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Title: Principles Of Political Economy - Abridged with Critical, Bibliographical, and Explanatory Notes, and a Sketch of the History of Political Economy
Author: Mill, John Stuart, 1806-1873
Language: English
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                     Principles Of Political Economy


                             John Stuart Mill

                Abridged, with Critical, Bibliographical,

                   and Explanatory Notes, and a Sketch

                   of the History of Political Economy,


                       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.



   A Sketch Of The History Of Political Economy.
   Books For Consultation (From English, French, And German Authors).
   Preliminary Remarks.
Book I. Production.
   Chapter I. Of The Requisites Of Production.
      § 1. The requisites of production.
      § 2. The Second Requisite of Production, Labor.
      § 3. Of Capital as a Requisite of Production.
   Chapter II. Of Unproductive Labor.
      § 1. Definition of Productive and Unproductive Labor.
      § 2. Productive and Unproductive Consumption.
      § 3. Distinction Between Labor for the Supply of Productive
      Consumption and Labor for the Supply of Unproductive Consumption.
   Chapter III. Of Capital.
      § 1. Capital is Wealth Appropriated to Reproductive Employment.
      § 2. More Capital Devoted to Production than Actually Employed in
      § 3. Examination of Cases Illustrative of the Idea of Capital.
   Chapter IV. Fundamental Propositions Respecting Capital.
      § 1. Industry is Limited by Capital.
      § 2. Increase of Capital gives Increased Employment to Labor,
      Without Assignable Bounds.
      § 3. Capital is the result of Saving, and all Capital is Consumed.
      § 4. Capital is kept up by Perpetual Reproduction, as shown by the
      Recovery of Countries from Devastation.
      § 5. Effects of Defraying Government Expenditure by Loans.
      § 6. Demand for Commodities is not Demand for Labor.
   Chapter V. On Circulating And Fixed Capital.
      § 1. Fixed and Circulating Capital.
      § 2. Increase of Fixed Capital, when, at the Expense of Circulating,
      might be Detrimental to the Laborers.
      § 3. —This seldom, if ever, occurs.
   Chapter VI. Of Causes Affecting The Efficiency Of Production.
      § 1. General Causes of Superior Productiveness.
      § 2. Combination and Division of Labor Increase Productiveness.
      § 3. Advantages of Division of Labor.
      § 4. Production on a Large and Production on a Small Scale.
   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, and Land.
      § 2. The Law of Population.
      § 3. By what Checks the Increase of Population is Practically
   Chapter VIII. Of The Law Of The Increase Of Capital.
      § 1. Means for Saving in the Surplus above Necessaries.
      § 2. Motive for Saving in the Surplus above Necessaries.
      § 3. Examples of Deficiency in the Strength of this Desire.
      § 4. Examples of Excess of this Desire.
   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
      § 2. Antagonist Principle to the Law of Diminishing Return; the
      Progress of Improvements in Production.
      § 3. —In Railways.
      § 4. —In Manufactures.
      § 5. Law Holds True of Mining.
   Chapter X. Consequences Of The Foregoing Laws.
      § 1. Remedies for Weakness of the Principle of Accumulation.
      § 2. Even where the Desire to Accumulate is Strong, Population must
      be Kept within the Limits of Population from Land.
      § 3. Necessity of Restraining Population not superseded by Free
      Trade in Food.
      § 4. —Nor by Emigration.
Book II. Distribution.
   Chapter I. Of Property.
      § 1. Individual Property and its opponents.
      § 2. The case for Communism against private property presented.
      § 3. The Socialists who appeal to state-help.
      § 4. Of various minor schemes, Communistic and Socialistic.
      § 5.  The Socialist objections to the present order of Society
      § 6. Property in land different from property in Movables.
   Chapter II. Of Wages.
      § 1. Of Competition and Custom.
      § 2. The Wages-fund, and the Objections to it Considered.
      § 3. Examination of some popular Opinions respecting Wages.
      § 4. Certain rare Circumstances excepted, High Wages imply
      Restraints on Population.
      § 5. Due Restriction of Population the only Safeguard of a
   Chapter III. Of Remedies For Low Wages.
      § 1. A Legal or Customary Minimum of Wages, with a Guarantee of
      § 2. —Would Require as a Condition Legal Measures for Repression of
      § 3. Allowances in Aid of Wages and the Standard of Living.
      § 4. Grounds for Expecting Improvement in Public Opinion on the
      Subject of Population.
      § 5. Twofold means of Elevating the Habits of the Laboring-People;
      by Education, and by Foreign and Home Colonization.
   Chapter IV. Of The Differences Of Wages In Different Employments.
      § 1. Differences of Wages Arising from Different Degrees of
      Attractiveness in Different Employments.
      § 2.  Differences arising from Natural Monopolies.
      § 3.  Effect on Wages of the Competition of Persons having other
      Means of Support.
      § 4. Wages of Women, why Lower than those of Men.
      § 5. Differences of Wages Arising from Laws, Combinations, or
   Chapter V. Of Profits.
      § 1. Profits include Interest and Risk; but, correctly speaking, do
      not include Wages of Superintendence.
      § 2. The Minimum of Profits; what produces Variations in the Amount
      of Profits.
      § 3. General Tendency of Profits to an Equality.
      § 4. The Cause of the Existence of any Profit; the Advances of
      Capitalists consist of Wages of Labor.
      § 5. The Rate of Profit depends on the Cost of Labor.
   Chapter VI. Of Rent.
      § 1. Rent the Effect of a Natural Monopoly.
      § 2. No Land can pay Rent except Land of such Quality or Situation
      as exists in less Quantity than the Demand.
      § 3. The Rent of Land is the Excess of its Return above the Return
      to the worst Land in Cultivation.
      § 4. —Or to the Capital employed in the least advantageous
      § 5. Opposing Views of the Law of Rent.
      § 6. Rent does not enter into the Cost of Production of Agricultural
Book III. Exchange.
   Chapter I. Of Value.
      § 1. Definitions of Value in Use, Exchange Value, and Price.
      § 2. Conditions of Value: Utility, Difficulty of Attainment, and
      § 3. Commodities limited in Quantity by the law of Demand and
      Supply: General working of this Law.
      § 4. Miscellaneous Cases falling under this Law.
      § 5. Commodities which are Susceptible of Indefinite Multiplication
      without Increase of Cost. Law of their Value Cost of Production.
      § 6. The Value of these Commodities confirm, in the long run, to
      their Cost of Production through the operation of Demand and Supply.
   Chapter II. Ultimate Analysis Of Cost Of Production.
      § 1. Of Labor, the principal Element in Cost of Production.
      § 2. Wages affect Values, only if different in different
      employments; “non-competing groups.”
      § 3. Profits an element in Cost of Production.
      § 4. Cost of Production properly represented by sacrifice, or cost,
      to the Laborer as well as to the Capitalist; the relation of this
      conception to the Cost of Labor.
      § 5. When profits vary from Employment to Employment, or are spread
      over unequal lengths of Time, they affect Values accordingly.
      § 6. Occasional Elements in Cost of Production; taxes and
   Chapter III. Of Rent, In Its Relation To Value.
      § 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.
      § 2. Such commodities, when Produced in circumstances more
      favorable, yield a Rent equal to the difference of Cost.
      § 3. Rent of Mines and Fisheries and ground-rent of Buildings, and
      cases of gain analogous to Rent.
      § 4. _Résumé_ of the laws of value of each of the three classes of
   Chapter IV. Of Money.
      § 1. The three functions of Money—a Common Denominator of Value, a
      Medium of Exchange, a “Standard of Value”.
      § 2. Gold and Silver, why fitted for those purposes.
      § 3. Money a mere contrivance for facilitating exchanges, which does
      not affect the laws of value.
   Chapter V. Of The Value Of Money, As Dependent On Demand And Supply.
      § 1. Value of Money, an ambiguous expression.
      § 2. The Value of Money depends on its quantity.
      § 3. —Together with the Rapidity of Circulation.
      § 4. Explanations and Limitations of this Principle.
   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.
      § 2. —Which is determined by the cost of production.
      § 3. This law, how related to the principle laid down in the
      preceding chapter.
   Chapter VII. Of A Double Standard And Subsidiary Coins.
      § 1. Objections to a Double Standard.
      § 2. The use of the two metals as money, and the management of
      Subsidiary Coins.
      § 3. The experience of the United States with a double standard from
      1792 to 1883.
   Chapter VIII. Of Credit, As A Substitute For Money.
      § 1. Credit not a creation but a Transfer of the means of
      § 2. In what manner it assists Production.
      § 3. Function of Credit in economizing the use of Money.
      § 4. Bills of Exchange.
      § 5. Promissory Notes.
      § 6. Deposits and Checks.
   Chapter IX. Influence Of Credit On Prices.
      § 1. What acts on prices is Credit, in whatever shape given.
      § 2. Credit a purchasing Power, similar to Money.
      § 3. Great extensions and contractions of Credit. Phenomena of a
      commercial crisis analyzed.
      § 4. Influence of the different forms of Credit on Prices.
      § 5. On what the use of Credit depends.
      § 6. What is essential to the idea of Money?
   Chapter X. Of An Inconvertible Paper Currency.
      § 1. What determines the value of an inconvertible paper money?
      § 2. If regulated by the price of Bullion, as inconvertible Currency
      might be safe, but not Expedient.
      § 3. Examination of the doctrine that an inconvertible Current is
      safe, if representing actual Property.
      § 4. Experiments with paper Money in the United States.
      § 5. Examination of the gain arising from the increase and issue of
      paper Currency.
      § 6. _Résumé_ of the subject of money.
   Chapter XI. Of Excess Of Supply.
      § 1. The theory of a general Over-Supply of Commodities stated.
      § 2. The supply of commodities in general can not exceed the power
      of Purchase.
      § 3. There can never be a lack of Demand arising from lack of Desire
      to Consume.
      § 4. Origin and Explanation of the notion of general Over-Supply.
   Chapter XII. Of Some Peculiar Cases Of Value.
      § 1. Values of commodities which have a joint cost of production.
      § 2. Values of the different kinds of agricultural produce.
   Chapter XIII. Of International Trade.
      § 1. Cost of Production not a regulator of international values.
      Extension of the word “international.”
      § 2. Interchange of commodities between distance places determined
      by differences not in their absolute, but in the comparative, costs
      of production.
      § 3. The direct benefits of commerce consist in increased Efficiency
      of the productive powers of the World.
      § 4. —Not in a Vent for exports, nor in the gains of Merchants.
      § 5. Indirect benefits of Commerce, Economical and Moral; still
      greater than the Direct.
   Chapter XIV. Of International Values.
      § 1. The values of imported commodities depend on the Terms of
      international interchange.
      § 2. The values of foreign commodities depend, not upon Cost of
      Production, but upon Reciprocal Demand and Supply.
      § 3. —As illustrated by trade in cloth and linen between England and
      § 4. The conclusion states in the Equation of International Demand.
      § 5. The cost to a country of its imports depends not only on the
      ratio of exchange, but on the efficiency of its labor.
   Chapter XV. Of Money Considered As An Imported Commodity.
      § 1. Money imported on two modes; as a Commodity, and as a medium of
      § 2. As a commodity, it obeys the same laws of Value as other
      imported Commodities.
   Chapter XVI. Of The Foreign Exchanges.
      § 1. Money passes from country to country as a Medium of Exchange,
      through the Exchanges.
      § 2. Distinction between Variations in the Exchanges which are
      self-adjusting and those which can only be rectified through Prices.
   Chapter XVII. Of The Distribution Of The Precious Metals Through The
   Commercial World.
      § 1. The substitution of money for barter makes no difference in
      exports and imports, nor in the Law of international Values.
      § 2. The preceding Theorem further illustrated.
      § 3. The precious metals, as money, are of the same Value, and
      distribute themselves according to the same Law, with the precious
      metals as a Commodity.
      § 4. International payments entering into the “financial account.”
   Chapter XVIII. Influence Of The Currency On The Exchanges And On
   Foreign Trade.
      § 1. Variations in the exchange, which originate in the Currency.
      § 2. Effect of a sudden increase of a metallic Currency, or of the
      sudden creation of Bank-Notes or other substitutes for Money.
      § 3. Effect of the increase of an inconvertible paper Currency. Real
      and nominal exchange.
   Chapter XIX. Of The Rate Of Interest.
      § 1. The Rate of Interest depends on the Demand and Supply of Loans.
      § 2. Circumstances which Determine the Permanent Demand and Supply
      of Loans.
      § 3. Circumstances which Determine the Fluctuations.
      § 4. The Rate of Interest not really Connected with the value of
      Money, but often confounded with it.
      § 5. The Rate of Interest determines the price of land and of
   Chapter XX. Of The Competition Of Different Countries In The Same
      § 1. Causes which enable one Country to undersell another.
      § 2. High wages do not prevent one Country from underselling
      § 3. Low wages enable a Country to undersell another, when Peculiar
      to certain branches of Industry.
      § 4. —But not when common to All.
      § 5. Low profits as affecting the carrying Trade.
   Chapter XXI. Of Distribution, As Affected By Exchange.
      § 1. Exchange and money make no Difference in the law of Wages.
      § 2. In the law of Rent.
      § 3. —Nor in the law of Profits.
Book IV. Influence Of The Progress Of Society On Production And
   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.
      § 2. Tendency to a Decline of the Value and Cost of Production of
      all Commodities.
      § 3. —except the products of Agriculture and Mining, which have a
      tendency to Rise.
      § 4. —that tendency from time to time Counteracted by Improvements
      in Production.
      § 5. Effect of the Progress of Society in moderating fluctuations of
   Chapter II. Influence Of The Progress Of Industry And Population On
   Rents, Profits, And Wages.
      § 1. Characteristic features of industrial Progress.
      § 2. First two cases, Population and Capital increasing, the arts of
      production stationary.
      § 3. The arts of production advancing, capital and population
      § 4. Theoretical results, if all three Elements progressive.
      § 5. Practical Results.
   Chapter III. Of The Tendency Of Profits To A Minimum.
      § 1. Different Theories as to the fall of Profits.
      § 2. What determines the minimum rate of Profit?
      § 3. In old and opulent countries, profits habitually near to the
      § 4. —prevented from reaching it by commercial revulsions.
      § 5. —by improvements in Production.
      § 6. —by the importation of cheap Necessaries and Implements.
      § 7. —by the emigration of Capital.
   Chapter IV. Consequences Of The Tendency Of Profits To A Minimum, And
   The Stationary State.
      § 1. Abstraction of Capital not necessarily a national loss.
      § 2. In opulent countries, the extension of machinery not
      detrimental but beneficial to Laborers.
      § 3. Stationary state of wealth and population dreaded by some
      writers, but not in itself undesirable.
   Chapter V. On The Possible Futurity Of The Laboring-Classes.
      § 1. The possibility of improvement while Laborers remain merely
      receivers of Wages.
      § 2.—through small holdings, by which the landlord’s gain is shared.
      § 3. —through co-operation, by which the manager’s wages are shared.
      § 4.  Distributive Co-operation.
      § 5. Productive Co-Operation.
      § 6. Industrial Partnership.
      § 7. People’s Banks.
Book V. On The Influence Of Government.
   Chapter I. On The General Principles Of Taxation.
      § 1. Four fundamental rules of Taxation.
      § 2. Grounds of the principle of Equality of Taxation.
      § 3. Should the same percentage be levied on all amounts of Income?
      § 4. Should the same percentage be levied on Perpetual and on
      Terminable Incomes?
      § 5. The increase of the rent of land from natural causes a fit
      subject of peculiar Taxation.
      § 6. Taxes falling on Capital not necessarily objectionable.
   Chapter II. Of Direct Taxes.
      § 1. Direct taxes either on income or expenditure.
      § 2. Taxes on rent.
      § 3. —on profits.
      § 4. —on Wages.
      § 5. —on Income.
      § 6. A House-Tax.
   Chapter III. Of Taxes On Commodities, Or Indirect Taxes.
      § 1. A Tax on all commodities would fall on Profits.
      § 2. Taxes on particular commodities fall on the consumer.
      § 3. Peculiar effects of taxes on Necessaries.
      § 4. —how modified by the tendency of profits to a minimum.
      § 5. Effects of discriminating Duties.
      § 6. Effects produced on international Exchange by Duties on Exports
      and on Imports.
   Chapter IV. Comparison Between Direct And Indirect Taxation.
      § 1. Arguments for and against direct Taxation.
      § 2. What forms of indirect taxation are most eligible?
      § 3. Practical rules for indirect taxation.
      § 4. Taxation systems of the United States and other Countries.
      § 5. A _Résumé_ of the general principles of taxation.
   Chapter V. Of A National Debt.
      § 1. Is it desirable to defray extraordinary public expenses by
      § 2. Not desirable to redeem a national Debt by a general
      § 3. In what cases desirable to maintain a surplus revenue for the
      redemption of Debt.
   Chapter VI. Of An Interference Of Government Grounded On Erroneous
      § 1. The doctrine of Protection to Native Industry.
      § 2. —had its origin in the Mercantile System.
      § 3. —supported by pleas of national subsistence and national
      § 4. —on the ground of encouraging young industries; colonial
      § 5. —on the ground of high wages.
      § 6. —on the ground of creating a diversity of industries.
      § 7. —on the ground that it lowers prices.
Appendix I. Bibliographies.
Appendix II. Examination Questions.


An experience of five years with Mr. Mill’s treatise in the class-room not
only convinced me of the great usefulness of what still remains one of the
most lucid and systematic books yet published which cover the whole range
of the study, but I have also been convinced of the need of such additions
as should give the results of 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 of principles in the facts around us; of a bibliography which
should make 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 frightened away the reader by an
appearance of too great abstractness, and to render them, if possible,
more easy of comprehension to the student who first approaches Political
Economy through this author. 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 two volumes into one,
with, of course, the additional hope that the smaller book would tempt
some readers who might hesitate to attack 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 the page is
taken literally from Mr. Mill, and, whenever it has been necessary to use
a word to complete the sense, it has been always inserted in square
brackets. All additional matter introduced by me has been printed in a
smaller but distinctive type. The reader 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 the original
treatise under the subjects of the Wages Question; of Wages 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 at present 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, have been simply omitted. In one
case I have changed the order of the chapters, by inserting Chap. XV of
Book III, treating of a standard of value, under the chapter treating of
money and its functions. In other respects, the same order has been
followed as in the original work.

Wherever it has seemed possible, American illustrations have been 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 such as I have employed in my class-room. The
use and preparation of such charts ought to be encouraged. The earlier
pages of the volume 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 has completed Mill
will then have a very considerable bibliography of 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 is being first studied, I have added a list of
the most important books 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 not have the
means of inquiring for authorities, and in Appendix II a number of
questions and problems for the teacher’s use.

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 such cases, 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, are examples. Whether I have succeeded or not, must be
left for the experience of the teacher to determine. Many small figures
and diagrams 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 to several 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

_September, 1884._

      [Illustration: Population Map of eastern United States, 1830]

                                 Chart I

          [Illustration: Population Map of United States, 1880]

                                 Chart II


A Sketch Of The History Of Political Economy.

    GENERAL BIBLIOGRAPHY.—There is no satisfactory general history of
    political economy in English. Blanqui’s “Histoire de 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

    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 from the 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
    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 growth of economic
    doctrine. The editor begs to acknowledge his great indebtedness
    for information to his colleague, Professor Charles F. Dunbar, of
    Harvard University.

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, and thickness. Economic history is the story of the
gradual evolution in the thought of men of an understanding of the laws
which to-day constitute the science we are studying. It is essentially

Aristotle(2) and Xenophon had some comprehension of the theory of money,
and Plato(3) had defined its functions with some accuracy. 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
even suspected.

It is worth notice that the first glimmerings of political economy came to
be seen through the discussions on money, and the extraordinary movements
of gold and silver. About the time of Charles V, the young study was born,
accompanied by the revival 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, and Florence; Venice
had become the great commercial city of the world; the Hanseatic League
was carrying goods from the Mediterranean to the Baltic; and the Jews of
Lombardy had by that time brought into use the bill of exchange. While the
supply of the precious metals had been tolerably constant hitherto, the
steady increase of business brought about a fall of prices. From the
middle of the fourteenth to the end of the fifteenth century the
purchasing power of money increased in the ratio of four to ten. Then into
this situation came the great influx of gold and silver from the New
World. Prices rose unequally; the trading 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
England deteriorated, while others were enriched, producing profound
social 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, Bishop of Lisieux (died
1382), had written intelligently on money;(4) but, about 1526, the
astronomer Copernicus gave a very good exposition of some of the functions
of money. But he, as well as Latimer,(5) while noticing the economic
changes, gave no correct explanation. The Seigneur de Malestroit, a
councilor of the King of France, however, by his errors drew out Jean
Bodin(6) to say that the rise of prices was due to the abundance of money
brought from 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 situation(8) 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 and silver, attributed to it abnormal power, and by heavy
duties and prohibitions tried to keep the precious metals to herself. This
led to a general belief in the tenets of the mercantile system, and its
adoption by all Europe. 1. It was maintained that, where gold and silver
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 and political power seemed to be in the
hands of the states having the greatest 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, the
policy of creating a favorable “balance of trade” by increasing exports
and diminishing imports, thus implying that the gain in international
trade was not a mutual one. The error consisted in supposing that a nation
could sell without buying, and in overlooking the instrumental character
of money. The errors even went so far as to create prohibitory
legislation, in the hope of 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 the more
peaceful conditions at the end of the sixteenth century, the expansion of
commerce, the value of money became steadier, and prices advanced more

Italian writers were among the first to discuss the laws of money
intelligently,(10) but a number of acute Englishmen enriched the
literature of the subject,(11) and it may be said that any modern study of
political economy received its first definite impulse from England and

The prohibition of the export of coin was embarrassing to the East India
Company and to merchants; and Mun tried to show that freedom of
exportation would increase the amount of gold and 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
more valuable in England than the precious metals. The purpose of the
mercantilists was to increase the amount of gold and silver in 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, and the 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 the mercantile 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 in ships belonging to the importing
nation. These remnants of the mercantile system continue to this day in
the shipping laws of this and other countries.(12)

A natural consequence of the navigation acts, and of the mercantile
system, was the so-called colonial policy, by which the colonies were
excluded from all trade except with the mother-country. A plantation like
New England, which produced commodities in competition with England, was
looked upon with 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 without a statement of
the form it assumed in France under the guidance of Colbert,(14) the great
minister of Louis XIV, from 1661 to 1683. In order to create a favorable
balance of trade, he devoted himself to fostering home productions, by
attempts to abolish vexatious tolls and customs within the country, and by
an extraordinary system of supervision in manufacturing establishments
(which has been the stimulus to paternal government from which France has
never since been able to free herself). Processes were borrowed from
England, Germany, and Sweden, and new establishments for making tapestries
and silk goods sprang up; even the sizes of fabrics were regulated by
Colbert, and looms unsuitable for these sizes 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 with stereotyped 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 of prosperity 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 came into the market. England and Holland retaliated and
shut off the foreign markets from France. The wine and wheat growers of
the latter country were ruined, and the rural population came to the verge
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 arose from 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 Boisguillebert(16) both began
to emphasize the truth that wealth really consists, not in money alone,
but in an abundance of commodities; that countries which have plenty of
gold and silver are not wealthier than others, and that money 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 the growth of economic truth. But in the middle of
the eighteenth century an intellectual revival set in: the “Encyclopædia”
was published, 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 court of Louis XV. Passing by
his ethical basis of a natural order of society, and natural rights of
man, his main doctrine, in brief, was that the cultivation of the soil was
the only source of wealth; that labor in other industries was sterile; and
that freedom of trade was a 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
distinguished between the creation of wealth (which could only come from
the soil) and the union of these materials, once created, by labor in
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 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 foreign commerce enriched a nation solely by increasing the
quantity of money. 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 right to 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; and even included in their
number Joseph II of Austria, the Kings of Spain, Poland, Sweden, Naples,
Catharine of Russia, and the Margrave of Baden.(20) Agriculture,
therefore, received a great stimulus.

Quesnay had many vigorous supporters, of whom the most conspicuous was the
Marquis de Mirabeau(21) (father of him of the Revolution), and the
culmination of their popularity was reached about 1764. A feeling that the
true increase of wealth was not in a mere increase of money, but in the
products of the 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
created wealth. As the mercantile system found a great minister in Colbert
to carry those opinions into effect on a national scale, so the
Physiocrats found in Turgot(22) 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 condition of the people while
Intendant of Limoges (1751), he was made comptroller-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 the rigidity of national prejudices was too strong to allow
him success. He had little tact, and raised many difficulties in his way.
The proposal to abolish the _corvées_ (compulsory repair of roads by the
peasants), and substitute a tax on land, brought his king into a costly
struggle (1776), and attempts to undermine Turgot’s power were successful.
With his downfall ended the influence of the Economists. The last of them
was Dupont de Nemours,(23) who saw a temporary popularity of the
Physiocrats 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 the prominence 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 to be rightly understood.(25) More
than that, many of the most important doctrines had been either discussed,
or been given to the public in print. It is at least certain that hints of
much that 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 most indebted, 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 on
money, interest, balance of trade, commerce, and taxation; and a 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 acquirements and Adam Smith’s possible indebtedness to him
have been but lately recognized. In a recent study(26) on Cantillon, the
late Professor Jevons has pointed out that the former anticipated many 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, he wrought out of all he had gathered the first rounded system of
political economy the world had yet known; which pointed out that labor
was at the basis of production, not merely in agriculture, as the French
school would have it, but in all industries; and which battered down all
the defenses of the mediæval mercantile system. In a marked degree Adam
Smith(27) combined a logical precision and a power of generalizing results
out of confused data with 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 on
natural theology, ethical philosophy, jurisprudence, and political
economy, believing that these subjects were complementary to each other.

A connected and comprehensive grasp of principles was the great
achievement of Adam Smith;(28) for, although the “Wealth of Nations” was
naturally not without faults, it has been the basis of 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 the attacks on the mercantile system. Seeing
distinctly that labor was the basis of all production (not merely in
agriculture), he shows (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 a necessary 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 factors of production, he is brought to wages, profit, and
rent. The functions of capital are explained in general; the separation of
fixed from circulating capital is made; and he discusses the influence of
capital on the distribution of productive and unproductive labor; the
accumulation of capital, money, paper money, and interest. He, therefore,
gets a connected set of ideas on production, distribution, and exchange.
On questions of production not much advance has been made since his day;
and his rules of taxation are now classic. He attacked vigorously the
balance-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 are prosperous, and that
nations have no interest in injuring each other. It was, however, but
human that his work should have been somewhat 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 to fairer proportions. The
first considerable addition comes from a contribution by a country
clergyman, Thomas Robert Malthus,(30) in his “Essay on the Principles of
Population” (1798). Against the view 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, he gave 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 of getting
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 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 have continued to appear. The chief contributions have
been by A. H. Everett, “New Ideas on Population” (1823), who believed that
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 improvement of the human race is a proof that man can produce
more than he consumes, or that in the progress of society preventive
checks necessarily arise; by W. R. Greg, “Enigmas of Life” (1873); and by
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 the innate _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 the modern
poor-house system, beginning with 1834 in England, and they corrected some
of the abuses of indiscriminate charity.

While Adam Smith had formulated very correctly the laws of production, in
his way Malthus was adding to the means by which a better knowledge of the
principles of distribution was to be obtained; and the next advance, owing
to the sharp discussions of the time on the corn laws, was, by a natural
progress, to the law of diminishing returns and rent. An independent
discovery of 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
with other 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, he it was, above all others, who established
the abstract political economy, in the sense of a body of scientific laws
to which concrete phenomena, in spite of temporary inconsistencies, must
in the end conform. His work, therefore, supplemented that of 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, his writings seem dry, but are notwithstanding mines
of valuable suggestions.

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 made for a superior
instrument, and in proportion to its superiority over the poorest
instrument which society found necessary to use, 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 operation of forces in the form of improvements acting
in opposition to the tendency toward lessened returns. The theory of rent
still holds its place, although it has met with no little opposition.(36)
A doctrine, quite as important in its effects on free exchange, was
clearly 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 1815-1830, 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 in a
happy and lively style, combined with good arrangement, and many
illustrations. The theory that general demand and supply are identical is
his most important contribution to the study. 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, 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 richesse commerciale” (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 distinguished
of the humanitarian economists. Seeing the sufferings caused by
readjustments of industries after the peace, and the warehouses filled
with unsold goods, he thought the excess of production over the power of
consumption was permanent, and attacked division of labor, labor-saving
machinery, and competition. Discoveries which would supersede labor he
feared would continue, and the abolition of patents, together with the
limitation of population,(39) was urged. These arguments furnished
excellent weapons to the socialistic agitators. Heinrich Storch(40) aimed
to spread the views of Adam Smith(41) in Russia, by his “Cours d’économie
politique” (1815). Without further developing the theory of political
economy, he produced a book of exceptional merit by pointing out the
application of the principles to Russia, particularly in regard to the
effect of a progress of wealth on agriculture and manufactures; to the
natural steps by which a new country changes from agriculture to a
manufacturing _régime_; and to finance and currency, with an account of
Russian depreciated paper since Catharine II.

For the next advance, we must again look to England. Passing by
McCulloch(42) and Senior, a gifted writer, the legitimate successor of
Ricardo is John Stuart Mill.(43) His father, James Mill,(44) introduced
him into a circle of able men, of which Bentham was the ablest, although
his father undoubtedly exercised the chief influence over his training.
While yet but twenty-three, in his first book, “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 be found here in a matured condition. The views on productive and
unproductive consumption, profits, economic methods, and especially 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 other sciences, and of the proper economic method
to be adopted in investigations. Through his “Principles of Political
Economy” (1848) he has exercised a remarkable influence upon men in all
lands; 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 and practical 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. Even yet, however, some parts of his book show the tendency
to too great a fondness for abstract statement, induced probably by a
dislike 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 he saw distinctly that political
economy was but one of the sciences, a knowledge of which was necessary to
a legislator in reaching a decision upon social questions. Mill shows an
advance beyond Ricardo in this treatise, by giving the study a more
practical direction. Although it is usual to credit Mill with originating
the laws of international values, yet they are but a development of
Ricardo’s doctrine of international trade, and Mill’s discussions of 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 in geometry. 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, although much 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 science since Mill’s day, is J. E.
Cairnes,(47) in his “Leading Principles of Political Economy newly
expounded” (1874). Scarcely any 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, and
international trade, to a rigid investigation, which has given us actual
additions to our knowledge of the study. The wages-fund theory 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, chapter iv) is the ablest and strongest to be found
in modern writers. This volume is, however, not a systematic treatise on
all the principles of political economy; but no student can properly pass
by these great additions for the right understanding of the science. His
“Logical Method of Political Economy” (1875) is a clear and able statement
of the process to be adopted in an economic investigation, and is a book
of exceptional merit and usefulness, especially in view of the rising
differences in the minds of economists as to method.

A group of English writers of ability in this period have written in such
a way as to win for them mention in connection with Cairnes and Mill.
Professor W. Stanley Jevons(48) 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 Leslie(49) 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
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 of small 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 discussed with 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 possession of rare qualities for financial writing; indeed, it
is in this practical way also, as editor of the London “Economist,”(52)
that he made his great reputation.

Of living English economists, Professor Henry Fawcett,(53) in 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 an exponent of the strict wages-fund
theory, and a vigorous free-trader. 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,”
from 1255 to 1793, in four volumes(54) (1866-1882).

Of all the writers(55) since Cairnes, it may be said that, while adding to
the data with which political economy has to do, and putting principles to
the test of facts, they have made no actual addition to the existing body
of principles; although questions of 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

It now remains to complete this sketch of the growth of political economy
by a brief account of the writers on the Continent and in the United
States, beginning with France. About the time of the founding of the
London “Economist” (1844) and “The Statistical 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 the French Cobden. He
especially urged a new(57) view of value, which he defined as the relation
established by an exchange of services; 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, was Michel Chevalier,(58) easily the first among modern French
economists. 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 the ablest 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
most industrious and reliable of the recent writers is the well-known
statistician, Maurice Block,(60) while less profound economists were J. A.
Blanqui(61) 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 and land-tenures—H. Passy,(63) Laveleye,
and Lavergne.(64) The latter is by far the most important, as shown by his
“L’économie rurale de la France depuis 1789” (1857), which gives a means
of 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 de la science économique”
(1862), by Antoine-Élise Cherbuliez,(65) a Genevan. The French were the
first to produce an alphabetical encyclopædia of economics, by Coquelin
and Guillaumin, entitled the “Dictionnaire de l’économie politique”
(1851-1853, third edition, 1864). Courcelle-Seneuil,(66) by his “Traité
théorique et pratique d’économie politique” (second edition, 1867); and
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, and Walras(72) 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 (died 1874). They have worked to secure complete liberty
of commerce and industry, and include in their numbers many men of ability
and learning. Yearly congresses have been organized for the purpose of
disseminating liberal ideas, and an excellent review, the
“Vierteljahrschrift für Volkswirthschaft, Politik, und
Kulturgeschichte,”(73) has been established. They have devoted themselves
successfully to reforms of labor-laws, interest, workingmen’s dwellings,
the money system, and banking, and strive for the abolition of protective
duties. Schulze-Delitzsch has acquired a deserved reputation for the
creation of people’s banks, and other forms of co-operation. The
translator of Mill into German, Adolph Soetbeer,(74) is the most eminent
living authority on the production of the precious metals, and a vigorous
monometallist. The school is represented in the “Handwörterbuch der
Volkswirthschaftslehre” (1865) of Reutzsch. 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 are very similar
to those of H. C. Carey in this country.(78) An able writer on
administrative functions and finance(79) 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 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 really acts. They therefore assert that
economic laws can only be truly discovered by induction, or a study of
phenomena first, as the means of reaching a generalization. To them
Bagehot(80) answers that scientific bookkeeping, or collections of facts,
in themselves 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, for example, the study of a
panic from the concrete phenomena would be like trying to explain the
bursting of a boiler without a theory of steam. More lately,(81) since it
seems that the new school claim that induction does not preclude
deduction, and as 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 the insistence
upon the merits of induction will be fruitful of good to “orthodox”
writers, in the more general resort to the collection of statistics and
means of verification. It is suggestive also that the leaders of the new
school in Germany and England have reached 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
descriptions of economic conditions existing at a given time; he simply
considers them as forces (often acting many on one point or 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.

The most prominent of the new school is Wilhelm Roscher,(82) of Leipsic,
who wrote a systematic treatise, “System der Volkswirthschaft” (1854,
sixteenth edition, 1883), in the first division of which the notes contain
a marvelous collection of facts 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 state and commune. The ablest
contemporary of Roscher, who was 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 the group 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 the interference 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, has received the name of “Socialists(85) of the Chair,” and
now wield a wide influence in Germany. Of these writers,(86) Wagner,
Engel, Schmoller, Von Scheel, Brentano, Held, Schönberg, and Schäffle are
the most prominent.

The historical school has received the adhesion of Émile de Laveleye,(87)
in Belgium, and other economists in England and the United States. While
Cliffe Leslie has been the most vigorous opponent of the methods of the
old school, there have been many others of less distinction. Indeed, the
period, the close of which is marked by J. R. McCulloch’s book, was one in
which the old school had seemingly come to an end of its progress, from
too 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 the historical school will probably
give a most desirable impetus to the same results, even though its
exaggerated claims as to the true method(88) 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 to other studies; Cattanes, who
turned to rural questions and free trade (combating the German, List);
Scialoja, at the University of Turin; and Francesco Ferrara, also at Turin
from 1849 to 1858. The latter was a follower of Bastiat and Carey, as
regards value and rent, and at the same time was a radical believer in
_laissez-faire_. Since the union of Italy there has been a new interest 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 stand above 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 the 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 made a 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, and only 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-books(89) by authors engaged in college instruction, and
therefore chiefly interested in bringing principles previously worked out
by others within the easy comprehension of undergraduate students.”(90) Of
these exceptions, Alexander H. Everett’s “New Ideas on Population”(91)
(1822), forms a valuable part 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 doctrines of
Ricardo is Henry Charles Carey.(92) Beginning with “The Rate of Wages”
(1835), he developed a new theory of value (see “Principles of Political
Economy,” 1837-1840), “which he defined 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 cost
of 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 value of accumulated capital as
compared with the results of present labor, from which is inferred a
tendency toward harmony rather than divergence of interests between
capitalist and laborer.” This theory of value(93) he applied to land, and
even to man, in his desire to give it universality. He next claimed to
have discovered a law of increasing production from land in his “Past,
Present, and Future” (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 brought to accept the supposed law of an ultimate limit to
numbers suggested 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 a protectionist, 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 and causing 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)

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 of accumulated capital. Professor W. G. Sumner(97) is a vigorous
writer in the school of Mill and Cairnes, and has done good work 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 of diminishing returns from
land, regards rent as the reward for a service rendered. Another writer,
Henry George,(99) has gained an abnormal prominence by a plausible book,
“Progress and Poverty” (1880), which rejects the doctrine of Malthus, and
argues 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 by people in general, sufficiently account for the wide
attention he has received.

Of late, however, new activity has been shown in the establishment 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.

Books For Consultation (From English, French, And German Authors).


Professor Fawcett’s “Manual of Political Economy” (London, sixth edition,
1883) is a brief statement of Mill’s book, with additional matter on the
precious metals, slavery, trades-unions, co-operation, local taxation,

Antoine-Élise Cherbuliez’s “Précis de la science économique” (Paris, 1862,
2 vols.) follows the same arrangement as Mill, and is considered the best
treatise on economic science in the French language. 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 by Henri Baudrillart, “Manuel d’économie
politique” (third edition, 1872).

Roscher’s “Principles of Political Economy” is a good example of the
German historical method; its notes are crowded with facts; but the
English translation (New York, 1878) is badly done. There is 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.


Adam Smith’s “Wealth of Nations” (1776). The edition of McCulloch is
perhaps more serviceable than that of J. E. T. Rogers.

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 from the 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 differs from 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).


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 of English
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), in six volumes.

Leroy-Beaulieu’s “Traité de la science des finances” (1883). This is an
extended work, in two volumes, on taxation and 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).


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.


The “Compendiums of the Census” for 1840, 1850, 1860, and 1870, 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 and Navigation,” and another on the
“Internal Commerce of the United States.”

The “Statistical Abstract” is an annual publication, by the same
department, compact and useful. It dates only from 1878.

The Director of the Mint issues an annual report dealing with the precious
metals and the circulation. Its tables are important.

The Comptroller of the Currency (especially during the administration 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 the general
finances of the United States. These, with the two last mentioned, are
bound together in the volume of “Finance Reports,” but often shorn of
their tables.

There are valuable special reports to Congress of commissioners on the
tariff, shipping, and other subjects, published by the Government.

The report on the “International Monetary Conference of 1878” 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 and useful. These can always be
purchased at given prices.

A. R. Spofford’s “American Almanac” is an annual of great usefulness.

Preliminary Remarks.

Writers on Political Economy profess to teach, or to investigate, the
nature of Wealth, and the laws of its production and distribution;
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 of human 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 results of
    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 the former
    everything which concerns social life. Some writers distinguish
    between the pure, or abstract science, and the applied 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 than physics, for, after a
    principle is ascertained, its operation is to be observed in the
    same way that we study the force of gravitation 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 to investigate 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 of being directly converted into it. According to
the doctrines then prevalent, whatever tended to heap up money or bullion
in a country 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)

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 brought in, however ample and valuable might be the returns in
another shape, 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 the returns would actually be made
in gold and silver. Importation of anything, other than the precious
metals, was regarded as a loss to the nation of the whole price of the
things imported; unless they 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 gold and
silver in existence; and in this competition no nation could gain
anything, except by making others lose as much, or, at the least,
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, 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 saving of 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
sort of 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 and private purpose, is
rightly regarded as wealth; but everything else which serves any human
purpose, and which nature does not afford gratuitously, is wealth also. To
be wealthy is to have 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 absolute of necessaries, bears no price in the market, because it can
be obtained 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 in which air would be a
part of wealth. If it became customary to sojourn long in places where the
air does not naturally penetrate, as in diving-bells sunk in the sea, a
supply of air artificially furnished 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 might
acquire a very high marketable value. In such a case, the possession of
it, beyond his own wants, would be, to its owner, wealth; and the general
wealth of mankind might at first sight appear to be increased, by what
would be so great a calamity to them. The error would lie in not
considering that, however rich the 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 useful or agreeable things
except those which can be obtained, in the quantity 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 human exertion_, so as to
    fit them for the gratification of human desires.... Nothing which
    Nature supplies to man without his labor 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 in
    supply, 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 adopts
    _property_ in its stead, defining it as that “which can be bought
    or sold.” Cherbuliez (“Précis,” p. 70) defines wealth as the
    material product of nature appropriated by labor for the wants 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.


Chapter I. Of The Requisites Of Production.

§ 1. The Requisites of Production are Two: Labor, and Appropriate Natural

    There is a third requisite of production, capital (see page 58).
    Since the limitation to only two requisites applies solely to a
    primitive condition of existence, so soon as the element of _time_
    enters into production, then a store of capital becomes necessary;
    that is, so soon as production requires such a term that during
    the operation the laborer can not at the same time provide himself
    with subsistence, then capital is a requisite of production. This
    takes place also under any general division of labor in a
    community. When one man is making a pin-head, he must be supplied
    with food by some person until the pins are finished and

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

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

Of the other requisite—appropriate natural objects—it is to be remarked
that some objects exist or grow up spontaneously, of a kind suited to the
supply of human wants. There are caves and hollow trees capable of
affording shelter; fruits, roots, wild honey, and other natural products,
on which human life can be supported; but even here a considerable
quantity of labor is generally required, not for the purpose of creating,
but of finding and appropriating them.

Of natural powers, some are unlimited, others limited in quantity. 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 made of it. Land is, in some newly settled
countries, practically unlimited in quantity: there is more than can be
used by the existing population of the country, or by any accession likely
to be made to it for generations to come. But, even there, land favorably
situated with regard to markets, or means of carriage, is generally
limited in quantity: there is not so much of it as persons would gladly
occupy and cultivate, or otherwise turn to use. In all old countries, land
capable of cultivation, land at least of any tolerable fertility, must be
ranked among agents limited in quantity. Coal, metallic ores, and other
useful substances found in the earth, are still more limited than land.

For the present I shall only remark that, so long as the quantity of a
natural agent is practically unlimited, it can not, unless susceptible 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—as soon 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 ownership or use of the natural agent acquires an exchangeable

    Rich lands in our Western Territories a few years ago could be had
    practically for the asking; but now, since railways and an
    increase of population have brought them nearer to the markets,
    they have acquired a distinct exchange value. The value of a
    commodity (it may be anticipated) is the quantity of 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 possesses of a certain quality and certain
advantages of situation, land of that quality and situation may be sold
for a price, or let for an annual rent.

§ 2. The Second Requisite of Production, Labor.

    It is now our purpose to describe the second requisite of
    production, labor, and point out that it can be either direct or
    indirect. This division and subdivision can be seen from the
    classification 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), are
    subsidiary to the production of a vast number of other articles;
    and hence we see the interdependence of one employment on another,
    which comes out so conspicuously at the time of a commercial

    “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 the
    sea—with tea from China, coffee from Brazil, spices from the East,
    and sugar from the West Indies; knives from Sheffield, made with
    iron from Sweden and ivory from Africa; with silver 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 these finished products to our homes—of the
    merchants, insurers, sailors, ship-builders, cordage and sail
    makers, astronomical-instrument makers, men of science, and
    others, before a pound of tea can appear in our market.”(101)

The labor(102) which terminates in the production of an article fitted for
some human use is either employed directly about the thing, 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 is that of the baker; but the labor of the miller,
though employed directly in the production not of bread but of flour, is
equally part of 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 the bread being one substance in
three different states. Without disputing about this question of mere
language, there is still the plowman, who prepared the ground for the
seed, and whose labor 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 of transporting the
produce from the place of its production to the place 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 the baker’s, and the bread from the baker’s
to the place of its final consumption.

