English ships and sailors can now navigate as cheaply as thoseof any other country, maintaining at least an equal competition
with the other maritime nations even in their own trade. The
ends which may once have justified navigation laws require themno longer, and afford no reason for maintaining this invidious
exception to the general rule of free trade.
Since the introduction of steamships and the advance of
invention in naval contrivances, the plea for navigation lawson the ground that they keep up a “nursery of seamen” forthe navy is practically obsolete. The “seaman” employed on
the modern naval ships more nearly resembles the artisan in a
manufacturing establishment; he need have but comparatively
little knowledge of the sea, since the days of sailing-vessels
have passed by, so far as naval warfare is concerned. Steamand mechanical appliances now do what was before done bywind and sail.
While Mr.
Mill thinks navigation laws were
economically—that is, so far as increase of wealth isconcerned—disadvantageous, yet he believes that they may
have been “politically expedient.” It is possible, for example,
that retaliation by the United States and other countries against
England early in this century brought about the remission of
the English restrictions on foreign shipping. But it is quite
another thing to say that such laws produced an ability to sailships more cheaply. That the English navigation acts of 1651
built up English shipping is not supported by many proofs;
whereas it is very distinctly shown that English shipping
languished and suffered under them.360 Moreover, under the
régime of steam and iron (which drew out England's peculiar
advantages in iron and coal), in all its history English shipping360

See “Sketch of the History of Political Economy,” supra, p. 6, note 1.

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never prospered more than it has since the abolition in 1849
of the navigation laws—events which have taken place since
Mr. Mill wrote.
The United States is still weighed down by navigation
laws adapted to mediæval conditions, and the relics of atime when retaliation was the cause of their enactment. So
long as wooden vessels did the carrying-trade, the naturaladvantages of the United States gave us a proud position on
the ocean. Now, however, when it is a question of cheaperiron, steel, and coal for vessels of iron and steel, we areat a possible disadvantage, and the bulk of navigation laws
proposed in these days are intended to draw capital either
by raising prices through duties on ships and materials, orby outright bounties and subsidies from industries in which
we have advantages, to building ships. And until of late no
distinction has been made between ship-building and shipowning (or ship-sailing). Within the last year (1884) many
burdens on ship-sailing have been removed; but even when
we are permitted to sail ships on equal terms with foreigners,
we can not yet build them with as small a cost as England(which is proved by the very demand of the builders of iron
vessels for the retention of protective duties), and our laws do
not as yet allow us to buy ships abroad and sail them under
our own flag.361[612]

With regard to subsistence, the plea of the Protectionists has
been so often and so triumphantly met, that it requires little
notice here. That country is the most steadily as well as the mostabundantly supplied with food which draws its supplies fromthe largest surface. It is ridiculous to found a general system ofpolicy on so improbable a danger as that of being at war withall the nations of the world at once; or to suppose that, even if
inferior at sea, a whole country could be blockaded like a town,
or that the growers of food in other countries would not be as
361

For bibliography of the United States shipping question, see Appendix I.

701
anxious not to lose an advantageous market as we should be not
to be deprived of their corn.
In countries in which the system of Protection is declining,
but not yet wholly given up, such as the United States, a doctrine
has come into notice which is a sort of compromise between
free trade and restriction, namely, that protection for protection's
sake is improper, but that there is nothing objectionable inhaving as much protection as may incidentally result from a tariff
framed solely for revenue. Even in England regret is sometimes
expressed that a “moderate fixed duty” was not preserved oncorn, on account of the revenue it would yield. Independently,
however, of the general impolicy of taxes on the necessaries
of life, this doctrine overlooks the fact that revenue is received
only on the quantity imported, but that the tax is paid on theentire quantity consumed. To make the public pay much, thatthe treasury may receive a little, is no eligible mode of obtaining
a revenue. In the case of manufactured articles the doctrine
involves a palpable inconsistency. The object of the duty asa means of revenue is inconsistent with its affording, evenincidentally, any protection. It can only operate as protection
in so far as it prevents importation, and to whatever degree it
prevents importation it affords no revenue.

§ 4. —on the ground of encouraging young
industries; colonial policy.
The only case in which, on mere principles of political economy,
protecting duties can be defensible, is when they are imposed
temporarily (especially in a young and rising nation) in hopesof naturalizing a foreign industry, in itself perfectly suitable tothe circumstances of the country. The superiority of one country
over another in a branch of production often arises only from

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having begun it sooner. There may be no inherent advantage
on one part, or disadvantage on the other, but only a present
superiority of acquired skill and experience. A country which
has this skill and experience yet to acquire may in other respects
be better adapted to the production than those which were earlier
in the field; and, besides, it is a just remark of Mr. Rae that
nothing has a greater tendency to promote improvements in any
branch of production than its trial under a new set of conditions.
But it can not be expected that individuals should, at their own
risk, or rather to their certain loss, introduce a new manufacture,and bear the burden of carrying it on, until the producers havebeen educated up to the level of those with whom the processes
are traditional. A protecting duty, continued for a reasonable
time, will sometimes be the least inconvenient mode in which
the nation can tax itself for the support of such an experiment.
But the protection should be confined to cases in which there isgood ground of assurance that the industry which it fosters willafter a time be able to dispense with it; nor should the domestic
producers ever be allowed to expect that it will be continued tothem beyond the time necessary for a fair trial of what they arecapable of accomplishing.
The great difficulty with this proposal is that it introduces(what is inconsistent with Mr. Mill's general system)
the Socialistic basis of state-help, instead of self-help. If
industries will never support themselves, then, of course, it
is a misappropriation of the property of its citizens whenevera government takes a slice by taxation from productive
industries and gives it to a less productive one to make up its
deficiencies. The only possible theory of protection to young
industries is that, if protected for a season, the industries
may soon grow strong and stand alone. Mr. Mill nevercontemplated anything else. But the difficulty is constantly
met with, in putting this theory into practice, that the industry,
once that it has learned to depend on the help of the state, never703
reaches a stage when it is willing to give up the assistanceof the duties. Dependence on legislation begets a want ofself-reliance, and destroys the stimulus to progress and goodmanagement. It is said: “There has never been an instance inthe history of the country where the representatives of suchindustries, who have enjoyed protection for a long series ofyears, have been willing to submit to a reduction of the tariff,or have proposed it. But, on the contrary, their demands
for still higher and higher duties are insatiable, and neverintermitted.”362 The question of fact, as to whether or not
the United States is indebted for its present manufacturing
position to protection when our industries were young, seems
to be capable of answer, and an answer which shows that
protection was imposed generally after the industries got afoothold, and that very little assistance was derived from theduties on imports.363
The following explanation by Mr. Mill364 of the meaning
put upon his argument of protection to young industries by
those who have applied it to the United States will be of noslight interest:“The passage has been made use of to show the inapplicabilityof free trade to the United States, and for similar purpose in
the Australian colonies, erroneously in my opinion, but certainlywith more plausibility than can be the case in the United States,for Australia really is a new country whose capabilities forcarrying on manufactures can not yet be said to have beentested; but the manufacturing parts of the United States—New
England and Pennsylvania—are no longer new countries; they
have carried on manufactures on a large scale, and with thebenefit of high protecting duties, for at least two generations;362

D. A. Wells, “Cobden Club Essays,” second series, p. 533.
See F. W. Taussig's “Protection to Young Industries as applied in the UnitedStates” (1883).
364
In a letter written February 26, 1866, to Mr. Horace White, published in the
Chicago “Tribune,” and reprinted in the New York “Nation,” May 29, 1873.
363

[614]

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their operatives have had full time to acquire the manufacturing
skill in which those of England had preceded them; there has
been ample experience to prove that the alleged inability of their
manufactures to compete in the American market with those ofGreat Britain does not arise merely from the more recent date of
their establishment, but from the fact that American labor andcapital can, in the present circumstances of America, be employedwith greater return, and greater advantage to the national wealth,in the production of other articles. I have never for a moment
recommended or countenanced any protecting industry except
for the purpose of enabling the protected branch of industry, in avery moderate time, to become independent of protection. Thatmoderate time in the United States has been exceeded, and if thecotton and iron of America still need protection against those of
the other hemisphere, it is in my eyes a complete proof that theyaught not to have it, and that the longer it is continued the greater
the injustice and the waste of national resources will be.”There is only one part of the protectionist scheme which
requires any further notice: its policy toward colonies and foreigndependencies; that of compelling them to trade exclusively withthe dominant country. A country which thus secures to itself
an extra foreign demand for its commodities, undoubtedly gives
itself some advantage in the distribution of the general gains of
the commercial world. Since, however, it causes the industry
and capital of the colony to be diverted from channels which areproved to be the most productive, inasmuch as they are those into
which industry and capital spontaneously tend to flow, there is aloss, on the whole, to the productive powers of the world, and themother-country does not gain so much as she makes the colonylose. If, therefore, the mother-country refuses to acknowledge
any reciprocity of obligations, she imposes a tribute on the colony
in an indirect mode, greatly more oppressive and injurious thanthe direct.

§ 5. —on the ground of high wages.

705§ 5. —on the ground of high wages.

The discussion by Mr. Cairnes on the question of wages asaffected by the tariff is such that I have quoted it as fully
as possible: “The position taken in the United States is that
protection is only needed and only asked for where Americanindustry is placed under a disadvantage, as compared with
the industry of foreign countries.... The rates of wages
measured in money are higher in the United States than inEurope, and, therefore, it is argued, the cost of producing
commodities is higher.... The high rates of wages in the
United States are not peculiar to any branch of industry, but
are universal throughout its whole range. If, therefore, a highrate of wages proves a high cost of production, and a highcost of production proves a need of protection, it follows
that the farmers of Illinois and the cotton-planters of theSouthern States stand in as much need of fostering legislation
as the cotton-spinners of New England or the iron-masters ofPennsylvania! A criterion which leads to such results must, I
think, be regarded as sufficiently condemned. The fallacy is,in truth, ... that all industries are not in each country equallyfavored or disfavored by nature, and have not, therefore, equal
need of this protecting care. If American protectionists are notprepared to demand protective duties in favor of the Illinois
farmer against the competition of his English rival, they arebound to admit either that a high cost of production is notincompatible with effective competition, or else that a highrate of wages does not prove a high cost of production; andif this is not so in Illinois, then I wish to know why the caseshould be different in Pennsylvania or in New England. If ahigh rate of wages in the first of these States be consistent witha low cost of production, why may not a high rate of wages in
Pennsylvania be consistent with a low cost of producing coaland iron?

[616]

706

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Principles Of Political Economy“The rate of wages, whether measured in money or in
the real remuneration of the laborer, affords an approximate
criterion of the cost of production,365 either of money, or of thecommodities that enter into the laborer's real remuneration,
but in a sense the inverse of that in which it is understood in
the argument under consideration: in other words, a high rateof wages indicates not a high but a low cost of production.366... Thus in the United States the rate of wages is high,whether measured in gold or in the most important articlesof the laborer's consumption—a fact which proves that thecost of producing gold, as well as that of producing thoseother commodities, is low in the United States.... I would
ask [objectors] to consider what are the true causes of thehigh remuneration of American industry. It will surely be
admitted that, in the last resort, these resolve themselves
into the one great fact of its high productive power.... I
must, therefore, contend that the high scale of industrial
remuneration in America, instead of being evidence of ahigh cost of production in that country, is distinctly evidenceof a low cost of production—of a low cost of production,that is to say, in the first place, of gold, and, in the next,of the commodities which mainly constitute the real wagesof labor—a description which embraces at once the mostimportant raw materials of industry and the most important
articles of general consumption. As regards commodities notincluded in this description, the criterion of wages stands inno constant relation of any kind to their cost, and is, therefore,
simply irrelevant to the point at issue. And now we may see

365
Business men constantly use the term “cost of production” when in reality
they mean that which to the economist is expressed by “cost of labor.” If costof labor becomes higher, it takes from profits—the place where they feel thedifficulties of competition—but they say that the cost of production has risen:
the cost, to them, only has risen, that is, the “cost of labor,” not “cost of
production.”
366
Cf. Cairnes, “Leading Principles,” pp. 324-341; and supra, Book III, Chap.
II, § 4.

