Xv. Money And Banking.

Xv. Money And Banking.

XIII. PROBLEMS OF DISTRIBUTION.

So far we have discussed for the most part those economic problems that center round the production of wealth, such as the use of natural resources, large-scale production, trusts and monopolies, labor organizations, unemployment, industrial education and co-operation. Now we shall consider briefly a few of the problems that are connected with the distribution of wealth. Professor Blockmar says that the three great problems of economic society are: “First, how to create the largest amount of utilities or wealth; second, how justly to divide this amount; and third, how to make the product minister to the permanent rather than to the transient well-being of society.” The first problem we have already discussed; the second forms the subject of the present section; while the third will be taken up in the next section. Within the last century the center of interest in the practical application of economic principles has decidedly shifted from production to distribution. The earlier writers in economics, as shown in the mercantile lists of the seventeenth and eighteenth centuries, even Adam Smith, were chiefly interested in methods of increasing a nation’s wealth. With the introduction of the factory system and the opening up of vast natural resources by improvements in mining and transportation, the production of wealth has enormously increased, and now the question of the method of its distribution or division is felt to be more pressing.

Under the term distribution two different processes are included, which should be distinguished before going further. The first is called functional distribution, and concerns the distribution of the product of industry or the income of society, among the different factors of production. That is to say, land, labor, capital and managerial ability have contributed in varying degrees to the production of a certain amount of current wealth, and the problem of functional distribution is to ascertain how the net product resulting from these joint efforts is divided. How much goes to rent, how much to wages, how much to interest and how much to profits? The second kind of distribution is the division of the wealth of society among individuals or families; this is personal distribution, and raises the question of poverty and great wealth. In discussing these problems, however, we must remember that wealth production and distribution takes place in modern society under conditions imposed by the social order in which we live; these were defined as competition, private property and personal liberty. If any modifications of the processes of distribution were desired, it would undoubtedly be necessary to alter these fundamental institutions.

John Stuart Mill held that production was governed by natural laws, which could be ascertained and stated, but that distribution was artificial and hence that it was not possible to discover constant and certain laws governing it. Beginning mainly with Mill, the ethical question has been more and more asked as to what share each factor in production ought to get, not merely what he does receive. “Hence the question is rising more and more as to what should be the basis of division, and many proposals have been made. It is proposed that laborers combine to get a larger share. Hence we have trade unions, Knights of Labor, etc. It is proposed that capitalists and landlords give a larger proportion of the produce to the laborers than they are able to secure by mere private struggle. Hence we have proposals for profit-sharing and various charities. It is proposed that laborers combine to be their own capitalists and landlords; hence we have all sorts of co-operative and communistic experiments. It is asserted that the wealthy classes have so much power in their hands that private co-operation cannot succeed in competing against them, and hence it is proposed that all the people, through government (municipal, state, and national), secure all the means of production (capital and land, so far at least as land is used for production), and operate them collectively for the equitable good of all, the people thus being their own employers, capitalists, and landlords. Hence we have municipalism, nationalism, socialism. It is claimed that capitalists and landlords have been able to secure, and are today able to maintain, their large share in distribution, only through the favoritism of the Government. Hence we have proposals for free trade, the single tax,... the extreme proposals of the very great minimizing of the state in individualism, or the abolition of the Government in anarchism.” In view of this very imperfect list it is not too much to say that most of the economic problems that are stirring society today are connected with the distribution of wealth.

The first question that suggests itself in the discussion of functional distribution is as to whether it is actually governed by natural law, so-called. It is observable that the amounts which go to rent, to wages, to interest, and to profits are regularly quite constant. What determines this? The socialists contend that natural distribution is the only just method and insist that the state should regulate this just distribution; they are not clear, however, as to what this natural method is. Henry George uses the same phrase when he says, “the just distribution of wealth is manifestly a natural distribution of wealth, and this is that which gives to him who makes it and secures to him who saves it.” All such statements beg the question for they all turn on the use of the word natural. Many modern economists are inclined to assert that the question of distribution is not an ethical one, not a question of what ought to be but of what is. Thus Professor Tetter says : “Distribution in economics is the seasoned explanation of the way in which the total product of a society is divided among its members. It is a logical question and not an ethical one.” And Professor Clark writes, “There is, in short, a deep-acting natural law at work amid the confusing struggles of the labor market.” It will not be possible, in the brief limits of this section, to take up all the theories as to the way in which this distribution is effected among the claimants to a share of the product, but a few of the more important practical results may be stated. We shall take up the four different factors in turn.