    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 the bread.
    Subsidiary to the direct labor of the bread-maker is the labor of
    all those who make the instruments employed in the process (as,
    e.g., the oven). Materials are completely changed in character by
    one use, as when the coal is burned, or the flour 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 the bread-maker in the price of his
    coal and flour when left at his door, so that the price of the
    loaf is influenced by these payments. Those persons, moreover,
    who, like the police and officers of our government, act to
    protect property and life, are also to be classed as laborers
    indirectly aiding in the production of the given article, bread
    (and by his taxes the bread-maker helps pay the wages of these
    officials). Shading off into a more distant, although essential,
    connection is another class—that of those laborers who train human
    beings in the branches of knowledge necessary to the attainment of
    proper skill in managing the processes and instruments of an
    industry. 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; and teachers are
    indirect laborers in producing almost every article in the market.
    In this country, especially, are inventors a class of 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 made American 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 in nearly every branch of
    industry. In the particular illustration given they have improved
    the ovens, ranges, and stoves, so that the same or better articles
    are produced at a less cost than 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 their fruits are obtained. Unless the
laborer, before commencing his work, possesses a store of food, or can
obtain access to the stores of 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
pursuit of 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 not forget the story of
    Joseph’s store of corn?), “but from the constantly recurring crops
    of the Nile Valley.”

He can not obtain food itself in any abundance; for every mode of so
obtaining it requires that there be already food in store. Agriculture
only brings forth food after the lapse of months; and, though the labors
of the agriculturist are not necessarily 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 to
support itself wholly by agriculture. A country like England or the United
States is only able to carry on the agriculture of the present year
because that of past years has provided, in those countries or somewhere
else, sufficient food to support their agricultural 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.

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 to sing or dance for him. If,
instead of these things, he gives it to productive laborers to support
them during their work, he can, 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 for this
forbearance:(103) he will expect his advance of food to come back to him
with an increase, called, in the language of business, a profit; and the
hope of this profit will generally have been 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.

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 high order of usefulness, of
which production is not the object. Labor has accordingly been
distinguished into Productive and Unproductive. Productive labor means
labor productive of wealth. We are recalled, therefore, to the question
touched upon in our [Preliminary Remarks], what Wealth is.

By Unproductive Labor, on the contrary, will be understood labor which
does not terminate in the creation of material wealth. And all labor,
according to our present definition, must be classed 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, and produces more than he consumes.

    The principle on which the distinction is made is perfectly clear,
    but in many cases persons may be misled chiefly in regard 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 of morality and self-control, ever
    caused an idler or wrong-doer to become a steady laborer, we can
    not say that a clergyman is a 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 do or do not, in fact, accomplish the protective
    purposes for which they exist. So with teachers. There is,
    however, no disparagement 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 no trace; 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 produces nothing 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 to unproductive 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 is wasted. Productive labor may render a nation poorer, if
the wealth it produces, that is, the increase it makes in the stock of
useful or agreeable things, be of a kind not immediately wanted: as when a
commodity is unsalable, because produced in a quantity beyond the present
demand; or when speculators build docks and warehouses before there is any

§ 2. Productive and Unproductive Consumption.

The distinction of Productive and Unproductive is applicable to
Consumption as well as to Labor. All the members of the community are not
laborers, but all are consumers, and consume either unproductively or
productively. Whoever contributes nothing directly or indirectly to
production is an unproductive consumer. The only productive consumers are
productive laborers; the labor of direction being of course included, as
well as that of execution. But the consumption even of productive laborers
is not all of it Productive Consumption. There is unproductive consumption
by productive consumers. What they consume in keeping up or improving
their health, strength, and capacities of work, or in rearing other
productive laborers to succeed them, is Productive Consumption. But
consumption on pleasures or luxuries, whether by the idle or by the
industrious, since production is neither its object nor is in any way
advanced by it, must be reckoned Unproductive: with a reservation,
perhaps, of a certain quantum of enjoyment which may be classed among
necessaries, 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 of production, 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 produces nothing 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 labor of the tailor than if the same sum had been paid
for a stall at the opera. 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.

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 the
country, a part only is destined to be consumed productively; the
remainder supplies the unproductive consumption of producers, and the
entire consumption of the unproductive class. Suppose that 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 are occupied from year to year and from generation to
generation in 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: the first half would suffice to produce, as they had done
before, their own necessaries and the necessaries of the second half, and
to keep the stock of materials and implements undiminished: the
unproductive 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 the sources of production would be
unimpaired, and the next year there would not necessarily be a smaller
produce than if no such 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 have been entirely
impoverished. It would be a great error to regret the large proportion of
the annual produce, which in an opulent country goes to supply
unproductive consumption. That so great a 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 the annual
   (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 for themselves. 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, who labor “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 primary and
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 produce of labor is termed Capital. What capital does for
production is, to afford the shelter, protection, tools, and materials
which the work requires, 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 labor with these
various prerequisites—are Capital.

    Professor Fawcett, “Manual” (chap. ii), says: “Since the laborer
    must be fed by previously accumulated food, ... some of 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 not
    confined to the food which feeds the laborers, but includes
    machinery, buildings, and, in fact, every product due to man’s
    labor 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 land and natural
    agents) which is employed in the production of new forms of
    wealth. Henry George (“Progress and Poverty,” page 41) returns to
    Adam Smith’s definition: “That part of 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 obtained by previous labor. “These auxiliary products
    accumulated with 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 the form of
buildings, fitted and destined for carrying on this branch of 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 clothing for his operatives it is not the custom of
the present age that he should directly provide; and few capitalists,
except the producers of food or clothing, have any portion worth
mentioning of their capital 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
of his possessions, whatever it be, which he designs to employ in carrying
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

    Care should be taken to distinguish between wealth, capital, and
    money. Capital may be succinctly defined as _saved wealth 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; the area 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 the area 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 not always
    understood that money is merely a convenient article by which
    other forms of wealth are exchanged against each other, 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.

[Illustration. Outer circle A, enclosing inner circle B, with small circle
                     C overlapping edge of circle B.]

Suppose, for instance, that the capitalist is a hardware manufacturer, and
that his stock in trade, over and above his machinery, consists at present
wholly in iron goods. Iron goods can not feed laborers. Nevertheless, by a
mere change of the destination of the iron goods, he can cause laborers to
be fed. Suppose that [the capitalist changed into wages what he had before
spent] in buying plate and jewels; and, in order to 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
plate and jewels, but in food. There is not, however, additional food in
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, the laborers 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 to a productive, has had the
effect of causing more food to be appropriated 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; and all 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
from it, 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 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 find none adapted to the inclinations of its
possessor: it then is capital still, 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 doubtless
    marketable at some price, if offered low enough. If no one wants
    them, then, by definition, they are not wealth so long as 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 necessity of having a larger accumulated fund
than is required for, or is 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 he
maintains less labor. (4) For another example: a farmer may enter on 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 a country
which is employed in paying the wages and salaries of laborers, 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 case of skilled laborers is usually considerable) is not
expended in supporting labor, but in remunerating it, and the laborers
could wait for this part of their remuneration until the production is

    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 division of labor), and also sufficient
    to purchase tools and materials. The various elements of capital
    are materials, instruments, and subsistence, giving “instruments”
    its wide signification which includes money (the tool of
    exchange), and other necessary appliances of each special kind of

In truth, it is only after an abundant capital had already been
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 to admit of habitually diverting a part of it to a mere

It will be observed that I have assumed that the laborers are always
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 this year’s
harvest, but on that of the last. The artisan is not living on the
proceeds of the work he has in hand, but on those of work previously
executed and disposed of. Each is supported by a small capital of his own,
which he periodically replaces from the 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 capital to
the nation, according as the fund which by the supposition he has 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 is
    entirely dissipated; as it can not longer be in circle A, it can
    not, 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
capital belongs to A, while B takes the trouble of employing it, and
receives for his remuneration the difference between the profit which it
yields and the interest he pays to A. This is the simplest case.

(2.) Suppose next that A’s ten thousand pounds, instead of being lent to
B, are lent on mortgage to C, a landed proprietor, by whom they are
employed in improving the productive powers of 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,
sufficient in a few years, if the outlay has been judicious, to replace
the amount, and in time to multiply it manifold. Here, then, is a value of
ten thousand pounds, employed in increasing the produce of the 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, is a spendthrift,
who burdens his land not to increase his fortune but to squander it,
expending the amount in equipages and entertainments. 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 than formerly; and nobody is richer. It may be said that those are
richer 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 by his 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, or by means of his servants or guests, these articles
have ceased to exist, 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 have been the consumers. By C’s prodigality,
that which would have been consumed with a return is consumed without
return. C’s tradesmen may have made a profit during the process; but, if
the capital had been expended productively, an equivalent profit would
have been made by builders, fencers, tool-makers, and the tradespeople who
supply the consumption of the laboring-classes; 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
the community, of at least ten thousand pounds, being the amount of C’s
unproductive expenditure. To A, the difference is not material, since his
income is secured to him, and while the security is good, and the market
rate of interest the same, he can always sell the mortgage at its original
value. To A, therefore, the lien of ten thousand pounds on C’s estate is
virtually a capital of that amount; but is it so in reference to the
community? It is not. 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 by farmers out of the produce of
_their_ capital.

(4.) Let us now vary the hypothesis still further, and suppose that 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 in destroying
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 the employment of it may have been
justifiable. A’s subsequent income is derived, not from the produce of his
own capital, but from 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, and what he
now possesses is a claim on the returns to other people’s capital and

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, “from taxes drawn from the
    produce of the remaining capital,” $1,270,596,784, as an income to
    bondholders. From this can be 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 to save, the smaller the outside circle (wealth), the
    less the inside circle (capital) must be.

Chapter IV. Fundamental Propositions Respecting Capital.

§ 1. Industry is Limited by Capital.

The first of these propositions is, that industry is limited by capital.
To employ labor in a manufacture is to invest capital in 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 and food to eat. Self-evident
as the thing is, it is often forgotten that 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 that property 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 to be produced.
Now, of what has been produced, a part only is allotted to the support of
productive labor; and there will not and can not be more of that labor
than the portion so allotted (which is the capital of the country) can
feed, and provide with the materials and instruments of production.

Because industry is limited by capital, we are not, however, to infer that
it always reaches that limit. There may not be as many laborers 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

    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, the whole 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

[Governments] can create capital. They may lay on taxes, and employ the
amount productively. They may do what is nearly equivalent: they may lay
taxes on income or expenditure, and apply 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 have been
drawn from the fund for unproductive expenditure, since people do not
wholly pay their taxes from what they would have saved, but partly, if not
chiefly, from what they would have spent.

§ 2. Increase of Capital gives Increased Employment to Labor, Without
Assignable Bounds.

While, on the one hand, industry is limited by capital, so, on the other,
every increase of capital gives, or is capable of giving, 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 in machinery, 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, not maintain 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 to-day that, while
    the rich are growing richer, the poor lack even the food to keep
    them alive; and throughout this discussion Mr. Mill has in view
    the fact that laborers may exist in the community either “half fed
    or unemployed.”

What I do intend to assert is, that the portion which is destined to their
maintenance may (supposing no alteration in anything else) be indefinitely
increased, without creating an impossibility of 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 very
much 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 the poor.

    It is to be noticed that, in fact, after the arts have so far
    advanced in a community that mankind can obtain by their exertion
    more than the amount of the mere necessaries of life sufficient on
    the average for the subsistence of all, any 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 the demand for the labor. Yet it is clear that
    it is not _expenditure_, but capital, by which employment is given
    to the poor.

Suppose that every capitalist came to be of opinion that, not being 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 the increased 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 is said),
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 of capitalists and land-owners. But, when these
classes turn their income into capital, they do not thereby annihilate
their power of consumption; they do but transfer it from themselves to the
laborers 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 the increase of capital. (1.)
If there is, the case offers no difficulty. The production of necessaries
for the new population takes the place of the production of luxuries for a
portion of the old, and supplies 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 form of
additional wages. We will assume them to be already sufficiently supplied
with necessaries.

What follows? That the laborers become consumers of luxuries; and the
capital previously employed in the production of luxuries is still able to
employ itself in the same manner; the difference being, that the luxuries
are shared among the community 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 constant differentiation of new
    desires. To satisfy these wants is the spring 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

    Now, in supposition (2) of the text, remember that the laborers
    are supposed not to be employed up to their full productive 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 a larger 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. 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 better house, and B wishes a carpet,
    both having food, clothing, and shelter. One of the capitalists
    abstaining from unproductive consumption, as above, is X, who,
    knowing the two desires of A and B, presents himself as a
    middle-man (i.e., he gives a market 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, in the 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 not give up their title to that
    capital, but they transfer the use of it, 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.

A second fundamental theorem respecting capital relates to the source from
which it is derived. It is the result of saving.

If all persons were to expend in personal indulgences all that they
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 states of economical relations;
people must have produced more than they 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 work of 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 and increased
privation. But it is obvious that whatever increases the productive power
of labor, creates an additional fund to make savings 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 is also more spared. There is a greater excess of
production over consumption. To consume less than is produced is saving;
and that is the process by which capital is increased; not necessarily by
consuming less, absolutely.

    The economic idea of saving involves, of course, the intention of
    using the wealth in reproduction. Saving, without this meaning,
    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 connected with the one
last discussed, is, that although saved, and the result 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 for
tools or machinery, which are worn out by use; part for seed or materials,
which are destroyed as such by being sown or wrought up, 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 turn save 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 is looked upon as diffusing
benefits all around, and is an object of so 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, under pretense of borrowing, and on promise of repayment, possesses
himself of capital belonging to others, and destroys that likewise.

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, being out 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
other case, there is a consumption, that is to say, a destruction, of
wines, equipages, and furniture. Thus far, the consequence to the national
wealth has been much the same; an equivalent quantity of it has been
destroyed in both cases. But in the spending, this 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 the destruction was going on, has had
laborers at work repairing it; who are ultimately found to have replaced,
with an increase, the equivalent 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 feature in the transaction; and since that
does not perish, but only changes 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 is simply 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 and instruments which are the means of
such employment do actually exist 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 to be spent—and the former
quite as rapidly as the latter. All the ordinary forms of language tend to
disguise this. When people talk of the ancient wealth of a country, of
riches inherited from ancestors, and similar expressions, the idea
suggested is, that the riches so transmitted were produced long ago, at
the time when they are said to have been first acquired, and that no
portion of the capital of the country was produced this year, except as
much as may have been this year added to the total amount. The fact is far
otherwise. The greater part, in value, of the wealth now existing [in the
United States] has been produced by human hands within the last twelve

    “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’

The land subsists, and the land is almost the only thing that subsists.
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 and
destroyed, 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 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 there is 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 in working condition, they will, in a short
time, have raised as great a produce, and acquired collectively as great
wealth and as great a capital, as before, by the mere continuance of that
ordinary amount of exertion which they are accustomed to employ in their
occupations. Nor does this evince any strength in the principle of saving,
in the popular sense of the term, since what takes place is 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 amount of
    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 not destroyed 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 the arts of production render it possible.

      [Illustration. Inner rectangle W, surrounded by rectangle W’.]

§ 5. Effects of Defraying Government Expenditure by Loans.

[An application of this truth has been made to the question of raising
government supplies for war purposes.] Loans, being drawn from capital (in
lieu of taxes, which would generally have been paid from income, and made
up in part or altogether by increased economy), must, according to the
principles we have laid 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
resources of the country, instead of diminishing, have given every sign of
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 to an inflated paper currency.

We will suppose the most unfavorable case possible: that the whole amount
borrowed and destroyed by the Government was abstracted by the lender from
a productive employment in which it had actually been invested. The
capital, therefore, of the country, is this year diminished by so much.
But, unless the amount 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 from that
portion of the capital of the country which consists of tools, machinery,
and buildings. It must have been wholly drawn from the 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 less by so
many millions sterling, these millions are gained by their employers. The
breach made in the capital of the country is thus instantly repaired, but
repaired by the privations and often the real misery of the

    As Mr. Mill points out, during the Napoleonic wars, in France the
    withdrawal of laborers from industry into the army was so large
    that it caused a rise of wages, and a fall in the profits of
    capital; while in England, inasmuch as capital, rather than men,
    was sent to the Continent in the war, the very reverse took place:
    the diversion of “hundreds of millions of capital from productive
    employment” caused a fall of wages, and the 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 a government for
extraordinary unproductive expenditure are best raised by loans, the
interest only being provided by taxes, or whether taxes should be at once
laid on to the whole amount; which is called, in the financial vocabulary,
raising the whole of the supplies within the year. Dr. Chalmers is
strongly for the latter method. He says the common notion is that, in
calling for the 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; and that it is
much better to require of them a small payment every year in the shape of
interest, than so great a sacrifice once for all. To which his answer is,
that the sacrifice is made equally in either case. Whatever is spent can
not but be drawn from yearly income. The whole and every part of the
wealth produced in the country forms, or helps to form, the yearly income
of somebody. The privation which it is supposed must result from taking
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 the interest, are incurred in pure
loss. Whenever capital is withdrawn from production, or from the fund
destined for production, to be lent to the state and expended
unproductively, that whole sum is withheld from the laboring-classes: the
loan, therefore, is in truth 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, with which
    it buys stores from B. If the loan all comes from within the
    country, A’s capital is _borrowed_, when the United States should
    have taken that amount outright by taxation. When the money 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 were taken by
    taxation, the title to the sum raised is in the state, and it is
    paid to the right person.

    The experience of the United States during the civil war is an
    illustration of this principle. It is asserted that, as a matter
    of fact, the total expenses of the war were defrayed by the
    Northern States, during the four years of its continuance, out of
    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   $2,400,000,000
    Revenue during that time      1,700,000,000
    Total cost of the war        $4,100,000,000

    In reality we borrowed only about $1,500,000,000 instead of
    $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 account had 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 paid in war taxes $650,000,000. At the beginning
    of the struggle, to June 30, 1862, the expenditure was
    $515,000,000, and by June 30, 1863, it had amounted to
    $1,098,000,000; so that $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 the
    Continental wars, 1793-1817:

    Total war expenditures                 £1,060,000,000
    Interest charge on the existing debt      235,000,000
    Total amount required                  £1,295,000,000
    Revenue for that period                 1,145,000,000
    Deficit                                  £150,000,000

    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)

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 of
rich and prosperous countries are generally made, not with funds withdrawn
from productive employment, but with the new accumulations constantly
making from income, and often with a part of them which, if not so taken,
would have migrated to colonies, or sought other investments abroad.

§ 6. Demand for Commodities is not Demand for Labor.

    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 this purpose represent by
    the letters of the alphabet, A, B, C, ... X, Y, Z, the different
    kinds of commodities produced in the world which are exchanged
    against each other in the process of reaching the consumers. This
    exchange of commodities for each other, it need hardly be said,
    does not increase the number or quantity of commodities already in
    existence; since their production, as we have seen, requires labor
    and capital in connection with natural agents. Mere exchange does
    not alter the quantity of commodities produced.

    To produce a plow, for example, the maker must have capital (in
    the form of subsistence, tools, and materials) of which 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 to day. This capital is all consumed,
    but in a longer or shorter term (depending on the particular
    industrial operation) it is reproduced in new forms adapted to the
    existing wants of man. Moreover, without any new exertion of
    abstinence, this amount of capital may be again consumed and
    reproduced, and so go on forever, after once being saved (if never
    destroyed in the mean while, thereby passing out of the category
    not only of capital, but also of wealth). The total capital of the
    country, then, is not the sum of one year’s capital added to that
    of another; but that of last year reproduced in a new form this
    year, plus a fractional increase arising from new savings. 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 for repairing tools, etc., as give
    back to the plow-maker all the commodities 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 5,000 of Z is produced,
    of which 4,000 is enough to reimburse the capital used up by labor
    in the operation, and that the owner of 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 entirely by the desires of the two parties to the
    transaction. No more goods are created simply by the exchange; the
    simple process of exchange does not keep the laborers engaged on A
    occupied. And yet the owner of Z had a demand for commodity A; his
    demand was worthless, except through the fact of his production,
    which gave him actual wealth, or purchasing power, in the form of
    Z. His demand for commodity 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 some other
    article—that is, the demand of one quantity of wealth for a
    certain thing determines the _direction_ taken by the owner of
    capital A. But, since the exchange is merely the form in which the
    demand manifests itself, it is clear that the demand does 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 which those commodities (A)
    are produced. It makes no difference to the existing employment of
    labor what want is supplied by the producers of A, whether it is
    velvet (intended for unproductive consumption) or plows (intended
    for productive consumption). Even if Z is no longer offered in
    exchange for A, and if then A is no longer to be made, the
    laborers formerly occupied in producing A—if warning is given of
    the coming change; 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 for him. The essential question is, Is more
    employment offered to labor by this action than the former
    exchange for A? That is, it is a question merely of distribution
    of wealth among the members of a community. The labor engaged on A
    is not 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 1,000
    of 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 the time 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 demand for commodities
    does not involve an increased demand for labor, 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 the other case, by giving Z to the
    unemployed crew, he actually went 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 owner of Z had done it; but meanwhile the additional
    laborers were employed. If the crew be employed productively, then
    the saving 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. One
    thousand of Z was able to purchase certain results of labor and
    capital in industry A, when in the hands of its former owner; and
    now when in the hands of the crew it will control, as purchasing
    power, equivalent results of labor and capital. 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 instead of A. The whole process may
    be represented by this diagram.

    [Illustration, showing interrelationships between A, Z, and Crew.]

    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 some minds to
    a proper understanding of the operations described above. The
    supposition, as given, applies to a condition of barter, but is
    equally true if money is used.(110) Imagine a display 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 is given 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, “If A is not wanted, after it is produced,
    and can not be sold, because the demand from Z has been withdrawn,
    then the 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 and
    normal one wherein production is correctly adapted to human
    desires. If A is found not to be wanted, after the production of
    it, an industrial blunder has been committed, and wealth is wasted
    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 made upon “orders,” and, except under
    peculiar circumstances, not actually 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 a demand 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 these commodities.
    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 with labor ready to manufacture
    the instrument. If capital were 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 is willing to forego the use of this wealth,
    or, in other words, save it 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
    for commodities, 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 demand for
    commodities, that does not of itself give additional employment to
    labor. If the goods had before been purchased abroad, under free
    discretion, then if produced at home they must require more
    capital and labor, or they would not have been brought from
    foreign countries. If produced at home, it would require, to
    purchase them, more of what was formerly sent abroad; or some must
    do without. The legislation can not, _ipso facto_, create capital,
    and only by an increase of capital 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 by circumstances in each particular case. It
    is not a thing to be governed by principles.

    (_b._) It follows from the above proposition also that taxes
    levied on the rich, and paid by a saving from their consumption 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 from what the rich would have expended in
    wages, then if the Government 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
    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.

Chapter V. On Circulating And Fixed Capital.

§ 1. Fixed and Circulating Capital.

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 at least not the same
service, nor to the same sort of production. Such, for example, is the
portion of capital which consists of materials. 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 is paid 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 this portion of capital requires to be
constantly renewed by the sale of 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 by a single use. To this class belong buildings,
machinery, and all or most things known by the name of implements or
tools. The durability of some of these is considerable, and their function
as productive instruments is prolonged through many repetitions of the
productive operation. In this class must likewise be included capital sunk
(as the expression is) in permanent 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 a mine,
for example; of cutting canals, of making roads or docks. Other examples
might be added, but these are sufficient. Capital which exists in any of
these durable shapes, and the return to which 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, and are 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, like a machine, to be made again, unless purposely
destroyed. The most permanent of all kinds of fixed capital is that
employed in giving increased productiveness to a natural agent, such as

To return to the theoretical distinction between fixed and circulating
capital. Since all wealth which is destined to be employed for
reproduction comes within the designation of capital, there are parts of
capital which do not agree with the definition of either species of it;
for instance, the stock of finished goods which a manufacturer or dealer
at any time possesses unsold in his warehouses. But this, though capital
as to its destination, is not yet capital in actual exercise; it is not
engaged in production, but has first to be sold or exchanged, that is,
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.

§ 2. Increase of Fixed Capital, when, at the Expense of 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 produce of the country.
Circulating capital being destroyed as such, the result of a single use
must be a reproduction equal to the whole amount 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 from the product of that use. The machine answers the
purpose of its owner if it brings in, during each interval of time, enough
to cover 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 the machine.

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 is true, 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, those
    industries 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 to enter the
    extractive industries.

The argument relied on by most of those who contend that machinery can
never be injurious to the laboring-class is, that by cheapening production
it creates such an increased demand for 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 inventions of Hargreaves and Arkwright, which shows
that, besides the enormous fixed capital now embarked in the manufacture,
it also 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 consequent on the improvements, but by drafts on
the general capital of the community, what better are the laboring-classes
for the mere transfer?

    There is a machine used for sizing the cotton yarn to prepare it
    for weaving, by which it is dried over a steam cylinder, the wages
    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 was invented.

All attempts to make out that the laboring-classes as a collective body
_can not_ suffer temporarily by the introduction of 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 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 them to augment their
consumption of others, thereby increasing the demand for other kinds of
labor. This is plausible, but, as was shown in the last chapter, involves
a fallacy; demand for commodities being a totally different thing from
demand for labor. It is true, the consumers have now additional means of
buying 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 some from other

    If the improvement has lowered the cost of production, it has
    often required less capital (as well as less labor) to produce the
    same quantity of goods; or, what is the same thing, an increased
    product with the same capital.

§ 3. —This seldom, if ever, occurs.

Nevertheless, I do not believe that, as things are actually transacted,
improvements in production are often, if ever, injurious, even
temporarily, to the laboring-classes in the aggregate. They would be so if
they took place suddenly to a great amount, because much of the capital
sunk must necessarily in that 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 capital
from actual production, but are made by the employment of the annual
increase. I doubt if there would be found a single example of a great
increase of fixed capital, at a time and place where circulating capital
was not rapidly increasing likewise.

    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 greater number of persons to be employed, as will
    be seen by the following comparison of 1860 with 1880 taken from
    the last census returns. (Compendium, 1880, pp. 928, 930.)

       Number of         Capital        Average     Total amount
       establishments.   (Thousands).   number of   paid in
                                        hands       wages during
                                        employed.   the year.
1860           140,433     $1,009,855   1,311,246   $378,878,966
1880           253,852      2,790,272   2,732,595    947,953,795

    “A hundred years ago, one person in every family of five or six
    must have been absolutely needed to spin and weave by hand 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 both to the
accumulation of capital and to the increase of production from the land,
which limits once attained, all further increase of produce must stop; but
that improvements in production, whatever may be their other effects, tend
to throw one or both of these 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 state of society, will hereafter be seen to be conclusive.(113)

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 another advantage, and] consists
in lessening the physical requirements of 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 is generally
    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 the quality and
    fiber of wool depend upon the soil and climate where the sheep are
    pastured. When Ohio sheep are transferred to 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 of climatic conditions is quite different
    from that of another set, and is used by the manufacturers for
    different purposes.

In hot regions, mankind can exist in comfort with less perfect housing,
less clothing; fuel, that absolute necessary of life in cold climates,
they can almost dispense with, except for industrial uses. They also
require less aliment. Among natural advantages, besides soil and climate,
must be mentioned abundance of mineral productions, in convenient
situations, and capable of being worked with moderate labor. Such are the
coal-fields of Great Britain, which do so much to compensate its
inhabitants for the disadvantages of climate; and the scarcely inferior
resource possessed by this country and the United States, in a 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 accompanied with 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

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 habitual energy. The third element which
determines the productiveness of 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 their knowledge of
the arts of life is self-evident, and that any progress in those arts, any
improved application of the objects or powers of nature to industrial
uses, enables the same quantity and intensity of labor to raise a greater
produce. One principal department of these improvements consists in the
invention and use of tools and machinery.(114)

The deficiency of practical good sense, which renders the majority of the
laboring-class such bad calculators—which makes, for instance, their
domestic economy so improvident, lax, and irregular—must disqualify them
for any but a low grade of 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 the effects
of intemperance upon their bodily and mental faculties, and of flighty,
unsteady habits upon the energy and continuity of their work (points so
easily understood as not to require being insisted upon), it is well
worthy of meditation how much of the aggregate effect of their labor
depends on their trustworthiness.

Among the secondary causes which determine the productiveness of
productive agents, the most important is Security. 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 the productiveness
of labor, we have left one untouched, which is co-operation, or the
combined action of numbers. Of this great aid to production, a single
department, known by the name of Division of Labor, has engaged a large
share of the attention 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 of much hay or
corn during a short period of fine weather, in draining a large extent of
land during the short season when such 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 whole of
the road shall always be kept in good order: in all these simple
operations, and thousands more, it is absolutely necessary that many
persons should work together, at the same time, in the same place, and in
the same way. [But] in the present state of society, the breeding and
feeding of sheep is the occupation of one set of people; dressing the wool
to prepare it for the spinner is that of another; spinning it into thread,
of a third; weaving the thread 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 number of families, all employed
precisely in the same manner; each family 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 are no 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 of
subsistence, there would be, no doubt, some kind of domestic manufactures;
clothing for the family might, perhaps, be spun and woven within it, by
the labor, probably, of the women (a first step 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 the seasons), coarse clothing, and very imperfect
lodging, it would be scarcely possible that the family should produce
anything more.

Suppose that a company of artificers, provided with tools, and with food
sufficient to maintain them for a year, arrive in 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 them
for 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 their
arrival has enriched the settlement, not only by the manufactured articles
which they produce, but by the food which would not have 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 for commodities does not constitute
employment for labor. The labor of 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 to
call their labor into increased vigor and efficiency; to stimulate them,
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 trade in agricultural produce to
supply a population elsewhere. I use the phrase “town population” for
shortness, to imply a population non-agricultural.

It is found that the productive power of labor is increased by carrying
the separation further and further; by breaking down more and more every
process of industry into parts, so that each laborer shall confine himself
to an ever smaller number of simple operations. And thus, in time, arise
those remarkable cases of what is called the division of labor, with which
all readers on subjects of this nature are familiar. Adam Smith’s
illustration from pin-making, though so well known, is so much to the
point that I will venture once more to transcribe it: “The business of
making 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 the head; 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 have seen 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
forty-eight 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 if they had all wrought
separately and independently, and without any of them having been educated
to this peculiar business, they certainly could not each of them have made
twenty, perhaps not one pin in a day.”

§ 3. Advantages of Division of Labor.

The causes of the increased efficiency given to labor by the division of
employments are some of them too familiar to require 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, the
invention of a great number of machines which facilitate and abridge
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 follow that 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 as of 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 music at 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 rapidity and facility acquired by
repetition. In simpler manual operations the effect is, of course, still
sooner produced.

(2.) The second advantage enumerated by Adam Smith as arising 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
cultivates a small farm, must lose a good deal of time in passing from his
loom to the field, and from the field to his loom. When the two trades can
be carried on in the same workhouse, the loss 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 no
weight; but I think there are counter-considerations which are overlooked.
If one kind of muscular or mental labor is different from another, for
that very reason it is to some extent a rest from that other; and if the
greatest vigor is not at once obtained in the second occupation, neither
could the first have been indefinitely prolonged without some relaxation
of energy. It is a matter of common experience that a change of occupation
will often afford relief where complete repose would otherwise be
necessary, and that a person can work many more hours without fatigue at a
succession of occupations, than if confined during the whole time to
one.(116) Different occupations employ different muscles, or different
energies of the mind, some of which rest and are refreshed while others
work. Bodily labor itself rests from mental, and conversely. The variety
itself has an invigorating effect on what, for want of a more
philosophical appellation, we must term the animal spirits—so important to
the efficiency of all work not mechanical, and not unimportant even to

(3.) The third advantage attributed by Adam Smith to the division 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 to that 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 the
    screw-propeller. A fancy-goods shopkeeper is one of the most
    enterprising experimentalists in agriculture. The most remarkable
    architectural design of our day has been furnished by a gardener.
    The first person who supplied London with water was a goldsmith.
    The first extensive maker of English roads was a blind man, bred
    to no trade. The father of English inland navigation was a duke,
    and his engineer was a millwright. The first great builder of iron
    bridges was a stone-mason, and the greatest railway engineer
    commenced his life as a colliery engineer.”(117)

(4.) The greatest advantage (next to the dexterity of the workmen) 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 of the same series of operations require unequal degrees
of skill and bodily strength; and those who have skill enough for the most
difficult, or strength enough for the hardest parts of the labor, are made
much more useful by being employed solely in them; the operations 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 have remarked, is
limited by the extent of the market. If, by the separation of pin-making
into ten distinct employments, forty-eight thousand pins can be made in a
day, this separation will only be advisable if the number of accessible
consumers is such as to require, every day, something like forty-eight
thousand pins. If there is only a demand for twenty-four thousand, the
division of labor can only be advantageously carried to the extent which
will every day produce that smaller number. The increase of the general
riches of the world, when accompanied with freedom of commercial
intercourse, improvements in navigation, and inland communication by
roads, canals, or railways, tends to give increased productiveness to the
labor of every nation in particular, by enabling each locality to supply
with its special products so much larger a market that a great extension
of the division of labor in their production is an ordinary consequence.
The division of labor is also limited, in many cases, by the nature of the
employment. Agriculture, for example, is not susceptible of so great a
division of occupations as many branches of manufactures, because its
different operations can not possibly be simultaneous.

    (5.) “In the examples given above the advantage obtained was
    derived 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 kind which, in
    order to their effective performance, call for special capacities
    in the workman, or special natural resources in the scene of
    operation. There would be a manifest waste of 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 established on some site which offered
    greater facilities to an industry of another sort, a waste,
    analogous in character, would be incurred. 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 those engaged in them, or in any of the localities in
    which they are respectively established, there are others which
    demand for their effective performance special personal
    qualifications and special local conditions; and the general
    effectiveness of productive industry will, other things being
    equal, be proportioned to the completeness with which the
    adaptation is accomplished between occupation on the one hand and
    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 that many
laborers should combine, the scale of the enterprise must be such as to
bring many laborers together, and the capital must be large enough to
maintain them. Still more needful is this when 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 carried on 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 take as an example a
set of operations which we are accustomed to see 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 subsidiary arrangements for collecting the
letters from the different offices and redistributing them. To this must
be added the much greater number of superior officers who would be
required to check and control the subordinates, implying not only a
greater cost in salaries 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 a large scale
preponderate in any particular case over the more watchful attention and
greater regard to minor gains and losses usually found in small
establishments, can be ascertained, in a 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 of labor; 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, and part of the
laborers in consequence lose their employment, the capital which
maintained and employed them is also set at liberty, and the general
produce of the country is increased by some other application of their

A considerable part of the saving of labor effected by substituting the
large system of production for the small, is the 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
will probably require the whole attention of the person conducting it,
sufficiently, at least, to hinder his time or thoughts from being
disposable for anything else; while a single manufacturer possessing a
capital equal to the sum of theirs, with ten or a dozen clerks, could
conduct the whole of their amount of business, and have leisure, too, for
other occupations.

Production on a large scale is greatly promoted by the practice of forming
a large capital by the combination of many small contributions; or, in
other words, by the formation of stock companies. The advantages of the
principle are important, [since] (1) many undertakings require an amount
of capital beyond 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, and is 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 one of 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
qualifications of the directing head. The stimulus of individual interest
is some security for exertion, but exertion is of little avail if the
intelligence exerted is of an inferior order, which it must necessarily 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 of candidates superior to the common
average, it is possible to select for the general management, and for all
the skilled employments of a subordinate kind, persons of a degree of
acquirement and cultivated intelligence which more than compensates for
their inferior interest in the result. It must be further remarked that it
is not a necessary consequence of joint-stock management that 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 with the interest of their employers, by giving them
part of their remuneration 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 when a 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, the widest
diffusion of commercial confidence and enterprise, the greatest annual
increase of capital, and the greatest number of 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 by limiting the employment of skilled agency to cases where
skill is required; and partly, no doubt, by the saving of labor arising
from 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 a number 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 a monopoly, 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 not to compete. As Mr. Mill says
    in regard to parallel railroads: “No one can desire to see the
    enormous waste of capital and land (not to speak of increased
    nuisance) involved in the construction 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 short time would probably be amalgamated.” The actual
    tendency of charges to diminish on the railways, before the matter
    of parallel railways was suggested is clearly seen by reference to
    Chart V (p. 137).

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, and Land.

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, the produce of
industry has usually tended to increase; stimulated not only by the desire
of the producers to augment their means of 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 products of labor, the term natural agents
all those which are not. The increase of production, therefore, depends on
the properties of these 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 which a single plant
will produce in one year the germs of a thousand; if only two come to
maturity, in fourteen years the two will have multiplied to sixteen
thousand and more. It is but a moderate case of fecundity in animals to be
capable of quadrupling their numbers in a single year; if they only do as
much in half a century, ten thousand will have swelled within 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

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.   Population.   Food.
    25          11 mills       x
    25          22 mills      2x
    25          44 mills      3x
    25          88 mills      4x
    25         176 mills      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 as much
    as _x_ (the subsistence of eleven millions) by additional
    application of another equal quantity of labor on the same land in
    each period, then at the end of one hundred years there would be
    the disproportion of one hundred and seventy-six millions of
    people, with subsistence for only fifty-five millions. Of course,
    this is prevented either by checking 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 practically no
    increase of population. It is stated that the white population of
    the United States between 1790 and 1840 increased 400.4 per cent,
    deducting immigration. The extraordinary advance of population
    with us, where subsistence is easily attainable, is to be seen in
    the chart on the next page (No. III), which shows 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 parts of our country, as shown by the two charts
    (frontispieces), which represent to the eye by heavier colors the
    areas of the more densely settled districts in 1830 and in 1880.


       Chart III: Population of European Countries, XIXth Century.

§ 3. By what Checks the Increase of Population is Practically Limited.

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 to mere animal instincts; and
they do not, therefore, propagate like swine, 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 the
    tenants lived so long were the new-comers long kept out of a

In proportion as mankind rise above the condition of the beast, population
is restrained by the fear of want, rather than by want itself. Even where
there is no question of starvation, many are similarly acted upon by the
apprehension of losing what have come 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 more than maintaining their circumstances—of improving them; but
such a desire is rarely found, or rarely has that effect, in the
laboring-classes. If they can bring up a family as they were themselves
brought up, even the prudent among them are usually satisfied. Too often
they do not think even of that, but rely on fortune, or on the resources
to be found in legal or voluntary charity.


           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” of Malthus.
    Mr. Bowen(119) 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 of the whole world
    prevents the necessity of considering the pressure of population
    upon subsistence as an actuality now or in the future. This,
    however, does not deny the existence of Malthus’s principles, but
    opposes them only on the methods of their action. Mr.
    Rickards(120) holds that man’s food—as, e.g., wheat—has the power
    to increase geometrically faster than man; but he omits to
    consider that for the growth of this food land is demanded; that
    land is not capable of such geometrical increase; 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 from our prairies, removes the previous pressure of
    population on subsistence. No believer in the Malthusian doctrine
    is so absurd as to hold that the growth of population actually
    exceeds subsistence, but that there is a “constant _tendency_ in
    all 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 faster than
    population. It is as if a block of wood on the floor were acted on
    by two opposing forces, one tending to move it forward, one
    backward: if it moves backward, that does not prove the absence of
    any force working to move it forward, but only that the other
    force is the stronger of the two, and that the 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 the large 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 and where it is less burdensome to have large
    families, there is no question as to their fertility.(123)

(1.) In a very backward state of society, like that of Europe in the
middle ages, and many parts of Asia at present, population is kept down by
actual starvation. The starvation does not take place in ordinary years,
but in seasons of scarcity, which in those states 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 increase
is kept within bounds, not by excess of deaths, but by limitation of
births.(124) The limitation is brought about in various ways. In some
countries, it is the result of prudent or conscientious self-restraint.
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 their children; 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 have the 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 last century, the growth of population was very effectually repressed
by the difficulty of obtaining a cottage to live in. It was the custom for
unmarried laborers to lodge and board with their employers; 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, rendered land-owners averse to promote marriage. About
the end of the century, the great demand for men in war and manufactures
made it be thought a patriotic thing to encourage population: and about
the same time the growing inclination of farmers to live like rich people,
favored as it was by a long period of high prices, made them 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 to build.

It is but rarely that improvements in the condition of the
laboring-classes do anything more than give a temporary margin, 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 comfortable living, they can be taught to make
a better use of favorable circumstances, nothing permanent can be done for
them; the most promising schemes end only in having a more numerous but
not a happier people. There is no doubt that [the standard] is gradually,
though slowly, rising in the more advanced countries of Western
Europe.(125) Subsistence and employment in England have never increased
more rapidly than in the last forty years, but every census since 1821
showed a smaller proportional increase of population than that of the
period preceding; and the produce of 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 has checked the
    thoughtless increase of numbers. On his few hectares, the French
    peasant sees in the size of his farm and the 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 of
    land in other parts of the world, but on this particular property
    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 all an 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).

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

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

The requisites of production being labor, capital, and land, it has been
seen from the preceding chapter that the impediments to the increase of
production do not arise from the first of these elements. But production
has other requisites, and, of these, the one 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 comes in [although it is not to be supposed that capital consists
wholly of food]. We have next, therefore, to inquire into the conditions
of 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 abstinence from
present consumption for the sake of a future good, the increase of capital
must depend upon two things—the amount of the fund from which saving can
be made, and the strength of the dispositions which prompt to it.

(1.) The fund from which saving can be made is the surplus of the produce
of labor, after supplying the necessaries of life to all concerned in the
production (including those employed in replacing 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
distinguished from the necessaries of the producers, are provided; it is
the fund 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 the
    laborer can be saved. When it is considered how enormous a sum is
    spent by the working-classes in drink alone (and also in the great
    reserves of the Trades-Unions collected for purposes of strikes),
    it is indisputable that the laborers have the margin from which
    savings can be made, and by which they themselves may become
    capitalists. The great accumulations in the savings-banks by small
    depositors in the United States also show somewhat how much is
    actually saved. In 1882-1883 there were 2,876,438 persons who had
    deposited in the savings-banks of the United States
    $1,024,856,787, with an 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_ be saved
    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, is capable 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.

§ 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 from savings. With
the same pecuniary inducement, the inclination is very different, in
different persons, and in different communities.

(2.) All accumulation involves the sacrifice of a present, for the sake of
a future good.

    This is the fundamental motive underlying the effective desire of
    accumulation, and is far more important than any other. It is, in
    short, the test of civilization. In order to induce the
    laboring-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 to
    political economy.

In weighing the future against the present, the uncertainty of 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. Thus a healthy climate or occupation, by increasing the
probability of life, 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 and in 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 and pestilence have always waste and luxury among the
other evils that follow in their train. For similar reasons, whatever
gives security to the affairs of the community is favorable to the
strength of this principle. In this respect the general prevalence of 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 parts of
    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 and order 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 persistent disregard of life and property. A rather
    startling confirmation of 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 old
    slave _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-born
    inhabitants 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 less safe, or the
vicissitudes ruinous to fortunes are more frequent and severe, fewer
persons will save at all, and, of those who do, many will require the
inducement of a higher rate of profit on capital to make them prefer a
doubtful future to the temptation of present enjoyment.

In the circumstances, for example, of a hunting tribe, “man may 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 a want of the motives exciting to provide
for the needs of futurity through means of the abilities of the present,
there is a want of the habits of perception and action, leading to a
constant connection in the mind of those distant points, and of the series
of events serving to unite them. Even, therefore, if motives be awakened
capable of producing the exertion necessary to effect this 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 this Desire.

