reasonable prospect of the consumer reaping the im-
mediate advantages in the shape of reduced prices, it
has been contended that the ultimate advantage to
the consumer did not rest with the competitive system.
The free action of the law of supply and demand in a
full competitive system tended to reduce prices to a
level which was barely sufficient to keep production
going on. Manufacture was too close to the margin
of productivity. That is to say, each of the manu-
facturers was working, or tended to work, too close to
that point at which profits disappeared, and so there
was always the possibility that some few or many
would be compelled to drop out of business.

Importance of Stability *of Prices It is to the
general advantage of the consumer that prices should
be maintained at a steady level. In the long run this
is best, even if the level of prices be rather high. This
question of stability of prices is one with which we
shall deal later on in the discussion of the relation of
money to prices. At present it should be noted that
when a person contracts to do a certain piece of work
149



150 AN INTRODUCTION TO ECONOMICS

it is absolutely essential that he should know what
prices he must pay for his materials. If these prices
are constantly fluctuating, as they undoubtedly would
fluctuate under the free play of the law of supply and
demand, it makes the work of estimating costs ex-
tremely difficult, and as a rule the contractor will feel
bound to protect himself by estimating upon the safe
side, that is, by charging higher prices. Whether we
believe monopoly in general to be good or bad, how-
ever, we have to admit the fact that the tendency
toward this form of organization exists, and it remains
for us, at present, to examine its nature.

The great evils which the protagonists of monopoly
organization declare to result from competition may
be summed up in very few words low prices and
waste. From the point of view of the consumer, pro-
vided production is maintained, low prices are any-
thing but an evil. On the other hand, waste is an evil
from whatever point of view it may be taken. Ad-
mitting, for the sake of the argument, that low prices
tend to cause restriction of production, we may admit
the possibility that monopolistic organization secures an
improvement. But that very admission constitutes
the fundamental criticism of monopolies, the criticism
that they raise prices.

High prices cannot be maintained, however, unless
there is some restriction in the free play of competition,
so there is evidently a close connection between monopo-
lies and restriction of competition. The term itself,
taken in its strict interpretation, signifies the entire
absence of competition. This is seldom realized in
practice, however, but it is approximated and we may



MONOPOLY AND MONOPOLY PRICE 151

use the term in a somewhat looser sense without damage
to our argument.

Varieties of Monopolies Monopolies are of various
kinds. There are temporary monopolies as contrasted
with those which have a relatively permanent exist-
ence. There are monopolies granted expressly by
government as a reward for services or as a protection
against unfair treatment, and those which have been
brought about by agreement between private indi-
viduals or corporations. We may deal with the least
important first.

Monopolies by Royal Grant The advantage of
being the only person who can deal in a commodity
is obvious, and it was no less obvious in the Middle
Ages. Kings and dukes were wont to grant rights of
monopoly to favorites to the great enrichment of the
latter, and to the still greater disgust of their subjects.
Even Queen Elizabeth, who was probably as popular
a monarch as ever lived, had to give way to the de-
mands of the people for the removal of this kind of
monopoly. The monopoly of selling salt, for instance,
weighed heavily upon a people who had no other means
of preserving meat than by salting. A high price, and
those medieval monopolists were never very delicate
in their price manipulations, might easily mean ruin.
Such monopolies have now ceased, although no doubt
there are courtiers yet who wish they were still possible.

Patents and Copyrights This does not mean, how-
ever, that governments have ceased to grant monopolies.
Every civilized country has a system of monopolies con-
trolled by the government through the patent laws.
A patent is nothing more nor less than a monopoly



152 AN INTRODUCTION TO ECONOMICS

right of production and sale. The argument is this.
An inventor or author or dramatist has given of his
time and thought, and possibly of his money also, to
the production of a new instrument or book or play.
In so doing he has rendered a service of more or less
value to the community, and the community should
pay for that service to the person who rendered it.
In the case of the invention of a new machine, the
government says, in effect, here is a new machine
which may or may not be valuable. If it is, those who
find it so ought to pay the inventor for discovering it.
The only way to find out whether it is valuable is to
try it out in use. Let the inventor have the sole right
of manufacturing and selling this machine. If the
public finds it valuable, it will pay. If it should be a
useful machine, it would not be fair to allow any one
who so wished to manufacture it and to reap the re-
ward due to the inventor. In order to protect the
public from extortion on the part of the inventor and
at the same time reap the fruits of the effort of his
brains, the exclusive right is limited to a term of years.