Rent is usually defined as the return for the use of natural objects and agencies. Rent has usually been low in the United States because of the large amount of land and other natural agents available. In general it may be said that when any factor of production is relatively abundant in comparison with the other factors, its share of the product will be small. Henry George, however, argues that as the amount of land is limited and is now practically all taken up, the future will see a constantly increasing demand for land, and hence the landlords will absorb most of the future income of society. This is true of most of land and other natural agents especially in demand, as choice sites in our cities, anthracite coal mines, etc. The practical problem that suggests itself is, do we wish private property in land? The socialists answer no, but the individualists insist that the best use has been and can be made of land only by reducing it to private ownership. In practice, however, even in modern individualistic societies, the absolute and unregulated use of land by the owner is restricted in various ways.

Interest is the amount paid for the use of capital. From the time of the church fathers in the Middle Ages down to the present-day socialists, interest and the private ownership of productive capital have formed favorite objects of attack. The justification of interest lies in the fact that men prefer present goods to future goods—a bird in the hand is worth two in the bush—and interest is the difference in value between the two at the present moment; it is time value. The justification of private property, on the other hand, lies rather in its expediency than in any inherent and unalterable law of nature. It has developed with civilization and has been, without question, a fundamental cause of material progress. But moderate individualists even, as John Stuart Mill, have attacked the institution of inheritance while leaving the main edifice of private property untouched. They would limit absolutely the amount of bequest or, as President Roosevelt advocated, would use inheritance taxes as a means of breaking up large fortunes.

Profits are the reward which the manager of a business receives for his services in organizing and superintending the business. This share of the social income was the last to be recognized by economists, and its rightfulness is even yet denied by the socialists. They insist that profits are really the earnings of labor which have been withheld from the laborer by the superior skill and economic strength of the capitalist manager; they are institutional robbery, the exploitation of labor. It is not possible to take up the arguments on this point, but it may be said in a word that the manager of business contributes a needed service to the work of society just as truly as the laborer does, and receives his earned reward in the form of profits.

Wages are the reward of labor. It is often assumed that wages are lower than they should be, that the laborer in some way is deprived of a portion of what he has rightfully earned. It is worth while inquiring briefly how the share of labor in the distribution of the social income is determined. Various theories have been developed to explain the distributive process, of which we may notice three. The oldest in point of time and the most pessimistic theory held that wages were fixed by competition and the growth of population at the bare subsistence minimum, a bare starvation level. If by some happy chance wages were raised above this point, then the population would speedily multiply and the increased competition thus brought about among the laborers would depress wages again to the lowest amount sufficient to support a family. Under the name of the “iron law of wages,” this theory is still put forth by the socialists as the explanation—together with the institution of private property—of wages. Historically, however, this theory has happily been proven untrue, as the advance in the standard of living among the working class during the past century testifies. It has now been almost wholly superseded by the so-called productivity theory, which asserts that wages depend upon the productivity of labor; that the laborer gets what he produces, and that this share is assured him by the working out of the competitive process under free competition. If this theory is true, there can be no ethical question raised; if labor is dissatisfied with its share, then it must increase its productive efficiency. As a matter of fact wages have always been high in the United States because labor has been relatively scarce compared with land and capital, and consequently its marginal productivity has been high. The third theory says that wages are a result of bargaining, of competition in the labor market, a question of supply and demand. Under these circumstances it is largely a question of economic strength between labor and capital, and if labor is well-organized, alert, and able to drive a good bargain, then wages will be high; otherwise they will be low. While there is an element of truth in the last theory, the second one seems the truest explanation of general wages; certain it is that no monopoly power of labor, however great, could permanently maintain wages at a level higher than the actual produce of labor. The element of truth in the first theory is that wages can never, for any length of time, fall below the cost of subsistence.

