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Title: Business Administration: Theory, Practice and Application. [Vol.
1] Business Economics

Editor: Walter D. Moody

Contributor: Oscar P. Austin
Ernest L. Bogart

Editor: Samuel MacClintock

Release date: November 21, 2017 [eBook #56018]
Most recently updated: October 23, 2024

Language: English

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*** START OF THE PROJECT GUTENBERG EBOOK BUSINESS
ADMINISTRATION: THEORY, PRACTICE AND APPLICATION. [VOL.
1] BUSINESS ECONOMICS ***

The Project Gutenberg eBook, Business Administration, by Various, Edited
by Walter D. (Walter Dwight) Moody and Samuel MacClintock

BUSINESS ADMINISTRATION
TEXT BOOKS

Business Economics.
Business Organization and Management.
Advertising and Salesmanship.
Trade and Commerce.
Transportation.
Money, Banking and Insurance.
Investments and Speculation.
Accounting.
Auditing and Cost Accounting.
Business Law and Legal Forms.

BUSINESS ADMINISTRATION
THEORY, PRACTICE AND APPLICATION

Editor-In-Chief

Walter D. Moody
General Manager, the Chicago Association of Commerce,
Author, “Men Who Sell Things.”

Managing Editor

Samuel MacClintock, Ph. D.
Editorial and Educational Director,
La Salle Extension University

This work is especially designed to meet the practical every-day needs of
the
active business man, and contains the fundamental and basic principles
upon which a successful business is founded, conducted and

maintained. To those looking forward to a business
career, this work forms the basis for a
practical and systematic course in
“Business Administration”

PUBLISHED BY
LA SALLE EXTENSION UNIVERSITY
CHICAGO

Copyright, 1910,
LASALLE EXTENSION UNIVERSITY.

BUSINESS ECONOMICS

¶ This treatise has been especially
prepared by E. L. Bogart, Ph. D.,
Associate Professor of Economics,
University of Illinois, and Author of
Economic History of the United States;
Hon. O. P. Austin, Chief of Bureau of
Statistics, Department of Commerce and
Labor; and John Bascom, D. D., LL. D.,
former President University of Wisconsin.
It is supplemented by the writings of
recognized experts in the production,
preservation and distribution of wealth.
The treatment is modern, popular and
authoritative. The volume contains many
timely and practical suggestions which
can be applied with profit to any business.
It is also arranged to serve as a quick
reference work, and includes a complete
table of contents, a comprehensive index
and test questions.
Walter D. Moody,
Editor-in-Chief.

INTRODUCTION TO BUSINESS ADMINISTRATION.

BY WALTER D. MOODY.

General Manager, The Chicago Association of Commerce.
Author of “Men Who Sell Things.”

“The recipe for perpetual ignorance is: Be satisfied with your own
opinion and content with your knowledge.”
Business a This is an era of the greatest commercial activity the world has
contest of wits
ever known. The development of business is one of the
marvels of the new century. A few years ago science, as a
factor in commerce, was little known and less appreciated. The amazing
advantages to business of intellectual attainments were utterly without
recognition. Today, however, business has become a contest in which the
quickest perception wins, thus transforming the counting room into a battle
ground upon which brain matches brain for supremacy and success.
Success— Ah, that enchanting word, S-U-C-C-E-S-S. It does not require
educated a magic key to unlock the door to business efficiency. There is
enthusiasm
nothing mystic, nothing mysterious in the applied method of
the really resourceful men in this day of great successes, of
marvelous achievements in business enterprise. The sum total is contained
in two words, words that electrify, nevertheless. EDUCATED
ENTHUSIASM.
Changing The most formidable barrier to progress has always been the
conditions senseless opposition of those to whom it would be of the
make
opportunities greatest benefit. Changing conditions are the order of the day,
for enlightenment has worked wonders. In olden times, a man
of affairs was obliged to guard his property and his loved ones by building a
moat around his house and posting sentinels in and around his estate. The
time is not long past when, because of prejudice, perversity or ignorance,
many men believed that opportunity knocked only once at any man’s door.

Today, thanks to deeper insight, most men believe that life itself is
opportunity; that the very air we breathe is opportunity; that each new day
presents broader opportunities for accomplishing more because of better
directed energy. This is not alone the accepted dogma of the man who is
making his way in the world. It is the creed, doctrine, tenet or religion,
whichever you may care to term it, of the great captains of industry
everywhere.
New ideas The more successful the man, the more does he think, study,
count plan, as a part of his daily occupation in the development of
the affairs in which he is interested. Newer and better ways to
get things done is the business standard employed today by successful men
in all lines. Only yesterday if a man of genius advanced a new idea, he
found himself ridiculed and his innovation opposed on all sides because it
was a new idea. Today, it is different. The man of ideas counts in the trend
of affairs as he has never counted before.
Must keep step Everything has a subjective reason. Progress is acting as a
with changing mighty dynamic force in changing men’s viewpoint of life and
times
things. Suppose the stroke oar on a varsity crew, while in a
race against an opposing crew from a competitive institution,
should suddenly stop rowing in harmony with his associates and begin to
row backwards—that crew would not get very far without trouble. Suppose
a lawn mower should be reversed and forced to run backwards—there
would not be much progress made in cutting grass on that lawn. Varsity
crews and lawn mowers must move forward. Business men must advance
with the times.
A great merchant in Chicago tells a good story of his youth. He was a
member of a state regiment of militia. On a certain occasion, his company
was sent out on dress parade. An old maiden aunt, with considerable
colonial blood in her veins, took much pride in her nephew and his
company. While reviewing the parade, she was suddenly heard to exclaim:
“Why, every single man in that company is out of step excepting my
nephew.” Most men who fail to get on in the world do not realize that
success lies in keeping step—in making progress with changing conditions.
They generally make the mistake of thinking that the world and everything
in it is out of harmony with themselves.

New ideas A business man of successful experience realizes that ideas—
worth newer and better principles of conducting business—are of the
searching for
greatest value, and he also knows that it pays him to search for
them. The same old way of doing things cannot longer be
successfully employed month after month and year after year as under the
old regime. The business man must be modern, up-to-date. The physician or
lawyer finds that to compete successfully he is compelled to search without
ceasing in order that he may comprehend the advancement in treatments or
procedures. “To the man who fails belong the excuses.”
Demand for President James, of the University of Illinois, was asked if
trained men there was any demand from business houses for college-bred
men. His reply was: “The demand has been far in excess of the
supply since courses in business administration were established in our
institution seven years ago. Each year has brought many more requests than
we have men to recommend.” Ten years ago President James would have
been ridiculed for advancing this new idea for the establishment of a school
of commerce in connection with a university. Today, commercial schools
are a part of the regularly established courses of nearly all of the great
universities of our country. Men trained in the theory, practice and
administration of business will always occupy the best positions and will
always command the greatest salaries.
Value of new All men fail at times in the accomplishment of satisfactory
ideas in results in the various enterprises in which they are engaged,
business
emergencies without being able to give an explanation. The principles that
have been applied successfully for many years seem
apparently to have counted for nothing. It is frequently evident that in such
cases a very insignificant thing, a mere oversight perchance, has been the
direct cause of the failure. To be able to put the finger on the precise cause
of the lack of success in one’s method would locate the cause of the
disaster. Then it is that a real appreciation of new ideas is fully realized.
Men paid for Failure is more often chargeable to a refusal to learn by
what they mistakes how to avoid them than it is in making them.
know—not for
what they do Experience is a good teacher, but who can deny the value to be
gained in learning from the experience of others, for we
cannot all have the same experience or the same view of similar

experiences. There are many pathways to success, but the road of individual
experience is narrow and rugged. It is a commonly accepted fact that for
every ten dollars a high-salaried man draws, he receives nine dollars for
what he knows and one dollar for what he does. On the same basis the
successful business man, employing a large force of other men, realizes that
his own greatest worth, as applied to his affairs, lies not so much in what he
can do himself as how much he can encourage his employes to do. In either
case, his own personal knowledge is the power behind the throne.
Knowledge in The man who would secure the largest net return from his
excess of individual effort in the field of endeavor, and he who would
present needs
necessary realize the greatest possible advantage from the efforts of
those under his command must, of necessity, possess
knowledge—indispensable perception far in excess of the needs of the
moment. Discernment, like a bank account, soon runs out if it is overdrawn
or if it is not continually replenished. In business the “checking system” of
knowledge is the sort of account that pays best—not the “savings account
system.” Knowledge that is simply corked up and allowed to accumulate
cobwebs and rust can avail nothing. The sharpest vinegar is procured by
constantly replenishing the old stock with new.
90% failures Reliable statistics prove that only about ten per cent of all
vs. 10% people who engage in business are successful and make
moneymakers
money; the other ninety per cent become insolvent and fail.
That is, they do not actually encounter the sheriff, or go into
the hands of a receiver, but they fail nevertheless to succeed in the sense of
making money, and what other possible reason can anyone have for
engaging in business if not to accumulate money?
Failures due to Why do so many fail? Ask any credit man and he will tell you
lack of that it is not because of the lack of capital, or other material
intellectual
capacity resources, but it is due primarily to a lack of intellectual
capacity, the sort of brains that dig and work and sweat until
they find a way to accomplish things; brains that go to the bottom of things;
brains that are always looking for better results; brains that never abandon a
problem until they have found a way to solve it. A friend once told me that
he inquired of the manager of a house employing some three hundred
traveling men how many salesmen they had. The manager replied, “Three.”

My friend asked, “How’s that? I am told your force of traveling men
numbers nearly three hundred.” “Ah, that is quite different,” replied the
manager; “we have two hundred and ninety-seven traveling men, but only
three salesmen.” Quite likely that manager’s estimate was intended to be
taken figuratively rather than literally, but it serves to illustrate the fact that
in this great United States there are millions of men, young, middle-aged
and old, who are content to plod along in a mediocre sort of way, heedless
or unmindful of the fact that opportunity, knowledge, possibilities, are
calling, calling, calling to them to come up higher. There are hundreds of
thousands of other men engaged in business who sit idly by while their
trade, like the sands in the hour glass, slowly ebbs away, and eventually is
absorbed by their more progressive business neighbors.
Moneymaking There is still another vast army of business men—salesmen,
and business clerks and wage-earners of all classes—who are beginning to
literature
catch a glimpse of the dawning of a new business era, the
greatest the world has ever known, an era impregnated with
possibilities and opportunities for those who are ready with wicks trimmed
and oil in their lamps. To the earnest latter class which is really desirous of
profiting by the experience of others, there is no need of elaborating the
possibilities embodied in this course of reading in Business Administration.
This set of books, containing valuable business data on many subjects,
thousands of pages telling the story of success illustrated by trained men
whose names are respected everywhere, is intended to reach all classes.
There is absolutely nothing in print that can even approach or can begin to
compare with it in value as a reference library for business men or excel it
as a complete course of instruction for any man desirous of making the best
of his possibilities and opportunities in the kaleidoscopic age through which
the business world is now moving.
Practical ideas The more practical the ideas, the better the basis for good
best work. Not long since, business men generally pooh-poohed
the idea of employing in the conduct of their business
anything new, which was taken from the writings and experience of others,
such as is contained in this remarkable series, contributed to by some of the
brightest minds in the business world today. There is, however, in these
days unmistakably a hungering and thirsting for just this new sort of
literature. It fills a long-felt need—fills it exactly, completely, satisfactorily.

Being the author of a work on salesmanship which has had a countrywide
circulation, I have been literally besieged by business men everywhere
asking me to recommend books treating of successful business methods,
and have been chagrined to find how limited was the supply. The man who
formerly was prejudiced against such sources of information must now step
aside and make way for progress or unite with the popular demand for more
education and better methods.
Cannot afford Show me the man who says he has no patience for such things,
vs. can affordand I will show you a man, like the stroke oar and the lawn
mower, who does not believe in moving forward in progress.
Show me the man who says he has no time to read of new methods and
principles, and I will show you the one who utterly fails to perceive that
familiarity with business literature of this kind means pecuniary
advancement. Show me the man who says he cannot afford to invest in such
a set of books, and I will show you one who apparently CAN afford to
waste his energy in misdirected effort—that energy and effort which are to
every wage-earner and tradesman both his stock in trade and his invested
capital.
Failures Someone has said, “There are three kinds of people in the
unnecessary world—the Can’ts, the Won’ts and the Wills. The first fail at
everything; the second oppose everything; the third succeed at
everything.” I would add a fourth kind—the largest class of all—the Don’t
Trys, the “Oh-what’s-the-use,” “It-doesn’t-interest-me” sort of people. Their
name is legion; their fault is lack of confidence. Knowledge is the greatest
inspiration of confidence to be found on earth. You may not personally be
held in the hope-paralyzing bondage that produces the “Oh-what’s-the-use,”
or “I’m-not-interested” germ, but if you are not, you are exceptional. Most
people are, and that is the reason that such persons are just about what luck,
good fortune or chance make them, succeeding if fortune favors them,
failing if they are left to depend upon their own resources. Result: Nine fail
where one succeeds.
It is very fortunate, indeed, for most men that so much of their happiness
depends upon success. There is nothing on earth quite so terrible to think of
as failure, especially that due to lack of effort, unless possibly it be the
failure of a man who lacks the courage or initiative to try to make the most

of himself, and thus lets his best opportunities escape him. And this last is
really the most pitiful thing that can befall a man. It is well enough to plan
opportunities, but if we had the wisdom to take advantage of such
opportunities as naturally come to us, results would more often be found in
the balance on the right side of the ledger. And so I am of the opinion that a
clear explanation of why a very large class of people do not succeed is
found in some of these expressions—“I don’t care,” “I can’t,” “It doesn’t
interest me,” or “Oh, what’s the use.”
Basis of all One of the great objects set forth in this Business
business Administration series is to supply the positive energy which
success
begets courage, confidence, initiative and success. We want to
make you feel the necessity of doing some reading, a little
plain thinking, and to make as clear as possible the important things that are
involved in the serious but very fine game of business.
With business becoming with each succeeding day more and more of a
science, it is high time to understand what is essential to it. Speaking of the
subject of “Organized Business,” a great authority recently said, “It is time
even for business men to understand business.” Again, the purpose of this
course in Business Administration is, if possible, to measure the power and
principles of business, to trace their ramifications, define their elements, get
hold of their vital fundamentals, and so comprehend them, both in technical
detail and as a mighty unit. And I am confident we have done all this. I find
that at the foundation, the machinery of business is simple, but whether it is
plain or complicated, all who would succeed must make every effort to
comprehend it thoroughly. All I care to emphasize at present is the great
truth that knowledge, established and classified, is the basis of all business
success. This is clearly established in this course of reading, and I am trying
to incite your imagination in writing of its merits just as I would endeavor
to enable you to realize it if I could talk to you personally right across my
desk. The observant man can see clearly the things I am talking about, but
to most men the mind’s eye perceives not by observation, but only when the
imagination is stimulated. So I would stir all men to look earnestly into
these things, with a view to their personal betterment.
Business is far more than business as it is commonly understood. It is a
science, and it is the eager, practical minds of business men that we shall

Business endeavor to convince first of that fact, and our reasons for
axioms simpleaddressing those principally concerned are especially good.
to understand
Why? I have found that in writing about business whenever I
was able to make the principles so plain that business men
understood them, everybody else did, so it is to be expected that if business
axioms can be made simple enough for business men to understand them,
everyone will apprehend them. Everybody. And it is everybody that we are
attempting to reach.
Knowledge is For nearly thirty centuries men have recognized the concrete
power wisdom of Solomon’s proverb: “A wise man is strong; yea, a
man of knowledge increaseth in strength.” Yet we have been
slow in making its application universal to the race. But we are beginning to
understand that the power inherent in knowledge applies as well to
commercial and industrial as to scholastic, political and social life, as well
to the counting room as to the pulpit, as well to the shop as to the university,
as well to the farm as to the bar. Knowledge is power and is the only source
of real intellectual sovereignty that the Creator has ever entrusted to men.
In conclusion, I would say that these words are addressed to the business
men of America, and this designation includes the banker and his clerks, the
farmer and his sons, the lawyer and the law student, the financier and the
man who sells bonds and stocks, the merchant and his clerk, the accountant
and the bookkeeper, the manager and his assistants—the ambitious young
men of the Twentieth Century type, contemplating the pursuit of any
business, trade or occupation.

CONTENTS

BUSINESS ECONOMICS.
Practical Economics.
By Ernest Ludlow Bogart 1
I. The Modern Industrial System— 1
The English Manor—​Institution of Private Property—​Competition
Defined—​Development of Industrial Liberty—​Domestic System of
Industry—​Factory System of Industry—​The State as a Regulator of
Industrial Undertakings.

II. The Agricultural Resources of the United States— 9
The Land Policy of the United States—​Irrigation—​Dry-Farming—​Farm
Ownership—​Decline of the Agricultural Population—​Character of
Agriculture in the United States—​Forest Resources—​Fisheries.