For instance: “Upon the banks of the St. Lawrence there are several little
Indian villages. The cleared land is rarely, I may almost say never,
cultivated, nor are any inroads made in the forest 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 in potatoes 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 is immediate. It is evidently
not the necessary labor that is the obstacle to more extended culture, but
the distant return from that labor. I am assured, indeed, that among some
of the more remote tribes, the labor thus expended much exceeds that given
by the whites. On the Indian, succeeding years are too distant to make
sufficient impression; though, to obtain what labor may bring about in the
course of a few months, he toils even more assiduously than the white

This view of things is confirmed by the experience of the Jesuits, in
their interesting efforts to civilize the Indians of Paraguay. The real
difficulty was the improvidence of the people; 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,
their indolent 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 deserves attention. “Durability is one of
the chief qualities, marking a high degree of the effective desire of
accumulation. The testimony of 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 plastered
with earth; the roofs, of reeds fastened to laths. A greater degree of
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, 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 of bearing 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 than exists in
the empire. The amount of self-denial would seem to be small. It is their
great deficiency in forethought and frugality in this respect which is the
cause of the scarcities and famines that frequently occur.”

That it is defect of providence, not defect of industry, that limits
production among the Chinese, is still more obvious than in 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,” it is well known that “the great progress
which has been made in the knowledge of the arts suited to the nature of
the country and the wants of its inhabitants” makes industry energetic and
effective. “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. Labor in this way draws from the materials
on which it acts very speedy returns. Nothing can exceed the luxuriance of
vegetation when the quickening powers of a genial sun are ministered to by
a rich soil 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 them tillable.”

When a country has carried production as far as in the existing state of
knowledge it can be carried with an amount of return corresponding to the
average strength of the effective desire of accumulation in that country,
it has reached what is called the stationary state; the state in which no
further addition will be made to capital, unless there takes place either
some improvement in the arts of production, or an increase in the strength
of the desire to accumulate. In the stationary state, though capital does
not on the whole increase, some persons grow richer and others poorer.
Those whose degree of providence is below the usual standard become
impoverished, their capital perishes, and makes room for the savings of
those whose effective desire of accumulation exceeds the average. These
become the natural purchasers of the lands, manufactories, and other
instruments of production owned by their less provident countrymen.

In China, if that country has really attained, as it is supposed to have
done, the stationary state, accumulation has stopped when the returns to
capital are still as high as is indicated by a rate of interest legally
twelve per cent, and practically varying (it is 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 to
borrow at two per cent, and private individuals, on good security, at

§ 4. Examples of Excess of this Desire.

In [the United States and] the more prosperous countries of Europe, there
are to be found abundance of prodigals: still, in 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
so strong 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 amount into evidence.

There are many circumstances which, in England, give a peculiar force to
the accumulating propensity. The long exemption of the country from the
ravages of war and the far earlier period than elsewhere at which property
was secure from military violence or arbitrary spoliation have produced a
long-standing and hereditary confidence in the safety of funds when
trusted out of the owner’s hands, which in most other countries is of much
more recent origin, and less firmly established.

    The growth of deposit-banking in Great Britain, therefore,
    advances with enormous strides, while in Continental countries it
    makes very little headway. The disturbed condition of the country
    in France, owing to wars, leads the thrifty to hoard instead of
    depositing their savings. But in the United States the same growth
    is seen as among the English. The net deposits of the national
    banks of the United States in 1871 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
    savings-banks 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 in Europe 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 States than of England,
    for the barriers raised against the movement from lower to higher
    social classes in the latter country are non-existent here, and
    consequently there is more stimulus toward acquiring the means of
    bettering a man’s social 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 direction of manufactures and commerce; into
supplying their wants and gratifying their ambition by producing and
saving, rather than by appropriating what has been produced and saved.
Much also depended on the better political institutions of this country,
which, by the scope they have allowed to individual freedom of 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 and potent stimulus to the desire of acquiring
wealth. The earlier decline of feudalism [in England] having removed or
much weakened invidious distinctions between the originally trading
classes and those who had been accustomed to despise them, and a polity
having grown up which made wealth the real source of political influence,
its acquisition was invested with a factitious value independent of its
intrinsic utility. And, inasmuch as to be rich without industry has always
hitherto constituted a step in the 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 long time past,
and now in most other countries in Europe, the second requisite of
increased production, increase of capital, shows no tendency to become
deficient. So far as that element is concerned, production is susceptible
of an increase without any assignable bounds. The limitation to
production, not consisting in any necessary limit to the increase of the
other two elements, labor and 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.

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, and capital, 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 capable of being raised on any
given piece of land is not indefinite. This limited quantity of land and
limited productiveness of it are the real limits to the increase of

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 of stopping it entirely. We
may rather compare it to a highly elastic and extensible band, which is
hardly ever so violently stretched that it could not possibly be stretched
any more, yet the pressure of 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 of
agriculture—as soon, in fact, as mankind have applied themselves to
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, by increasing the
labor, the produce is not increased in an equal degree; doubling the labor
does not double the produce; or, to express the same thing in other words,
every increase of produce is obtained by a more than proportional increase
in the application of labor to the land. This general law of agricultural
industry is the most important proposition in political economy. Were the
law different, nearly all the phenomena of the production and distribution
of wealth would be other than they are.

    It is not generally considered that in the United States, where in
    many sparsely settled parts of the country new land is constantly
    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, the produce 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 proportional amount of labor for growing the produce,
the other for carrying it to market. If the land A yields a thousand
quarters of wheat to a given outlay in wages, manure, etc., and, in order
to raise another thousand, 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 a less 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 be plowed or
harrowed twice instead of once, or three times instead 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 the soil more completely pulverized; it
might be oftener or more thoroughly 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 the soil.

    The example of market-gardens in the vicinity of great cities and
    towns shows how the intensive culture permits an increase of 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 of Dakota. New England and New
    Jersey farms, generally speaking, no longer attempt the culture of
    grains, but (when driven out of that culture by the great railway
    lines which have opened up the West) they have arranged themselves
    in a scale 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, and therefore of price. If
the additional demand could continue to be supplied from the superior
lands, by applying additional labor and 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 the whole market. Lands of a lower degree of fertility
or in a more remote situation might indeed be cultivated by their
proprietors, 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 an
investment, is a proof that cultivation on the more eligible lands has
reached a point beyond which any greater application of labor and capital
would yield, at the best, no greater return than can be obtained 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 that which 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, when food is wanted, labor will always be applied to
producing it in preference to anything else. But this labor is more
effective for its end by being applied to fresh soil than if it were
employed in bringing the soil already occupied into higher cultivation.

    The Western movement of what might be called the “wheat-center” is
    quite perceptible. Until recently Minnesota has been a 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 move onward to newer lands, and to
    sell the land to cultivators of a different class (of fruit and
    varied products), who produce for a denser population. So that (in
    1884) Dakota, instead 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 rise of 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 for great 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 the land 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
portion of the labor and capital already employed. It would sometimes be
much more amply remunerated. This could not be, if capital always 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 a diminishing
ratio to the increase in the labor employed, is, as we have said (allowing
for occasional and temporary exceptions), the universal law of
agricultural industry. This principle, however, has been denied. So much
so, indeed, that (it is affirmed) the 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

    The law of diminishing returns is the physical fact upon which the
    economic doctrine of rent is based, and requires careful
    attention. Carey asserts, instead, that there is a law of
    increasing productiveness, since, as men grow in numbers and
    intelligence, there arises an ability to get more from the
    soil.(132) Some objectors even deny that different grades of land
    are cultivated, and that there is no need of taking inferior soils
    into cultivation. If this were true, why would not one half an
    acre of land be as good as a whole State? Johnston(133) 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 not yield good first
    crops. Thus that which is poor land for a poor 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 old series, some going out of cultivation,
    some remaining, and some of the new lands entering the list. The
    result is a new series of grades better suited to satisfy the
    wants of men.

This, however, does not prove that the law of which we have been speaking
does not exist, but only that there is some antagonizing principle at
work, capable for a time of making head against the law. Such an agency
there is, in habitual antagonism to the law of diminishing return from
land; and to the consideration of this we shall now proceed. It is no
other than the progress of civilization. The most obvious [part of it] is
the progress of agricultural knowledge, skill, and invention. Improved
processes of agriculture are of two kinds: (1) some enable the land to
yield a greater absolute produce, without an equivalent increase of labor;
(2) others have not the power of increasing the produce, but have that of
diminishing the labor and expense by which it is obtained. (1.) Among the
first are to be reckoned the disuse of fallows, by means of the rotation
of crops; and the introduction of new articles of cultivation capable of
entering advantageously into the rotation. The change made in agriculture
toward the close of the last century, by the introduction of
turnip-husbandry, is spoken of as amounting to a revolution. Next in order
comes the introduction of new articles of food, containing a greater
amount of sustenance, like the potato, or more productive species or
varieties of the same plant, such as the Swedish turnip. In the same class
of improvements must be placed a better knowledge of the properties of
manures, and of the most effectual modes of applying them; the
introduction of new and more powerful fertilizing agents, such as guano,
and the conversion to the same purpose of substances previously wasted;
inventions like subsoil-plowing or tile-draining, by which the produce of
some kinds of 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, those which diminish labor, but
without increasing the capacity of the land 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
equally calculated with the former to counteract the tendency in the cost
of production of agricultural produce, to rise with the progress 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 which food is the
    chief. The amount of tonnage carried is enormous; and the cost of
    this service to the producers and consumers of the United States
    is a question of very great magnitude. The serious reduction in
    the cost of transportation on the railways will be a surprise to
    all who have not followed the matter 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
    less to move the main articles of immediate necessity. Had the
    charge 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 more than the charge
    actually made, owing to the reductions by the railways. It seems,
    however, that this process of reduction culminated about 1879. In
    order to show the facts of this process, note the changes in the
    following chart, No. V. The railways of the State of New York are
    taken, but the same is also true of those of Ohio:

    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 each Year, Compiled by
    Months, in Gold; Compared Graphically with the Decrease in the
    Charge per Ton per Mile, on all the Railroads of the State of New
    York, during the Same Period._

    Year.   Price in      Charge for     Decrease in    Decrease in
            gold of       carrying one   the railroad   the profits
            staple farm   ton one        expenses per   of the
            products.     mile.          ton. (Cents)   railroads
            (Dollars)     (Cents)                       for carrying
                                                        one ton.
    1870         776.02         1.7016         1.1471          .5545
    1871         735.33         1.7005         1.1450          .5555
    1872         675.92         1.6645         1.1490          .5155
    1873         662.50         1.6000         1.0864          .5136
    1874         748.54         1.4480          .9730          .4750
    1875         696.40         1.3039          .9587          .3452
    1876         651.74         1.1604          .8561          .3043
    1877         751.95         1.0590          .7740          .2850
    1878         569.81          .9994          .6900          .3094
    1879         568.34          .8082          .5847          .2295
    1880         631.32          .9220          .6030          .3190
    1881         703.10          .8390          .5880          .2510
    1882         776.12          .8170          .6010          .2160
    1883         662.11          .8990          .6490          .2500

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

    Tons moved 1 m. in 1883 by    9,286,216,628
    railroads of N.Y.
    At rate of 1855, would cost    $303,659,283
    Actual cost in 1883              83,464,919
    Saving to the State            $220,194,364

    The explanation of this reduced cost is given by Mr. Edward
    Atkinson(135) as (1) the competition of water-ways, (2) the
    competition of one railway with another, and (3) the competition
    of other countries, which forces our railways to try to lay our
    staple products down in foreign markets at a price which will
    warrant continued shipment. Besides these reasons, much ought also
    (4) to be assigned to the progress of 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 for large
    investments of a rapidly growing capital. The building of
    railways, however, has been going on, at some times with greater
    speed than at others. Instead of 33,908 miles of railways 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 be seen 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 (Book IV, Chap. III), which
    gives the total grain-crops of the United States, it will be seen
    that since 1879, although our population has increased from 12-½
    per cent to 14 per cent, our grain-crops only 5 per cent, yet our
    railway mileage has increased 40 per cent.

    The extent to which the United States has carried
    railway-building, as compared with European countries, although we
    have a very much greater area, is distinctly shown by Chart No.
    VII. This application of one form of improvement to oppose 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, in other words,
    that we have not yet felt the law of diminishing returns in some
    large districts.

Chart VI.

_Miles of Railroad in Operation on the 1st January in each Year, and the
Miles added in the Year Ensuing._

Year.   Miles of Railroad.   Miles added.
1865                33,908          1,177
1866                35,085          1,716
1867                36,801          2,449
1868                39,250          2,979
1869                42,229          4,615
1870                46,844          6,070
1871                52,914          7,379
1872                60,293          5,878
1873                66,171          4,107
1874                70,278          2,105
1875                72,383          1,713
1876                74,096          2,712
1877                76,808          2,281
1878                79,089          2,687
1879                81,776          4,721
1880                86,497          7,048
1881                93,545          9,789
1882               103,334         11,591
1883               114,925          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 serve to 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 or materials brought from beyond sea, a corresponding

§ 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 a given amount of food to be
obtained with a smaller expenditure of labor. A great improvement in the
process of smelting iron would tend to cheapen agricultural implements,
diminish the cost of 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 cost of production
of food. The same effect would follow from an 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 as a
very important discovery in agriculture would have done; and any great
improvement in the construction of corn-mills would have, in proportion, a
similar influence.

Those manufacturing improvements which can not be made instrumental to
facilitate, in any of its stages, the actual production of food, and
therefore do not help to counteract or retard the diminution of the
proportional return to labor from the soil, have, however, another effect,
which is practically equivalent. What they do not prevent, they yet, in
some degree, compensate for.(136)

Chart VII.

_Ratio of Miles of Railroad to the Areas of States and Countries—United
States and Europe. The relative proportion is 1 Mile Railroad to 4 Square
Miles of Area._

No.   Name.           Rank in Size.   Relative.
  1   Massachusetts              67          98
  2   Belgium                    62          96
  3   England and                29          88
  4   New Jersey                 62          81
  5   Connecticut                68          80
  6   Rhode Island               71          65
  7   Ohio                       44          60
  8   Illinois                   32          59
  9   Pennsylvania               40          55
 10   Delaware                   69          53
 11   Indiana                    50          52
 12   New Hampshire              65          45
 13   Switzerland                59          44
 14   New York                   39          41
 15   Iowa                       33          39
 16   German Empire               4          38
 17   Scotland                   52          37
 18   Maryland                   63          36
 19   Vermont                    64          35
 20   Ireland                    51          29
 21   Michigan                   31          28
 22   France                      5          27
 23   Denmark                    60          26
 24   Netherlands                57          25
 25   Missouri                   26          24
 26   Wisconsin                  34          23
 27   Austrian                    3          21
 28   Virginia                   45          19
 29   Italy                      13          18
 30   Georgia                    30          17
 31   Kansas                     22          16
 32   Kentucky                   46          15
 33   South                      49          14
 34   Tennessee                  42          14
 35   Minnesota                  21          13
 36   Alabama                    36          13
 37   West Virginia              55          12
 38   Roumania                   41          12
 39   North                      37          12
 40   Maine                      48          12
 41   Nebraska                   23          10
 42   Mississippi                38           9
 43   Spain                       6           9
 44   Portugal                   47           9
 45   Sweden                      7           9
 46   Arkansas                   35           8
 47   Louisiana                  43           8
 48   Colorado                   16           8
 49   California                  8           7
 50   Turkey                     27           7
 51   Texas                       2           7
 52   Utah                       20           6
 53   Florida                    28           6
 54   Dakota                      7           6
 55   Russia in                   1           5
 56   Nevada                     15           5
 57   Norway                     11           5
 58   Oregon                     18           4
 59   Bulgaria                   54           4
 60   New Mexico                 12           3
 61   Wyoming                    17           2
 62   Indian                     25           2
 63   Washington                 24           1
 64   Arizona                    14           1
 65   Idaho                      19           1
 66   Greece                     58           0
 67   Montana                    10           0
 68   Bosnia and                 53           0
 69   Servia                     56           0
 70   Eastern                    61           0
 71   Montenegro                 70           0
 72   Andorra                    72           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 from the land, the law of
diminishing return, must in the last resort be applicable to manufacturing
as well as to agricultural history. As population increases, and the power
of the land to yield increased produce is strained harder and harder, any
additional supply of material, as well as of food, must be obtained by a
more than proportionally 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 the whole labor worked up in
the commodity.

    Mr. Babbage(137) gives an interesting illustration of this
    principle. Bar-iron of the value of £1 became worth, when
    manufactured into—

    Slit-iron, for nails              1.10
    Natural steel                     1.42
    Horseshoes                        2.55
    Gun-barrels, ordinary             9.10
    Wood-saws                        14.28
    Scissors, best                  446.94
    Penknife-blades                 657.14
    Sword-handles, polished steel   972.82

    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 cost of the
    materials forms but a small portion of the cost of the

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 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 proportional
cost. This fact has manifested itself in the progressive fall of the
prices and values of almost every kind of manufactured goods during two
centuries past; a fall accelerated by the mechanical inventions of the
last seventy or eighty years, and susceptible of being prolonged and
extended beyond any limit which it would be safe to specify. The benefit
might even extend to the poorest class. The increased cheapness of
clothing and lodging might make up to them for the augmented cost of their

There is, thus, no possible improvement in the arts of production which
does not in one or another mode exercise an antagonistic influence to the
law of diminishing return to agricultural labor. Nor is it only industrial
improvements which have this effect. Improvements in government, and
almost every kind of moral and social advancement, operate in the same
manner. We may say the same of improvements in education. The intelligence
of the workman is a most important element in the productiveness of labor.
The carefulness, economy, and general trustworthiness of laborers are as
important as their intelligence. Friendly relations and a community of
interest and feeling 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, or
philanthropy, would qualify them to originate and promote the most
valuable improvements, both in the economical resources of their country
and in its institutions and customs.

§ 5. Law Holds True of Mining.

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 a more 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 labor and capital. As a
mine does not reproduce the coal or ore taken from it, not only are all
mines at last exhausted, but even when 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
keep them clear of water; the produce must be lifted from a greater depth,
or conveyed a greater distance. The law of diminishing return applies
therefore to mining in a still more unqualified sense than to agriculture;
but the antagonizing agency, that of improvements in production, also
applies in a still greater degree. Mining operations are more susceptible
of mechanical improvements than agricultural: the first great application
of the steam-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 all existing mines toward
exhaustion: this is, the discovery of new ones, equal or superior in

    Professor Jevons has applied this economic law to the industrial
    situation of England.(139) While explaining that the supply of
    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 future when the
    increased supply can be obtained only at a higher cost. When coal
    costs England as much as it does any other nation, then her
    exclusive industrial advantage will cease to exist. 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 of greater 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 series of 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. This law may, however, be suspended, or
temporarily controlled, by whatever adds to the general power of mankind
over nature, and especially by any extension of their knowledge, and their
consequent command, of the properties and powers of natural agents.

Chapter X. Consequences Of The Foregoing Laws.

§ 1. Remedies for Weakness of the Principle of Accumulation.

From the preceding exposition it appears that the limit to the increase of
production is twofold: from deficiency of capital, or of land. Production
comes to a pause, either because the effective desire of accumulation is
not sufficient to give rise to any further increase of capital, or
because, however disposed the possessors of surplus income may be to save
a portion of it, the limited 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 economically considered is an
increase of industry, and of the effective desire of accumulation. The
means are, first, a better government: more complete security of property;
moderate taxes, and freedom from arbitrary exaction under the name of
taxes; a more permanent and 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.

    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 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 of Population from Land.

But there are other countries, and England [and the United States are] 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 great a 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 to increase of production altogether, is a result
of the necessary and inherent conditions of production from the land.

    This, of course, is based on the supposition that no new lands,
    such as those of the United States, can be opened for cultivation.
    If there is no prohibition to the importation of cheaper 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, is there all the same, forever

In all countries which have passed beyond a very early stage in the
progress of agriculture, every increase in the demand for food, occasioned
by increased population, will always, unless there is a simultaneous
improvement in production, diminish the share which on a fair division
would fall to each individual. An 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 the same proportion. The population must either work harder or
eat less, or obtain their usual food by sacrificing a part of their other
customary comforts. Whenever this necessity is postponed, it is because
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 of
restraining population is not, as many persons believe, peculiar to a
condition of great inequality of property. A greater number of people 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 to over-population. An
unjust distribution of wealth does not even aggravate 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 new mouths 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 to allow 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 has a counteracting operation, and allows
of increased numbers without any deterioration, and even consistently with
a higher average of comfort. Improvement must here be understood in a wide
sense, including not only new industrial inventions, or an extended use of
those already known, but improvements in institutions, 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 been
    enormous, as already seen, but the increase of production has been
    still greater, owing to the fertility of our land, to improvements
    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 increase of population, so that it
    manifests itself in a larger average wealth to each inhabitant.

    Decades.   Valuation.   Per cent    Population.   Per cent    Per
                            of                        of          capital
                            increase.                 increase.   valuation.
    1800           $1,742          ..     5,308,483          ..         $328
    1810            2,382          37     7,239,881          36          329
    1820            3,734          57     9,633,882          33          386
    1830            4,328          16    12,866,020          34          336
    1840            6,124          41    17,069,453          33          359
    1850            8,800          44    23,191,876          36          379
    1860           16,160          84    31,443,321          35          514
    1870           30,068          86    38,558,371          23          780
    1880           40,000          33    50,155,783          30          798

If the productive powers of the country increase as rapidly as advancing
numbers call for an augmentation of produce, it is not necessary 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; or at all events this loss of power is compensated
by the increased efficiency with which, in the progress of improvement,
labor is employed 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 or slackened, 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.

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 have outstripped it, if that very augmentation
of return had not called forth an additional portion of the inherent power
of multiplication in the human species. During the twenty or thirty years
last elapsed, so rapid has been the extension of improved processes of
agriculture [in England], that even the land yields a greater produce in
proportion to the labor employed; the average price of corn had become
decidedly lower, even before the repeal of 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, or
even surpass, the actual increase of population, it assuredly never comes
up to the rate of increase of which population is capable: and nothing
could have prevented a general deterioration in the condition of the human
race, were it not that population has in fact been restrained. Had it been
restrained still more, and the same 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 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 not superseded by Free Trade in

When the growth of numbers outstrips the progress of improvement, and a
country is driven to obtain the means of subsistence on terms more and
more unfavorable, by the inability of 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 their rate
of increase. One of these expedients is the importation of food from
abroad. The other is emigration.

The admission of cheaper food from a foreign country is equivalent to an
agricultural invention by which food could be raised at a similarly
diminished cost at home. It equally increases the productive power of
labor. The return was before, so much food for so much labor employed in
the growth of food: the return is now, a greater quantity of food for the
same labor employed in producing cottons or hardware, or some other
commodity to be given in exchange for food. The one improvement, like the
other, throws back the decline of the productive power of labor 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, when a country draws its supply of
food from so wide a surface as the whole habitable globe, so little
impression can be produced on that great expanse by any increase of mouths
in one small corner of it that the inhabitants of the country may double
and treble their numbers without feeling the effect in any increased
tension of the springs of production, or any enhancement of the price of
food throughout the world. But in this calculation several things are

In the first place, the foreign regions from which corn can be imported 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 an increasing 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 be obtained 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, and those in which it is weak. In Australia and
the United States of America, the effective desire of accumulation is
strong; capital increases fast, and the production of food might be very
rapidly extended. But in such countries population also increases with
extraordinary rapidity. Their agriculture has to provide for their own
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 the labor and expense.

    The extraordinary resources of the United States are scarcely
    understood even by Americans. Chart No. XVIII (see Book IV, Chap.
    III) may give some idea of the agricultural possibilities of our
    land. It will be seen from this that the quantity of fertile land
    in but one of our States—Texas—is greater than that of

But the countries which have at the same time cheap food and great
industrial prosperity are few, being only those in which the arts of
civilized life have been transferred full-grown to a rich and uncultivated
soil. Among old countries, those which are able to export food, are able
only because their industry is in a very backward state, because capital,
and hence population, have never 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, whenever population
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 are willing to draw their food from any
accessible quarter that can afford 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 capacity of their land: I mean
Emigration, especially in the form of Colonization. Of this remedy the
efficacy as far as it goes is real, 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 the region
to be colonized is near at hand, and the habits and tastes of 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 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 of the
    natives of the State of New York. The greater or less frequency of
    natives of New York, residing in other States, is shown by
    different degrees of shading on the map. A large district westward
    as far as the Mississippi shows a density of 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 be anything else than the same
    as that for the larger movement from Europe to America.

There is no probability that even under the most enlightened arrangements
(in older countries) a permanent stream of emigration 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 made during the same short period in the arts of life,
tends to render living 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 necessity of
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 in this century. The United States has received
about one fourth of its 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.

Periods.        Numbers.
From        250,000(143)
1820-1830        151,824
1831-1840        599,125
1841-1850      1,713,251
1851-1860      2,598,214
1861-1870      2,491,451
1871-1880      2,812,191
1881-1883      2,061,745
Total         12,677,801

Of this number, 5,333,991 came from the British Isles, of which 3,367,624
were Irish.

There came 3,860,624 Germans, 593,021 Scandinavians, and 334,064 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 the migration 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 our shores. 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 colored map, Chart No. VIII, giving the
different densities of foreign-born population in different parts of the
Union. It seems almost certain that the general belief hitherto in the
insecurity of life and property in the old slave States has worked against
the material prosperity of that section.

The different ages of the native- and foreign-born inhabitants of the
United States may be seen from the accompanying diagrams(145) comparing
the aggregate population of the United States with the foreign-born. This
may profitably be compared with a similar diagram relating to the Chinese
in the United States (Book II, Chap. III, § 3).

Aggregate: 1870. The figures give the number of thousands of each sex.

Decade of Life.   Males.   Females.
              1      136        132
              2      115        114
              3       87         90
              4       62         63
              5       47         44
              6       31         27
              7       17         15
              8        7          7
              9        2          2

Foreign: 1870.

Decade of Life.   Males.   Females.
              1       24         23
              2       48         49
              3      128        114
              4      134        113
              5      107         84
              6       60         44
              7       27         23
              8        9          9
              9        2          2


Chapter I. Of Property.

§ 1. Individual Property and its opponents.

The laws and conditions of the Production of Wealth partake of 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 Wealth depends 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 in
different 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 modes of
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 institution, on which,
unless in some exceptional and very limited cases, the economical
arrangements of society have always rested, though in its secondary
features it has varied, and is liable to vary. I mean, of course, the
institution of individual property.

Private property, as an institution, did not owe its origin to any of
those considerations of utility which plead for the maintenance of it when
established. Enough is known of rude ages, both from history and from
analogous states of society in our own time, to show that tribunals (which
always precede laws) were originally established, not to determine rights,
but to repress violence and terminate quarrels. With this object chiefly
in view, they naturally enough gave legal effect to first occupancy, by
treating as the aggressor 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 a community unhampered by
any previous possession; a body of colonists, 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 injustice which obstruct the beneficial operation of the principle in
old society. Every full-grown man or woman, we must suppose, would be
secured in the unfettered use and disposal of his or her bodily 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, and the balance redressed by assigning to the less robust members
of 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 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
of production as the joint property of the community, and to carry on the
operations of industry on the common account. The direction of the labor
of the community would devolve upon a magistrate or magistrates, whom we
may suppose elected by the suffrages of the community, and whom we must
assume to be voluntarily obeyed by them. The division of the produce would
in like manner be a public act. The principle might either be that of
complete equality, or of apportionment to the necessities or deserts of
individuals, in whatever manner might be conformable to 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 of life and enjoyment, and (2) those
who admit inequality, but grounded on some principle, or supposed
principle, of justice or general expediency, and not, like so many of the
existing social inequalities, dependent on accident alone. The
characteristic name for this [first] economical system is Communism, a
word of Continental origin, only of late introduced into this country. The
word Socialism, which originated among the English Communists, and was
assumed by them as a name to designate their own doctrine, is now, on the
Continent, employed in a larger sense; not necessarily implying Communism,
or the entire 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 used in the
    distinct sense of a system which abolishes private property, and
    places the control of the capital, labor, and combined 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 also a term now used by
    German and French writers to describe an organization 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 of property and
equal distribution of the produce, that each person would be incessantly
occupied in evading his fair share of the work, 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 of society is now conducted. And though the “master’s eye,”
when the 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 the whole 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 a laborer 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 for himself and any number of
children, on the sole condition of willingness to work, prudential
restraint on the multiplication of mankind would be at an end, and
population would start forward at a rate which would reduce the community
through successive stages of increasing discomfort to actual starvation.
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 the mass would then cause (which now it
does not) immediate and unmistakable inconvenience to every individual in
the association; 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 labor of the
community among its members. There are many kinds of work, and by what
standard are they to be measured one against another? Who is to judge how
much cotton-spinning, or distributing goods from the stores, or
brick-laying, or chimney-sweeping, is equivalent to so much plowing?
Besides, even in the same kind of work, nominal equality of labor would be
so great a real inequality that the feeling of justice would revolt
against its being enforced. All persons are not equally fit for all labor;
and the same quantity of labor is an unequal burden on the weak and the
strong, the hardy and the delicate, the quick and the 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, of Communism, would be
but as dust in the balance. But, to make 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 of
private 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 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
abstinence of 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 render private 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 to that equitable principle, of proportion between
remuneration and exertion, on which, in every vindication of it that will
bear the light, 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 mass of 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 no poverty, even under the present social institutions:
and, these being 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 question of 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 human society.

If a conjecture may be hazarded, the decision will probably depend mainly
on one consideration, viz., which of the two systems is consistent with
the greatest amount of human liberty and spontaneity. It is yet to be
ascertained whether the communistic scheme would be consistent with that
multiform development of human nature, those manifold unlikenesses, that
diversity of tastes and talents, and variety of intellectual points of
view, which not only form a great part of the interest of human life, but,
by bringing intellects into stimulating collision and by presenting to
each innumerable notions that he would not have conceived 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 of
    socialists 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 the object
    of most of the socialistic organizations in the United States and
    Europe is to strive for the assumption by the state of the
    production and distribution of wealth.(147) At present the most
    active Socialists are to be found in Germany. The origin of this
    influence, however, is to be traced to France.(148) Louis
    Blanc,(149) in his “Organisation du Travail,” considers property
    the great scourge of society. The Government, he asserts, should
    regulate production; raise money to be appropriated without
    interest for creating state workshops, in which the workmen should
    elect their own overseers, and all receive the same wages; and the
    sums needed should be raised from the abolition of collateral
    inheritance. The important practical part of his scheme was that
    the great state workshops, aided by the Government, would make
    private competition in those industries impossible, and thus bring
    about the change from the private to the socialistic system.

    The founder of modern German socialism was Karl Marx,(150) and
    almost the only Socialist who pretended to economic knowledge. He
    aimed his attack on the present social system against the question
    of value, by asserting that the amount of labor necessary for the
    production of an article is the sole measure of its exchange
    value. It follows from this that the right of property in the
    article vests wholly in the laborer, while the capitalist, if he
    claims a share of the product, is nothing less than a robber. No
    just system, he avers, can properly exist so long as the rate of
    wages is fixed by free contract between the employer and laborer;
    therefore the only remedy is the nationalization of all the
    elements of production, land, tools, materials, and all existing
    appliances, which involves, of course, the destruction of the
    institution of private property. An obvious weakness in this
    scheme is the provision that the Government should determine what
    goods are to be produced, and that every one is bound to perform
    that work which is assigned by the state. In this there is no
    choice of work, and the tyranny of one master would be supplanted
    by the tyranny of a greater multiplex master in the officers of
    Government. Moreover, it can not be admitted that exchange value
    is determined by the quantity of labor alone. Every one knows that
    the result of ten days’ labor of a skilled watch-maker does not
    exchange for the result of ten 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 and
    superintendent also. In other words, he proposes to take away all
    the incentives to the acquirement or exercise of superior and
    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 made the
    instrument of a socialist propaganda under the leadership of
    Ferdinand Lassalle.(151) This active leader, in 1863, founded the
    German “Workingmen’s Union,” a year earlier than the
    “International(152) Association.” In 1869 Liebknecht and his
    friends established the “Social Democratic Workingmen’s Party,”
    which after some difficulties absorbed the followers of Lassalle
    in a congress at Gotha in 1875, and form the present 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. As
    general profitable labor can only be done by the human society,
    the whole product of labor belongs to society—i.e., to all its
    members—who have the same duties and the same right to work, each
    according to his reasonable wants.

    In the present society the means of work are the monopoly of the
    class of capitalists. The class of workingmen thus become
    dependent on them, and consequently are given over to all degrees
    of misery and servitude.

    In order to emancipate labor it is requisite that the means of
    work be transformed into the common property of society, that all
    production be regulated by associations, and that the entire
    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 free state 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 social and political inequality.

    The German Social Workingmen’s party, although first working
    within its national confines, is fully conscious of the
    international character of the general workingmen’s movement, and
    is resolved to fulfill all duties which it imposes on each
    workingman in order to realize the fraternity of all men.

    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 be supported by the
    state government, and under the control of the working-people. The
    productive associations are to be founded in such numbers that the
    social organization of the whole production can be effected by

    The German Social Workingmen’s party requires as the basis of
    state government:

    1. Universal, equal, direct, and secret suffrage, which, beginning
    with the twentieth year, obliges all citizens to vote in 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 and peace
    by the people.

    3. General capability of bearing arms; popular defense in place of
    standing armies.

    4. Abolition of all exceptional laws, especially those relating 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 education by 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 on realizing in the
    present state of society:

    1. The largest possible extension of political rights and freedom
    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, and in place of
    indirect taxes, which unequally burden the people.

    3. Unlimited right of combination.

    4. A normal working-day corresponding with the wants of 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 the workingmen; an
    effectual law guaranteeing the responsibility of employers.

    7. Regulation of prison-work.

    8. Unrestricted self-government of all banks established for the
    mutual assistance of workingmen.

    The above scheme also represents very well the character of the
    Socialist agitators in the United States, who are themselves
    chiefly foreigners, and have foreign conceptions of socialism. On
    this form of socialism it is interesting to have Mr. Mill’s later
    opinions(154) 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 a village 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 the more thoughtful and
philosophic Socialists generally. The other class (2) who are more a
product of the Continent than of Great 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 with this
view some of them avow as their purpose that the working-classes, or
somebody in their behalf, should take possession of all the property of
the country, and administer it for the general benefit. The aim of that is
to substitute the new rule for the old at a single stroke, and to exchange
the amount of good realized under the present system, and its large
possibilities of improvement, for a plunge without any preparation into
the most extreme form of the problem of carrying on the whole round of the
operations of social life without the motive power which has always
hitherto worked the social machinery. It must be acknowledged that those
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 and Socialistic.

[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-Simonian(155) scheme does not contemplate an equal, but an unequal
division of the produce; it does 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
suppose that one or a few human beings, howsoever selected, could, by
whatever machinery of subordinate agency, be qualified to adapt each
person’s work to his capacity, and proportion each person’s remuneration
to his merits, is a supposition almost too chimerical to be reasoned

The most skillfully combined, and with the greatest foresight of
objections, of all the forms of Socialism is that commonly known as
Fourierism.(157) This system does not contemplate the abolition of private
property, nor even of inheritance: on the contrary, it avowedly takes into
consideration, as an element in 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 their
labor on a district of about a square league in extent, under the guidance
of chiefs selected by themselves (the “phalanstery”). In the distribution
a certain minimum is first assigned for the subsistence of every member of
the community, whether capable or not of labor. The remainder of the
produce is shared in certain proportions, to be determined beforehand,
among the three 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 other joint-stock company, proportional
dividends. The claim of each person on the share of the produce
apportioned to talent is estimated 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 not of necessity be
expended or enjoyed in common; there would be separate _ménages_ for all
who preferred them, and no other community of living is contemplated than
that all the members of the association should reside in the same pile of
buildings; for saving 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 a single 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 and Nathaniel Hawthorne.

    There have been many smaller communities established in the United
    States, but it can not be said that they have been successful from
    the point of view either of numbers or material prosperity. The
    followers of Rapp, or the Harmonists, in Pennsylvania and Indiana;
    the Owenites,(158) in Indiana; the community of Zoar, in Ohio; the
    Inspirationists, in New York and Iowa; the Perfectionists, at
    Oneida and Wallingford—are all evidently suffering from the
    difficulties due to the absence of family life, from the
    increasing spirit of personal independence which carries away the
    younger members of the organizations,(159) and the want of that
    executive ability which distinguishes the successful manager in
    private enterprises.

§ 5.  The Socialist objections to the present order of Society examined.

“The attacks(160) on the present social order are vigorous and earnest,
but open to the charge of exaggeration.

“In the first place, it is unhappily true that the wages of ordinary
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, _une baisse 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
money or 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 by something 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 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 when it comes to be seen that the tendency to
over-population is a fact which Communism, as well as the existing order
of society, would have to deal with. However this may be, experience shows
that in the existing state of society the pressure of population on
subsistence, which is the principal cause of low wages, though a great, is
not an increasing evil; on the contrary, the progress of 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
improvement in the intelligence and prudence of the population. It is, of
course, 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 for Socialism; but it has no
just claim to be considered as the sole means of preventing the general
and growing degradation of the mass of mankind through the peculiar
tendency of poverty to produce over-population.

“Next, it must be observed that Socialists generally, and even the most
enlightened of them, have a very imperfect and one-sided 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 the buyers of labor and of commodities
compete with one another as well as the sellers; and that, if it is
competition which keeps the prices of labor and commodities as low as they
are, it is competition which keeps them from falling still lower. To meet
this 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 ordinary branches of
industry no one rich competitor has it in his 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 in which 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 this enables 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 the
laboring-classes, and diminishing, _pro tanto_, that waste of the
resources of the community so much complained of by Socialists, the
unnecessary multiplication of mere distributors, and of the various 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 other partisans of labor
against capital, relates to the proportion in which the produce of the
country is really shared and the amount of what is actually diverted from
those who produce it, to enrich other 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 he only 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, and might squander it if he chose, but
if he did he would not have the £2,000 a year also. For all personal
purposes they have the capital 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 small part only belongs to him as the owner of capital. The portion of
the produce which falls to capital merely as capital is measured by the
interest of money, since that is all that the owner of capital obtains
when he contributes to production nothing except the capital itself.

“The result of our review of the various difficulties of Socialism has led
us to the conclusion that the various schemes for managing the productive
resources of the country by public instead of private agency have a case
for a trial, and some of them may eventually establish their claims to
preference over the existing order of things, but that they are at present
workable only by the _élite_ of mankind, and have yet to prove their power
of training mankind at large to the state of improvement which they

§ 6. Property in land different from property in Movables.

It is next to be considered what is included in the idea of private
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 right to the exclusive
disposal of what he or she have produced by their own exertions, or
received either by gift or by fair agreement, 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
can produce by them, and to whatever he can get for them in a fair market:
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 of
inheritance, as distinguished from bequest, does not. That the property 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
have agreed in the opinion, that, if there are no heirs either in the
descending or in the ascending line, the property, in case of intestacy,
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 on him, 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 accumulated by 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 all from industry, or if there were any means of
discriminating what is 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;
the same person who has plowed and sown must be permitted to reap.

But though land is not the produce of industry, most of its valuable
qualities are so. Labor is not only requisite for using, but almost
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 productiveness is wholly the effect of labor
and art. One of the barrenest soils in the world, composed of the material
of the Goodwin Sands, the Pays de Waes in Flanders, has been so fertilized
by industry as to have become one of the most productive in Europe.
Cultivation also requires buildings and fences, which are wholly the
produce of labor. The fruits of this industry can not be reaped in a short
period. The labor and outlay are immediate, the benefit is spread over
many years, perhaps over all future time. A holder will not incur this
labor and outlay when strangers and not himself will be benefited by it.
If he undertakes such improvements, he must have 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

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 is wholly a question of general
expediency. When private property in land is not expedient, it is unjust.
The reverse is the case with property in movables, and in all things the
product of labor: over these, the owner’s power both of use and of
exclusion should be absolute, except where positive evil to others would
result from it; but, in the case of land, no exclusive right should be
permitted in any individual which can not be shown to be productive of
positive 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 others from acquiring the like by the same
means; but, from the very nature of the case, whoever owns land keeps
others out of the enjoyment of it. When land is not intended to be
cultivated, no good 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 of acres as his
single share, is not entitled to think that all this is given to him to
use and abuse, and deal with as if it concerned nobody but himself. The
rents or profits which he can obtain from it are at his sole disposal; but
with regard to the land, in everything which he does with it, and in
everything which he abstains from doing, he is morally bound, and should,
whenever the case admits, be legally compelled to make his interest and
pleasure consistent with the public good.

Chapter II. Of Wages.

§ 1. Of Competition and Custom.

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 tendency of 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 and scientific 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 of monopolies, either natural or
artificial, or of any interferences of 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
or in artificial obstacles; yet in which the result is not determined by
competition, but by custom or usage; competition either not 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 the results
    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 are _tendencies_, not actual descriptions of
    any given conditions in this 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 influence of fixed customs. The relations, more
especially between the land-owner and the cultivator, and the payments
made by the latter to the former, are, in all states of society but the
most modern, determined by the usage of the country. The custom of 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 to feel 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 number of dealers. The influence of competition is making itself
felt more and more through the principal branches of retail trade in the
large towns.

All professional remuneration is regulated by custom. The fees of
physicians, surgeons, and barristers, the charges of attorneys, are nearly
invariable. Not certainly for want of abundant competition in those
professions, but because the competition operates by diminishing each
competitor’s chance of fees, 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 portions of 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 overruled by any other agency, the conclusions will fail more
or less of being applicable. To escape error, we ought, in applying the
conclusions of political economy to the actual affairs of life, to
consider not only what will happen supposing the maximum of competition,
but how far the result will be affected if competition falls short of the

§ 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 of different employments. It is
convenient to keep these two classes of considerations separate; and in
discussing the law of wages, to proceed in the first instance as if there
were no other kind of labor than common unskilled labor, of the average
degree of hardness and disagreeableness.

Competition, however, must be regarded, in the present state of society,
as the principal regulator of wages, and custom or individual character
only as a modifying circumstance, and that in a comparatively slight

Wages, then, depend mainly upon the demand and supply of labor; 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 whole of that, but the part which is expended in the direct
purchase of labor. To this, however, must be added all funds which,
without forming a part of capital, are paid in exchange for labor, such as
the wages of soldiers, domestic servants, and all other unproductive
laborers. There is unfortunately no mode of expressing, 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
that wages depend on population and capital. It will be convenient to
employ this expression, remembering, however, to consider it as
elliptical, 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; nor fall, except either by a diminution of the funds
devoted to paying labor, or by an increase in the number of laborers to be

      [Illustration: Pie chart of Fixed Capital, Raw Materials, and
                               Wages Fund.]

    This is the simple statement of the well-known Wages-Fund Theory,
    which has given rise to no little animated discussion. Few
    economists now assent to this doctrine when stated as above, and
    without changes. The first attack on 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 really
    compete with each other, he regarded the idea of average wages as
    absurd as the idea of an average price of ships and cloth; he
    declared that there was no predetermined wages-fund necessarily
    expended on labor; and that “demand for commodities” 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 amount as 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 of an
    economic law from that which we think right to insist upon. The
    character of mankind being what it is, it will be for their
    interest to invest so much and no more in labor, and we must
    believe that in this sense there is a predetermination of wealth
    to be paid in wages. In order to make good investments, a certain
    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. Mill(163) 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 wealth of 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 within circle 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 the economic sense by general laws regarding
    the accumulation of 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 capital
    actually 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 conditions
    of 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 be assigned to
    a given machine for a given amount of material. With some kinds of
    hand-made goods the largest share of capital goes to wages, a less
    amount for materials, and a very small proportion for machinery
    and tools. In many branches of agriculture and small farming this
    holds true. The converse, however, is true in many manufactures,
    where machinery is largely used. No two industries will maintain
    the same proportion between the three elements. The nature of the
    industry, therefore, will determine whether a greater or a 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 the
    demand of either of the two parties to production, Labor and
    Capital; it responds only to the advance of mechanical science or
    general intelligence. It is impossible, then, to escape the
    conclusion 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 fund can 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:

    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 at a monthly expenditure of
    $12,000. The present state of cotton-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 by each spindle and woven by each loom; and the nature
    of the process 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 relationship is
    fixed for, not by, him. Now, each of the five hundred laborers
    being supposed to receive on an average $1.00 a day, 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 a change in the supply of labor: but
    the point to be noticed is that 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 the
    economic 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 labor
    market. The following is Mr. Cairnes’s statement of the amount 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 prospect of
    profit will ‘determine’ a certain proportion of this wealth to
    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 the
    nature of the national industries—‘determined,’ not under acts of
    Parliament, or in virtue of any physical law, but through the
    influence of the investor’s interests; while this, the form of the
    investment, will again ‘determine’ the proportion of the whole
    capital which shall be paid as wages to laborers.”(166) In this
    excellent and masterly conception, the doctrine of a wages-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 the wage-receivers.(167)

    In applying these principles to the question of strikes, it is
    evident enough that if they result in an actual expansion of the
    whole circle B, by forcing saving from unproductive expenditure, a
    real addition, of some extent, may be made to the wages-fund; but
    only by increasing the total capital. If, however, they attempt to
    increase one of the elements of capital, the wages-fund, without
    also adding to the other elements, fixed capital and materials, in
    the proportion fixed by the nature of the industry, they will
    destroy all possibility of continuing that production in the
    normal way, and the capitalist must withdraw from the enterprise.

