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. " ; i I



Volume II

Economics— IPolume U









Copyright, 1916, 1922, by
The Centuby Co.

First Edition, 1916
Reprinted January, 1917
December, 1918
September, 1919
February, 1920
March, 1920
February, 1921
Revised Edition, 1922
Reprinted November, 1922
May, 1923
December, 1923
December, 1924
March, 1926
November, 1926

rnixTKh IX u. s. A.








Part I. Money and Prices

1. Nature of economic problems 3

2. Origin and nature of money 11

3. Commodity money and the quantity theory 25

4. Fiduciary money, metal and paper 36

5. Price levels and the gold standard 54

6. Rising prices and the standard 70

Part II. Banking and Insurance

7. The functions of banks 91

8. Banking in the United States before 1914 107

9. The Federal Reserve Act 117

10. Crises and industrial depressions 138

11. Institutions for saving and investment 158

12. Principles of insurance 176

13. Scientific life insurance 191

Part III. Tariff and Taxation

14. American tariff history 207

15. International trade 230

16. The policy of a protective tariff 246

17. Objects and principles of taxation 270

18. Property and corporation taxes 288

19. Personal taxes 304

Part IV. Wages and Labor

20. Methods of industrial remuneration 321

21. Organized labor 337

22. Public regulation of hours and wages 358

23. Other protective labor and social legislation 379

24. Social insurance 398

25. Population and immigration 417

Part V. Public Policy Toward Private Industry

26. Agricultural and rural population 441

27. Problems of agricultural economics 457



28. The transportation problem 477

29. Railroad regulation 490

30. The problem of industrial monopoly 505

31. Public policy in respect to monopoly 522

Part VI. Private Property versus Socialism

32. The present economic system 543

33. Public ownership 558

34. Methods of distribution 574

35. Socialism, present and future 588

Index 005


In this revised edition every chapter has been rewritten
with reference to the momentous events that have filled the
years since 1916, when the first edition of this work appeared.
The statements of facts and figures have so far as possible
been brought down to date. The materials formerly con-
stituting the first two chapters have been distributed under
other headings. New sections appear in every chapter, and
new chapters have been added in the treatment of money,
insurance, transportation, and socialism. Numerous charts
have been added which, it is hoped, will be helpful to the
reader. Most of these have been reproduced from charts
prepared for the use of the author's classes, and others have
been taken from various sources. A brief list of references
has been appended to each chapter.

The year 1921, in the depths of an industrial depression,
does not mark the end of an era of normal economic changes
in anything like the sense that did the year 1916. Rather it
might be said that it is the half-way stage in another decade.
After five years more the broader economic effects of the
world war can be much better appraised. It is the author's
hope, however, that in its present form this volume will aid,
in some measure, the earnest and open-minded reader to in-
terpret the important changes now in progress.

The author makes renewed acknowledgment to those col-
leagues and other friends who assisted him in various ways
in the preparation of the first edition. Thanks are due to
the statistical officers of the Federal Reserve Bank of the
Second District for permission to reprint diagrams that have
appeared in the Monthly Review, and to others named specifi-
cally in notes to the charts and maps.

Princeton, N. J., Jan. 2, 1922.





§ 1. Increase of economic problems. § 2. Opinions and feelings in
economic discussion. § 3. False contrast of theory and practice.
§ 4. Superficial thinking and popular error. § 5. American economic
problems in the past. § 6. Main factors in economic problems. § 7.
Range of economic problems treated.

§ 1. Increase of economic problems. The present volume
deals with various specific problems in economics, as an earlier
volume deals with the general economic principles of value
and distribution. The word "problem" is often on our
tongues. Life itself is and always has been a problem. In
every time and place in the world there have been questions
of industrial policy that challenged men for an answer, and
new and puzzling social problems that called for a solution.
And yet, when institutions, beliefs, and industrial processes
were changing slowly from one generation to another and
men's lives were ruled by tradition, authority, and custom,
few problems of social organization forced themselves upon
attention, and the immediate struggle for existence absorbed
the energies and the interests of men. But the present time
of rapid change seems to be peculiarly the age of problems.
The movement of the world has been more rapid in the last
century than ever before — in population, in natural science,
in invention, in the changes of political and economic institu-



tions; in intellectual, religious, moral and social opinions and

Some human problems are for the individual to solve, as
whether it is better to go to school or to go to work, to choose
this occupation or that, to emigrate or to stay at home. Other
problems of wider bearing concern the whole family group;
others, still wider, concern the local community, the state, or
the nation. In each of these there are more or less mingled
economic, political, and ethical aspects. Economics in the
broad sense includes the problems of individual economy,
domestic economy, of corporate economy, and of national
economy. In this volume, however, we are to approach the
subject from the public point of view, to consider primarily
the problems of "political economy," considering the private,
domestic, and corporate problems only insomuch as they are
connected with those of the nation or of the community as a
whole. Our field comprises the problems of national wealth
and of communal welfare.

