thingo
No doubt it turns one act of exchange into two; but the two are far more easy to manage than one, because they need not be made with the same person.
78. Money as a Measure of Value.When money is used in exchange, he who receives money is saidto sell goods, and he who pays money is saidto buy or to purchase. In each case there is an act of exchange, and sales and purchases are not really different in nature from acts of barter, except that one of the commodities given or received is employed for the purpose of arranging the exchange. Thus money may be calledcurrent commodity, because it is merchandise chosento runabout as a medium of exchange. Now, in every purchase or sale there must be some proportion between the quantity of the money, and the quantity of the other commodity. This proportion expresses the value of the one commodity as compared with the other. Value in exchange means nothing but this proportion, as was before explained (section 72). Now when money is used, the quantity of money given or received for a certain quantity of goods is calledthe price of that goods, so that the price is the value of goods stated in money. But as money when once introduced is used in almost every act of exchange, a further great advantage arises. We are able to compare the value of any commodity with that of any other commodity. If we know how much copper may be had for so much lead; how much iron for so much steel; and so on with zinc and brass, bricks and timber, and so forth, it would not be possible to compare the value of copper with zinc, or iron with timber. But if we know that for one ounce of gold we can get 950 ounces of tin, 1,700 ounces of copper, 6,400 ounces of lead, and 16,000 ounces of wrought iron, then we learn without any trouble that for 1,700 ounces of copper we can get 16,000 ounces of iron, and so on. Thus gold or any other substance used as money serves as acommon measure of value; it measures the valueof every other commodity, and thus enables us to compare the value of each commodity with that of every other.
This is an immense convenience. It leads every one to think and speak of the values of things in terms of a money known to everybody. All lists of values of goods are given as lists of prices and everybody understands these prices and can compare the prices in one list with those in another. Money may then be said to have two chief functions. It serves as
(1)A medium of exchange.(2)A common measure of value.
But it is important to remember that, though money thus acts in a very useful and peculiar way, it never ceases to be a commodity. Its value is subject to the laws of supply and demand already stated (section 73); if the quantity of money increases, its value is likely to decrease, so that more money is given for the same commodity, andvice versa.
79. What Money is made of.As already remarked almost any commodity may be used as money, and in different ages all kinds of things such as wine, eggs, olive oil, rice, skins, tobacco, shells, nails, have actually been employed in buying and selling. But metals are found to serve much the best for several reasons, and gold and silver are better for the purpose than any of the other metals. The advantages of having gold and silver money are evident. Such metals areportable, because they are so valuable that a small weight of metal equals in value a great weight of corn or timber or other goods. Then they areindestructible, that is, they do not rot like timber, nor go bad like eggs, nor sour like wine; thus they can be kept for any length of time without losing their value. Another convenience is, that there is no difference in quality in the metal itself; pure gold is always the same as pure gold, and though it may be mixed with more or less base metal, yet we can assay or analyse the mixture, and ascertainhow much pure metal it contains. The metals are alsodivisible; they may be cut or coined into pieces, and yet the pieces taken together will be as valuable as before they were cut up. It is a further advantage of gold and silver that they are such beautiful, brilliant substances, and gold is also so heavy that it is difficult to make any counterfeit gold or silver; with a little experience and care, every one can tell whether he is getting real money or not—when the money is made of gold or silver. Finally, it is a great convenience thatthese metals do not change in value rapidly. A bad harvest makes corn twice as dear as before, and destructible things, like eggs, skins, &c., are always rising or falling in value. But gold and silver change slowly in value, because they last so long, and thus the new supply got in any one year is very little compared with the whole supply or stock of the metal. Nevertheless,gold and silver, like all other commodities, are always changing in value more or less quickly.
80. Metallic Money.Almost all the common metals—copper, iron, tin, lead, &c.—have been used to make money at one time or other, besides various mixtures, such as brass, pewter, and bronze. But copper, silver, and gold have been found far more suitable than any of the other metals. Copper, indeed, being comparatively low in value, is wanting in portability. It was formerly the only money of Sweden, and I have seen a piece of old Swedish money consisting of a plate of copper about two feet long and one foot broad. A merchant making payments in such money had to carry his money about in a wheel-barrow. Now we use copper only for coins of small value, and to make the copper harder, it is melted up with tin and converted into bronze.
In the Saxon times English money was made of silver only, but this was inconvenient both for very large and for very small payments. The best way isto use gold, silver, and bronze money according as each is convenient.In the English system of money, gold is the standard money and the legal tender, because no one can be obliged to receive a large sum of money in any other metal. If a person owes a hundred pounds, he cannot get rid of the debt without tendering or offering a hundred pieces of coined gold to his creditor. Silver coin is a legal tender only to the amount of forty shillings—that is, no creditor can be obliged to receive more than forty shillings in a single payment. Similarly, bronze coin is a legal tender only up to the amount of one shilling in all.
81. What is a Pound Sterling?In England people are continually paying and receiving money in pounds, but few could say exactly what a pound sterling means. No doubt it is represented by a coin called a sovereign, but what is a sovereign? Strictly speaking,a sovereign is a piece of gold coined, in accordance with an Act of Parliament, at a British mint, still bearing the proper stamp of that mint, and weighing not less than 122½ grains. On the average the sovereigns issued from the mint ought to weigh 123.274 grains, but it is impossible to make each coin of that exact weight, and if this were done, the coins would soon be lessened in weight by wear. A sovereign is legal tender for a pound as long as it weighs 122½ grains or more, and is not defaced; but, in reality, people are in the habit of paying and receiving sovereigns which are several grains less in weight than the law requires.