    Francis A. Walker(168) has also offered a solution of this problem
    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 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 of the 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
    principle of 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 is
    determined by the same principles which govern the saving of past
    products. An increase of circle A by a larger production makes
    possible an increase of circle B, but whether it will be enlarged
    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 to this [the
Wages-Fund] doctrine, which it is incumbent on us to consider and explain.

1. For instance, it is a common saying that wages are high when 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 the contrary when there is what is called a stagnation: then
work-people are dismissed, and those who are retained must submit to a
reduction of wages; though in these cases there is neither more nor less
capital than before. This is true; and is one of those complications in
the concrete phenomena which obscure and disguise the operation of general
causes; but it is not really inconsistent with the principles laid down.
Capital which the owner does not employ in purchasing labor, but keeps
idle in his hands, is the same thing to the laborers, for the time being,
as if it did not exist. All capital is, from the variations of trade,
occasionally in this state. A manufacturer, finding a slack demand for his
commodity, forbears to employ laborers in increasing a stock which he
finds it difficult to dispose of; or if 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 for some of them. But no one expects either of these
states to be permanent; 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 unusually brisk, enabling the
manufacturer to sell his commodity even faster than he can produce it; his
whole capital is then brought into complete efficiency, and, if he is
able, he borrows capital in 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 will in its turn be locked
up in crowded warehouses; and wages in these several departments will ebb
and flow accordingly: but nothing can permanently alter general wages,
except an increase or a diminution of capital itself (always meaning by
the term, the funds of all sorts, destined for the payment of labor)
compared with the quantity of labor offering itself to be hired.

2. Again, it is another common notion that high prices make high wages;
because the producers and dealers, being better off, can afford to pay
more to their laborers. I have already said that a 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 save more, and make an addition to their capital, or
at least to their purchases of labor. Wages will probably be temporarily
higher in the employment in which prices have risen, and somewhat lower in
other employments: in which case, while the first half of the phenomenon
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 the dealers 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 diminished savings of other

    A clear distinction must be made between real wages and money
    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 his exertion constitutes his real
    wages. The mere amount of money he receives for his exertions,
    irrespective of what the money will exchange for, forms his money
    wages. Since the functions 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 are
    paid, this total will rise or fall (efficiency of labor remaining
    the same) with the price of the particular article. If the price
    rises, profits will be greater than elsewhere, and more capital
    will be invested in that one business; that is, the capital will
    be a demand for more labor, and, until equalization is
    accomplished in all trades between wages and profits, money 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. General high prices would
    not change general _real wages_. But if high prices cause higher
    money wages in particular branches of trade, then, because the
    movement is not general, there will accrue, to those receiving
    more money, the means to buy more of real wages. And, as in
    practice, changes in prices which arise from an increased demand
    are partial, and not general, it often happens that high prices
    produce high real wages (not general high wages) in some, not in
    all employments. (For a further study of this relation between
    prices and wages the reader is advised to recall this discussion
    in connection with that in a later part of the volume, Book III,
    Chaps. XX and XXI.)

3. Another opinion often maintained is, that wages (meaning of 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 and labor: 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
artificially adjusted to it by law or charity): or rather, it has some
tendency to affect them in the contrary way to that supposed; since in
times 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, no more 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, a greater number of the children will prematurely die; and thus
wages will ultimately be higher, but only because the number of people
will be smaller, than if food had remained cheap. (2.) But, secondly, even
though wages were high enough to admit of food’s becoming more costly
without depriving the laborers and their families of necessaries; though
they could bear, physically speaking, to be worse off, perhaps they would
not consent to be so. They might have habits of comfort which were to them
as necessaries, and sooner than forego which, they would put an additional
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 of food, 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 the laborers, a rise of the price of food, or any other
disadvantageous change 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 case their
previous habits in respect of population prove stronger than their
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 in agriculture, the repeal
of corn laws, or other such causes, the necessaries of the laborers are
cheapened, and they are enabled with the same [money] wages to command
greater comforts than before. Wages will not fall immediately: it is even
possible that they 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 class
is 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 a family. According to all
experience, a great increase invariably takes place in the number of
marriages in seasons of cheap food and full employment.

    This is to be seen by some brief statistics of marriages in
    Vermont and Massachusetts.

    Year.   Vermont   Massachusetts
    1860      2,179          12,404
    1861      2,188          10,972
    1862      1,962          11,014
    1863      2,007          10,873
    1864      1,804          12,513
    1865      2,569          13,052
    1866      3,001          14,428
    1867      2,857          14,451

    In Vermont, while the average number of marriages was reached in
    1860 and 1861, it fell off on the breaking out of the war; rose in
    1863, under the fair progress of the Northern 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 fell earlier than in agricultural Vermont, at the beginning
    of the difficulties.

    1856, July to Jan.   6,418
    1857, Jan. to July   5,803
    1857, July to Jan.   5,936
    1858, Jan. to July   4,917
    1858, July to Jan.   5,610

    The effects of the financial panic of 1857, in Massachusetts, show
    a similar movement in the number of marriages. The crisis came in
    October, 1857. In the three months 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, the
improvement 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 their condition becomes permanent.

§ 4. Certain rare Circumstances excepted, High Wages imply Restraints on

Wages depend, then, on the proportion between the number of the 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 the subsistence and comfort of the class
of hired laborers are more ample, it is for no other reason than because
capital bears a greater proportion to population. It is not the absolute
amount of accumulation or of production that is of importance to the
laboring-class; it is not the amount even of the funds destined for
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 by altering 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.

In countries like North America and the Australian colonies, where the
knowledge and arts of civilized life and a high effective desire of
accumulation coexist with a boundless extent of unoccupied land, the
growth of capital easily keeps pace with 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
in abundance the necessaries, many of the comforts, and some of the
luxuries of life; and, unless in case of individual misconduct, or actual
inability to work, poverty does not, and dependence need not, exist. [In
England] so gigantic has been the progress of the cotton manufacture since
the inventions of Watt and Arkwright, that the capital engaged in it has
probably quadrupled in the time which population requires for doubling.
While, therefore, it has attracted from other employments nearly all the
hands which geographical circumstances and the habits or inclinations of
the people rendered available; and while the demand it created for infant
labor has enlisted the immediate pecuniary interest of the operatives in
favor of promoting, instead of restraining, the increase of population;
nevertheless wages in the great seats of the manufacture are still so high
that the collective earnings of a family amount, on an average of years,
to a very satisfactory sum; and there is as yet no sign of decrease, while
the effect has also been felt in raising the general standard of
agricultural wages in the counties adjoining.

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 are backward 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 are at their highest known degree, the increase
of capital is checked, because there is not fresh land to be resorted to
of as good quality as that already occupied. Though capital should for a
time double itself simultaneously with population, if all this capital 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 is slackened.

Except, therefore, in the very peculiar cases which I have just noticed,
of which the only one of any practical importance is 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 in some 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 of these must and does exist, and very powerfully too, in
all old societies. Wherever population is not kept down by the prudence
either of individuals or of the state, it is kept down by starvation or

§ 5. Due Restriction of Population the only Safeguard of a Laboring-Class.

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, or affords 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 trade corporations of the
middle ages were in vigor, their by-laws or regulations were conceived
with a very vigilant eye to the advantage which the trade derived from
limiting competition; and they made it very effectually the interest of
artisans not to marry until after passing through the two stages of
apprentice and journeyman, and attaining the rank of master.

Unhappily, sentimentality rather than common sense usually presides 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 no country and in no time of the world so rife as in
the present generation; but there is a tacit agreement to ignore totally
the law of 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 that they 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 they
would obtain higher wages? This is the question, and no other: and it is
idle to divert attention from it, by attacking any incidental position of
Malthus or some other writer, and pretending that to refute that is to
disprove the principle of population. Some, for instance, have achieved an
easy victory over a passing remark of Mr. Malthus, hazarded chiefly by way
of illustration, that the increase of food may perhaps be assumed to take
place in an arithmetical ratio, while population increases in a
geometrical: when every candid reader knows that Mr. Malthus laid no
stress on 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 of the earlier followers of Mr. Malthus. Several
writers had said that it is the tendency of population to _increase
faster_ than the means of 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
not checked either by mortality or by prudence. But inasmuch as these
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 the reverse 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 to maintain that population, in any improving community, tends to
increase faster than, or even so fast as, subsistence.(171) The word
tendency(172) 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?

Chapter III. Of Remedies For Low Wages.

§ 1. A Legal or Customary Minimum of Wages, with a Guarantee of

The simplest expedient which can be imagined for keeping the wages of
labor up to the desirable point would be to fix them by law; and this is
virtually the object aimed at in a variety of plans 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 they should be variable; but some have proposed to fix
a minimum of wages, leaving the variations above that point to be adjusted
by competition. Another plan, which has found many advocates among the
leaders of the operatives, is that councils should be formed, which in
England have been called local boards of trade, in France “conseils de
prud’hommes,” and other names; consisting of delegates from the
work-people and from the employers, who, meeting in conference, should
agree upon a rate 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; to provide that the
workmen shall have _reasonable_ wages, and the capitalist reasonable

    The one expedient most suggested by politicians and
    labor-reformers in the United States is an eight-hour law,
    mandatory upon all employers. It is to be remembered, however,
    that in very many industries piece-work exists, and if a
    diminution of hours is enforced, that will mean a serious
    reduction in the amount of wages which can be possibly earned in a
    day. 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 cost of 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 are very low. It must be
    recalled, however, that in the United States there has been, under
    the influence of natural causes, unaided by legislation, a very
    marked reduction in the hours of labor, accompanied by an increase
    of wages. For example, in 1840, Rhode Island operatives in the
    carding-room of the cotton-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 arising
    from the invention of labor-saving machinery.

Others again (but these are rather philanthropists interesting themselves
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, it would intervene rashly and ignorantly; they are
convinced that 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 the legal sanction, these
persons desire to compass by the moral. Every employer, they think,
_ought_ to give _sufficient_ wages; and if he does it not willingly,
should be compelled to it by general opinion; the test of sufficient wages
being their own feelings, or what they suppose to be those of the public.
This is, I think, a fair 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 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 capital consistently
with employing all the laborers. For it is a mistake to suppose that
competition merely keeps down wages. It is equally 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 the competition of sellers
may lower prices, and the competition of laborers may lower wages, down to
zero, or some unassignable minimum. Nothing can be more unfounded. Goods
can only be lowered in price by competition to the point which calls forth
buyers sufficient to take them off; and wages can only be lowered by
competition until room is made to admit all the laborers to a share in the
distribution of the wages-fund. If they fell below this point, a portion
of capital would remain unemployed for want of laborers; a
counter-competition would commence on the side of capitalists, and wages
would rise.

    The assumption in the last chapter in regard to competition and
    custom should be kept in mind in all this reasoning. As a matter
    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 skilled labor.
    Of course, the _tendency_ is as explained by Mr. Mill, and as time
    goes on there is a distinctly greater mobility of labor visible.
    Vast numbers pass from Scandinavia and other countries of Europe
    to the United States, or from England to Australia, urged by the
    desire to go from a community of low to one of higher wages.

Since, therefore, the rate of wages which results from competition
distributes the whole wages-fund among the whole laboring 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 these should starve, they must be provided for by a
forced increase of the wages-fund—by a compulsory saving. It is nothing to
fix 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 or a 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 the rich 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 and the wages-fund would thus be
modified to the advantage of the laborers, not by restriction of
population, but by an increase of capital.

§ 2. —Would Require as a Condition Legal Measures for Repression of

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 for the existing numbers of
the people; such a proposition would have no more strenuous supporter than
myself. Society mainly consists of those who live by bodily labor; and if
society, that is, if the laborers, lend their physical force to protect
individuals in the enjoyment of superfluities, they are entitled to do so,
and have 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 no one 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 have produced and
accumulated are called upon to abstain from consuming 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 and preventive; there would be nothing to hinder population from
starting forward at its rapidest rate; and as the natural increase of
capital would, at the best, not be more rapid than before, taxation, to
make up the growing deficiency, must advance with the 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 were fed, would bear a less and less proportion to
the whole produce and to the population: and the increase of people going
on in a constant ratio, while the increase of produce went on in a
diminishing ratio, the surplus would in time be wholly absorbed; taxation
for the support of the poor would engross the whole income 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, it is bound in self-protection,
and for the sake of every purpose for which government exists, to provide
that no person shall be born without its consent. To give profusely to the
people, whether under the name of charity or of employment, without
placing them under such influences that prudential motives shall act
powerfully upon them, is to lavish the means of benefiting mankind without
attaining the object. But remove the regulation of their wages from their
own control; guarantee to them a certain payment, either by law or by the
feeding of the community; and no amount of comfort that you can give them
will make either them or their descendants look to their own
self-restraint as the proper means for preserving them in that state.

    The famous poor-laws of Elizabeth, enacted in 1601, were at first
    intended to relieve the destitute poor, sick, aged, and impotent,
    but in their administration a share was given to all who _begged_
    it. Employers, of course, found it cheaper to hire 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 a crying 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, the poor-rates were quadrupled, and had reached, in 1833,
    the enormous amount of £8,600,000. In many parishes they were
    approaching the annual value of the land itself.”(173) The old
    poor-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 made as
    disagreeable as possible, in order to stimulate among the poor 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
    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 and counsel the
    unfortunate, but never give money. This system has been very
    successful, and, by basing its operations on the principle of
    self-help, has given the best proof of its right to an increasing

§ 3. Allowances in Aid of Wages and the Standard of Living.

Next to the attempts to regulate wages, and provide artificially that all
who are willing to work shall receive an adequate price for their labor,
we have to consider another class of popular remedies, which do not
profess to interfere with freedom of contract; 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 for the 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 natural consequence that more
should be given to the married than to the single, 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 minimum of wages.

There is a rate of wages, either the lowest on which the people 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 (as the fact proves) rather than restrain the instinct of
multiplication. Their habits will not be altered for the better by giving
them parish 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 in the 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 those in the
    community who have a higher one, has been seen in 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 their lower standard by forming a group by
    themselves, and are thereby not assimilated into the body of
    laborers who have a higher standard of comfort, they can, to the
    extent of their ability to do work, drive other laborers out of
    employment. This, moreover, is exactly what was done by the Irish,
    who drove 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 come here now without
    their families, as may be seen by the accompanying diagram, in
    which the shaded side represents the males on the left, and the
    unshaded the females on the right, of the perpendicular line.

    Decade.   Males.   Females.
    1              6          4
    2            106         12
    3            351         37
    4            283         15
    5            139          3
    6             32          1
    7             10          0
    8              1          0
    9              0          0

    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 question is
    here discussed, which requires for its solution many ethical and
    political considerations besides.

§ 4. Grounds for Expecting Improvement in Public Opinion on the Subject of

By what means, then, is poverty to be contended against? How is the evil
of low wages to be remedied? If the expedients usually recommended for the
purpose are not adapted to it, can no 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 practice a
sufficient degree of prudence in regard to the increase of their families,
because they have hitherto stopped short of that point, show an inability
to estimate the ordinary principles of human action. 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 wages on population will not influence the
conduct of a laboring-man, because it is not the children he himself can
have that will 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 which keeps
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 the laboring-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 those would exempt themselves from it who were in
the habit of making light of social obligations generally; and there would
be then 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 cases of 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

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 of them it is already recognized
and habitually acted on. It is familiar to all trades-unions: every
successful combination to keep up wages owes its success to contrivances
for restricting the number of competitors; all skilled trades are anxious
to keep down their own numbers, and many impose, or endeavor to impose, as
a condition upon employers, that they shall not take more than a
prescribed number of apprentices. There is, 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 a clear perception of the relation between their numbers
and their remuneration. 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 circumscribed field; secondly, skilled
artisans are a more intelligent class than ordinary 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 have the most to preserve.

§ 5. Twofold means of Elevating the Habits of the Laboring-People; by
Education, and by Foreign and Home 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 which shall (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 judgment of 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 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, but on the contrary
strengthening, every incentive to industry, and every motive to

The first is a great national measure of colonization. I mean, a grant 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; and that the funds required, even by way of advance,
would not be drawn from the capital employed in maintaining labor, but
from that surplus which can not find employment at such profit as
constitutes an adequate remuneration for the abstinence of the possessor,
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
laboring-class who would reclaim and bring them into cultivation by their
own labor.

    This suggestion works to the same purpose as the proposal that 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

The preference should be given to such laborers, and there are many of
them, as had saved enough to maintain them until their first crop was got
in, or whose character was such as to induce some responsible person to
advance to them the requisite amount on their personal security. The
tools, the manure, and in some cases the subsistence also, might be
supplied by the parish, or by the state; interest for the advance, at the
rate yielded by the public funds, being laid on as a perpetual quitrent,
with power to the peasant 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 of amicable arrangement among the
heirs, they might be bought by government 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 the
Continent, 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 intermediate class 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 these
measures 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 them to live and bring up their children in a
degree of comfort and independence to which they have hitherto been

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

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

In treating of wages, we have hitherto confined ourselves to the causes
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 some degree on different laws. We will now
take into consideration these 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 agreeableness or disagreeableness of the
employments themselves; secondly, the easiness and cheapness, or the
difficulty and expense of learning them; thirdly, the constancy or
inconstancy of employment in them; fourthly, the small or great trust
which must be reposed in those who exercise them; and, fifthly, the
probability or improbability of success in them.”

(1.) “The wages of labor vary with the ease or hardship, the cleanliness
or dirtiness, the honorableness or dishonorableness of the 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 less dangerous, and is carried on in daylight and above
ground. Honor 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
contrary effect. The trade of a butcher is a brutal and an odious
business; but it is in most places more profitable than the greater part
of common trades. The most detestable of all employments, that of the
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 of manufactures, 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 in foul 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
he is employed, must not only maintain him while he is idle, but make 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 combined with (2) the
hardship, disagreeableness, and dirtiness of the work, 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, the wages of common labor. His high wages arise altogether from the
hardship, disagreeableness, and dirtiness of his work. His employment may,
upon most occasions, be as constant as he pleases. The coal-heavers in
London exercise a trade which in hardship, dirtiness, and disagreeableness
almost equals that of colliers; and from the unavoidable irregularity in
the arrivals of coal-ships, the employment of the greater part of them is
necessarily very inconstant. If colliers, therefore, commonly 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 their condition a few years ago, it was found that,
at the rate at which they were then paid, they could earn about four times
the wages of common labor in London.”

These inequalities of remuneration, which are supposed to compensate for
the disagreeable circumstances of particular employments, would, under
certain conditions, be natural consequences of perfectly free competition:
and as between employments of about the same grade, and filled by nearly
the same 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 agreeable and disagreeable
employments. The really exhausting and the really repulsive labors,
instead of being better paid than others, are almost invariably paid the
worst of all, because performed by 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 supply of labor so far
exceeds the demand that to find employment at all is an uncertainty, and
to be offered it on any terms a favor, the case is totally the reverse.
Partly from this cause, and partly from the natural and artificial
monopolies, which will be spoken of presently, the inequalities of wages
are generally in an 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 the influence
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 up, in the general estimation,
for those adverse chances. Put your son 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 that
succeeds, that one ought to gain all that should have been gained by the
unsuccessful twenty. How extravagant soever the fees of counselors-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 is necessary
to produce equality of attractiveness, and are examples of the equalizing
effect of free competition. The following are cases 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 to those of many other workmen, not only of equal but
of much superior ingenuity, on account of the precious materials with
which they are intrusted.” The superiority of reward is not here the
consequence of competition, but of its absence: not a compensation for
disadvantages inherent in the employment, but an extra advantage; a kind
of monopoly price, the effect not of a 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 advantage of the
peculiarity, and obtain higher pay in proportion to its rarity.

    This same explanation of a natural monopoly applies exactly to the
    causes which give able executive managers, who watch 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 as plentiful, in proportion to the
    demand for them, as ordinary artisans, in proportion to the demand
    for them, then the former 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 the land.

(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, an inherent 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 rate of
profit, within the number of years [the laborer] can expect to live 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,
or that the laborer must be maintained for a considerable time from other
sources, suffices everywhere to exclude the great body of the laboring
people from the possibility of any such competition. Until lately, all
employments which required even the humble education of reading and
writing could be recruited only from a select 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. Cairnes(175) in his theory of non-competing
    groups 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. Mill certainly understood this
    fully, and stated it clearly again in Book 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 the increased facilities of education which
already are, and will be in 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

A modifying circumstance still remains to be noticed, which interferes to
some extent with the operation of the principles thus far brought to view.
While it is true, as a general rule, that the earnings of skilled labor,
and especially of any labor which requires school education, are at a
monopoly rate, from the impossibility, to the mass of the people, of
obtaining that education, it is also true that the policy of nations, or
the bounty of individuals, formerly did much to counteract the effect of
this limitation of competition, by offering eleemosynary instruction to a
much larger class of persons than could have obtained the same 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 been rather 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 never been either able to
raise the wages of curates or to sink those of laborers to the degree that
was intended, because it has never been able to hinder either the one from
being willing to accept of less than the legal allowance, on account of
the indigence of their situation and the multitude of their competitors,
or the other from receiving more, on account of the contrary competition
of those who expected to derive either profit or pleasure from employing

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 so by 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 these, the remuneration is, on the whole, decidedly high;
because, though exposed to the competition of what used to be called “poor
scholars” (persons who have received a learned education from some public
or private charity), they are exempt from that of amateurs, 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 wages of equally severe labor in other
employments. The principal example of the kind is domestic manufactures.
When spinning and knitting were carried on in every cottage, by families
deriving their principal support from agriculture, the price at which
their produce was sold (which constituted the remuneration of their labor)
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 the quantity of the commodity produced by
this description of labor suffices to supply the whole of the demand. If
it does not, and there 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, and to
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 to continue the production. Thus
far, as to the remuneration of the subsidiary 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 the wages 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 children of the artisan aid
in the work. The income which the habits of the class demand, and down to
which they are almost sure to multiply, is made up in those trades by the
earnings of the whole family, while in others the same income must be
obtained by the labor 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 the two going further
in their domestic economy after marriage than before.

    This statement seems to be borne out by the statistics of
    wages(176) both in England and the United States. In our
    cotton-mills, where women do certain kinds of work equally well
    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.

§ 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 earn as much as men; and so
they do in hand-loom weaving, which, being paid by the piece, brings their
efficiency to a sure test. When the efficiency is equal, but the pay
unequal, the only 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 carried on 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 of men, 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 and usage make accessible to them are comparatively so few that
the field of their employment is still more overcrowded.

    Yet within the employments open to women, such as millinery and
    dress-making, certain women are able to charge excessively high
    prices for work, because, having obtained a reputation for
    especial skill and taste, they can exact in the high 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 their occupation that amount
    of skill and those business qualities (owing, of course, to their
    being brought up unaccustomed to business methods) which are
    requisite for the success of any one, either man or woman.

It must be observed that, as matters now stand, a sufficient degree of
overcrowding may depress the wages of women to a 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 pittance absolutely 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 by general custom
contribute to his earnings, the man’s wages must be at least sufficient to
support himself, a wife, and a number of children adequate to keep up the
population, since, if it were less, 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 human interference; being
limited only by natural causes, or by the unintended 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 a particular 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, and to some extent,
the combinations of workmen produce a similar effect. 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
habits of the people were to remain forever unimproved, these partial
combinations, in so far as they do succeed in keeping up the wages of any
trade by limiting its numbers, might be looked upon as simply intrenching
round a particular spot against the inroads of over-population, and making
the wages of the class depend upon their own rate of increase, instead of
depending on that of a more reckless and improvident class than

To conclude this subject, I must repeat an observation already made, that
there are kinds of labor of which the wages are fixed by custom, and not
by competition. Such are the fees or charges of professional persons—of
physicians, surgeons, barristers, and even attorneys.

Chapter V. Of Profits.

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

Having treated of the laborer’s share of the produce, we next proceed to
the share of the capitalist; the profits of capital or stock; the gains of
the person who advances the expenses of production—who, from funds in his
possession, pays the wages of the laborers, or supports them during the
work; who supplies the requisite buildings, materials, and tools or
machinery; and to whom, 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 he can 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 of abstinence. 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 he requires a recompense.

Of the gains, however, which the possession of a capital enables 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 by others. The remuneration which is obtained in any
country for mere abstinence is measured by the current rate of interest on
the best security; such security as precludes any appreciable chance 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
unexceptionable security he runs little or no risk. But if he embarks in
business on his own account, he always exposes his capital to some, and in
many cases to very great, danger of partial or total loss. For this danger
he must be compensated, otherwise he will not incur it. (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 the greatest 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

    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 the risk; 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 necessary connection whatever with the
    possession of capital. The thing with which the laborer is
    occupied does not give the reason for associating his wages with
    the name of that thing; because a highly-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 of capital. The payment for services,
    in the one case as in the other, depends upon the skill of the
    manager, just as it does with an ordinary mechanic, rising or
    falling with his fitness for the peculiar work. Skill as a manager
    is the cause; the amount of the remuneration is the consequence.
    If so, then the wages of superintendence have no logical
    connection, in the economic sense, with capital as the thing which
    determines the amount of its reward, any more than it affects the
    wages of any 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 true that 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 the capital 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 those affecting the amounts of all other kinds of
    wages, such as are discussed in the preceding chapter. The
    acknowledgment of this distinction is of extreme importance, and
    affects, in a 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.

§ 2. The Minimum of Profits; what produces Variations in the Amount of

The lowest rate of profit that can permanently exist is that which is
barely adequate, at the given place and time, to afford an equivalent for
the abstinence, risk, and exertion implied in the employment of capital.
From the gross profit has first to be deducted as much as will form a fund
sufficient on the average to cover all losses incident to the employment.
Next, it must afford such an equivalent to the owner of the capital for
forbearing to consume it as is then and there a sufficient motive to him
to persist in his abstinence. How much will be required to form this
equivalent depends on the comparative value placed, in the given society,
upon the present and the future (in the words formerly used): on the
strength of the effective desire of accumulation. Further, after covering
all losses, and remunerating the owner for forbearing to consume, there
must be something left to recompense the labor and skill of the person who
devotes his time to the business.

Such, then, is the minimum of profits: but that minimum is exceedingly
variable, and at some times and places extremely low, on account of the
great variableness of two out of its three elements. 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 the element which consists in compensation for risk.

The remuneration of capital in different employments, much more than the
remuneration of labor, varies according to the circumstances 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
employment. The greatest, however, of these differences, is that caused by
difference of risk. The profits of a gunpowder-manufacturer must be
considerably greater than the average, to make 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 the compensation
which the owner of the ship or cargo receives for that payment does not
appear in the estimate of his profits, but is included in the replacement
of his capital.

    The minimum of profits can not properly include wages of
    superintendence, nor is it so included, practically, in Mr. Mill’s
    discussions on the minimum of profits in a later part of this
    volume. The operation of the various elements in changing the
    amount of profits might be expressed as follows: As between
    different countries and communities, who have a different
    effective desire of accumulation, profits may vary with 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 skillful manager may make a large return,
    a poor one none at all. Or between two employments, interest and
    risk remaining the same, 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, is very 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 and skill is required to conduct a
business necessarily of limited extent. In such cases a higher than common
rate of profit is necessary 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 or aggravate the disparities
in the remuneration of different kinds of labor, operate similarly between
different employments of capital.

    In this passage Mr. Mill points out distinctly that the movement
    up and down in the wages of a manager are governed by the same
    laws as those which regulate differences in the different rewards
    of labor, but yet he connects it improperly with capital. It will
    be seen that Mr. Mill uses the term “gross profit” on the next
    page in order to avoid the difficulty, which rises unconsciously
    in his mind, of the anomalous presence of 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 of inequality,
namely, difference in the risk or agreeableness of different employments,
and natural or artificial monopolies [which give greater or less wages of
superintendence], the rate 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
the same time and place, whatever be the employment. The rate of interest,
on equally good security, does not vary according to the destination of
the principal, though it does vary from time to time very 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 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 of personal connection; and even on chance. Hardly any two
dealers in the same trade, even if their commodities are equally good and
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 effect depends 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 a
footing as to hold out, not equal profits, but equal expectations of
profit, to persons of average abilities and advantages. By equal, I mean
after making compensation for any inferiority in the agreeableness or
safety of an employment. If the case were not so; if there were,
evidently, and to common experience, more favorable chances of pecuniary
success in one business than in others, more persons would engage their
capital in the business. If, on the contrary, a business is not considered
thriving; if the chances of profit in it are thought to be inferior to
those in other employments; capital gradually leaves it, or at least new
capital is not attracted to it; and by this change in the distribution of
capital between the less profitable and the more profitable employments, a
sort of balance is restored.

[Illustration: Parallel vertical lines AB and GD, with horizontal lines EG
                          and FC joining them.]

    This may be easily shown by a diagram in which the capital in one
    employment is represented by _A B_, and which exceeds _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 be transferred 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 channels of credit through
which, in commercial nations, unemployed capital diffuses itself over the
field of employment, flowing over in greater abundance to the lower
levels, are the means by which the equalization is accomplished. The
process consists in a limitation by one class of dealers or producers and
an extension by the other of that portion of their business which is
carried on with borrowed capital.

    “Political economists say that capital sets toward the most
    profitable trades, and that it rapidly leaves the less profitable
    and non-paying trades. But in ordinary countries this is a slow
    process, and some persons, who want to have ocular demonstrations
    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 and the bankers. If the
    iron-trade ceases to be as profitable as usual, less iron is sold;
    the fewer the sales the fewer the bills; and in consequence the
    number of iron bills [at the banks] is diminished. On the other
    hand, if, in consequence of a bad 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

In the case of an altogether declining trade, in which it is necessary
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 established connection,
and of acquired skill and experience, that people are always very slow in
resolving upon it, and hardly ever do so until long 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 in the average profits of
different employments (other than the standing 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 is
more chance of making a large fortune in some employments than in others.
But it would be found that in those same employments bankruptcies also are
more frequent, and that the chance of greater success is balanced by a
greater probability of complete failure.

§ 4. The Cause of the Existence of any Profit; the Advances 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,” and the sense in
which, and the limitations under which, this ordinary rate has a real
existence. It now remains to consider what causes determine its amount.

The cause of profit is, that labor produces more than is required 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 of receiving all they produce, they will, in
addition to reproducing their own necessaries and instruments, have a
portion of their time remaining, to work for the capitalist. We thus see
that profit arises, not from the incident of exchange, but from the
productive 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 the considerations 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 the laborers and
capitalists are separate classes, prevails, with few exceptions,
universally; namely, that the capitalist advances the whole expenses,
including the entire remuneration of the laborer. That he should do so is
not a matter of inherent necessity; the laborer might wait until the
production is complete for all that 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 a capitalist, investing capital in the concern, by supplying
a portion of the funds necessary for carrying it on; and even in the
former case 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 with interest (on
whatever principle computed) from the proceeds of the enterprise.

The capitalist, then, may be assumed to make all the advances and receive
all the produce. His profit consists of the excess of the 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 corn sells
    for the same sum as one yard of cloth), his profit consists of
    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 it is 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 consists in the
direct payment of wages. What does not consist of this is composed of
materials and implements, including buildings. But materials and
implements are produced by labor; and as our 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 the
materials and tools instead of producing them, the case is not altered: he
then repays to a previous producer the wages which that previous producer
has paid. It is true he repays it to him with a profit; and, if he had
produced the things himself, he himself 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 the
capitalists concerned have, for the sake of general convenience, had their
share of profit paid to them before the operation was completed.

    This idea may be more clear, perhaps, if we imagine a large
    corporation, not only making woolen cloth, but owning
    sheep-ranches, where the raw materials are produced; the shops
    where all machinery is made; and who even produce on their own
    property all the food, clothing, shelter, and consumption of the
    laborers employed by them. A line of division may be passed
    through the returns in all these branches 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 many small capitalists.

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

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; and secondly, 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, that the rate of
profits depends upon wages; rising as wages fall, and falling as wages
rise. In adopting, however, this doctrine, I must insist upon making a
most necessary alteration in its wording. Instead of saying that profits
depend on wages, let us say (what Ricardo really meant) that they depend
on the _cost of labor_.

    This is an entirely different question from that concerning the
    rate 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 was affected by the
    number of competitors for labor, as compared with the existing
    capital, taking into account the nature of the industries 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 a decrease of population will
    bring about the reverse. The rate of wages, however, now that we
    are considering the matter from 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 to the 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 quantity of advances
    compared with the quantity returned; that is, the relation of the
    total capital to the total production arising from the 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 order to produce circle
    A, it is necessary to advance what is represented 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, and which 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 and printed, being looked upon from the same
point of view of the payers, much oftener than from that of the receivers,
nothing is more 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 is
frequently at its highest where wages are lowest. This may arise from two
causes. (1.) In the first place, the labor, though cheap, may be

    The facts presented by Mr. Brassey(178) 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 true of railway construction in
    different parts of the world. With different character, varying
    amounts of industrial energy, varying intelligence, and endurance,
    different people do not have the same efficiency of labor. It is
    ascertained that inefficiency 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, and
    in England from seventy-five to eighty-seven cents a day, yet it
    cost as much to build a mile of railway in India as in England.
    The English laborer gave a full equivalent for his higher wages.
    Moreover, while an English weaver tends from two to three times as
    many looms as his Russian competitor, the workman in the United
    States, it is said, will tend even more 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, came to 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 the articles 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 the purchaser, 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 other country 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 of labor to the capitalist is considerably lower
than in Europe. It must be so, since the rate of profit is higher; as
indicated by the rate of interest, which is six per cent at New York when
it is three or 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 cost(179) at which the articles composing that real
reward can be produced 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 important
    in 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 the employer,
    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 the kind of machinery, the speed
    with which it is run, and on the general 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 hundred years ago, “one operative in Lowell, working one
    year, can produce the cotton fabric needed for the year’s supply
    of 1,500 to 1,800 Chinese.” Moreover, there is no question as to
    the fact 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 to every
    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 lowering profits, 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 so vastly increased the production
    for a given outlay. As one of a few facts showing this tendency in
    the last fifty years, note the following table, taken from the
    books of the Namquit cotton-mill in Bristol, Rhode Island:

    Kind Of Labor.                    1841.   1884.
    Card-room help, per week          $3.28   $5.40
    Card-strippers, per week           4.98    6.00
    Weavers, per week                  4.75    6.00
    Carding-room overseer, per week    7.00   13.50

    The hours per week have decreased in the same time from 84 to 66,
    while the product of the mill in pounds has increased 25 per cent.
    It may be unnecessary, perhaps, to say that these figures
    represent the current wages in other mills at the same periods;
    and that these facts can be sustained by the records of other

    In its economic effect we must also consider, under efficiency,
    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 a vastly greater amount of
    wheat in Dakota than in Vermont or England. 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, such as 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 the sense 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 to connect different parts of
    the economic system together. And the questions of Cost of Labor
    and Cost of Production are of 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 the articles composing that
remuneration; or if those articles became less 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;
or if, 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

    The connection of profit with the three constituents of cost of
    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 their money 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 woolen-mill employing 500
    men, and paying them in corn; and suppose that one yard of woolen
    cloth exchanges for one bushel of corn in the open market. In the
    beginning, with a given condition of efficiency, suppose that each
    man produces on 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 product of
    600,000 yards.
    500 men, each paid 1,000 bushels, cause an outlay of 500,000
    Profit: 100,000 yards.

    (1.) Now suppose a change increasing the efficiency of labor to
    such an extent that each laborer produces 1,300 instead of 1,200
    yards, then the account will stand, if the other elements remain

    500 men, each producing 1,300 yards, give a total product of
    650,000 yards.
    500 men, each paid 1,000 bushels, cause an outlay of 500,000
    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 account will be:

    500 men, each producing 1,200 yards, give a total product of
    600,000 yards.
    500 men, each paid 1,100 bushels, cause an outlay of 550,000
    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 corn that they
    are obliged to give one and one tenth yard of their goods for one
    bushel of corn (1,000 bushels of corn costing them 1,100 yards of
    cloth), then the statement will read:

    500 men, each producing 1,200 yards, give a total product of
    600,000 yards.
    500 men, each paid 1,000 bushels, cause an outlay of 550,000
    Profit: 50,000 yards.

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 a share of the produce as the
price of that consent, is the person who, by the arrangements of society,
possesses exclusive power over some 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 only class, of any numbers or importance, who have a claim to a
share in the distribution of the produce, through their ownership of
something 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 land is, 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 connection of
    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, but of
    its diminishing productiveness.” The doctrine of rent depends upon
    the law of diminishing returns; and it is only by the pressure of
    population upon land that the lessened productiveness of land,
    whether because of poorer qualities or poorer situations, is made
    apparent. Or, to take things in their natural 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 application of 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, and the conditions then exist under which
    land pays rent. Those, therefore, who admit the law of diminishing
    returns are inevitably led to the doctrine of rent.

§ 2. No Land can pay Rent except Land of such Quality or Situation as
exists in less Quantity than the Demand.

A thing which is limited in quantity, even though its possessors do not
act in concert, is still a monopolized article. But even when monopolized,
a thing which is the gift of nature, and requires no labor or outlay as
the condition of its existence, will, if there be competition among the
holders of it, command a price only if it exist in less quantity than the

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 is capable of cultivation,
should be cultivated. The food and other agricultural produce which the
people need, and which they are willing and able to pay for at a price
which remunerates the grower, may always be obtained without cultivating
all the land; sometimes without cultivating more than a small part of it;
the more fertile lands, or those in the more convenient situations, being
of course preferred. There is always, therefore, some land which can not,
in existing circumstances, pay any rent; and no 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
less advantageous than the resort to less favored soils. (1.) The worst
land which can be cultivated as a means of subsistence is that which will
just replace the seed and the food of the laborers 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
this is not a question of political economy, but of physical fact. The
supposition leaves nothing for profits, nor anything for the laborers
except necessaries: the land, therefore, can only be cultivated 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 for capital is that which, after replacing the
seed, not only feeds the agricultural laborers and their secondaries, but
affords them the current rate of wages, which may extend to much more than
mere necessaries, and leaves, for those who have advanced the wages 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 the market value of agricultural produce. What the land
can do for the laborers and for the capitalist, beyond feeding all whom it
directly or indirectly employs, of course depends upon what the remainder
of the produce can be sold for. The higher the market value of produce,
the lower are the soils to which cultivation can descend, consistently
with affording to the capital employed the ordinary rate of profit.

As, however, differences of fertility slide into one another by insensible
gradations; and differences of accessibility, that is, of distance from
markets do the same; and since there is land so barren that it could not
pay for its cultivation at any price; it is 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 a higher place in the scale of fertility, it can not pay any rent. It
is evident, however, that the community needs the produce of this quality
of land; since, if the lands more fertile or better situated than it could
have sufficed to supply the wants of society, the price 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 a country which is fit for cultivation, and
not withheld from it by legal or other factitious obstacles, is not
cultivated, the worst land in 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 the ordinary 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 other land. Any land yields just as much more than the
ordinary profits of stock as it yields more than what is returned by the
worst land in 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 of other
capitalists, that competition which equalizes the profits of different
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

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. Inferior land, 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 which
alternate 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 than the common rate of
profit. It is thus scientifically true that the remaining parts pay no

    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 was such
    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 he rented the farm he
    would find it to his interest to cultivate it, simply because it
    yielded him a profit, and because he was not obliged to pay rent
    upon it; if required to pay rent for it, he would lose the
    ordinary rate of profit, would have no reason for cultivating it,
    of course, and would throw it out of cultivation. Moreover,
    suppose that lands down to grade three paid rent when A took the
    farm; now, if the price of produce rises slightly, grade four may
    pay something, but possibly not enough to warrant any rent going
    to a landlord. A will put capital on it for this return, but
    certainly not until the price warrants 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 have gone up to the point which makes
    possible its cultivation even for a profit, without rent. There
    must always be somewhere some 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 this objection,
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 a certain quality of soil, it happened
nevertheless that all the soil of 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 extension of cultivation, but by an increased application of labor and
capital to land already cultivated.

Now we have already seen that this increased application of capital, other
things being unaltered, is always attended with a smaller proportional
return. The rise of price enables measures to be taken for increasing the
produce, which could not have been taken with profit at the previous
price. The farmer uses more expensive manures, or manures land which he
formerly left to nature; 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 for the purpose
will be returned to him with the ordinary profit, and not 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 to
which the last addition to the produce was due; or (to express the
essentials of the case in one phrase) that which is applied in the least
favorable circumstances. But the same amount of demand 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 the advantage it possesses. And this surplus it is
which competition enables the landlord to appropriate.

    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 when applied,
    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 and capital simply for the
    five bushels that at first had received a return of twenty
    bushels, the price must have gone up so that five bushels should
    sell for as much as the twenty did formerly; so, _mutatis
    mutandis_, of installments second and third. So that if the demand
    is such as to require all of the fifty bushels, the agricultural
    capital which produced the five bushels will be the standard
    according to which the rent of the capital, which grew twenty,
    fifteen, and ten bushels respectively, is measured. The principle
    is exactly the same as if equal installments of capital and labor
    were invested on four different grades of land returning twenty,
    fifteen, ten, and five bushels for each installment. Or, as if in
    the table on page 240, A, B, C, and D each represented different
    installments of 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 return to the whole
capital employed on it above what is necessary to replace the capital with
the ordinary rate of profit, or, in other 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 of capital is rendered so by being employed on the
worst soil, or by being expended in extorting more produce from land which
already yielded as much as it could be made to part with on easier terms.

It will be true that the farmer requires the ordinary rate of profit on
the whole of his capital; that whatever it returns to him beyond this he
is obliged to pay to the landlord, but will not consent to pay more; that
there is a portion of capital applied to agriculture 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 pending contracts,
individual miscalculations, the influence of habit, and even the
particular feelings and dispositions of the persons concerned.

    The law of rent, in the economic sense, operates in the United
    States as truly as elsewhere, although there is no separate class
    of landlords here. With us, almost all land is owned by 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 two parts, 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 this working 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 a payment 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 and other
    agricultural produce has not risen in proportion to the increase
    of our numbers, as it ought to have done if Ricardo’s theory were
    true, but has fallen, since 1830, though since that time our
    population has been more than tripled.”(181) This overlooks the
    fact that we have not even yet taken up all our best agricultural
    lands, so that for some products the law of diminishing
    productiveness has not yet shown itself. The reason is, that the
    extension of our railway system has only of late years brought the
    really good grain-lands into cultivation. The fact that there has
    been no rise in agricultural products is due to the enormous
    extent of marvelously fertile grain-lands in 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 the first column),
    first the best and then the poorer lands are brought into
    cultivation. We will suppose (1) that the most fertile land, A, at
    first pays no rent; then (2), when more food is wanted than land A
    can supply, it will be profitable to till land 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 the ordinary 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:

Population         A                   B                   C                   D
             24                  18                  12                  6
             bushels             bushels             bushels             bushels
             Total     Rent in   Total     Rent in   Total     Rent in   Total     Rent in
             product   Bushels   product   Bushels   product   Bushels   product   Bushels
I.                24         0        ..        ..        ..        ..        ..        ..
II.               24         6        18         0        ..        ..        ..        ..
III.              24        12        18         6        12         0        ..        ..
IV.               24        18        18        12        12         6         6         0

§ 5. Opposing Views of the Law of Rent.