III. The Mineral Resources of the United States— 19
The Problem Connected with our Mineral Resources—​Steps Taken to
Remedy the Evil—​Coal—​Petroleum—​Iron—​Precious Metals—​Copper
—​Water Power and Its Use.

IV. Capitalistic Production— 29
The Rapid Industrial Development and Its Causes—​Factory Defined—​
Division of Labor—​Use of Labor-Saving Machinery—​Specialization
and Localization of Industry—​Large-Scale Production—​System of
Standardization.

V. Trusts and Monopolies— 39
Phases of Combination for Fixing Prices—​Classes of Industrial
Establishments—​The Trust Movement—​Causes and Effects of
Industrial Combinations—​Evils of Combination—​Legislative
Regulation.

VI. Speculation and Crises— 51
Risks of Modern Business—​Function of the Speculator—​Legitimate
and Illegitimate Speculation—​The Occasion of a Crisis—​“Hard
Times”—​Theories as to the Causes of Crises.

VII. The Modern Wage System— 60
Beneficial Results of the Factory System—​Abuses of the Factory
System—​The Existence of a Wage-Earning Class—​The Wage System

—​Historical Systems of Labor—​Modifications of Individualism—​The
Bargain Between the Employer and the Laborer—​Necessity of
Protective Legislation.

VIII. Labor Organizations and Collective Bargaining— 68
Growth of Labor Organizations in the United States—​Knights of Labor
—​American Federation of Labor—​Objects and Methods of Labor
Organizations—​Restrictions Limiting the Output of Labor—​Collective
Bargaining—​Boards of Conciliation and Arbitration.

IX. Women and Children at Work— 80
Evils of Early Factory System—​Expansion of Woman Labor—​Why
Women are Paid Lower Wages than Men—​Desirability of Employment
of Women—​Child Labor—​Labor Legislation.

X. Unemployment and Insurance— 90
Number of Unemployed in Modern Industry—​Classification of the
Unemployed—​Causes of Unemployment—​Insurance against Accident,
Sickness and Old Age in the United States; in Germany.

XI. Machinery and Industrial Efficiency— 101
Evils of Machinery—​Labor’s Complaint against Machinery—​Industrial
Education in Germany; in England; in the United States—​Aids to
Industrial Development in the United States.

XII. Profit-Sharing and Co-Operation— 110
Methods of Profit-Sharing—​Economic Theory of Profit-Sharing—​
Objections against Profit-Sharing—​Experiments in Profit-Sharing—​Co-
Operation—​The Rochdale Society—​Producers’ Co-Operation—​
Advantages and Defects of Co-Operation.

XIII. Problems of Distribution— 119
Functional Distribution—​Personal Distribution—​Forms of Distribution
Proposed—​Questions Connected with Functional Distribution; with
Personal Distribution.

XIV. Saving and Spending— 127
Expenditures for Different Purposes—​Relation Between Saving and
Spending—​Desirability of Work for its Own Sake—​Problem of Luxury
—​Economy in Consumption—​Economic Evils of Intemperance.

XV. Money and Banking— 137
What Determines the Value of Money—​Bimetallism—​Monometallism
—​Government Paper Money—​Kinds of Money in the United States—​
Problems of the Banking System of the United States.

XVI. Transportation and Communication— 145

Consolidation in the Railroad World—​Question of Railroad Rates—​The
Public Nature of Railroads—​Ownership of Railroads—​Electric
Interurban Railways—​Express Companies—​The Telephone—​The
Telegraph—​Inland and Ocean Water Transportation—​Our Canal
System—​Our Merchant Marine.

XVII. Taxation and Tariff— 154
Consequences of Taxation—​Adam Smith’s Rules of Taxation—​
Problems of Taxation—​Sources of Revenue in the United States—​The
General Property Tax—​Inheritance Taxes—​The Question of the Tariff.

XVIII. The Functions of Government— 163
Functions of a Modern State—​Anarchism—​Individualism—​Modified
Individualism—​Culture State Theory—​State Socialism—​Socialism—​
Municipalization of Local Public Utilities.

XIX. Economic Progress— 172
Improvement in Rate of Wages and Hours or Labor—​Advances in the
Field of Production—​Reasons Why Labor has not Profited More by the
Great Increase in Wealth—​Reduction in the Cost of Semi-Luxuries—​
Lines Along Which Reform is Needed.

Manufacturing.
By O. P. Austin 179
Introduction— 179
The Hand Method of Manufacturing—​The Factory Method—​Chief
Producers by each Method—​Exchanges of the World—​Relation of
Development of Manufactures to Commerce.

I. Modern Manufacturing Systems of the World— 185
Their Development During the Last Two Centuries—​The Waterfall as a
Source of Power—​Development of Steam Power—​Enlargement of the
Use of Machinery Following the Application of Power—​The Factory
Town—​Results of the Application of Steam Power to Transportation—​
Electricity as an Aid in Manufacturing.

II. The Use of Machinery in Manufacturing— 193
The Spinning Wheel—​The Loom—​Kay’s Flying Shuttle—​Hargreave’s
Spinning Jenny—​Arkwright’s Water Frame—​Crompton’s Spinning
Mule—​Machinery in the Iron and Steel Industry—​Growth in
Manufacturing Following the Application of Machinery to the Leading
Industries—​Effect of Machinery upon the Employment of Men—​Effect
upon Employment of Capital—​Effect upon Prices of Labor, of Raw
Materials, of Finished Products—​Effect upon Commerce—​Effect upon
the Quality of Manufactures Produced.

III. Development of the Factory System— 203

Growth of the Factory System in England—​Causes of the Recent
Growth of the Manufacturing Industries in the United States—​Estimates
of the Value of Manufactures in the Principal Countries of the World—​
Net and Gross Valuations of Manufactures in the United States.

IV. Capital in Manufacturing— 214
Capital a Growing Factor in Manufacturing Industries—​Manufacturing
in Great Establishments and under Expert Management a Favorite
Investment for Capital—​Effect of Increase in Gold Production—​
Investments of Capital and Use of Machinery Increase more Rapidly
than Employment of Labor—​United States Statistics of Investment and
Production Superior to those of Other Countries.

V. Trusts and Combinations— 222
Reasons for Co-Operation—​The Pooling System—​The Company—​The
Corporation—​Trusts and Other Combinations—​Causes of the
Transformation from the Company and the Corporation to the Trust—​
Effect of Trusts upon Production, Prices, Wages and Employment.

VI. The Iron and Steel Industry— 230
Pig Iron the Basis of all Iron and Steel Manufacturing—​Pig Iron
Production of the World in 1800 Compared with 1907—​Fall in Prices of
Iron and Steel a Result of the Application of Modern Methods of
Manufacture—​History of Iron Manufacture; Development in England
and Germany—​History of Iron-Making in the United States—​
Transformation from the Charcoal Method to that of Coal and Coke—​
The Earlier Methods of Manufacturing Steel Contrasted with those of
Today—​Rival Claims of the English and the American Inventors,
Bessemer and Kelly, to the Modern System of Steel Manufacturing—​
Description of the Process of Manufacturing Steel under American
Methods—​The Use of Powerful Machinery and Lessening Proportion
of Work Performed by Man Power—​The Railway and Steamship in
Relation to the Steel Industry—​Great Combinations of Iron and Steel
Manufacturers—​Description of the Process of Transforming Iron into
Steel by the Bessemer Process.

VII. The Textile Industry— 247
Growth of the Textile Industry from the Hand Industries to Use of
Machinery and the Factory System—​Great Britain, the Greatest Cotton
Manufacturing Country of the World in Proportion to Population—​The
United States the World’s Greatest Producer of Raw Cotton—​Contrast
of Manufacturing Methods in the United States and Europe—​Great
Britain the World’s Principal Cotton Manufacturer for Exportation—​
The United States a Large Manufacturer but Chiefly for her Own People
—​Light Grades of Cotton Manufactured in Europe—​History of the
Textile Industry—​Description of the Manufacture of Textiles—​Cotton
Manufacturing has Outgrown that of Other Textiles—​History of its
Manufacture in India, in Asia Minor, in America, and, in Recent Years,
in Japan—​Other Oriental Countries Manufacture by the Hand Processes

—​Growth of the Use of Machinery in Cotton Manufacturing, from the
Spinning Wheel and Spinning Jenny to Modern Machine Methods—​
The Textile Industry of the United States.

VIII. The Manufacturing Industries of the United States— 263
The United States the World’s Greatest Manufacturer—​Its System
Developed More Recently than that of Europe—​Has Utilized Modern
Methods in Combination with Large Sums of Capital—​The United
States the Only Nation Taking a Census of Manufactures—​The Gross
and Net Value of Manufactures as Reported by the Census—​Relation of
the Gross and Net Figures to Those of Other Countries—​Acceptance of
the Lowest Estimate of Manufactures in the United States Places her
Products Far in Excess of Those of any Other Nation—​Growth of
Manufacturing has Outgrown Consuming Power of the People and
Resulted in Rapid Growth in Exportation—​Manufactures Form a
Growing Share of Exports—​Principal Manufactured Articles Exported
and Principal Countries to which Sent.

IX. Statistics of Manufacturing— 289
Production of Manufacturers’ Materials—​Development of
Transportation Facilities—​Distribution of Manufactures—​World’s
Production of Gold, 1492 to 1908—​Enlargement of Capital Invested in
Manufacturing—​The Various Classes of Manufactures Produced in the
United States—​The Value of Each Group at Recurring Censuses from
1880 to 1905—​Distribution of the Manufacturing Industries in the
Various Sections of the United States—​Share which Manufactures Form
in the Imports and Exports of the United States—​Share which
Manufactures Form in the Imports and Exports of the Principal
Countries of Europe—​Estimated Value of Manufactures Produced in the
Principal Countries of the World, 1780 to 1905—​Commerce of the
World, 1780 to 1905—​Number of Persons Engaged in the Principal
Manufacturing Industries of the United States—​Cotton Spindles of the
World—​Cotton Production of the World—​Growth of Population,
Commerce, Transportation Facilities, and in Production of Certain
Articles Required in Manufacturing, 1800 to 1908.

Concrete and Steel.
By J. F. Springer 322
Chemistry and the Industries.
By Benjamin Ball Freud
341
The Close Relation of the Producer-Gas Power Plant to the Conservation of our
Fuel Resources.
By Robert Heywood Fernald 352
Efficiency in Shop Operations.
By H. F. Stimpson
370

The Bridge Between Labor and Capital.
By John Mitchell 380
The Unemployed.
By John Bascom
384
Quiz Questions 403

PRACTICAL ECONOMICS.
BY ERNEST LUDLOW BOGART, Ph. D.
[Born Yonkers, N. Y., 1870; A. B., A. M., Princeton University, 1890, 1896; Ph. D., University of
Halle, 1897; Graduate Student, University of Halle, 1894, 1896-7, University of Berlin, 1894-5,
Princeton University (Fellow), 1895-6, Columbia University, 1897-8. Assistant Professor Economics
and Social Science, Indiana University, 1898-1900; Professor Economics and Sociology, Oberlin
College, 1900-1905; Assistant Professor Economics, History and Politics, Princeton University,
1905-9; Associate Professor Economics, University of Illinois, 1909. Author of Economic History of
the United States (Longmans Green & Co., 3rd edition, 1909), and several monographs and
periodical articles.]

INTRODUCTION.

In the preparation of this text the author has endeavored to apply the
principles of economic science to some of the more important problems of
the modern industrial world, and especially those now confronting the
people of the United States. He has attempted in doing this above all to
make the text practical. The student or teacher of economics will recognize
at once that the sections are arranged into groups corresponding with the
traditional divisions of economic text-books into production and
distribution (land, capital and organization, and labor), consumption,
exchange, and the relation of the government to the individual. It is hoped
that the text may not be without profit and interest to the general reader as
well as the students of the La Salle Extension University.

I. THE MODERN INDUSTRIAL SYSTEM.

We shall probably get the clearest idea of the complexity of our modern
industrial society if we contrast it briefly with the simpler state of social
organization which preceded it. For this purpose we may take the English
manor of the eleventh century. At that time England was a purely
agricultural country, and the whole country was divided into manors, of
which the lord was regarded as the owner, under feudal conditions, while
those who cultivated the land were his tenants. These tenants—villeins and
cotters—worked on the lord’s land two or three days in the week, and the
rest of the time cultivated their own holdings. The whole of the land of the
manor, both that of the lord and that of the tenants, was cultivated on an
elaborate system of joint labor. The land was divided into strips of about
half an acre each, and a man’s holding might consist of a dozen or more of
these strips scattered about in different parts of the manor. This was done in
order to secure equality in the fertility and location of each man’s land. At
that time the prevailing method of agriculture was known as the three-field
system, in which one field, comprising about one-third of the manor and
containing a portion of the scattered strips of the lord and every tenant, was
planted with wheat, a second field comprising another third of the
cultivated land was planted with barley or oats, while the third field was left
fallow. The second year saw the second stage of this three-year rotation,
one-third of the manor lying fallow each year to recuperate from this
exhausting method of cropping; artificial manures were unknown.
Now the significant characteristics of such a manorial society were three.
First, it was economically self-sufficient, that is, practically everything that
was needed or was consumed on the manor was produced there. There was
no need of intercourse with the outside world and there was little contact
with it. Salt, iron, and millstones were almost the only things that the
inhabitants of such a manor had to buy from outsiders. Consequently there
was no production of goods for a market, little money, and almost no trade.
The few things that were purchased were paid for at prices fixed by custom.
Secondly, agriculture was carried on under a system of joint labor, and

under customary methods which did not change from generation to
generation. It is clear that as long as all the land of the manor was thrown
together, for purposes of cultivation, into fields on which were planted
wheat or barley or which lay fallow, no one individual could cultivate his
land differently from his neighbors. Indeed, the holdings of the different
tenants were not even separated by fences, but only by ridges of grass. On
the land which lay fallow the cattle were turned out to graze; if any man had
attempted to plant a new crop the third year, his neighbors’ cattle would
have devoured it under such a system. Production was regulated absolutely
by custom, and no opportunity was given for the development of the
inventiveness or initiative of the progressive individual. Thirdly, the tenants
were personally unfree, that is, they did not have the liberty of moving
freely from place to place, but were bound to the soil which they cultivated.
A man could not freely choose either his occupation or his residence. There
was no mobility or freedom of movement. Labor was wholly or partly
compulsory, and on terms rigidly fixed by custom or by superior authority.
Such a society differs from that of today in almost every point, and offers a
startling proof of how far we have progressed in the past eight or nine
hundred years. For many of these characteristics, however, we do not need
to go back to the English mediaeval manor; the plantation of the South two
generations ago, with its system of slave labor, furnishes an illustration
more familiar to most of us. With such a condition of industrial
development we may now profitably contrast our own of the twentieth
century. The chief characteristics of the modern industrial system are the
institutions of private property, of competition, and of personal liberty.
The institution of private property is so familiar to us and so fundamental in
modern economic life, that we commonly regard it as a natural right.
Nevertheless, private property, like most other economic institutions, is the
result of a long evolution. Primitive man can hardly have had the
conception of private property, and when it did begin to emerge, it was at
first confined to movables. Indeed we may say that on the mediaeval
English manor the private ownership of land did not yet exist in the modern
sense. It was found however that, when each cultivator was permitted to
fence in his holding and to call it his own, he cultivated it much more
carefully and produced much more. Inclosure led to private property in land
and to individual freedom in its use. Today in the United States the

possession and transfer of landed property is almost as easy as that of
movables. Private property must be justified on the ground of social utility,
because under this method of control so much more is produced than under
any system of commercial ownership yet tried. But there are not wanting
objectors who contend that limits should be placed upon this institution, and
that the right of use, of bequest, and possibly of unlimited acquisition
should be brought under social control. The beneficence of private property
turns largely upon the existence of competition and individual liberty and to
these we must now turn.
Competition is defined as “the act of seeking or endeavoring to gain what
another is endeavoring to gain at the same time.” But competition in
modern industrial life is not merely a struggle to appropriate an existing
good. The very contest, as over the control of a market, may and probably
will lead to cheaper and larger production, and thus to the benefit of society.
Competition is a selective process in our modern economic society, and
through it we have the survival of the fittest. “Competition,” so runs the
proverb, “is the soul of trade.” There is, to be sure, a dark side to the
picture, for economic competition involves the defeat of the weaker party,
but this does not necessarily mean his destruction, for his very failure may
sharpen his faculties and secure his ultimate success, or at worst he may
find employment under his successful rival. But here again it is being urged
that competition is brutal and that we should go back to the mediaeval
method of regulation by custom, or resort to combination and monopoly.
We are now witnessing experiments in both directions, but competition still
remains the controlling force of modern economic society, and bids fair to
continue so. It should however be the function of society to raise the ethical
level of competition.
Industrial liberty has been developed even more slowly and painfully than
the institution of private property, and has in some instances not yet been
wholly won. Slavery and serfdom have given way before the higher and
more beneficent conception of freedom or liberty. We believe today that a
man generally knows what is best for him and will utilize his opportunities
to the best advantage; that by giving him a maximum of freedom the
welfare of society will at the same time be best promoted. Consequently, in
our modern industrial society, a man is given not only social and religious
liberty, but is free to move, to choose his occupation, to produce and to