Of more practical interest are questions connected with the personal distribution of wealth. In this connection arise such problems as the increase of large fortunes, the causes of poverty, and similar questions. The boast of our Republic has long been that here opportunity was open to all, that wealth was widely diffused, and that such inequalities of fortune as characterized the nations of the Old World were happily lacking. In the fifty-five years, 1850-1904, the per capita value of all property in the United States exactly quadrupled; how has this increase been distributed? Unfortunately we have no complete statistics on this point, yet reliable estimates by authoritative writers all tell the same story—of great concentration of wealth in the possession of a comparatively few rich families. In 1893 Mr. George K. Holmes concluded from a study of the statistics of farm and home ownership in the United States that “91 per cent of the families of the country own no more than about 29 per cent of the wealth, and 9 per cent of the families own about 71 per cent of the wealth.” A more accurate and satisfactory statement can be drawn from the income-tax returns for Prussia, which tells almost the same story with regard to income. The table on the following page is condensed from an article by Professor A. Wagner:

Distribution of Income in Prussia, 1902

Income

Below $214

$214 to $714

Over $714

According to these figures over two-thirds of the persons—heads of families or single adults—had only one-third of the income, while 3½ per cent had another third. Another striking fact shown by the table is the large proportion of persons receiving incomes of less than $214 a year, the minimum taxable income. It shows the poverty of the mass of the people as well as the concentration of wealth among the few rich. In the United States, where the natural resources have been so much richer than in Germany, a similar table would probably show a much smaller proportion under the Prussian minimum, but on the other hand it would probably show a greater concentration of income in the hands of a few. Europe has as yet no billionaire. The great fortunes of the United States have been made possible by the unrivaled opportunities for the exploitation of rich natural resources, the appropriation of natural monopolies, and to special privileges and opportunities in manufactures and transportation. The importance of monopoly privileges in the distribution of wealth is well shown by the results of an investigation made in 1892 by the New York Tribune into the sources of the fortunes of millionaires. It was undertaken to show that protection was not the main cause; but while it proved this, it showed clearly that most of them were built up on monopoly. “Of the 4,047 millionaires reported, only 1,125, or 28 per cent, obtained their fortunes in protected industries.... About 78 per cent of the fortunes were derived from permanent monopoly privileges, and only 22 per cent from competitive industries unaided by natural and artificial monopolies.... Furthermore, if the size of fortunes is taken into account it will be found that perhaps 95 per cent of the total values represented by these millionaire fortunes is due to those investments classed as land values and natural monopolies, and to competitive industries aided by such monopolies.” It is essential to the stability of our democratic institutions that all special privileges be absolutely prohibited, and that monopoly be brought under strict government control and regulation. Improper methods of wealth accumulation should certainly be prevented.

The opposite question of poverty has already been discussed and some of the causes of poverty pointed out. It will be sufficient here to try to answer the question which has often been asked: Are the rich growing richer and the poor poorer? Though the first part of the question has just been affirmed, the second part may be denied. The nineteenth century has witnessed a vast improvement in the condition of the laboring man, who has shared in the increasing wealth which he has helped to produce. Wages have steadily increased, the hours of labor have been reduced, and the material well-being of the wage-earner is greater today than it has ever been before. It has more than once been pointed out by writers on this subject that with an equal distribution of wealth no one would be well-to-do, while many others insist that inequality in itself is a desirable thing. Greater diffusion of wealth can come about only by very slow processes, and permanent plenty can be secured only by a great increase in the accumulations of capital and the efficiency of each worker. Any suggested reform, therefore, that would weaken the motives to thrift and industry must be rejected.

XIV. SAVING AND SPENDING.

The goal and purpose of all economic activities is the satisfaction of human wants. The object of production is consumption. We work because we desire and need various things which we can get only if we produce them or earn the money to buy them. In this section we take up some of the problems connected with the rational use or consumption of the wealth which is continually being produced. We have seen something of the conditions under which it is produced, and the manner in which it is distributed; we must now study the not less important subject of its application to human needs and desires. The great question is, how can we get the largest and most rational return for a given expenditure? Before trying to answer this question, it will be helpful to present a summary statement of actual expenditures in different places:

Expenditures for Different Purposes.