Twenty silver shillings are by law to be received as equal in value to a pound. This is necessary, in order that we may be able to pay a fraction of a pound, for a coin made of gold equal to the twentieth part of a pound would easily be lost, worn, or even blown away. But the silver in twenty shillings is not equal in value to the gold in a pound; its value varies with the gold price of silver, and, at present, twenty shillingsare only worth about sixteen gold shillings and eightpence, that is,5/6of a pound. It is necessary to make the silver coin thus of less value than it is taken for, in order to render it unprofitable to melt the coin. In the same way, the metal in a bronze penny is worth only about the sixth part of a penny, so that people would lose a great deal by melting up or destroying pence.
82. Paper Currency.Instead of using actual coins of gold, silver, or bronze, it is common to make use of paper notes containing promises to pay money. When the sum of money to be paid is large, a bank note is much more convenient, being of far less weight than the coins, and less likely to be stolen. A five-pound bank note is a promise to pay five pounds to any person who has the note in his possession, and who asks for five pounds in exchange for the note at the office of the bank issuing the note. Aconvertible bank noteis one which actually can be thus changed into the coins whenever it is desired, and so long as this is really the case, it is evident that the note is just as valuable as the coins, and is more convenient. The only fear is that, if a banker be allowed to issue these bank notes, he will not always have coins enough to pay them when presented. Very frequently banks have been obliged to stop payment; that is, to refuse to perform their promises. Nevertheless, when there is no other currency to be had, the bank notes often go on circulating like money. They are then calledinconvertible notes, and there is said to be apaper money. A person is willing to receive paper currency in exchange for goods, if he believes that other people will take it from him again. But such paper currency is very bad, because its value will rise or fall according to the quantity issued, and people who owe money will often be able to pay their debts with less value than they received. The subject of bank notes and paper money, however, is too difficult for us to pursue in this Primer.
83. What Credit means.It is very important for those who would learn political economy to understand exactly what is meant bycredit. John is said to give credit to Thomas when John leaves some of his property in the use of Thomas, expecting to have it returned at a future time. In short, any one who lends a thinggives credit, and he who borrows itreceives credit. The wordcreditmeansbelief, and John believes that he will get back his property from Thomas, though this, unfortunately, does not always prove to be the case. John is called thecreditor, and Thomas thedebtor.
It is not common, indeed, to speak of credit in the case of most articles: when a man borrows a horse, a book, a house, an engine, or other common article, and pays for its use, he is said tohireit, and what he pays for the use is called the hire, fare, or rent. In some countries, where coins are not yet used, people lend and borrow corn, oil, wine, rice, or any common commodity which all like to possess. In the parts of Africa where palm oil is produced in great quantities, people give and take credit in oil. But in all civilised countries it has become the practice to borrow and lend money. If a man needs an engine, and has nothing to buy it with, he goes and borrows money enough from the person who will lend it on the lowest terms, and then he buys the engine where he can get it most cheaply. Frequently, indeed, the man who sells the engine will give credit for its price, that is, will lend the sum of money to the buyer, just sufficient to enable him to buy it.
Credit is a very important thing, because, when properly employed,it enables property to be put into the hands of those who will makethebest use of it. Many people have property but areunable to go into business, as is the case with women, children, old men, invalids, &c. Rich people perhaps have so much property that they do not care to trouble themselves with business, if they can get others to take the trouble for them. Even those who are engaged in business often have sums of money which they do not immediately want to use, and which they are willing to lend for a short time. On the other hand, there are many clever active men, who could do a great deal of work in establishing manufactories, sinking mines, or trading in goods, if they only had enough money to enable them to buy the requisite materials, tools, buildings, land, &c. A man must have some property of his own before he can expect to get credit; but with some property to fall back upon in case of need, and with a good character for honesty and ability, a trader can by credit obtain other people's capital to deal with.
84. Loans on Mortgage.Credit is given in many different ways; sometimes a man is assisted by a permanent loan from a relative or friend who has confidence in him. Enormous sums of money are lent, as it is called, uponmortgage. A man, for instance, who has built a cotton mill with his own money, pledges the mill as security for a loan, that is, he gives his creditor a right to sell the mill unless the debt is paid when required.The mill is called a mortgage or dead pledge, because it becomes dead to the former owner, if he breaks the conditions of the loan. There are many institutions, such as insurance companies, building societies, &c., which have a great deal of capital to lend on mortgage, and many rich people invest their money in the same way. Thus a very large part of the houses, land, factories, shops, &c., are not really owned by the people who seem to own them, but bymortgagees, who have lent money on them.
Generally speaking, the interest paid for such loans is 4½ or 5 per cent. per annum, when the security isquite good, that is, when the property mortgaged is sure to sell for more than is lent upon it. A considerable margin is always left to cover mistakes or alterations as regards the value of the property; thus, if a house be said to be worth £1000, it will usually be security only for a debt of £700 or £800. When the security is not so good, because the ownership or the value of the property mortgaged is doubtful, the rate of interest charged will be higher, and may be six, seven, or more per cent. The surplus covers the risk, that is, compensates the lender, for the chance of losing what he lends. Mortgage loans are generally made upon fixed capital like houses, mills, ships, &c., which last a long time; but sometimes stocks of goods, such as cotton, wine, corn, &c., are mortgaged as security for temporary loans.