trade, to associate with his fellows, and to expend his income as he will. But
here again, while the prevailing rule is liberty, society has found it
necessary to lay restrictions upon the abuse of this liberty. It is not enough
even to regard the industrial world as a great game in which each may act as
he pleases provided only he observes the rules of the game. A higher
conception of responsibility and duty must accompany freedom of action if
we are to secure the best results.
The term “industrial society” has already been frequently used and needs a
somewhat fuller explanation. About the year 1760 there took place in
England what is usually called the Industrial Revolution. A number of
inventions were made which rendered it possible to use steam-driven
machinery in the manufacture, first of textile and then of other goods.
Manufactures were removed from the home, where they had hitherto been
carried on, to the factory. Capital began to be used in large masses,
machinery displaced hand tools, and the laborer ceased to own the
implements with which he worked. Men, machines, and capital were
massed in the factory and organized under the management of a new set of
industrial organizers for the purpose of producing goods for a world market.
The development of such an industrial society has been attended by the
minute division of labor, by a growing separation of classes, by
concentration of the population in urban centers, by the increasing cost and
complexity of machinery, by the development of improved methods of
transportation and of credit, by the combination of labor and of capital, by
the enormous increase of production, and by the growing concentration of
wealth.
The introduction of power manufacture completely revolutionized industry.
The independent workman with his own tools was superseded by the
factory, the small producer has given way in turn to the trust. With the
introduction of expensive machinery it became necessary to organize
capital on a large scale. Corporations with limited liability were organized
for the manufacture of goods, the exploitation of mines, the building of
railroads, and the carrying on of trade. As methods of production improved
industry became more and more concentrated, and finally huge trusts took
over the operation of combined plants. The business unit has grown
increasingly larger, and the need and power of capital have become
increasingly important. Capital has played a role of growing significance

and has become more and more powerful in modern economic life. Indeed
the name “capitalistic production” has been applied to modern industry
because of the predominant importance of capital in all lines of wealth
production. Impersonal, growing by sheer force of its own momentum,
capital is often thought of as intensely selfish and even cruel. Abuses which
have arisen in the development of modern capitalistic industry must be
remedied, but attacks upon capital itself are misguided and rest upon a
mistaken analysis of methods of production.
Before the introduction of the factory system, under the so-called
“domestic” system of industry, the laborer carried on his work in his own
home, where he provided the raw material, owned his own tools, furnished
the motive power—his muscles—and was his own master. Today every one
of these conditions is changed—the work is carried on in the factory, the
raw material, the tools, the motive power are all provided by the capitalist,
the laborer contributing only his own more or less skilled labor, while the
conditions under which he carries on his work are largely determined for
him. He is no longer his own master. To protect himself against the growing
power of capital the worker has organized with his fellows into trade
unions. These seek to meet the monopolistic power of capital by exerting a
monopolistic control over labor. While they realize that modern productive
processes cannot be carried on without capital, they also insist that labor is
equally essential. They claim that capital has received more than its fair
share of their joint production and has exploited labor; consequently they
insist that labor must now demand its just reward and enforce the claim by
strikes and by raising wages. To enforce their monopoly, the policy of the
closed shop is often enforced. The interests of capital and labor have thus
often been made to appear antagonistic instead of complementary to one
another. Frequently in their struggles the interests of the consumer have
been entirely lost sight of.
These conflicts in the productive processes of modern economic society
have led many people to look to the state as the regulator of industry and to
invoke state aid or state interference along many lines. Maladjustments in
the labor contract, mistaken production, leading perhaps to speculation and
financial panics, abuses of power by corporate interests, discriminations by
railroads, and similar irregularities are made the excuse for an appeal to
state authority. Some would even go so far as to have the state take over and

manage all productive enterprises; but socialism is as yet a protest rather
than a constructive force. In the last analysis the state is the regulator of all
industrial undertakings, for they all concern society. The state must hold the
balance even and see that fair play is given to all groups and all classes; but
the greatest amount of freedom compatible with economic justice must be
sought for. It is a difficult question how far the state must interfere in the
conduct or management of industrial enterprises in order to secure social
justice. There is a decided tendency at present to a strengthening of the
regulative power of the state for the protection of the weaker classes of
society. And yet on the whole the institution of private property, free
competition, and a maximum of individual liberty remain the fundamental
conditions of our economic life.
But while under the system of individualism, industrial activities have been
multiplied, wealth has been enormously increased, and human progress has
been greatly advanced, many abuses and evils still remain. Many practical
economic problems still await solution. Some of these have already been
suggested in the preceding paragraphs; others remain to be presented. It is
the purpose of this text to apply to some of the more important practical
current problems of our modern industrial life the principles of economic
science, and to endeavor to reach fair and just conclusions on controverted
points.

II. THE AGRICULTURAL RESOURCES OF THE UNITED STATES.

The land area of the United States, exclusive of Alaska and our island
possessions, is a little less than 3,000,000 square miles, or an area
somewhat less than the whole of Europe (3,700,000 square miles). Of this
about 840,000 square miles, or a little more than one-fourth, still remains in
the possession of the Federal Government and constitutes the public
domain. The rest belonged to the original thirteen states, has been given to
railways or to the states for educational purposes, or has been sold and
given away to individual settlers. The policy of the Government in the
disposition of the public domain has, on the whole, been to place it as
rapidly as possible in the hands of cultivators, and also to use it as a fund to
promote internal improvements and education. About 200,000,000 acres
had been granted to railroads down to 1871, at which time land grants were
discontinued, to secure their early construction. This policy has often been
bitterly condemned, and it has been contended that the land should have
been saved for actual settlers. It may however be said that without such
grants the railroads would not have been built at as early a date as they
actually were, and that without railroads the land was practically worthless,
as it was too far removed from any navigable waterway to have access to a
market. Moreover, the Federal Treasury lost nothing, for the sections of
land alternating with those granted to the railroads were sold to settlers for
$2.50 an acre instead of $1.25, the customary price for the public lands.
The grants of land for educational purposes have been generally approved.
Upon such grants rests the establishment of our state agricultural colleges.
The unique and characteristic feature of the land policy of the United States
has been the granting of land to the settler upon actual residence and
cultivation for five years. Such a grant of 160 acres is called a “homestead,”
and since 1862 has been made to any citizen who is the head of a family or
above the age of twenty-one years. In this way over 230,000,000 acres have
been placed without cost in the possession of the actual cultivators. The
newer public land states are peopled by proprietors, and there has never

grown up in the United States a large class of rich land owners whose land
is cultivated by a tenant peasant class, such as exists in England and parts of
Europe. For this we must thank not only our land policy, but also the vast
extent of unoccupied land that might be had almost for the asking.
Now, however, the public lands available for agriculture have been
exhausted; practically all that remains is situated in the arid zone, and needs
systematic irrigation before it can be made available for any use except that
of grazing. There are still about 100,000,000 acres of choice land in Indian
reservations, and as a consequence of the pressure upon this resource and
also because of the unwisdom of the old reservation system, the policy has
now been adopted of dividing these lands among the Indians in individual
ownership, under careful safeguards, and of assimilating the Indians to the
rest of the population.
The exhaustion of the fertile and well-watered lands of the Mississippi
Valley has forced the later comers to have recourse to the arid soils in the
almost rainless region west of the one hundredth meridian of longitude. The
character of farming under such climatic conditions must of necessity be
very different from what it is in the rainy districts, and the versatility and
adaptability of the American farmer is well illustrated by the development
which has taken place there. The first effort at the solution of the problem
was in irrigation, a method which had been early practised by the Pueblo
Indians, and later and most successfully by the Mormon settlers in Utah. By
1900, according to the census, 7,539,545 acres were under irrigation. While
most of the work up to that time had been done by private initiative, a
demand arose for irrigation at government expense, in response to which
Congress in 1902 provided for the building of irrigation works out of the
proceeds of the sales of public lands. Regulation and conservation of the
limited water supply by governmental authority, either state or national, is
indeed essential to the success of irrigation and will probably be the policy
of the future.
A second and even more interesting development of American agriculture is
the so-called dry-farming which is being successfully introduced into the
semi-arid regions. Carefully selected seeds and plants of crops especially
adapted to these climatic conditions are used, and then a very careful and
intensive method of tillage is followed. The soil is plowed deep and

thoroughly pulverized so that the roots can strike down to the deeper levels
and absorb all the moisture available. Extraordinary results have already
been attained, and the region that the older geographies labeled “The Great
American Desert” bids fair to become one of the most flourishing districts
in the country.
That part of the area of the United States which has already been reduced to
private ownership is divided into 5,700,000 farms. As almost half of the
land in these farms is uncultivated, being forest, waste land, or pasture, it is
evident that there is still room for a great increase in the agricultural
production of the United States without bringing additional land into the
field. The average size of these farms is 146 acres, which looms large
indeed when compared with the 20-acre farms of France and the 60-acre
farms of Great Britain. The difference is of course due to the difference in
the methods of agriculture and the character of the crops, the European
conditions demanding intensive cultivation while our methods are still
largely extensive.
A more important question even than the number and size of farms, from an
economic point of view, is that of ownership. In 1880, when for the first
time the federal census collected the statistics of farm tenure, the gratifying
result was announced that three-quarters (74.5 per cent) of the farms in the
United States were cultivated by their owners. The last census however
showed that the proportion had fallen to 64.7 per cent in 1900, and alarm
has been expressed that our democratic conditions of land ownership are
giving way to a system of tenantry, that the ownership of our farms is being
concentrated in fewer hands, and that methods of large-scale production in
agriculture are crushing out the independent farmer as effectively as they
have crowded out the small manufacturer and retailer in other fields.
Correctly interpreted, however, the statistics seem to indicate that the
growth of the tenant class marks the endeavor of farm laborers and farmers’
sons to establish themselves as independent farmers rather than the fall of
former owners to the rank of tenants. The great majority of the young men
are laborers, the majority of those in middle life are tenants, while the older
men are for the most part owners of farms. There seems to be a healthy
progress upward in the advancement of wage laborers and farmers’
children, first to tenancy, and finally, with increased ability and capital, to

farm ownership. Moreover most of the rented farms are hired by negroes,
the change in whose status from slave to tenant marks a great advance.
Another change in our farming population that has been viewed with
considerable misgiving is the movement from the farm to the city and the
decline in the proportion of the agricultural population to the whole. Indeed
the change has been startling, as the United States has passed from a
primitive agricultural stage of development to a highly organized
manufacturing and commercial stage. From 86.3 per cent of the population
in 1820 the percentage of those engaged in agriculture fell steadily until it
reached 35.7 per cent in 1900. Many persons have thought that such a
movement indicated the desertion of our farms owing to the greater
attraction of the cities, and the disappearance of a healthy agricultural
population. It has indicated rather a great improvement in the arts of
agriculture, whereby one person today, working with improved machinery
and better knowledge, can produce nearly three times as much as his
grandfather did. The labor set free has gone to the cities—cities of over
8,000 inhabitants now contain one-third of our population as compared with
one-thirtieth one hundred years ago—and there produces the thousand and
one things which contribute to our modern well-being. A smaller number
can now raise all the food necessary to feed the population; that the rest are
free to do other things must certainly be counted again, though the
conditions under which work in the factory and life in the city are at present
constructed leave much to be desired.
Writing about 1865 an eminent English traveler, Sir S. Morton Pets,
apologized for calling the United States an agricultural country; today he
would be spared this worry, for the Census of 1900 gave the net value of
products of the farm as $3,764,000,000 and of pure manufactures as
$5,981,000,000. Indeed since 1890 the value of the manufactures of the
country has been larger than of the farm products, and the United States
now ranks as one of the leading manufacturing nations of the world.
Nevertheless the value and amount of the agricultural products are
stupendous; the United States leads all countries in the production of dairy
products, corn, and wheat, and the greater part of the lumber, meats,
tobacco, and cotton which enter into the world’s trade come from her
forests and fields.

While the territory of the United States is well adapted by nature to the
cultivation of a great variety of agricultural products, as a matter of fact
only four branches of agriculture showed a total product in 1900 of more
than one million dollars. These were the raising of live stock, and the
production of hay and grain, cotton, and dairy produce. The regional
distribution of these products was fairly well marked, over half of the live
stock and of the hay and grain farms being situated in the North Central
States, nearly half of the dairy farms being located in the North Atlantic
division, while practically all the cotton is confined to the southern zone;
the same may also be said of tobacco and sugar. The semi-arid region of the
West is given over almost exclusively to stock-raising. Iowa and Illinois
lead as agricultural states.
The character of agriculture in the United States, as in all new countries, has
hitherto been extensive, that is, a small amount of labor and capital has been
applied to a relatively large amount of land, and only the cream of the soil
has been skimmed off, as it were. Where labor is dear and land is cheap this
is the most economical method for the farmer; and, although European
critics have severely criticized our system of “earth butchery,” whereby the
fertility of the soil has been exhausted by constant cropping, with no effort
to restore the exhausted properties by fertilizing, the practice has been
justified by the conditions which produced it. Already the practical
exhaustion of the free public domain has had the effect of raising the price
of lands in the Middle West, and this in turn will cause a more careful and
intensive system of cultivation. In other words, as our social and industrial
conditions approach those of Europe more closely, we may expect our
agricultural methods to do so also. One of the most serious practical
problems now confronting the American farmer is the change from the old,
wasteful, extensive methods to the new, careful, intensive methods of
farming. Those who cannot make the change will complain of the
unprofitableness of agriculture, but to those who successfully meet the new
conditions the future offers much greater rewards than even the era of free
land could produce.
It has been said that the year 1887 marked the beginning of a new stage of
development in American agriculture—that of reorganization—because in
that year Congress passed the Experiment Station Act. This marked the
application of the principles of experimental science to agriculture on a

more comprehensive and systematic scale than had ever been attempted
before. Stimulated by the increased activity of the government experiment
stations, the agricultural colleges have expanded their work. They are
offering practical courses to the farmers, and in co-operation with the
railroads, some of them have recently been sending out special lecturers,
with moving laboratories, to bring the teachings of science as close home to
the producers as possible. Finally, the wonderful work being done by
Burbank and others in selecting and crossing, by travelers for the federal
Agricultural Department in securing plants from all over the world suited to
our varied climatic conditions, and by the experiment stations and
agricultural colleges in spreading the new knowledge among the farmers
and putting it into actual practice—all these departures promise to
revolutionize agriculture, and to make it, as one writer has said, a learned
profession.
The production of cereals is the most important branch of agriculture,
comprising corn, wheat, oats, barley, rye, buckwheat, and rice. Since the
building of the trunk railroads, by which the western territory was given
access to a market, the progress of cereal production has been extremely
rapid, nor does there seem to be any observable slackening. With the
introduction of improved varieties of spring wheat, cereal production is
being pushed further up into British Canada and our own Northwest. The
center of cereal production has moved steadily westward, from eastern
Indiana in 1860 to eastern Iowa in 1900. With the practical exhaustion of
unoccupied land suitable for grain-raising in the United States, it is clear
that the future extension of the industry depends rather upon improvements
in the methods of agriculture than upon the addition of new lands. The very
practical problem here presented to the American farmer if he wishes to
maintain his supremacy in the world’s markets is being nobly and
successfully met by the agricultural experiment stations. They are teaching
the farmer how to increase his yield of wheat, for example, by scientific
seed selection and more careful methods of tillage, from an average of 12.5
bushels per acre for the whole country in 1900 to treble that amount.
Of the separate crops corn is by far the most important, representing 60 per
cent of the total value of all cereals produced in 1900. Most of the corn is
fed to stock throughout the so-called “corn belt” and comes to market in the
form of pork and beef. Although corn is very nutritious and is a favorite