From this table it is seen that practically half of the income of average working-class families is expended for food, and five-sixths of it goes for the bare necessaries. It is therefore of the utmost importance that this be spent wisely. The remaining one-sixth, included here under the head “miscellaneous,” comprises such items as education, care of health, comfort, mental and bodily recreation, etc. It is manifest that this group can be expanded in only one of two ways: either by enlarging the total income, or by economizing on the other items by a wiser and better-ordered expenditure. The former question has already been discussed; here we are concerned only with the latter. Dr. Frederick Engel, a Prussian statistician, laid down certain laws with regard to consumption: as the income of a family increases a smaller percentage is spent for food and a larger percentage for education, health, recreation, etc.; while the percentage spent for clothing, rent, fuel and light remains approximately the same. A higher civilization and culture for the mass of the people can only be secured by expanding the group of culture expenditures. As long as these remain unsatisfied for the ordinary family we cannot claim to have attained our economic goal. The author of a recent study of conditions in New York City, where the cost of living is high, concludes that a “fair living wage for a workingman’s family in New York City should be at least $728 a year, or a steady income of $14 a week.” The actual earnings are certainly below this figure.

One of the problems which has often proved very puzzling is the relation between saving and spending. At what point should one stop spending in order to save? If the satisfaction of our wants is the object of production, why should we save at all? This is the point urged by the author of a specious little book called “The Fallacy of Saving.” The problem can be most easily solved by a more careful analysis of terms. In the popular view, saving involves the withdrawal of goods or money from use, while spending means putting them to immediate use. The spendthrift is proverbially popular. “If the rich do not spend, the poor die of hunger,” said Montesquieu. Saving may take the form of hoarding or withdrawing things from use, but nowadays this is practised only by misers; saving ordinarily takes the form of investment in some productive enterprise, either directly or through a bank. In this way a demand is created for goods just as truly as though the money had been spent for a dinner or a suit of clothes. Saving is spending, but it is spending for the future rather than the present; it usually causes the production of permanent material goods rather than transient or immaterial pleasures. Another cause of the confusion of ideas on this subject is that we always speak of money and thus lose sight of the acts of production and consumption that lie back of the money transfer. We see that money is transferred by spending and think that it increases trade. Consequently, when a prodigal spends his money foolishly, it is excused on the ground that it makes employment and puts money in circulation. We forget that it would have been “put in circulation” just as effectively if he had not spent it, but had placed it in a bank. If we look back of the money transfer, we see that usually there has been a foolish or wasteful expenditure, sometimes an absolute destruction of wealth. A fire which burns down valuable buildings is an absolute social loss, even though employment be given to masons and carpenters in putting them up again.

A third confusion of ideas that exists in the popular mind is due to an over-emphasis of the desirability of work for its own sake. The man who “makes work” is thought to be doing a desirable thing, even though this results from the unnecessary destruction of useful things. Now the real goal of all rational economic endeavor is not production for its own sake, but consumption; not work, but the gratification of wants. Every destruction of durable commodities which lessens the power to gratify wants is a loss to a community and no juggling with words can make it anything else. If it gives employment to labor, that means that the labor has been diverted from the production of other things to which it would have been devoted. Edward Atkinson several years ago calculated that every year fires destroyed property in the United States to the amount $150,000,000. That workmen are employed to reproduce the buildings, etc., can surely not be reckoned as a social gain. There is great danger in a commercial age like ours of forgetting that work is not an end in itself, but simply a means to an end. But it may be argued that unless these men had been given employment of this sort, they would have starved. It is conceivable that during or after a revolution industry would be so interrupted that ordinary employments would not be open. But in ordinary times such a statement is simply an assertion of the fallacious lump-of-labor theory, that there is just so much work to be done and no more. New wants are continually pressing for satisfaction, waiting only for the prior ones to be satisfied before they urge their claims. So soon as the old ones are satisfied, additional employment is provided in meeting the newer desires. The aim of society is to expand continually the circle of gratified desires. As durable goods and agents are accumulated by the process of saving, this becomes increasingly possible in every progressive society. Useless destruction involves sheer waste and cannot be justified on any grounds.