85. Banking.A large part of the credit given, in a civilised country, is given by bankers, who may be saidto deal in credit, or which comes to the same thing,in debt. A banker usually carries on three or four different kinds of work, but his proper work is that of borrowing from persons who have ready money to lend, and lending it to those who want to buy goods. As a shopkeeper sells his stock of goods, he receives money for it. And, until he buys a new stock, he has no immediate need of this money. Those, again, who receive salaries, dividends, rents, or other payments once a quarter, do not usually want to spend the whole at once. Instead of keeping such money in a house, where it pays no interest and is liable to be stolen, lost, or burnt, it is much better to deposit it with a banker, that is, to lend it to a banker who will undertake to pay it back when it is wanted. Generally speaking a merchant, manufacturer, or tradesman sends to his banker every day the money which he has received, and only keeps a few pounds to give change or make petty payments. The advantages of thus depositing money with the banker are chiefly as follows:—
(1.) The money is safe, as the banker provides strong rooms, locked and guarded at night.
(2.) It is easy to pay the money away by means of cheques or written orders entitling the persons named therein to demand a specified sum of money from the banker.
(3.) The banker usually allows some interest for the money in his care.
Bankers receive deposits on various terms; sometimes the depositor engages to give seven days' notice before withdrawing his deposit; in other cases the money is lent to the banker for one, three, or six months certain, and the longer the time for which it is lent the better the rate of interest the banker can usually give. But a great deal of money is depositedon current account, that is, the customer puts his money into the bank, and draws it out just when he likes, without notice. In this case the banker gives very little interest, or none at all, because he has to keep much of the money ready for his customers, not knowing when it will be wanted.
Nevertheless, while some depositors are drawing their money out, others will be putting more in, and it is exceedingly unlikely that all the thousands of customers of a large bank will want their deposits at the same time. Thus it happens that the banker, in addition to his own capital, has a large stock of money always on hand, and he makes profit by lending out this money to other customers, who need credit.
There are various ways in which a banker arranges his loans; sometimes he lends upon the mortgage of goods, houses, and other property, or of shares in railways and government funds, in the way described; but this is not a proper way for a banker to employ much of his funds, because he may not be able to get back such loans rapidly enough when he needs them. One of the simplest ways of lending money is to allow customers to overdraw their accounts, that is, to draw more money out of the bank than they have put in.But a banker naturally takes care not to allow overdrafts unless he has great confidence in his customer, or has received a guarantee of repayment from him or his friends.
86. Discount of Bills.The most common and proper way in which a banker gives credit and employs his funds is in the discount of bills, that is, in advancing money in exchange for a definite promise to pay it back at a stated time. Suppose that John Smith has sold a thousand pounds worth of cotton goods to Thomas Jones, a shopkeeper; several months will pass perhaps before Jones can sell the goods over the counter, and if he has not much capital, he agrees that John Smith shall give credit for the thousand pounds but in the mean time draw a bill upon Jones. This bill would very likely be somewhat in this form—
London, 1st February, 1878.£1000, 0s. 0d.Three months after date pay to me or my order the sum of one thousand pounds, value received.JOHN SMITH.To Mr. Thomas Jones.
London, 1st February, 1878.
£1000, 0s. 0d.
Three months after date pay to me or my order the sum of one thousand pounds, value received.
JOHN SMITH.To Mr. Thomas Jones.
John Smith is said to be thedrawerof the bill; Thomas Jones is thedrawee, and the bill amounts to a claim on the part of John Smith that Thomas Jones owes him the sum named. If the drawee acknowledges that this is the case, he signifies it when the bill is presented to him, by writing on the back the word "accepted," together with his name.
Now if the drawer and drawee of a bill are persons of good credit, a banker will readily discount such a bill, that is, buy it up for the sum due, after subtracting interest at the rate of say five per cent. per annum for the length of time the bill has to run. The bill forms good security, because, when accepted, John Smith is bound to pay the thousand pounds when due, and if he fails, the drawee is liable. Such bills are oftenbought by one person after another, beingendorsedby each to the next, that is, impressed with an order that the money shall be paid to the next person named. When due the last owner must claim the money from John Smith, and if he refuses to pay, each owner has a claim upon the previous owners.
87. Industry is Periodic. Everybody ought to understand that trade varies in activity, from time to time, in a periodic manner.A thing is said to vary periodically, when it comes and goes at nearly equal intervalslike the sun, or rises and falls like the tides. Now, in industry, as Mr. William Langton pointed out twenty years ago, there are tides almost as regular as those of the sea. Shakespeare says truly—
"There is a tide in the affairs of men,Which, taken at the flood, leads on to fortune."
Some of these tides depend upon the seasons of the year; business is more active in the spring and summer, and falls off in winter. It is comparatively easy to borrow money in January, February, March, June, July, August, and September; October and November are particularly bad months; the rate of interest then often runs up rapidly, and the bankruptcies in these months are more numerous than at any other time of year. April and May are also dangerous months, but in a less degree. Men of business should always bear these facts in mind, and, by being prepared beforehand, they may escape disaster.