article of diet in this country in various forms, astonishingly little of it is
exported. The development of a foreign market still awaits the enterprise of
the American farmer and food manufacturer.
The production of live stock is essentially a frontier industry, and while it
will probably always be carried on in the semi-arid grazing districts of the
West, which can be reclaimed for agriculture only at considerable expense,
it already shows a relative decline. Owing to the great growth of the
population the domestic demand now consumes almost all the meat
produced and the exports are declining. This is one of the reasons for the
recent rise in the price of meat. The industry is extensive. Quite the opposite
is true of the dairy industry, which is intensive, being carried on for the
most part in the vicinity of large cities where land is expensive. The
changing character of agriculture and the fact that it is itself a business
enterprise demanding a knowledge of market conditions and business
methods is well illustrated by the nature of the dairy industry. Dairies are
inspected and must conform to certain standards, the milk must be sterilized
and shipped, often by special trains, to the cities. Over a third of the butter
and practically all of the cheese is now made in factories instead of on the
farm, so that it is a question whether the latter at least should not be
classified as a product of manufacture rather than of agriculture.
Of the last of the four important branches of agriculture, namely cotton-
raising, there is not so much to be said. Owing to the intensive nature of its
cultivation, machinery has never been applied on a large scale to its
production, as was done in the case of hay and grain. The wasteful methods
that prevailed before the Civil War in the South have been largely corrected,
and the tendency to sterility of the soil has been met by the increased use of
fertilizers. The statistics of cotton crops for the past thirty years do not
indicate any decrease in productiveness, and show that the point of
diminishing returns has not yet been reached. A peculiar and interesting
feature about cotton production is that it is largely in the hands of tenants.
The old slave plantations of the South have been broken up into small
holdings and many of these are operated by tenants, negroes and whites,
who are too poor or too improvident to buy the land outright. The main
problems connected with cotton culture are labor problems; and the
question has often been anxiously asked whether the free negro will
produce as much as the former slave. This can now be confidently answered

in the affirmative, though it yet remains to be seen whether he can be made
as efficient a producer as his white competitor. Upon the answer to that
question depends not merely the future of cotton production, but the
economic salvation of the negro himself. The constantly expanding use of
cotton goods assures a brilliant future to the cotton-growing states of the
South, for not merely is there an assured market in America and Europe, but
the primitive peoples of Asia and Africa may be depended upon to absorb
increasing quantities of cotton fabrics.
Hand in hand with the heedless extensive methods of agriculture in the past
went wasteful use and even destruction of our forest resources. The annual
cut of lumber in the United States is today about forty billion feet board
measure; at this rate of consumption it is estimated that the present
available supply will last only 35 to 50 years. It will doubtless surprise most
readers to learn that about three-quarters of the annual wood cut is
consumed as fuel, probably half of our population still depending upon
wood instead of coal for fuel. The rapid exhaustion of our forest supplies,
with the attendant effects upon moisture, floods, etc., has brought the
question of forest preservation to the front as a practical economic problem.
We have been squandering the heritage of our children and efforts are now
being made to repair some of the loss before we are declared bankrupt. In
1898 the Federal Government began practical work in the introduction of
forestry; this received a great stimulus in 1905 when the care of the national
forest reserves, embracing over 60,000,000 acres, was put under the control
of the Forest Service. Over 150 trained foresters are employed, who manage
the forests on the public lands and co-operate with private owners in the
introduction of scientific forestry. Several states have taken up the
movement, and there is every indication that scientific methods of culture
such as prevail in Prussia and other European states, will supplant our
destructive denudation of the land. That it is high time to devote attention to
the better conservation of this natural resource is made evident by the high
and increasing price of lumber.
There is one other natural resource the conditions of whose supply resemble
those of forestry and of agriculture in general; this is the fisheries. With
careful use, providing for depreciation, and restoring the elements
destroyed, all of these should prove inexhaustible and should continue to
furnish man with food and lumber for all time. But as in the case of the

other two industries, so with the fisheries, we have been using up our
capital and declaring enormous dividends at the expense of the future. The
value of the annual catch of fish is $40,000,000, which is exceeded only by
that of Great Britain. The problem of the better conservation of this
resource has been taken in hand by the Federal Government, through the
Fish Commission, and much has been done to repair our early prodigality
by restocking lakes and streams with fish. More stringent fish and game
laws have also been passed by most of the states, designed to prevent the
extermination of the supply.

III. THE MINERAL RESOURCES OF THE UNITED STATES.

The natural resources of any country may be divided into two broad groups,
which call for different treatment and give rise to very different problems.
There are, on the one hand, resources which are exhaustible but which can
be restored again; and on the other, resources which, once exhausted, can
never be replaced again by human agency. Under the first head come the
soil, the forests, the fisheries, and even the water power, for all of these can
be made to yield steady returns to man for thousands of years, if used
intelligently. Under the second head belong coal, petroleum, natural gas,
and all the minerals; man may discover substitutes, he may economize in
the use of these substances, but he can never augment their supply. In the
previous section we considered some of the problems that arise in the use of
the soil in agriculture, and those connected with our forests and fisheries.
For the most part they had to do with the intelligent use of these agencies
and the restoration or repair of the elements destroyed. In this section we
are met by a very different problem, namely, the conservation of a limited
supply of resources and their most economical application to the needs of
mankind.
We can distinguish two contrasting answers to this problem, one careless
and optimistic, and the other pessimistic and fearful of the future.
According to the former point of view we should not borrow trouble of the
future; man’s career has been one of constant progress; when he has been
confronted with a difficulty he has invariably met it. Indeed necessity has
been the most prolific mother of invention. If our coal supplies are
exhausted, man will devise means of utilizing the heat of the sun, the force
of the tides, the motion of the waves, the stores of electrical energy in the
air, all of which will yield inexhaustible supplies of heat and energy. If our
stores of iron should fail, some enterprising inventor would surely discover
a practicable and commercially profitable method of extracting aluminum
from clay. New sources of raw materials will undoubtedly be discovered
before the old ones give out, and we may confidently expect that, while the

material bases of a high civilization may shift somewhat, they will never
crumble and fall.
The other school has sounded a louder note of alarm. At the present rate of
consumption the coal and iron deposits of Europe and America must soon
be exhausted. The supplies of copper, lead, and other metals in favorable
locations are also being consumed at an alarming rate, and no other known
supplies are in sight. Within the past century scientific knowledge and
engineering skill have combined to unlock the storehouses of the geologic
ages, and now like prodigals we are dissipating our fortunes. To treat these
exhaustible sources of supply as permanent sources of income, without
regard for the future, is based upon unsound theory and must lead to
reckless practice.
As so often in opposing counsels, there is an element of truth in each of
these contrasting points of view. But the safer plan is not to wait until we
have exhausted our natural resources before remedying the evil, but to heed
the warnings now. A long step in this direction was taken in May, 1908,
when a conference of the governors of all the states, together with college
and railroad presidents, business men and others, was held at the White
House upon invitation of President Roosevelt. As a result of this gathering a
National Conservation Commission was appointed, which will make an
exhaustive investigation into the amount and rate of consumption of the
natural resources of the country and suggest measures for their better
utilization and preservation through national, state, and local action. In line
with this movement two other commissions have been established, one on
inland waterways and one on country life. As a result of the national
awakening we may expect to see a more rational use made of the gifts of
nature, and a better organization of our national life. Heretofore the ideal of
our business men has been to exploit, one might almost say pillage, the
stores of nature as rapidly as possible; it was a pioneer stage of industry,
inevitable but wasteful. From now on the new conception must be the
restoration where possible of exhausted elements, as of the soil and the
forests, and the careful use of the non-renewable stores of wealth so that at
least we shall not make them engines of destruction, as in the case of floods
and devastation occasioned by careless hydraulic mining in the West. Let us
now turn to a more detailed consideration of the separate items in our
inventory of national wealth.

Our modern civilization may be said to rest upon coal, for upon its
possession depends man’s ability to utilize most of the other items of his
wealth. Passing over its utility as a fuel to heat our houses, without coal it
would be impossible to smelt the iron needed in all our industries, to drive
the machinery, to run our locomotives or steamboats, or in a word to carry
on the manifold activities of our industrial life. According to the United
States Geological Survey there are 335,000 square miles of coal-bearing
strata in this country, but the larger part of it is too thin or impure to be
useful for industrial purposes; it serves in many localities however as
domestic fuel, as in the case of the lignite deposits of the Northwest. An
estimate of Professor Tarr places the coal-producing area in the United
States at not over 50,000 square miles. At the present rate of consumption—
over 350,000,000 tons in 1905—it has been estimated that the anthracite
coal deposits will last for only fifty years longer, while we have only
enough bituminous coal for one hundred years.
The large deposits of coal in England and their early development gave that
country a great advantage over Europe. But as long ago as 1861 Professor
Jevons, a noted English economist, sounded a note of alarm: he prophesied
that because of the superior size and character of the coal deposits of
America, industrial supremacy must inevitably pass to this country. His
prediction has already been verified in the case of coal and iron production,
and will probably soon prove true of textiles also. The coal deposits of the
United States are thirty-seven times as great as those of England, but at the
present rate of mining are threatened with exhaustion at no distant date. It
has been estimated that there are in China coal deposits capable of
supplying the world with fuel for another thousand years. But such
estimates are, in the present state of our knowledge about China, the merest
guesses, and if true would seem to point rather to the future industrial
supremacy of that country in the world’s markets.
Two-thirds of the coal mined in the United States is obtained from the
Appalachian field, extending from New York to Alabama, Pennsylvania
being the largest coal-producing state in the Union. In the iron and steel
industries most of the coal is coked, as it is better for blast-furnace use in
this form, giving greater heat and containing less sulphur or other injurious
substances than coal. Owing to the smaller bulk and cost of transporting

ore, most of the iron and steel industries are situated in the vicinity of the
coal supply, as in Pennsylvania, Ohio, Alabama, etc.
Petroleum or coal-oil is closely allied to coal in its origin and distribution
and must be classed with it as a most important product, not only for
industrial uses, but also because of the contributions it has made to the
comforts of living. In its production the United States ranks first, being
closely followed by Russia; together these two countries furnish over 90 per
cent of the world’s supply of petroleum. Enormous economies have been
effected in its production and distribution, which is done by piping the
crude oil underground to the refineries. For illuminating purposes it is the
cheapest form of artificial light; as a fuel it is supplanting coal, where the
latter is dear or its cost of carriage high, as on ocean steamers. Finally, the
construction of light and convenient gasoline motors has given it great
importance as a source of motive power. Natural gas is closely related to
petroleum, but the supply has been so reduced by rapid and reckless use
that it has but a limited economic outlook and is of local significance only.
Of all the metals iron must be considered the most useful for man, far
surpassing the so-called precious metals in economic importance. Its great
value is so evident that its production and use have often been taken as a
criterion of the material progress of a community. Iron is the only metal that
can be welded, and is accordingly of great significance, whether in making
strong machinery, as the shafts of ocean steamships or the framework of a
twenty-story building, or, in the form of steel, the most delicate surgical
instruments or watch springs. Judged by the test of iron ore production the
United States ranks high, for it turns out about four-fifths of the world’s
supply; all of this is used for domestic consumption, in its own blast
furnaces, though much of it is afterwards exported in the form of pig iron or
structural iron or steel. Though iron is universally distributed throughout
creation, it must occur in large beds or deposits before it can be profitably
mined. “The most favorable situation of an iron ore for profitable extraction
is near good coking coal for smelting and limestone for a flux, as in the
Birmingham district of Alabama; and in such a situation even low-grade
ores can be worked profitably. Unless this is the case, iron ore cannot be
extensively mined excepting under conditions of great abundance and
economical methods of transportation, as in the Lake Superior district,
where thick and remarkably uniform beds of good ore occur in such a

position that water transportation to the market is possible. Where these
conditions do not exist, iron-mining is feasible only on a small scale for the
local market. Thus, in the Rocky Mountains there are almost inexhaustible
supplies of iron, often of a high grade, which are at present of no value
whatsoever.”[1]
The most wonderful iron-mining region in the United States and probably
in the world lies in the northern part of Michigan and Minnesota, where five
ranges or lines of hills contain immense deposits. These lie so near the
surface that they can be dug out of open pits at a cost of from 10 to 50 cents
a ton, against $1 a ton in a shaft or underground mine. Three-quarters of the
iron ore produced in the United States is mined in this district. Its proximity
to the lake ports makes possible its transportation to the iron and steel
manufacturing centers at very low rates. Machinery has been applied on an
immense scale to the work of mining, loading and unloading the ore. Steam
shovels scoop up the ore from the open pit, filling cars at the rate of almost
one a minute; the work of loading this into the ore ships at the ports is
equally expeditious, only about two hours being required to load an ore ship
of 6,000 tons, while the work of unloading is performed for the most part
by an endless chain of buckets and traveling cranes. By these means an
ultra-intensive exploitation of these magnificent deposits is taking place and
it is a question whether they will not soon be exhausted. “But the
Americans,” writes Professor Leroy-Beaulieu, a friendly but keen critic of
our industrial development, “relying on the constant good-will of nature,
are confident that they will discover either new and productive ranges in
this district, or rich deposits in other districts.”
The precious metals have received more than their fair share of attention,
for the industrial progress of the world is much less dependent upon their
presence in large and easily obtained quantities than it is upon the more
common metals. Nevertheless they are of importance both in the arts and
especially because of their use as money. In their production the United
States stands second, being surpassed in the output of gold by the Transvaal
in Africa and in that of silver by Mexico. The production of these metals
has always in the world’s history proceeded spasmodically, and a
speculative spirit has usually been present. More recently, however,
scientific geological knowledge and improved metallurgical methods are
removing the industry of gold and silver mining from a gambling venture to

a legitimate industry. The practical problem at present confronting
American gold-mining companies is to reduce expenses, some of the
principal bearings having for some years shown signs of exhaustion, as for
instance in the Cripple Creek district of Colorado. There is always a chance
however that new gold fields may be discovered to make good the
exhaustion of the old. In the case of silver, on the other hand, the metal is
found in such abundance that the present rate of production seems almost
indefinitely assured; a slight increase of the price or improvements in the art
of extracting the metal will at any time bring enlarged supplies on the
market. Africa, Australia, and the United States produce almost all the
world’s supply of gold, Colorado being the leading state in the last-named
country. Mexico and the United States together produce over two-thirds of
the world’s silver, the leading rank in this country being held by Montana.
Among the other metals copper is by far the most important. In primitive
civilizations, before the art of smelting iron had been discovered, copper
was indispensable as it was so easily malleable; in Homeric times, for
instance, armor, utensils, money, etc., were made of copper or alloys of
copper (bronze and brass). After an eclipse of some centuries copper has
again risen to the front rank by reason of its qualities as a conductor of
electricity. The new use of electricity to transmit power and the
development of electrical industries has greatly increased the demand for
this metal and has caused a great expansion in its production. Here again
the United States holds first rank, contributing over half of the world’s
copper supply. As in the case of iron the northern peninsula of Michigan is
the most important center of copper production, with Montana a close
second and Arizona contributing most of the remainder. Like petroleum,
copper production is controlled by a small number of operators, five mining
companies alone furnishing one-half of the American supply. It is far from
being monopolized, however, as petroleum is, for new and rich supplies lie
just on the margin of profitable working and will always be brought into the
market whenever the price is artificially raised. One reason for American
pre-eminence, aside from the rich stores of the metal, lies in the progress
made in the art of refining it by the electrolytic process, considerable
foreign ore being brought here to be treated by this method.
Nature has not blessed the United States so abundantly with the minor
metals, lead, zinc, and aluminum, while almost all the tin used here has to

be imported.
It is apparent from even this brief and hasty survey of the mineral resources
of the United States, comprising those extractive industries which once
exhausted can never be restored by man, that this country is wonderfully
well equipped with the material means of civilization. Minerals and metals
are remarkably abundant and accessible. The wonderful material progress
of the United States during the nineteenth century is abundantly explained
by this fact, though due credit must also be given to the enterprise, industry,
and genius of those who developed these natural resources. The industrial
supremacy of the American nation seems well assured, founded on such a
stable material basis. We of this country have been rather inclined to boast
of our industrial progress and our material bigness, whereas it must now be
apparent that we owe much, if not most, to the bounty of nature. We should
therefore see to it, in a proper spirit of humility and thoughtfulness, that we
do not waste our heritage, but hand it on as nearly undiminished as possible
to our children.
There is one other asset in our national wealth which has already
contributed much to our progress, and is destined to play an even more
important role in the future—and that is our water power. In colonial days,
before the invention of the steam engine and the use of coal, this was of
prime importance and determined the location of many a town, most of
them being located at the “fall line” of the rivers, where water power was
obtainable. With the invention of the steam engine and the use of steam as a
motive power, industry became less dependent upon water power and
moved away from the rivers to the vicinity of coal mines. Now again has
come another swing of the pendulum, and with the rise of electricity as a
motive power and the harnessing of our streams and waterfalls for the
creation of electrical energy, we are beginning to value more highly this
source of power. Here again we find the United States wonderfully blessed
as compared with other countries. “It is probable,” says Shaler, “that,
measured in horse power or by manufactured products, the energy derived
from the streams of this country is already more valuable than those of all
other lands put together.” The total amount of direct water power used by
manufacturing establishments in 1900 was 1,727,000 horsepower.