On the other hand, saving is socially necessary in every industrially developed community in order to furnish the requisite capital for the continued production of wealth. Professor Marshall has estimated that every year one-fifth of the wealth of a nation is used up in the processes of manufacture and production; just to keep machines, factories, railroads, and other instruments of production up to the point of efficiency and restore loss and depreciation would therefore require considerable saving. If the nation is to grow wealthier and is to accumulate additional capital, manifestly still more must be saved. This is done in all progressive countries. Saving is carried on by individuals, however, and not by nations, and the motives that lead to it are personal. The most important is probably the desire to provide for wife and children or other relatives; next to that is the wish to lay by sufficient for one’s old age. In our individualistic society, where each family forms an independent unit and is assumed to be self-supporting, it is very desirable that habits of thrift and saving be developed. Both from a social and a personal point of view therefore saving must be approved, though it is undesirable that it should proceed so far as to prevent spending for the gratification of essential present needs.

But what shall we say about expenditures for luxuries? Here the spending is for the gratification of a want, though it may be out of proportion to the results. What shall be our attitude to it? This question is not so easy to answer as the other. Three different schools have given as many answers to the problem of luxury: the first condemns it utterly; the second approves it wholly; and the third takes an intermediate position between the two extremes. Luxury is condemned by the first school from three points of view: as a question of individual morals, it is regarded as debasing and enervating, thus preventing the highest development of the human faculties; as a question of economics it is condemned as wasteful; and as a question of right and justice it is incompatible with an equitable distribution of wealth. It is upon this last point that the opponents of luxury lay the greatest emphasis. As the quantity of existing wealth is insufficient to satisfy even the primal wants of the large majority of our fellow-creatures, we should endeavor to increase this available store as much as we can, and should refrain from drawing upon it in a reckless manner in order to gratify superfluous wants. Furthermore, the productive powers that we can use are, as a matter of fact, limited; and therefore, if the wealthy classes divert a portion of these forces towards the production of articles of luxury, there will be so much the less available for the production of those staple articles that the masses require for their consumption. In the case of a Robinson Crusoe this would be perfectly clear: if he devoted several months to the polishing of a diamond for ornament, he would have to go without a house or other improvements he might have made in that time. Or, if he forced his man Friday to spend half his time polishing diamonds for him, Friday might be compelled to go without sufficient clothing or food or housing. The same thing is true of organized society, only the truth is hidden by the phenomena of exchange. It has been estimated that the annual consumption of wealth in the United States is divided somewhat as follows: necessaries, six billion dollars; luxuries, three and one-half billion (of which $900,000,000 go for liquor and $500,000,000 for tobacco); capitalistic uses, three and three-quarter billion. It is manifest that if the expenditure for luxuries was curtailed or abandoned, there would be more to devote to the other categories.

The opposite school replies to these arguments that luxury is an indispensable stimulus to progress; that really all economic progress is first manifested in the form of a need of luxury, and that luxury therefore is a necessary phase of its development. Since luxury is wholly relative, every want or need is, on its first appearance in the world, regarded as superfluous; first, because no one has hitherto wanted it, and secondly, because its production probably requires a considerable amount of labor, on account of man’s inexperience and the inevitable gropings in the dark that attend all beginnings. The decencies of life today and even the necessities were once regarded as luxuries—chimneys in houses, shoes, forks and knives, linen for the body, bath tubs, etc. If all luxury had always been sternly suppressed when it made its appearance, all the needs that constitute civilization would have been nipped in the bud, and we should still be in the condition of our ancestors of the Stone Age. Civilization depends on the multiplication of wants. Economic progress is a process of converting superfluities into conveniences, and conveniences into necessities.