There is also a much longer kind of tide in business, which usually takes somewhere about ten years to rise and fall. The cause of this tide is not well understood,but there can be no doubt that in some years men become confident and hopeful. They think that the country is going to be very prosperous, and that if they invest their capital in new factories, banks, railways, ships, or other enterprises, they will make much profit. When some people are thus hopeful, others readily become so too, just as a few cheerful people in a party make everybody cheerful. Thus the hopefulness gradually spreads itself through all the trades of the country. Clever men then propose schemes for new inventions and novel undertakings, and they find that they can readily get capitalists to subscribe for shares. This encourages other speculators to put forth proposals, and when the shares of some companies have risen in value, it is supposed that other shares will do so likewise. The most absurd schemes find supporters in a time of great hopefulness, and there thus arises what is called a bubble or mania.
88. Commercial Bubbles or Manias.When the schemes started during a bubble begin to be carried out, great quantities of materials are required for building, and the prices of these materials rise rapidly. The workpeople who produce these materials then earn high wages, and they spend these wages in better living, in pleasure, or in buying an unusual quantity of new clothes, furniture, &c. Thus the demand for commodities increases, and tradespeople make large profits. Even when there is no sufficient reason, the prices of the remaining commodities usually rise, as it is called,by sympathy, because those who deal in them think their goods will probably rise like other goods, and they buy up stocks in the hope of making profits. Every trader now wants to buy, because he believes that prices will rise higher and higher, and that, by selling at the right time, the loss of any subsequent fall of prices will be thrown upon other people.
This state of things, however, cannot go on verylong. Those who have subscribed for shares in new companies have to pay up the calls, that is, find the capital which they promised. They are obliged to draw out the money which they had formerly deposited in banks, and then the bankers have less to lend. Manufacturers, merchants, and speculators, who are making or buying large stocks of goods, wish to borrow more and more money, in order that they may have a larger business, the profit seeming likely to be so great. Then according to the laws of supply and demand, the price of money rises, which means that the rate of interest for short loans, from a week to three or six months in duration, is increased. The bubble goes on growing, until the more venturesome and unscrupulous speculators have borrowed many times as much money as they themselves really possess.Credit is said to be greatly extended, and a firm, which perhaps owns a capital worth ten thousand pounds, will have undertaken to pay two or three hundred thousand pounds, for the goods which they have bought on speculation.
But the sudden rise which, sooner or later, occurs in the rate of interest, is very disastrous to such speculators; when they began to speculate interest was, perhaps, only two or three per cent.; but when it becomes seven or eight per cent., there is fear that much of the profit will go in interest paid to the lenders of capital. Moreover, those who lent the money, by discounting the speculators' bills, or making advances on the security of goods, become anxious to have it paid back. Thus the speculators are forced at last to begin selling their stocks, at the best prices they can get. As soon as some people begin to sell in this way, others who hold goods think they had better sell before the prices fall seriously; then there arises a sudden rush to sell, and buyers being alarmed, refuse to buy except at much reduced rates. The bad speculators now find themselves unable to maintain their credit, because, if they sell their large stocks at a considerable loss, their own real capital will be quite insufficient to cover this loss. They are thus unable to pay what they have engaged to pay, andstop payment, or, in other words, become bankrupt. This is very awkward for other people, manufacturers, for instance, who had sold goods to the bankrupts on credit; they do not receive the money they expected, and as they also perhaps have borrowed money while making the goods, they become bankrupt likewise. Thus thediscreditspreads, and firms even which had borrowed only moderate sums of money, in proportion to their capital, are in danger of failing.
89. Commercial Crisis or Collapse.The state of things described in the last section is called a commercial collapse, because there isa sudden falling in of prices, credit, and enterprise. It is also calleda Crisis, that is, a dangerous and decisive moment(Greek, κρἱνω,to decide), when it will soon be seen who is to become bankrupt, and who not. No sooner has such a crisis arrived, than everything changes. No one ventures to propose a new scheme, or a new company, because he knows that people in general have great difficulty in paying up what they promised to the schemes started during the bubble.This bubble is now burst, and it is found that many of the new works and undertakings from which people expected so much profit, are absurd and hopeless mistakes. It was proposed to make railways where there was nothing to carry; to sink mines where there was no coal nor metal; to build ships which would not sail; all kinds of impracticable schemes have to be given up, and the capital spent upon them is lost.
Not only does this collapse ruin many of the subscribers to these schemes, but it presently causes workpeople to be thrown out of employment. The more successful schemes indeed are carried out, and, for a year or two, give employment to builders, iron-manufacturers, and others, who furnish the materials.But as these schemes are completed by degrees, no one ventures to propose new ones; people have been frightened by the losses and bankruptcies and frauds brought to light in the collapse, and when some people are afraid, others readily become frightened likewise by sympathy. In matters of this kind men of business are much like a flock of sheep which follow each other without any clear idea why they do so. In a year or two the prices of iron, coal, timber, &c., are reduced to the lowest point; great losses are suffered by those who make or deal in such materials, and many workmen are out of employment. The working classes then have less to spend on luxuries, and the demand for other goods decreases; trade in general becomes depressed; many people find themselves paupers, or spend their savings accumulated during previous years. Such astate of depressionmay continue for two or three years, until speculators have begun to forget their failures, or a new set of younger men, unacquainted with disaster, think they see a way to make profits. During such a period of depression, too, the richer people who have more income than they spend, save it up in the banks. Business men as they sell off their stocks of goods leave the money received in the banks; thus by degrees capital becomes abundant, and the rate of interest falls. After a time bankers, who were so very cautious at the time of the collapse, find it necessary to lend their increasing funds, and credit is improved. Then begins a new credit cycle, which probably goes through much the same course as the previous one.
