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by the laborer. Sec. 138.

The amount of capital consumed in production is known as the
cost of production. Private cost is better known as expense. The
excess of return above expense is private profit. This is measur-
able. Public profit is not. Private profit is justifiable because it
conduces to public profit. Sec. 139.



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The expectation of profit leads to investment. Capital invested
for a remote return is fixed capital. This increases with the advance
of society. Sects. 140-141.

The economic institutions of society should encourage invest-
ment. The most important institution is that of private property.
It is justifiable because it fosters investment. Sec. 142.

Property right is better than government ownership, (i) It
offers incentive to improvement. (2) It generally will yield more
taxes to the government by reason of the increased value due to the
improvement. Sects. 143-144.

Property right is best when the owner is the occupier. It is good
when the occupier is the owner's agent. If the land owners oppi-ess
the tenants juidicial rents should replace competitive ones. Sec.
145.

All land speculation is not hurtful. Sec. 146.

Grants of monopoly in manufactures as inland stimulates their
development. Sec. 147.

Patents are short guarantees of monopoly which make invention,
and investment therein possible. Copyrights are justifiable for the
same reason. Sects. 148-149.

The public gains, attendant on the transplantation of a process,
are far less than those which are attendant on those which have
been wholly untried. Sec. 150.

Where grants of monopoly are impractical subsidies are granted.
Sec. 151.

A practical means of encouraging investment is the modern system
of interest. It is justifiable because it encourages capital to be
used that would be idle or wasted. Sec. 152.

The ratio of selling price to the income is the rate of capitaliza-
tion. For instance, a piece of land is worth $2,000 ; its income is
jgioo; the rate of capitalization is 5 per cent. Sec. 153.

Saving banks and insurance companies lead people to save by the
benefits which accrue. Sec. 154.

Among ignorant non-commercial people usury laws are good.
Sec. 155.

In commercial communities they are a hindrance because they
prevent just investments of capital often times. Sec. 156.

Usury laws are circumvented. The borrowers are hurt by the
honesty of the honest, and by the high charges of the unscrupulous.
The more honest lenders, by keeping out of the market, aggravate
the scarcity of money loanable. Sec. 157.



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Loans are justifiable by the productiveness of the thing it is to be
used for, rather than by the wants of the person who borrowed it.
If a loan leads to a productive thing the borrower should have
every chance to attract capital to it. If the loan will not be pro-
ductive the lenders should have little inducement to lend it. The
creditor has to look to the investment rather than to the borrower's
person. Sec. 158.

The small liability of the members of corporations protects them
from unwise directors. In partnership, however, the members are
justly liable. Sects. 159-160.

An over-production of machinery causes a commercial crisis. It
is wrong to say that the harm comes from too great investment of
capital. More often there is too little investment. Sec. 161.

There are no " absolute " or " natural " rights to land. Property
right is the chief modern incentive to labor care and avoidance of the
waste of capital. The rights of capital are narrower. They effect
the methods of management rather than the motives on which it is
founded. To modify the method is easy ; to modify the motives is
to remove the substruction of society. Sec. 163.

The presence of the modern orginization of capital is per se the
strongest proof of its vitality. The maintenance of the rights of the
capitalists is vital to our growth. Sec. 164.

CHAPTER VI.

The investment of fixed capital has wrought more radical changes
in manufactures and transportation than in agriculture. The pro-
ductiveness of manufactures has increased faster than that of farms.
The investment of capital in agriculture has not gone so far that its
interest and maintenance constitute the main elements in the cost of
food production. The theory of normal price, under these circum-
stances, is a hindrance. But we may still rely on competition to pro-
tect consumers, and do no injustice to the producers. Sec. 165.

The extreme economy of large production tends to make prices
oscillate, by tending to create an oversupply which would lower
prices. Sec. 166.

The failure to reach a staple price leads to combination. Sec. 167.

Combinations are economical both to the individual producers and
to the public. This is especially true of distributive services.
Sec. 168.



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The " combine " system is often poor, on account of the unscrupu-
lousness of its members. The public is best served by a one price
system such as a " combine " inaugurates. Sec. 169.