Prior to 1890 the largest use of water power was in its direct application to
machinery at the immediate point of development. Since that time,
however, the use of electricity as an agency whereby the energy developed
by falling water can be transformed and applied to the driving of machinery
has entirely changed the conditions under which the power of our streams
can be utilized. The practical possibility of transmitting electrical power
over long distances—for example, over 200 miles from the Sierras to San
Francisco—has removed the necessity of building factories immediately
adjacent to water powers, but permits its utilization where most convenient
and often where the lack of coal has made the use of steam power
impracticable. The best-known example of the development and
transmission of electrical energy for industrial purposes is the case of
Niagara Falls, but more striking illustrations may be found on the Pacific
coast, while the existence of enormous opportunities on the Atlantic
seaboard give brilliant promise for the future of manufacturing in this
region. So valuable indeed are these sources of power now seen to be that
there is danger that their control may be monopolized by a few shrewd and
far-sighted individuals before the general public awakes to a realization of
their importance. It has recently been asserted in a reputable magazine that
there is a “water power trust” already organized for this purpose. The
opportunities for wealth-getting have hitherto been so great in this country,
and the great task of the American people has thus far been so exclusively
the task of developing its wonderful natural resources, that we have grown
careless of our common rights and have permitted the monopolization by
private individuals of a number of limited resources of this character. One
of the great practical problems of the future is that of securing the growing
value of these natural monopolies to the whole people, without at the same
time retarding the energy and industrial development of the American
people.

IV. CAPITALISTIC PRODUCTION.

Modern production is usually called capitalistic because it involves in its
processes the use of a large amount of capital. In a primitive stage of culture
man appropriated directly from nature’s bounty the food and shelter which
he required. But today man has adopted long and roundabout methods of
producing goods, involving numerous steps between his first efforts and the
turning out of the finished articles. He invents tools and machinery to assist
him in his work, and while he multiplies the processes of production he also
enormously increases the results. Capital has become absolutely
indispensable in modern production and is yearly playing a more important
role. At the same time various problems, born of the new conditions, have
arisen, such as the growth of large-scale production, the elimination of the
small producer and the independent artisan, the growth of trusts, the
rhythmic recurrence of speculative periods and industrial crises, the
relations of labor and capital, and others similar in character.
The most striking phenomenon of the nineteenth century was the great
industrial progress of the more developed nations; this is best shown in a
table taken from Mulhall’s “Industries and Wealth of Nations,” which
follows:
Growth of Manufactures in the Nineteenth Century.

Millions of Dollars.
Countries
1820 1840 1860 1894
United Kingdom 1,411 1,883 2,808 4,263
France 1,168 1,606 2,092 2,900
Germany 900 1,484 1,995 3,357
Austria 511 852 1,129 1,596
Other States 1,654 2,516 3,455 5,236
Europe 5,644 8,341 11,479 17,352
United States 268 467 1,907 9,498
Total 5,912 8,808 13,386 26,850

Extraordinary as has been this universal growth, the development of
manufactures in the United States has been still more marvelous, both
absolutely and in relation to other branches of industry Between 1850 and
1900 the population and the products of agriculture both trebled; but the
value of manufactured products increased twelvefold and that of capital
invested in manufactures nineteenfold The United States, though politically
younger than the countries of Europe, is industrially one of the most
advanced The application of labor-saving machinery and of improved and
economical methods of production and distribution has probably proceeded
further here than in any other place Nowhere can we study to better
advantage, therefore, than in America the problems that have grown out of
this advanced capitalism
The causes of this rapid industrial development are enumerated by the
census report as five in number: the agricultural resources of the country,
the mineral resources, the highly developed transportation facilities, the
freedom of trade between states and territories, and the absence of inherited
and over-conservative ideas We have already considered the wonderful
agricultural and mineral resources of the country, and have seen how greatly
the American people are indebted for their industrial prosperity to the
bounty of nature. The magnificent system of inland waterways, comprising
over 18,000 miles of navigable rivers, and the railroad system, with over
200,000 miles of track, facilitate a rapid and cheap exchange of products.
The enormous domestic market afforded the American manufacturer, larger
in consuming capacity than that in any other country in the world, has
permitted the economic production of goods on a large scale and a
consequent reduction in cost. Foreigners have often asked the question why,
if freedom from tariffs and trade restraints has been a good thing within the
United States, freedom of trade with other countries would not prove
equally advantageous. In answer to this, James G. Blaine, formerly
Secretary of State, wrote, “It is the enjoyment of free trade and protection at
the same time which has contributed to the unexampled development and
marvelous prosperity of the United States.” Finally, the absence of tradition
and of over-conservative ideas handed down from a former and more
primitive system of industry has been a great boon. There have been
developed traits of energy, inventiveness, and ingenuity, which, aided by a

universal system of compulsory free education, have contributed greatly to
the material progress of the people.
The system under which the production of wealth in a modern industrial
nation is carried on is usually called the factory system, and to this we must
now turn, for it is in the factory that the utilization of machinery and capital
finds its greatest development. The term is not easily defined, but we may
adopt the description given by the late Carroll D. Wright: “A factory is an
establishment where several workmen are collected for the purpose of
obtaining greater and cheaper conveniences of labor than they could
procure in their own homes, for producing results by their combined efforts
which they could not accomplish separately, and for preventing the loss
occasioned by carrying articles from place to place during the several
necessary processes to complete their manufacture.” The essential elements
in such a system are the minute division of labor, the large use of labor-
saving machinery, the increasing specialization and localization of industry,
and the concentration of production in fewer and larger establishments with
consequent increase of product and reduction of cost.
The division of labor may mean either the separation of occupation or the
division of a process into minute parts. An illustration of separation of
occupations may be found in the manufacture of a carriage: one factory
produces hubs, another wheels, a third axles, a fourth the body, a fifth
manufactures upholstery, a sixth the hardware, and a seventh (the carriage
factory, so-called) assembles the parts and places the completed product on
the market in the form of a carriage.
As an example of an extreme division of labor the slaughtering and meat-
packing industry offers a classical example, though in this case the use of
complex machinery is not involved. “It would be difficult,” writes Professor
Commons,[2] “to find another industry where division of labor has been so
ingeniously and microscopically worked out. The animal has been surveyed
and laid off like a map; and the men have been classified in over thirty
specialties and twenty rates of pay, from 16 cents to 50 cents an hour. The
50-cent man is restricted to using the knife on the most delicate parts of the
hide (floorman) or to using the axe in splitting the backbone (splitter) and,
wherever a less skilled man can be slipped in at 18 cents, 18½ cents, 20
cents, 21 cents, 22½ cents, 24 cents, 25 cents, and so on, a place is made for

him, and an occupation mapped out. In working on the hide alone there are
nine positions, at eight different rates of pay. A 20-cent man pulls off the
tail, a 22½-cent man pounds off another part where the hide separates
readily, and the knife of the 40-cent man cuts a different texture and has a
different ‘feel’ from that of the 50-cent man. Skill has become specialized to
fit the anatomy.”
Usually, however, when the division of labor becomes as minute as that
described, the routine-like process is handed over to a machine. Indeed Mr.
John A. Hobson states as a law of machine industry the fact that as soon as
a process becomes perfectly automatic and mechanical a machine is
invented which can do the work better and more rapidly than human hands.
Hand in hand, therefore, with the subdivision of labor goes the extension of
labor-saving machinery. Labor becomes relatively of less importance than
capital in the new methods of production, and man becomes a machine
tender rather than an independent producer. There are practical benefits and
disadvantages connected with this system. Many writers insist that the
effect on the worker is narrowing in the extreme, but Professor Marshall
points out that his labor as tender of a machine demands a higher order of
intellectual development than that of a handicraftsman, and that he has
more leisure, while the product of the present system is immeasurably
greater than under the old hand methods. The manufacture of products by
machinery has in turn required the making of machines by machinery, as
the complex machines of today could not be turned out by hand methods. A
characteristic feature of the modern factory system therefore has been the
growth of the machine trades, which supply the equipment of the new
industry.
With the growing specialization of industry there has gone on an increasing
localization in some favored spot or locality. Thus most of the collars and
cuffs (85 per cent) manufactured in the United States are made in Troy, N.
Y.; 64 per cent of the oyster canning is carried on in Baltimore; 54 per cent
of the gloves are made in Gloversville, N. Y.; 48 per cent of the coke in
Connellsville, Pa.; 48 per cent of the brassware in Waterbury, Conn.; and 46
per cent of the carpets in Philadelphia. While there are undoubted
advantages in such localization and specialization in a particular industry,
such as reputation, growth of special skill, etc., there are also offsetting
disadvantages, as the complete prostration of the whole community if the

particular trade upon which it depends is disastrously affected by trade
depression or by a shifting of the industry to some other locality.
More striking than the concentration of manufactures in particular places
has been its concentration in a few large establishments and under the
control of fewer individuals. Without entering into the discussion, as yet, of
the trust problem, we may at this time take up the earlier and important
tendency of industry to be conducted on a large scale. This concentration
into a relatively smaller number of establishments has been going on pretty
steadily since 1850 and shows no signs of abatement at this time. In the
case of the iron and steel industries, cotton manufactures, and leather goods,
the movement is positively startling, an actual decrease in the number of
establishments having occurred in the half century. This is most marked in
the monopolized industries. At the same time there has gone on an
enormous increase in the size of the individual plant, in the capital
employed, the number of men employed, and the value of the product.
Almost the only industries which have not yet displayed this tendency are
those which are essentially local in their nature, as grist mills, cheese and
butter factories, etc. But in general it is characteristic of manufactures in the
United States. The same tendency has been manifest in the countries of
Europe, though there a system of well-developed and fairly vigorous hand
trades has resisted the movement and made the development in this respect
much less rapid than in this country.
Large-scale production is more profitable than production on a small scale
in all industries which are subject to increasing returns. By this is meant
that the return in product for each additional dollar’s worth of labor and
capital employed grows greater the larger the scale on which the enterprise
is conducted. When this is true the big enterprise will be able to undersell
the little enterprises and eventually to drive them out of business. This is
true not only in the competitive industries, but also in those which enjoy a
legal or a natural monopoly, as street railways, gas and water plants, etc., all
of which show an irresistible tendency to consolidation. Before drawing any
conclusions as to the desirability of such a movement, let us examine some
of the economies of large-scale production. The most striking and the most
important is the economy in fixed capital. Concentration is a result of
machine production. As machinery becomes more expensive, the breaking
up of the processes of manufacture into small parts requires more complex

and detailed machinery; a larger outlay is requisite for an up-to-date plant.
Thus the average amount of capital invested in each iron and steel
establishment in the United States increased from $47,000 in 1850 to
$858,000 in 1900. The head of a steel company in Pittsburg recently
testified before the Industrial Commission that to build and equip a plant for
the manufacture of iron and steel under modern conditions would call for an
investment of from $20,000,000 to $30,000,000. It is clear that under such
conditions of expensive machine methods a small plant would have little
chance of existence. Steam railways afford another good illustration of an
industry in which enormous economies are effected by the concentration of
a number of small, independent lines under one unified control. Every
machine is utilized to the utmost; there is no needless duplication of
machinery such as would occur if several small plants divided up the
business, while expensive machines to carry on relatively small processes
can be profitably installed.
But other economies than those in the use of capital are present in large-
scale production. A large concern can hire more expensive and better
managers, can afford to experiment with new methods, can effect a more
minute and economical division of labor, as for example in the slaughtering
business above referred to. A striking economy can also be effected in the
utilization of what were formerly waste products, and still are in small
concerns. This has been carried furthest in the oil-refining and meat-
packing industries; a recent statement of Swift and Co., for instance, alleged
that the dividends on the stock were paid out of the by-products, such as
neatsfoot oil, land fertilizer, glue, fats, etc. Owing, however, to the generally
wasteful methods prevailing in the United States not so much attention has
been given to this point as in England and Germany. A final economy may
be mentioned that can be secured by a large business, namely, carrying on
allied or subsidiary processes. Thus the Standard Oil Company builds its
own pipe lines, makes its own barrels, tin cans, pumps, tanks, sulphuric
acid, etc.
Such an extension in the size of the single establishment would of course
not have been possible if improvements in the arts of communication and
transportation had not at the same time immensely widened the market. As
long as the market was local, and a factory could afford to send its goods
over only a limited territory there was of course a fixed limit to the

expansion of that industry. Now, however, when markets are often world-
wide and the demand for goods has so enormously increased, while the
modern railway and steamship can transport goods cheaply and quickly half
around the globe, enterprises can be expanded and carried on on a scale
commensurate with the expanded market and improved methods. It is clear
then that the tendency to production on a large scale is the logical result of
machine methods, that it secures great economies, and that in industries of
increasing returns it is absolutely inevitable.
But not only in manufacturing is this movement observable. More recently
concentration in large establishments has revolutionized the retail trade.
Department stores have supplanted the small shops because they can buy on
better terms, get transportation cheaper, offer a greater variety to the
customer at a lower price, and save time and trouble to the customer. The
growing ease of communication with central shopping districts, the rapid
changes in fashion with the consequent large variety which only a large
establishment could afford to carry—all these factors have helped along the
movement. There are limits to such a movement, for small tradesmen will
always hold the repairing trades, and the sale of perishable goods; thus there
are no businesses so scattered as the small stores of the “butchers and
grocers.” But on the whole we may safely conclude that the small
storekeeper is doomed now just as the small manufacturer was two or three
decades ago. In the carrying trade country carriers and a few cabmen in the
cities are the only survivals of the small independent business; the steam
railroad and the electric railway have driven the small carrier out of
business. In agriculture alone, where concentration is strictly limited by the
necessity for intensive cultivation, and in professional and personal service,
where the very nature of the business prevents it, is there little or no
development in the direction of large-scale methods.
The industrial and social effects of this development have been marked in
all countries. In the United States the main attention has been given to the
organization and development of machinery, and a wonderful industrial
advance has followed the movement. The economic readjustments have
consequently been made with comparative ease, and the labor set free by
the invention of new machines has been reabsorbed in the same or other
industries. Consequently the social effects have not been so marked as to
call for special emphasis; as the same question presents itself, however, in

connection with the more recent trust movement we may profitably defer its
discussion to the next section.
There is one other characteristic feature of modern capitalistic machine
industry which deserves special mention, especially as its development has
been carried furthest in the United States. Reference is made to the system
of standardization and of interchangeable parts. In no single feature is the
contrast between modern machine methods and those of the old hand trades
greater. By standardization is meant the production of so-called “standard
products” according to some acceptable size, form, or shape. In the
manufacture of screws or iron beams, or even ready-made clothing, for
example, certain dimensions and sizes which are best adapted for general
use, are selected as standard sizes and these are then turned out in large
quantities by automatic machinery. The advantages of such a system, in
cheapness, quickness of delivery, ability to replace a single broken part,
etc., are numerous and manifest. “The possibilities of standardization are
strikingly shown in a recent international incident. The Egyptian
Government desired a bridge for the Atbara at the earliest possible moment;
inquiry was made of the English bridgemakers, but no promise of prompt
delivery could be secured. Within twenty-seven days after the tender of the
contract was made to an American firm the bridge was ready for shipment.
The feat, not a remarkable one, was due to the standardization of bridge
material. This in itself was a guarantee of quick delivery and
construction.”[3]
Standardization was followed by the system of interchangeable parts,
according to which each part of an intricate machine or product is made
exactly like the same part in every other machine. The parts can thus be
turned out in large quantities and “assembled” at a single operation. From
the standpoint of the consumer or user of the machines thus made, the great
merit of the system lies in the fact that he can quickly and at small expense
duplicate any broken part. It is today applied to almost every product of
large consumption, from agricultural implements and steam engines to
watches and nails. By producing machinery on this plan it has been possible
for American manufacturers to extend their trade very materially in foreign
lands. It was recently reported in the newspapers that Mr. E. H. Harriman
had expended $65,000,000 in standardizing the equipment on his railroad

systems; while this sum is enormous, it will undoubtedly be justified by the
increased economy of repairs and operation.