90. Commercial Crises are Periodic.It would be a very useful thing if we were able to foretell when a bubble or a crisis was coming, but it is evidently impossible to predict such matters with certainty. All kinds of events—wars, revolutions, new discoveries, treaties of commerce, bad or good harvests, &c.—may occur to decrease or increase the activity of trade.Nevertheless,it is wonderful how often a great commercial crisis has happened about ten years after the previous one. During the last century, when trade was so different from what it now is, there were crises in or near the years 1753, 1763, 1772 or '3, 1783, and 1793. In this century there have been crises in the years 1815, 1825, 1836-9, 1847, 1857, 1866, and there would probably have been a crisis in 1876 or 1877 had it not been for an exceptional collapse in America in 1873. There is at present (February, 1878) the great depression of trade which marks the completion of one cycle and the commencement of a new one.
Good vintage years on the continent of Europe, and droughts in India, recur every ten or eleven years, and it seems probable that commercial crises are connected with a periodic variation of weather, affecting all parts of the earth, and probably arising from increased waves of heat received from the sun at average intervals of ten years and a fraction. A greater supply of heat increases the harvests, makes capital more abundant and trade more successful, and thus helps to create the hopefulness out of which a bubble arises. A falling off in the sun's heat makes bad harvests and deranges many enterprises in different parts of the world. This is likely to break the bubble and bring on a commercial collapse.
Generally,a credit cycle, as Mr. John Mills of Manchester has called it, will lastabout ten years. The first three years will witness depressed trade, with want of employment, falling prices, low rate of interest, and much poverty; then there will be perhaps three years of active, healthy trade, with moderately-rising prices, a reasonable rate of interest, fair employment, and improving credit; then come some years of unduly-excited trade, turning into a bubble or mania, and ending in a collapse, as already described. This collapse will occupy the last of the ten years, so thatthe whole credit cycle will, on the average, be as follows:—
It is not to be supposed that things go as regularly as is here stated;sometimes the cycle lasts only nine, or even eight years, instead of ten; minor bubbles and crises sometimes happen in the course of the cycle, and disturb its regularity. Nevertheless, it is wonderful how often the great collapse comes at the end of the cycle, in spite of war or peace or other interfering causes.
91.How to avoid Loss by Crises.Now, these bubbles and crises are very disastrous things; they lead to the ruin of many people, and there are few old families who have not lost money at one collapse or another. The working-classes are often much injured; many are thrown out of employment, and others, not seeing why their wages should be reduced, make things worse by strikes, which, after a collapse, cannot possibly succeed. It is most important, therefore, that all people—working-people, capitalists, speculators, and all connected with any kind of business—should remember thatvery prosperous trade is sure to be followed by a collapse and by bad trade. When, therefore, things look particularly promising, investors should be unusually careful into what undertakings they put their money.As a general rule, it is foolish to do just what other people are doing, because there are almost sure to be too many people doing the same thing.If, for instance, the price of coal rises high, and coal-owners make large profits, thereare certain to be many people sinking new mines. Such a time is just the worst one for buying shares in a coal-mine, because, in the course of a few years, there will be a multitude of new mines opened, the next collapse of trade will decrease the demand for coal, and then there will be great losses in the coal business. This is what has happened in the last few years in England, and the same thing has happened over and over again in other trades. As a general rule,the best time to begin a new factory, mine, or business of any kind, is when the trade is depressed, and when wages and interest are low. Mining, building, or other work can then be done more cheaply than at other times, and the new works will be ready to start just when business is becoming active and there are few other new works opening.
This rule, indeed, does not apply to the schemers, speculators, orpromoters, as they are called, who start so many companies. These people make it their business to have new schemes and shares to offer just when people are in a mind to buy, that is, during a bubble or time of excited trade. They take care to sell their own shares before the collapse comes, and it is their dupes who bear all the loss. A prudent man, therefore, would never invest in any new thing during a mania or bubble; on the contrary, he would sell all property of a doubtful or speculative value, when its price is high, and invest it in the very best shares or government funds, of which the value cannot fall much during the coming collapse. The wisest men have been deluded during manias; and in the Library of the Royal Society is shown a letter from Sir Isaac Newton requesting a friend to buy shares for him in the South Sea Company, just at the moment when the South Sea Bubble was at its worst. Let people take warning by Sir Isaac Newton, and never speculate in a thing because other people are doing the same; then these bubbles and collapses will be prevented, or will becomemuch less disastrous. Credit cycles will go on until the public learn to look out for them, and act accordingly. Business men must become bold during depressed trade, careful during excited trade, instead of acting exactly in the opposite way. It is only a knowledge of these credit cycles which can prevent them, and this is the reason why I have said so much about them in this Primer.