§ 5. —on the ground of high wages.

707

what this claim for protection to American industry, foundedon the high scale of American remuneration, really comes to:it is a demand for special legislative aid in consideration of
the possession of special industrial facilities—a complaint, inshort, against the exceptional bounty of nature.
“Perhaps I shall here be asked, How, if the case beso—if the high rate of industrial remuneration in America be
only evidence of a low cost of production—the fact is to be
explained, since fact it undoubtedly is, that the people of theUnited States are unable to compete in neutral markets, inthe sale of certain important wares, with England and other
European countries?367 No one will say that the people of
New England, New York, and Pennsylvania, are deficientin any industrial qualities possessed by the workmen of any
country in the world. How happens it, then, that, enjoying
industrial advantages superior to other countries, they are
yet unable to hold their own against them in the generalmarkets of commerce? I shall endeavor to meet this objection
fairly, and, in the first place, let me state what my contention
is with regard to the cost of production in America. I do
not contend that it is low in the case of all commodities
capable of being produced in the country, but only in thatof a large, very important, but still limited group. With
regard to commodities lying outside this group, I hold thatthe rate of wages is simply no evidence as to the cost of theirproduction, one way or the other. But, secondly, I beg thereader to consider what is meant by the alleged ‘inability’of New England and Pennsylvania to compete, let us say,with Manchester and Sheffield, in the manufacture of calicoand cutlery. What it means, and what it only can mean, isthat they are unable to do so consistently with obtaining that367

The fact (sufficiently established by Mr. Brassey) is not considered alsothat England gives higher wages to operatives than the Continent, and yet
England is able to undersell France and Germany in neutral markets. It isevident, however, that England can undersell only in occupations in which she
has advantages.

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rate of remuneration on their industry which is current in
the United States. If only American laborers and capitalists
would be content with the wages and profits current in GreatBritain, there is nothing that I know of to prevent them fromholding their own in any markets to which Manchester andSheffield can send their wares. And this brings us to the heartof the question. Over a large portion of the great field ofindustry the people of the United States enjoy, as comparedwith those of Europe, (1) advantages of a very exceptionalkind; over the rest (2) the advantage is less decided, or (3)they stand on a par with Europeans, or (4) possibly they
are, in some instances, at a disadvantage. Engaging in the
branches of industry in which their advantage over Europe isgreat, they reap industrial returns proportionally great; and,so long as they confine themselves to these occupations, they
can compete in neutral markets against all the world, and stillsecure the high rewards accruing from their exceptionally richresources. But the people of the Union decline to confine
themselves within these liberal bounds. They would cover thewhole domain of industrial activity, and think it hard that theyshould not reap the same rich harvests from every part of the
field. They must descend into the arena with Sheffield andManchester, and yet secure the rewards of Chicago and St.
Louis. They must employ European conditions of production,and obtain American results. What is this but to quarrel
with the laws of nature? These laws have assigned to an
extensive range of industries carried on in the United Statesa high scale of return, far in excess of what Europe cancommand, to a few others a return on a scale not exceeding
the European proportion. American enterprise would engage
in all departments alike, and obtain upon all the high rewards
which nature has assigned only to some. Here we find thereal meaning of the ‘inability’ of Americans to compete withthe ‘pauper labor’ of Europe. They can not do so, and at
the same time secure the American rate of return on theirwork. The inability no doubt exists, but it is one created, not§ 5. —on the ground of high wages.

709

by the drawbacks, but by the exceptional advantages of theirposition. It is as if a skilled artisan should complain that hecould not compete with the hedger and ditcher. Let him only
be content with the hedger and ditcher's rate of pay, and there
will be nothing to prevent him from entering the lists evenagainst this rival.”368
It is often said that wages are kept at a high rate in
the United States by the existence of protected industries.
On the other hand, the truth is that the protected industries
must pay the current high rate of wages fixed by the generalproductiveness of all industries in the country. When the facts
are investigated, it is surprising how small a portion of thelaborers of the United States are employed in occupations
which owe their existence to the tariff. A general view of
the relative numbers engaged in different occupations may beseen by reference to Chart No. XXIV, based on the returns forthe census of 1880. The data are well worth examination:369(1.) Agriculture(2.) Manufacturing, mechanical, and mining(3.) Trade and transportation(4.) Professional and personal services
All occupations

7,670,493
3,837,112
1,810,256
4,074,238
17,392,099

[619]

368
369

Cairnes, “Leading Principles,” pp. 382-388.
“Compendium,” 1880, pp. 1343-1377.

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Chart XXIV. Chart showing for the United States, in 1880,
the ratio between the total population over ten years of age
and the number of persons reported as engaged in eachprincipal class of gainful occupations. Compiled from thereturns of the Tenth Census, by the Editor. NOTE.—Theinterior square represents the proportion of the population
which is accounted for as engaged in gainful occupations.
The unshaded space between the inner and outer squares
represents the proportion of the population not so accountedfor.
Of the second class, less than 450,000 work-people areengaged in the chief protected industries—cotton, woolen,
and iron and steel, combined. This class, it is to be
noted, in the census returns, includes bakers, blacksmiths,§ 5. —on the ground of high wages.
brick-makers, builders, butchers, cabinet-makers, carpenters,
carriage-makers, and so on through the whole list of similar
occupations practically unaffected by the tariff (so far asprotection to them is concerned). So that, at the most, there
are less than a million laborers engaged in industries directly
dependent on the tariff, and the number is undoubtedly verymuch less than a million. When some writers assert, therefore,that the existence of customs-duties allows industries (evenincluding all those employed in producing cotton, wool,
iron, and steel) to employ less than a million laborers insuch a way that the remuneration is fixed for the remaining
16,000,000 laborers in the United States, keeping wages highfor 16,000,000 by paying current wages for less than a million,
the extravagance and ignorance of the statement are at once
apparent; while, on the other hand, it is distinctly seen thatthe causes fixing the generally high rates of wages for the
16,000,000 are those governing the majority of occupations,and that the less than one million must be paid the wages
which can be obtained elsewhere in the more productive
industries. The facts thus strikingly bear out the principles asstated above.
Confirmation—if
confirmation
now seems necessary—may be found in a study370 by ourablest statistician, Francis A. Walker, upon the causes whichhave operated on the growth of American manufactures.
This growth has not been commensurate, he finds, with theremarkable inventive and industrial capacity of our people,
and with the richness of our national resources: “I answer thatthe cause of that comparative failure is found, primarily andprincipally, in the extraordinary success of our agriculture,as already intimated in what has been said of the investmentof capital. The enormous profits of cultivating a virgin soil
without the need of artificial fertilization; the advantages
which a sparse population derives from the privilege of370“Princeton Review,” 1883, p. 222.

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selecting for tillage only the choicest spots,371 those mostaccessible, most fertile, most easily brought under the plow;
and the consequent abundance of food and other necessaries
enjoyed by the agricultural class, have tended continuallyto disparage mechanical industries, in the eyes alike of thecapitalist, looking to the most remunerative investment of
his savings, and of the laborer, seeking that avocation whichshould promise the most liberal and constant support.

[621]“It has been the competition of the farm with theshop which, throughout the entire century of our national
independence, has most effectually hindered the growth of
manufactures. A people who are privileged to cultivate areasonably fertile soil, under the conditions indicated above,
can secure for themselves subsistence up to the highest limitof physical well-being. If that people possess the added
advantage of great skill in the use of tools, and great adroitness
in meeting the large and the little exigencies of the occupationand cultivation of the soil, the fruits of their labor will include
not only everything which is essential to health and comfort,
but much that is of the nature of luxury.”
It remains to be said in this connection that workmen
are already discerning the practical and real causes at work
affecting their wages—affecting them more directly than any
tariff system possibly could—by showing no small alarm at theimmigration of foreigners, such as the Hungarian miners and
Italian laborers, who willingly underbid them. In other words,
they are beginning to realize, in a practical way, the truth that
increasing numbers are far more potent than anything else in
reducing wages. So long as immigration is free to any raceor nationality, there is no such thing as “protection to homelaborers”; the only protection to them—not that I am urging
the desirability of such measures—can come solely fromforces which limit the number of workmen who enter into
371

The United States have at the present time but five persons engaged inagriculture for each square mile of settled area.

§ 6. —on the ground of creating a diversity of industries.

713

competition with them. Any other protection to laboring-men
than the prohibition of immigration—which no one thinks of(except for the Chinese)—is an economic delusion. Insteadof “protecting” them to the extent of affording higher wages,
the tariff increases the cost of woolen clothing and otherarticles of their consumption, in addition to forcing capital
into employments which yield a less return, and so insure
lower wages.

§ 6. —on the ground of creating a diversity ofindustries.
It must be kept in mind that Political Economy deals onlywith the phenomena of material wealth; it does not supply
ethical or political grounds of action. It is quite conceivablethat a legislator, in coming to a decision, may have to balance
economic gains against moral or political losses, and may
choose to give up the former to prevent the latter. But theeconomic truth remains unchanged. Political economy, forinstance, to the question, Is there any gain in international
trade? answers, unequivocally, yes. Would it be a lossof wealth to the community to have the goods formerlybought abroad now produced at home? The answer is,certainly it would. But here it has been ably urged byintelligent writers that a state has other ends to gain than theaccumulation of mere riches; that it must aim to secure thegreatest moral, social, and elevating influences possible forthe working-classes; and that while free exchange of goods
may add to wealth, it may injure the social and politicalwell-being of a nation. So far as these are social and politicalquestions they do not belong to Political Economy. But thecommonest form of argument is that, under free exchange, theUnited States would become purely an “agricultural” country,

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Principles Of Political Economy
its social horizon would become narrowed, and a lower
standard of industrial activity would then ensue; instead ofwhich, it is said, we should, by protection, keep in existence
diversified industries by which the national mind may bebetter stimulated, and greater enterprise may be encouraged
in all branches of industry. This argument for “diversity ofindustries,” however, is not merely a sociological question;
it can only be fully discussed from an economic stand-point,and deserves even more than the brief attention we can give it
here.
In the first place, as soon as any purely agricultural country
gains even a slight density of population—a density only suchas to warrant the introduction of the principle of division oflabor—there comes an inevitable differentiation of pursuits,
wholly outside of legislation, and through the operation ofnatural causes. Not all of any population is required inagriculture to provide the whole with food. By a divisionof labor, one man in agriculture can produce the sustenanceof himself and many others. “The United States have at thepresent time but five persons engaged in agriculture for eachsquare mile of settled area.” By the side of the farm must
early spring up a wide circle of industries—the shoemaker, thecarpenter, the blacksmith, the wagon-maker, the painter, thebuilder, the mason, and all the ordinary employments whicharise in any small community from the earliest division oflabor. Moreover, “agriculture” is often used in a too limitedsense as confined to producing food alone (although evenin that limited sense employing nearly one half of the total
number of our laborers). In a new country the natural fieldof employment is found in the “extractive industries,” which
include the preparation for the market not only of food, butalso of all ores, coal, minerals, oils, hides, leather, wool,
lumber, and the industries intimately connected with them;
all the employments which transport these from one part ofthe country to another (employing at present over one ninthof all our laborers); and professional and personal services§ 6. —on the ground of creating a diversity of industries.