V. TRUSTS AND MONOPOLIES.

We have already seen how production upon a large scale has superseded
production upon a small scale in most important branches of manufactures.
We have now to inquire whether production upon a large scale is in turn to
be supplanted by single consolidated enterprises, by those combinations of
capital known as trusts. Under one of these three conditions industry must
be carried on; few people wish to revert to the stage when production was
carried on in small establishments, but warm controversy and difference of
opinion still exist as to whether centralized management by a single
company or combination offers superior advantages to production by
independent competing establishments. The concentration of production in
a few large establishments has been followed by the consolidation of these
larger units into a single whole. Since the days of Adam Smith capital has
tended to combine for the purpose of fixing prices, and these combinations
have passed through several phases. The earliest form is the agreement of
independent concerns to fix prices, as was done by the American railroads
in their early traffic agreements. The next step was to divide the field, as has
been done by the French railways and the American express companies. A
third phase of combination was the pool, which attempted to regulate the
output rather than to fix the price or divide the field. Railway, whisky,
beam, and other pools were organized for this purpose, but all broke down
because of the difficulty of enforcing the agreement and the temptations to
each member to break it secretly for the sake of the large profits obtainable.
By this time it had become clear that if a real permanent consolidation of
interests was to be secured by the competing enterprises some closer form
of combination must be devised which could not be broken at will by any
member. An industrial union and not a loose confederation must be attained.
Accordingly the next step was taken in 1882 by the formation of the
Standard Oil Trust, so called because the constituent concerns handed over
their business to the complete control of a central board of trustees,
receiving in return trust certificates which entitled them to dividends.
Similar “trusts” were formed in the whisky, sugar, and other industries, but

were speedily declared illegal by the federal Supreme Court. By this
decision the form of combination was changed, but the movement was not
at all checked. The next phase and the last was the establishment of holding
corporations, which are organized to buy up and hold the stock of a number
of individual corporations, which still retain their corporate existence. In
this way unity of control is secured, to which is added a certain flexibility;
but it is really the trust under another legal form. Where pooling and
combination by means of holding companies have been forbidden by law,
as in the case of railroad companies, actual consolidation has often taken
place, though when trusts are spoken of the other form of combination is
more often meant. From the point of view of business organization the
holding company is simply an extension of the principle of the corporation,
and to a consideration of this we must therefore turn.
There are three classes of establishments by which industry is carried on—
those that are the property of an individual, those which belong to
partnerships or firms of unlimited liability, and those belonging to
corporations of limited liability. The usefulness of the individual system is
of course limited to small undertakings, where but little capital and credit
are necessary; this form of organization still dominates the field in
agriculture, in the small retail trade, and in the repairing industries. The
partnership is a joint undertaking by two or more individuals, and makes
larger enterprises possible, but as each individual is liable for all obligations
of the firm or his partners his personal liability is greatly increased. While it
is well adapted to certain undertakings, as moderate mercantile
establishments and professional firms, owing to a certain elasticity in the
contractual relations of its members, it is not suited to large industrial
ventures, both because of the excessive personal liability, and because of
the necessity of dissolving the partnership upon the death, withdrawal, or
insolvency of any member. The advantage of the corporation lies in the fact
that it has a continuous existence, and that the liability of the shareholders is
limited to the amount of capital actually contributed by each; it is well
adapted to modern enterprise because it permits the summation of large
amounts of capital from a number of small savers and centralizes the use of
this capital in the most economical manner. There may thus be
concentration of management without concentration of ownership. The
federal census of manufactures in 1905 showed that, although less than one-

quarter of the manufacturing establishments were organized as
corporations, yet they produced three-quarters of the total manufactures in
money value. In the field of transportation, corporations are in almost
exclusive control, most banks and insurance companies are organized under
this form, while mercantile and industrial undertakings are being more and
more generally organized as corporations. Not merely are most of our
business enterprises being conducted under corporate form and
organization, but most recently, as has been already pointed out, there has
been a movement to combine individual corporations into larger concerns,
or trusts. The trust is usually thought of as a monopoly and, while not
necessarily so, it usually does exercise monopoly control; but for the
present we shall consider the trust problem from the standpoint of business
organization, deferring to the end of the section the discussion of monopoly.
The trust movement may be said to have begun with the formation of the
Standard Oil Trust in 1882, but down to 1898 its progress was slow.
Beginning with the revival of prosperity in 1898, however, there ensued a
veritable stampede of business managers to enter into combinations. During
the next three years 149 large combinations, with a capital of over
$3,000,000,000, were formed. The movement spent most of its force by
1902, though it is by no means at an end yet, as the recent floating of the
Dry Goods Trust indicates. A few figures from reliable authorities will
make clear the extent of the movement. According to the New York Journal
of Commerce, industrial (i.e., manufacturing and commercial) and gas
trusts were organized in the United States between 1860 and 1900, not
including combinations in banking, shipping, railroads, etc., as shown in the
accompanying table.
Another more recent list by John Moody[4] gives the number of “industrial”
trusts organized down to Jan. 1, 1904, as 318; these have acquired or
control 5,288 plants, and have a total nominal capital of $7,246,342,533. A
movement so general and widespread, and of such gigantic proportions,
must have had some powerful and intelligible causes behind. For it was not
confined to the United States, but was equally observable in such industrial
diverse countries as England, France, Germany, Russia, and other European
nations.

Number Total
Decade.
Organized. Nominal Capital.
1860-69 2 $ 13,000,000
1870-79 4 135,000,000
1880-89 18 288,000,000
1890-99 157 3,150,000,000
Total, 40 years 181 $3,586,000,000

The most important and general cause was the desire to secure the
legitimate economies of large-scale production. A combined or federated
industry may secure even greater economies than a single large factory.
These have been concisely stated as follows[5]: “The cost of management,
amount of stock carried, advertising, cost of selling the product, may all be
smaller per unit of product. A large aggregation can control credit better and
escape loss from bad debts. By regulating and equalizing the output in the
different localities, it can run more nearly full time. Being acquainted with
the entire situation it can reduce the friction. A strong combination has
advantages in shipment. It can have a clearing-house for orders and ship
from the nearest source of supply. The least efficient factories can be first
closed when demand falls off. Factories can be specialized to produce that
for which each is best fitted. The magnitude of the industry and its presence
in different localities strengthens its influence with the railroads. Its
political as well as its economic power is increased.”
Many of these economies of production are not new to these trusts, but have
been secured equally by large-scale manufacturing establishments. Some of
the savings, especially in buying raw material and marketing their products,
are peculiar to the trusts and mark a more efficient mode of organization
than mere concentration of industry in single large establishments. Thus, it
has been found possible to dispense with a great number of traveling
salesmen, of whom it was said that 30,000 lost their positions in the year
1898 alone. When the whisky trust was formed only twelve of the eight
distilleries entering into the combination were kept running, but as these
were the largest, best located and best equipped, and were run at their full
capacity, they were able to turn out as much as all had done before and at an
immense economy. The saving of cross freights by having an order filled
from the plant most conveniently located is considerable; Mr. Gates

estimated the saving of the American Steel and Wire Company in this single
point at $500,000 a year. Such an economy could not be secured by a single
establishment, no matter how well organized or on how large a scale. The
specialization of particular factories to do special processes is well
illustrated by the organization of the United States Steel Corporation.
The growth of this latter combination is an example not only of
consolidation, but of the integration of industry, that is, the grouping
together under one control of a whole series of industries. From the mining
of the ore and coal, through the processes of carrying it to the furnaces,
coking the coal and making the pig iron, manufacturing the latter into the
finished forms of iron and steel products, and down to the marketing of the
latter, every step is carried on under the control of the United States Steel
Corporation. The assets of the company were stated as follows soon after its
organization, and illustrate the magnitude and scope of its operations:

Iron and Bessemer ore properties $ 700,000,000
Plants, mills, machinery, etc. 300,000,000
Coal and coke fields 100,000,000
Railroads, ships, etc. 80,000,000
Blast furnaces 48,000,000
Natural gas fields 20,000,000
Limestone properties 4,000,000
Cash and cash assets 148,251,000
Total $1,400,281,000

In addition to economies due to improvements in methods of organization,
production and marketing, another cause for the sudden and vigorous
outburst of trust promotion in the years 1898-1902 may be found in the
profits to be secured by promoters and organizers. After the successful
launching of the first few trusts, with their undoubted economies and
advantages, the movement was taken in hand by professional promoters,
who organized combinations, often with the help of underwriters, in every
branch of industry where there was any promise of profit. That many of
these were artificial or premature is evident from the financial results: of the
183 industrial combinations enumerated by the census in 1900, one-third
paid no dividends whatever after their formation and another one-third paid
no dividends to the holders of common stock. As an indication of the profits
obtained by the successful trust promoter may be cited the testimony given
before the Industrial Commission in the case of the Tin Plate Trust stating
that this promoter realized from $2,000,000 to $3,000,000 profit from the
undertaking. When to this is added the profit obtained by the owners of the
constituent plants, which were usually taken over by the trust at an
exorbitant valuation, it is clear that the stimulus of financial gain was
probably stronger in many cases than that of economy in production. The
bill was of course paid in most cases by the investing public, which
absorbed large amounts of industrials in the years of their active promotion.
Other causes have sometimes been adduced to explain the growth of
combinations, such as the tariff and railroad freight discriminations, but
these are too local in their influence to explain adequately the world-wide
movement toward combination. Trusts exist in free-trade England, and in
Germany where freight discriminations on the state-owned railroads are

practically unknown. It is, however, true that in the United States both these
factors have been of decisive importance in building up certain powerful
trusts. “There can be no doubt,” said the conservative report of the
Industrial Commission, “that in early times special favors from railroads
were a prominent factor, probably the most important factor, in building up
some of the largest combinations. The receipt of discriminating favors from
railroads has been conceded repeatedly by representatives of the
combinations themselves.” The Standard Oil, beef, coffee, steel, and other
trusts may be cited as illustrations. In the matter of the tariff Mr.
Havemeyer’s statement that “the mother of all trusts is the customs tariff
law” may be set down as the rather peevish utterance of a disappointed
beneficiary; but there is no doubt that combination has been made easier
behind the tariff wall. Instance the sugar trust itself, the leather, steel, tin
plate, and others.
Let us now turn to some of the effects of industrial combinations, which we
may classify according as they bear upon competitors and producers of raw
materials, labor, and consumers. As the number of competitors is reduced
the fierceness of competition among those remaining in the field is greatly
increased, for the value of the prize to the successful enterprise is
correspondingly greater. It is not surprising therefore that at times this
rivalry should have assumed unethical if not actually illegal forms. The
practice by some trusts of fixing prices below cost at some strategic point in
order to crush out a troublesome competitor, and then correspondingly
raising them elsewhere so as not to sustain any loss, is serious because so
subtle. Prof. John B. Clark regards this as so serious an evil that he would
have the Constitution amended in order that power might be given the
Federal Government to prevent it. The producers of raw materials, as
cattlemen, crude oil and coal producers, sugar and tobacco growers, and
others, complain that the prices at which they sell their products are dictated
to them by the trusts, which are practically the sole purchasers of what they
have produced. They claim that prices are depressed to the lowest point
possible and that every gain from increase of demand goes into the pockets
of the trust managers. It may of course be answered that the trust cannot
depress prices below the point at which a living profit can be secured by the
producer of the raw material or he will stop producing, but there is no doubt
but that the monopoly power possessed by the trust in such cases will

sometimes be used to the disadvantage of those whose product it alone
buys.
The effects upon labor of the organization of capital in combined industries
and under centralized control are more complex. As trusts have superseded
single corporations because this mode of industrial organization was more
economical, we must expect to find that one of the economies was the
displacement of labor. The discharge of traveling salesmen has already been
spoken of; with the consolidation of various plants under one control other
high-priced men were let go—managers, superintendents, etc. The same
thing was true at the other end of the industrial scale and thousands of
workmen, usually the least efficient and capable, were deprived of work.
The natural consequences of these combinations and economies were not
clearly apparent at the time, because they were happily coincident with a
period of business expansion and prosperity which reabsorbed into the
industrial organism most of the displaced workers. Another phase of the
relation between trusts and labor is that of their effect upon wages. In
general it may be said that there are only two sources out of which an
increase of wages can be paid, and these are the profits of the business
organizer and manager or the increased product of the business itself, and of
these two only the latter can serve as a permanent source of higher wages.
Now it is pretty evident that labor has not been in a position to force the
trust magnates to forego their profits. On the other hand, wages in industries
carried on by industrial combinations have risen, and it must therefore have
been because there was more produced and consequently more to be
divided. If the inefficient workers were discharged and only the best ones
retained by the trusts, here is one explanation why they could afford to pay
high wages—they paid more because they got more done. As yet labor has
not admitted that it is unable to cope with these industrial combinations; it
has however demanded that it be allowed to combine on a national scale
and to bargain collectively for united labor with combined capital.
The discussion of the effects of trusts upon the consumer leads at once to
the discussion of their effects upon prices, for it is through the agency of
price that the trust touches the ordinary man. The advantages claimed by
trust organizers are economies of production and lowered cost; but the vital
question to the consumer is whether lowered cost increases profits or
reduces prices. On this point the Industrial Commission reaches the

following conclusion: “that in most cases the combination has exerted an
appreciable power over prices, and in practically all cases it has increased
the margin between raw materials and finished products. Since there is
reason to believe that the cost of production over a period of years has
lessened, the conclusion is inevitable that the combinations have been able
to increase their profits.” Moreover the power over prices was greatest
during certain periods when the control of the combinations was greatest.
The problem therefore resolves itself into the question, are trusts
monopolies? While a categorical answer cannot be given to this, it may
safely be affirmed that all trusts try to be monopolies. Nor is it necessary to
control the production, sale, or purchase of a commodity absolutely in order
to exercise monopoly power; the control of 50 or 60 per cent may suffice to
secure virtual monopoly. The purpose of a monopoly is so to fix the price
that it will obtain the maximum net profit. It is conceivable that this result
may be attained by lowering the monopoly price below the point of the
competitive price, but this is unusual. In general a monopoly price has
meant a high price, and a high price has meant a restriction of the output.
Where that has been the result of trust control, society has been injured, for
not only has it not shared in the economies of production but it actually gets
less and has to pay more than it would have done under competition. It may
be said, however, that even in the case of the greatest monopoly there is
always the specter of potential competition threatening its profits, while the
possibility of substituting some other commodity for the monopolized
article protects the consumer from too great extortion and keeps the price
within limits. Absolute control over price is never exercised by any
monopoly. Nevertheless, we may fairly conclude, in the words of Henry D.
Lloyd, that “monopoly is business at the end of its journey,” control over
prices is the object of combination.
There remains to be considered another charge of monopoly which has been
brought against the trust, the monopoly of opportunity or the suppression of
individual initiative. It is no longer possible, it is claimed, for the man of
small means, even with good talents, to engage in business for himself: he
must accept some subordinate position in a corporation where his
individuality is checked and his power of initiative does not find free play.
So far as this is true it would seem to be the result not so much of the trust
movement as of large-scale production. We have seen that the tendency of

machine production is to enlarge the business unit and to call for the
investment of constantly larger amounts of capital in up-to-date
establishments. Some writers even point out that the average business man
who engages in business on his own account fails, and that he should
therefore be grateful if more efficient producers offer him a remunerative
and steady salaried position. Without insisting upon this point it may still
fairly be noted that there are large fields of enterprise that lie outside the
area of monopolistic control. “Large-scale production is best adapted to
articles that can be turned out in large quantities according to uniform
patterns and standards; individual initiative is still free in those lines of
production that call for artistic ability or appeal to individual tastes, or
which, like agriculture, are dependent upon variable conditions.”[6]
There are, however, other evils connected with trust organization and
management that are more easily remediable and that call for legislative
regulation. “The evils of combination, remedied by regulative legislation,”
concludes the report of the Industrial Commission,[7] “come chiefly from
two sources: (1) the more or less complete exercise of the power of
monopoly; (2) deception of the public through secrecy or false
information.” Various remedies have been suggested to meet the first class
of evils, those of monopoly, generally in the direction of strengthening the
powers of the Federal Government. We have however no lack of legislation
on this subject already: thirty-four states and territories have passed anti-
trust laws, and the federal Anti-Trust Law of 1890 explicitly provides that
“every contract, combination in the form of a trust or otherwise, or
conspiracy in restraint of trade or commerce among the several states, or
with foreign nations, is hereby declared illegal.” The severe restrictive
measures of the states have been largely nullified by the loose legislation of
three or four “charter granting” states, in which 95 per cent of all the trusts
have accordingly been chartered, while the federal enactments have been
found very difficult to enforce. It is not easy to define or to prove monopoly
or conspiracy in restraint of trade. The second class of evils has been met by
statutes requiring publicity and more definitely fixing the responsibility of
corporation officials. Such measures of control must be the first step toward
intelligent regulation, and are to be commended as thoroughly reasonable.
The establishment of the federal Bureau of Corporations with power to
“investigate” industrial corporations engaged in interstate commerce has

already led to the publication of some valuable reports. We must first
proceed along the lines of publicity and intelligent information before we
attempt more drastic remedies.