The attitude taken by practically all economists today is intermediate between these two extremes. Moderate luxury is justified, but lavish and indiscriminate luxury is disapproved of. This justification of luxury rests upon purely economic grounds. In so far as personal consumption is the objective point of production, the prohibition of luxury would act as an impediment to enterprise. If the desire to enjoy luxuries stimulates the productive powers of economically important members of society, it is justifiable as a necessary motive force. The introduction of luxuries and the consequent raising of the standard of living seems often the only way to secure progress. If the mass of the people live on the minimum of cheap food, multiply as long as cheap food is to be had, and spend little for comforts and luxuries, then most of the labor of such a community must be spent in obtaining food for the masses. Such is the condition in India and China. But if a large part of the community has a higher standard of living, it will exercise self-restraint in the increase of its numbers, and the whole level of intelligence and comfort will be raised, as in France or Switzerland or New England. On the other hand, it is urged that “failure on the part of any family to secure the necessaries of life is injurious, not only to it, but to the whole community. Under-consumption means under-nutrition and loss in industrial efficiency. If permitted to continue it must inevitably undermine the standards which make a family self-supporting and self-sufficient and reduce its members to dependency. The general interest requires, therefore, acceptance of the maxim: the consumption of luxuries should be deferred until all are provided with necessaries.... This suggests that no one is justified in spending income for a luxury for himself or his family that will afford less happiness than would the same income spent for someone else.”

But the difficult question at once suggests itself: How can the surplus incomes of the rich be used so as to provide for the needs of the poor, without undermining their independence or permanently lowering their earning power? It has been suggested that there should be a socialization of luxury; that the rich should use their wealth for the construction of public art galleries, libraries, parks, baths, etc., which would thus gratify as great a number as possible. The feeling is growing in the United States and in the world that wealth is a social trust, and that the ownership of wealth imposes upon a person certain moral obligations. While every man has a legal right to spend his surplus income as he pleases, he is morally bound to spend it in such a way as to increase the welfare of the whole community.

Let us now finally take up the problem of economy in consumption. It is said that an American family will waste enough food for a French family to live on. The farmer who leaves his implements out in the rain or his cattle without proper shelter, is guilty of waste. We all waste clothing by frequent changes in fashion. Such waste is as much due to a lack of knowledge and training as to carelessness. The single example of the consumption of food will illustrate this point. “If we place the average income of an American family at $500—and it will not greatly exceed that figure—then nearly $250 of this amount is expended each year for food. Waste occurs in any or all of the following ways: (1) needlessly expensive foods containing little real nutriment are used; (2) there is a failure to select the foods best suited to the needs of the family; (3) a great deal is thrown away which ought to be utilized; (4) bad preparation of the food causes it to lose much of the nutriment which it does contain; (5) badly constructed ovens diffuse heat, instead of confining it, and cause enormous loss of fuel. We shall state less than the truth if we estimate that fully one-fifth of the money expended for food is absolutely wasted, while the excessive expenditure often fails to provide adequate nutrition.” The remedy for such a waste as this clearly lies in the teaching of domestic science in our public schools to the daughters and future wives of the workingmen. As the ordinary household expenses, as shown above, absorb from 80 to 90 per cent of the ordinary income, the training of the housewife, under whose control they fall, is almost as imperative as that of the wage-earner.

The economic evils of intemperance have already been partially stated in the objections to luxury. There is, however, one additional objection to the excessive use of intoxicating liquor which is not true of most indulgences: it diminishes a man’s productive powers. It is harmful in its effects upon both consumption and production. Other items of consumption appear, however, not so clearly under the immediate control of the consumer. The housing accommodations in many of our large cities have often been unsanitary and unworthy of being called homes. Legislation has been necessary to compel the erection of better tenements and prevent the exploitation of helpless people. So too it has been found necessary to legislate against loan-sharks, in order to protect people against their own improvidence and ignorance. In addition to legislation against positive evils, we must of course look to education as the great remedy of waste in consumption.

There is one other phase of the subject of consumption that may well be mentioned before leaving this subject. Owing to the constant pressure of the consuming public for cheap goods, many articles are produced under conditions dangerous to the health, morality and well-being of the operatives, as in the case of the “sweated trades.” To remedy these evils consumers’ leagues have been started in many places, the members of which pledge themselves not to buy goods or to trade in stores where the conditions of work are not up to certain prescribed standards. They realize that as consumers they owe a duty to other members of society not to exploit them. While this method has proven a fairly effective method of protest in some cases, it cannot be looked to as a solution of this evil. But it emphasizes the fact that the interests of all members of society as producers and consumers are closely interdependent, and that the progress of society requires the improvement of the condition of all.