Many bona fide " combines " are broken down by selfish con-
sumers. Sec. 170.

Pools take three forms, (i) Division of the field. (2) Division
of the traffic. If the state affairs is such that one course is weaker
than the other a differential rate is given to the weaker concern,
which shall attract trade its way sufficiently to make the divisions
equal. (3) Division of the earnings. The two latter systems are
very good. Both are productive of mutual trust. All three prevent
cutthroat competition. Sec. 171.

In the United States pools are illegal. To obviate this the joint
counting rooms take the form of clearing houses. When the
majority of stock of each company is put in the hands of a common
board of trustees, there is said to be a trust. The stockholders,
who have given their stock to the trustees, lose their vote. They
receive their earnings. Consolidation is possible, but it is taxed on
the whole property in each state. The prevention of consolidation
led to combination. The advantages of industrial combination are
often overbalanced by the evils of commercial combination. The
economy of combination is somewhat offset by the loss of stimulus
which competition alone seems able to give. Sec. 173.

Boycotting of rival companies by combinations is bad. Non-re-
striction of charges is a shortsighted policy. Sec. 174.

A corner may force prices and make money for a short time. The
real gains are, however, less than the apparent ones. Sec. 175.

If the article consumed is sold directly to consumers, the com-
merce will be unsuccessful, because the demand will decrease. If
an intermediary has contracted to supply the article to the consumer,
the corner will be more successful. It pays to sell cheap with small
profits. Sec. 176.

Low prices with low profits do not invite competition. Sec. 177.

Often a monopoly is governed indirectly in its charges. A railroad
must fix its rates so as to permit transportation. Sec. 178.

There are few cases when the monopoly of the sources of supply
is so complete that even the possibility of indirect competition is
absent. It is far more profitable to have low charges and small
profits. Sec. 179.

The evils of a shortsighted policy leads to the demand that the



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government should control it. But worse results would follow from
this than before. Sec. 182.

There are three methods of regulating such industries, (i) Limi-
tation of profits. (2) Fixing of rates by public authority. (3) En-
forcement of farsighted methods of management. Sec. 183.

A limitation of profits would remove the incentive to get maximum
profits which are gained at the same time that the public is best
served — that is when the business is large and the profits small. It
also prevents the investment of capital, which is the best guarantee
for the protection of efficient public service. It does not foster new
methods and inventions, because it takes away the possibility of
special profit. Besides a legal limitation is easily got around: (i)
By extravagance of management and salaries : (2) Stock watering.
The evil of this is far worse than that of unlimited profit. Sects.
185-187.

The limitation of rates is much better, but it has these objections :
(i) It is hard for the manufacturers to determine the cost of pro-
ducts. It depends so much on quantity. (2) It is much harder for
the government to determine rates justly. The depreciation in the
value of stock, and the fluctuation of the cost of materials interfere
with a just legal fixing of rates. Sects. 187-188.

Trivate companies fix a rate for maximum profit. This is the
point, as we have seen, of greatest advantage to the public. The
government would not be able to fix the rate so well, because it is
not interested like the private company. In many kinds of business
the company itself don't know how to fix rates. In many cases
they are very variable, as in the case of bye products. The govern-
ment cannot manage affairs so well as the company, because the
self-interest of the company leads it to make maximum profits.
Maximum profits are accompanied by the best public service.
Although the laws might be efficient, their operation is, in almost
every case, unsatisfactory. Sects. 189-194.

New industries need legal regulation, because they have not had
the experience which teaches them that they serve themselves best
by serving the public best. If the attempts to prescribe rates is
unsatisfactory the managers will lay their own shortcomings all on
the government. This retards the educational process. Sects.
195-196.

Court arbitration is less useful because of the increasing compli-
cation of human affairs. Sec. 196.



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Commissioners are often good, but they increasingly depend on
authority. Advisory boards are also good. Sec. 197.

Publicity of rates is useful. General legal principles are better
than special statutes. Sec. 198.

The directors should be made more responsible. Sects. 199-200.