The same is true of an author. He writes a book
which the public may buy if it wishes. If it should
prove a success, that is, if the public should demand the
book in large numbers, it would be unfair to allow any
printer who so desired to print cheap copies and cir-
culate them by selling at a comparatively low price,
thus preventing the author from receiving the reward
due to his labor.

These monopolies are rightly limited in time, how-
ever. For it is manifestly unfair that a man's heirs in
perpetuity should keep on receiving a reward for the



MONOPOLY AND MONOPOLY PRICE 153

deeds of their ancestor. It is not only the inventor
or author himself who must be protected, however.
The inventor may be quite willing to forego any rights
of his own. Herbert Spencer, the great philosopher,
found this out through personal experience. He was
a lover of music and was annoyed at the unsatisfactory
clips on the music stands which he used. So he in-
vented one of his own which proved perfectly satis-
factory. He did not want to make any money out
of the idea, but when he tried to find a manufacturer
to produce the clip so that other music lovers could
avoid a similar annoyance, he found that the manu-
facturer insisted on a patent being taken out. If there
were no patent, the manufacturer claimed that he
would not be able to gain a reasonable profit on the
risk that he ran, for should the clip prove a failure the
loss would be all his own, and should it prove a success
other manufacturers would step in and take away a
great part of his sales.

Trade Marks Another form of monopoly is worth
mentioning before we treat of the form to which the
term is commonly applied. Governments in most
countries provide for the exclusive use of trade marks.
The owner of a trade mark has the sole use of that
particular sign with which to mark his goods. This is
a protection to him and is very rightly given as such.
If a firm has spent a great deal of trouble building up
a business which is recognized as a sound one, in pro-
ducing goods which win popular approval, or has gone
to great expense in advertising these goods, it is hardly
fair that it should be deprived of the fruits of that
labor and expense. In order to distinguish its goods



154 AN INTRODUCTION TO ECONOMICS

from those sold by competitors, a firm marks those
goods by some distinguishing sign or name, by which
they become well known as the reputation of the pro-
ducer grows. If there were no provision for copy-
righting the distinguishing sign, other merchants or
manufacturers might use it for their own productions
and thus sell goods to consumers on the reputation
gained by their more successful competitor.

A soap company, for example, may manufacture a
soap which they call " Imperial." If the public de-
cides that this is a good soap they will buy it steadily,
and gradually the name will become familiar as repre-
senting a desirable variety. Realizing that consumers
are in the habit of asking for " Imperial " soap an-
other manufacturer might label his production " Im-
perial " also and so sell large quantities to those who
thought they were getting the goods manufactured by
his rival. This is so manifestly unfair that trade marks
may be registered and copyrighted, and the owners
are protected against the use of their trade mark or
one so similar as to be easily confused with it.

This form of exclusive use, however, is not true
monopoly. For while the Imperial Soap Company
has the exclusive right to the use of the word " Im-
perial " it has no exclusive right to the manufacture
of soap. Competition still exists and the Imperial
Soap must take its chance with the Regal and the Re-
publican and all the other possible brands.

Monopoly of Location Nor is the sole right to
have a store in a certain district rightly to be construed
as a monopoly. It is true that it eliminates a certain
amount of competition, but the effect of competition



MONOPOLY AND MONOPOLY PRICE 155

from outside the monopoly district is bound to be
felt. If this particular store charges too high a
price, its customers can go outside the district for
their goods.