715

of an extended variety. Even, therefore, if we were obliged
to forego manufactures entirely, the “extractive industries”
would necessarily involve a very extensive diversity of
employments.
The real question, however, for most persons, centersin the next stage of the industrial evolution—that of the
manufactures of these above-mentioned products of the“extractive industries.” It will be remembered, here, thata country does not possess an equal ability in producing eachof these or any commodities: the timber formerly near greatrivers may vanish into the interior; the oil-sources may be
more or less fertile; or the ore-deposits may be more or lessrich, more or less accessible, than those of other countries.
This being understood, then, as soon as the demand in the
country calls for an increased quantity of a particular article,
the cost may increase under the law of diminishing returns
until a foreign country—having inferior agents of production
as compared with our best—may be able to send supplies
into our markets. It all depends on whether the United States
wants more articles than can be produced on grades of natural
agents superior to those possessed by foreigners, taking costof carriage to this country into consideration. Even thoughforeign competition appears when we reach poorer grades ofnatural agents, it does not follow that some of the particular
articles will not be produced. What ought to be clear is, that
untrammeled exchange between countries will not prevent theexistence of various industries, but only limit production to
those grades of agents which are its best. This may be better
seen by a simple diagram:Iron and Coal: England
Iron and Coal: United States
Wheat: England
Wheat: United States
England

may

have

7
4
4
7

6
3
3
6
seven

5
2
2
5

4
1
1
4

different

[623]

3

2

1

3

2

1

grades

of

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Principles Of Political Economy
productiveness in her iron and coal supplies, of which her
grades 1, 2, and 3 are superior to the best grade of the UnitedStates, while grades 1, 2, 3, and 4 in the United States may
compare only with grades 4, 5, 6, 7 of England. So long as
England can supply herself and the United States also withcoal and iron from the three superior grades, the United States
can not work grade 1 at home. But if the supply for Englandand the world requires grade 5 to be worked, then the UnitedStates can begin the industry on her best grade, althoughthat is far inferior to the best grade in England. Likewise, if
the United States has three grades of wheat-land superior to
England's best grade, the ability of England to grow wheat
depends on whether the United States can, or can not, supply
both herself and England from grades 1, 2, and 3. If we mustresort to grade 4, then England can begin to grow wheat aswell as we. In short, under a system of free exchange, as greata diversity as under protection is probably possible, but only insuch a way that the best possible advantages in each particularindustry are employed. Smaller amounts in some branches,and greater amounts in others, may be produced under a free
than under a restrictive system, but with all the greater gain
which arises from a proper and healthy adjustment of trade.
The most poorly endowed enterprises in each occupation
would be given up, but not the whole industry itself. No classof persons feel the competition of rivals more than English
farmers since American wheat has come into English markets,and yet it does not follow that England can not grow a bushel
of wheat. The fact is, merely, that some kinds of lands werethrown out of cultivation, and a readjustment made, to thebenefit of those wanting cheaper food. So with us: we should
not, by the free exchange, be forced to give up the iron andcoal industries entirely; for the best mines would still keepthat occupation in existence to “diversify” the others.
So far the explanation covers the “extractive industries”
only, or those industries affected by the law of diminishingreturns when a larger quantity is demanded. The real question§ 6. —on the ground of creating a diversity of industries.
arises as to the manufactures of these materials. But wecount upon larger industrial rewards, in the form of wages,
and profits, here than in England; we must get more from anindustry than England in order to satisfy us. Our grades ofoccupations, therefore, must be more productive to a certain
extent, grade for grade, than English grades, in order to allowof their remaining free from competition. But we have thissuperiority, as regards our home market, owing to naturalcauses: (1) cheap raw materials (if we except wool and othercommodities whose price is raised by the tariff); (2) advantage
over England in cost of transportation of raw products; and(3) in the cost of transportation, again, of the finished goods
in reaching our markets. Now, the processes of manufacture
which do not put much labor upon the materials, especiallywhere the articles are bulky, are conducted in this country
without fear of foreign competition. And the range of thisclass of manufactures is surprisingly large. It includes the
manufactures of iron, such as stoves, and the common utensilsof every-day life; of hides, such as leather, harnesses, etc.;
and of wood, such as all the furniture of common use. The
list is too long to be fully stated here. These industries are
not kept in existence by the tariff; and a diversity as wide as
this would arise under a system of free exchange, as well asof restriction. Indeed, if duties were removed from so-called“raw materials,” it is altogether probable that a wider diversity
would exist than ever before.
And yet, it will be said, there are some things we can notproduce in free competition with England. Of course thereare; and it is to be hoped it will long continue so. If there are
not some kinds of commodities which foreigners can produce
to better advantage than we, then there will be no possibilityof any foreign trade whatever; since, if they can send us
nothing, they can take nothing from us. To deny this position,is to say that the export and import trade of the United States(amounting in 1883 to more than $1,500,000,000) is of no
profit, and had best be entirely destroyed, in order that a

717

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Principles Of Political Economy
few industries in which we have no natural advantages (andwhich employ less than one seventeenth of the laborers in the
United States) should be continued at a loss to the generalproductiveness of our labor and capital, and so to a generaldiminution of wages and profits.

§ 7. —on the ground that it lowers prices.
The argument—heard less frequently now than formerly—has
been advanced, drawn inductively from statistics, that
protection does not raise prices; because, after duties are
put on, a larger quantity is produced, the advantages of large
production are reaped, and then the price of the manufactured
commodity falls lower here than it was before the duty was
imposed. The position is then held that protection does notraise prices. It is, of course, understood to mean the prices ofprotected commodities—a necessary precaution, because wefind our own agricultural (unprotected) commodities cited toshow that prices are lower here than in England.
No one, however, will deny that there has been a fall in
the prices of textile fabrics and manufactured goods. Thatis the result of a general law of value, and of the tendencies
of a progressive state of industry.372 The causes of thisacknowledged fall would be at work, no matter whether
tariffs existed or not. It is the result of the general forwardmarch of improvements, as evidenced in the application of
new inventions and the display of skill and ingenuity in newprocesses. To say that it comes because of a tariff, is acomplete non sequitur. How true this is may be seen byobserving that a country like England, without tariffs, sharesin the general fall of prices of manufactured goods equallywith the country which has heavy customs-duties. The causes
372Book IV, Chap. I, § 2.

§ 7. —on the ground that it lowers prices.

719

must be wider than tariffs, if they are seen working alike intariff and non-tariff countries.
But the fact itself can not be gainsaid that protection does
raise the prices of the protected goods in the home market. The
comparison is not to be made between prices as they now arein this country and as they were twenty or forty years ago also
in this country, for this would show only the general marchof improvements in this country; but a comparison is to bemade between prices in this country to-day and present prices
in foreign countries. Does, for instance, the tariff increase
the price of woolen goods and clothing to every consumer
far beyond what the price would be if the duty on imported
woolens were removed? The very existence of a protecting
duty is the answer to this. If the duty does not raise the price,then why does the woolen industry wish a continuance of theduties? If goods can be sold as cheaply here as the foreign
goods, why do protectionists want any duties? The duties areintended to keep foreign goods out of our markets; and theywould be unnecessary if our goods could be sold as cheaplyas the foreign wares.
The facts, however, are at hand to show that the statementof principle as made above is corroborated by the statistics.
In 1883, although average weekly wages in Massachusetts
were over 77 per cent higher than in England, the American
laborer had to pay more for the articles entering into his real
wages; and to that extent lost the advantage of his higher
reward in this country. This is to be seen in the following
figures,373 which show, in percentages, whether prices arehigher or lower here than in England:
Classes of Articles.
Groceries
373

Higher
cent.
16

Per-

Lower
cent.

Per-

“Fifteenth Annual Report of the Massachusetts Bureau of Statistics, 1884,”
by Carroll D. Wright.

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Principles Of Political Economy

Provisions, including meat,
eggs, butter, and potatoes
Dry goods (all grades)
Boots, shoes, and slippers
Clothing

[627]

23
13
62
45

And yet, in spite of the high prices, 31 per cent of
the Massachusetts workman's expenditure represents more
comfort and better home surroundings than is enjoyed by the
English workman. If the American could purchase at English
prices, he would have no less than 37 per cent of a surplus
for additional enjoyments (after making due allowance forthe higher rents paid here than in England). In other words,
higher prices cut off the American laborer from reaping all thesuperiority in comfort which might be expected from knowingthat he had an advantage over the English laborer of 77 percent in the money wages received.
In order that the reader may easily find the arguments ofthe protectionists, he is referred to the following books:
Carey's “Principles of Social Science” (3 vols.). The formof argument is, briefly, that all industries should be kept going
within the bounds of a country so as to avoid foreign trade.
The change of form into the finished commodity should, heholds, take place near the spot where the raw materials areproduced, so that not so great a share should go to the mere
middle-men, or transporters.
Bowen's “Political Economy,” Chap. XX, advocatesprotection on the ground that it is needed to secure diversityof industries, and that it lowers the prices of imported goods.
Sir J. B. Byles's “Sophisms of Free Trade” is an answer
to Bastiat's “Sophisms of Protection,” the latter having beentranslated into English by Horace White.
Erastus B. Bigelow's “The Tariff Question.” This is oneof the ablest discussions, from the protectionist point of view,§ 7. —on the ground that it lowers prices.
based on statistical tables and comparisons of the policy ofEngland and the United States.
Stebbins's “Protectionists' Manual” is a brief and handy
statement.
Ellis H. Roberts's “Government Revenue” is the form into
which he has thrown his lectures at Cornell University (1884)
on protection, and is the latest statement emanating from thatside of the discussion. He goes at length into the history oftaxes in various countries; holds that wages are higher here
than in England because of protection; that our manufactures
are more flourishing than our agriculture, etc.
Frederick List's “National Economy” is the Germanstatement of protection, much on Carey's own grounds.
“The Congressional Globe” contains numerous speechesof members of Congress on the tariff; and the Iron and Steel
Association of Philadelphia send out pamphlets explaining
the protectionist position.
The free-trade arguments may be found also in W. M.
Grosvenor's “Does Protection Protect?” He studies the resultsof the various tariffs of the United States, and gives many
very valuable tables and collections of statistics bearing uponthis question.
W. G. Sumner's “History of Protection in the UnitedStates” is a very vigorous account of the evils of the various
tariffs and the protective system.
D. A. Wells's “Reports” as Special Commissioner ofthe Revenue, and his numerous pamphlets (see Putnams'
publisher's catalogue), are full of facts, and give the resultsof special study of the subject as affecting the United States.
A. L. Perry's “Political Economy” gives a radical free-trade
view.
Henry Fawcett's “Free Trade and Protection” explains thecauses which have retarded the more general adoption of free
trade.
J. E. Cairnes's “Leading Principles of Political Economy”
gives the ablest discussion of the economic principles involved

721

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Principles Of Political Economy
in the question which has yet been offered to the reader.
Moreover, almost all our systematic writers on political
economy (excepting, perhaps, Bowen and R. E. Thompson)
give the system of free exchange their support on economic
grounds.

[631]

Appendix I. Bibliographies.