CHAPTER VII.

Money is a basis of commercial obligations. It serves two pur-
poses : (i) Cash reserve. (2) Medium of exchange. There must
be a cash reserve to secure solvency. Sects. 201-202.

A basis of contracts not based on a medium of exchange is money
of account. Sec. 203.

It is necessary that money be homogeneous and invariably accept-
able. One kind must not be worth more than another. Sects.
204-205.

Metals are used for coinage because their value is less liable to
fluctuations due to the current production in one year. They are
permanent and homogeneous. Sec. 206.

The choice of metal depends largely on the cost of production.
It also depends on its scarcity, e. g., platinum in Russia. Sec. 207.

Coinage is the process of stamping a piece of metal certifying its
weight and fineness. Coins are milled, stamped on both sides and
returned, when old, to prevent the operations of the counterfeiter
and sweater. The sweater rubs off some of the metal and makes a
new coin look like a much worn one. Sec. 208.

The declaration of legal tender must be with the accord of the^
property holders, else no one will accept it. Sec. 209.

The superior execution of the coinage which seignorage makes
possible, is of far more value than the slight increase in elasticity
which free coinage affords. Sec. 210.

The charge which the government makes for coinage is called
seignorage. This is generally charged on subsidiary coin. Subsidi-
ary coin is not worth its face value. Usually it is not legal tender.
When seignorage is abstracted from legal tender it is called debase-
ment. Sec. 211.

Gresham's law is that a relatively small increase to the currency
with debased currency, decreases the amount of good money in
circulation by nearly the same amount. Sec. 212.

When the debased currency replaces the good by more than a



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little its value falls ; this process is called inflation. The result is
depreciation. Debasement usually results in depreciation, because
the motive to expand the debased currency is large. The govern-
ment is tempted to coin the seignorage. Sec. 213.

Paper money is useful on account of convenience. There are
three forms: (i) Coin or bullion certificates. (2) Redeemable
paper. (3) Irredeemable paper. The bullion certificates are
secured dollar for dollar. Redeemable paper are not founded on
actual reserve, but on the assets of the treasury. There is the
danger that these will, in an emergency, be converted into inconvert-
ible paper. This is likely in an excess to be discredited. It is
likely to be issued in excess. The evils are obvious in contracts.
Sec. 2r4.

There are, besides these, bank notes. The sum total of all these
comprises the currency. Bank checks are part of the currency.
Sec. 215.

The value of money is measured by the quantity of other things
which a unit will purchase. It varies inversely with the level of
prices. A method of determining the value of prices has been
found by the weighted average of prices, and by the relative amounts
used in an average family. Both these are worked out for a number
of years. The results are quite the same. Sects. 215-216.

The index numbers thus formed do not indicate the enjoyment
gained in spending money, because: (i) They deal with products
alone. They do not take into account rent, wages and services
rendered. (2) They deal with wholesale prices and not retail
which do not correspond. For this reason the index is distorted.
(3) They are based on wholesale prices nearest the point of con-
sumption. Cheap transportation affects these prices. All these
causes tend to make the gain to the consumer, and the loss to the
producer, from the observed fall, much less than a superficial view
of the index would lead people to infer. Sec. 217.

The amount of money times the circulation is equal to all the
business done. This is equal to the prices times the transactions.
R — rapidity of circulation. M — money. P — price. T — transac-
tions. RxM— PxT. If R is proportionate to T, M is proportionate
to P. Sec. 218.

In this system, changes in the quantity of money are at once a
cause and an effect of changes of general price level. There is less
error in regarding the changes as effects. The amount of production



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of gold is so far affected by changes in the price level, that it tends
to adapt the supply to the demand, and thus mitigates changes
more than it causes them. Sec. 219.

Under free coinage gold is withdrawn from the arts or currency as
its value is greater in the arts or currency. Sec. 220.