VI. SPECULATION AND CRISES.

An unavoidable element of risk enters into all modern business. In the old
handicraft stage of industry goods were made upon order; demand preceded
supply very definitely, and there was little possibility of mistakes in
production. Nowadays, as we have seen, production is for a distant and
often uncertain market. It is carried on by machine methods and roundabout
processes; sometimes the result is a very remote one and the uncertainty of
success is correspondingly great. Production is not based upon order, but
upon a forecast of the possible demand, upon a future market. Chance and
change are inseparable from productive enterprise—natural chances from
the elements, political changes, as war or unfavorable legislation, industrial
mistakes or sickness or death of oneself or others, and economic changes,
as the invention of a new machine or a change in fashion. These are the
unavoidable incidents in industry and are not under the control of the
individual business. Some of them, however, are so regularly recurrent that
they can be foretold on a large scale for any industrial society, and can be
guarded against by insurance. Everyone recognizes the desirability of
having such risks as those of fire, shipwreck, lightning, death, etc., assumed
by certain individuals or companies who make a business of such risk-
taking. A small premium is paid by the individual for protection, and he is
freed from anxiety from mischance and is able to devote his whole energies
and capital to his business; the insurance company has specialized in this
one department and by equalizing the chances over a wide field has
practically eliminated them. In doing this it performs a service of
recognized and undoubted social value.
There is another kind of risk-taking the social utility of which is not at first
sight so clear. Among the chances of productive enterprise are those due to
the rise and fall in the prices of the raw materials, the labor, and the finished
product between the time when the process of production is begun and the
time when it is completed. Every farmer, every manufacturer, every student
even who invests capital in his own education, is to some extent a
speculator. Along certain lines he can protect himself by insurance, but that

is not possible in all. Is there no way, then, by which he can guard himself
against price fluctuations and assure himself of the legitimate gains of his
business? This, it may be answered, is the function of the speculator in
modern business, and in performing this service he is benefiting society in
much the same way that the insurance company does. We must, however,
clearly distinguish between legitimate and illegitimate speculation; we are
discussing only the former.
One way in which the speculative risk attaching to price fluctuations is
reduced for the manufacturer and assumed by the speculator is by the
establishment of a continuous open market, as the stock and produce
exchanges. If a miller, for instance, engages to deliver flour a year hence
and expects to begin milling in six months, he must know at what price he
can buy his wheat when he needs it, or his anticipated gain may be turned
into a loss by an unexpected rise in the price of wheat. He is able, however,
to buy a “future” in wheat on the produce exchange from some broker who
makes a specialty of this business. He buys his needed wheat now for
delivery six months hence, and on the basis of this price is able to accept an
order for his flour a year from now, allowing himself a fair profit as a miller
but wholly eliminating the speculative risk of price fluctuations. Or a
building contractor, before making an estimate of the cost of erecting a
structure, will secure options at definite prices from dealers on the materials
he will require. So, too, in the iron and steel business it is customary for
manufacturers to contract in advance for materials at the same time that
they accept orders for the delivery of the finished products. In all these
cases the business of dealing in futures is assumed by a particular class,
who have developed a special skill and ability in forecasting price
variations, and who can do so very accurately. It is not a matter of luck or
chance, but the result of wide knowledge and careful study. “To foretell the
price of wheat one must know the rainfall in India, the condition of the crop
in Argentina, must be in touch as nearly as possible with every unit of
supply that will come into the market.” Sometimes the speculators make
mistakes, but they are certainly less apt to do so than men who are without
their special talent and training.
The social value of this service lies in the equalization of demand and
supply between the present and future that is thereby effected. Let us take as
an illustration the case of the miller cited above. If at the time he accepts the

order for flour the price of wheat is high, he will be inclined to charge a
high price. But the wheat broker, foreseeing that there is going to be an
abundant crop six months hence, engages to sell him his wheat for future
delivery at a low price, and he is thereby enabled to sell his flour at a lower
price. At the same time the price of the wheat on hand at the present time,
instead of being held and sold at famine prices, is consumed for present
needs at moderate prices. The operations of the wheat brokers in such a case
have a very steadying influence on prices, preventing the oscillation
between very high prices in times of scarcity and very low prices in times
of glut. It must be admitted that dealings in futures are highly speculative;
“but it must be remembered that it is not merely the dealings in futures, but
the future itself, that is uncertain. If such dealings can be confined to the
men most competent to make accurate predictions, their tendency will
clearly be to lessen the uncertainties of business.”[8] But closely connected
with legitimate speculation or risk-taking by a specialized and trained class,
there is, as our stock and produce exchanges are actually conducted, a large
amount of illegitimate speculation, and to this we may now turn for a brief
consideration.
The facilities offered by the open markets on the exchanges and the practice
of dealing in futures are taken advantage of by many who, without any
special training or opportunities of knowing the market, simply bet on the
price movements. Brokers are willing to buy and sell produce or stocks for
their customers if the latter will put up with them a margin of about 10 per
cent to protect them from loss. It is therefore possible for a person with little
capital and no knowledge to speculate on a margin, buying what he does not
want and selling what he does not own. In practice it is impossible to
distinguish between those dealings in which actual delivery is intended
(legitimate speculation) and those in which no such delivery is
contemplated (gambling), and consequently most efforts to regulate
transactions on the exchanges have failed to accomplish their purpose. The
purification of their methods would seem to lie with the members of such
exchanges themselves. The contention has often been made that these
fictitious transactions in such commodities as wheat or corn or cotton create
an artificial reduction in prices, since the professional gambler usually sells
short or “bears” the market, and that this injuriously affects the farmer. This
is manifestly untenable, since every fictitious sale must be balanced by a

fictitious purchase. What actually takes place is simply a bet between the
two parties to such a transaction on the actual course of prices and of itself
does not affect prices, except in the unusual case of a “corner.” There is,
however, great possibility of evil in the presence of a crowd of uninformed
speculators, for they can greatly increase the power of an unscrupulous
operator who can persuade them to follow his lead. Their presence, too,
increases the temptation to such a man to rig the market. Under present
conditions the abuses of speculation are more in evidence than the
economic advantages. How to confine speculation to the small group of
risk-takers who have special training and aptitude for it, and to prevent
gambling on the stock and produce exchanges is one of the economic
problems of the day.
One of the most striking phenomena of modern industry is the frequent and
violent convulsions of business known as crises. They are characteristic of
all commercially advanced countries and are generally most marked in
those countries which are most advanced. They are a product of modern
methods of capitalistic production and are essentially a phenomenon of the
nineteenth century. A crisis in its last analysis is the result of a lack of
adjustment between production and consumption, due primarily to mistakes
in production. It is significant that crises usually occur in periods of
business prosperity when credit is easy, prices high, and employment
general. Such a period of business prosperity and rising credit may have
been begun by a series of good harvests. The demand for manufactured
commodities increases, prices rise, manufacturers enlarge their factories or
engage in new enterprises, wages and profits go up. Many speculators,
seeing the rise, and thinking it will continue, borrow money to buy goods
with the expectation of selling again at a profit. Credit operations are
expanded to a dangerous extent, and when at last a shock to confidence
occurs the house of cards collapses and a painful liquidation and
readjustment of industry ensues. The state of trade, in the words of Lord
Overstone, “revolves apparently in an established cycle. First we find it in a
state of quiescence—next improvement, growing confidence, prosperity,
excitement, over-trading, convulsion, pressure, stagnation, distress, ending
again in quiescence.”
The immediate occasion of a crisis is always a shock to credit or
confidence. Such a shock, begun perhaps by the failure of a bank or

merchant, creates a demand for ready money. No one is sure that his
neighbor will remain solvent. Everyone accordingly tries to secure himself
against loss by enlarging his cash reserve and thus lessens the supply for
others. Now modern industry is carried on by means of credit. There is at no
one time enough money in the country to meet all obligations expressed in
terms of money. Considerably over three-fourths of the larger commercial
transactions in the United States are carried on by means of credit. If
everyone tries at the same time to get actual cash, there is simply not
enough money in the country to go around. This increase of demand and
diminution in the supply of money forces up the interest rate on short-time
loans. Money—actual cash—is needed by many people to meet immediate
engagements and they are willing to pay almost any price for it. In the last
panic the rates for call money went up to over 100 per cent and in many
cities in the United States clearing-house certificates and other substitutes
for money were issued for use in ordinary retail trade. But even at high rates
money can often not be borrowed. Many merchants and manufacturers are
compelled to sell their goods at a sacrifice in order to obtain it. Vast
quantities of goods and securities are thrown on the market just when
investors and consumers feel least able to purchase. The result is a fall in
prices. Such a fall in prices lowers profits. Enterprises have been started and
engagements made on the supposition that prices would continue at the old
high level. When they fall it is impossible to pay interest out of current
earnings. Foreclosures and readjustments take place. There is a general
liquidation and reorganization of industry. When interest contracts have
been adjusted, then the effect on wages begins to be felt. As long as a
manufacturer is struggling to maintain his credit he will keep his factory
going, but when he has failed and perhaps been foreclosed, then the factory
stops. Men are thrown out of work, and wages—the price of labor—fall.
Labor troubles usually mark the end of such a period of readjustment.
This stage marks the end of the crisis and the beginning of a period of
depression or “hard times,” which continues for a longer or shorter period.
The panic of 1893 was followed by a long-continued depression which
lasted until 1897, a period which was marked by low prices and slack work.
In 1898 began a revival of business and an era of marked prosperity set in
which continued for almost ten years, interrupted only slightly by a “Wall
Street panic” in 1903. In October, 1907, a severe crisis occurred, recovery

from which, however, has been remarkably rapid. The periodicity which has
attended crises in the past is so marked—occurring as they have at intervals
of about ten years—that many writers consider them inevitable. As the
easiest way to answer this question we may take up three main theories as
to the causes of crises.
A much quoted, but now generally discredited, theory is that of W. S.
Jevons, a noted English economist, who ascribed crises to sun-spots. Every
ten years and a fraction there occur outbursts of electrical and heat energy
on the sun, which we call sun-spots. These result in increased heat waves,
which affect the crops on the earth, causing enlarged harvests in Europe and
the United States and drought and famine in India and the tropics. The large
harvests and good prices start a wave of prosperity and speculation, which
culminates inevitably in a panic and depression, until a recurrence of the
heat phenomenon starts the cycle again. The theory states some undoubted
facts, but no causal connection between sun-spots and crises can be traced,
as the latter are too irregular and the two do not always coincide. Were this
theory true crises would be beyond human control.
A second theory, or group of theories, are those which attribute crises to
over-production. Under modern conditions of industry a small group of men
direct industry and determine what shall be produced. They try to estimate
future demand and to adjust production to consumption, but they often
make mistakes. They divert capital into unproductive industries, they
produce the wrong things and create a comparative glut in certain lines, and
when they cannot sell their goods at a profitable price they fail and
precipitate a crisis. Industry must then be reorganized and frequently
control be put in the hands of other men. A variation has been given this
theory by the socialists, under the leadership of Rodbertus, who insist that
the reason that there is over-production is because of the institution of
private property. Since the capitalists own all the tools of production they
pay the laborers only starvation wages. The latter cannot possibly buy all
that is produced and commodities consequently heap up in the warehouses
until they are thrown upon the market to be sold at any price. Then a panic
occurs and a readjustment of production.
The last of these theories regards a crisis as essentially due to a failure of
credit. It is seen that a large part of modern industry is carried on by

borrowed capital, by roundabout processes and for a distant market and not
upon order. That is, the success of a business depends upon its ability to sell
its goods when produced. Now the aggregate volume of transactions that
can be carried on in a year, so runs the theory, depends upon the efficiency
of the credit system; that is, in general, upon the freedom with which banks
are willing to loan money to people who engage to repay it in the future out
of their ventures. If for any reason the banks reduce this accommodation the
amount of business that can be transacted upon borrowed capital is
lessened. Either some transactions must stop or prices must fall. Either of
these events causes commercial disaster. The contraction of credit makes it
impossible to get the goods into the right hands, and so we have the
phenomena of over-production in a great many lines. As exchange and
transportation have developed and markets widened, crises have become
more universal. According to this theory, they are inseparably connected
with the use of credit and can be controlled only by a more careful granting
of credit by the banks to industrial managers. Another phase of the credit
theory is presented by those who insist that the cause of crises is the
rhythmic overestimation of the profits to be secured out of certain lines of
production, or their over-capitalization. The new enterprises are financed by
the banks on the basis of this mistaken over-capitalization, their organizers
engage to pay rates of interest which they cannot earn, and the crash
inevitably follows. This is often called the over-capitalization theory, and is
essentially psychological in its character.
There is no doubt as to the truth contained in this last theory. It helps to
explain the rhythmic periodicity of crises. After every period of business
depression confidence revives and hope is renewed; overestimation of the
success of new ventures is inevitable. Then follows a mistaken investment
of capital in certain lines of production, as in railroads in 1884, and a
relative over-production at profitable prices of certain commodities. The
true explanation seems to be found in a combination of the over-production
and over-capitalization theories.
The practical problem that presents itself in this connection is the question
as to whether it is possible to prevent the recurrence of crises. In view of the
explanation just given it would seem that they must be regarded as
unpreventable as long as industry is carried on under the competitive
capitalistic system of production and the modern credit system. Moreover,

crops differ in amount from year to year and probably always will. Human
production and human genius are unequal. Crises may be regarded as the
price a progressive society pays for its advance, and they may be expected
to recur pretty regularly at periodic intervals. Their disastrous effects may,
however, be greatly lessened by wise currency legislation, by greater care in
granting credit, and by greater wisdom in the direction of individual effort.

VII. THE MODERN WAGE SYSTEM.

We have already characterized the modern system of industry as
capitalistic, that is, as involving the use of expensive and complex
machinery in factories under the control of the capitalist managers of
industry. As we have seen, such a system has caused an enormous increase
in the production of wealth; it has also raised the general standard of
comfort and the level of wages, and has relieved labor to a considerable
extent of the deadly strain of hard manual toil that was characteristic of
preceding systems. The factory system, under which capitalistic production
is now carried on, may also fairly be credited with other beneficial results:
as steadiness and punctuality are essential, it has on the whole led to
increased sobriety and temperance; the work in general is healthier, being
performed under better sanitary conditions than under the old domestic
system; the intellectual status of the workingman has been raised, as vastly
more intelligence is required of a skilled machine operator than of the old-
time hand laborer; and finally the general well-being of the working class
has been improved, as they have shared in the larger production made
possible by machine methods. But, on the other hand, the new processes
and methods have been accompanied by great abuses, though never so great
in this country as in England. Long hours, the employment of women and
children, the weakened economic position of the laborer, fluctuations in
production, liability to be without employment, industrial accidents, the
abolition of personal ties between employer and employe, the crowding of
workmen into a small space to work by day and their concentration in city
tenements by night—these are some of the problems for which the factory
system must be held responsible. The condition and position of labor have
been vitally affected. So far we have considered mainly the problems
connected with the organization and use of capital. We must now take up
the various questions connected with the relation of labor to capital and to
the capitalistic system of production.
One of the most vital factors in the situation—which we must frankly admit
at the start—is the existence in modern industrial society of a distinct wage-

earning class. It is perfectly obvious that under present conditions of
production great capital or great ability is necessary in order to become the
manager of an industrial enterprise. Most laborers do not possess either the
one or the other of these, and although there are fortunate examples of
industrial leaders who have risen from the ranks, the general rule is, once a
wage-earner always a wage-earner. The number of those who can achieve
industrial independence is moreover growing smaller as business becomes
more specialized and centralized. The laborer therefore belongs to a class,
which is rapidly developing what the German socialists call class-
consciousness, that is, the feeling that he belongs to a distinct industrial
group with interests different from and often antagonistic to those of other
groups or classes. In his struggles with employers over wages this
antagonism of immediate aims obscures the deeper mutuality and
interdependence of their really complementary interests and not
infrequently leads to a feeling of hostility, finding expression in strikes and
labor agitation.
In the transition to the factory system Mr. John A. Hobson[9] points out that
the position of the laborer has been one of increasing dependence in the
following five important points: (1) The ownership of material—at first the
worker owned this and made it into the finished product, but now he has
only a passing interest in a small part of the process of working it up. (2)
Ownership of tools—he retained these up to the time of the introduction of
machinery, but now seldom owns them. (3) Control of productive power—
with the displacement of hand labor and muscular power by steam-driven
machinery, he no longer owns even this. (4) Relations between workers and
employers—they were formerly on an equality; under the guild system the
master and the apprentice had the same social position; now the laborer has
sunk in the scale, or the employer has risen, until the only bond between
them is, as Carlyle said, the “cash nexus.” A case was recently instanced
where a workingman who had been working in a factory met his employer
for the first time at the end of seventeen years. (5) Workplace—until the
establishment of the factory system this had always been the home; now it
is the factory, and there is a complete divorcement between work and the
home.
Another characteristic of modern industry from the labor point of view is
the existence not merely of a wage-earning class, but, more fundamental, of

the wage system. “It is characteristic of the modern industrial system,”
writes President Hadley,[10] “that a laborer who owns no capital, though
nominally free to do what he pleases, must actually find some property
owner who will give him enough to keep him alive during the period which
must elapse between the rendering of the labor and the sale of the finished
product. Under such circumstances, the laborer almost inevitably submits to
the direction of the property owner in deciding how his labor shall be
applied. Laborers without capital must necessarily work on this basis; even
those who have small amounts of capital habitually do so. Such advances of
capital are known as wages.” Here we have the essence of the wage system
in a nut shell. The laborer sells his labor to an employer for a stipulated
wage. He has a commodity, his labor, consisting of a certain amount of
strength and skill, which he is free to dispose of on the market to the best
advantage, as the owner of any other commodity might do. Legally, labor is
property. Owing, however, to the fact that all modern production requires
capital, the only buyer of his labor is a capitalist, who directs the way in
which the labor shall be applied. Such a condition, as well as some
peculiarities of the commodity labor leave the laborer, indeed, only
“nominally” free. In theory the labor contract is a perfectly free contract,
entered into voluntarily by both employer and wage-earner, and the courts
have generally insisted that this theoretical freedom must be maintained. In
practice various modifications of the theory have taken place: legislation
has been passed protecting laborers from bargaining away their rights, and
trade unions have been formed to bargain collectively for a group of
laborers. In the last analysis, however, the laborer must support himself by
the sale of his labor; society guarantees him neither a living nor even the
right to work. He is a bargainer in a competitive industrial world and he
must assume the responsibility of providing for himself and his family by
securing work. Just what is involved in such a statement is perhaps best
brought out by comparing the modern wage system with previous systems
of labor.
The first historical system of labor, aside from that in the family, was that of
slaves. In this case the labor was forced, and being given under coercion
was probably very inefficient; but the laborer was at least assured of a
minimum of food, clothes and shelter. Slavery was the main source of
manual labor in the ancient world, and did not disappear in England until