A Brief Bibliography Of The Tariffs Of The
United States.
I. General Works.—Young's “Special Report on the CustomsTariff Legislation of the United States” contains useful extracts
from debates of Congress, and also valuable tables of duties; inthe Index, p. cciii, under “Tariff Act,” will be found references
to, and dates of, all acts to 1870. See, also, Sumner's “Historyof American Currency,” and his “Lectures on Protection in the
United States”; A. L. Perry's “Political Economy,” chap. xiii;
Grosvenor's “Does Protection Protect?” A valuable study is E.
J. James's “Studien über den Amerikanischen Zoll tariff.” For
different views, see Carey's “Social Science”; Bolles's “Financial
History of the United States,” vol. ii, Bk. i, chap. v, Bk. iii,
chaps. iii to x; and Stebbins's “American Protectionists' Manual.”
II. Earlier Periods.—H. C. Adams's “Taxation in the UnitedStates, 1789-1816”; F. W. Taussig's “Protection to Young
Industries”; the works of Hamilton, Madison, Jefferson, Webster,and Clay; “The Statesman's Manual”; and of course the Debatesin Congress, etc. See, also, Bristed's “Resources of the UnitedStates”; Pitkin's “Statistical View of the Commerce of the UnitedStates”; Seybert's “Statistical Annals” (1818); and the “American
Almanac.”
III. Noteworthy Documents.—Hamilton's Reports: “Reporton Manufactures,” Works, ii, pp. 192-284, or American State

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Principles Of Political Economy

Papers, Finance, i, 123-144. Dallas, Treasury Report of 1816,
American State Papers, Finance, iii, 87-91.
A report which is of the greatest importance and weight isAlbert Gallatin's “Memorial in Favor of Tariff Reform” (1832).
Printed separately. Unfortunately, not in his collected works.
Walker's Report, see Finance Report, December 3, 1845.
J. Q. Adams's Report of 1832, Congressional Documents,
1831-1832, H. R. No. 481.
D. A. Wells's “Reports as Special Commissioner of the
Revenue,” 1866, Senate Documents, second session, Thirtyninth Congress, vol. i, No. 2; 1868, House Executive Documents,
second session, Fortieth Congress, vol. ix, No. 81; 1869, House
Executive Documents, third session, Fortieth Congress, vol. vii,
No. 16; 1869, House Executive Documents, second session,
Forty-first Congress, vol. v, No. 27; and his paper in the Cobden
Club Essays (second series).
W. D. Kelley's “Speeches, Addresses, and Letters.”“Report of the Tariff Commission,” 1882 (two vols). H. R.
Miscellaneous Documents, No. 6, Part I, Forty-seventh Congress,
second session.
IV. Pauper-Labor Argument.—See Taussig, “Protection toYoung Industries,” p. 69, note 1; Calhoun's speech, Works, iv,
pp. 201-212; Greeley's speech of 1843; Cooper's “Politics,” pp.
99-109; Webster's Works, v, pp. 161-235; Cairnes, “Leading
Principles,” pp. 382-388. Fifteenth Annual Report of the
Massachusetts Bureau of Statistics (1884), by Carroll D. Wright.
D. A. Wells, “Princeton Review,” November, 1883, p. 261;
Schoenhof, “Wages and Trade.”
V. View of Early Manufactures.—Bishop, “History ofAmerican Manufactures”; Batchelder's “Introduction and Early
Progress of the Cotton Manufacture in the United States”; N.
Appleton, “Origin of Lowell”; G. S. White, “Memoir of SamuelSlater”; B. F. French, “History of the Rise and Progress of theIron Trade of the United States for 1621-1857”; H. Scrivenor,

Appendix I. Bibliographies.

725“History of the Iron Trade”; “Bulletin of the National Associationof Woolen Manufactures,” ii, pp. 479-488. Tench Coxe,“Statement of the Arts and Manufactures of the United States for1810” (1814).
VI. Later View of Manufactures:(1.) THE IRON MANUFACTURE.—See Swank's “Reports of Iron
and Steel Association,” 1882; ibid., “Census Report,” 1880;
ibid., “Iron Trade,” 1876; J. S. Newberry, for an excellent article
in “International Review,” i, pp. 768-780.
For Bessemer steel, Swank, “Census Report,” 1880, pp. 149153; and Schoenhof, “Destructive Influences of the Tariff,” chap.
vii. A. S. Hewett, Speech in Congress, May 16, 1882. Separately
printed.
(2.)
WOOL, WOOLENS, AND COTTONS.—Production andimportation of wool, see “United States Statistical Abstract”;“Tariff Commission Report,” i, pp. 1782-1785; ii, p. 2432.
Production and importation of woolens, see “Bulletin of
Woolen Manufacturers,” vii, p. 359; “Commerce and Navigation
Reports.”
Prosperity of woolen manufacturers after 1867, see Wells,“Wool and the Tariff” (a letter to the “New York Tribune,”
March 20, 1873); R. W. Robinson, article of December, 1872,
in “Bulletin of Woolen Manufacturers,” iii, p. 354. Edward
Harris, “Memorial of the Manufacturers of Woolen Goods to theCommittee of Ways and Means,” Washington, 1872. John L.
Hayes, “The Fleece and the Loom.”
Production and importation of cottons, see “Commerce andNavigation Reports”; Census Report of 1880.
(3.) SILK.—Manufacture since 1860, see “Silk Association
Reports”; Wyckoff, “Silk Manufacture in the United States”(1883) for recent history, pp. 42-51. Wyckoff, “The Silk Goodsof America” (1880), on methods of manufacture, chaps. ii, iv, vi.
(4.) SUGAR DUTIES.—D. A. Wells, “Princeton Review,” vi(November, 1880), pp. 319-335; and “The Sugar Industry of the

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United States and the Tariff” (1878).
VII. Present Tariff.—Heyl's “United States Duties on Imports”(1881) contains all acts in force to date of publication, and gives
all acts since the year 1861 in full. It is used by the United States
officials.
“Imports Duties from 1867 to 1883 inclusive” (House ofRepresentatives, Miscellaneous Documents, No. 49, Fortyeighth Congress, first session) gives duties on each article by
years, and reduces specific to ad valorem rates.
“The Existing Tariff on Imports into the United States,” 1884
(Senate Document, Report, No. 12, Forty-eighth Congress, firstsession).

A Brief Bibliography Of Bimetallism.
“The Report of the International Monetary Conference, 1878”(p. 754), contains an extended bibliography on money, by S.
Dana Horton. Chevalier's third volume of his “Cours d'Économie
politique,” entitled “Monnaie,” also gives a bibliography.
I. Standard of Value.—See Jevons, “Money and the
Mechanism of Exchange,” chaps iii, xxv; S. Dana Horton,“Gold and Silver,” chap. iv, p. 36; F. A. Walker, “Political
Economy,” pp. 363-368, “Money, Trade, and Industry,” pp.
56-77; Wolowski, “L'Or et l'Argent,” pp. 7, 22, 207; Mill,“Principles of Political Economy,” book iii, chap. xv; Walras,“Journal des Économistes,” October, 1882, pp. 5-13.
II. Bimetallic Theory.—Horton, “Gold and Silver,” p. 29; F.
A. Walker, “Money, Trade, and Industry,” p. 157, “Political
Economy,” p. 408; Giffen, “Fortnightly Review,” vol. xxxii(1879), p. 279; Wolowski, “L'Or et l'Argent,” p. 35; Jevons,ibid., chap, xii; A. J. Wilson, “Reciprocity, Bimetallism, andLand Reform,” p. 107; S. Bourne, “Trade, Population, andAppendix I. Bibliographies.

727

Food,” p. 227; Seyd, “The Decline of Prosperity,” and thevarious pamphlets of Cernuschi.
III. Operation of Gresham's Law.—Macaulay, chap. xxi forclipped coin of 1695; Jevons, ibid., pp. 80-85, also gives anexample taken from the Japanese currency; for the case of France,
see “Report of the Select Committee of the House of Commonson the Depreciation of Silver, 1876,” p. xlii, and Appendix, pp.
86, 148; for the United States, see supra, book iii, chap. vii, § 3.
See, also, Lord Liverpool's “Treatise on the Coins of the Realm,”chap. xii, for changes in the coin of England.
IV. Compensatory Effect of Two Standards.—Jevons, ibid.,
pp. 139, 140; F. A. Walker, “Political Economy,” pp. 411-416;
Wolowski, “L'Or et l'Argent,” p. 28; Mannequin, “Journal desÉconomistes,” August, 1878, p. 202.
V. Effect of a League of States, or Law, on the Relative
Value of Gold and Silver.—Giffen, “Fortnightly Review,” vol.
xxxii (1879), pp. 285-290; Wolowski, “L'Or et l'Argent,”
pp. 23, 24, 31; F. A. Walker, “Political Economy,” p. 410,
“Report of the International Monetary Conference, 1878,” p. 74;
Sumner, “Princeton Review,” vol. iv, p. 563; S. Dana Horton,“Report of the International Monetary Conference, 1878,” p.
741; Bourne, “Trade, Population, and Food,” pp. 228, 230;
Jevons, “Contemporary Review,” vol. xxxix (1881), p. 750; S.
Newcomb, “International Review” (1879), p. 314.
VI. Production of Gold and Silver; Relative Value of the Two
Metals.—Ad. Soetbeer, Petermann's “Mittheilungen,” No. 57;“House of Commons Report on Depreciation of Silver,” 1876,
Appendix, pp. 11, 12, 24; Bourne, “Statistical Journal,” vol. xlii,
p. 409, gives Sir H. Hay's figures corrected by him to 1878;
Spofford's “American Almanac,” 1878, gives tables from the“Journal des Économistes”; the figures of Seyd, Hay, Jacob, andTooke and Newmarch are in the “House of Commons Report,”
above. Also see, supra, book iii, chap. vi, for references.
The relative values of gold and silver since 1834, as given in

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Pixley and Abell's (London) tables, are trustworthy. Previous to1834 there is much uncertainty. Soetbeer, ibid., gives Hamburg
quotations since 1687. Another table, probably incorrect inplaces, is that of White, see “Report of the International Monetary
Conference,” 1878, p. 647.
VII. Demonetization of Silver by Germany.—For copy of lawsof 1871 and 1873, see “Report of Directors of the United States
Mint, 1873,” p. 82; “House of Commons Report on Depreciationof Silver,” 1876, p. 18; “Conférence Monétaire Internationale,”
1881, index, p. 215 for “Allemagne.”
VIII. Latin Union.—For treaty, see “Journal des Économistes,”
May, 1866; “House of Commons Report,” ibid, xxxviii,
Appendix, pp. 92, 98, 106-109, 116; “Report of Monetary
Conference,” 1878, pp. 779-787.
IX. Flow of Silver to the East.—The figures of Sir Hector
Hay after 1851, “House of Commons Report,” ibid., App., p.
24, are fullest, and should be combined with Pixley and Abell's
figures for years before 1851, ibid., Appendix, p. 21. See
also Bourne, “Statistical Journal,” 1879, p. 422; Waterfield,“House of Commons Report,” ibid., Appendix, pp. 171,172, 174; Quetteville, ibid., p. 184; “Conférence Monétaire
Internationale,” 1881, p. 197; London “Economist,” February
24, 1883, Supplement, p. 7; “Parliamentary Documents,” 1881,
vol. xciii; “Report of the Director of the United States Mint,”
1880 (in the Finance Report, 1880, p. 194); J. B. Robertson,“Westminster Review,” vol. cxv, p. 200.
X. Depreciation of Silver, 1876.—Causes, Bourne, ibid., pp.
206, 212, 222, 233; Wilson, ibid., p. 128; “House of Commons
Report,” ibid.; Sumner, “Princeton Review,” vol. iv., p. 570;
S. Newcomb, “International Review,” vol. vi (1879), p. 326;
Cochut, “Revue des Deux Mondes,” i, December, 1883, p. 514;
Cairnes, “Essays”; F. Bowen, “Minority Report of the UnitedStates Silver Commission,” 1878.
Supposed cause of panic of 1873, see Williamson,

Appendix I. Bibliographies.