92. Functions mean performances (Latin,fungi,functus, to perform), and the functions of government mean those things which a government ought to do,—the duties which it undertakes to perform, or the services which it may be expected to render to the people governed. These functions are commonly divided into two classes—
(1) The necessary functions.(2) The optional functions.
Thenecessary functionsof a government are such as it is obliged to undertake; thus it must defend the nation against foreign enemies, it must keep the peace within the country, and prevent insurrections which might threaten the existence of the government itself; it must also punish evildoers who break the laws, and try to become rich by robbery; it must also maintain law courts in which the disputes of its subjects can be fairly decided, and set at rest. These are far from being all the necessary functions.
Theoptional functionsof government consist of those kinds of work which a government can execute with advantage, such as providing a good currency, establishing a uniform system of weights and measures, constructing and maintaining the roads, carrying letters through a national post office, keeping up a national observatory and a meteorological office,&c. The optional functions are in fact very numerous, and there is hardly any end to the things which one government or another has provided for the people. It would be a most important work, if it were possible, to decide exactly what undertakings a government should take upon itself, and what it should leave to the free action of other people; but it is impossible to lay down any precise rules upon this subject. The characters and habits and circumstances of nations differ so much, that what is good in one case might be bad in another. Thus in Russia the government makes all the railways, and the same is the case in the Australian States; but it does not at all follow that, because this is necessary or desirable in those countries, therefore it is desirable in England, or Ireland, or the United States. Experience shows that though the English Post Office is very profitable, the Postal Telegraphs cannot at present be made to pay. There can be no doubt thatit would be altogether ruinous to put the enormous system of English railways under the management of government officers. Each case has thus to be judged upon its own merits, and all that the political economist can do is to point out the general advantages and disadvantages of government management.
93. The Advantage of Government Management.There is often immense economy in having a single establishment to do a certain kind of work for the whole country. For instance, a weather office in London can get daily telegraphic reports of the weather in all parts of the kingdom and many parts of Europe; combining and comparing these reports it can form a much better opinion about the coming weather than would be possible to private persons, and this opinion can be rapidly made known by the telegraph and newspapers. The few thousand pounds spent by the government yearly on the meteorological office are inconsiderable compared with the serviceswhich it may render to the public by preventing shipwrecks, colliery explosions, and other great disasters and inconveniences which often arise from our ignorance of the coming weather. It is certainly proper then to make meteorological observation one of the functions of government.
Great economy would arise, again, if an establishment like the post-office were created in Great Britain in order to convey small goods and parcels. At present there are a great number of parcel companies, but they often send a cart a long way to deliver a single parcel. In London some half a dozen independent companies send carts all over the immense town; each of the chief railway companies has its own system of delivering parcels, and the larger shops have their own delivery vans as well. Thus there is an enormous loss of horse power and men's time. If a government postal system undertook the work, only one cart would deliver goods in each street, and as there might be a parcel for almost every house, or sometimes several, there would be an almost incredible saving in the distance travelled and the time taken up. This illustrates the economy which may arise from government management.
94. The Disadvantage of Government Management.On the other hand there is great evil in the government undertaking any work which can be fairly done by private persons or companies. Officers of the government are seldom dismissed when once employed, or, if turned away, they receive pensions. Thus when the government establishes any new work, it cannot stop it without great expense, and the work is usually carried on whether it is done economically or not. Then again, government officers, knowing that they will not be dismissed without a pension, are commonly less active and careful than men in private employment. For the work which they do they are paid at a higher rate than in private establishments.
It is therefore very undesirable that the Governmentshould take any kind of work into its own hands, unless it is perfectly clear that the work will be done much better, and more cheaply than private persons could do it. There is a balance of advantages and disadvantages to be considered: the advantage of a single great establishment with plenty of funds; and the disadvantage that work is always done more expensively by Government. In the case of the post-office, the advantages greatly outweigh the disadvantages; the same would probably be the case with a well-arranged parcel post; in the postal telegraphs, there are many advantages, but they are obtained at a considerable loss of revenue. If the state were to buy up and manage the railways of Great Britain, the advantages would be comparatively small, but the losses would be enormous. In America the express or parcel companies are so admirably managed that they do the work more safely and better than the Government post office. There can be little doubt, too, that the American railways and telegraphs are far better managed now than they would be if acquired by the Federal Government.
95. There must be Taxes.Whether governments undertake more or less functions, it is certain that we must have some kind of government, and that this government will spend a great deal of money. This money, too, can very seldom be obtained in the form of real profit on the work done, so that it must be raised by taxation. We generally apply the name tax to any payment required from individuals towards the expenses of the local or general government. We may easily indeed be taxed without being aware of it; thus, nearly the half of every penny paid for posting a letteris a tax, and a town may be taxed through the price of gas or water.
At one time or another, and in one country or another, taxes have been raised in every imaginable way. ThePoll Taxwas a payment required from every poll or head of the population, man, woman, or child. This was considered a very grievous tax and has never been levied in England since the reign of William III. TheHearth Taxconsisted of a payment for each hearth in a house; then a rich family with a large house and many hearths paid far more than a poor family with only one or two hearths. But as people did not like the tax-gatherer coming into the house to count the hearths, the window tax was substituted, because the tax-gatherer could walk round the outside of the house, and count the windows. Now, in England, we do not tax the light of heaven at all, but we fix a man's payments by the rent of his house, the amount of his income, or the quantity of wine and beer he drinks.