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 should stock 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

But with regard to capital actually sunk in improvements, and not
requiring periodical renewal, but spent once for all in giving the land a
permanent increase of productiveness, it appears to me that the return
made to such capital loses altogether the character 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 increase of 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 rent of
the improved land is governed by the same rules as that of the unimproved.

    Mr. Carey (as well as Bastiat) has declared that there is a law of
    increasing returns from land. He points out that everything now
    existing could be reproduced to-day at a less cost than that
    involved in its original production, owing to our advance in
    skill, knowledge, and all the arts of production; that, for
    example, 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 at less cost to-day
    than that originally spent upon it. The gain of society has, we
    all admit, been such that we produce almost everything at a less
    cost now than long ago; but to class a farm and an axe together
    overlooks, in the most remarkable way, 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 be abundantly 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 the labor employed upon it has
    progressively become greater and greater.”(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 a ship 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 theory of rent, namely, that
in point of historical fact the lands first brought under cultivation are
not the most fertile, but the barren lands. “We find the settler
invariably occupying the high and thin lands requiring little clearing and
no drainage. With the growth 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, those which when
cultivated yield the least return, in proportion to the labor required for
their culture, will always regulate the price of agricultural 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
occasionally used 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 and science
being supposed the same, is not a diminishing return, he would 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 than that 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 from one 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 grain on this same land, so that one
    grain, by one process, produces of its kind 200, 400, 800, or
    1,600, because you can not multiply the land in any such ratio as
    would accompany this potential reduplication of the grain. This
    objection would not seem worth answering, were it not that it
    furnishes some difficulty to really honest inquirers.

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 of Ricardo’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 demand of the community required
that it should all be cultivated, and cultivated beyond the point at which
a further application of capital begins to be attended with a smaller
proportional return.

    This is simply the question, before discussed, whether, if only
    one class of land were cultivated, some agricultural capital would
    pay rent or not. It all depends on the fact whether population—and
    so the demand for food—has increased to the point where it calls
    out a recognition of the diminishing productiveness of the soil.
    In that case different capitals would be invested, so that there
    would be different returns to the same amount of capital; and the
    prior or more advantageous investments of capital on the land
    would yield more than the ordinary rate of profit, which could be
    claimed as rent.

    A. L. Perry(184) admits the law of diminishing returns, but holds
    that, “as land is capital, and as every form of capital may be
    loaned or rented, and thus become fruitful in the hands of
    another, the rent of land does not differ essentially in its
    nature from the rent of buildings in cities, or from the interest
    of money.” Henry George admits Ricardo’s law of rent to its full
    extent, but very curiously says: “Irrespective of the increase of
    population, the effect of improvements in methods 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 effect of labor-saving improvements will be
    to _extend the demand for land_, and, wherever the limit of the
    quality of land in use is reached, to bring into cultivation lands
    of less natural productiveness, or to extend cultivation on the
    same lands to a point of lower natural productiveness. And thus,
    while the primary effect of labor-saving improvements is to
    increase the power of labor, the secondary effect is to extend
    cultivation, and, where this lowers the margin of cultivation, to
    increase rent.”(185) Francis Bowen(186) rejects Ricardo’s law, and
    says, “Rent depends, not on the increase, but on the distribution,
    of the population”—asserting that the existence of large cities
    and towns determines the amount of rent paid by neighboring

§ 6. Rent does not enter into the Cost of Production of Agricultural

Rent does not really form any part of the expenses of [agricultural]
production, or of the advances of the capitalist. The grounds on which
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 the rent 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 the use of it he would save in his other expenses the
equivalent of what it cost him: without it he could not do the same
quantity of work, unless at an additional expense equal to the rent. The
same thing is true of land. The real expenses of production are those
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 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 in the same position as, his fellow-producer who
pays no rent, but whose 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, and beyond which
    it is not profitable to cultivate. The price of corn will not, for
    any long time, remain at a higher rate than is sufficient to cover
    with ordinary profit the cost of that portion of 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, and pays 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 of agricultural produce, but
    the value which regulates the cost.


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, the consideration of Value has
to do with the latter alone; and with that 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 to satisfy 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 value of a thing may fall short, to any amount,
of its value in use; but that it can ever exceed the value in use implies
a contradiction; it supposes that persons will give, to possess a thing,
more than the utmost value which they themselves put upon it, as a means
of gratifying their inclinations.

The word Value, when used without adjunct, always means, in political
economy, value in exchange.

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 of a thing, its general power of purchasing; the
command which its possession gives over purchasable commodities in
general. What is meant by command over commodities in general? The same
thing exchanges for a greater quantity of some commodities, and for a very
small quantity of others. A coat may exchange for less bread this year
than last, if the harvest has been bad, but for more glass or iron, if a
tax has been taken off those commodities, or an improvement made in their
manufacture. Has the value of the coat, 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, that an 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 to be affected at the very
time by a similar depressing cause. Those [changes] which originate in the
commodities with which we compare it affect its value in relation to those
commodities; but those which originate in itself affect its value in
relation to all commodities.

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 quantity of A. All things can not rise relatively to one another.
If one half of the commodities in the market rise in exchange value, the
very terms imply a fall of the other half; and, reciprocally, the fall
implies a rise. Things which are exchanged for one another can 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 to an alteration in the value of money, and is
a matter of complete indifference, save in so far as it affects existing
contracts for receiving and paying fixed pecuniary amounts.

Before commencing the inquiry into the laws of value and price, I have one
further observation to make. I must give warning, once for all, that the
cases I contemplate are those in which values and prices are determined by
competition alone. In so far only as they are thus determined, can they be
reduced to any assignable law. The buyers must be supposed as studious to
buy cheap as the sellers to sell dear.

    The reader is advised to study the definitions of value given by
    other writers. Cairnes(190) defines value as “the ratio in which
    commodities in open market are exchanged against each other.” F.
    A. Walker(191) holds that “value is the power which an article
    confers upon its possessor, irrespective of legal authority or
    personal sentiments, of commanding, in exchange for itself, the
    labor, or the products of the labor, of others.” Carey(192) says,
    “Value is the measure of the resistance to 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 this school, 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. Perry(194) defines value as
    “always and everywhere the relation of mutual purchase established
    between two services by their exchange.” Roscher(195) explains
    exchange value as “the quality which makes them exchangeable
    against other goods.” 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 to them, the result of man’s thought, or his view of them.
    Thus, for instance, in a beleaguered city, the stores of food do
    not increase in utility, but their value in use does.”
    Levasseur(196) regards value as “the relation resulting from
    exchange”—_le rapport resultant de l’échange_. Cherbuliez(197)
    asserts that “the value 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.” Jevons(198) defines value as
    “proportion in exchange.”

§ 2. Conditions of Value: Utility, Difficulty of Attainment, and

That a thing may have any value in exchange, two conditions are necessary.
1. It must be of some use; that is (as already explained), it must conduce
to some purpose, satisfy some desire. No one will pay a price, or part
with anything which serves some of 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 the
    existence of any value. Very justly Cairnes(199) adds also a third
    condition, “the possibility of transferring the possession of the
    articles 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. Walker(201) believes that
    “value depends wholly on the relation between demand and supply.”
    Carey(202) holds that value depends merely on the cost of
    reproduction of the given article. Roscher(203) finds that
    exchange value is “based on a combination of value in use with
    cost value.” Cherbuliez(204) calls the conditions of value two,
    “the ability to give satisfaction, and inability of attainment
    without effort. The first element is subjective; it is determined
    wholly by the needs or desires of the parties to the exchange. The
    second is objective; it depends upon material considerations,
    which are the conditions of the existence of the 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. Perry(205) 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

The difficulty of attainment which determines value is not always the same
kind of difficulty: (1.) It sometimes consists in an absolute limitation
of the supply. There are things of which it is physically impossible to
increase the quantity beyond certain narrow limits. Such are those wines
which can be grown only in 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
such may also be reckoned houses and building-ground, in a town of
definite extent.

    De Quincey(206) has presented some ingenious diagrams to represent
    the operations of the two constituents of value in each of the
    three following cases: U represents the power of the article to
    satisfy some desire, and D difficulty of attainment. In the first
    case, exchange value is not hindered by D from going up to any
    height, and so it rises and falls entirely according to the force
    of U. D being practically infinite, the horizontal line, exchange
    value, is not kept down by D, but it rises just as far as U, the
    desires of purchasers, may carry it.

 [Illustration: Vertical line D, paralleled by shorter vertical line U, D
             and U connected at top of U by horizontal line.]

(2.) But there is another category (embracing the majority of all things
that are bought and sold), in which the obstacle to attainment consists
only in the labor and expense requisite to produce 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.

    In case (2) the horizontal line, representing exchange value,
    follows the force of D entirely. The utility of the article is
    very great, but the value is only limited by the difficulty of
    obtaining 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
    horizontal line indicate that the exchange value of articles in
    this class tend to fall in value.

[Illustration: Parallel vertical lines U and D, U being longer, joined by
               several horizontal lines of Exchange 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 a
limited quantity can be produced at a given cost; if more is wanted, 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 source of very important
consequences; one of which is the necessity of a 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 high value.
    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 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.

                     [Illustration: Same as before.]

§ 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 in quantity, such as
ancient sculptures or pictures.

Of such things it is commonly said that their value depends on their
scarcity; others say that the value depends on the demand and supply. But
this statement requires much explanation. The supply of a commodity is an
intelligible expression: it means the quantity 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 is meant 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 as purchasing power in
    exchange for other commodities. That is, 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 is necessarily 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 general
    purchasing power, is introduced, Mr. Cairnes(208) 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 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.,
    are engaged 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 each
    case the producer and the consumers are distinct, and hence, by a
    very natural fallacy, it is concluded that the whole body of
    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 particular commodities (not
    general demand and supply), the increase of the demand is not
    necessarily followed by an increased supply, or _vice versa_. Out
    of the total production (which constitutes general demand) a
    varying amount, sometimes more, sometimes less, may be directed by
    the desires of men to the purchase of some given thing. This
    should be borne in mind, in connection with the future discussion
    of over-production. The identity of general demand with general
    supply shows there can be no general over-production: but so long
    as there exists the possibility that the demand for a particular
    commodity may diminish without a corresponding effect being
    thereby produced on the supply of that commodity, by a necessary
    connection, we see that there may be over-production of particular
    commodities; that is, a production in excess of the demand.

The proper mathematical analogy [between demand and supply] 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, the value 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 and
supply are again equal to one another: and the value which a commodity
will bring in any market is no other than the value which, in that market,
gives a demand just sufficient to carry off the existing or expected

Mr. Cairnes(209) finally defined market value as the price “which is
sufficient, and no more than sufficient, to carry the existing 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 and demand, _not_ as existing
in the particular market, but in the larger sense which I have assigned to
the terms. To this price the _actual market price_ will, according to my
view, approximate, in proportion to the intelligence and knowledge of the

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 be permanently 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 and necessarily limited
in supply. But any commodity whatever may be artificially so. The
monopolist can fix the value as high as he pleases, short of what the
consumer either could not or 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 demand
and 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; the quantity of corn already existing in the world is
all that can be had for sometimes a year to come. During that interval,
corn is practically 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 are some articles
of which the supply may be indefinitely increased, but can not be rapidly
diminished. There are things so durable that the quantity in existence is
at all times very great in comparison with the annual produce. Gold and
the more durable metals are things 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
monopoly of the article, and could repay himself for the destruction of a
part by the increased value of the remainder. The value, therefore, of
such things may continue for a long time so low, either from excess of
supply or falling off in the demand, as to put a complete stop to further
production; the diminution of supply by wearing out being so slow a
process that a long time is requisite, even under a total suspension of
production, to restore the original value. During that interval the value
will be regulated solely by supply and demand, and will rise very
gradually as the existing stock wears out, until there is again a
remunerating value, and production 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
    1882(211) was only $212,000,000. The loss of gold by 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 a perceptible effect on their value only
    after such a time as will permit the change to affect the existing
    quantity in a way 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 from the annual

Finally, there are commodities of which, though capable of being increased
or diminished to a great and even an unlimited extent, the value never
depends upon anything but demand and supply. 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 we treat of International Values; that is, of the terms
of interchange between things produced in different countries, or, to
speak more generally, in distant places.

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

When the production of a commodity is the effect of labor and expenditure,
whether the commodity is susceptible of unlimited multiplication or not,
there is a minimum value which is the essential condition of its being
permanently produced. The value at any particular time is the result of
supply and demand, and is 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 at a 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, is also, if competition is free and active,
the maximum which they can expect. If the value of a commodity is such
that it repays the cost of production not only with the customary but with
a higher rate of profit, capital rushes to share in this extra gain, and,
by increasing the supply of the article, reduces its value. This is not a
mere supposition or surmise, but a fact familiar to those conversant with
commercial operations. Whenever a new line of 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 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 is corrected 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 their produce by availing themselves more largely of their
credit, while those who are not making the ordinary profit, restrict their
operations, and (in manufacturing phrase) work short time. In this mode is
surely and speedily effected the equalization, not of profits, perhaps,
but of the expectations of profit, in different occupations.

As a general rule, then, things tend to exchange for one another at such
values as will enable each producer to be repaid the cost of 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, that is, the cost of production, is
equal, things must on the average exchange for one another in the ratio of
their cost of production; things of which the cost of production is the
same, must be of the same value.

    Mr. Mill has here used cost of production almost exactly in the
    sense of cost of labor, and as excluding profit (while in the next
    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: “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”; “the cost of production, _together
    with_ the ordinary profit, may therefore be called the _necessary_
    price, or value”; “it repays the cost of production, not only
    _with_ the customary, but _with_ a higher rate of profit”; “the
    cost of production with the ordinary profit—in other words, such
    as will give to all producers the same rate of profit on their
    outlay”; “that the profit may be equal where _the outlay, that is,
    the cost of production_, is equal.” This is a view which
    distinctly uses cost of production in the sense of the outlay 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 natural value,
    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 will remain for us in
    the next chapter to consider whether any other view of it is more

Adam Smith and Ricardo have called that value of a thing which 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, the moment 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 the other, 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 by storms. It is enough that no point, at least in the open
sea, is permanently higher than another. Each place is alternately
elevated and depressed; but the ocean preserves its level.

§ 6. The Value of these Commodities confirm, in the long run, to their
Cost of Production through the operation of Demand and Supply.

The latent influence by which the values of things are made to conform in
the long run to the cost of production is the variation that 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 it fell below that ratio.

    If one dollar covers the expense of making one spade, then when 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 the supply that one spade would
    sell for only one dollar; then all would receive the average
    profit. If, owing to a cessation of demand for spades, the price
    fell to ninety cents, then the manufacturers would lose ten cents
    on each one made and sold. Thereupon they would cease to do a
    losing business, capital would be withdrawn, and spades would not
    be made until the supply was suited to the necessary expense of
    making them (one dollar). In this way, whenever there is a
    departure of the value from the normal cost, there is set in
    motion _ipso facto_ a series of forces which automatically
    restores the value to that cost. So here again we see the nature
    of an economic law: the value may not often correspond exactly
    with cost of production, but there is a _tendency_ in all values
    to conform 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 of
    gravitation 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 cause but the
consequence of the alteration in value. If, indeed, the supply _could_ not
be increased, no diminution in the cost of 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 mutual competition makes them anticipate the result by lowering
the price.

    Before the electric light was yet known as a feasible means of
    lighting (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.

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, demand and supply depend
upon it. There is a demand for a certain quantity of the commodity at its
natural or cost value, and to that the supply in the long run endeavors to

    Mr. Cairnes(213) 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, to yield 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 from
miscalculation, or from a change in some of the elements of the 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 to the supply, the market value will deviate from
the natural value; but only for a time, for the permanent tendency of
supply is to conform itself to the demand which is found by experience to
exist for the commodity when selling at its natural value. If the supply
is either more or less than this, it is so accidentally, and affords
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 of all things which
can not be indefinitely increased; except that even 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 obey
a 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 it again deviate.

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 the advances, 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 part of 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 the article 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 the cloth-manufacturer.
It consists also of the wages of spinners and wool-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 reimbursed in the contract price of erecting his factory. It
partly consists of the wages of machine-makers, iron-founders, and miners.
And 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 at wholly
    from the stand-point of the capitalist, and was identical with
    Cost of Labor to the capitalist.

The value of commodities, therefore, depends principally (we shall
presently see whether it depends solely) on the quantity of labor required
for their production, including in the idea of production that of
conveyance to the market. But since the cost of production to the
capitalist is not labor but wages, and since 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 the quantity together with the remuneration, and that values
must partly depend on wages.

Now the relation of one thing to another can not be altered by any cause
which affects them both alike. A rise or fall of general wages is a fact
which affects all commodities in the same manner, and therefore affords no
reason why they should exchange for each 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 do with them; but that high wages make high prices, is a
popular and widely spread opinion. The whole amount of error involved in
this proposition can only be seen thoroughly when we come to the theory of
money; at present we need only say that if it be true, 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 of everything, they could not, for any
substantial purpose, rise at all. It must be remembered, too, that general
high prices, even supposing 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 mode in
which capitalists can compensate themselves for a high cost of 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

§ 2. Wages affect Values, only if different in different employments;
“non-competing groups.”

Although, however, _general_ wages, whether high or low, do not affect
values, yet if wages are higher in one employment than another, 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 skilled labor, exchange for the produce of a much
greater quantity of unskilled 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 has
hitherto caused the wages of all those classes of laborers who are
separated from one another by any very marked barrier to depend more than
might be supposed upon the increase of the population of 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
not rise or fall simultaneously, but are, for short and sometimes even for
long periods, nearly independent of one another. All such disparities
evidently alter the _relative_ cost of production of 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 labor necessary for
producing different commodities affect their value just as much as the
relative _quantities_ of labor. It is true, the absolute 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, so that 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, not only 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
flax-spinner, part of whose expenses consists of the purchase of flax and
of machinery, has had to pay, in their price, not only the wages of the
labor by which the flax was grown and the machinery 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 by sacrifice, or cost, to the
Laborer as well as to the Capitalist; the relation of this conception to
the Cost of Labor.

    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 the price 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 immediate both) were one, all the
    advances of the capitalist might be considered 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 outlay of the immediate producers should include the
    profit of the auxiliary capitalist. More than this, Mr. Mill now
    includes in cost 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
    and last 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 “cost of 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 United States produce one hundred
    bushels of wheat, it will happen that the same men and capital
    will only produce sixty bushels on ground, B, in England.

                   [Illustration: Cost of Production.]

    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 same thing, that less labor and
    capital could produce sixty bushels in 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 United States the one hundred dollars of
    capital receives twenty-five bushels 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 made is that where cost of production is low, wages and
    profits are high. The high productiveness of extractive industries
    in the 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 and profits are
    both higher in the United States than in England, but no one is so
    absurd as to say that the cost of production of 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 an increased cost of production of a given
    article, we mean that its production requires more labor and
    capital than before; and of a decrease in cost of production, that
    it requires less labor and capital than before; meaning by “more
    labor” that a given quality of labor is exerted for a longer or
    shorter time, and by “more capital” that a greater or less
    quantity of wealth abstained from is employed for a longer or
    shorter time; or, in other words, that laborers and capitalists
    undergo more or less sacrifice in exertion and abstinence,
    respectively, to attain a given result. This is the contribution
    to cost of production made by Mr. Cairnes, and briefly defined as
    follows: “In the case 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 severity of 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 quantity of 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, the cost, or
    real sacrifice, to the laborer as well as to the capitalist. 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 for labor 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 the sacrifice involved in
    each case. If so, the amount paid in wages and profits represents
    the sacrifices in each case. Now, the aggregate product of an
    industry is the source from which 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
    of a commodity, therefore, within the competing group, must
    conform to the costs of production. If, for example (_a_), the
    value 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 not pass freely from one
    employment to another; and it must be said that capital does not
    either, although vastly more ready to 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
    the exertions of each group of producers is the source from which
    wages and profits are drawn. The aggregate wages and profits 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, this value depends on the
    reciprocal demand of one group for the commodities of the other
    groups, as compared with the demand 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 value of A’s products would rise, and A would get more of
    other goods in exchange; that is, the total produce is large, but
    a second increment, arising from a higher exchange value, is to be
    shared among A’s laborers and capitalists. A few years ago, about
    1878-1879, the value of wheat in the United States rose 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 so increased 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 non-competing 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, their products do not exchange
    for each other in proportion to their costs of production.
    Reciprocal demand is the law of their value.

    It will be said, at once, that the foregoing conception of cost of
    production is entirely opposed to the language of practical men of
    affairs. They constantly speak of higher or lower wages as
    increasing their cost of production, or as affecting 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 chief part of the outlay he
    makes in order to get a given return; but we have already seen
    this, and, in the language of Political Economy, termed it “cost
    of labor” to the capitalist. When the business 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 them of 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 from its misuse in the common
    language of business.

    The real connection between the proper conception of cost of
    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, the
    higher its wages and profits may be, and it is exactly at this
    point that more attention should be given to the relations of
    labor 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 light on many
    industrial questions in the United States. In the connection in
    which it stands, as I have shown, to cost of labor, it means that
    if commodities can be produced at a less sacrifice to labor and
    capital by the use of machinery and new processes, higher wages
    are consistent with a lower price of the 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. Brassey(217)
    has pointed out that English wages are higher 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 same observations apply to the United States;
    but the question of foreign competition will be further discussed
    (Book III, Chap. XX) after we have studied international trade and

    “And here it may be well to state precisely what is to be
    understood by a ‘fluctuation of the market,’ as distinguished from
    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 other of two causes—cost of
    production and reciprocal demand. A change in normal price,
    therefore, is a change which is the consequence of an alteration
    in one or other of these conditions. So long as the determining
    condition—be it cost of production or reciprocal demand—remains
    constant, the normal 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. Such changes
    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 of Time, they affect Values accordingly.

Value, however, being purely relative, can not depend upon absolute
profits, no more than upon absolute wages, but upon relative profits only.
High general profits can not, any more than high general wages, be a cause
of high values, because high general values are an absurdity and a
contradiction. In so far as profits enter into the cost of production of
all things, they can not affect the value of any. It is only by entering
in a greater degree into the cost of production of some things than of
others, that they can have any influence on value.

Profits, however, may enter more largely into the conditions of 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 yield a 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 by equal
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 end of five years he can sell it for as
much more than the cloth as amounts 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_ something
else—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 other advances, for which outlay he
must be indemnified at last.

    Regarding cost of production as the amounts of labor and
    abstinence required in production, and not as Mr. Mill regards 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 in proportion to the sacrifices
    involved; so that the wine would exchange for more of cloth,
    because there was more sacrifice undergone. The same explanation
    also holds good in the following illustration:

All commodities made by machinery are assimilated, at least 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
denote by money, and suppose it to be £1,000. A is made wholly by
immediate labor, the whole £1,000 being expended directly in wages. B is
made by means of labor which cost £500 and a machine which cost £500, and
the machine is worn out by one year’s use. The two commodities will be of
exactly the same value, 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 case of 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 of the 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 exchange in the ratio simply of the quantities of
labor required to produce them; not even if we allow for the unequal rates
at which different kinds of labor are permanently remunerated.

(2.) A second consequence is, that every rise or fall of general profits
will have an effect on values. Not, indeed, by raising or lowering them
generally (which, as we have so often said, is a contradiction and an
impossibility), but by altering the proportion in which the values of
things are affected by the unequal lengths of time for which profit is
due. When two things, though made by equal labor, are of unequal value
because the one is called upon to yield profit for a greater number of
years or months than the 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 vulgarly supposed, by raising them
universally; but an increase in the cost of labor lowers profits, and
therefore lowers in natural values the things 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 which machinery 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 to them. This truth is sometimes expressed in a phraseology
more plausible than sound, by saying that a rise of wages raises the value
of things made by labor in comparison with those made by machinery. But
things made by machinery, just as much as any other things, are made by
labor—namely, the labor which made the machinery itself—the only
difference being that profits enter somewhat more largely into the
production of things for which machinery is used, though the principal
item of the outlay is still labor.

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

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, and the 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 in cost 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 those
articles 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 general taxation, 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, when unappropriated, 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 mere fact of the appropriation, but only from scarcity—that is,
from limitation of supply. But it is equally certain that they often do
bear 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 ground-rent 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 is peculiarly valuable, the rent paid for it must, on the average,
be compensated 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

    These occasional elements in cost of production, such as taxes,
    insurance, ground-rent, etc., are to be considered as just 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 a longer time,
    to be rewarded. These elements, therefore, if they are not
    universal (or common to all articles), will affect the exchange
    value of commodities, wherever there is a free competition.

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

§ 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.

We have investigated the laws which determine the value of two classes of
commodities—the small class which, being limited to a definite quantity,
have their value entirely determined by demand 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 can
permanently 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 the same amount of labor and capital; of
which so much may be produced at a given cost, but a further quantity not
without a greater cost. These commodities form an intermediate class,
partaking of the character of both the others. The principal of them is
agricultural produce. We have already made abundant reference to the
fundamental truth that in agriculture, the state of the art being given,
doubling the labor does not double the produce; 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 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 cultivation of the
land already under the plow, the additional hundred, or some part of them,
at least, might cost double or treble as much per quarter as the former

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 20_s._ the quarter, the natural
price of wheat, so long as no more than that quantity was required, would
be 20_s._; and it could only rise above or fall below that price from
vicissitudes of seasons, or other 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, no more 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 these things will be done without a rise
in price. This rise of price will gradually be brought about by the
increasing demand. So long as the price has risen, but not risen enough to
repay with the ordinary profit the cost of producing an additional
quantity, the increased value of the limited supply partakes of the nature
of 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 25_s._ the quarter; and that this price is also necessary to
remunerate the expensive operations by which an increased produce might be
raised from land of the first quality. If so, the price will rise, through
the increased demand, until it reaches 25_s._ That will now be the natural
price; being the price without which the quantity, for which society has a
demand at that price, will not be produced. At that price, however,
society can go on for some time longer; could go on perhaps forever, if
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 long as society can
obtain the supply it requires without a second increase of the cost of

In the case supposed, different portions of the supply of corn have
different costs of production. Though the twenty, or fifty, or one hundred
and fifty quarters additional have been produced at a cost proportional to
25_s._, the original hundred quarters per annum are still produced at a
cost only proportional to 20_s._ 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 20_s._, has been
made to produce one hundred and fifty by an expensive process, which it
would not answer to undertake without a price of 25_s._ The cost which
requires 25_s._ 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, on that quantity, of the whole rise of price
caused by the increased demand: no one, therefore, will incur the
additional expense for the sake of the additional fifty, unless they alone
will pay for the whole of it. The fifty, therefore, will be produced at
their natural price, proportioned to the cost of their production; while
the other hundred will now bring in 5_s._ a quarter more than their
natural price—than the price corresponding to, and sufficing to
remunerate, 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, that price 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 is the same with its average value) is
determined by the cost of that 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 in circumstances more favorable,
yield a Rent equal to the difference of Cost.

If the portion of produce raised in the most unfavorable circumstances
obtains a value proportioned to its cost of 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

The owners, however, of those portions of the produce enjoy a privilege;
they obtain a value which yields them more than the ordinary profit. The
advantage depends on the possession of a natural agent of peculiar
quality, as, for instance, of more fertile land than that which determines
the general value of the commodity; and when this natural agent is not
owned by themselves, the person who does own it is able to exact from
them, 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 to different parts of the capital
employed on the soil. Whatever surplus 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 the
existing demands of society compel a recourse to, that surplus will
naturally be paid as rent from that capital, to the owner of the land on
which it is employed.

    The discussion of rent is here followed wholly from the point of
    view of value, while before (Book II, Chap. VI) the law of rent
    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 it solely in
    respect to value, brings us to the same law:

Price            A                   B                   C                   D
           24                  18                  12                  6
           bushels             bushels             bushels             bushels
          Total       Rent.   Total       Rent.   Total       Rent.   Total
          value of            value of            value of            value of
          product.            product.            product.            product.
$1.00       $24.00    $0.00       ....     ....       ....     ....       ....
$1.33       $32.00    $8.00     $24.00    $0.00       ....     ....       ....
$2.00       $48.00   $24.00     $36.00   $12.00     $24.00    $0.00       ....
$4.00       $96.00   $72.00     $72.00   $48.00     $48.00   $24.00     $24.00

It was long thought by political economists, among the rest even by Adam
Smith, that the produce of land is always at a monopoly value, because
(they said), in addition to the ordinary rate 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 will yield the ordinary profit, but allow nothing for rent: and that
land, if within the boundary of a farm, will be cultivated by the farmer;
if not so, probably by the proprietor, or by some other person 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 the capital most
unfavorably circumstanced among those actually employed, 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 it to 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 obtained that price the whole would obtain
it. Rent, therefore, unless artificially 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 had
retained it, or imposed an equivalent in the shape of a land-tax, it would
then have been a fund applicable to general instead of private advantage.

    The nationalization of the land, consequently, would not benefit
    the laboring-classes a whit through lowering the price to them, or
    any consumer, of food or agricultural produce.

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

Agricultural productions are not the only commodities which have several
different costs of production at once, and which, in consequence of that
difference, and in proportion to it, afford a rent. 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 in fertility—that is, yielding very different
quantities of the product to 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 which more than a
certain number of laborers can not be simultaneously employed. But this is
not true of all mines. In collieries, for example, 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 of different degrees of richness are in operation, and since the
value of the produce must be proportional to the cost of production at the
worst mine (fertility and situation taken together), it is more than
proportional to that of the best. All mines superior in produce 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 qualities of land do; and the demand may be such as to
keep the value of the produce considerably above the cost of production at
the worst mine now worked, without being sufficient to bring into
operation a still worse. During the interval, the produce is really at a
scarcity value.

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 the whole class. Some rivers are
far more productive in salmon than others. 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 already in 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 the
commodity—will be a mine or fishery of better quality than that by 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 an indefinite amount; the
surplus being either in consideration of beauty or of convenience, the
convenience often consisting in superior 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 are governed 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 the
    alphabet; that those below O pay no agricultural rent, and that
    all lands increase in fertility and situation as we approach the
    beginning of the alphabet, but which, as far up as K, are used in
    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, that it must pay a
    ground-rent as high as the agricultural rent of K, the most
    fertile land cultivated in agriculture. It must pay a ground-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 for the 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, the patentee will make an extra profit equal
to the advantage which his process possesses over theirs. This extra
profit is essentially similar to rent, and sometimes even assumes the form
of it, the patentee allowing to other producers the use of his privilege
in consideration of an annual payment.

The extra gains which any producer or dealer obtains through superior
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 be transferred to their customers through the
diminished value of the article; he only retains it for himself because he
is able to bring his commodity to market at a lower cost, while its value
is determined by a higher.(219)

§ 4. _Résumé_ of the laws of value of each of the three classes of

A general _résumé_ of the laws of value, where a free movement of labor
and capital exists, may now be briefly made in the following 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 are three
classes of commodities.
3. Transferableness.

Of the second condition, there are three classes:
1. Those limited in supply—e.g., ancient pictures or monopolized
2. Those whose supply is capable of indefinite increase by the use 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 Demand and Supply.
The only limit is U.

Of those whose supply is capable of indefinite increase, their normal and
permanent value is regulated by Cost of Production, and their temporary or
market value is regulated by Demand and Supply, oscillating around Cost of
Production (which consists of the amount of labor and abstinence

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, which is 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 the value of
those commodities which has been said, in the above classification, to
depend on cost of production, will be governed by the law of Reciprocal

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 laws of 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 principles of the mutual interchange of
commodities are affected by the use of what is termed a Medium of

    As Professor Jevons(220) has pointed out, money performs three
    distinct services, capable of being separated by the mind, and
    worthy of separate definition and explanation:

    1. A Common Measure, or Common Denominator, of Value.

    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 the
    money-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 for values_ of different sorts. If a
tailor had only coats, and wanted to buy 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 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 regular
quotations of value. As it is much easier to compare different lengths by
expressing them in a common language of feet and inches, so it is much
easier to compare values by means of a common language of [dollars and

    The need of a common denominator of values (an excellent term,
    introduced by Storch), to whose terms the values of all other
    commodities may be reduced, and so compared, is as great as that
    the inhabitants of the different States of the United States
    should have a common language as a means by which 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 for taxation 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 the common denominator of
    value is that the latter measures value, 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 some more
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 to
his own immediate wants, was in great and general demand, and easily
divisible, so that he might be sure of being able to purchase with it
whatever was offered for sale. The thing which people 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 furnished by
    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 other songs, she was to receive
    a third part of the receipts. When counted, her share was found to
    consist of three pigs, twenty-three turkeys, forty-four chickens,
    five thousand cocoanuts, besides considerable quantities of
    bananas, lemons, and oranges. 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
    with the 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.
    Walker(223) as a “standard of deferred payments.” Its existence is
    due to the desire to have a means of comparing the purchasing
    power of a commodity at one time with its purchasing power at
    another distant time; that is, that for long contracts, exchanges
    may be in unchanged ratios at the beginning and at the end of the
    contracts. There is no distinction between this function and the
    first, except one arising from the introduction of _time_. At the
    same time and place, the “standard of value” is given in the
    common denominator of value.

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 thing which is to measure it, we may define a
Measure of Value to be something, 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 of value at a given
time and place; since we can always infer the proportion in which things
exchange for one another, when we know the proportion in which each
exchanges for any third thing. To serve as a convenient measure of value
is one of the functions of the commodity selected as a medium of exchange.
It is in that commodity that the values of all other things are habitually

But the desideratum sought by political economists is not a measure of the
value of things at the same time and place, but a measure of the value of
the same thing at different times and places: something by comparison with
which it may be known whether any given thing is of greater or less value
now than a century ago, or in this country than in America or China. To
enable the money price of a thing at two different periods to measure the
quantity of things in general which it will exchange for, the same sum of
money must correspond at both periods to the same 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 not
    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, so many
    pounds, or bushels, or cords, or yards, to form a standard
    required. The value of these articles, in the quantities
    specified, and all of standard quality, shall be ascertained
    monthly or weekly by Government, and the total sum [in money]
    which would then purchase this bill of goods shall be, thereupon,
    officially promulgated. Persons may then, if they choose, make
    their contracts for future payments in terms of this multiple or
    tabular standard.”(225) A, who had borrowed $1,000 of B in 1870
    for ten years, would make note of the total money value of all
    these articles composing the multiple 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 these ten 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 falls due,
    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 that case, A is obliged to
    pay back but eight multiple units, which costs him only $800 in
    money, while B receives from A the same 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 to his exertions. On the other hand, if, between 1870
    and 1880, prices had risen, _mutatis mutandis_, the eight units
    would have cost 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 in so 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 to receive 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; a
consideration of much importance in an age of insecurity. Jewels are
inferior to gold and silver in the quality of divisibility; and are of
very various qualities, not to be accurately discriminated without 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.

Jevons(226) has more fully stated the requisites for a perfect money as—

      1. Value.
      2. Portability.
      3. Indestructibility.
      4. Homogeneity.
      5. Divisibility.
      6. Stability of value.
      7. Cognizability.

Accordingly, though furs have been employed as money in some countries,
cattle in others, in Chinese Tartary cubes of tea closely pressed
together, the shells called cowries on the coast of Western Africa, and in
Abyssinia at this day blocks of rock-salt, gold and silver have been
generally preferred by nations which were able to obtain them, either by
industry, commerce, or conquest. 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 of value. No
commodity is quite free from such fluctuations. Gold and silver have
sustained, since the beginning of history, one great permanent alteration
of value, from the discovery of the American mines.

In the present age the opening of new sources of supply, so abundant as
the Ural Mountains, California, and Australia, may be the commencement of
another period of decline, on the limits of which it would be useless at
present to speculate. But, on the whole, no commodities are so little
exposed to causes of variation. They fluctuate less than almost any other
things in their cost of production. And, from their durability, the total
quantity in existence is at all times so great in proportion to the annual
supply, that the effect on value even of a change in the cost of
production is not sudden: a very long time being required to diminish
materially the quantity in existence, and even to increase it very greatly
not being a rapid process. Gold and silver, therefore, are more fit than
any other commodity to be the subject 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 of 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) of from nine to
    fifteen per cent. Another change took place, a change in the
    value, of silver, in 1876, which has resulted in a permanent fall
    of its value since that time (see chart No. X, Chap. VII). Before
    that date, silver sold at about 60_d._ per ounce in the central
    market of the world, London; and now it remains about 52_d._ per
    ounce, although it once fell to 47_d._, in July, 1876. In spite of
    Mr. Mill’s expressions of confidence in their stability of
    value—although certainly more stable than other commodities—the
    events of the last thirty-five years have fully shown that neither
    gold nor silver—silver far less than gold—can successfully serve
    as a perfect “standard of value” for any considerable length of

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
recognized proportion 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 have become
insupportable. Governments found it their interest to take the operation
into their own hands, and to interdict all coining by private persons.

§ 3. Money a mere contrivance for facilitating exchanges, which does not
affect the laws of value.

It must be evident, however, that the mere introduction of a particular
mode of exchanging things for one another, by first exchanging a thing for
money, and then exchanging the money for something else, makes no
difference in the essential character of transactions. It is not with
money that things are really purchased. Nobody’s income (except that of
the gold or silver miner) is derived from the precious metals. The
[dollars or cents] 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 he makes choice of. The
farmer pays his laborers and his landlord in these 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 to them directly, or sells it for them and gives them
the price. There can not, in short, be intrinsically a more insignificant
thing, in the economy of society, than money; except in the character of a
contrivance for sparing time and labor. It is a machine for doing quickly
and commodiously what would be done, though less quickly and commodiously,
without it; and, like many other kinds 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 operation of any of
the Laws of Value laid down in the preceding chapters. The reasons which
make the temporary or market value of things depend on the demand and
supply, and their average and permanent values upon their cost of
production, are as applicable to a money system as to a system of barter.
Things which by barter would exchange for one another will, if sold for
money, sell for an equal amount of it, and so will exchange for one
another still, though the process of exchanging them will consist of two
operations instead of only one. The relations of commodities to one
another remain unaltered by money; the only new relation introduced is
their relation to money itself; how much or how little money they will
exchange for; in other words, how the Exchange Value of money itself is
determined. Money is a commodity, and its value is determined like that of
other commodities, temporarily by demand and supply, permanently and on
the average by cost of production.

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 is what money will
exchange for, the purchasing power of money. If prices are low, money will
buy much of other things, and is of 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 general prices; 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 right to 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 much capital; the money is the
mere instrument of transfer. But the capital usually passes from the
lender to the receiver through the means 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 their capital disposable for investment on loan are called the
moneyed class; and the equivalent given for the use of capital, or, in
other words, interest, is not only called the interest of money, but, by a
grosser perversion of terms, the value of money.

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

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 for sale. 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 is bought and sold like other things, whenever other
things are bought 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 which people are offering
to buy, is money offered for sale. The supply of 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 a reserve 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 the goods he brings with
him constitute his demand. The demand for money differs from the demand
for other things in this, that it is limited only by the means of the

    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 for other things, inasmuch
    as, in our corrected view of demand for other things (p. 255), it
    was found that the demand for other things than money was also
    limited by the means of the purchaser.(228)

As the whole of the goods in the market compose the demand for money, so
the whole of the money constitutes the demand for goods. The money and the
goods are seeking each other for the purpose of being exchanged. They are
reciprocally supply and demand 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

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 the same, 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 in the
possession of any one, another pound, shilling, or penny were suddenly
added. There would be an increased money demand, and consequently an
increased money value, or price, for things of 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 of values only as estimated in money, a thing only wanted to buy
other things with; and would not enable any one to buy more of them than
before. Prices would have risen in a certain ratio, and the value of money
would have fallen in the same ratio.

It is to be remarked that this ratio would be precisely that in which the
quantity of money had been increased. If the whole money 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 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 the channels 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 is a 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 to money. We did not find it to be true
of commodities generally, that every diminution of supply raised the value
exactly in proportion 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, the desire, being for the
thing itself, may be stronger or weaker; and the 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 of money, which is desired as the means of universal
purchase, the demand consists of everything which people have to sell; and
the 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.

It might be supposed that there is always in circulation in a country a
quantity of money equal in value to the whole of the goods then and there
on sale. But this would be a complete misapprehension. The money laid out
is equal in value to the goods it purchases; but the quantity of money
laid out is not the same thing with the quantity in circulation. As the
money passes from hand to hand, the same piece of money is laid out many
times before all the things on sale at one time are purchased and finally
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 of times those
goods are resold, to be fixed quantities, the value of money 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 for the whole of the money, multiplied by the number of
purchases made on the average by each piece. Consequently, the amount of
goods and of transactions being the same, the value of money is inversely
as its quantity multiplied by what is called the rapidity of 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

    This may be expressed in mathematical language, where V is the
    value of money, Q is the quantity in circulation, and R the number
    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 made by 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 piece of money hardly performs more than one
purchase in a year; but if this arises from the small number of
transactions—from the small 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 value
of money higher. The essential point is, not how often the same 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 a given time, not with the time itself, but with the
goods sold in that same time. If each piece of money changes hands on an
average 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 circulation is £100,000, and
each piece changes hands, by the purchase of 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 a given
pecuniary amount of transactions.

    “There is no doubt that the rapidity of circulation varies very
    much between one country and another. A thrifty people with slight
    banking facilities, like the French, Swiss, Belgians, and Dutch,
    hoard coin much more than an improvident people like the English,
    or even a careful people, with a perfect banking system, like the
    Scotch. Many circumstances, too, affect the rapidity of
    circulation. Railways and rapid steamboats enable coin and bullion
    to be more swiftly remitted than of old; telegraphs prevent its
    needless removal, and the acceleration 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 amount of currency in a country and the aggregate of
    the exchanges which can be effected by it.”(229)

§ 4. Explanations and Limitations of this Principle.

The proposition which we have laid down respecting the dependence of
general prices upon the quantity of money in circulation must be
understood as applying only to a state of things in which money—that is,
gold or silver—is the exclusive instrument of exchange, and actually
passes from hand to hand at 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 much less
direct and intimate, and that such connection as does exist no longer
admits of so simple a mode of expression. That an increase 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 the others. In any state of things, however, except
the simple and primitive 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 inevitable consequence. 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, and is there actually exchanged against goods.
Whatever increases the amount of this portion of the money in the country
tends to raise prices.

    This statement needs modification, since the change in the amounts
    of specie in the bank reserves, particularly of England and the
    United States, determines the amount of credit and purchasing
    power granted, and so affects prices in that way; but prices are
    affected not by this specie being actually exchanged against

It frequently happens that money to a considerable amount is brought into
the country, is there actually invested as capital, and again 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.

A foreigner landing in the country with a treasure might very probably
prefer to invest his fortune at interest; which we shall 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 the hands of the public. By doing this he would raise the
prices of those different securities, or in other words would lower the
rate of 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 to send it abroad for foreign
investment, rather than buy securities at home at the advanced price. As
much money might thus go out as had previously come in, while the prices
of commodities would have shown no trace of its temporary presence. This
is a case highly deserving of attention; and it is a fact now beginning to
be recognized that the passage of the precious metals from country 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

If there be, at any time, an increase in the number of money transactions,
a thing continually liable to happen from differences in the activity of
speculation, and even in the time of year (since certain kinds of business
are transacted only at particular seasons), an increase of the currency
which is only proportional to this increase of transactions, and is of no
longer duration, has no tendency to raise prices.

    For example, bankers in Eastern cities each year send in the
    autumn to the West, as the crops are gathered, very large sums of
    money, to settle transactions in the buying and selling of grain,
    wool, etc., but it again flows back to the great centers of
    business in a short time, in payment of purchases from Eastern

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.