If the area be so wide, however, that it is extremely
difficult for customers to go outside, then the monopoly
tends to be more absolute. This is because it has a
better control of price-making. It can raise its prices
with less likelihood of customers buying elsewhere.
Now in every one of the cases we have taken, it is ob-
vious that what is being sought is this very power of
fixing prices without being subjected to competition.
This is the essence of monopoly. But there is more
to be considered before we are able to give a clear-
cut definition. Even if the power to fix prices inde-
pendently of the law of supply and demand exists for a
time, that time will be limited unless there is a certain
minimum of control of production, as well as of dis-
tribution of the monopoly goods.

Necessity of Control of Production and Distribu-
tion If there is no control of production, but only
of distribution, there cannot be permanent control of
price-fixing, as far as the distributors are concerned,
for the producers may so raise their prices that the
profits of high retail prices will not be reaped by the
distributors. In order that the monopoly should have
a chance of real success, there should be some measure
of control of production also. In this way there is a
unity which the purely distributing side could not pos-
sess. This has been felt in a great many of the
monopolies which exist at present. The steel monopoly,
for example, means not merely the control of the selling



156 AN INTRODUCTION TO ECONOMICS

of steel, but also the more or less absolute control of
the ore beds, of the rolling mills, and of the railroads.

Definition of Monopoly This qualification, how-
ever, merely emphasizes the nature of the control
necessary before those engaged in a business can have
the power to exercise definite control over price. We
may, therefore, define a monopoly as a business group
which has such unity of producing and distributing
organization as gives it power to fix prices without
reference to competition.

It is the aim of every monopoly so to charge for the
goods it produces as to reap the maximum profit.
This does not necessarily mean an increase in price.
It may happen, for example, that the greatest profit
can be obtained by selling large quantities at com-
paratively low prices. The cost of production for a
monopoly organization should be, and often is, less than
that of competing manufacturers. In competitive
production there is commonly a great deal of waste,
both of effort and material. This is evidenced by the
fact that in many cases, upon the formation of a
monopoly, several of the former competing plants
have been shut down without any lessening of the
supply of the product. Before the formation of the
monopoly organization most of the factories had been
working at somewhat less than their capacity. When
the monopoly was formed all the factories actually
engaged in producing were working at full capacity,
while the less efficient were shut down.

With this economy of production, therefore, it is
possible for the monopoly to charge lower prices and
still reap a greater total profit than that gained by the



MONOPOLY AND MONOPOLY PRICE 157

competing firms. It does not follow, however, that
the monopoly is satisfied with such a gain. If it can
obtain higher profits by increasing the prices, prices
will be increased. It is claimed for the Standard Oil
Company that the prices charged for oil under its
organization are less than formerly. This is probably
true. But since the formation of the Standard Oil
Company there have been many improvements in the
method of manufacturing fuel and illuminating oil,
and the probability is, that if competition still existed
the price would be considerably lower than that charged
by the Standard Oil Company.

Factors in Determination of Monopoly Price The
.problem of fixing a monopoly price is not simple.
There are many factors to be considered. The nature
of the demand for the particular commodity must
first be dealt with. If the demand is very intense it
may be possible to fix a high price. Too high a price,
however, will in any case reduce demand. The opera-
tors who made a famous " corner " in copper discovered
this to their cost. For a short time they gained ab-
solute control of the supply of copper, and at once
raised the price to such a level that the consumers
simply ceased to consume copper. There were no
buyers. The corner collapsed in consequence, for the
operators could not control the necessary capital to
hold on long enough. Had they been satisfied with
a more moderate price, they might have made immense
profits.

Latent Competition A very high price, long main-
tained, encourages competition. It is true that if the
monopoly is sufficiently strong it may crush such com-



158 AN INTRODUCTION TO ECONOMICS

petition, but only at the expense of temporarily re-
ducing prices. Therefore what may be termed latent
competition has an influence on the price fixed by the
monopoly.