729“Contemporary Review,” April 1879; Seyd, “Decline ofProsperity”; Bourne, ibid., pp. 226, 227.
XI. Appreciation of Gold.—Giffen, “Statistical Journal,” vol.
xlii, p. 36, started the theory for the period 1873-1879. Also
see Bourne, “Statistical Journal,” vol. xlii, p. 406; S. Newcomb,“International Review,” 1879, p. 329; Wolowski, ibid., pp. 29,
30; Goschen, “Journal of the Institute of Bankers” (London), vol.
iv, part vi, May, 1883; Patterson, “Statistical Journal,” vol. xliii,
p. 1; for table of prices see London “Economist” (e.g., December
28, 1878).
XII. Bimetallism in the United States.—See supra, bookiii, chap. vii; for a vast array of materials, see “Report of theInternational Monetary Conference,” 1878; Linderman's “Moneyand Legal Tender”; the Finance Reports of the United States;
and Congressional Documents. For the coinage laws of 1792,
1834, 1853, 1873, 1878, see pamphlet, “Extracts from the Lawsof the United States relating to Currency and Finance,” by C.
F. Dunbar. For detailed account of passage of Act of 1873,
see “Report of the Comptroller of the Currency,” 1876, p. 170.
Present situation, “Atlantic Monthly,” May, 1884, “The Silver
Danger.”A Brief Bibliography Of American
Shipping.
I. English Navigation Acts.—Macpherson's “Annals,” ii, pp. 442,
484; Scobell, “Collection of Acts,” p. 176; Ruffhead, “Statutes
at Large,” iii, p. 182; Roger Coke, “Treatise on Trade” (1671),
p. 36; Sir Josiah Child, “New Discourse on Trade” (1671); SirMatthew Decker, “Essay on the Causes of the Decline of Foreign
Trade” (1744); Joshua Gee, “Trade and Navigation of GreatBritain” (1730); Lindsay, “History of Merchant Shipping and

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Principles Of Political Economy

Ancient Commerce”; McCulloch, “Dictionary of Commerce”(new edition), articles “Navigation” and “Colonial Trade”; ibid.,
edition of Adam Smith, note xii, p. 534; Huskisson, speeches,iii, 13, 351; Levi, “History of British Commerce,” p. 158.
II. Navigation Laws of the United States.—“United States
Statutes at Large,” i, 27, 287, 305; Act of 1817, Statutes, iii,
351; Revised Statutes (1878), “Commerce and Navigation,” p.
795; Lord Sheffield, “Observations on the Commerce of theUnited States”; Pitkin, “Statistical View of the Commerce of theUnited States,” chap, i; D. A. Wells, “Our Merchant Marine,”chap. v; Seybert's “Statistical Annals”; Macgregor, “Commercial
Statistics of America.”
III. Growth of American Shipping.—Rapid growth, 18401856. Levi, “History of British Commerce,” p. 582; Bigelow,“Tariff Question,” Appendix No. 57; “Harper's Magazine,”
January, 1884, p. 217; Lindsay, “History of Merchant Shipping,”
iii, p. 187; for ship-building, see Report of the United States
Bureau of Statistics, “Commerce and Navigation,” 1881, p.
927; for tonnage, ibid., pp. 928-930; also, see “UnitedStates Statistical Abstract”; Dingley's Report to House ofRepresentatives, December 15, 1882, No. 1,827, Forty-seventh
Congress, second session, pp. 5, 8, 254.
IV. Steam and Iron Ships.—Preble, “History of SteamNavigation”; Colden, “Life of Fulton”; Porter, “Progress of the
Nation,” section 3, chap. iv; Nimmo, “Report to the Secretaryof the Treasury in Relation to the Foreign Commerce of theUnited States and the Decadence of American Shipping” (1870);
Dingley's Report, pp. 4, 23; Kelley, “The Question of Ships,”
Appendix ii, p. 208.
V. Decline of American Shipping.—“Report on Commerceand Navigation” (1881), pp. 927, 928; Lindsay, ibid., iii, pp.
83, 187, 593, 645; ibid., iv, pp. 163-180, 292, 316, 376;
“North American Review,” October, 1864, p. 489; “Report on
Commerce and Navigation,” 1881, lxv, pp. 915, 916, 922, 934;

Appendix I. Bibliographies.

731

Lynch, Report to House of Representatives on “Causes of theReduction of American Tonnage,” February 17, 1878, pp. ix, 80,
176, 195-213; remission of duties, Revised Statutes of the UnitedStates (edition of 1878), section 2,513; Report on “Commerce andNavigation,” xi, 83, 210; Dingley's Report; Nimmo, “Decadenceof American Shipping” (which gives several charts), p. 17, “The
Practical Workings of our Relations of Maritime Reciprocity”(1871); Kelley, ibid.; Reports of the New York Chamber ofCommerce; Sumner, “Shall Americans own Ships?” in “North
American Review,” June, 1880; Codman, “Free Ships”; forhigh-rate profit in the United States, Dingley's Report, p. 4.
VI. Burdens on Ship-Owners.—Tonnage duties, Wells, p. 179;
sailors' wages, Revised Statutes, sections 4,561, 4,578, 4,5804,584, 4,600; consular fees, Dingley's Report, p. 9; pilotage,
taxation, Wells, p. 172, et seq.; see also Act of 1884, abolishing
many of these burdens.
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Appendix II. Examination
Questions.
The following problems and questions have been arranged toindicate to the reader the character of examinations set byEnglish374 and American universities. They have been taken ineach case from papers actually given. It is hardly necessary tostate, perhaps, that these questions do not exhaust the subject,
and are only some of a kind of which many more might be added:
DEFINITIONS.
1. Define briefly, Fixed Capital; Unproductive Consumption;
Law of Diminishing Returns; Effective Desire of Accumulation;
Law of Increase of Labor; Communism; Wages Fund; Wages ofSuperintendence; Real Wages; Value; Price; Demand; Medium
of Exchange; Gresham's Law.
2.
Explain carefully the following terms: Productive
Consumption, Effectual Demand, Margin of Cultivation, Costof Production, Value of Money, Cost of Labor, Wealth, andAbstinence.
3. Explain the following terms: Real Wages, Fixed Capital,
Allowance System, Margin of Cultivation, Price, Demand,
Medium of Exchange, Seignorage, Value of Money, and Bill of
Exchange.
4. Define Supply, Value of Money, Productive Consumption,
Cost of Production, Cost of Labor, Exchange Value, Law of
Production from Land, Rate of Profit, Capital, and Gresham's
Law.
374

See Milnes's “Problems in Political Economy.”

Appendix II. Examination Questions.

733

5. Define Political Economy: State the parts into which it may
be divided, and show how they are mutually related.
LABOR.
6. Distinguish between direct and indirect labor, and give an
illustration of the distinction.
7. Apply the distinction between productive and unproductive
labor, and productive and unproductive consumption,
respectively, to each of the following persons: a tailor, anarchitect, an annuitant, a sailor, and a brick-layer.
8. Is an actor to be classed as a productive laborer? The
inventor of a machine? A confectioner?
9. In which of the two classes of laborers, productive andunproductive, would you place the following?
(1.) The officers of our Government.
(2.) The maker of an organ.
(3.) An organist.
(4.) A schoolmaster.
(5.) An artist.
(6.) He who makes an article for which there is no use.
10. Classify as productive or unproductive the following
laborers: a clergyman, musical-instrument maker, actor, soldier,and lace-maker.
CAPITAL.
11. Explain fully what you understand by capital, and what
function it discharges in production. Consider whether or not thefollowing ought to be included in capital: (1) the original andacquired powers of the laborer, (2) the original properties of thesoil, (3) improvements on land, (4) credit, (5) unsold stock in
the hands of a merchant, (6) articles purchased but still in the
consumer's hands.
12. Does a national loan add to the capital of a country?
13. Inquire how far, or in what cases, or in what sense, it may
be said that a common dwelling-house, an hotel, a school-house,

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Principles Of Political Economy

a police-station, a theatre, and a fortification, constitute part ofthe capital of the country.
14. Discuss carefully the question whether money lying in abank (or corn lying in a granary) is always capital, or whether its
economic nature depends upon the intentions of the owner.
15. Are railway-shares, stocks of wine, wheat, munitions ofwar, and land, to be considered capital, or not?
16. Explain fully whether you consider that United Statesbonds are capital or not.
17. Is an investment in government funds capital, or not? Giveyour reasons.
18. In what manner does a large expenditure for military
purposes affect the operations of capital and labor?
19. Distinguish between wealth and capital. Show that there
is no assignable limit to the employment of capital in bettering
the condition of the members of a community.
20. “If there are human beings capable of work, and foodto feed them, they may always be employed in producing
something.” Explain the meaning of this fully.
21. What is meant by saying wealth can only perform thefunctions of capital by being wholly or partially consumed?
22. Explain and illustrate the statement that demand forcommodities is not demand for labor.
23. Show that expenditure of money does not necessarily
increase the demand for labor.
24. In what way would a general demand for luxuries affectproductive laborers and the wealth of the community?
25. In a community where capital is all employed, what would
be the effect if one employer gradually withdrew some of his
capital, and spent this for personal luxuries?
26. It is contended that “the demand for commodities, which
can only be got by labor, is as much a demand for labor as ademand for beef is a demand for bullocks.” Criticise this position.

Appendix II. Examination Questions.

735

27. “It is often said that, though employment is withdrawn
from labor in one department, an exactly equivalent employment
is opened for it in others, because what the consumers save in
the increased cheapness of one particular article enables themto augment their consumption of others, thereby increasing thedemand for other kinds of labor.” Point out the fallacy.
28.
A college undergraduate, with the applause of
shopkeepers, bought twenty waistcoats, under the plea that he
was doing good to trade. Examine the economical soundness of
his act.
29. A man invested a portion of his capital in a loan to a state
which subsequently repudiated its debts. The man thereupon
gave up his carriage, discharged superfluous gardeners, andreduced the number of his domestic servants. Examine the effectof these changes on the employment of labor in the district where
he resides.
30. In the sixteenth century a great change in the mode of
expenditure took place. Retainers were dismissed, households
were reduced and a demand for commodities was substituted fora demand for labor. How would this change affect wages, andwhy?
31. It is supposed by some persons that expenditure by the richin costly entertainments is good for trade. What is your opinion
on the subject?
32. A is an absentee who spends his income abroad. B spends
his income chiefly on American pictures and other works of art.
C spends most of his income on American servants. D saves andbuys United States bonds. E employs most of his income in the
production of manufactures. Explain the various effects of thesedifferent modes of expenditure on the amount of wealth in the
United States, and on the working-classes of the country.
33.
Compare the economic effects of defraying war
expenditure (1) by loans, (2) by increased taxation.

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Principles Of Political Economy

34. Define the term capital, and distinguish between fixed andcirculating capital, giving instances of each.
35. Distinguish between fixed and circulating capital, andpoint out how far, or in what manner, each of the following
articles belongs to one kind or the other: a dwelling-house,a crop of corn, a wagon, a load of coal, an ingot of gold, a
railway-engine, a bale of cotton goods.
36. Of the following, which would you class under fixed andwhich under circulating capital: cash in the hands of a merchant,a cotton-mill, a plow, diamonds in a jeweler's shop, a locomotive,
a nursery-gardener's seeds, greenhouses, manures; a carpenter's
tools, woods, nails?
37. If in a country like this a large amount of capital becomes
fixed in the building of railroads, what effect will this changetaken by itself have upon the laboring-class, supposing the capital
to be (1) domestic, or (2) borrowed wholly or in part from abroad?
38. What conclusion is reached by Mr. Mill respecting theobjections to the use of labor-saving machinery?
39. Is the extension of machinery beneficial to laborers?
40. What is “the conclusive answer to the objections against
machinery”?
EFFICIENCY OF PRODUCTION.
41.
Explain briefly the chief causes on which the
productiveness of labor depends.
42. What are the principal ways in which advantage arises
from the division of labor?
43. What are the principal advantages of division of labor? In
what cases and why is it better to carry on a productive enterpriseon a large scale?
44. Under what circumstances, and in what callings, can thedivision of employment be carried out to the fullest extent?
45. Show how the amount of available capital and the extent
of the market for products limit division of labor.
POPULATION.