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 the exportation 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 to suppose 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 made for coinage, the
value of money will conform to the value of the 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, the metal 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 in
circulation was so much diminished as to equalize its value with 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 being a manufactured article
will naturally be, of greater value than the 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 and in some others, coins money gratis for any one who
furnishes the metal. 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 than has
been received in bullion, and is called levying a seigniorage), the coin
will rise, to the extent of the seigniorage, above the value 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 holders of 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 on gold
    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 not legal money, a seigniorage was charged
    equal simply to the expense 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.

The value of money, then, conforms permanently, and in a state of freedom
almost immediately, to the value of the metal of which it is made; with
the addition, or not, of the expenses of coinage, 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 values of 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 supplied with gold and silver by its own mines [as
in the case of the United States], reserving for future consideration how
far our conclusions require modification to adapt them to the more usual

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 those which may be had in unlimited quantity, but
at an increasing cost of production—the precious metals, being the produce
of mines, belong to the third class. Their natural value, therefore, is in
the long run proportional to their cost of production in the most
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 is made to conform to its
natural value in the same manner as the values of other things are made to
conform to their natural value. Suppose that it were selling above its
natural value; that is, above the value which is an equivalent for the
labor and expense of mining, and for the risks attending a branch of
industry in 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; the supply 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 their works; if the depreciation was
great, some of the inferior mines would perhaps stop working altogether:
and a falling off in the annual 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 diminished or annihilated, he will diminish
his production, if not abandon his employment.

In this manner it is that the value of money is made to conform to 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 the adjustment takes a
long time to effect, in the case of a commodity so generally desired and
at the same time so durable as the precious metals. Being so largely used,
not only as money but for plate and ornament, there is at all times a very
large quantity of these metals in existence: while they are so slowly worn
out that a comparatively small annual production is sufficient to keep up
the supply, and to make any addition to it which may be required by 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 make any very material difference in prices. The quantity
may be increased much more rapidly than it can be diminished; but the
increase must be very great before it can make itself much felt over such
a mass of the precious metals as exists in the whole commercial world. And
hence the effects of all changes in the conditions of production of the
precious metals are at first, and continue to be for many years, questions
of quantity only, with little reference to cost of production. More
especially is this the case when, as at the present time, many new sources
of supply have been simultaneously opened, most of them practicable by
labor 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 the different sources being
entirely unascertained.

    For the facts in regard to the production of the precious metals,
    see the investigation by Dr. Adolf Soetbeer,(230) from which 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 taken from the reports of the Director of
    the United States Mint. Other accessible sources, for the
    production of the precious metals, are the tables in the
    appendices to the Report of the Committee to the House of Commons
    on the “Depreciation of 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 gold and 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.          Silver.         Gold.        Total.
1493-1520    $2,115,000    $4,045,500    $6,160,500
1521-1544     4,059,000     4,994,000     9,053,000
1545-1560    14,022,000     5,935,500    19,957,500
1561-1580    13,477,500     4,770,750    18,248,250
1581-1600    18,850,500     5,147,500    23,998,000
1601-1620    19,030,500     5,942,750    24,973,250
1621-1640    17,712,000     5,789,250    23,501,250
1641-1660    16,483,500     6,117,000    22,600,500
1661-1680    15,165,000     6,458,750    21,623,750
1681-1700    15,385,500     7,508,500    22,894,000
1701-1720    16,002,000     8,942,000    24,944,000
1721-1740    19,404,000    13,308,250    32,712,250
1741-1760    23,991,500    17,165,500    41,157,000
1761-1780    29,373,250    14,441,750    43,815,000
1781-1800    39,557,750    12,408,500    51,966,250
1801-1810    40,236,750    12,400,000    52,636,750
1811-1820    24,334,750     7,983,000    32,317,750
1821-1830    20,725,250     9,915,750    30,641,000
1831-1840    26,840,250    14,151,500    40,991,750
1841-1850    35,118,750    38,194,250    73,313,000
1851-1855    39,875,250   137,766,750   177,642,000
1856-1860    40,724,500   143,725,250   184,449,750
1861-1865    49,551,750   129,123,250   178,675,000
1866-1870    60,258,750   133,850,000   194,108,750
1871-1875    88,624,000   119,045,750   207,669,750
1876-1879   110,575,000   119,710,000   230,285,000

               [Illustration: Rise of Average Gold Prices.]

 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 appreciation of gold. Mr.
    Giffen’s paper in the “Statistical Journal,” vol. xlii, is the
    basis on which Mr. Goschen founded an argument in the “Journal of
    the Institute of Bankers” (London), May, 1883, and which attracted
    considerable attention. On the other 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 and 1866 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 most recommended
    for use as the materials of money—their _durability_—is also the
    very thing which has, for all practical purposes, excepted them
    from the law of cost of production, and caused their value to
    depend practically upon the law of demand and supply. Their
    durability is the reason of the vast 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 the annual supply.

§ 3. This law, how related to the principle laid down in the preceding

Since, however, the value of money really conforms, like that of other
things, though more slowly, to its cost of production, some political
economists have objected altogether to the statement that the value of
money depends on its quantity combined with the rapidity of circulation,
which, they think, is assuming a law for money that does not exist for any
other commodity, when the truth 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, which is 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 none on supply. But,
secondly, there really is, in one respect, a closer connection between the
value of money and its quantity than between the values of other things
and their quantity. The value of 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 demand, and so require an increase or diminution of supply, as a
consequence, not a cause, of the alteration in value. Now, this is also
true of gold and silver, considered as articles of expenditure for
ornament and luxury; but it is not true of money. If the permanent 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 fourth
higher, one fourth more money would be required to make the accustomed
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 production of 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, to discard the proposition which asserts a connection between
the value of money and its quantity.

    There are cases, however, in which the _potential_ change of the
    precious metals affects their value as money in the same way that
    it affects the value of other things. Such a case was the 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 of silver by Germany; and
    the decreased demand for export to India. 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 the market;(233) and yet the price of silver so fell
    that the depreciation amounted to 20-¼ per cent as compared with
    the average price between 1867 and 1872. The change in value,
    however, took place without any corresponding change in the actual
    quantity in circulation. The relation between prices and the
    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 law of
    Demand and Supply in the same way that it affects things other
    than money.

It is evident, however, that the cost of production, in the long run,
regulates the quantity; and that every country (temporary fluctuation
excepted) will possess, and have in circulation, just that 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 other goods: and, precisely because the quantity can not
be prevented from affecting the value, the quantity itself will (by a sort
of self-acting machinery) be kept at the amount consistent with that
standard of prices—at the amount necessary for performing, at those
prices, all the business required of it.

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 eminent and 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 more costly 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. Gold and 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
variations of value which take place occasionally do not affect both
metals alike. Suppose such a variation to take place—the value of the two
metals relatively to one another no longer agreeing with their rated
proportion—one or other of them will now be rated below its bullion value,
and there will be a profit to be made by melting it.

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. Two consequences 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, and he can procure silver convertible into twenty shillings for
less gold 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 comparative value. 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 for the purpose
of being melted, and sold as bullion for gold at their real value—that is,
above the legal valuation. The money of the community, therefore, would
never really consist of both metals, but of the one only which, at the
particular time, best suited the interest of debtors; and the standard of
the currency would be constantly liable to change from the one metal to
the other, at a 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) to the
    purport that “money of less value drives out money of more value,”
    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 and perfect coin before 1695.
    They hanged men and women, but they did not prevent the operation
    of Gresham’s law and the disappearance of the perfect coins. When
    the state refused the clipped coins at legal value, by no longer
    receiving them in payment of taxes, the trouble ceased.(234)
    Jevons gives a striking illustration of the same law: “At the time
    of the treaty of 1858 between Great Britain, the United States,
    and Japan, 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, consisting of a thin
    oval disk of gold about two inches long, and one and a quarter
    inch wide, weighing two hundred grains, and ornamented 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 18_s._
    5_d._, whereas the silver itzebu was equal only to about 1_s._
    4_d._ [four itzebus being worth in English money 5_s._ 4_d._]. 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 from circulation the remainder of the gold.”(235)

It appears, therefore, that the value of money is liable to more frequent
fluctuations when both metals are a legal tender at a fixed valuation than
when the exclusive standard of the currency is either gold or silver.
Instead of being only affected by variations in the cost of production of
one metal, it is subject to derangement 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 called a
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, all payments will be made in
the one which has risen least; and, if to fall, then in that which has
fallen most.

    While liable to “more frequent fluctuations,” prices do not follow
    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 of silver, 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 course of variations. While the fluctuations are more
    frequent in D, they are less extreme than in C.


        Chart showing the line of prices under a double standard.

§ 2. The use of the two metals as money, and the management of Subsidiary

The plan of a double standard is still occasionally brought forward by
here and there a writer or orator as a great improvement in currency.

It is probable that, with most of its adherents, its chief merit is 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 obtained by those nations with whom one only of the two metals
is a legal tender, but the other also is coined, and allowed to pass for
whatever 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 the two 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 can be compelled to receive silver in payment for a larger
amount than 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 turn of the market in its
favor would make it worth more than a sovereign, 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 back at a higher value than properly belongs to it;
this, however, has been guarded against (3) by limiting the quantity of
the silver coinage, which is not left, like that of gold, to the
discretion of individuals, 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 a double 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, and from
    1878 to the present time, is a most valuable source of instruction
    in regard to the practical working of bimetallism. While we have
    nominally had a double standard, in reality we have either had one
    alone, or been in a transition from one to the 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 that a 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

    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 ratio of 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 the gold dollar. It was the best
    possible example of the bimetallic system to be found, and the
    mint ratio was intended to conform to the market ratio. If this
    conformity could have been maintained, there would have been no
    disturbance. But a cause was already in operation affecting the
    supply of one of the metals—silver—wholly independent of
    legislation, and without 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 the enormous yield from the
    mines of the New World, continuing from 1545 to about 1640, and
    (2) the only other period of great production at all comparable
    with it (that is, as regards the production of silver relatively
    to gold) was that lasting from 1780 to 1820, due to the richness
    of the Mexican silver-mines. 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 an
    average during the first period, the average annual amount of
    silver produced relatively to gold was probably a little greater
    from 1780 to 1820. The effect of the first period in lowering the
    relation of silver to gold is well recognized in the history of
    the precious metals (see Chart X for the fall in the value of
    silver relatively to gold); that the effect of the second period
    on the value of silver has not been greater than was actually
    caused—it has not been small—is explicable only by the laws of the
    value of money. If you let the same amount of water into a small
    reservoir which you let into a large one, the level of the former
    will be raised more than the level of the latter. The great
    production of the first period was added to a very small existing
    stock of silver; that of the second period was added 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 the total silver stock in existence.
    The effect of this process was beginning to be felt soon after the
    United States decided on a double standard. For this reason the
    value of silver was declining about 1800, and, although the annual
    silver product fell 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.

    This diminishing value of silver began to affect the coinage of
    the United States as early as 1811, and by 1820 the disappearance
    of gold was everywhere commented upon. The process by which this
    result is produced is a simple one, and is adopted as soon as a
    margin of profit is seen arising from a divergence between the
    mint and market ratios. In 1820 the market ratio of gold to silver
    was 1 to 15.7—that is, the amount of gold in a dollar (24-¾
    grains) would exchange for 15.7 times as many grains of silver in
    the market, in the form of 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
    grains of 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
    to be 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 the value
    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 the value 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.


    Chart X. Chart showing the Changes in the Relative Values of 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 the quantity of
    silver in the dollar until the dollar of silver was intrinsically
    worth the gold in the gold dollar; or (2) debase the gold
    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 the integrity of
    our monetary standard, was adopted: 6.589 per cent 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 correspond with 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 by making the mint ratio of gold to silver a little
    larger than the market 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
    that the act of 1834 set at work forces for another change in the
    coinage—forces of a similar kind, but working in exactly the
    opposite direction to those previous to 1834. A dollar of gold
    coin 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 the mint, 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 a surprising and unexpected impetus by
    the gold discoveries of California and Australia in 1849, before
    mentioned, and made gold less valuable relatively to silver, by
    lowering the value of gold. Here, again, was another natural
    cause, independent of legislation, and not to be foreseen,
    altering the value of one of 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 a large part of this period we had in reality a
    single standard of gold, the other metal not being able to stay in
    the currency.

    III. After our previous experience, the impossibility of retaining
    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 subsidiary coinage 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 subsidiary coins, which, together with silver
    dollar-pieces, had all gone out of circulation. Before this, two
    halves, four quarters, or ten dimes contained the same quantity of
    pure silver as the dollar-piece (371-¼ grains); therefore, when it
    became profitable to withdraw the dollar-pieces and substitute
    gold, it gave exactly the same profit to withdraw two halves or
    four quarters in silver. For this reason all the subsidiary silver
    had gone out of circulation, 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
    subsidiary coin to 345.6 grains. By making so much less an amount
    of silver equal to a dollar of small coins, it was more valuable
    in that 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 a
    gold dollar, when 371-¼ grains were worth only 104 cents of the
    gold dollar); (2) this over-valuation of silver in subsidiary coin
    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 of 1853) 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, its legal-tender power was
    restricted to payments not exceeding five dollars. This system, a
    single gold standard for large, and silver for small, payments,
    continued without question, and with great convenience, until the
    days of the war, when paper money (1862-1879) drove out (by its
    cheapness, again) both gold and silver. Paper was far cheaper than
    the cheapest of the two metals.


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

    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 effect on 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 our sense 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 of gold, 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, to make the original
    dollar weigh 416 grains in all, its “standard” weight. In 1837 the
    amount of alloy was changed from 1/12 to 1/10 of the standard
    weight, which (as the 371-¼ grains of pure silver were unchanged)
    gave the total weight of the dollar 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 by
    this 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; and the United States
    dollar, 371-¼. By making the “trade-dollar” slightly heavier than
    any coin used in the Eastern world, it would give our silver a new
    market; and the United States Government was simply asked to
    certify to the fineness and weight 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 were legal 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 more silver than the 412-½-grains dollar). They ceased
    to be coined in 1878, to which time there had been made

    IV. In February, 1878, an indiscreet and unreasonable movement
    induced Congress to authorize the recoinage of the silver
    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 our previous experience
    could be explained only by a desire to force this country to use a
    silver coinage only, and had its origin with the owners of
    silver-mines, aided by the desires of debtors for a cheap unit in
    which to absolve themselves from their indebtedness. There was no
    pretense of setting up a double standard about it; for it was
    evident to the most ignorant that so great a disproportion between
    the mint and market ratios must inevitably lead to the
    disappearance of gold entirely. This would happen, if owners could
    bring their silver freely, in any amounts, to the mint for coinage
    (“Free Coinage”), 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 was prevented 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 each month. This retarded, but will
    not ultimately prevent, the change 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
    practically reached in the August following. Unless a repeal of
    the law is reached very soon, the uncomfortable spectacle will be
    seen of 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 a statement of the
    coinage(239) during the above periods, which well shows the
    effects of Gresham’s law.

    Ratio in the mint and in     Period.   Gold coinage.   Silver dollars
    the market.                                            coined.
    1:15 (silver lower in      1792-1834     $11,825,890      $36,275,077
    1:15.98 (gold lower in     1834-1853     224,965,730       42,936,294
    1:15.98 (gold lower in     1853-1873     544,864,921        5,538,948
    Single gold standard.      1873-1878     166,253,816         ........
    1:15.98 (silver lower,     1878-1883     354,019,865      147,255,899
    but no free coinage)

    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 the mint 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 the silver, owns the
    coin, and holds all that it can not induce the public to receive
    voluntarily; so that but a part of the total coinage is out of the
    Treasury. And most of the coins issued are returned for deposit
    and silver certificates received in return. There being no free
    coinage, and no greater amount in circulation than satisfies the
    demand for change, instead of small 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 process of 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) 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 no little 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 of law, which, provided
    that enough countries join in the plan, shall fix the ratio of
    exchange in the coinage for all great commercial countries, and by
    this means keep the coinage ratio equivalent to the bullion ratio.
    The difficulty with this scheme, even if it were wholly
    sufficient, has thus far been in 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.)

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

§ 1. Credit not a creation but a Transfer of the means of Production.

Credit has a great, but not, as many people seem to suppose, a magical
power; it can not make something out of nothing. How often is an extension
of credit talked of as equivalent to a creation of capital, or as if
credit actually were capital! It seems strange that there should be any
need to point out that, credit being only permission to use the capital of
another person, the means of 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 much
diminished. The same sum can not be used as capital both by the owner 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 of laborers 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 the wealth of B for other purposes; he can
enter into arrangements in reliance on it, and can borrow, when needful,
an equivalent sum on 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.

§ 2. In what manner it assists Production.

But, though credit is never anything more than a transfer of capital from
hand to hand, it is generally, and naturally, a transfer to hands more
competent to employ the capital efficiently in production. If there were
no such thing as credit, or if, from general 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 unskillful attempts
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 resources of any commercial country, and is
naturally attracted to those producers or traders who, being in the
greatest business, have the means of employing it to most advantage,
because such are both the most desirous to obtain it and able to give the
best security. Although, therefore, the productive funds of the country
are not increased by credit, they are called into a more complete state of
productive activity. As the confidence on which credit is grounded extends
itself, means are developed by which even the smallest 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 of deposit. Where these do not exist, a prudent person
must keep a 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 time, and knowing that, if one depositor happens to require
more than the average, another will require less, is able to lend the
remainder, 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 account for purposes of production. Many a
person who has either no capital of his own, or very little, but who has
qualifications for business which are known and appreciated by some
possessors of capital, 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 the sources of public wealth. It makes over in
temporary use, not the capital of the unproductive classes to the
productive, but that of the 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 influence on
prices; the chief cause of most of the mercantile phenomena which perplex
observers. In a state of commerce in which much credit is habitually
given, _general prices at any moment depend much more upon the state of
credit than upon the quantity of money_. For credit, though it is not
productive power, is purchasing power; and a person who, having credit,
avails himself of it in the purchase of goods, creates just as much demand
for the goods, and tends quite as much to raise their price, as if he made
an equal amount of purchases with ready money.

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 to another, 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 create purchasing power are those in which no money passes at the
time, and very often none passes at all, the transaction being included
with a mass of other transactions in an account, and nothing 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 have transactions 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 end of 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 is due. This balance, which may be less than the amount of
many of the transactions singly, and is necessarily less than the sum of
the transactions, is all that is paid in money; and perhaps even this 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 to the value of thousands.

But, secondly: The debts of A to B may be paid without the intervention 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 to himself from a third person, C. This
is conveniently done by means of a written instrument, called a bill of
exchange, which is, in fact, a transferable order by a creditor upon his
debtor, and when _accepted_ by the debtor, that is, authenticated by his
signature, becomes an acknowledgment of debt.

§ 4. Bills of Exchange.

Bills of exchange were first introduced to save the expense and risk of
transporting the precious metals from place to place.

The trade between New York and Liverpool affords a constant illustration
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 the same time, a cargo of steel rails to D in New York, also
worth £20,000. Without the use of bills of exchange, B would have been
obliged to send £20,000 in gold across the Atlantic, and so would D, at
the risk of loss to both. By the device of bills of exchange the goods are
really bartered against each other, and all 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) he finds 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 (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 [the importer 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].

By this means D transfers his title to the £20,000 to C, sends the bill
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 more safely by the use of this convenient
device. This is the simplest form of the transaction, and it does not
change the principle on which it is based, when, as is the case, a banker
buys the bills of A, 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 length of credit for goods bought: three
months, six months, a year, even two years, according to the convenience
or custom of the particular trade. A dealer who has sold goods, for which
he is to be paid in six months, but who desires to receive payment sooner,
draws a bill on his debtor payable in six months, and gets the bill
discounted by a banker or other money-lender, that is, transfers the bill
to him, receiving the amount, minus interest for the time it has still to
run. It has become one of the chief functions 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 York correspondents, 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 meet these
    demands. But the purchases of the West in New York will 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 the use of bills. There
    is, however, less movement of funds of late, now that Western
    cities have accumulated more capital of 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 that B, 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 the end of six months, be six bills of
£100 each existing at the same 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 the amount of his
real notes; and, as it is highly desirable in commerce 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 functions of 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 transaction in which the bill has performed
the functions of money.

§ 5. Promissory Notes.

A third form in which credit is employed as a substitute for currency 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 the promissor 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 commission-house on
    credit, customarily gives his note for the amount, and this note
    is put upon the market, or presented at a bank for 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 and buyers. The custom, however, is
    quite different in England and 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 worth of 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 this bill
    (perhaps adding its own firm name as indorsers to the paper), and
    presents it for discount at a London bank. This now explains why
    it is that, when a particular industry is prosperous 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

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, not their capital merely, but their
credit, and not only such portion of 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 a very convenient manner by lending their own promissory notes
payable to bearer on demand—the borrower being willing to accept these as
so much money, because the credit of the lender makes 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 amount of 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 him
to meet any claims of that sort which can be expected to occur 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

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 the more useful, because it is the only mode in which
they are able to borrow money without paying interest.

§ 6. Deposits and Checks.

A fourth mode of making credit answer the purposes of money, by which,
when carried far enough, money may be very completely superseded, consists
in making payments by checks. The custom of 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 this country 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 that of the receiver. If all persons
in [New York] kept their cash at the same banker’s, and made all their
payments by means of checks, no money would be required or used for any
transactions beginning and terminating in [New York]. This ideal limit is
almost 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 money or
bank-notes now pass, and then only when the amounts are 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 into some 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-house to the banks on
which they are drawn, and demand money for them. There is a building
called the Clearing-House, to which every [member of the association]
sends, each afternoon, all the checks on other bankers which he has
received during the day, and they are there exchanged for the checks on
him which have come 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 the total demands of all the other
    banks against itself; and this sum total is set off against the
    given bank’s demands upon the others. The difference, for or
    against the bank, as the case may be, may then be settled by a

    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, consult
    Jevons, “Money and the Mechanism of Exchange,” Chapters XIX-XXIII.
    The explanation of the functions of a bank, Chapter XX, is very

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 of money, or, what is
equivalent, the prices of commodities. It is hardly necessary to say that
the permanent value of money—the natural 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 an order, or
note of hand, or bill payable at sight, for an ounce of gold, 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 we have seen, may
deviate very widely from the standard of cost of production. Among other
causes of fluctuation, one we have found 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
thrown into circulation than the quantity which can circulate at a value
conformable to its cost of production, the value of money, so long as the
excess lasts, will remain below the standard of cost of production, and
general prices will be sustained above the natural rate.

But we have now found that there are other things, such 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 same manner as money itself? I apprehend that
bank-notes, bills, or checks, as such, do not act on prices at all. What
does act on prices is Credit, in whatever shape given, and whether it
gives 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 tendered in exchange
for commodities. The demand which influences the prices 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, or even 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
the measure of the effect which he produces on price.

Suppose that, in the expectation that some commodity will rise in 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 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 he has actually in hand. He creates a demand for
the article to the full amount of his money and credit taken together, and
raises the price proportionally to both. And this effect is produced,
though none of the written instruments called substitutes for currency may
be called into existence; though the transaction may give rise to no bill
of exchange, nor to the issue of a single bank-note. The buyer, instead of
taking a mere book-credit, might have given a bill for the amount, or
might have paid for the goods with bank-notes borrowed for that purpose
from a banker, thus making the purchase not on his own credit with the
seller, but on the banker’s credit with the seller, and his own with the
banker. Had he done so, he would have produced as great an effect on price
as by a simple purchase to the same amount on a book-credit, but no
greater effect. The credit itself, not the form and mode in which 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 demand for
commodities by making use of all or much of their credit as a purchasing
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 as the price has not begun to fall, are willing to believe
that it will continue rising. These, by further purchases, produce a
further advance, and thus a rise of price, for which there were originally
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, the price 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 in proportion to the greatness of the fall and to the quantity of
the commodity 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 number of merchants
and traders at once either have, or apprehend that they shall have, a
difficulty in meeting their engagements. The most usual cause of this
general embarrassment is the recoil of 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 to
realize, 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 firms of known solidity can obtain even the credit to
which they are accustomed, and which it is the greatest inconvenience to
them to be without, because all dealers have engagements to fulfill, and,
nobody feeling sure that the portion of his means which he has intrusted
to others will be available in time, no one likes to part with ready
money, or to postpone his claim to it. To these rational considerations
there is superadded, in extreme cases, a panic as unreasoning as the
previous over-confidence; money is borrowed for short periods at almost
any rate of interest, and sales 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 period of
speculation they have risen above it; the fall, as well as the rise,
originating not in anything affecting money, but in the state of 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 followed by 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 growth which 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 not been 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 testified(244) concerning the New York banks in 1873 that
    “their capital needed for legitimate purposes was practically lent
    out on certain iron rails, railroad-ties, bridges, and
    rolling-stock, _called_ railroads, many of them laid down in
    places where these materials were practically useless.”

    Under the effects due to swift communication by steam, but
    especially to the electric telegraph, modern credit is a very
    different thing from what it was fifty years ago. Now, a shock on
    the Bourse at Vienna is felt the same day at Paris, London, and
    New York. A commercial crisis in one great money-center is felt at
    every other point in the world which has business connections with
    it. Moreover, as Cherbuliez(245) 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 a certain degree of vigor and maturity.”

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

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-power in 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
the bill changes hands; while (3) every bank-note issued renders the
credit of the banker a purchasing power to that amount in the hands 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 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 from hand 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 in every respect
to bank-notes, giving equal facilities to an extension of 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
make payments. These checks might possibly even pass from hand to hand
like bank-notes; more commonly, however, the receiver would pay them into
the hands of his own banker, and when he wanted 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 with the 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 to a 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; 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.

The credit given to any one by those with whom he deals does not depend on
the quantity of bank-notes or coin in circulation at the time, but on
their opinion of his solvency. If any consideration of 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 on which 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; an opinion grounded either on the
rise or fall already going on, or on his prospective judgment respecting
the supply and the rate of 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 shall
then be in possession of sufficient funds from the proceeds of his other
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 in
the same manner as money. Money and credit are thus exactly on a par in
their effect on prices.

    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 find
    industries in which the rate of profit is satisfactory—all of
    which depends on the business character and activity of the
    people—will prevent credit from being used, no matter how many
    bank-notes, or greenbacks, or how much gold there is in 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 the money.
    The reason why more credit is wanted is because men see that
    increased production is possible of a kind that will 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 plethora of 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 is really at the disposal of the borrowers; in a
    crisis, the quantity of wealth supposed to be represented by
    credit is very much greater than that at the disposal of the

§ 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 in particular 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 universally admitted to be money; in the French
language the phrase _papier-monnaie_ actually _means_ inconvertibility,
convertible notes being merely _billets à porteur_. An instrument which
would be deprived of 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
not money, 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 of money is
    that it should have value in itself. No one parts with valuable
    commodities for a medium of exchange which does not possess value;
    and we have seen that Legislatures can not control 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 of things which may serve as money. It is practically of
    little importance, however, what we include under money, so long
    as its functions are well understood; it is merely a question of
    nomenclature, and need not disturb us.

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
issuing such paper substitutes for money were subject, of giving, when
required, for the sign, the thing signified. They determined to try
whether they could not emancipate themselves from this unpleasant
obligation, and make a piece of paper issued by them pass for a pound, by
merely calling it a pound, and consenting to receive it in payment of the

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 the persuasion that it will be taken from him on the
same terms by others. The only question is, what determines the value of
such a currency, since it can not be, as in the case of gold and silver
(or paper 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 quantity. If the
quantity, instead of depending on the ordinary mercantile motives of
profit and loss, could be arbitrarily fixed by authority, the value would
depend on the fiat of that authority, not on cost of production. The
quantity of a paper currency not convertible into the metals at the option
of the holder _can_ be arbitrarily fixed, especially if the issuer is the
sovereign power of 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 from
    this 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 existing
    value for his paper. The “convention” by which real value (the
    essential idea of money) was associated with this paper in the
    minds of all is thereby broken. _Fiat_ money—that is, a piece 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 see that _fiat_ money
    has some, although a fluctuating, value at certain times: if the
    State receives it for taxes, if it is a legal acquittal of
    obligations, then, to that extent, a certain quantity of it is
    given a value equal to the wealth represented by the taxes, or the
    debts. Jevons remarks on this point(247) that, if “the quantity of
    notes issued was kept within such moderate limits that any one
    wishing to realize the metallic value of the notes could find some
    one wanting to pay taxes, and therefore willing to give coin for
    notes,” stability of value might be secured. If there is more in
    circulation than performs these functions, it will depreciate in
    the proportion of the _quantity_ to the extent of the uses
    assigned to it; so that the relation of quantity to uses is the
    only thing which can give value to _fiat_ money, but beyond a
    certain point in the issues other forces 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, to give a popular value to paper.

    Although the State may not promise to pay a dollar, yet, wherever
    such paper money carries any purchasing power with it (which has
    very seldom happened, and then only for short 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, the income of taxes, or similar resources, were
    promised as a means 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 was less
    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 was partially true, even of
    our own greenbacks, which were not _fiat_ money, 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 the paper. Every victory or defeat of the Union
    arms raised or lowered the premium on gold; it was the register of
    the opinion of the people as to the value to be associated with
    the paper. The second and third resorts to issues of greenbacks
    were regarded as confessions of financial distress; it was this
    which produced the effect on their value. It was not only the
    quantity but also that which caused the issue of the quantity. It
    is, of course, clear that the value of a paper money like the
    greenbacks, which were the promises to pay of a rich country,
    would bear a definite relation to the actual quantity issued; and
    this 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 in people’s
    minds was the possibility of ultimate redemption; and the 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 a lower stage in this later
    period was not due to any decrease in the quantity outstanding,
    because the contraction had been stopped in 1868, and that
    consequent on the resumption act in May, 1878.

Suppose that, in a country of which the currency is wholly metallic, a
paper currency is suddenly issued, to the amount of half the metallic
circulation; not by a banking establishment, or in the form of loans, but
by the Government, in payment of 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 than an 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 issue
of paper. Then prices will relapse to what they were at first, and there
will be nothing changed, except that a paper currency has been substituted
for half of the metallic currency which existed before. Suppose, now, a
second emission of paper; the same series of effects will be renewed; and
so on, until the whole of the metallic money has disappeared [see Chart
No. XIV, Chap. XV, for the exportation of gold from the United States
after the issue of our paper money in 1862]: that is, if paper be issued
of as low a denomination as the lowest coin; if not, as much will remain
as convenience requires for the smaller payments. The addition made to the
quantity of gold and silver disposable for ornamental purposes will
somewhat reduce, for a time, the value of 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 will keep the value of the currency down to the reduced value
of the metallic material; but the value having fallen below the cost of
production, a stoppage or diminution of the supply from the mines 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 have supposed throughout, that
the country has mines of its own, and no 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 as
    convenience requires for the smaller payments,” will not hold
    true. During our recent experiment of depreciated paper, the
    depreciation 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 note shall be issued for the
    fractional part of a dollar, and not more than $35,000,000 shall
    be of lower denominations than 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 to a value below that of the 345.6 grains of
    silver in two halves or four quarters of a dollar. By July 2d the
    disappearance of 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 the
    subsidiary silver at 96, in accordance with Gresham’s law.

Up to this point the effects of a paper currency are substantially the
same, whether it is convertible into specie or not. It is when the metals
have been completely superseded and driven from circulation that the
difference between convertible and inconvertible 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 into
bullion. There is no longer any coin in circulation; but, if the paper
currency is convertible, coin may still be obtained from the 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 issuers in 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, with an 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, in other words, depreciate the currency without limit.

Such a power, in whomsoever vested, is an intolerable evil. All variations
in the value of the circulating medium are mischievous: they disturb
existing contracts and expectations, and the liability to such changes
renders every pecuniary engagement of long date entirely precarious. The
person who buys for himself, or gives to another, an annuity of one
[hundred dollars], does not know whether 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
arbitrary disposal 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 source of profit—not to add,
that the issuers may have, and, in the case of a government paper, always
have, a direct interest in lowering the value of the currency, because it
is the medium in which their own debts are computed.

    The United States Supreme Court had decided in December, 1870, by
    the second legal-tender decision, that the issue of greenbacks
    (inconvertible from 1862 to 1879) was constitutional during a time
    of war; but it was thought that the reissue 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 the doctrine 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 limits of those provisions of the Constitution (section
    8), which gave Congress the means to do whatever was “necessary
    and proper” to carry out the powers expressly granted to it.
    Nothing now can prevent Congress, should it choose to do so, from
    issuing paper money of any description whatever, even if of
    absolutely 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 the case of
    the silver coinage in 1878), is appalling to reflect upon.

§ 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 from being altered
by design, and may be as little as possible liable to fluctuation from
accident, the articles least liable of all known commodities to vary in
their value, the precious metals, have been made in all civilized
countries the standard of value for the circulating medium; and no paper
currency ought to exist of which 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 the names 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 an inconvertible paper. There is not, indeed, the self-acting
check which convertibility brings with it. But there is a clear and
unequivocal indication by which to judge whether the currency is
depreciated, and to what extent. That indication is the price of the
precious metals. When holders of paper can not demand coin to be converted
into bullion, and when there is none left in circulation, bullion rises
and falls in price like other things; and if it is above the mint price—if
an ounce of gold, which would be coined into the equivalent of [$18.60],
is sold for [$20 or $25] in paper—the value of the currency has sunk just
that much below what the value of a metallic currency would be. If,
therefore, the issue of inconvertible paper were subjected to strict
rules, one rule being that, whenever bullion rose above the mint price,
the issues should be contracted until the market price of bullion and the
mint price were again in accordance, such a currency would not be subject
to any of the evils usually deemed inherent in an inconvertible 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 necessity of 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, the
possibility of fraudulent tampering with the price of bullion for the 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 can be 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, by the public generally, in an
inconvertible currency so regulated, as in a convertible one: and the most
instructed person might reasonably doubt whether such a rule would be as
likely to be inflexibly adhered to. The grounds of the rule not being so
well understood by the public, opinion would probably not enforce it with
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 and more 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 however slight
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 depreciated more than about one
    half of one per cent. But this was a very rare management of
    inconvertible paper, since the issues were actually 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 of
inconvertible paper. There is, in truth, a great charm in the idea. To be
able to pay off the national debt, defray the expenses of government
without taxation, and, in fine, to make the fortunes of the whole
community, is a brilliant prospect, when once a man is capable of
believing that printing a few characters on bits of paper 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, to the 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 the whole concern to
be wound up. On this theory there have been many schemes for “coining the
whole land of the country into money” 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 it makes any promise of payment in
cash, either on demand or at any 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 that
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 be efficacious as a precaution.
But the theory takes no account of another 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 on these principles. The assignats “represented” an immense
amount of highly valuable property, namely, the lands of the crown, the
church, 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 do them 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 that the 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 the revolution succumbed; the bits of
paper which represented land, becoming prodigiously multiplied, could no
more keep up their value than the land itself would have done if it had
all been brought to market at once; and the result was that it at last
required an assignat of five hundred francs to pay for a cup of coffee.

The example of the assignats has been said not to be conclusive, because
an assignat only represented land in general, but not a definite quantity
of land. To have prevented their depreciation, the proper course, it is
affirmed, would have been to have made a valuation of all the confiscated
property at its metallic value, and to have issued assignats up to, but
not beyond, that limit; giving to the holders a right to demand any piece
of land, at its registered valuation, in exchange for assignats to the
same amount. There can 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 their market value, they would
probably have been brought in to be exchanged for land. It must be
remembered, however, that their not being depreciated would presuppose
that no greater number of 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 permanent system 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; and besides, land, to most persons, being rather an
incumbrance than a 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
    legal-tender 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 than 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 for land. 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 of the lands they
    represented. By 1796, 45,000,000,000 francs of assignats had been

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

    The experience of the colonies before our Revolution is rich in
    warning examples of the over-issue of inconvertible paper money.
    Those of Rhode Island(250) and the Province of Massachusetts(251)
    are the most conspicuous, perhaps, because we have better
    knowledge of them, but other colonies suffered in as great a
    degree. The experience of the latter illustrates as well as any,
    perhaps, not only the general theory of inconvertible paper, but
    the device of supporting the paper by paying interest upon the
    notes. Although the issues since 1690 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 like the thirst of a hard drinker after the first
    exhilaration has passed off. On the new issues five per cent
    interest was paid, 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 the taxes 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 depreciated thirty per cent, when the
    charm of legal tender was thrown around them, but to no purpose.
    The idea of value was not associated with them in people’s minds,
    and they put no faith in 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, or for loans from the state to private persons at interest
    to be paid annually. Such facts show the train of evils following
    the first innocent departure from the maintenance of a currency
    equivalent to coin. The people forgot, or did not know, the nature
    of money, or the offices it performed. They did not understand
    that creating paper money did not create wealth. This experiment
    closed only in 1750 (March 31st), when the province had courage
    enough to resume specie payments. The effect was to transfer the
    West India trade from paper-issuing colonies to Massachusetts, and
    to produce a steady prosperity in her business interests.

                        [Illustration: Chart XI.]

         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 of getting funds,
    has been fully illustrated in our country by the Continental
    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 the excuse for making issues
    of that well-known paper money, which has given rise to the
    familiar by-word for absence of 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 coin had gone up! Legal attempts were made to repress the
    premium 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 black line represents
    the amounts of issues, and the broken line the depreciation 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 issues(253) 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 the policy 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
    from the 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 how these views were
    realized as we go along. In favor of paper issues it was urged
    that we could borrow a large amount without 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 seen that there might be temptations to issue without
    provisions for redemption; that even if a fund were kept, a
    disturbance of 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 Chase(254) then decided
    against paper issues. Government bonds, however, did not sell, 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 at seeing an empty
    Treasury, Congress passed the legal-tender act (February 25,
    1862), issuing $150,000,000 of paper in the form of promises to
    pay. A committee of bankers showed that the issue could have been
    avoided by selling bonds at their market price; but Congress would
    not sell them below par. No necessity for the issues of paper need
    have arrived. In four months another issue of $150,000,000 was
    authorized (July 11, 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
    the provision that they be received for taxes (except customs),
    avail for this purpose.

    The effects of the depreciation were as evil as can well be
    imagined. (1) The expenses of the Government were increased 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 unsettling of legitimate trade and
    to greater variations in prices; (4) the existence of depreciated
    paper later gave rise to all the dishonest schemes for paying the
    coin obligations of the United States in cheap issues, to the ruin
    of its credit and honor; and (5) it has practically become a
    settled part of our circulation, and a possible source of danger.

    Of the whole $450,000,000, $50,000,000 were set aside 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 issue of paper was but a temporary
    measure, forbade any further issues. Secretary McCulloch,
    immediately on the close of the war, began to contract, and, by a
    resolution of the lower branch in Congress (December 18, 1865), a
    cordial concurrence in the measures for contraction was
    manifested. Of course, the return from 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 was a lack of courage not foreseen by Secretary Chase.
    This was again 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 Province of 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, and we were fortunately saved from it only by
    the veto of President Grant (April 22, 1874). This was another
    landmark in the history 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 the amount
    outstanding was thus $382,000,000. A compromise measure was passed
    (June 20, 1874), which retained this amount 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 in a
    contraction of the latter from $382,000,000 to $346,000,000. The
    reason of this was, that there was no provision for the increase
    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 in a 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 a most 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, and
    resumption 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 the
    temptation to misuse paper money if it is in any way permitted, in
    spite of all the warnings of history, there seems to be a
    dangerous acquiescence in the presence of government paper money
    in our currency. It is an open pitfall, tempting to evils whenever
    sudden emergencies arise. It ought not to be allowed to remain any

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

Another of the fallacies from which the advocates of an inconvertible
currency derive support is the notion that an increase 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, and brings all the capital and labor of the country into
complete employment; and that this has invariably happened in all periods
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 more of 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 rise equally, no one was really better paid for his goods than before.
It calculates on finding the whole world persisting forever in the belief
that more pieces of paper are more riches, and never discovering that,
with all their paper, they can not buy more of 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, must be) times of speculation, the speculators did not think
they were growing rich because the high prices would last, but because
they would not last, and because whoever contrived to realize while they
did last would find himself, after the recoil, in possession of a greater
number of [dollars], without their having become of less value.

Hume’s version of the doctrine differed in a slight degree from Mr.
Attwood’s. He thought that all commodities would not rise in price
simultaneously, and that some persons therefore would obtain a real gain,
by getting more money for what they had to sell, 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,
there is necessarily some other person who gains less. The loser, if
things took place as Hume supposes, would be the seller of the commodities
which are slowest to rise; who, by the supposition, parts with his goods
at the old prices, to purchasers who have already benefited by the new.
This seller has obtained for his 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 is going
on, he will raise his price, and then the buyer will not have the 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 them as if they were a real
capital; and, so long as the notes are no permanent addition to the
currency, but merely supersede gold or silver to the same amount, the gain
of the issuer is a loss 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 holders of
currency lose, by the depreciation of its value, the exact equivalent of
what the issuer gains. A tax is virtually levied on them for his benefit.

But besides the benefit reaped by the issuers, or by others through them,
at the expense of the public generally, there is another 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 transferred to them. On a superficial view it may be imagined
that this is an advantage to industry; since the productive classes are
great borrowers, and generally owe larger debts to the unproductive (if we
include among the latter all persons not actually in business) than the
unproductive classes owe to them, especially if the national debt be
included. It is only thus that a general rise of prices can be a source of
benefit to producers and dealers, by diminishing 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 in particular.

§ 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 the following
    classification the main points discussed (in Chaps. IV to X) under
    money and credit, in continuance of a similar classification of

    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 value changes exactly with the
                supply, which is expressed 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).

    Of these substitutes for money, (1) Use of credit depends not on
    quality of coin and notes, and (2) Various kinds of credit.

    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)

Chapter XI. Of Excess Of Supply.

§ 1. The theory of a general Over-Supply of Commodities stated.

After the elementary exposition of the theory of money contained in 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 the case 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 a profit; that there ensues a general depression of prices
or values (they are seldom accurate in discriminating between the two), so
that producers, the more they produce, find themselves the poorer instead
of richer; and Dr. Chalmers accordingly inculcates on capitalists the
practice of a moral restraint in reference to the pursuit of gain, while
Sismondi deprecates machinery and the various inventions which increase
productive power. They both maintain that accumulation of capital may
proceed too fast, not merely 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 not exceed the power of

When these writers speak of the supply of commodities as outrunning the
demand, it is not clear which of the two elements of demand they have in
view—the desire to possess, or the means of 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 this uncertainty, it is necessary to examine both

    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 discussion of
    over-production should also be connected by the student with 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 of demand for all commodities
for want of the means of payment? Those who think so can not have
considered what it is which constitutes the means of payment for
commodities. It is simply commodities. Each person’s means of paying for
the productions of other people consists of those which he himself
possesses. All sellers 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 of certain 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 than double 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 the remuneration of producers does not depend on how
much money, but on how much of consumable articles, they obtain for their
goods. 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 arising from lack of Desire to

A general over-supply, or excess of all commodities above the demand, so
far as demand consists in means of payment, is thus shown to be an
impossibility. But it may, perhaps, be supposed that 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, at least, of the community which has an equivalent to

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 particular commodity than is desired by those
who have the ability to purchase, 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, the fact
that they go on adding to the production proves that this is not
_actually_ the case. Assume the most favorable hypothesis for the 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 to obtain 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 the foreigner himself want something? When he
produced the superfluous 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 in the community, for the satisfaction of which some one would
grow more food and give it to him in exchange, he had the alternative of
growing food for himself, either on fresh land, if there was any
unoccupied, or as a tenant, or partner, or servant of some former
occupier, willing to be partially relieved from labor. He has produced a
thing not wanted, instead of what was wanted, and he himself, perhaps, is
not the kind of producer who is wanted—but there is no over-production;
production is not excessive, but merely ill-assorted. We saw before that
whoever brings additional commodities to the market brings an additional
power of purchase; we now see that he brings also an additional desire to
consume, since if he had not that desire he would not have troubled
himself to produce. Neither of the elements of demand, 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 the growth of the
    artistic sense the articles of common use change their entire
    form; and the advances in the arts disclose new commodities which
    satisfy the world’s desires, and for these new satisfactions
    people are willing to work and produce in order to attain them.
    With education also comes a wider horizon and a more refined
    perception of taste, which creates wants for new things for which
    the mind before had no desires. A little reflection, therefore,
    must inevitably lead us to see that no person, no community, ever
    had, or probably ever will have, all its wants satisfied. So far
    as we know man, it does not seem possible that there will ever be
    a falling off in demand, because of a satiety of all material

§ 4. Origin and Explanation of the notion of general Over-Supply.