Elasticity of Demand Apart from the ever-present
possibility of competition, the important factor to be
considered is the nature of the demand. Some com-
modities have a very wide demand, as, for example,
those which are of everyday use. In these cases, the
greatest profit is gained through the widest possible
sale. This means a comparatively low price. In the
case of the manufacture and sale of soap a very high
price will cause a large falling off in sales. To sell
soap for, say, a dollar a cake, may be perfectly possible
if the monopoly is strong. But at that price a great
many possible buyers will decide to do without soap
and regard it as an expensive luxury. Reduce the
price to twenty-five cents a cake and the sales will
multiply much more than fourfold. If we assume,
as we may quite safely, that the increased purchases
amount to ten times those at the higher price we may
estimate the profits made. Suppose the cost of a cake
of soap is ten cents to the manufacturer, inclusive of
all distributing costs. The profit on the sale of one
cake is ninety cents, at the price of one dollar a cake.
But the profits made by selling ten cakes at twenty-
five cents amount to one dollar and a half.

It must also be noted that almost invariably the
unit cost of production is lessened when the quantity
produced is increased. So we safely reason that in
the case of the reduced sale at a high price the cost
of the single cake of soap is considerably higher than



MONOPOLY AND MONOPOLY PRICE 159

when the larger quantity is produced for the wide
market at twenty-five cents.

It would seem, therefore, that in such cases the
tendency of a scientifically conducted monopoly would
be to lower, rather than to increase prices. Few
monopolies are so scientifically conducted, however,
and even where prices have been lowered, as we have
already said, the prices are probably not as low as they
would be under competition, provided the production
and distribution were efficiently managed. In other
words, the facts in regard to monopoly prices support
the common belief that monopoly price is synonymous
with high price.

NOTE. In this chapter the word production, as distin-
guished from distribution, is used in the ordinary colloquial
sense, and not with the meaning given to the term by earlier
definition. Of course, speaking accurately, distribution is a
form of production.



CHAPTER XIII

THE EVOLUTION OF MONEY

One of the most difficult facts for students to re-
member in connection with problems of exchange is
that all commerce consists merely in the exchange of
goods or services for goods or services, that is, in the
exchange of utilities. We speak so commonly of ex-
changing money for goods that we are inclined to for-
get that money is merely an intermediary in the matter
of exchange. When we buy a pound of butter at a
grocery store we pay, let us say, sixty cents. The
sixty cents are then used by the grocer to buy, possibly,
a pound of meat. In reality what has happened is
that there has been an exchange of butter for meat.
Money has intervened to facilitate the transaction.

In order to obtain a clear idea of the nature of
money it will be well to study the simple transactions
before money was invented. Every schoolboy has
taken part in such transactions, for money, as a rule,
is a scarce commodity with schoolboys, although ex-
changes are common enough. In these transactions
it is perfectly obvious that the exchange is one of goods
alone, with no intermediary. A knife is traded for a
baseball bat, which may in turn be traded for a bird's
nest with a few eggs in it, or for a supply of foreign
stamps or some such article. The problems to be solved
are comparatively simple as the number of exchange-
160



THE EVOLUTION OF MONEY 161

able commodities is small. In this respect the school-
boy's commerce is not unlike that of primitive man.
In primitive times few articles were produced which
were subject to exchange, and hence exchanges could
readily take place, although with some difficulty.
This difficulty can be seen in a modern instance.

Problems of Barter Exchange The advertise-
ment columns of almost any newspaper will show that
some one is desirous of exchanging an automobile for a
city lot. Let us suppose that some individual, whom
we will call John Smith, wishes to exchange his ma-
chine for a city lot. He must first find some other
person who has a city lot which he wishes to get rid
of. There is never much difficulty in finding such an
individual. But it is not every lot-owner who will be
satisfactory. He must not only be willing to dispose
of his lot, but he must want an automobile in exchange.
This reduces the number of lot-owners who can deal
with John Smith. Still further the city lot must be
one which Smith considers equal to or greater in value
than his automobile and the owner of the lot must be
satisfied with Smith's machine. With each condition
to be satisfied there is a corresponding reduction in the
number of people who can trade with Smith.