Appendix II. Examination Questions.

737

46. Give a brief statement of Malthus's theory of population,
explaining the different checks on population in different stagesof civilization.
47. Enunciate Malthus's law of population, and give an outlineof the reasoning by which he established it. Give an account of
any objections that have been brought against Malthus's position,and criticise those objections.
48. When the growth of population outstrips the progress ofimprovements, what are the means of relief for the laborer?
49. Does the increased facility of emigration nullify the
Malthusian law of population in your opinion or not, and why?
50. Explain the law of diminishing return and the Malthusian
doctrine of population; and trace the connection between them.
INCREASE OF PRODUCTION.
51. Compare the motives to saving in the case of savages, andof a country like the United States. State the causes of diversity
in the strength of the effective desire of accumulation.
52. Capital is said to be accumulated by saving; what issaving? Is hoarded money a saving while hoarded?
53.
How far does the increasing productiveness ofmanufacturing industry tend to neutralize the effect on profits ofthe diminishing productiveness of agricultural industry?
54. What conclusion as to the limit to the increase of
production does Mr. Mill deduce from his investigation of thelaws of the various requisites of production?
PROPERTY.
55. What are the essential elements of property? Are thegrounds of property in land the same as those of property in
movables?
56. Give what you conceive to be the chief arguments in favorof the institution of private property, as opposed to common
ownership.
57. What arguments does Mr. Mill suggest in favor of some
redistribution of landed property?

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58. What are the economic arguments for and against
Communism?
59. In what way, and by what means, do Socialists want toalter the present distribution of wealth?
60. Sketch the principal forms of Communistic and Noncommunistic Socialism.
61. Should the power of bequest be limited?
WAGES.
62. On what, according to Mill, does the rate of wages depend?
Hence, show the fallacy of the popularly proposed remedies for
low wages.
63. State and examine the principal theories which have been
put forward as to the circumstances which regulate the general
rate of wages, saying which you deem to be correct, and why so.
64. Mr. Thornton argues that the wages-fund is neither“determined” nor “limited”: not “determined,” because there isno “law” to compel capitalists to devote any portion of theirwealth to the payment of labor, nor are they morally “bound” todo so; and not “limited,” because there is nothing to prevent themfrom adding to the portion of their wealth so applied. Criticise
this argument, and, if you dissent from Mr. Thornton's view, state
the causes which “determine” and “limit” the fund in question.
65. State precisely what you mean by the “wages-fund,” andexplain the conditions on which its growth depends.
66. Explain generally the circumstances which determine therate of wages. Mention some of the reasons why wages should
be higher in one occupation than in another.
67. In what way does dearness or cheapness of food affectmoney wages?
68. What determines—(1.) The general rate of wages in a country?
(2.) The relative rates of wages in different employments?

Appendix II. Examination Questions.

739

69. What causes different rates of wages in different
employments, and by what methods might wages be raised?
70. How do you explain the fact that some of the mostdisagreeable kinds of labor are the most badly paid?
71. What, according to Mr. Mill, are the most promisingmeans for the improvement of the laboring-classes?
72. In the Island of Laputa a law was passed compelling eachworkman to work with his left hand tied behind his back, and thelaw was justified on the ground that the demand for labor was
more than doubled by it. Examine this argument.
73. Some coal-workers are calling for a diminution of theoutput of coal, so as to keep up their wages. Examine how far, if
at all, this result would follow from their proposed action.
74. Discuss any remedies for low wages that have been or
might be suggested.
75. Why are the wages of women habitually lower than thoseof men?
PROFITS.
76. What is the cause of the existence of profits? And what,
according to Mr. Mill, are the circumstances which determine
the respective shares of the laborer and the capitalist?
77. (1.) What is the lowest rate of profit which can permanently
exist? (2.) Why is this minimum variable?
78. Analyze the remuneration received by any of the following:(1) the proprietor of a cotton-mill managing his own mill; (2) amerchant conducting his own business; (3) a railway shareholder;(4) a holder of government funds.
79. Into what portions may we divide the return which isusually called profit? Which of these portions would be received
by a merchant carrying on business with borrowed capital?
80. Analyze the payment called profits into its various
elements. Point out in what respects the earnings of the employer
differ from or resemble the wages paid to other classes of laborers.

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81.
It is asserted that “profits tend to an equality.”
What conditions must be satisfied before this position can be
maintained?
82. How is the alleged tendency of profits to equivalencein different employments to be reconciled with the notorious
difference in the profit of different individuals?
83. Which one of the elements in profit has the greatest effecton its amount? Explain by comparing the causes which regulate
each element.
84. How does Mill reconcile the high wages in America with
Ricardo's law of profits?
85. Explain the proposition that the rate of profits depends onthe cost of labor, stating carefully what elements are included incost of labor.
86. Explain what connection there may be between an increaseof population and any of the elements entering into cost of labor.
87. What effect would an increase or diminution of population
have upon cost of labor?
88. Explain Mill's view as to the cost of labor being a functionof three variables, considering the passages in which he says, 1.
“If without labor becoming less efficient its remuneration fell, no
increase taking place in the cost of the articles composing that
remuneration;” 2. “If the laborer obtained a higher remuneration,
without any increased cheapness in the things composing it; orif, without his obtaining more, that which he did obtain would
become more costly”: profits in the last two cases would suffera diminution; and discussing—Firstly, if the remuneration oflabor falls, what can the cost of the articles composing that
remuneration signify to the capitalist? Secondly, if the laborer
gets a higher remuneration, what can the increased cheapness ofthe things composing it signify to the capitalist?
89. Is the contest between capital and labor permanent andfundamental? If not, give your reasons for your answer.

Appendix II. Examination Questions.

741

90. What is the effect on wages and profits of the introductionof machinery?
RENT.
91. What connection exists between the law of Malthus andRicardo's doctrine of rent?
92. What is the reason why land-owners can demand rent?
93. Explain and illustrate the distinction between rent andprofits. In what cases are they nearly indistinguishable?
94. It has often been observed that in America land is muchless highly cultivated than in England. Explain the economic
reasons for this.
95. How does the theory of rent apply in a country like theUnited States, where the farmer owns his land instead of hiringit?
96. How is it that some agricultural capital pays rent, even if
resort is not had to different grades of land?
97. Give a brief description of the theory of rent, and pointout to what payments not usually called rent the theory may be
applied.
98. State briefly Ricardo's theory of rent, and show that, if it
be true, the following statements of Adam Smith must be false:“The most fertile coal-mine regulates the price of coals at all
the other mines in the neighborhood.”“In the price of corn one part pays the rent of the landlord,another pays the wages, and another the profit of the farmer.”
99. Why does the farming business pay rent, and the cotton
business (ground-rent excluded) pay none? Define rent.
100. “As population increases, rents estimated in cornincrease, and the price of corn rises; rents, therefore, doubly
tend to increase.” Prove this.
101. Professor Rogers adduces, in refutation of the common
theory of rent, the fact that land near New York pays a high rent,
while land of the same natural fertility in the Western States pays
no rent. How far do you admit the force of this objection?

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102. Examine the following doctrine:“If invention and improvement still go on, the efficiency oflabor will be further increased, and the amount of labor andcapital necessary to produce a given result further diminished.
The same causes will lead to the utilization of this new gainin productive power for the production of more wealth; themargin of cultivation will be again extended, and rent will
increase, both in proportion and amount, without any increasein wages and interest. And so, ... will ... rent constantly increase, though population should remain stationary.”—Henry
George, “Progress and Poverty” (p. 226).

[645]

103. What answer is made to Mr. Carey's objection to
Ricardo's theory of rent, that in point of fact the poorer, not thericher, lands are first brought under cultivation?
104. Explain how land, “even apart from differences ofsituation,... would all of it, on a certain supposition, pay rent.”
105. Explain clearly how it is possible for the land of a country
which is all of uniform fertility to pay rent.
106. “If the earth had a perfectly smooth surface the same
everywhere, and if it were all tilled and cultivated in exactly thesame way, there would be no such thing as rent.” Examine this
proposition.
107. Show that rent does not increase the price of bread.
108. How is it shown that “rent does not really form any part ofthe expenses of production or of the advances of the capitalist?”
109. (1.) What connection exists between the price ofagricultural products and the amount of rent paid? (2.) Can rent
affect the price?
110. “Rent is the effect and not the cause of price.” Prove this.
111. Does rent enter into the cost of production of thefollowing commodities or not, and why: Corn, cloth, the wine of
the best vineyards?

Appendix II. Examination Questions.

743

112. “Rent arises from the difference between the least fertileand the most fertile soils, and from the fact that the former havebeen taken into cultivation.... Rent is the difference between themarket price of produce and the cost of production.” Harmonize
these statements.
113. In order that the actual payments made by farmers tolandlords should generally correspond with “economic rent,”
what conditions must be observed?
114. What is assumed, as to competition, in all Mr. Mill's
reasoning on wages, profits, and rent? Explain its action in eachcase.
VALUE.
115. Enumerate, compare, and criticise any opinions known
to you which have been held concerning the nature, origin, or
measure of value in exchange.
116. Define precisely what it is which gives value to objects,
and point out the causes which vary the value of the same object
under differing circumstances.
117. Do men dive to the bottom of the sea to get pearls because
they are valuable; or are pearls valuable because men must diveto the bottom of the sea to get them?
118. There are three forms of difficulty of attainment. Statethe law of value applicable to each.
119. Explain the exact economic meaning of the words supply
and demand.
120. When it is said that the value of certain commodities
depends upon supply and demand, what is meant by demand?
121. If the supply of all commodities were suddenly doubled,
would any changes in their relative values ensue or not, and why?
122. State the laws which regulate the permanent andtemporary values of agricultural products.
123. How far does the value of commodities depend on thequantity of labor required for their production?

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124. Has the term exchange value any precise meaning when
we are comparing times or places very remote from one another?
125. What is meant by the natural (or normal) price and themarket price of commodities? To what extent can they differ?
126. Does a general rise of wages raise the prices ofcommodities in general or not, and why? Does it tend tocause any change in the relative prices of commodities or not,and why?
127. Suppose that wages were double, would the values ofcommodities be affected? What would be the effect on prices
and profits of such an increase of wages?
128. Are wages and profits influenced by prices?
129. Can employers recoup themselves by a rise of prices fora rise of—(a.) Wages in particular employments?
(b.) General wages?
How does this question bear on the efficacy of tradesunionism?
130. Do values depend on wages?
131. Explain the following statement: “It is true the absolutewages paid have no effect upon values; but neither has theabsolute quantity of labor.”132. Explain the statement that “high general profits can not,any more than high general wages, be a cause of high values....
In so far as profits enter into the cost of production of all things,
they can not affect the value of any.”
133. Explain fully why it is that capitalists can not compensate
themselves for a general high cost of labor through any action onvalues and prices.
134. “The value of a commodity depends on its cost of
production.” Under what conditions is this true, and what causesinterfere with it?

Appendix II. Examination Questions.