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-supply of money. From the sudden annihilation of
a great mass of credit, 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 a great error to suppose, with
Sismondi, that a commercial crisis is the effect of a general excess of
production. It is simply the consequence 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 restoration
of confidence. It is also evident that this temporary derangement of
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 much to him as the larger price was
before. In no matter does this phenomenon 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 want of
markets, which those writers contemplate, is a conception to which the
nature of a commercial crisis gives no support.

The other phenomenon from which the notion of a general excess of wealth
and superfluity of accumulation seems to derive countenance is one of a
more permanent nature, namely, the fall of profits and interest which
naturally takes place with the progress of population and production. The
cause of this decline 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 want of 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; and
this all active and intelligent persons in business perfectly well know:
but even those who comply with the necessities of their time grumble at
what they comply with, and wish that there were less capital,(257) or, as
they express it, less competition, in order that there might be greater
profits. Low profits, however, are a different 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
really is, and its effects and necessary limits, will be seen when we
treat of that express subject.

Chapter XII. Of Some Peculiar Cases Of Value.

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

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, in which 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 in indefinite quantity at the same cost;
in which case the permanent value is determined by the cost of production,
and only the fluctuations 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 determined by the
greatest cost which it is necessary to incur in order to obtain the
required supply: and, lastly, we have found that money itself is a
commodity of the third class; that its value, in a state of freedom, is
governed by the same laws as the values of other commodities of its class;
and that prices, therefore, follow the same laws as values.

From this it appears that demand and supply govern the fluctuations of
values and prices in all cases, and the permanent values and prices of all
things of which the supply is determined by 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 their cost of production.

    Here, again, is a distinct recognition of the true meaning of cost
    of production, and its ruling influence within a competing group,
    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 part for 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 and coal-gas are
both produced from the same material, and by the same 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 do with 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

Since cost of production here fails us, we must revert to a law of value
anterior to cost of production, and more fundamental, the law of demand
and supply. The law is, that the demand for a commodity varies with its
value, and that the value adjusts itself so that the demand shall be equal
to the supply. This supplies the principle of repartition which we are in
quest of.

Suppose that a certain quantity of gas is produced and sold at 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 price put upon the gas and coke
respectively, the whole of the gas finds an easy market, without either
surplus or deficiency, but that 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
the gas, will not be remunerating; the manufacture, as a whole, will not
pay its expenses with the ordinary profit, and will not, on these terms,
continue to be carried on. The gas, therefore, must be sold at a higher
price, to make up for the deficiency on the coke. 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 much less 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 the
existing extent of the gas-manufacture.

Or suppose the reverse case; that more coke is wanted at the present
prices than can be supplied by the operations required by the existing
demand for gas. Coke, being now in deficiency, will rise in price. The
whole operation will yield more than the usual 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 cost of production,
their natural values relatively to each other are those which will create
a demand for each, in the ratio of the quantities in which they are sent
forth by the productive process.

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

Another case of value which merits attention is that of the different
kinds of agricultural produce. The case would present nothing peculiar, if
different agricultural products were either grown indiscriminately and
with equal advantage on the same soils, or wholly on different soils. The
difficulty arises from two things: first, that most soils are fitter for
one kind of produce than another, without being absolutely unfit for any;
and, secondly, the rotation of crops.

For simplicity, we will confine our supposition to two kinds of
agricultural produce; for instance, wheat and oats. If all soils were
equally adapted for wheat and for oats, both would be grown
indiscriminately on all soils, and their relative cost of production,
being the same everywhere, would govern their relative value. If the same
labor which grows three quarters of wheat on any given soil would always
grow on that soil five quarters of oats, the three and the five quarters
would be of the same value. The fact is, that both wheat and oats can be
grown on 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 be grown not only on the soils peculiarly
fitted for it, but on the medium soils which, without being specifically
adapted to either, are about equally suited for both, the cost of
production on those medium 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. Thus far the
question presents no difficulty, to any one to whom the general principles
of value are familiar.

                  [Illustration: Agricultural Produce.]

    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 is reached, 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 a comparison with
    whatever grade of land planted in oats is cultivated at the least
    return, as E, for example. So, if all the wheat-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 the two, as for example
wheat, may so outstrip the demand for the other, as not only to occupy the
soils specially suited for wheat, but to engross entirely those equally
suitable to both, and even encroach 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
relative value must be in proportion to the cost on that quality of land,
whatever it may be, on which the comparative demand for the two grains
requires that both of them should be grown. If, from the state of the
demand, the two cultivations meet on land more favorable to one than to
the other, that one will be cheaper and the 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 less adapted
    for wheat (although good land for oats), wheat may be pushed down
    one stem of the V and up the other to D, or even to C. Then the
    value of wheat will be regulated by the cost of production on C,
    and the rent will be determined by a comparison between the
    productiveness of _a_, _b_, etc. (running downward through E),
    with C. The price of wheat will be high relatively 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

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.

Chapter XIII. Of International Trade.

§ 1. Cost of Production not a regulator of international values. Extension
of the word “international.”

Some things it is physically impossible to produce, except in particular
circumstances of heat, soil, water, or atmosphere. But there are many
things which, though they could be produced at home without difficulty,
and in any quantity, are yet imported from a distance. The explanation
which would be popularly given of this would be, that it is cheaper to
import than to produce them: and this is the true reason. But this reason
itself requires that a reason be given for it. Of two things produced in
the same place, if one is cheaper than the other, the reason is that it
can be produced 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 of cost, time) than in the place
to which they are brought? Does the law, 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 be sold cheapest, by
being produced in some other place than that at which it can be produced
with the smallest amount of labor and abstinence.

This could not happen between adjacent places. If the north bank of the
Thames possessed an advantage over the south bank in the production of
shoes, no shoes would be produced on the south side; the shoemakers would
remove themselves and their capitals to the north bank, or would have
established themselves 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 they would 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 very strong motive. If capital removed to remote parts of
the world as readily, and for as small an inducement, as it moves to
another 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 capital would produce them in greatest quantity and of
best quality. A tendency may, even now, be observed toward such a state of
things: capital is becoming more and more cosmopolitan; there is so much
greater similarity of manners and institutions than formerly, and so much
less alienation of feeling, among the more civilized countries, that both
population and capital now move from one of those countries to another on
much less temptation than heretofore. But there are still extraordinary
differences, both of wages and of profits, between different parts of the

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 to move from one place to the other in such
quantity as to level those inequalities. The capital belonging to a
country will, to a great extent, remain in the country, even if there be
no mode of employing it in which it would not be more productive
elsewhere. 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 with less labor than
itself; because those countries, supposing them to have an advantage over
it in all productions, would have a greater advantage in some things than
in others, and would find it their interest to import the articles in
which their advantage was smallest, that they might employ more of their
labor and capital on those in which it was greatest.

    It might seem that a special theory of value is required for
    international trade, as compared with domestic trade, for the
    particular 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
    their relative 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 with the 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.” The addition, therefore, made to Mr.
    Mill’s exposition by Mr. Cairnes(259) is, that the word
    “international” (in default of a better term) should be applied to
    those conditions either within a country, or between two
    countries, which, because of the actual 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 and capital which produce the conditions
    called “international” are: 1. “Geographical distance; 2.
    Difference in political 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 the other
    an old slave State. Labor and capital have not in the past moved
    freely even across Mason and Dixon’s line. There is, 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.

§ 2. Interchange of commodities between distance places determined by
differences not in their absolute, but in the comparative, costs of

As I have said elsewhere(260) after Ricardo (the thinker who has done most
toward clearing up this subject),(261) “it is not a difference 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 she produced them
herself, we should obtain our iron with an advantage [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 the foreigners themselves. The bargain is still advantageous
to the foreigner, 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.             Sweden.
Cotton.         10 days’ labor       15 days’ labor
                produces _x_ yds.    produces _x_ yds.
Iron.           12 days’ labor       15 days’ labor
                produces _y_ cwts.   produces _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 be done, for _y_
    cwts. of iron, brings back to England that which cost 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 absolute advantage over Sweden in
    iron of a less amount (i.e., of one fourth of twelve days’ labor).
    It is to be distinctly understood that by difference in
    _comparative cost_ we mean a difference in the comparative cost of
    producing two or more articles in the _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 England of both cotton and iron (not the
    different costs of cotton 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 and of corn. It may first be supposed that the
advantage is of equal amount 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 to
the 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 with 150 days’ labor at home; and she would, in
importing it, have the 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 to be 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 the absolute costs of
the two articles are different in the two countries. If, while the iron
produced with 100 days’ labor in the United States was produced with 150
days’ labor in England, the corn which 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
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 for it 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 to
purchase 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 the corn which would have cost her 200
days at a cost exceeding 150, though short of 200. England, therefore, no
longer gains the whole of the labor which is saved to the two jointly by
trading with one another.(262)

    The case in which both England and the United States would gain
    from the trade may be thus briefly shown:

    Articles        United States.       England.
    Corn.           100 days’ labor      200 days’ labor
                    produces _x_ bus.    produces _x_ bus.
    Iron.           125 days’ labor      150 days’ labor
                    produces _y_ tons.   produces _y_ tons.

    The ship which carries _x_ bushels of corn from the United States
    to England can there exchange it for at least _y_ tons of 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 at home. In this case the United
    States has an advantage over England 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 of iron. Our _comparative_ advantage is in
    corn. England, also, by sending to the United States _y_ tons of
    iron, gets in return for it _x_ bushels of corn. To produce the
    corn herself would have cost her 200 days’ labor, but she bought
    that corn by only 150 days’ labor spent on iron. England’s
    _comparative_ advantage is in iron. Then both countries will gain.

    Mr. Bowen(263) gives an instance of international trade where one
    country has the advantage in both of the commodities entering into
    the exchange: “The inhabitants of Barbadoes, favored by their
    tropical climate and fertile soil, can raise provisions cheaper
    than we can in the United States. And yet Barbadoes buys nearly
    all her provisions from this country. Why is this so? Because,
    though Barbadoes has the advantage over us in the ability to raise
    provisions 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 better
    for her to employ all her labor and capital in that branch of
    production in which her advantage is greatest. She can thus, by
    trading with us, obtain our breadstuffs and meat at a smaller
    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, the people of
    Barbadoes can still profitably buy the flour from this country, if
    they can pay for it with sugar which cost them 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 cost eleven days’ labor.... The United
    States receive sugar, which would have cost them eleven days’
    labor, by paying for it with 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
    greater in precisely the same degree, there would be no motive for

    It may be said, however, that in practice no business-man
    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 of less 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, as it is of other commodities.(264) It may
    be stated in the following 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, by
    reciprocal demand.”(265)

§ 3. The direct benefits of commerce consist in increased Efficiency of
the productive powers of the World.

From this exposition we perceive in what consists the benefit of
international 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 the world. 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 two countries 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 for the
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 one of the two countries may
be altogether inferior to the other in productive capacities, and that its
labor and capital could be employed to greatest advantage by being removed
bodily to the other. 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 whole world 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, emigrate _en 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 exchange of
    commodities, rests, is division of labor, or separation of
    employments. Beyond the ordinary gain from division of labor,
    arising from increased dexterity, there exist gains arising from
    the development of “the special capacities or resources possessed
    by particular individuals or localities.” International exchanges
    call out chiefly the special advantages offered by particular
    _localities_ for the prosecution of particular industries.

    “The only case, indeed, in which _personal aptitudes_ go for much
    in the commerce of nations is where the nations concerned occupy
    different grades in the scale of civilization.... 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 that which was furnished by the Southern
    States of the American Union previous to the abolition of slavery.
    The effect of that institution was to give a very distinct
    industrial character to 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 entire industry of the country was consequently turned
    to the production of two or three crude commodities, in raising
    which the industry of slaves was found to be effective; and these
    were used, through an exchange with foreign countries, as the
    means of supplying the inhabitants with all other requisites....
    In the main, however, it would seem that this cause [personal
    aptitudes] does not go for very much in international

    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 same as
    those from the former.

§ 4. —Not in a Vent for exports, nor in the gains of Merchants.

According to the doctrine now stated, the only direct advantage of 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 labor than 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 less labor and capital, leaving the surplus disposable to produce
other things. The vulgar theory disregards this benefit and deems 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 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 mines of 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 an outlet for the surplus produce of a
country, and enabled a portion of the capital of the country to replace
itself with a profit. The expression, surplus produce, seems to imply that
a country is under 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, the corresponding portion of capital
would remain idle, and the mass of productions in the country would be
diminished by so much. 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 labor and capital which had been
employed in producing with a view to exportation would find employment in
producing those desirable objects which were previously brought from
abroad; or, if some of them could not be produced, in producing
substitutes for them. These articles would, of course, be produced at a
greater cost than that of the things with which they had previously been
purchased from foreign countries. But the value and price of the articles
would rise in proportion; and the capital would just as much be replaced,
with the ordinary profit, from the returns, as it was when 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 them something 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 that part of the
income of the country which had been expended in imported commodities
would be ready to expend itself on the same things produced at home, or on
others instead of them. Commerce is virtually a mode of cheapening
production; and in all such cases the consumer is the person ultimately
benefited; the dealer, in the end, is sure to get his profit, whether the
buyer obtains much or little for his money.

    _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 (when competition became free) would
    necessarily be employed in the industries in which we had an
    advantage, and would supply—and the transferred capital would be
    the only means of 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 as
    unprofitable, it means that that employment is naturally, and in
    itself, less productive than the usual run of other industries in
    the country, and so less profitable to both labor and capital than
    the majority of other occupations.

§ 5. Indirect benefits of Commerce, Economical and Moral; still greater
than the Direct.

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
make greater use of machinery, and is more likely to make inventions and
improvements in the processes of production. Whatever causes a greater
quantity of anything to be produced in the same place tends to the general
increase of the productive powers of 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
with new 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 were previously
undeveloped for want of energy and ambition in 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 the still 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 and moral. 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 the present age, one of the primary sources of progress.
Finally, (4) commerce first taught nations to see with goodwill the wealth
and prosperity 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 and progress to his own country. It is
commerce which is rapidly rendering war obsolete, by strengthening and
multiplying the personal 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 guarantee of the
peace of the world, is the great permanent security for the uninterrupted
progress of the ideas, the institutions, and the character of the human

Chapter XIV. Of International Values.

§ 1. The values of imported commodities depend on the Terms of
international interchange.

The values of commodities produced at the same place, or in places
sufficiently adjacent for capital to move freely between them—let us say,
for simplicity, of commodities produced in the same country—depend
(temporary fluctuations apart) upon their cost of production. But the
value of a commodity brought from a distant place, especially from a
foreign country, does not depend on 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 the case of an imported article, means the cost of production of the
thing 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 of a 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, depends on the
quantity of home produce which must be given to the foreign country in
exchange for it. In other words, the values of 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 be exchanged with the United States for exactly that quantity of cloth?
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 both made in the United States, they
would [possibly] exchange at their 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
determined that 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, not upon 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 those
    existing between two separate nations, which are such as to
    prevent the free movement of labor and capital from one group of
    industries to another, or from one locality to another distant
    one. Even if woolen cloth could be made cheaper in England 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 advantage in Providence than in Lynn,
    the shoe industry will come to Lynn; but it does not follow that
    the English shoe industry would come to Lynn, even if the
    advantages of the latter 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, then
    there 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 the same country, as before
    explained. When this fact is once fully grasped, the subject of
    international values becomes very simple. It does not differ from
    the question of those domestic values for which we found(269) that
    the dependence on cost of production would not hold, but that
    their values were governed by reciprocal demand and supply.

    Attention should be drawn to the real nature of the present
    inquiry. It is not here a question as to what causes international
    _trade_ between two countries: that has been treated in the
    preceding chapter, and has been found to be a difference in the
    comparative cost. The question now is one of _exchange value_,
    that is, for how much of other commodities a given commodity will
    exchange. The reasons for the trade are 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 than the other.

    In the trade between the United States and England in iron and
    corn, formerly referred to (p. 383), it was seen that a 100 days’
    labor of corn buys from England iron which would have cost the
    United States 125 days’ labor. England sends 150 days’ labor of
    iron and buys from the United 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, at which the exchanges will take place? The trade
    increases the productiveness of both countries, but in what ratio
    will the two countries share this gain? The answer is, briefly, in
    _the ratio set by reciprocal demand and supply_, that is, the
    relative strength, as compared with each other, of the demands of
    the two 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 the exchange 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 the
    other commodity. And this simple form of the statement of
    reciprocal demand and supply is also the law of international

    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 corn and of the United States
    for iron. Something may cut off England’s demand for our
    breadstuffs, and they will then have a less exchange value
    relatively to iron (if we keep up our demand), and their prices
    will fall. But if, on the other hand, England has poor harvests,
    and consequently a great demand for corn, and if our demand for
    iron is not excessive at the same time, then our breadstuffs will
    rise in value. And this was precisely what happened from 1877 to
    1879. Now, in the above 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
    of the 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 with
    changing conditions, namely, the desires of the people of the two
    countries, together with their means of purchase.

    But yet these variations are capable of ascertainment as regards
    their extreme limits. The reciprocal demand can not carry 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 light demand 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 the corn herself; and that she
    would then have no gain whatever from 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 for _y_ 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 our goods wanted by
    England, and iron all English goods wanted by the United States,
    the conclusions would be exactly the 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 fixed by the reciprocal demands acting on all the
    goods. Goods are payments for goods; the ratio of exchange depends
    on reciprocal 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 number of persons. If
    France, Germany, and England all want our corn, 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 explanation is consistent with the facts is to be seen when
    we notice how eagerly the exporters of American staples watch the
    conditions 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 of corn to
England and of iron to the United States. But, as every one knows, an
increase of price affects the demand; and, as the demand on each side is
affected, a new ratio of exchange will finally be reached consistent with
the strength of desires on each side. Who, therefore, will pay the most of
the cost of carriage England or the United States? That will, again,
depend on whether England has the greatest relative demand for American
goods, as compared with the demand of the United States for English goods.

No absolute rule, therefore, can be laid down for the division of the
cost, no more than for the division of the advantage; and it does not
follow that, in whatever ratio the one is divided, the other will be
divided in the same. It is impossible to say, if the cost of carriage
could be annihilated, whether the producing 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 nothing for itself which it did not also
make for other countries. But in consequence of cost of carriage there are
many things, especially bulky 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 is
under 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 obtained by importing one and
exporting another. This is the case with numerous commodities of common
consumption, including the coarser qualities of many articles of food and
manufacture, of which the finer kinds are the subject of extensive
international traffic.

§ 3. —As illustrated by trade in cloth and linen between England and

    Mr. Mill still further illustrates the operation of the law of
    reciprocal demand by the case of a trade between England and
    Germany in cloth and linen, as follows:

“Suppose that ten yards of broadcloth cost in England as much labor as
fifteen yards of linen, and in Germany as much as twenty.” This
supposition then being made, it would be the interest of England to import
linen from Germany, and of Germany to import cloth from England. “When
each country produced both commodities for itself, ten yards of cloth
exchanged for fifteen yards of linen in England, and for twenty in
Germany. They will now exchange for the same number of yards of 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 the whole of the benefit. If for any
number intermediate between fifteen and twenty, the advantage will be
shared between the two countries. If, for example, ten yards of cloth
exchange for eighteen 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 proportion in which
the cloth of England and the linen of Germany will exchange for each
other? Let us suppose, then, that by the effect of what Adam Smith calls
the higgling of the market, ten yards of 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 cloth is now seventeen yards of linen,
or whatever quantity of money is equivalent in Germany to seventeen yards
of linen. Now, that being 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

“Let us now turn our attention to England. There the price of 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 that price, 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 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 same terms of interchange, Germany requires. The
demand on each side 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 be interchanged, 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 have sufficed 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 she
would 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 a greater quantity of linen. She
would consume, possibly, at that price, 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 for the
900 times eighteen yards of linen which England is willing to 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 the rate of ten for
seventeen, would have taken 1,200 times seventeen 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; and ten yards of cloth will fall, in both countries, below
the value of seventeen yards of linen. By this fall of cloth, or, what is
the same 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 and the linen will
exactly pay for one another; and, when once this point is attained, values
will remain without further alteration.”

§ 4. The conclusion states in the Equation of International Demand.

“It may be considered, therefore, as established, that when two countries
trade together in two commodities, the exchange value of these commodities
relatively to each other will adjust itself to the inclinations and
circumstances of the consumers on both sides, in such manner that the
quantities required by each country, of the articles which it imports from
its neighbor, shall be 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 of production in the one
country and the ratio between their costs of 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.”

If, therefore, it be asked what country draws to itself the greatest share
of the advantage of any trade it carries on, the answer is, the country
for whose productions there is in other countries the greatest demand, and
a demand the most susceptible of increase from additional cheapness. In so
far as the productions of any country possess this property, the country
obtains all foreign commodities at less cost. It gets its imports cheaper,
the greater the intensity of the demand in foreign countries for its
exports. It also gets its imports cheaper, the less the extent and
intensity 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, in exchange for the produce of a very small
quantity of its labor and capital.

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 order that the whole of her exports may
exactly pay for the whole of her imports. This law of International Values
is but an extension of the more general law of Value, which we called the
Equation of Supply and Demand.(270) We have seen that the value of a
commodity always so adjusts itself as to bring the demand to the exact
level of the supply. But all trade, either between nations or individuals,
is an interchange of commodities, in which the things that they
respectively have to sell constitute also their means of purchase: the
supply brought by the one constitutes his demand for what is brought by
the other. So that supply and demand are but another expression for
reciprocal demand; and to say that value will adjust itself so as to
equalize demand with 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

    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, and exclusive of
    specie, to and from the United States. From 1850 to 1860, after
    the discoveries of the precious metals in this country, we sent
    great quantities of gold and silver out of the country, purely as
    merchandise, so that, if we should include the precious metals
    among the exports in those years, the total exports would more
    nearly equal the total imports. The transmission of gold at that
    time was effected exactly as that of 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 and speculation 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 the
    great purchases of the former period; and the epoch of great
    exports, from 1875 to 1883, balanced the opposite conditions in
    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.

                       [Illustration: Chart XIII.]

   Chart XIII. _Value of Merchandise_ IMPORTED _into (dotted line) and_
    EXPORTED _from (black line) the United States from 1835 to 1883_.

§ 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 sense of cost: (1.) It gets them
cheaper in the first sense, by their falling in value relatively to other
things; the same quantity of them 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 for the same quantity of
all other things for which they before obtained only fifteen. The degree
of cheapness, in this sense of the term, depends on the laws of
International Demand, so copiously illustrated in the preceding sections.
(2.) But, in the other sense, that of cost, a country gets a commodity
cheaper when it obtains a greater quantity of the commodity with the same
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 the general productiveness of its
domestic industry; to the general efficiency of its labor. The labor of
one country may be, as a whole, much more efficient than that of another:
all or most of 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 from exchanging
commodities. The things which the more favored country 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 the articles 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 those
commodities. Of these, the last alone depends on the efficiency of her
labor; the first depends on the law of international values; that is, on
the intensity and extensibility of the foreign demand for her commodities,
compared with her demand for foreign commodities.

    The great productiveness of any industry in our country has thus
    two results: (1) it gives a larger total out of which labor and
    capital at home can receive greater rewards; and (2) the
    commodities being cheaper in comparison than other commodities not
    so easily produced, furnish the very articles which are most
    likely to be sent abroad, in accordance with the doctrine of
    comparative cost. In the United States, those things in the
    production of which labor and capital are most efficient, and so
    earn the largest rewards, are precisely the articles entering most
    largely into our foreign trade. That is, we get foreign articles
    cheaper precisely because these exports cost us less in labor and
    capital. These, of course, since we inhabit a country whose
    natural resources are not yet fully worked, are largely the
    products of the extractive industries, as may be seen by the
    following table of the value of goods entering to the greatest
    extent into our foreign export trade in 1883:

    Raw cotton               $247,328,721
    Breadstuffs              208,040,850
    Provisions and animals   118,177,555
    Mineral oils             40,555,492
    Wood                     26,793,708
    Tobacco                  22,095,229

    These six classes of commodities are arranged in the order in
    which they enter into our export trade, and are the six which come
    first and highest in the list.

Chapter XV. Of Money Considered As An Imported Commodity.

§ 1. Money imported on two modes; as a Commodity, and as a medium of

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, when completed, will in its turn
enable us to conclude the subject of foreign trade.

Money, or the material of which it is composed, is, in Great Britain, and
in most other countries, a foreign commodity. Its value and distribution
must therefore be regulated, not by the law 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 shall use the
terms money and the precious metals indiscriminately. This may be done
without leading to any error; it having been shown 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: from which it never permanently differs, except by the
expense of coinage, when this is paid by the individual and not by the

Money is brought into a country in two different ways. It is imported
(chiefly in the form of bullion) like any other merchandise, as being an
advantageous article of commerce. It is also imported in its other
character of a medium of exchange, to pay some debt due to the country,
either for goods exported or on any other account. The existence of these
two distinct modes in which money flows into a country, while other
commodities are habitually introduced only in the first of these modes,
occasions somewhat more of complexity and obscurity than exists in the
case of other commodities, and for this reason only is any special and
minute exposition necessary.

§ 2. As a commodity, it obeys the same laws of Value as other imported

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 the commercial world. They are the
staple commodities of those countries, or at least are among their great
articles of regular export; and are shipped on speculation, in the same
manner as other 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 will call the United States(272))
for what England has to give.

The bullion required by England must exactly pay for the cottons or other
English commodities required by the United States. If, however, we
substitute for this simplicity the degree of complication which really
exists, the equation of international demand must be established not
between the bullion wanted in England and the cottons or broadcloth wanted
in the United States, but between the whole of the imports of England and
the whole of her exports. The demand in foreign countries for English
products must be brought into equilibrium with the demand 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 effect they 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 general principles of demand.
So far as they are wanted for purposes of luxury or the arts, the demand
increases with the cheapness, in the same irregular way as the demand for
any other commodity. So far as they are required for money, the demand
increases with the 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 other things.

Money, then, if imported solely as a merchandise, will, like other
imported commodities, be of lowest value in the countries for whose
exports there is the greatest foreign demand, and which have themselves
the least demand for foreign commodities. To these two circumstances it
is, however, necessary to add two others, which produce their effect
through cost of carriage. The cost of obtaining bullion is compounded of
two elements; the goods given to purchase it and the expense of transport;
of which last, the bullion countries will bear a part (though an uncertain
part) in the adjustment of international values. The expense of transport
is partly that of carrying the goods to the bullion 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 the goods. 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 whose
exportable productions (1) are most in demand abroad, and (2) contain
greatest value in smallest bulk, (3) which are nearest 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 the highest. 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
of cheapness a fifth condition, namely, “whose productive industry is the
most efficient.” This last, however, does not at all affect the value of
money, estimated in commodities; it affects the general abundance and
facility with which all things, money and commodities together, can be

    The accompanying Chart, No. XIV, on the next page, gives the
    excess of exports from the United States of gold and silver coin
    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 a regular article of export, like
    merchandise. From 1850 to 1879 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 the fact that we had a depreciated paper currency, which sent
    the metals out of the country as merchandise. This chart should be
    studied in connection with Chart No. XIII.

                        [Illustration: Chart XIV.]

 Chart XIV. _Chart showing the Excess of Exports and Imports of Gold and
  Silver Coin and Bullion, from and into the United States, 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 be raised 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 of international 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 demand in England for foreign commodities, by the
laying on of import duties in England or of export duties elsewhere; these
and all other events of similar tendency would make the imports of England
(bullion and other things taken together) no longer an equivalent 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 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 for English
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 those countries, 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 from the
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.

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 would in 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 sold for money, but as themselves money, to pay a debt, or effect a
transfer 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 the mechanism 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 even pass through
the same hands. Each is separately bought and paid for with money. We have
seen, however, that, even in the same country, money does not actually
pass from hand to hand each time that purchases are made with it, and
still less does this happen between different countries. The habitual mode
of paying and receiving payment for commodities, between country and
country, is by bills of exchange.

A merchant in the United States, A, has exported American commodities,
consigning them to his correspondent, B, in 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 England should 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 the other, 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, and sends 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 from the United States
to England, are both paid without sending an ounce of gold or silver from
one country to the other.(274)


This implies (if we exclude for the present any other international
payments than those occurring in the course of commerce) 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 international transactions are liquidated without the passage of any
money from one country to the other. But, if there is a greater sum due
from the United States to England than is due from England to the United
States, or _vice versa_, the debts can not be simply written off against
one another. After the one has been applied, as far as it will go, toward
covering the other, the balance must be transmitted in the precious
metals. In point of fact, the merchant 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
foreign country, 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 a class of middle-men or brokers,
who bring buyers and sellers together, or stand between them, buying bills
from those who have money to receive, and selling bills to those who have
money to pay. When a customer comes to a broker for a bill on Paris or
Amsterdam, the broker sells to him perhaps the bill he may himself have
bought that morning from a merchant, perhaps a bill 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 the whole settlement of the pecuniary transactions between
distant places, 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, in that case, they have no means of
enabling the correspondents on whom their bills are drawn to pay them when
due, except by transmitting part of the amount in gold or silver, they
require from those to whom they sell bills an additional price, sufficient
to cover the freight and insurance of the gold and silver, with a profit
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 must otherwise go to the
expense of remitting the precious metals themselves, and it is done
cheaper by those who make doing it a part of their especial business. But,
though only some of those who have a debt to pay would have actually to
remit money, all will 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 find more 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, which is exceedingly active, prevents
them from retaining this discount as a profit for themselves, and obliges
them to give the benefit of it to those who buy the bills for purposes of

When the United States had the same number of dollars to pay to England
which England had to pay to her, one set of merchants in the United States
would want bills, and another set would have bills to dispose of, for the
very same number of dollars; and consequently 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 United
States 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 than there were bills drawn by persons to whom
money was due. A bill on England for $1,000 would then sell for more than
$1,000, and bills would be said to be at a premium. The premium, however,
could not exceed the cost and risk of making the remittance in gold,
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 to receive from
England than to pay, there would be bills offered for a greater number of
dollars than were wanted for remittance, 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, bills on the United States are at a premium
in England. If they are at par in either country, they are so, as we have
already seen, in both.(275)

Thus do matters stand between countries, or places which have the 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 by having, to their own inconvenience
and that of their neighbors, a peculiar currency of their own. To our
present purpose this makes no other difference than that, instead of
speaking of _equal_ sums of money, we have to speak of _equivalent_ sums.
By equivalent sums, when both currencies are composed of the same metal,
are meant sums which contain exactly the same quantity of the metal, 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 price will
    go up, of course; but it can not go more than a small fraction
    beyond $4.90, since about 3-¼ cents is sufficient to cover the
    brokerage, insurance, and freight per pound sterling in a shipment
    of gold to London. Therefore, in order to get money to a creditor
    in London, no one will pay more for a pound in the form of a bill
    than he will be obliged to pay for sending 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 the exchanges are at $4.90, it will be found that
    gold is going abroad. On the other hand, when the supply of bills
    is greater than the demand, their price will fall. A man having a
    bill on 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 than the expense
    of bringing the gold itself across. Since this expense is about
    3-¼ cents, bills can not fall below about $4.83. When exchange is
    at that price, it will be found that gold is coming to the United
    States from England. This price is the “shipping-point” for
    imports of gold. This, of course, applies to sight-bills only.

    Formerly, we computed exchange on a scale of percentages, the real
    par being about 109. This was given up after the war.

When bills on foreign countries are at a premium, it is customary to say
that the exchanges are against the country, or unfavorable to it. In order
to understand these phrases, we must take 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
more than $1,000 to buy a bill of £205, $1,000 of American money are worth
less than their real equivalent of English money: and this is called an
exchange unfavorable to the United States. The only persons in the United
States, however, to whom it is really unfavorable are those who have money
to pay in England, for they come into the bill market as buyers, and have
to pay a premium; but to those who have money to receive in England the
same state of things is favorable; for they come as sellers and receive
the premium. The premium, however, indicates that a balance is due by the
United States, which must be eventually liquidated in the precious metals;
and since, according to the old theory, the benefit of a trade consisted
in bringing money into the country, this prejudice introduced the practice
of calling the exchange favorable when it indicated a balance to receive,
and unfavorable when it indicated one to pay; and the phrases in turn
tended to maintain the prejudice.

§ 2. Distinction between Variations in the Exchanges which are
self-adjusting and those which can only be rectified through Prices.

It might be supposed at first sight that when the exchange is unfavorable,
or, in other words, when bills are at a premium, the premium must always
amount to a full equivalent for the cost of transmitting money. But a
small excess of imports above exports, or any other small amount of debt
to be paid to foreign countries, 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 and credits without any
actual transmission of the metals. And this is the more likely to happen,
as there is a self-adjusting power in 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, a diminution of
profit to those who import. Besides the price of the goods, they have to
pay a premium for remittance. So that what is called an unfavorable
exchange is an encouragement to export, 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 of bills,
without the transmission of any bullion. Not so, however, when the excess
of imports above exports, which has made the exchange unfavorable, arises
from a permanent cause. In that case, what disturbed the equilibrium must
have been the state of 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 of imports, and yet that the exports should be kept permanently up
to the imports by the extra profit on exportation derived from the premium
on bills; for, if the exports were kept up to the imports, bills would not
be at a premium, and the extra profit would not exist. It is through the
prices of commodities that the correction must be administered.

Disturbances, therefore, of the equilibrium of imports and exports, and
consequent disturbances of the exchange, may be considered as of two
classes: the one casual or accidental, which, if not on too large a scale,
correct themselves through the 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 money
from 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 the balance of
debts and credits with each country separately, but with all countries
taken together. The United States may owe a balance of payments to
England; but it does not follow that the exchange with England will be
against the United States, and that bills 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 is
technically called arbitration of exchange. There is some little
additional expense, partly commission and partly loss of interest in
settling debts in this circuitous manner, and to the extent of that small
difference the exchange with one country may vary apart from that with

    A common use of bills of exchange is that by which, when three
    countries are concerned, two of them may strike a balance through
    the third, if both countries have dealings with that 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.


    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 it from C, the whole circle of exchanges is completed
    without the transmission of the precious metals.

Chapter XVII. Of The Distribution Of The Precious Metals Through The
Commercial World.

§ 1. The substitution of money for barter makes no difference in exports
and imports, nor in the Law of international Values.

Having now examined the mechanism by which the commercial transactions
between nations are actually conducted, we have next 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 adjacent places. Things which would have
been equal in value if the mode of exchange had been by barter are worth
equal sums of money. The introduction of money is a mere addition of one
more commodity, of which the value is regulated by the same laws as that
of all other commodities. We shall not be surprised, therefore, if we find
that international values also are determined by 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 other goods, really buys
those goods with his own commodities. And so of nations: their trade is a
mere exchange of exports for imports; and, whether money is employed or
not, things are only in 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 by bills, 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

But the process by which things are brought back to this state when they
happen to deviate from it is, at least outwardly, not the 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 sole means 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 at the same
price as before, and, as she exports no equivalent, the balance 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 United States,(276)
and the country which receives it, England. By this transmission 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 that the equation of international demand is not yet
established: that there is at the ordinary prices a permanent demand in
the United States for more English goods than the American goods required
in England at the ordinary prices will pay for. When this is the case, if
a change were not made in the prices, there would 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, or by the exportation of bullion, they will reach the circulation
at last, for, until they do, nothing can stop the drain.

When, therefore, the state of prices is such that the equation of
international demand can not establish itself, the country requiring more
imports than can be paid for by the exports, it is a sign that the country
has more of the precious metals, or their substitutes, in circulation,
than can permanently circulate, and must necessarily part with some of
them before the balance can be 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,
from the 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 a greater pecuniary
value, or until the increased dearness (positive or comparative) of
foreign goods makes the United States take a less pecuniary value, the
exports of the United States will be no nearer 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 nations tend to the
same equilibrium between exports and imports, whether money is employed or
not, but the means by which this equilibrium 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 the law of international trade. Every country exports and
imports the very same things, and in the very same quantity, under the one
system as under the other. In a barter system, the trade gravitates to the
point at which the sum of the imports exactly exchanges for the sum of the
exports: in a money system, it gravitates to the point 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, the exports and imports which are equal in money price would,
if money were not used, precisely exchange for one another.(277)

§ 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 is participated in by the
countries importing it.

The improvement may either consist in the cheapening of some article which
was already a staple production of the country, or in the establishment of
some new branch of industry, or of some process rendering an article
exportable which had not till then been exported at all. It will be
convenient to begin with the case of a new export, as being somewhat the
simpler of the two.

The first effect is that the article falls in price, and a demand arises
for it abroad. This new exportation disturbs the balance, turns the
exchanges, money flows into the country (which we shall suppose to be the
United States), and continues to flow until prices rise. This higher range
of prices will somewhat check the demand in foreign countries for the new
article of export; and will diminish the demand which existed abroad for
the other things 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 of this increased power of purchase, there
will be an increase of imports; and by this, and the check to exportation,
the equilibrium of imports and exports will be restored. The result to
foreign countries 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 the very same price (cost
of carriage excepted) in the United States and in other countries. The
cheapness, however, of the article is not measured solely by the
money-price, but by that price compared with the money-incomes of the
consumers. The price is 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 the
latter have had their money-incomes probably diminished by the same cause.
The trade, therefore, has not imparted to the foreign consumer the whole,
but only a portion, of the benefit which the American consumer has derived
from the improvement; while the United States has also benefited in the
prices of foreign commodities. Thus, then, any industrial improvement
which leads to the opening of a new branch of export trade benefits a
country not only by the cheapness of the article in which the improvement
has taken place, but by a general cheapening of all imported products.

Let us now change the hypothesis, and suppose that the improvement,
instead of creating a new export from the United States, 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 other
words, to lay out in cloth the same sum of money as before; the same
aggregate payment as before will be due from foreign countries to the
United States; the equilibrium of exports and imports will remain
undisturbed, and foreigners will obtain the full advantage of the
increased cheapness of cloth. But if the foreign demand for cloth is of
such a character as to increase in a greater 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 the improvement.
If, on the contrary, the cheapening of cloth does not extend the foreign
demand for it in a proportional degree, a less sum of debts than before
will be due to the United States for cloth, while there will be the usual
sum of debts due from the United States to foreign countries; the balance
of trade will turn against the United States, money will be exported,
prices (that of cloth included) will fall, and cloth will eventually be
cheapened to the foreign purchaser in a still greater ratio than the
improvement has cheapened it to the United States. These are the very
conclusions which [would be] deduced on the hypothesis of barter.(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 such proportions among the different countries of the world
as to accommodate themselves to the natural traffic which would take place
if no such metals existed, and the trade between countries were purely a
trade of barter.” Of this principle, so fertile in consequences, previous
to which the theory of foreign trade was an unintelligible chaos, Mr.
Ricardo, though he did not pursue it into its ramifications, was the real

    On the principles of trade which we have before explained, the
    same rule will apply to the distribution of money in different
    parts of the same country, especially of a large country with
    various 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 parts of 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 more money in the so-called great financial
    centers, because there are more exchanges of goods there. In
    sparsely settled parts of 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 the following legislation of Congress to distribute the
    national-bank circulation: “That $150,000,000 of the entire amount
    of circulating notes authorized to be issued shall be apportioned
    to associations in the States, in the District of Columbia, and in
    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 the same Law, with the precious metals as a

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 with the law by which we found
that the value of money is regulated when imported as a mere article of

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 of money would depend, if it were
never imported except (2) as a merchandise, and never except directly from
the mines. When the value of money in a country is permanently lowered (1)
[as a medium of exchange] by an influx of it through the balance of 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 those
of foreign countries. Now, an increased foreign demand for the 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 purchase all imports, and consequently (2) the
precious metals, at a lower value. There is, therefore, no contradiction,
but the most perfect accordance, in the results of the two different modes
[(1) as a medium of exchange; and (2) as merchandise] in which the
precious metals may be obtained. When money [as a medium of exchange]
flows from country to country in consequence of changes in the
international demand for commodities, and by so doing 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 by which 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 what manner
and degree the preceding conclusions are affected by the existence 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, or interest 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 for which there is to be no return,
it is no longer requisite that the imports and exports should pay for one
another; on the contrary, there must be an annual excess of exports over
imports, equal to the value of the remittance. If, before the country
became liable to the annual payment, foreign commerce was in its natural
state of equilibrium, it will now be necessary, for the purpose of
effecting the remittances, that foreign countries should be induced to
take a 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 of exports will be brought about, and
this excess will become the permanent 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.

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 is necessarily made in money. This lowers
prices in the remitting country, and raises them in the receiving. The
natural effect is, that more commodities are exported than before, and
fewer imported, and that, on the score of commerce alone, a balance of
money 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; the equilibrium of exports and imports
will no longer exist, but that of payments will; the exchange will be at
par, the two debts will be set off against one another, and the tribute or
remittance will be virtually paid in goods. The result to the interests of
the two 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.

    It has been seen, as in Chart No. XIII, that, considering the
    exports and imports merely as merchandise, there is, in fact, no
    actual equilibrium at any given time in accordance with the
    equation of International Demand. Another element, the “financial
    account” between the United States and foreign countries, must be
    considered before we can know all the factors necessary to bring
    about the equation. If we had been borrowing 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 and normal 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 of various kinds; but, if our exports are not
    sufficient at once to balance 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 the
    exports; and so we find a period, like that during and after the
    war, 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 the equilibrium. But
    our government bonds and other securities have been coming back to
    us, producing a return current to balance 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, and generally a later, time.
    Moreover, the large expenses of people traveling in Europe will
    require us to remit abroad in the form of exports more than would
    ordinarily balance our imports by the amount spent by the
    travelers. The financial operations, therefore, between the United
    States and foreign countries, 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 be
    stated more broadly, as follows: “The state of international
    demand which results in commercial equilibrium is realized when
    the reciprocal demand of trading countries produces such 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 of a great
    borrowing country, we should have, as a rule, a permanent excess
    of imports.

Chapter XVIII. Influence Of The Currency On The Exchanges And On Foreign

§ 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 and international
values on the hypothesis of barter. We next showed that 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 influence
of those same laws, distribute themselves in such proportions among the
different countries of the world as to allow the very same exchanges to go
on, and at the same values, as would be the case under a system of barter.
We lastly considered how the value of money itself is affected by those
alterations in the state of trade which arise from alterations either in
the demand and supply 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 purposes of 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 dispensed with. These changes
act upon the trade between other countries and the mining countries, and
upon the value of the precious metals, according to the general laws of
the value of imported 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 permanent conditions 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 or other 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, and from 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 permanent
circumstances of international demand) could only be when the money had
diffused itself so equally that prices had risen in the same ratio in all
countries, so that the alteration of price would 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 value of money throughout the world (at least if the diminution
was considerable) 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 made up, and the usual causes of
destruction would gradually reduce the aggregate 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 below that 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 importation in 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. Suppose(282) that the
United States possessed a currency, wholly metallic, of $200,000,000, and
that suddenly $200,000,000 of bank-notes were sent into circulation. If
these were 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 great part of the
$200,000,000 of gold out of the country as capital, to seek a higher rate
of interest elsewhere, before there had been time for any action on
prices. But we will suppose that the notes are not issued by bankers, or
money-lenders of any kind, but by manufacturers, in the payment of wages
and the purchase of 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 countries
of the world, in the order of their proximity, geographically and
commercially, to the United States.