XV. MONEY AND BANKING.

Probably on no subject has there been such confused thinking or have such widely varying views been held as on that of money. There is, however, substantial unanimity of opinion on the important points among economists today, though in practice there still remain many unsolved problems. The modern industrial system has already been characterized as one of capitalistic production, of large-scale enterprises with extended use of machinery. Not less fundamental are the processes of valuation and exchange made possible by the use of money and credit; and also by the machinery for the geographical distribution of goods, our railroads and steamship lines. The modern stage of economic development has been described by Hildebrand as one of “credit economy,” as opposed to those of barter and money economy, which preceded. It is inconceivable that the modern complex system of exchange could be maintained without the extended use of money and credit. Without attempting to define these terms or to trace their historical development, we may proceed at once to state some of the problems to which they have given rise.

The first question that suggests itself is, what determines the value of money? The generally accepted answer may be briefly stated: it is, that the value of money depends, other things remaining the same, upon its quantity. According to the quantity theory an increase in the supply of money will cause a fall in the value of each unit, just as an increase in the supply of wheat or cotton will cause a fall in the value of each bushel or bale. Conversely, a decrease in the quantity of money will cause a rise in the value of money. It is simply an application of the general law of value to money. The phrase “other things remaining the same” is however an important one, for it assumes that the amount of business and the methods by which it is conducted will remain substantially unchanged. Of course if an increase in the amount of money is accompanied by an equivalent expansion of trade, the one may offset the other and the value of money remain unchanged. Now, inasmuch as the prices of all goods and services are measured and expressed in terms of money, it is clear that a fall in the value of money means a rise of general prices; the value of each commodity is now expressed in terms of a larger number of less valuable units or dollars. Prices will be high if the quantity of money in circulation in a country is large; they will be low if the quantity is small. To the question, which is better for a country, high prices or low prices, it may be answered that it is a matter of indifference, provided only that there is enough money to do the work of exchange efficiently and that fluctuations are prevented. Just how much constitutes enough is, however, a matter of contention. In the undeveloped sections of our country, where capital is scarce and banking facilities undeveloped and where most of the people are debtors, there has always been a demand for cheap and abundant money. Capital and money have been confused and the need of one has led to a demand for the other.

It is not a matter of indifference, however, whether prices be rising or falling, that is, whether inflation or contraction of the currency is taking place. A period of falling prices means hardship and injustice to debtors and producers of goods, as farmers, manufacturers, etc. Having contracted obligations and engaged in the production of commodities with the expectation of a given price, they find their goods worth less when ready for the market and themselves confronted with a loss instead of the anticipated profit. Under such circumstances a contraction of the currency and falling prices means lessened production of wealth. Consequently many writers, and even so good an economist as President Walker, have urged that a slow steady inflation of the currency would promote trade and “give a fillip to industry.” The monetary history of the United States is filled with attempts to realize this in practice: colonial and revolutionary bills of credit were first issued; when these were forbidden by the new Constitution resort was had to issues by state banks. When the Federal Government began the issue of greenbacks and restricted the use of state bank notes, the inflationists looked to this source for assistance. After the defeat of the Greenback party, they turned finally to the coinage of silver, which was now falling in price, and the question of bimetallism in the United States was made a practical political issue.

Down to 1870 practically all the nations of Europe and America had the system of bimetallism at ratios of 15½ or 16 to 1. About that date the great increase in the supply of gold and the fall in the value of silver led one country after another to abandon the latter and to adopt the system of gold monometallism. This was vigorously resisted by many persons and several fruitless efforts made to secure a system of international bimetallism. Failing that, the friends of silver in this country endeavored to secure independent action by the United States alone, and were ultimately successful in obtaining the purchase by the Federal Government of practically the entire silver output of the country during the years 1878-1893.

Development of the Manufacturing Industries in the United States, 1800-1905.

[B] Calendar years.

Development of the Manufacturing Industries in the United States, 1800-1905—Continued.