Every individual must have a cash reserve. If a nation does no
banking business, each individual must hold a relatively great
reserve. A man must have some cash reserve. It is reduced if he
has deposited his money in the bank, for his reserve is the bank's
reserve. This is smaller in proportion. A nation's demand for
money is the sum of cash reserves which its individual members
deem necessary for their maximum profit. The higher the price
level the greater will be the amount of money which has to be held
as reserve. Sec. 221.

If there is a temporary deficiency of the money reserve, there will
be a demand for short time loans at high interest. If this lasts long
men will sell goods and securities in order to get gold. Prices will
go down. Gold will go up. This attracts gold from other countries,
and from the arts. Under free coinage the gold will so increase
that its value will go down, with respect to commodities. Prices
will go up again. The converse case of excess of money shows
corresponding effects. Sec. 222.

The supply and demand of gold money are in equilibrium, when
the value of coin equals the value in the arts ; when the marginal
utility of an ounce of gold used in the arts is exactly equal to the
marginal utility of the goods which it will purchase at current prices
when used as money. Sects. 223-224.

The marginal utUity as gold bullion must be equal to the marginal
utility of any of the various articles the money coined from such
bullion would purchase. This may be represented by a diagram. If
gold were used in the arts alone, the nominal price would be when
the curve of the demand for gold cuts the curve of the supply of
gold. If the gold is used both for money and the arts, more gold
will be needed than before. Therefore, to the curve of the amount
of gold which is demanded in the arts must be added the amount of
gold which currency demands. This brings the price of gold up.
Sec. 226.

The present scarcity of gold is adjusting itself by increasing the
supply. Sec. 227.

In the case of money which is increased in amount at increased



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cost, we have a double equilibrium: (i) Between the marginal
utility of the bullion used in the arts, and the marginal utility of the
commodities purchased by coin of corresponding weight. (2) Be-
tween the cost of production of such bullion, and the cost of the
production of the articles for which a corresponding amount of
coined money is exchanged. The changes in the value of gold are
bound to be slow enough to allow people to readjust contracts.
Sec. 228.

Money fluctuates in both quantity and value. Sec. 229.

A tabular standard has been devised to ascertain the fluctuations.
Contracts would be payable in coin, but the amount would depend
on the price level when the payments became due. When the
index number rose the amount paid should be larger. In the reverse
case it should be smaller. This has two objections: (i) It is unfair
to set any fixed tables of commodities as a basis for the construction
of such a table. (2) There is no authority to do this except the
treasury department. In emergencies it would be difficult to trust to
its impartiality. Sec. 230.

If there are two kinds of money, one of which is worth more than
the other, the debtor will pay in the cheaper metal, and the creditor
will want the dearer metal in the absence of a tabular standard.
Sec. 231.

Bimetallism is the policy of allowing free coinage of more than
one metal. This keeps both metals in convenient and alternating
use. Sec. 232.

Bimetallism diminishes the chance of fluctuations in the value of
money. It does not permit appreciation as does monometallism.
A slowly depreciating currency is better than a slowly appreciating
one. It is better for the debtor, and also tends to prevent an over
supply of capital, and its consequent rash investment. These are
the arguments of the bimetallist. .Sects. 233-236.

Gold has not appreciated so much as the bimetallist asserts.
Prices have not gone down universally. Many things have risen in
price. This shows that gold has not appreciated much. .Sec. 236.

Besides, as prices have fallen, interest has decreased. In times of
advancing prices, the loss of the creditor was offset by an increase
in the interest rate. Most of the contracts for the payment of
interest were of short enough duration to enable the creditor to
indemnify himself for any probable loss of his principle by increased
interest charges. Although there is injustice it is less than would
appear from looking at the figures of prices alone. Sec. 287.



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Labor bears a very constant ratio to gold. This prevents much
injustice. If the laborer earns about the same amount of real
wages, there is no injustice, because he will be able, with real wages,
to do as much as before. Sec. 238.

Silver has depreciated much more than gold. This would have
made a system of bimetallism more fluctuating. Sec. 239.

The evil secondary results of quick inflation are not avoided by a
slow continuous process of depreciation. While prices advance
speculators come into the control of business by offering high rates
which they cannot pay unless the depreciation is continued. Over
production of machinery results. Sec. 240.