§ 2. Opinions and feelings in economic discussion. The
student beginning economics, or the general reader, is likely
to think that the study of principles is more difficult than is
that of concrete questions. In fact, the difficulty of the latter,
though less obvious, is equally great. The study of princi-
ples makes demands upon thought that are open and unmis-
takable ; its conclusions, drawn in the cold light of reason, are
uncolored by feeling, and are acceptable of all men as long as
the precise application that may justly be made of them is not
foreseen. But conclusions regarding practical questions of
public policy, though they may appear to be simple, usually
are biased and complicated by assumptions, prejudices, selfish
interests, and feelings, deep-rooted and often unsuspected.
When the casual reader declares that he finds the study of
practical questions in economics much easier than that of
theory, he really means that the one seems to require little or
no thought, while the other requires much.

In many questions feeling is nine tenths of reason, and one's


sympathies often dictate one's conclusions. In the following
pages the reader is repeatedly warned when the discussion
reaches such a danger point. When, however, in this work,
outlooks and sympathies are expressed or tacitly assumed,
they are not so much those personal to the author as they are
those of oar present-day American democratic society, taken
at about its center of gravity. When the people generally
feel different as to the ends to be attained, a different public
policy must be formulated, though the logical analysis of the
problems may not need to be greatly changed.

§ 3. False contrast of theory and practice. Still another
word of caution should be given to those who find theoretical
economic questions hard but who imagine that the under-
standing of "practical" economic questions is comparatively
easy. The very contrasting of theoretical and practical study
in this way is erroneous and misleading. The true under-
standing of every so-called "practical" question requires the
understanding of theory, both the general theory (treated in
Volume I) that underlies all economic activity, and the
special theories that are related to the particular problems
(treated in this volume). Indeed, theory as it is here used,
and as it ought to be used, is hardly more than a synonym for
"understanding"; it is logical analysis, insight, orderly ar-
rangement, in our thought, of the forces, motives, and mate-
rial conditions that help to bring about certain results. The
more clearly the student has thought through the general
theories of value, price, time-preference, wages, etc., the better
prepared he is to take up the study of such practical problems
as money, banking, tariff, labor and capital, etc., every one of
which involves more special theories of price levels, fiat money,
international trade, the open shop, and minimum wage, re-

§ 4. Superficial thinking and popular error. A practical
economic problem is always presented as a question: What
is the right thing to do or the best course to pursue with re-
spect to some matter that is tied up with many other matters ;


so that the whole situation is usually very complex. The
hrst answer of the untrained mind is almost certain to be a
wrong one — just as to the natural man the earth seems flat,
though it is round, the sun seems to circle around us, whereas
we revolve on the earth's axis daily, and at the same time
slowly circle around the sun ; the echo seems to be a mocking
spirit answering us, whereas it is our own voice reflected back.
Thousands of erroneous ideas were held by primitive man,
and still are held by the savage, the child, and the untrained
adult mind, regarding the simplest affairs of every-day life.
In a like manner, the first answers to economic problems are
usually superficial.

Since almost every economic matter affects various interests,
there is the additional difficulty that some groups of persons,
often influential and powerful, have something to gain by
continuing to think superficially and by getting those who
would benefit by the truth to keep on thinking superficially.
Indeed, to think clearly, even if one suspects that it would be
to his advantage to do so, is even for the ablest minds a dif-
ficult task, and for the mass of men, under the conditions, is
often impossible. It should not surprise us, therefore, to find
that nearly all economic improvements have been opposed not
only by the few who would lose but by the many who would
gain by the change; and to find, likewise, that the projects of
reform that most quickly win the belief and support of the
mass of men seeking relief from hard conditions have usually
been as superficial and false in their theory as the errors they
were meant to displace. Truth, when at last found, is simpler
than error, but often it is to be attained only by the hard
road of analytic and abstract thought that follows through to
the end the workings of each separate force and factor.

§ 5. American economic problems in the past. What,
then, are the politico-economic problems in America? They
are problems that are economic in nature because they concern
the way that wealth shall be used and that citizens are enabled
to make a living, but that are likewise political because they


can be solved only collectively by political action. With the
first settlements of colonists on this continent politico-eco-
nomic problems appeared. Take, for example, the land
policy. Each group of colonists and each proprietary land-
holder had to adopt some method of land tenure, whether by
free grant or by sale of separate holdings or by leasing to
settlers. In one way and another these questions were an-
swered; but rapidly changing conditions soon forced upon
men the reconsideration of the problem as the old solution
ceased to be satisfactory.