96. Direct and Indirect Taxes.Taxes are calleddirect taxeswhen the payment is made by the person who is intended to bear the sacrifice. This is the case generally with the assessed taxes, or the charges made upon people who have menservants, private carriages, &c. As most people keep carriages only for their own comfort, they cannot make other people repay the cost of the tax. But if a carrier or tradesman were taxed for his carts, he would be sure to make his customers repay it; thus the tax would not be direct, and carriages employed in trade are therefore exempt from taxation. Other taxes in England, which are generally direct ones, are the income-tax, the dog-tax, the poor-rates, the house-duty; but a tax which is usually direct, may sometimes become indirect, and it is often impossible to say what is reallythe incidence of a tax, that is, the manner in which it falls upon different classes of the population.
Indirect taxesare paid in the first place bymerchants and tradesmen, but it is understood that they recover the amount paid from their customers. The principal part of such taxes in England consist of thecustoms dutieslevied upon wine, spirits, tobacco, and a few other articles, when they are imported for use in this country.Excise dutiesare similar duties levied upon like goods produced within the kingdom. These were calledexcise, because it was originally the practice actually to cut off a portion of the goods themselves, and take it as the duty. In England, excise duties are now levied on a few things only, such as spirits and beer; and care is taken to make the excise duty as nearly as possible equal to the customs duty on the same kind of imported goods. English brandy pays a duty equivalent to that on French brandy, and the matter is arranged so that the duty shall neither encourage nor discourage the making of English brandy. Thus the trade is left as free as it can be, consistently with raising a large revenue. Another important class of indirect taxes consist ofthe stamp duties, which are payments required from people when they make legal agreements of various kinds. According to law, deeds, leases, cheques, receipts, contracts, and many other documents are not legally valid unless they be stamped, and the cost of the stamp varies from a penny up to hundreds or even thousands of pounds, according to the value of the property dealt with. Stamp duties are probably in most cases indirect taxes, but it would be very difficult to say who really bears the cost; this must depend much upon circumstances.
97. Maxims of Taxation.Adam Smith first stated certain rules, or maxims, which should guide the statesman in laying on taxes; they are such good rules that everybody who studies political economy ought to learn them. They are as follows—
(1) The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; thatis, in proportion to the revenue which they respectively enjoy under the protection of the state.
This we may call themaxim of equality, and equality consists in everybody paying, in one way or another, about an equal percentage of the wages, salary, or other income which he receives. In England the taxes amount to something like ten per cent., or one pound in every ten pounds, and this is pretty equally borne by different classes of society. It is probable, however, that the very rich do not pay as much as they ought to do. At the same time those who are too poor to pay income tax, and who do not drink nor smoke, are almost entirely free from taxation in this country; they pay very little, except poor rates. It would be impossible to invent any one tax which could be equally levied upon all persons. The income tax is a tax of so many pence in every pound of a person's income, but it is impossible to make people state their income exactly, and poor people could never be got to pay such a tax. Hence it is necessary to put on a certain number of different taxes so that those who manage to escape one tax shall be made to pay in some other way.
(2) The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain. This is themaxim of certainty, and it is very important, because, if a tax is not certainly known, the tax-gatherers can oppress people, requiring more or less as they choose. In this case it is very probable that they will become corrupt, and will receive bribes to induce them to lower the tax. On this account duties ought never to be levied according to the value of goods, orad valorem, as it is said. Wine, for instance, varies in value immensely according to its quality and reputation, but it is impossible for the custom-house officer to say exactly what this value is. If he takes the statement of the people who import the wine, theywill be tempted to tell lies, and say that the value is less than it really is. And as it would not be easy to prove the guilt either of the customs officer or of the importers, it is to be feared that some officers will receive bribes. But if the wine is taxed simply according to its quantity, the amount of duty is known with great certainty, and fraud can easily be detected. The same remarks apply more or less to every kind of goods which varies much in quality.
(3) Every tax ought to be levied at the time, and in the manner, in which it is most likely to be convenient for the contributor to pay it. This isthe maxim of convenience, and the reason for it is sufficiently obvious. As government only exists for the good of the people at large, of course it ought to give the people as little trouble as possible. And as the Government has immensely more money at its command than any private person, it ought to arrange so as to demand a tax when the taxpayer is likely to be able to pay it. Thus there seems to be no sufficient reason why the government should make people pay the income-tax in January, when they are likely to have plenty of other bills to pay. In respect of this maxim, the customs and excise duties are very good taxes, because a person pays duty whenever he buys a bottle of spirits or an ounce of tobacco. If he does not want to pay taxes, let him leave off drinking and smoking, which will probably be better for him in every way. At any rate, if he can afford to drink spirits and smoke tobacco, he can afford something for the expenses of government. The penny receipt duty, again, is in this respect a good tax, because when a person is receiving money he is sure to be able to spare one penny for the State, and he is generally so glad to get his money that he thinks nothing of the penny.