745

135. Describe the hindrances which impede the free movementof capital to those fields which apparently offer the highest returnfor its employment.
136. Give J. S. Mill's analysis of the “cost of production,”and also Professor Cairnes's, with the arguments for and against
each.
137. Analyze cost of production. What is its connection withcost of labor?
138. Give an analysis of cost of production of any commodity.
139. Show carefully the distinction between wages, cost oflabor, and cost of production.
140. Define clearly value, price, real wages, and cost of
production.
141. Define real wages, money wages, cost of labor.
MONEY.
142. Point out the difference between the scientific andpopular conceptions implied in the terms wealth and money.
143. Show the fallacy of confounding capital with money.
Can there be a glut of capital?
144. What is money? To what sort of necessity does it owe its
existence? What articles have been used for money? Enumerate
the qualities which render a commodity fit to serve as money.
145. What are the qualities requisite in any commodity inorder that it may serve as money?
146. Distinguish accurately between the functions of money.
147. How far is a fixed standard of value possible?
148. What effect does the great durability of gold and silver
have upon the value of money?
149. How far does the law of demand and supply govern thevalue of money?
150. Explain fully how it is that the value of the precious
metals is affected by “questions of quantity only, with little
reference to cost of production.”

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151. What is to be said to the following: “Some political
economists have objected altogether to the statement that thevalue of money depends on its quantity combined with therapidity of circulation; which, they think, is assuming a law formoney that does not exist for any other commodity”?
152. Under what conditions is it true that the “value of money
is inversely as its quantity”?
153. Explain carefully the following: “The average value ofgold is made to conform to its natural value in the same manneras the values of other things are made to conform to their naturalvalue.”
154. In what various meanings is the phrase “the value ofmoney” used? How far does the value of money in each of these
meanings depend on (1) the cost of production, (2) supply anddemand?
155. Are the values of gold and silver subject to exactly thesame natural laws as other commodities?
156. Give the explanations and qualifications required torender the following proposition true: “The quantity of coin in
every country is regulated by the value of the commodities which
are to be circulated by it.”157. Would the world be richer if every individual in it
suddenly found the quantity of money in his possession doubled?
158. How far, or in what way, do you consider it correct to
say that the general level of prices in a country depends upon thequantity of gold coin existing in that country?
159. A single good harvest causes a considerable fall in thevalue of wheat; but a great addition to the year's supply of gold
from the mines produces little effect on its general value. How
do you account for the difference?
160. Show the effect of establishing a double standard.
161. Show how Gresham's law is illustrated by the history of
the currency in the United States between 1834 and 1873.

Appendix II. Examination Questions.

747

162. What effect had the discovery of gold in this century
upon the coinage of the United States?
163. What is the system upon which the small silver currencyof the United States is coined and issued?
164. State briefly the aim of the United States coinage act of1853.
CREDIT.
165. How do you define credit? Form a classification of credit
documents.
166. It has been said that “credit is capital.” Is this so or not?
167. Define capital, and examine the meaning of the term in
the following statements:(a.) Demand for commodities can not create capital.
(b.) Credit is not a creation, but a transfer of capital.
(c.) Wages depend upon the proportion between populationand capital.
168. State the law of the value of money which governs
general prices. What change is to be made in the statement, if
credit is to be taken into consideration?
169. What is the part which instruments of credit, other thanbank-notes, play in the exchange of commodities?
170. Mention some of the principal features of a credit crisis.
171. What are inconvertible notes? What objections are there
to currency of this description?
172. Can an inconvertible currency be made to maintain thesame value as a convertible currency, and, if so, how? Supposingthat it can, what objections are there, nevertheless, to it?
173. “Nothing is subject to more variation than paper money,
even when it is limited, and has no guarantees; for this simple
reason, that, having no value of its own, it depends on the ideathat each person forms of those guarantees.” Comment on thispassage.

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174. How is it that a bad dollar does the work of buying aswell as a good one until it is found out? Is it that it makes nodifference whether it is made of gold or not?
175. To what extent is a government capable of giving
fictitious value to a paper or a metallic currency?
176. In a country with an inconvertible paper currency, how
can it be determined whether the issues are excessive or not, andwhy?
177. What will be the effect if the circulating medium of acountry is increased beyond its natural amount—(1) when the medium is coin?
(2) when it is coin and convertible paper?
(3) when it is inconvertible paper?
178. What is the error involved in the assumption, frequently
made by writers and public speakers, that the currency of acountry ought to increase in like ratio with its wealth andpopulation?
179. On what does the desire to use credit depend? Whatconnection exists between the amount of notes and coin in
circulation and the use of credit?
180. Compare the advantages and disadvantages of a metallic
and paper currency.
181. A member of Congress advocated expansion of thepaper currency by the following argument: “Our currency, as
well as everything else, must keep pace with our growth as anation.... France has a circulation per capita of thirty dollars;
England, of twenty-five; and we, with our extent of territory andimprovements, certainly require more than either.” State youropinion of this argument.
182. Trace the effects, immediate and ultimate, on generalprices of (a) an extended system of credit, (b) an enlarged issueof paper money, and (c) an addition to the stock of precious
metals, respectively.

Appendix II. Examination Questions.

749

183. What is the error in the common notion that “a paper
currency can not be issued in excess so long as every note
represents property, or has a foundation of actual property to rest
on”?
184. Explain the action of the check and clearing-housesystem, and state what is meant by the restoration of barter.
OVER-PRODUCTION.
185. State the relation between supply and demand as
aggregates, e.g., between the aggregate supply of commodities
in a given community and the aggregate demand for them, andshow the bearing of the principle involved on the doctrine of“general over-production.”
186. Prove that the increase of capital and the extensionof industry can not lead to a general over-production ofcommodities.
187. What is the error of those who believe in the danger ofover-production?
188. Distinguish “excess of supply” from a “commercial
crisis.”189. Give the substance of Mill's examination of the theories
of excess of supply.
190. “When production is fully equal to consumption, every
discovery in the arts, or in mechanics, is a calamity, because
it only adds to the enjoyment of consumers the opportunity ofobtaining commodities at a cheaper rate, while it deprives the
producers of even life itself.” Discuss this opinion of Sismondi.
191. Explain the difference in the theories of Dr. Chalmers
and Mr. Mill on over-production, and the excess of supply.
PECULIAR CASES OF VALUE.
192. It costs as much to produce straw as to produce grain;
how, then, do you explain the comparatively low value of straw?
193. Suppose a considerable rise in the price of wool to beforeseen, how should farmers expect the prices of mutton to beaffected, and why?

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Principles Of Political Economy

194. Explain the operation of the laws of value by which therelative prices of wool and mutton are regulated.
INTERNATIONAL TRADE AND VALUES.
195. What is the meaning of the statement that “it is not adifference in the absolute cost of production which determines theinterchange [of commodities between countries], but a differencein the comparative cost”?
196. What are the advantages which a country derives fromforeign trade?
197. Explain clearly the following passage: “We may often,
by trading with foreigners, obtain their commodities at a smaller
expense of labor and capital than they cost to the foreigners
themselves.”
198. Is there any essential difference between trade between
country and country, and trade between county and county, oreven between man and man? What is the real nature of trade in
all cases?
199. Why is it necessary to make any different statement of
the laws of value for foreign than for domestic products? Whatis the cause for the existence of any international trade?
200. How would a serious decline in the efficiency ofEngland, as compared with other countries, in the production of
manufactures affect the scale of money incomes and prices inEngland, and why?
201. Mr. Mill refers the value of home products to the “costof production”; of foreign products to the “cost of acquisition.”
Examine the truth of this distinction.
202. It is said that in the home market the value of commodities
depends on the cost of production, in the foreign market on thecost of acquisition. Comment on this distinction.
203. Is the cost of production the regulator of international
values?
204. Discuss the following statement: “International value
is regulated just as inter-provincial or inter-parishional value is.

Appendix II. Examination Questions.

751

Coals and hops are exchanged between Northumberland andKent on absolutely the same principles as iron and wine between
Lancashire and Spain.”—Ruskin, “Munera Pulveris,” p. 84.
205. What determines the value of imported commodities?
206. Why does cost of production fail to determine the valueof commodities brought from a foreign country? Does it also
fail in the case of commodities brought from distant parts of thesame country?
207. It is on the matter of fact that there is not much migrationof capital and labor from country to country that Mr. Mill has
based his whole doctrine of “international trade and international
values.” Explain and comment on the above statement.
208. What are the causes which determine for a nation thecost of its imports?
209. It follows from the theory of international values, as
laid down by Mill, that the permanent residence of Americans in
Europe may enhance the cost of foreign imports to Americans
residing at home. Explain in what way.
210. Suppose two countries, A and B, isolated from the rest of
the world, and a trade established between them. In consequenceof the labor of A becoming less effective, the cost of productionof every article which can be produced in that country is greatly
increased, but so that the relation between the costs of any two
articles remains the same. What, if any, will be the effect of
the change on the trade between A and B? Does your answer
depend upon your using the phrase “cost of production” in asense different from that given to it by some economists?
211. Show that every country gets its imports at less cost in
proportion to the efficiency of its labor.
FOREIGN EXCHANGES.
212. What is the ordinary limit to the premium on foreign billsof exchange, and why?
213. What are the chief effects on the foreign exchanges
which are produced by the breaking out of a war? Account for

[651]

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Principles Of Political Economy

the fact that in 1861 the exchanges on England in America fell
considerably below specie point.
214. Suppose that the next harvest in England should be very
defective, and extraordinary supplies of American grain needed.
How would this probably affect the price of bills of exchange
between England and America, and the profit on the exportationof English manufactures to the latter, and why?
215. Trace the process by which the precious metals spreadfrom the mines over the world.
216. Suppose the exchange between England and the UnitedStates to be heavily against England, how will this fact affect theexport and import trade between the two countries, and why?
217. What is meant by exchanges being against a country?
218. Enumerate the principal circumstances which affect therate of exchange between two countries. How is the par of
exchange ascertained?
219. In what way are gold and silver distributed among thedifferent trading countries? Between different parts of the same
country?
220. Trace the effects of large and continuous issues ofinconvertible paper currency on the prices of commodities, on
importation and exportation, and on the foreign exchanges.
221. State the conditions under which international trade canpermanently exist. What will be the ultimate effect of a large
movement of foreign gold upon prices, imports, and exports in
the receiving country?
222. State the theory of the value of money (i.e., “metallic
money”), and clear up any apparent inconsistencies between thefollowing statements: (1.) The value of money depends onthe cost of production at the worst mines; (2.) The value ofmoney varies inversely as its quantity multiplied by its rapidityof circulation; (3.) The countries whose products are most in
demand abroad and contain the greatest value in the smallest
bulk, which are nearest the mines and have the least demand forAppendix II. Examination Questions.

753

foreign productions, are those in which money will be of lowest
value.
228. The effects of the depreciation of the paper currency in
the United States are thus described by Mr. Wells: “It renders
it impossible to sell abroad the products which have cost too
much at home, and invites from other countries the products ofa cheaper labor paid for in a sounder currency. It exaggerates
imports, while destroying our ability to pay in kind.” State how
far you agree with the deductions here drawn, assigning yourreasons where you differ.
224. When the foreign exchanges are manifestly against
a country, and a balance of indebtedness is the cause, theequilibrium can be restored in two ways. State and explain theoperation of each.
225. What are the conditions which determine for a country ahigh range of general prices? How far is this advantageous?
226. What is the effect of the imposition of a tribute by one
country on another upon the course of trade between them, andthe terms on which they exchange commodities; and why?
227. For what reasons may a nation's exports habitually exceed
or fall short of its imports?
228. Explain the real and nominal exchange.
229. Expound Mr. Mill's theory of the influence which a
convertible currency exercises on foreign trade.
230. What is the effect of a depreciated currency on (1) foreign
trade, and (2) the exchanges?
INTEREST.
231. How does the general rate of interest determine theselling price of stocks and land?
232. Is there any relation between the rate of interest and thevalue of money?
233. What are the relations of interest and profit? On whatcauses does the rate of interest depend?