Every transaction of this sort, which is called barter,
is subject to all the difficulties mentioned. To carry
out our modern commerce on this basis is obviously
impossible. Even in the cases advertised in the news-
papers, the probability is that when the settlement
is arrived at, there is a balance in money paid by one
or the other of the parties. Now, when money did not
exist, the exchange had to be kept to the two articles



162 AN INTRODUCTION TO ECONOMICS

and to them alone. Suppose an Indian makes a
specialty of producing arrowheads. He must exchange
most of those he makes for food or clothing or shelter.
Probably he takes in exchange some furs from animals
caught by the hunter, who desires a fresh supply of
arrowheads. It is quite conceivable, however, that
the arrow maker has sufficient furs for his needs and
wants something else, say a new supply of dried buffalo-
meat. If the hunter cannot offer this meat, the ex-
change will not take place. This leaves both hunter and
arrow maker unsatisfied. Obviously, what is required
is some commodity which is desired by every one.

Cattle Used as Money In primitive times this
one commodity existed, just as it does to-day, although
it is not the same commodity. Food was wanted by
all, and any one who possessed a store greater than he
needed for his own use could always exchange some of
his surplus for other articles. The form which this
commodity took was usually the living cattle. Prices
were made in terms of head of cattle. To show how
intimately the cattle form of money is connected with
our earlier stages of development, it is sufficient to
consider the etymology of some of our money terms.
The word " cattle," for example, is derived from the
Latin, caput, a head. The word "chattel" is of
similar origin, and so is the term "capital" which is so
closely associated in common language with money.
Again the Latin word for a flock or herd is pecus, from
which is derived the Latin for money, pecunia.

Another word which commonly denotes a payment
of money is the word " fee," which is derived from the
Anglo-Saxon feoh, meaning either cattle or money.



THE EVOLUTION OF MONEY 163

Other etymological illustrations might be given from
other languages, all pointing to the same elementary
fact, but the above will be sufficient.

Other Forms of Money Apart from articles of
food, those which are desirable for purposes of cloth-
ing or ornament have been used as money. In the
early years of the colonization of America, skins were
commonly used for the purpose of exchange, just as
they were, apparently, among the Israelites. The
well-known quotation from Job, skin for skin, yea, all
that a man hath will he give for his life, seems to indi-
cate that skins were used in facilitating exchange. The
American Indians used strings of beads, or wampum
belts, as money. The list of articles which have been
so used is almost inexhaustible, including feathers,
furs, oil, fruits, shells, grain, and so forth.

All these different articles were not uniformly satis-
factory for the purpose of exchange. Each involved
certain difficulties, and we can best appreciate these
difficulties by enumerating the qualities which are
necessary for a good money material.

The Qualities Desirable in a Money Material,
i. Value in Use Of absolute importance is the
necessity that such money material should have a
value in use, apart from its value as a means of exchange
or a measure of value. All the articles named above
possess this quality. Cattle, grain, oil are useful for
food; furs and skins, for clothing; beads, shells,
feathers, for ornament. This quality is essential, but
there are many forms of goods which, although they
possess the quality of satisfying some desire, are not
fit for purposes of exchange.



164 AN INTRODUCTION TO ECONOMICS

2. Universal Acceptability The second quality is
that of universal acceptability. It is not sufficient for
one or two persons to desire the article. It must be
desired by every one. If a professor of geology were
to write an article for a geological magazine and the
editor offered him, in payment, an extremely rare fossil,
it is probable that the geologist would willingly accept
it. But if that professor offered the fossil to the
plumber for repairing the plumbing in his bathroom,
there is little doubt as to the attitude the plumber
would take. In primitive times the payment would
be made in one of the articles we have named, or some-
thing similar.

3. Divisibility All exchanges are not of the same
magnitude, however. It might still be possible to
use a herd of cows in payment for part of a ranch, for
instance. But if cattle were the only money substance
it would be very difficult to buy a box of candy, or to