(4) Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it bringsinto the public treasury. This is themaxim of economy. Thus, a tax ought not to be imposed if it would require a great many officers to collect it, and thus waste much of what is collected, or if it disturbs trade and makes things dearer than they would otherwise be. Again, the government ought not to cause people to lose time and money in paying the taxes, because this is just as bad for them as if they paid so much more taxes. In this respect the stamp-duties are very bad taxes, because in many cases it is requisite for a person to take his deeds and other documents to the stamp-office and lose his time, or else employ lawyers and agents to do it for him, who charge considerable fees. So troublesome are some of the stamp-duties that in many cases people neglect to have their agreements stamped, and prefer to trust to the honesty of those they deal with. Such agreements are thus often rendered of no legal value, and the government, for the sake of sixpence or a shilling, practically denies law to the people.
98. Protection and Free Trade.Almost every government has employed taxation at one time or another, for the purpose of encouraging industry within the country. It is often supposed that if purchasers are prevented from buying foreign goods, they will have to buy home-made goods, and thus manufacturers at home will be kept busy, and there will be plenty of employment. This is altogether a fallacy, which we may call thefallacy of Protection, but it is one which readily takes hold of people's minds. No tradesman or manufacturer likes to see himself underbid by those who offer better goods at lower prices. When foreign goods, then, are preferred by purchasers, the home manufacturers of such goods complain bitterly, and join together to persuade people that they are being injured by foreign trade. There is still so much national pride and animosity, that a nation does not like to be told that it is being beaten by foreigners.The manufacturers, misled by their own self-interest, use all kinds of bad arguments to show that if foreign products were kept out of the country, they could make as good ones in a little time, and then they could employ many people, and add to the wealth of the country. They fall, in fact, intothe fallacy of making workbefore described (section 55), and argue as if the purpose of work was to work, and not to enjoy abundant supplies of the necessaries and comforts of life.
Now it is impossible to deny that certain owners of lands and mines and works may be benefited by putting duties upon foreign goods of the kind which they want to produce. Those who are already enjoying the advantage of such improper duties may, of course, be injured when they are removed. But what we have in political economy to look to, is not the selfish interests of any particular class of people, but the good of the whole population. Protectionists overlook two facts—(1) that the object of industry is to make goods abundant and cheap; (2) that it is impossible to import cheap foreign goods without exporting home-made goods of some sort to pay for them.
We have already learnt the obvious truth that wealth is to be increased by producing it in the place most suitable for its production. Now the only sure proof that a place is suitable is the fact that the commodities there produced are cheap and good. If foreign manufacturers can underbid home-producers, this is the best, and in fact the only conclusive proof that the things can be made more cheaply and successfully abroad. But then it may be objected, what is to become of workmen at home, if all our supplies be got from another country. The reply is, that such a state of things could not exist. Foreigners would never think of sending us goods unless we paid for them, either in other goods, or in money. Now, if we pay in goods, workmen will of course be needed to makethose goods; and the more we buy from abroad, the more we shall need of home produce to send in exchange. Thus, the purchase of foreign goods encourages home manufactures in the best possible way, because it encourages just those branches of industry for which the country is most suited, and by which wealth is most abundantly created.
99. The Mercantile Theory.Perhaps, however, it will be objected that our foreign imports will be paid for not in goods but in money; thus the country will be gradually drained of its wealth. This isthe old fallacy of the Mercantile Theory, which was to the effect that a country becomes rich by bringing gold and silver into it. It is an absurd fallacy, because we can get no benefit by accumulating stocks of gold and silver. In fact, to keep precious metals causes a loss of interest upon their value; people who are rich may afford to have costly plate, and the pleasures they derive from it may be worth the interest. But to have more gold, or silver money than is just sufficient to make the ordinary payments of trade causes dead loss of interest. Nor is there any fear that the country will be drained of money entirely. For, if money became scarce, its value would rise according to the laws of supply and demand, and prices of goods would fall; then imports would decrease, and exports increase. It is only a country like Australia or North America, possessing gold or silver mines, which could go on paying money for its imports, and then it is quite right it should do so, the metal being a commodity which can be cheaply produced in the country. Gold and silver must be got out of mines, and therefore a country which buys goods with money must either have such mines, or else get the metal from other countries which possess mines. In no case, then, can we import foreign commodities without producing at home goods of equivalent value to pay for them, and thus we see beyond all doubt that foreign trade isa means of increasing, not decreasing, the activity of industry at home.
100. Is Political Economy a Dismal Science?This is only a Primer, a very brief and elementary account of some parts of political economy, and it is evidently impossible to argue out the subjects of such a science in so small a compass. But the purpose of this little treatise will be fulfilled if those who begin with the primer can be persuaded to go on and study larger works on the science. But even he who has read only thus far must know that political economy is no cold-blooded or dismal science, as people say. Is it a dismal thing to relieve the labourer of his load, or to spread his table with the most nutritious food? No doubt the science is dismal enough so far as it leads us to reflect upon the needless misery existing on every side. It is dismal to think of the hundreds of thousands who lengthen out a weary life in workhouses and prisons and infirmaries. Strikes are dismal; lockouts are dismal; want of employment, bankruptcy, dear bread, famine, are all dismal things. But is it political economy which causes them?Is not our science more truly described as that beneficent one, which, if sufficiently studied, would banish such dismal things, by teaching us to use our powers wisely in relieving the labours and misery of mankind.
END.