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Principles Of Political Economy

234. “High interest means bad security.” Comment on thissaying.
235. Is the rate of interest affected by the supply of the
precious metals?
236. What determines the rate of interest on the loanable
funds? Is the “current [or ordinary] rate of interest the measureof the relative abundance or scarcity of capital”?
237. What are the chief causes that determine the rate ofinterest?
238. If it be true that in America every man, however rich, isengaged in some business, but that in England many rich men
have no trade or profession, how is the rate of interest in eachcountry affected in consequence, and why?
239. How does a fall in the purchasing power of money tend
to affect, if at all, and why, (1) the rate of interest, (2) the priceof land, (3) the price of government bonds, (4) the price of goldand silver ornaments and plate?
FOREIGN COMPETITION.
240. Explain the grounds of Mr. Mill's proposition that general
low wages never caused any country to undersell its rivals, nor
did general high wages ever hinder it from doing so. If you think
the proposition needs qualification, give your reason.
241. (1.) What is the true theory of one country underselling
another in a foreign market? (2.) What weight should be
attributed to the fact of generally higher or lower wages in oneof the competing countries?
242. Discuss the question whether a high rate of wages
necessarily lays the commerce of a country under a disadvantage
with reference to a country where the rate of wages is lower.
243. What are the conditions under which one country canpermanently undersell another in a foreign market?
244. Point out distinctly the connection between the money
wages of laborers in the United States and the productiveness ofthe soil.

Appendix II. Examination Questions.

755

245. In the Eastern States iron-molders earn from fourteen
to seventeen dollars a week; in California their wages run fromtwenty-one to twenty-seven dollars. Account for this variation.
PROGRESS OF SOCIETY.
246. What are the reasons for the change in the normal valuesof manufactured and of agricultural commodities, respectively,
during the progress of society?
247. Wages and profits in different employments andneighborhoods are not uniformly proportional to the effortsof labor and abstinence of which they are the respective rewards.
Classify the circumstances which prevent this correspondence,and show how far their effect is likely to be reduced (a) bygeneral economical progress, and (b) by the extension of thedivision of labor.
248. What is the law of diminishing returns? Can you
point out any connection between this law and the following
phenomena?—(a.) Density of population.
(b.) Rate of wages.
(c.) Rate of profits in different countries.
249. Sketch the influence on rents and profits of an increaseof population and capital concurrently with a stationary state of
the arts of production.
250. Is there reason to believe that Mr. Mill has underrated
the powers possessed by man of extending the area of production
and facilitating the market of food? If such a statement has been
made, to what extent is his theory of population modified, andthe risks he had indicated rendered distant?
251. Compare the effects on rent, profits, and wages, of asudden improvement in the production (a) of food, (b) of somemanufactured articles largely consumed by the working-classes.
252. Trace the connection between Ricardo's theory of rent andthe decline in the general rate of profits as a country increases in

[654]

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Principles Of Political Economy

population. Explain clearly the connection which exists between
wages and profits.
253. What effect is produced upon rents, profits, and wages,
respectively, in a country like France, where population is
stationary and capital advancing?
254. If capital continued to increase and population did not,explain the proposition that “the whole savings of each year
would be exactly so much subtracted from the profits of the next
and of every following year,” if improvements were stationary.
255. How does social and industrial progress tend to affectthe prices of land, raw produce, and manufactures, respectively,
and why?

[655]256. The capitalized value of land rises, in the progressof society, from two causes—from one which affects land incommon with all investments; from another which is peculiar toland.
257. “The tendency of improved communications is to lower
existing rents.” How far is this true, and in what directions is ittrue?
258. What would be the effect on profits, wages, and rentsof an improvement in a manufactured article consumed by thelaboring-class?
259. Explain the doctrine of the tendency of profits to aminimum, the cause of that tendency, and the circumstances
which counteract it.
260. What was Adam Smith's doctrine as to the decline ofprofit in progressive communities? Criticise his argument.
261. Mention some of the principal causes which, in theordinary progress of society, respectively tend to increase or to
reduce the current rate of profits.
262. Why do profits tend to fall as population increases, andhow may this result be retarded or prevented?

Appendix II. Examination Questions.

757

263. What is the effect of a general rise of money wages, apartfrom the consideration of a greater efficiency of labor, in prices,
profits, and rent? Give reasons for your answer.
264. How does the general progress of society in wealth andindustrial efficiency tend to affect the rate of wages, the rate ofprofit, and the rate of rent, respectively?
265. What is the general effect of the progress of society on
the land-owner, the capitalist, and the laborer?
FUTURE OF LABORING-CLASSES.
266. Examine the influences of machinery on the economic
condition of the working-classes.
267. Mention and discuss some of the popular remedies for
low wages, and especially the effect of the subdivision of landed
property among peasant proprietors.
268. Explain briefly what is meant by co-operation, andindicate the more prominent forms assumed by the co-operative
movement.
269. What is meant by the co-operative system of industry?
Show ways in which this system may affect, for good or for evil,
the productiveness of labor; and mention any moral benefits, orthe opposite, in which it may be expected to issue.
270. What are the difficulties in the way of co-operation forthe production of salable objects?
271. Explain the advantages of industrial partnership, in which
the employés share, in proportion to the wages received, half the
profits of the business beyond a certain fixed minimum which is
assigned to the employers.
TAXATION.
272. How is the state justified in undertaking any manufactureor service which might be performed by private enterprise?
273. Enumerate Adam Smith's canons of taxation.
274. Examine the argument in favor of the resumption by thestate of what is called the unearned increment in the value ofland arising from the development of society.

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Principles Of Political Economy

275. A picture by Gainsborough and a house in Broadway
are sold in the same year at the same price; at the end of fifty
years each sells for five times its first cost. Is there any, and, if
so, what, reason why the increase should be sequestrated for the
public benefit in the one case and not in the other?
276. Explain the incidence of taxes laid on wages.
277. Why should a tax on profits, if no improvements follow,
fall on the laborer and capitalist?
278. Explain what effect, if any, will be produced on the priceof corn by—(1) a tax upon rent;(2) a tithe;(3) a tax of so much per acre, irrespective of value;(4) a tax of so much per bushel.
279. On whom does a tax of a fixed proportion of agricultural
produce fall?
280. Discuss the question whether the income-tax ought to bea tax upon income and property, or upon expenditure.
281. Discuss the expediency of a graduated income-tax.
282. State the arguments which you think strongest both forand against exempting savings from the income-tax.
283. Explain the conditions which should be observed in
imposing taxes on commodities.
284. What taxes does a tradesman get back in the price of thearticles he sells, and what does he not?
285. Test by Adam Smith's four maxims of taxation the policyof indirect taxes on the necessaries of life.
286. All indirect taxation violates Adam Smith's fourth canon.
287. Discuss the following:“A man with $100,000 in United States bonds comes to
Boston, hires a house...; thus he lives in luxury.... I am in favor of
taxing idle investments such as this, and allowing manufacturing
investments to go untaxed.”

Appendix II. Examination Questions.

759

288. Compare the advantages and disadvantages of direct andindirect taxation.
289. On what principles is this country now taxed?
290. Explain the arguments for and against the policy ofmaintaining a surplus for the purpose of redeeming a national
debt.
291. In estimating the ability of the United States to pay its
public debts, it is usual to include among the data of the question
the increased productiveness of industry in that country. How far
is this a pertinent consideration?
PROTECTION.
292. Mention some of the principal arguments brought forward
in favor of protective tariffs.
293. Connect the principle of the division of employments(or labor) with the policy of free trade and the functions ofgovernment.
294. Sketch the effects of discriminating duties, including theoperation of the corn laws.
295. Examine the following argument, emending, if you thinkit necessary, the free-trader's doctrine on the point raised: The
free-trader's belief is that a customs duty is added to the price of
the article upon which it is imposed. If the article is imported,
according to his theory, the increase of the price goes into the
public treasury; if the article is made in the country, the increaseof the price goes into the pocket of the producer. But in theformer case there is no protection; and competition will preventthe latter. Therefore protection does not increase the price of theprotected article. If a customs duty is imposed upon a commodity,
and its price is not raised in consequence, what inference can you
draw?
296. Under what circumstances did Mr. Mill think nascentstates might be justified in adopting a policy of protection?
Criticise his opinion, and, if you agree with it, give someexamples of its application.

[657]

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Principles Of Political Economy

297. American protectionists allege that the high rate of wages
prevailing in the United States disables them from competingwith “the pauper labor” of Europe. Examine the grounds ofthis statement, and consider how far it forms a justification forprotection to American industry.
298. A high rate of wages indicates, not a high, but a low costof production for all commodities measured in which the rate ofwages is high.
Explain and prove this proposition, and illustrate it from thecircumstances of the United States.
299. State under what limitations the proposition is correct,
that profits vary inversely with wages. Explain the circumstances
which cause both a higher rate of wages and profits to prevail ina young country, such as the United States, than in England.
300. In America wages are much higher than in England, yet
the general rate of profits is higher also, according to Mr. Mill.
How do you reconcile the two facts?
301. Examine the following:“It seems to me that protection is absolutely essential tothe encouragement of capital, and equally necessary for theprotection of the American laborer.... He must have good
food, enough of it, good clothing, school-houses for his children,
comforts for his home, and a fair chance to improve his condition.
To this end I would protect him against competition with the halfpaid laborers of European countries.”—Congressional Globe.
302. An American newspaper has said of the burning ofChicago: “The money to replace what has been burned will not
be sent abroad to enrich foreign manufacturers; but, thanks to thewise policy of protection which has built up American industries,
it will stimulate our own manufactures, set our mills running
faster, and give employment to thousands of idle working-men.”
Comment on this passage.
303. On whom does a tax on imports, if not prohibitory, fall?

Appendix II. Examination Questions.

761

304. In what cases would duties on imported commodities fallon the producers?
305. Are taxes on imports in any way paid by foreigners?
306. Discuss the effects of duties on exports.
307. Trace the effects of duties on the importation of raw
materials, and distinguish, with examples, between duties that
violate and duties which do not violate the principle of free trade.
308. Is it possible for any country by legislative enactments toengross a larger share of the advantages of foreign trade than it
would naturally have? Discuss the question fully.
309. “Those are, therefore, in the right who maintain that taxes
on imports are partly paid by foreigners; but they are mistaken
when they say it is by the foreign producer. It is not on the personfrom whom we buy, but on all those who buy from us, that a
portion of our customs duties spontaneously falls.” Explain andexamine the reasons for this conclusion.
310. State the principle which determines the relation between
the amount of a country's imports and that of its exports, andshow how this relation is affected by a system of protective
duties.
THE END.
[659]

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Appendix II. Examination Questions.

763

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Principles Of Political Economy

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[661]

Charts.

Chart XII. Fluctuations in the Price of Gold, from January 1st1862, to December, 1865.

[662]

766

Principles Of Political Economy

Chart XVIII. Graphical Presentation of the Comparative Areasof the States and Territories of the United States and theCountries of Europe, omitting Russia and Alaska.

[663]

Appendix II. Examination Questions.

767

Chart XIX. Giving the actual figures, compiled from theaccounts of two Cotton-Mills in New England by Edward
Atkinson, of Wages, Cost of Labor, etc., from 1830 to 1884,
working on Standard Sheetings, No. 14 yarn.

[664]

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Principles Of Political Economy

Chart XX. Comparison of 1840 with 1883-1884, of theRelations of Labor and Capital in the same Mills.

[665]

Appendix II. Examination Questions.

769

Chart XXI Part 1.

[666]

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Principles Of Political Economy

Chart XXI Part 2.

[667]

Appendix II. Examination Questions.

771

Chart XXII. Outstanding Principal Of The Public Debt From1791 To 1881.

Footnotes

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