In large part our political history is but the reflection of
the economic motives and economic changes in the national
life. Thus the American Revolution arose out of resistance
to England's trade regulations, commercial restrictions, and
attempted taxation of the colonies. The "War of 1812 was
brought on by interference with American commerce on the
high seas. The Mexican War was the result of the coloniza-
tion of Texas territory by American settlers and the desire of
powerful interests to extend the area of land open to slavery.
The Civil War arose more immediately out of a difference of
opinion as to the rights of states to be supreme in certain
fields of legislation, but back of this political issue was the
economic problem of slave labor. Illustrations of this kind,
which may be indefinitely multiplied, do not prove that the
material, economic changes are the cause of all other changes,
political, scientific, and ethical; for in many cases the eco-
nomic changes themselves appear to be the results of changes
of the other kinds. There is a constant action and reaction
between economic forces and other forces and interests in
human society, and the needs of economic adjustment are
constantly changing in nature.

§ 6. Main factors in economic problems. The particular
economic problems in America at this time are determined
by the whole complex economic and social situation. Two
main factors in this may be distinguished: the objective and
the subjective, or the material environment and the people
composing the nation. The one is what we have, the other is


what we are. These factors are closely related : for what we
are as a people (our tastes, interests, capacities, achievements)
depends largely on what we have, and what we have (our
wealth and incomes) depends largely on what we are.

I. The objective factor presents two phases :

(a) The basic material resources, consisting of the mate-
rials of the earth's surface and the natural climatic condi-
tions which together provide the physical conditions neces-
sary for human existence, and which furnish the stuff out of
which men can create new forms of wealth.

(b) The industrial equipment, consisting of all those arti-
ficial adaptations and improvements of the original resources
by which men fit nature better to do their will. These two
(a and b) become more and more difficult to distinguish in
settled and civilized communities, and become blended into
one mass of valuable objects, the wealth of the nation.

II. The subjective factor presents two phases:

(a) The people, considered with reference to their num-
ber, race, intelligence, education, and moral, political, and
economic capacity.

(b) The social system under which men live together,
make use of wealth and of their own services, and exchange
economic goods.

The particular economic problems that are presented to
each generation of people are the resultant of all these factors
taken together. A change in any one of them alters to some
extent the nature of the problem. The problems change, for
example, (I a) with the discovery or the exhaustion (or the
increase or decrease) of any kind of basic material resources;
(lb) with the multiplication or the improvement of tools and
machinery or the invention of better industrial equipment;
(II a) with the increase or decrease of the total number of
people, and the consequent shift in the relation of popula-
tion to resources; (II b) with changes in the ideals, educa-
tion, and capacities of any portion of the people whether or
not due to changes in the race composition of the population.


Many examples of these various changes may be found in
American history, and some knowledge of them is necessary
for an appreciation of the genesis and true relation of our
present-day problems.

§ 7. Range of economic problems treated. Of number-
less economic problems that are calling for solution in a
modem nation like the United States of America, only the
more important in relation to present needs can be discussed
in their main aspects within the limits of a single volume.
The ones here chosen, as may be seen by referring to the table
of contents, include a wide range, from the more impersonal
financial questions connected with money and the medium of
exchange, to the most burning issues of class interests and
conflicts; and from those that seem to do merely with the
individual (as incomes or wages or taxes) to the most funda-
mental questions of the form of economic organization and
the displacement of private property by communism. In
truth, these contrasts are often misleading; for the welfare
of individuals is affected in many ways, often remote and
unsuspected, on the one hand by impersonal factors such as
the production of gold or the invention of machinery, and on.
the other hand by the form and function of the social organi-
zation of which each of us is a part.

Some conceive of the economist's task narrowly as beingr
merely the study of market prices ; others broaden the field to
include the study of individual valuations and gratifications;
and still others make it include the solution of all problems
of economic legislation affecting the general welfare of society.
No practical problem in the field of economics can be rightly
solved as if it were an economic problem in any narrow sense
untouched by political, moral, and social considerations. In
this volume the broadest of these conceptions is taken, prices
and values being studied because of their bearing upon social
welfare. Welfare economics rather than price economics is
our ideal.


References: The titles of the chief encyclopedias of economics and of
several good collections of general readings are given in the Manual
of references and exercises in economics, for use with the author's
Economic Principles, published by the Century Co., New York. (Ref-
erences to the author's Source Book in Economics [1912] have been
dropped in this edition, as that work is now out of print.) Several
American general texts on political economy treat more or less fully
the questions taken up in the present volume. Some of the texts are
listed here, and are not referred to specifically in connection with
the various chapters following.