    A study of Chart No. XIV will show how exactly this description
    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 differences were only those which existed
before, and which corresponded to permanent differences in the cost of
obtaining it. When the rise of prices had extended itself in an equal
degree to all countries, exports and imports would everywhere revert to
what they were at first, would balance one another, and the exchanges
would return to par. If such a sum of money as $200,000,000, when spread
over 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 the general 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 would cease partially or wholly, until the
$200,000,000 were absorbed.(283)

Effects of another kind, however, will have been produced: $200,000,000,
which formerly existed in the unproductive form of metallic money, have
been converted into what is, or is capable of becoming, productive
capital. This gain is at first made 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
other commodities. 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 a function
in which it was only employed in rendering other soils and capitals
productive, and would itself become applicable to production; the office
it previously fulfilled being equally well discharged by a medium which
costs nothing.

The value saved to the community by thus dispensing with metallic money is
a clear gain to those who provide the substitute. They have the use of
$200,000,000 of circulating medium which have cost them only the expense
of an engraver’s plate. If they employ this accession to their fortunes as
productive capital, the produce of the country is increased and the
community benefited, as much as by any other capital of equal amount.
Whether it is so employed or not depends, in some degree, upon the mode of
issuing 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 equivalent amount; in which last case the amount is saved by the
tax-payers at large, who either add it to their capital or spend it as
income. When [a part of the] paper currency is supplied, as in our 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 the strongest inducements not
to squander it, and the only cases in which 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, and a succession of borrowers,
mostly for short periods, who, after paying the interest, gain a profit in
addition, or a convenience equivalent to profit. The capital itself in the
long run becomes entirely wages, and, when replaced by the sale of the
produce, becomes wages again; thus affording a perpetual fund, of the
value of $200,000,000, for the maintenance of productive labor, and
increasing the annual produce of the country by all that can be produced
through the means of a capital of that value. To this gain must be added a
further saving to the country, of the annual supply of the precious metals
necessary for repairing the wear and tear, and other waste, of a metallic

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 is necessary to maintain, both in
fact and in public belief, the convertibility 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

§ 3. Effect of the increase of an inconvertible paper Currency. Real and
nominal exchange.

When metallic money had been entirely superseded and expelled from
circulation, by the substitution of an equal amount of bank-notes, any
attempt to keep a still further quantity of paper in circulation must, if
the notes are convertible [into gold], be a complete 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 value of 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 (in his earlier writings), and Sir
    Robert Peel, implied that even a convertible paper was liable to
    over-issues. This last school brought about the Bank Act of

[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, and would be for that purpose
demanded from the banks, to the full extent of the superfluous notes,
which thus could not possibly be retained 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 from
circulation (except what may be retained for the convenience of small
change), and the issues still go on increasing. When the paper begins to
exceed in quantity the metallic currency which it superseded, 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 the cases before examined, stimulate import and
discourage export. The imports and exports are determined by the metallic
prices of things, not by the paper prices; and it is only when the paper
is exchangeable at pleasure for the metals that paper prices and metallic
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 the expense 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 for
more 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 is not depreciated
paper, but gold or silver; and since in the United States bullion has
risen in the same proportion with other things—if the merchant brings the
gold or silver to the United States, he can sell his $27.50 [in coin] for
$33 [in paper], and obtain as before 10 per cent for profit and expenses.

It thus appears that a depreciation of the currency does not affect 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 bill on England for $25 will be worth $30. When, therefore,
the _real_ exchange is at par, there will be a _nominal_ exchange against
the country 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 the country for the purpose of drawing a bill
against it and profiting by the premium; because the gold so sent must be
procured, not from 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 has altered,
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 the metallic par. The quoted
exchanges, therefore, when there is a depreciated currency, are compounded
of two elements or factors: (1) the real exchange, which follows the
variations of international payments, and (2) the nominal exchange, which
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 portion of the quoted exchange, being referable to
depreciation, may be struck off as nominal, the result so corrected
expressing the real exchange.

The same disturbance of the exchanges and of international trade which is
produced by an increased issue of convertible bank-notes is in like manner
produced by those extensions of credit 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 spirit
of 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 of high prices, exportation is checked
and importation stimulated; though in fact the increase of importation
seldom waits for the rise of prices which is the consequence of
speculation, inasmuch as some of the great articles of import are usually
among the things in which speculative overtrading first shows itself.
There is, therefore, in such periods, usually a great excess of imports
over exports; and, when the time comes at which these must be 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 extension of
credit is rapidly exchanged for an unusual contraction of it. Accordingly,
when credit has been imprudently stretched, and the speculative spirit
carried to excess, the turn of the exchanges and 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 the situation
    here described. After the war, and until 1873, while the United
    States was under the influence of high prices and a 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 equally striking, 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

Chapter XIX. Of The Rate Of Interest.

§ 1. The Rate of Interest depends on the Demand and Supply of Loans.

The two topics of Currency and Loans, though in themselves distinct, are
so intimately blended in the phenomena of what is called the money market,
that it is impossible to understand the one without the other, and in many
minds the two subjects are mixed up in the most inextricable confusion.

In the preceding book(285) we defined the relation in which interest
stands to profit. We found that the gross profit of capital might 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, and interest. 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 of the particular employment, there remains a surplus, which
partly goes to repay the owner of the capital for his abstinence, and
partly the employer of it for his time and trouble. How much goes to the
one and how much to the other is shown by the amount 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 this case from what they have in all others. The rate of
interest will be such as to equalize the demand for loans with the supply
of them. It will be such that, exactly as much as some people are desirous
to borrow at that rate, others shall be willing to lend. If there is more
offered than demanded, interest will fall; if more is demanded 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 or less
influenced by every circumstance which affects the state or prospects 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 the same for two days together; as is shown by the
never-ceasing variations in the quoted prices of the funds and other
negotiable securities. Nevertheless, there must be, as in other cases of
value, some rate which (in the language of Adam Smith and Ricardo) 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 going on in the hands of persons who can not
themselves attend to the employment of their savings, and partly on the
comparative taste existing in the community for the active pursuits of
industry, or for the leisure, ease, and independence of an annuitant.

§ 2. Circumstances which Determine the Permanent Demand and Supply of

In [ordinary] circumstances, the more thriving producers and traders have
their capital fully employed, and many are able to transact business to a
considerably greater extent than they have capital for. These are
naturally borrowers: and the amount which they desire to borrow, and can
give security for, constitutes the demand for loans on account of
productive employment. To these must be added the loans required by
Government, and by 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 hands of persons
disinclined or disqualified for engaging personally in business, (1) a
mass of capital equal to, and even exceeding, this demand. In that case
there would be an habitual excess of competition on the part of lenders,
and the rate of interest would bear a low proportion to the rate of
profit. Interest would be forced 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 by engaging in business on
their own account, and incurring the risks, 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 and
    worthless 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 them from personally
superintending its employment, may be short of the habitual demand for
loans. It may be in great part absorbed by the investments afforded by the
public debt and by mortgages, and the remainder may not be sufficient to
supply the wants of commerce. If so, the rate of interest will be raised
so high as in some way to re-establish the equilibrium. When there is only
a small difference between interest and profit, many borrowers may no
longer be willing to increase their responsibilities and 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, than they otherwise would have done.

Or, lastly, instead of [capital] being afforded by persons not in
business, the affording it may itself become a business. A portion of the
capital employed in trade may be supplied by a class of professional
money-lenders. These money-lenders, however, must have more than a mere
interest; they must have the ordinary rate of profit on their capital,
risk and all other circumstances being allowed for. [For] it can never
answer, to any one who borrows for the purposes of his business, to pay a
full profit for capital from which he will only derive a full profit: and
money-lending, as an employment, for the regular supply of trade, can not,
therefore, be carried on except by persons who, in addition to their own
capital, can lend their credit, or, in other words, the capital of other
people. A bank which lends its notes lends capital which it borrows from
the community, and for which it pays no interest.

    Of late years, however, banks are generally not permitted to issue
    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 Bank of England
    since 1844). It is not generally true, then, that banks now create
    the means to make loans by issuing notes by 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 the community in
small parcels, sometimes without paying any interest, and, if it does pay
interest, it still pays much less than it 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 this subsidiary resource, bankers are enabled to obtain, by lending
at 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 is that 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, which investment, except under peculiar temptations or
necessities, is not changed.

§ 3. Circumstances which Determine the Fluctuations.

Fluctuations in the rate of interest arise from variations either in the
demand for loans or in the supply. The supply is liable to variation,
though less so than the demand. The willingness to lend 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 other people 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 not belong to them. Accordingly, these are the times when the
rate of interest is low; though for this too (as we shall immediately see)
there are other causes. During the revulsion, on the contrary, interest
always rises inordinately, because, while there is a most pressing need on
the part of many persons to borrow, there is a general disinclination to

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, a general
distrust in each other’s solvency; disposing every one not only to refuse
fresh credit, except on very onerous terms, but to call 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, and withhold their customary advances; merchants
refuse to renew mercantile bills. At such times the most calamitous
consequences were 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 the lender 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 States in this
    country of making any interest beyond a certain rate illegal. When
    it is remembered that legitimate business is often largely done on
    credit—until the proceeds of goods sold on credit are
    collected—the rate of interest from day to day is very 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 better to 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 willing to 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 loaning at higher than the legal rates when
    charged upon call-loans; and it has mitigated the extreme
    fluctuations of the rate in a market when financial necessity is
    contending against the law.

Except at such periods, the amount of capital disposable on loan is
subject to little other variation than that which arises from the gradual
process of accumulation; which process, however, in the great commercial
countries, is sufficiently rapid to account for 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 the mean time, there is always found to have occurred
in those few years so large an increase of capital seeking investment as
to have lowered considerably the rate of interest, whether indicated by
the prices of securities or by the rate of discount on bills; and this
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 time of war, for
example, is a period of unusual draughts on the loan 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, and productive industry is stinted of its usual

    The United States during the late war found that it could not
    borrow at even six or seven per cent. By receiving depreciated
    paper 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
    the weakened credit of the Government; but still it remains true
    that the rate was higher because the United States was in the
    market 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 already contracted continue to afford
an investment for a greatly increased amount of the disposable capital of
the country, which, if the national debt were paid off, would be added to
the mass of capital seeking investment, and (independently of temporary
disturbance) could not but, to some extent, permanently lower the rate of

    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 for enormous sums
    of loanable funds, and to the same extent increased the supply in
    the market. Without doubt this aids in making the present rate of
    interest a very low one. Whether the rate will remain “permanently
    lower,” however, will depend upon whether the field of investment
    in the United States is already practically occupied. We believe
    it is not.

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 scale comparable to that of the war loans, is the
absorption of capital in 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 to be
ultimately employed in buying securities from persons who would have
employed the purchase-money in discounts or other loans at interest: in
either case, it was a draft on the general loan fund. It is, in fact,
evident that, unless savings were made expressly to be employed in railway
adventure, the amount thus employed must have been derived either from the
actual capital of persons in business or from capital which would have
been lent to persons in business.

§ 4. The Rate of Interest not really Connected with the value of Money,
but often confounded with it.

From the preceding considerations it would be seen, even if it were 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 before has precisely
the same effect on the four dollars, and therefore 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 of banks in
encouraging the excesses of speculation, an immense effect is usually
attributed to their issues of notes, but until of late hardly any
attention was paid to the management of their deposits, though nothing is
more certain than that their imprudent extensions of credit take place
more frequently by means of their deposits than of their issues. Says Mr.
Tooke: “Supposing all the deposits received by a banker to be in coin, is
he not, just as much as the issuing banker, exposed to the importunity of
customers, whom it may be impolitic to refuse, for loans or discounts, or
to 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 around
    the 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 effect on credit all influences due
    to issues, England has had the same difficulties to encounter as
    before, which shows that the real question is concerned with the
    two essential functions of banking—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.

§ 5. The Rate of Interest determines the price of land and of Securities.

Before quitting the general subject of this chapter, I will make the
obvious remark that the rate of interest determines the value and price of
all those salable articles which are desired and bought, not for
themselves, but for the income which they are capable of 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 of power and dignity are associated with its
possession. But these differences are constant, or nearly so; and, in the
variations of price, land follows, _cæteris paribus_, the permanent
(though, of course, not the daily) variations of the rate of interest.
When interest 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 the same
    ($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 with the time it
    has to run. At the same rate of interest, a bond running for a
    long term of years is better for an investment than one for a
    short term. The lumberman, who looks at two trees of _equal
    diameter_ at the base, estimates the total value of each according
    to the _height_ of the tree. Then, again, a bond running for a
    short term may be worth less than one for a long term, even though
    the first bears a higher rate of interest. That is, to resume the
    illustration, one tree, not rising very high, although _larger_ at
    the bottom, may not contain so many square feet as another, with
    perhaps a _less_ diameter at the bottom, but which stretches much
    higher up into the air.

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 word _underselling_.
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, while in
    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 them at all, the imports
    which it obtains by its foreign trade are procured at greater

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 the article exported by both; meaning by a
greater advantage (as has been already so fully explained) not absolutely,
but in comparison with other commodities; and (2) in the second place,
such must be her (A’s) relation with the customer-country in respect to
the demand for each other’s products, and such the consequent state of
international values, as to give away to the customer-country more than
the whole advantage possessed by the rival country (B); otherwise the
rival will still be able to hold her 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 the two 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, unless by a country (such as India) which
    offered not merely more than 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, be able to produce wheat at less cost, compared with
    iron, than the United States herself; and, in the next place, must
    have such 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; to give, 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 for ten, at which both countries would be
    able to maintain their ground, and to sell in England enough wheat
    to pay for the iron, or other English commodities, for which, on
    these newly adjusted terms of interchange, they had a demand. In
    like manner, England, as an exporter of iron, could only be driven
    from the American market by some rival whose superior advantages
    in the production of iron enabled her, and the intensity of whose
    demand for American produce compelled her, to offer ten cwts. of
    iron, not merely for less than seventeen bushels of wheat, but for
    less than fifteen. In that case, 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)

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 the minor inconvenience of carrying it on
at a diminished advantage; an inconvenience chiefly falling on the
consumers of foreign commodities, 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 can sell [wheat] in
foreign markets, at some particular time, a trifle cheaper than they can
themselves afford to do in the existing state of prices in [the United
States]. Suppose them to be temporarily unsold, and their exports
diminished; the imports will exceed the exports, 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 compete with their rivals.

The loss which [the United States] will incur will not fall upon the
exporters, but upon those who consume imported 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 meant that
    prices were to fall, and gold leave the country. Those holding
    large stocks of goods would for that time suffer; and so, at
    first, it might really happen that “exporters,” in the sense of
    exporting agents (not the producers, perhaps, of the exportable
    article), would incur a loss. In the end, of course, the consumers
    of imports suffer. But, temporarily, and on the face of it,
    exporters do lose.

§ 2. High wages do not prevent one Country from underselling another.

According to the preceding doctrine, a country can not be undersold in any
commodity, unless the rival country has a stronger inducement than itself
for devoting its labor and capital to the production of the commodity;
arising from the fact that by doing so it occasions a greater saving of
labor and capital, to be 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 to the
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 superseded by it. The advantage, of course,
consists in being able to produce the commodity of better quality, or with
less labor (compared with other things); or perhaps not with less labor,
but in less time; with a less prolonged detention of the capital employed.
This may arise from greater natural advantages (such as soil, 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 the case of lower wages.
This, however, in the theories commonly current, is a favorite cause of
underselling. We continually hear of 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 from all markets
in which he is not artificially protected.

    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 a comparison, also, between the absolute price of the
    goods in one country and the absolute price of the same goods in
    the 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 in close
    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 the illustration already used, we must,
    for example, offer more than 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 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 as
    compared with the price in London would be an indication of the
    fact. So that the comparison of prices here with prices abroad is
    merely a register of the terms at which our international
    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 the limit of our comparative
    advantages in wheat and iron; so that we are obliged to offer
    twenty or more bushels of wheat for ten 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, the
    ordinary rate of profit. In exporting wheat from the United States
    the capital engaged will insist on getting the rate of profit to
    be found in other occupations to which the capital can 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 and profits 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 of advantage in foreign trade arising
    from competition, generally shows itself first in lessened
    profits. The price, then, is the means by which we determine
    whether a certain article gives us that comparative advantage
    which will insure a gain from international trade.

    An exportable article whose price in this country is 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 the industry is very productive;
    that the same capital and labor produce more for their exertion in
    this than in other industries. And yet it is precisely in the most
    productive industries that higher wages and profits can be, and
    are, paid. Although each 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,
    the price 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 and profits may be
    very high (relatively to older countries) in those industries of
    the United States whose productiveness is great, yet the very fact
    of this low cost, and consequently this low 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, from sending goods abroad—because we send
    goods abroad from our most productive employments. As an
    illustration of this principle, it is found that the leading
    exports of the United States, 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 order to determine
    whether the trade can be a profitable one, we constantly hear it
    said that we can not send goods abroad because our labor is so
    dear. It need scarcely be observed that we do not hear this from
    those engaged in any of the 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 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 labor and
    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 of machinery 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 can everywhere else receive at
    home. For, at a price low enough to warrant an exportation, the
    quantity made by a given amount of labor and capital does not
    yield a total value so great as is given in the majority of other
    occupations to the same amount of labor and capital, and out of
    which the usual high wages and profits can be paid. The less
    productiveness of an industry, compared with other industries in
    the same country, then, is the real cause which prevents it from
    competing with foreign countries consistently with receiving the
    ordinary rate of profit. It is the high rate of profits as well as
    the high rate of wages common in the country which prevents
    selling abroad. It is absurd to say that it is only high wages: it
    is just 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 general
    productiveness 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 equally well
    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 that any 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 foreign trade.

    Our present high wages should be a cause for congratulation,
    because they are due to the generally high productiveness of our
    resources, or, in other words, due to low 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 that wages are known to be higher in this country
    than abroad.) So long as wages continue high, we may possibly be
    unwilling to see gratified that false and ignorant desire which
    leads some people to think that we ought to produce, equally well
    with any competitor in the world, everything that is made. If, as
    was pointed out under the discussion on cost of labor,(289) we
    must necessarily connect with efficiency of labor all natural
    advantages under which labor works, it is easy to see that high
    wages are entirely consistent with low prices; and that high wages
    do not prevent us to-day from having an hitherto unequaled export
    trade. Even if all wages and all profits were lower, it would,
    however, affect all industries alike, and some would still be more
    productive relatively to others, and the same inequality would
    remain. If, however, we learn to use our materials better, use
    machinery with more effect on the quantity 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.

    Mr. Mill now goes on to consider the suggestive fact that wages
    are higher in England than on the Continent, and yet that the
    English have no difficulty in underselling their Continental

Before examining this opinion on grounds of principle, it is worth while
to bestow a moment’s consideration upon it as a question of fact. Is it
true that the wages of manufacturing labor are lower in foreign countries
than in England, in any sense in which 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 his
labor cost less to his employer? Though wages may be lower on the
Continent, is not the Cost of Labor, which is the real element in the
competition, very nearly the same? That it is so seems the opinion of
competent judges, and is confirmed by the very little difference in the
rate of profit between England and the 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
than in 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 proved by the fact that the general rate of profits
and of interest is very much higher.

§ 3. Low wages enable a Country to undersell another, when Peculiar to
certain branches of Industry.

But is it true that low wages, even in the sense of low Cost of Labor,
enable a country to sell cheaper in the foreign market? I mean, of course,
low wages which are common to the whole productive industry of the

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 in the foreign market. It
lessens the _comparative_ cost of production of 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, are produced 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 by
slaves 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 in the products, both in
the home and in the foreign market, as if they had been made by a less
quantity of labor. If the slaves in the Southern States were emancipated,
and their wages rose to the general level of the earnings of free labor in
America, that country might be obliged to erase some of the slave-grown
articles from the catalogue of its exports, and would certainly be unable
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 is obtained, an apter comparison would be with the
cheapness of stolen goods.

                        [Illustration: Chart XV.]

                                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 slave-labor in the
    United States. The abolition of slavery has been an 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 were increased by 30 per cent, and those of raw cotton by
    no less than 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 to sell 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, and changes 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 the secret may be found why the simple and
unlearned Swiss manufacturer can always go on competing and increasing in
prosperity 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 their loom for a part only, if for
any part, of their actual maintenance, can afford to work for a less
remuneration than the lowest rate of wages which can permanently exist in
the employments by which 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 the limit of possible
cheapness is not the necessity of living by their trade, 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.

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, and consequently to undersell its
rivals, or to avoid being undersold by them. But no such advantage is
conferred by low wages when common to all branches of industry. General
low wages never caused any country to undersell its rivals, nor did
general high wages 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 do not cause low
prices, nor high wages high prices, within the country itself. General
prices are not raised by a rise of wages, 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 he would 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 increase in the
productiveness of labor, does not make prices low, but profits high. If
wages fall (meaning here by wages the cost of labor), why, on that
account, should the producer lower his price? He will be forced, it may be
said, by the competition of other capitalists who will crowd into his
employment. But other capitalists 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 it is 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 the total
    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 of larger
    profits, and so wages would rise. Therefore, it is possible 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 high prices, yet the two may be found
    together, as both due to a common cause, viz., the small or great
    value of the total product.(291)

Since low wages are not a cause of low prices in the country itself, so
neither do they cause it to offer its commodities in foreign markets at a
lower price. It is quite true that, if the cost of 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 not with 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 with
himself, the benefit of a low cost of labor, and have accordingly a high
rate of profit. This high profit the cotton-spinner must also 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 which have a low cost of labor and high profits do not for that
reason undersell others, but they do oppose a more obstinate resistance to
being undersold, because the producers can often submit to a 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 with the rest of their countrymen has become
manifestly hopeless.

§ 5. Low profits as affecting the carrying Trade.

It is worth while also to notice a third class of small, but in this case
mostly independent communities, which have supported and enriched
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 general commerce of Southern
Europe, they had scarcely any competitors: the thing would not have been
done at all without them, 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 that of
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 the variety of circumstances, a lower rate of profit
at home, could afford to carry for other countries at a smaller advance on
the original cost of the goods than would have been required by their own
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, like those 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, which still remain
    on the statute-book. They do not permit an American to buy a
    vessel abroad and sail it under our flag without paying enormous
    duties; a provision which is intended to foster ship-building in
    the United States. Even with this legislation, ships, as a fact,
    are not built here for the foreign trade; and our ship-builders
    practically supply the coasting-trade 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-owning or ship-sailing, is quite distinct
    from it. The ability to get as great a return from capital and
    labor invested in a ship as from other 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 the returns 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 the shipping engaged in carrying our own goods.

Chapter XXI. Of Distribution, As Affected By Exchange.

§ 1. Exchange and money make no Difference in the law 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 of the mechanism interfere with and
modify the presiding principles.

The primary division of the produce of human exertion and frugality 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,
to the other two sharers, the market value of their labor and land. If we
examine on what the pecuniary value of labor and the pecuniary value of
the use of land depend, we shall find that it is on the very same causes
by which we found that wages and rent would be regulated if there were no
money and no exchange of commodities.

It is evident, in the first place, that the law of wages is not affected
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 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 in
new colonies, depends on the strength of the checks by which the too rapid
increase of population is restrained, it may be said, popularly speaking,
that wages depend on the checks to population; that, when the check is not
death by starvation or disease, wages depend on the prudence of the
laboring people; and that wages in any country are habitually at the
lowest rate to which in that country the laborer will suffer them to be
depressed rather 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 the first 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 the time an
invariable standard, no alteration taking place in the conditions under
which the circulating medium itself is produced or obtained. If money
itself undergoes no variation in cost, the money price of labor is an
exact measure of the cost of labor, and may be made use of as a convenient
symbol to express it [if the efficiency of labor also be supposed to
remain the same].

The money wages of labor are a compound result of two elements: first,
real wages, or wages in kind, or, in other words, 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 the increase of population is in any degree checked by the
difficulty of obtaining subsistence—the habitual money price of labor is
that which will just enable the laborers, one with another, to purchase
the commodities without which they either can not or will 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 the various 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 the
principles which have been laid down in this Third Part. The cost of
production of food and agricultural produce has been analyzed in a
preceding chapter. It depends on the productiveness of the least fertile
land, or of the least productively employed portion of capital, which the
necessities of society have as yet put in requisition for agricultural
purposes. The cost of production of 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 the
least 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 which urges cultivation in
this downward course is the increase of people; while the counter-force,
which checks the descent, is the improvement of agricultural science and
practice, enabling the same 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
the race which population and agricultural skill are always running
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 are always
    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 margin of cultivation is
    high: only soils of high productiveness are in cultivation, and
    the returns to labor and capital are, consequently, very large.
    High wages are found together with low 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 our laborers. 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 low that any change in the cost
    of producing food would require checks upon population. There is a
    considerable margin above necessaries, in the laborer’s real wages
    in the United States, which may go for comforts, decencies, and

§ 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. When the 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 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, shall
just replace the expenses with the ordinary profit. If the least favored
land and capital just do thus much, all other land and capital 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 originally(293) 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 the least 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, that the 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 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, which is correctly
represented (money being supposed invariable as well 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 the price,
of the chief articles of the laborer’s consumption. On either of these
suppositions the rate of profit will fall.

If the laborer obtains more abundant commodities only by reason 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 rate of profit. But, if he obtains a
greater quantity of commodities of which the cost of production is not
lowered, he obtains a greater cost; his money wages are higher. The
expense of these increased money wages falls wholly on the capitalist.
There are no conceivable means by which he can shake it off. It may be
said—it used formerly to be said—that he will get rid of it by raising his
price. But this opinion we have already, and more than once, fully

The doctrine, indeed, that a rise of wages causes an equivalent rise 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 his money 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
general wages falls on profits. There is no possible alternative.

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 to arise 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, unless
the price of food rose sufficiently to remunerate the farmer for the
increased cost of production. The farmer, however, in this case sustains a
twofold disadvantage. He has to carry on his cultivation under less
favorable conditions of productiveness than 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 the price 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, for which 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 to
produce a given quantity of food; but the increased wages of that labor
are a burden common to all, and for which no one can be indemnified. 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 the expense of profits. And by reversing the
cases, we should find in like manner that diminished wages, when
representing a really diminished Cost of Labor, are equivalent to a rise
of profits. But the opposition of pecuniary interest thus indicated
between the class of capitalists and that of laborers is to a great extent
only apparent. Real wages are a very different thing from the Cost of
Labor, 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 of labor 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 confirmation of our original theorem that
Profits depend on the Cost of Labor: or, to express the meaning with still
greater accuracy, the rate of profit and the cost of labor vary inversely
as one another, and are joint effects of the same agencies or causes.


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

In the leading countries of the world, and in all others as they come
within 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, including some not yet founded, will successively
enter upon the same career. It will, therefore, be our first object to
examine the nature 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, and especially 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 foresight can extend (1), the unlimited, growth of
man’s power over nature. Our knowledge of the properties and laws of
physical objects 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 of civilized 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 of accumulation. 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 of modern
society is, (3) an improvement in the business capacities of the general
mass of mankind. I do not mean that the practical sagacity of an
individual human being is greater than formerly. What is lost in the
separate efficiency of each is far more than made up by the greater
capacity of united action. Works of all sorts, impracticable to the savage
or the half-civilized, are daily accomplished by civilized nations, not by
any greatness of 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, in
short, of civilized beings, is the capacity of co-operation; and this,
like other faculties, tends to improve by practice, and becomes capable 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 growth of 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, but many of the poor might grow rich, that the intermediate
classes might become more numerous and powerful, and the means of
enjoyable 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 a supposition, however greatly we
deprecate as a fact, an increase of population as long-continued, as
indefinite, and possibly even as rapid, as the increase of production and

§ 2. Tendency to a Decline of the Value and Cost of Production of all

The changes which the progress of industry causes or presupposes in the
circumstances of production are necessarily attended with changes in the
values of commodities.

The permanent values of all things which are neither under a natural nor
under an artificial monopoly depend, as we have 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 other words, diminishes cost of production. All
inventions by which a greater quantity of any commodity can be produced
with the same labor, or the same quantity with less labor, or which
abridge the process, so that the capital employed needs not be advanced
for so 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 were an exception to the
general diminution of cost of production, the values 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 other things, 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 since 1850
    there has been a vast increase in their amount, and probably in
    greater proportion than the need arising from increased
    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 in lower 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 the London “Economist”—2,200 indicating
    the price of a given number of articles in 1845-1850, as the basis
    of the table with which the prices of other years are compared:

    Year.               Index numbers.
    1845-1850           2,200
    1857, July 1        2,996
    1858, January 1     2,612
    1865                3,575
    1866                3,564
    1867                3,024
    1868                2,682
    1869                2,666
    1870                2,689
    1871                2,590
    1872                2,835
    1873                2,947
    1874 (Depression)   2,891
    1875 (Depression)   2,778
    1876 (Depression)   2,711
    1877 (Depression)   2,723
    1878 (Depression)   2,529
    1879 (Depression)   2,202
    1880                2,538
    1881                2,376
    1882                2,435
    1883                2,343

    But the progress of society, particularly in the direction of
    improved and cheapened processes of manufacturing, has vastly
    lowered the cost of a great number of articles of common
    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 those in 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 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 this century. 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 circumstance accompanying 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 the ignorant attempts to restrain it by tariffs become obsolete,
commodities tend more and more to be produced in the places in which their
production can be carried on at the least expense of labor and capital to
mankind. (3.) Much will also depend on the increasing migration of labor
and capital to unoccupied parts of the 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 in efficiency
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 gradually unfolding 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 by others, the
progress of things enables a country to obtain, at less and less of real
cost, not only its own productions but those of foreign countries. Indeed,
whatever diminishes the cost of its 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 and Mining, 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 the case of the most important classes of commodities, food,
and materials, there is a tendency diametrically opposite to that of which
we have been speaking. The cost of production of these commodities tends
to increase.

This is not a property inherent in the commodities themselves. If
population were stationary, and the produce of the earth never needed 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 real increase of cost of production,
are those which, depending on a material which is not renewed, are either
wholly or partially exhaustible, 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 richest and most
tractable ores.

When, however, population increases, as it has never yet failed to do,
then comes into effect that fundamental law of 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 of the earth increases, _cæteris paribus_, with every
increase of the demand.

    Mr. Cairnes has made some essential contributions to the
    discussion of changes of value arising from the progress of
    society:(296) “When a colony establishes itself in a new country,
    the course of its industrial development naturally follows the
    character of the opportunities offered to industrial enterprise by
    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 such as
    to draw the bulk of the industrial activity of the new people into
    some one or more of those branches of industry which have been
    conveniently designated ‘extractive.’ Agriculture, pastoral and
    mining pursuits, and the cutting of lumber, are among the
    principal of such industries.” To these pursuits apply “that law
    of Political Economy, or, more properly, of physical 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 be thus 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 those natural agents, cultivated with the
    degree of skill brought to bear upon them, are capable of
    yielding; but, after this point has been passed, though an
    increased application of labor and capital will obtain an
    increased return, it will not obtain a proportionally 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 with a return constantly
    diminishing.... What I am now concerned to show is the manner in
    which, with the progress of society, the law in question affects
    the course of normal(297) values in all commodities coming under
    its influence.

    “The class of commodities in the production of which the
    facilities possessed by new communities, as compared with old,
    attain their greatest height, are those of which timber 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 the course of values in the products
    of extractive industry, and in the commodities just referred to
    among the rest, is the degree 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 is found that, taking timber and
    meat as a type—one possessing portableness in a vastly greater
    degree than the other—in the early settlement of a new country,
    the portable article, like timber, at once rises in price “to a
    level lower than that prevailing in old countries only by the cost
    of transport”; on the other hand, perishable articles like meat
    are “confined for a market, if not to the immediate locality where
    it is produced, 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 the natural
    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 demand for
    dairy-products, eggs, small fruits, fresh vegetables, milk, etc.,
    and thereby it becomes more profitable to employ land near
    populous centers for such perishable products than for 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, is familiar 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 of land—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 with such 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

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, the more 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, manufacturing industry is subject, in respect of one of its
essentials, to the same 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 much
overbalanced by the diminution continually taking place in all the other
elements; to which diminution it is impossible at present to assign any

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 as a rule that manufactured
articles tend, as society advances, to fall in money price. The industrial
history of modern nations, especially during the last hundred years, fully
bears out this assertion.

    In regard to manufactures, as opposed to raw products, it is to be
    remarked “that, as the course of price in the field of raw
    products is, on the whole, upward, so in that of manufactured
    goods the course is, not less strikingly, in the opposite
    direction. The reasons of this are exceedingly plain. In the first
    place, _division of labor_—the first and most 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, in fact, 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
    no limitation; it follows, I say, from these considerations, that
    that portion of the cost of manufactured goods which properly
    belongs to the manufacturing process must, with the progress of
    society, undergo constant diminution.... In all the great branches
    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 the influence 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 in which these
    admit of being applied to manufacture is mainly dependent upon the
    scale on which the manufacturing process 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 most marked. 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 to stimulate a great increase of demand. All the common
    kinds of 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 marvels of
    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. Such coarser 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 to compensate 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 in
    price have been accomplished in the past, and it is in them,
    probably, that we shall witness in the future the greatest results
    of the same kind.”

§ 4. —that tendency from time to time Counteracted by Improvements in

Whether agricultural produce increases in absolute as well as comparative
cost of production depends on the conflict of the two antagonist
agencies—increase of population and improvement in 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, and the 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 a strong impulse
sets in toward agricultural improvement. Such an impulse has shown itself
in Great Britain during the last fifteen 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 less cost than
they were thirty years ago; and the abolition of the Corn Laws has given
an additional stimulus to the spirit of improvement. In some other
countries, and particularly in France, the improvement of agriculture
gains ground still more decidedly 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 our Western States
    at a low price even after having been carried to transatlantic
    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

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 their fluctuations. 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 of the same commodity
might exist in places not very distant from each other, because the want
of roads and canals, the imperfection of marine navigation, and the
insecurity of communications generally, prevented things from being
transported from the places 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 whole world, is [now] a thing almost
unknown. In modern times, therefore, there is only dearth, where there
formerly would have been famine, and sufficiency everywhere when anciently
there would have been scarcity in some places and superfluity in others.

The same change has taken place with respect to all other articles of
commerce. The safety and cheapness of communications, which enable a
deficiency in one place to be supplied from the surplus of another, at a
moderate or even a small advance on the ordinary price, render the
fluctuations of prices much less extreme than formerly. This effect is
much promoted 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 to moderate its inequalities. The prices
of things are neither so much 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 from
    that which is customary in this country. Merchants who buy
    outright and store up grain are not speculators in the sense in
    which the word is used with us; but those gamblers who purchase,
    “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 the alternations 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 not hitherto become either less
frequent or less violent with the growth of capital and extension of
industry. Rather they may be said to have become more so, in consequence,
as is often said, of increased competition, but, as I prefer to say, of a
lower rate of profits and interest, which makes capitalists dissatisfied
with the ordinary course of safe mercantile gains. The connection of this
low rate of profit with the advance of population and accumulation is one
of the points to be illustrated in the ensuing chapters.

    Mr. Cairnes also adds some investigations as to the fluctuations
    of value: “Hitherto I have examined the derivative laws of value
    in so far only as they are exemplified in the movements of
    _normal_ prices. It will be interesting now to consider whether it
    is possible to discover in the movements of _market_ prices any
    corresponding phenomena.

    “Taking manufactures first, it is evident at once that, as regards
    conditions of protection, the circumstances of the case are 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 a moderate-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 of manufacture
    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 the circumstances 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 the process much more uncertain, the commodity at
    once more perishable and less portable, and human requirements in
    relation 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, the minimum is considerably
    larger. (2.) Again, the farmer may decide upon the breadth of
    ground to be devoted to a particular crop, or upon the number of
    cattle he will maintain; but the actual returns will vary
    according to the season, and may prove far in excess or far in
    defect of his calculations. These circumstances all present
    obstacles to the adjustment of supply and demand, and consequently
    tend to produce frequent and extensive deviations of the market
    from the normal price. Nor are the other conditions of the case
    such as 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, and so
    far tends to correct fluctuations of price. But, on the other
    hand, (4.) the relation of these products to human wants is such
    as greatly to enhance that tendency to violent fluctuation
    incident to the conditions of their production. More especially is
    this the case with the commodity, whatever it may be, which forms
    the staple food of a people. For observe the peculiar nature of
    human requirements with reference to such a commodity. They are of
    this kind, that, given the number of a population, the quantity of
    the staple food required is nearly a fixed quantity, and this
    almost irrespective of price. Except among the poorest, increased
    cheapness will not stimulate a larger consumption; while, on the
    other hand, all, at any cost within 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 their usual 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, the competition of sellers, in their eagerness to
    find a market for the superfluous portion of the supply, is
    equally powerful to depress it.”

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 share in it. We may confine our
attention to the system of distribution which is the most complex, and
which virtually includes all others—that in which the produce of
manufactures is shared between two classes, laborers and capitalists, and
the produce of agriculture among three, laborers, capitalists, and

The characteristic features of what is commonly meant by 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)

§ 2. First two cases, Population and Capital increasing, the arts of
production stationary.

    For the sake of clearness we will form two general groups of these

    A. _The Influence of Population and Capital_ (_Improvements
    remaining stationary_).

    B. _The Influence of Improvements_ (_Population and Capital
    remaining stationary_).

    We will first take up A, and under this division make for
    convenience two separate suppositions:

    I. The first is that, while Population is advancing, Capital is
    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 the form of capital to be now
    distributed among more laborers (1), real wages must fall;
    whereupon, if the same capital purchases more labor, and obtains
    more produce (2), profits rise. 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 much food as before, and if, as by the supposition, there
    are more laborers, an increased quantity of food will be required
    from the soil. This supply can be produced only at a greater cost,
    and, as inferior soils are called into cultivation (3), rents will
    rise. 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 fall of
    real wages; so that profits will not gain so much as if rents had
    not risen. The result of this first supposition, then, is, that
    the landlord is the chief gainer:

    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 these real 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; and in 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 an increased 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 of real wages as before, and the cost of them has risen,
    as just explained, an increased cost of labor will result which
    must come out of profits. (2) Profits will fall. So that the
    results of A upon distribution, taken separately from B, are that
    the 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 and population stationary.

    Now, let us go back to our first general group of causes, B—an
    advance in the arts of production (while capital and population
    remain stationary). We can now study by themselves the effect of
    improvements on wages, profits, and rent. The general effects
    arising from the extended introduction of machinery into
    agriculture and manufactures, the lowered cost of transportation
    by steam, have been to lessen the value of articles consumed
    chiefly by the laboring-classes. For the sake of clearness,
    imagine that the improvement comes suddenly. The first effect will
    be to lower the value and price of articles entering into the real
    wages of the laborers; and, if those consist mostly of food, there
    will be a rise in the margin of cultivation and a fall in rents
    (3). It has been previously shown(299) that improvements retard,
    or put back, the law of diminishing 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.

    We have seen that improvements cheapen the price of articles
    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 to retain this higher standard, this would be the situation.
    Sadly enough, however, in practice they are apt to be satisfied
    with the old standard; and the amount of real wages to give the
    old standard of living can be had now for less money wages. While
    only the same number, without any increase, can live at the new
    (higher) standard, a larger number can live at the old (lower)
    standard. In short, the obstacles to an increase of population
    will be removed by the possession of higher money wages. After a
    generation, it is very probable that a larger number of laborers
    will be in existence living at the same (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 have not); 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 just described, will then

    B. (1.) Real wages remain the same; money wages less.
    (2.) Profits rise.
    (3.) Rents fall.

§ 4. Theoretical results, if all three Elements progressive.

    We have considered, on the one hand, under A, the manner in 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 affected by improvements in
    production, and more especially in agriculture, as follows:

    A. (1.) Wages the same. B. (1.) Real wages the same, money wages
    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 a tendency to
    a rise of rents (3), an increased cost of labor, and a fall of
    profits (2); under B, a fall of rents (3), a diminished cost of
    labor, and a rise of profits (2). We have, therefore, analyzed the
    forces belonging to the progress of industry, and found two
    distinct and antagonistic forces, working against each other. If,
    at any period, improvements (B) advance faster than population and
    capital (A), rent and money wages will tend downward and profits
    upward. If, on the other hand, population advances faster than
    improvements (B) either the laborers 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 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,” and effaces its
    effects as fast as they are produced.

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 the natural state of a country which is but half
cultivated, namely, that the land is highly productive, and food obtained
in great abundance 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 the immediate
vicinity of markets or means of conveyance, where a bad quality is
compensated by a good situation); and even if no further improvements were
made in agriculture or locomotion, cultivation would have many steps yet
to descend, before the increase 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 the worst
land under the plow was, from the rude state of agriculture, quite as
unproductive as the worst land now cultivated, and that cultivation had
approached as near to the ultimate limit of profitable tillage in those
times as in the present. What the agricultural improvements since made
have really done is, by increasing the capacity of production of land in
general, to enable tillage to extend downward to a much worse natural
quality of land than the worst which at that time would have admitted of
cultivation 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; population
meanwhile always pressing so hard against the barrier that there is never
any visible margin left for it to seize, every inch of 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 conflicting with increase of population as a partial
relaxation of the bonds which confine that increase.

    Now, since improvements enable a much poorer quality of land 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 and capital, 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 must otherwise have stopped.

    Inasmuch as, in point of fact, B never gets the start of A, but
    follows 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 cost of
    laborers’ subsistence and a fall of profits (2). The effect of 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 increase of
    population, the land-owners will reap the benefits of the
    improvement in the rise of rent. The final result, then, is as

    (1.) Real wages, probably higher.
    (2.) Profits fall.
    (3.) Rents rise.

    It is possible that a different combination from the above may
    sometimes occur in the causes which underlie the progress of
    society: (1.) There may be a period in which capital is increasing
    more rapidly than population, and when 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, these cases 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 burdened with the
    disabilities of the old slave _régime_ are far behind the others.
    The changes in the rank of the States, in respect of population,
    at each decade, as seen in Chart No. XVI, are suggestive.

                        [Illustration: Chart XVI.]

      Chart XVI. _Changes of the Rank of the States in the Scale of
                 Relative Population, from 1790 to 1880._

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 early recognized 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
competition of 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 computed in money, the expenses of every producer
have diminished as much 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 is that, and
not the fall of prices, which has lowered the profits of capital. There is
another thing which escaped the notice of Adam Smith; that the supposed
universal fall of prices, through increased competition of capitals, is a
thing which can not take place. 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
the money in the hands of the community destined to be laid out in
commodities; and, as long as the proportion of this to the commodities is
not diminished, there is no fall of general prices. Now, howsoever capital
may increase, and give rise to an increased production of commodities, a
full share of the capital will be drawn to the business of producing or
importing money, and the quantity of money will be augmented in an equal
ratio with the quantity of commodities. For, if this were not the case,
and if money, therefore, were, as the theory supposes, perpetually
acquiring increased purchasing power, those who produced or imported it
would obtain constantly increasing profits; and this could not happen
without attracting labor and capital to that occupation 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 the gradual exhaustion of the mines.

It is not tenable, therefore, in theory, that the increase of capital
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 in which there have been improvements in
production, greater than have taken place in the production of the
precious metals; as, for example, all spun and woven fabrics. Other
things, again, instead of falling, have risen in price, because their cost
of production, compared with that of gold and silver, has increased. Among
these are all kinds of food, comparison being made with a much earlier
period of history. The doctrine, therefore, that competition of 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 view of the subject, and arrives,
through a substantially correct series of deductions, at practical
conclusions which appear to me just and important. Mr. Wakefield’s
explanation of the fall of profits is briefly this: Production is limited
not solely by the quantity of 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 to
take 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 the acquisition of fertile
land, or by opening new markets in foreign countries, from which food and
materials can be purchased with the 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 to circumstances. It depends on two
elements: One is the strength of the 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 to others to be so employed, there is always
some additional risk over and a