Bimetallism is impracticable. It is attempted under three con-
ditions :

(i) If the ratio between gold and silver is the market ratio
of price, a slight fluctuation would make one dear and one cheap
metal, both of which would be legal.

(2) If the ratio were near the market ratio, the mints might
begin to operate and make the ratio correspond to their bullion
value. This might happen on account of ignorance ; no one could
tell what would happen. In order to support this the nation would
have to take silver enough to keep the gold in circulation. A large
amount of silver would drive the gold out of circulation. No
nation could keep this operation up.

(3) When the ratio is far from the market ratio, the result will
tend to be monometallism. Sects. 241-242.

France had bimetallism under good conditions. It degenerated
into gold and subsidiary silver coins, because of the discovery of
gold in California and Australia. She could not support her silver,
but simply had to make it subsidiary on account of the rise in price.

The United States went through the same series. Sec. 244.

The Bland Act (1878) secured the coinage of $2,000,000 worth of
silver per month. The government kept the seignorage. This was
all right, because the country was growing and could absorb the cur-
rency. Sec. 245.

The Sherman Act (1890) provided for the purchase of four and a
half millions ounces of silver a month, by an issue of treasury notes,
equal in amount to the bullion purchased. This sent the price up.
Two mines were opened and the prices were again lowered. The
government could not buy the silver ; gold was all spent, and relief
was only obtained by the repeal of the Act, This proved the ineffi-
ciency of bimetallism for the United States. Sec. 246.



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There are four plans proposed to replace monometallism :
(i) A bimetallism on shifting rates. This is bad, because of its
liability to mismanagement. If an attempt were made to regulate
these matters by international agreement, the friction attendant on
such would be great.

(2) Large coinage of silver by a number of nations, limited, how-
ever, so as to drive out the gold. This forces nations to carry much
silver coin. The people might not agree to this. If they did not
the nations would have to carry still more silver.

(3) Bimetallism provides a currency which consists of a certain
weight of both metals combined. This is possible to abuse by the
government.

(4) P'ree and unlimited coinage of silver at 16 to i. Under this
the currency would be exposed to the changes of silver production.
Besides, this would be inconvenient in foreign exchange. Such a
currency as this would not be universally acceptable, perhaps. This
would raise interest. It would scale down debts. Any gain to the
debtor would be offset by the difficulty of borrowing. Sects. 247-
250.

An issue of legal tender notes without reserve has been contem-
plated. Three motives combine to cause unwise and spasmodic in
flation of paper money of this kind :

(i) A fiscal motive; to issue money to meet expenses. (2) Con-
stant pressure of the debtor class for an increased volume of legal
tender money. (3) A general popularity of such issues. Sec. 251.

Inflation may cause temporary ease, but it has its secondary effects.
Sec. 252.

The reason for this superficial view is that the borrower wants
money and he thinks the larger the currency the easier to get money.
What he really wants is capital. No increase in the currency will
increase capital. Interest will rise because lenders will fear that the
government will increase the currency again. To secure themselves
they charge a higher rate. Sec. 253.

Inflation of the currency causes a temporary inflation of business.
Then ensues depression, the proportion of legitimate transactions
diminishes under these circumstances, and gambling increases, be-
cause there is less security and more chance in business. The
tendency is to raise prices faster than money. This hurts the
laborers. The scaling down of debts does more harm than good to
the laborers. Sec. 255.



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CHAPTER VIII.

If capital is scarce the community try to use credit instead of
money. Sec. 256.

This is thought to be a sign of progress. The tendency is to
increase the use of cash. Sec. 257.

The pressure to use credit and little money is felt in two distinct
cases, (i) In poor communities people keep too little cash reserve
This results in high credit prices, low level of prices for cash, and
an uncertain commercial system. (2) In very active communities
the people in their eagerness invest all their wealth to increase,
their wealth in the future. Sec. 258.

A system of credit is worked out by checks on the bank. The
necessity for actual payments is diminished by letting the account
run from month to month. Sec. 260.

The Clearing House may be used for checks on banks not in the


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