Carver, T. N., Principles of political economy, 1919.

Same, Principles of national economy. Boston. Ginn & Co. 1921.

Fisher, Irving, Elementary principles of economics. New York.
Macmillan. 1912.

Ely, R. T., Outlines of economics. Rev. Ed. New York. Macmillan.

Clay, H. Economics. (American Revision.) New York. Macmillan.

Seager, H. R., Principles of economics. New York. Holt. 1913.

Seligman, E. R. A., Principles of economics. 3d ed.

Taussig, F. W., Principles of economics. 2 vols. New York. Mac-
millan. 1911.

Turner, J. R., Introduction to economics. New York. Scribners.


§ 1. Origin of money. § 2. Money as a tool. § 3. Money defined.
§ 4. Qualities of the original money -good. § 5. Industrial changes and
forms of money. § 6. The precious metals as money. § 7. Varying
extent of the use of money. § 8. Relative importance of money.
§ 9. Standard-commodity money. § 10. Commodity money without
coinage. § 11. The money -material in its commodity uses.

§ 1. Origin of money. Everywhere in the world where
the beginnings of regular trade have appeared, some one of
the articles of trade soon has come to be taken by many
traders who did not expect to keep or use it themselves, but
to pass it along in another trade. 1 This made it money, for
money is whatever comes to be used as a general price-good.
The character of a general price-good clearly distinguishes
money from goods bought and sold by a particular class of
merchants, such as grain, cattle, etc., to be sold again. It
is only in so far as a particular good comes to be taken by
persons not specially dealing in it, taken for the purpose of
using it as a price-good to get something else which they de-
sire, that a thing has the character of money. The thing
called money thus is a durative good passing from hand to
hand in a community, and completing its use in turn te
each possessor of it only as he parts with it in exchange for
something else.

The use of money is of such social importance that it would
be impossible for modern industrial society to exist without
it. The discussion of money touches many interests ; it raises
many questions of a political and of an ethical nature. There

i See Vol. 1, pp. 15-16. 50-53, and 262-264.for an introductory state-
ment of the origin and functions of money.



are perhaps more popular errors on this than on any other
one subject in economics, but the general principles of money
are as fully understood and as firmly established as are any
parts of economics.

§ 2. Money as a tool. Money is often, by a figure of
speech, called a tool. A tool is a piece of material taken into
the hand to apply force to other things, to shape them or
move them. Figuratively, this is what money does : it moves
things into one's control. A man takes it, not to get enjoy-
ment out of it directly, but to apply force, to move something,
and that which he moves is the thing he buys. Money thus
(as money) is always an indirect agent. Adam Smith aptly
likened money to the roads and wagons that transport goods,
thus gratifying desires by putting goods into more convenient
places. The fundamental use that money serves is to appor-
tion one's income conveniently as it accrues and as it is spent.
The use of money increases the value of goods by increasing
the ease with which trade can take place. Like any tool or
agent, money is valued for what it does or helps to do. It en-
hances the value of the goods that it buys and sells by divid-
ing them into quantities convenient for use and by making
them available at the right times.

It has been said that the service performed by money is to
overcome the difficulty in barter of the double coincidence of
wants and possessions. For example, a man may possess a
horse that he is willing to sell, and he wants in place of it not
just one thing, but a group of things, say a cow, a bag of flour,
a pair of shoes, and several other small commodities, perhaps
preferring not to have them all at once, but distributed over
a period of some days or some weeks. Now, it is not likely
that these things would exchange at such ratios in the market
that the horse would just be of equal value to the group of
other goods. Little less than a miracle would be needed to
find a man desiring a horse, and who at the same time pos-
sessed just that group of goods to exchange for it. So, either no
trade at all could take place, or there must be a series of trades


in which the man takes some of the things he wants (say a
cow) and other things "to boot," in the hope that later these
may be traded for the right things. Evidently, when the
"possession" is one large thing and the "wants" are many
(or vice versa), the coincidence required is much more than
double. In the light of the principles of diminishing gratifi-
cation and of time-preference, it is clear that the amounts in
which and the times at which goods are available have an
essential bearing on their values. Money is the most suc-
cessful device ever discovered for distributing the supplies
of a journey along its course and the goods of daily need
over a period of time. The use of money as a storehouse of
value by hoarding it is merely a more extreme case of keeping
income until a time when it will have a greater value to the
owner than it has in the present. 2

§ 3. Money defined. Money may be defined as a material

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