the eleventh century. The feudal system of the Middle Ages was
characterized by serfdom, according to which the laborer was bound to the
soil and was compelled to render his lord certain services. Gradually
serfdom was broken down and the wage system took its place, although
remnants of serfdom remained in England until the eighteenth century. Four
centuries before this, however, the disintegration of the feudal society had
already begun, the serfdom of the agricultural laborer was commuted into
regular money payments, and the artisan bought or otherwise secured his
freedom from feudal exactions. In the towns industry was regulated by the
guilds, and while at first they were distinctly beneficial, in time they
became monopolistic and oppressive. Power was lodged in the hands of the
wealthy traders and merchants and they legislated in their own behalf
against the growing class of laborers, as did the wealthy land owners
against the agricultural laborers. The Statute of Laborers and other acts
sought to fix wages and to prevent the freedom of the laborer in moving
about or choosing his own occupation. Not indeed until the nineteenth
century were the last of these old regulative laws repealed and the modern
labor contract recognized in law and practice as a free contract. “The
growth of labor,” says Brentano, has been “from the system of authority to
the system of contract.” The system of authority, by which rates of wages,
length of apprenticeship, and other details of industry were fixed by some
superior authority, was found to be restrictive, uneconomic and unjust, and
it gave way to the principle of economic freedom. According to the newer
theory, first given effective voice by Adam Smith, in 1776, the individual
should be left to himself, as he knows his own interest better than does the
most enlightened government. The freest scope was given to the powers of
individuals and each was to be the unlimited master of himself and his
possessions.
It has since been found necessary, however, to modify both the theory and
practice of this extreme individualism in order to protect the interests of
various classes of society, especially the laborer. The legal theory still is that
“today the labor contract is perfectly free: either side may make whatever
contract he can get the other side to sign. Not only this, but either side may
freely combine to demand any form of contract from the other side, as mere
combinations alone are now made perfectly legal.”[11] In practice, however,
this complete freedom has been greatly modified by factory acts, acts

restricting the hours and conditions of employment of women and children,
anti-truck acts, laws providing for weekly payments, guarding of
machinery, limiting the hours of labor, and on the other hand prohibiting
intimidation and molesting. For the most part these laws have applied to
women and children, who are thought less capable of guarding their own
interests, and to a much less degree to labor contracts made by men, who
have been considered better able to make equal contracts with employers.
But concerning certain conditions of employment it has been realized that
even adult males are not capable of securing equitable bargains, and along
these lines the nominal freedom of the labor contract has been decidedly
abridged. The attitude of the courts toward such legislation shows that they
have declared many laws unconstitutional on the ground that they infringe
upon the right of free contract, but in the long run seem inclined to uphold
as much of this restrictive legislation as seems necessary to obviate the
undoubtedly evil results that flow from this real inequality of employer and
laborer.
It is a very vital and important practical economic problem that presents
itself in this connection. How far shall we carry this regulative principle, or
how far shall we insist upon the principle of freedom? Many labor leaders
are again asking for an effectual control of the labor contract, not by the
action of trade unions, but by the direct legislation of the state. What shall
be our attitude to this demand? Before we can fairly answer this question
we must consider somewhat more fully the character of the bargain that
takes place between an employer and an individual workman, and the
nature of the commodity that the laborer has to sell.
It has already been stated that the commodity which the laborer brings upon
the market is his labor, that is, himself, his time, and his energies. But these
wares are peculiar and differ in several important respects from ordinary
marketable commodities. In the first place, labor is like a perishable
commodity which must be sold at once if the owner is not to incur loss. The
laborer has usually little if any capital by which to support himself in case
he cannot find work, and may be compelled to make a forced sale of his
labor, that is, to accept unduly low wages. In this respect then he is at a
disadvantage in bargaining with his employer. A second peculiarity of the
sale of labor is that the laborer and his work are inseparable. The seller of
an ordinary commodity disposes of it absolutely when he makes a sale. “It

matters nothing to the seller of bricks whether they are to be used in
building a palace or a sewer; but it matters a great deal to the seller of labor,
who undertakes to perform a task of given difficulty, whether or not the
place in which it is to be done is a wholesome and a pleasant one, or
whether or not his associates will be such as he cares to have.” The person
who buys this labor necessarily directs the application of it to the task in
hand, and thus controls very largely the place, the sanitary and social
conditions, the hours, the character, and safety of the work. In the third
place, the superior knowledge and intelligence of the employers gives them
an advantage in bargaining with their employes, while the reluctance of
employers to “spoil the labor market” often prevents that freedom of
competition which is supposed to secure to the laborer his full share of the
product he helps to produce.
In view of these facts we may fairly conclude that workmen are inferior to
employers as bargainers and that protective legislation is necessary in order
to put them on a real equality. “When laborers have to make a forced sale of
their labor, their freedom of contract is more nominal than real. When
women and children stand individually before the manager of hundreds of
thousands of capital, it is possible that there may be little freedom and less
equality in the contract by which they sell their services.”[12] It is clear that
between two parties of such unequal knowledge, resources and ability as a
laborer and his employer the labor contract cannot be entirely free and
equal. While trade unions, by combining isolated workmen into formidable
and unified groups, have immeasurably increased their bargaining strength,
yet legislation has also been found necessary to remedy the disadvantages
already enumerated. It is realized that “there is no greater inequality than
the equal treatment of unequals.” In the opening section of this text
attention was called to the fact that economic freedom or liberty was one of
the corner stones of our modern industrial society. But freedom can best be
secured by securing equality and responsibility. Factory legislation and
labor laws are designed to correct the inequalities imposed by nature or
involved in the very nature of capitalistic production. Direct interference by
the state in the freedom of contract is justified as leading to a more real and
certain equality and liberty. But while we may thoroughly approve the
principle of labor legislation it is difficult to know at what point we should
stop. A leading American authority on the law of labor has stated[13] that

“the industrial laborer at least is beginning to be a privileged class in the
law.” On the other hand, it was possible for Disraeli to say as late as 1875,
after the passage of the Employers and Workmen Act by the British
Parliament, “for the first time in the history of this country employer and
employed sit under equal laws”—so recently were the legal disabilities
removed under which the English workmen had suffered up to this time.[14]
The pendulum has swung so rapidly and so far in labor’s direction in the
last generation that it is a fair question how far it will—or should—continue
to go.

VIII. LABOR ORGANIZATIONS AND COLLECTIVE
BARGAINING.

As modern capitalistic production caused the growth of a distinct wage-
earning class and brought about a sharp separation between employers and
laborers, and as the latter were thrown upon their own resources under the
prevailing theories of free competition and free contract, it was inevitable
that they should organize to secure their interests as a class. The growth of
labor organizations has been greatest in those countries where the laborer
has been forced to depend mostly upon his own efforts for protection and
improvement, namely, in England and the United States. On the continent
of Europe, on the other hand, where the individual has been accustomed to
look to the government for the redress of industrial grievances, there has
been a much less vigorous and spontaneous development of such
organizations. They are a product of the nineteenth century and had their
origin in modern machine production.
The growth of labor organizations in the United States has proceeded hand
in hand with the industrial development of this country, and has been
especially rapid since the Civil War. Two distinct types of trade unions may
be noted—the local and the national (or international) unions. The former,
which comprises members who live and work in the same locality, is the
primary unit, and dates back to the beginning of the century. Each local
union, even when subordinate to a national organization, is a self-governing
unit, and is absolutely democratic. Its relation to the national body has been
well compared to that of one of our states to the United States. The first
national union was not formed until 1850, but now these far surpass the
locals in importance. Their government is representative, as they are made
up of local unions. The great majority of the national trade unions are bound
together in the powerful federal organization, the American Federation of
Labor. The membership of this body numbers considerably over 1,000,000,
while the railroad unions, which are not connected with it, claim about
125,000 more. Probably not far from 1,500,000 persons in the United States
belong to labor organizations, which is about 10 per cent of the total

working population or about 15 per cent of those engaged in trade and
transportation, manufacturing and mechanical pursuits. While this does not
seem a very large proportion and is not as large as the membership of
British trade unions, yet it must be remembered that they constitute on the
whole the elite of the labor world and exercise an authority and power out
of proportion to their numbers. Many other workmen, who do not
themselves belong to the unions, follow their lead and are directly affected
by their actions.
Historically the two most important national organizations in this country
have been the Knights of Labor and the American Federation of Labor, and
they represent such different principles that it will be worth while to
describe them. The Knights of Labor was organized in 1869 as a local union
of seven garment cutters and had a meteoric career, counting a membership
of 730,000 in 1886, the year of its greatest strength. It was a national
amalgamation of mixed local assemblies composed of workers of all trades
who lived in the same locality. It held the theory that the interests of all
members of the laboring class are identical and must be cared for at the
same time, if possible, by political action, by co-operation, and by
education. In 1886, however, it entered upon a series of disastrous strikes;
later it came into conflict with trade unions which had not joined its ranks
and were opposed to its policies; and finally it became entangled in politics.
As it lost in influence and strength its place was taken by the American
Federation of Labor, which was its very opposite in organization and
government. This latter body is a “confederation of trade and labor unions,”
each trade being organized separately into local unions which are given
great autonomy, these unions alone being represented in the national body.
Only matters of general interest come before it, all local trade matters being
left to the local unions. In 1903 it claimed a membership of 1,745,000.
More important than the history of labor organizations is a knowledge of
their objects and methods. The primary purpose is of course to control the
conditions of labor and to substitute the principle of collective bargaining
for individual contract. As one of the most effective ways to secure this
result they aim at a more or less complete monopoly of the labor market.
This they may do by bringing all workers in a trade within the union or by
preventing non-union men from working. The first of these is called the
inclusive method,[15] and if successful makes the union the sole seller of the

kind of labor controlled by its members. It is a monopoly of the laborers
against the employers and is sought to be enforced by inducing men to join
the union either by persuasion or coercion, the latter finding expression in
the strikes against the employment of non-union men and the insistence
upon the “closed shop.” The other form of monopoly consists in the
exclusion of new members from the trade and in a control of employment;
this is a monopoly of a small group against their fellow-workmen. It is
enforced by regulating the entrance to the trade, making it difficult or
expensive, or by limiting the number of apprentices. Sometimes, as in the
Chicago Building Trades in 1900, they have united with their employers by
means of “exclusive agreements” to raise wages and prices of the finished
products at the same time, and thus jointly to mulct the public. Such efforts
to monopolize the labor market have their counterparts in the organization
of capital, as we have seen. In practice such a labor monopoly has
sometimes been used to improve and elevate conditions, just as sometimes
a capitalistic monopoly has reduced prices below the competitive point. In
general, however, we must condemn monopoly on principle in the
competitive field and insist that freedom and opportunity be given to all on
as equal terms as possible. Of the two forms of trade union monopoly, the
former alone, which endeavors to make it all comprehensive and to enforce
generally union conditions, can be economically justified.
“The establishment of a standard rate of wages may perhaps be said to be
the primary object of trade union policy. Without the standard rate the trade
union, such as it is, could have no existence.”[16] The purpose of the union is
to substitute collective bargaining for individual agreements and thereby to
improve the condition of its members. But if a single bargain is to
determine the pay of a large number of men, there must be a common
standard. In every employment on a large scale the men are necessarily
grouped together and their pay is determined by a common rule. This is true
even in non-union shops. It is generally assumed that the standard rate of
labor organizations means a uniform wage for each member, but this is not
the case; it means rather a uniform rate of pay to all for the same
performance. In the case of piece work, it could manifestly not mean
anything else; but a large number of labor leaders object to piece work.
They insist that a standard wage means a minimum wage, and that by the
establishment of such a minimum the whole standard of efficiency and the

plane of competition are raised, as the employers cannot then afford to hire
any but competent workmen. The question immediately presents itself as to
what is to become of the older or partially disabled men, who are no longer
able to earn the standard or minimum wage? In England they are practically
guaranteed a subsistence by the union; in this country the union not
infrequently exempts them from the provisions as to the standard wage.
When the rule is enforced there is certainly a real hardship for these men.
But from the employers there comes the more serious complaint that the
effect of the standard wage is to reduce to a dead level the efficient and the
inefficient; that it is a maximum wage and that the efficient and industrious
are prevented from earning more than a fixed amount. There is undoubtedly
a great deal of truth in this charge; the man who hastens the pace is said to
be taking “blood money,” and sometimes a maximum wage is set which the
members are forbidden to exceed. On the other hand, it may fairly be said
that while the union regulation of wages does tend to produce greater
uniformity, the union rate is usually higher than the competitive rate would
be, that is, wages are leveled up, not down; and finally, that territorial
variations make the local rate conform to local conditions.
A reduction in the hours of labor has been even more strenuously urged by
progressive labor leaders in the United States than an increase in wages.
“Organize and control your trade and shorten your hours,” is their
contention, “and wages will take care of themselves.” Their arguments in
favor of a general shortening of the working day are twofold. In the first
place, owing to the intensity and strain of work under modern machine
methods, the worker cannot work efficiently more than eight or nine hours a
day. The work is too exacting and the strain on the attention too great; it is a
noticeable fact that most of the accidents in industrial establishments occur
in the last hour or two of the working day. Not only that, but the laborer is
entitled to his share of industrial progress in the form of more leisure,
giving him time for a better family and social life, affording opportunity for
intellectual improvement, and permitting the development of more rational
and higher wants. With the improvement in the condition of the laboring
classes, will go the elevation of society as a whole.
The second argument in favor of shorter hours put forward by the trade
unionist, is economic rather than social. He argues that a “reduction of
hours will diminish the supply of labor in the market, and so will raise its

price. It will make room for the unemployed, and so will remove the
depressing influence of their competition.” There is involved in this
contention the familiar lump-of-labor argument of the trade unionist: there
is just so much work to be done, and if some men do each a little less there
will be more for others. By shortening the hours of labor of everybody
employment will be made more general, and the work will be better
distributed. Now the economists in general have supported the trade unions
in their demands for a shorter working day, but they have done so because
they believed that the product of industry would not thereby be diminished.
They have seen that when the hours of labor were reduced the laborer was
less rapidly worn out physically, that he could work more rapidly for a short
time, and that his increased leisure and pay, if rationally used, made him a
more intelligent and efficient worker. In other words, a reduction in the
hours of labor from 15 a day to 12, to 10, and even in some cases to 8, was
not attended by a parallel reduction in the output, but the latter remained
about the same. This is the great economic justification of the shorter
working day, and as long as this can go on without materially affecting the
product of industry it must be approved. If, however, the latter is decreased
there will be less to divide and then the relative disadvantages of a smaller
dividend must be weighed against the advantages of increased leisure. Of
course the point to which the number of hours can be reduced without
lessening the product can only be determined by experiment, and will differ
in different trades, but it is inevitable that until this point is reached the
pressure of the trade unions for shorter working days—or for more holidays
or half-holidays—will not be successfully resisted.
Turning now from theory to fact, we find that there has been a great
improvement in the condition of labor in this respect. At the beginning of
the nineteenth century the almost universal working day was, as McMaster
tells us, from sun to sun. As factories grew up the habits of agricultural
labor were carried over into industrial occupations, and working days of 16
and 18 hours were not uncommon. In 1903 the average length of the
working day in the United States was 9.6 hours. This great reform may
fairly be credited to the efforts of organized labor itself, for without their
insistence and struggles it is unlikely that it would have been voluntarily
granted by employers.

The limitation of output results almost necessarily from the above-
mentioned practices of the unions: reduction of hours, prohibition of piece
work, and the standardization of wages all tend to restrict the output of the
individual worker. But some of the unions have gone further and have
directly limited the amount that could be produced during a given period by
the laborer. This has been particularly true of British unions and is the
subject of common complaint by English employers and writers, but
illustrations may easily be found in the United States. Thus in Chicago in
1900 “the lathers limited a day’s work to twenty-five bundles of lath, for
which they received $3; they had formerly done thirty-five bundles for a
daily wage of $1.75. Plasterers were limited to thirty square yards a day; the
steam fitters were permitted to lay only ninety feet of steam pipe per day;
but the plumbers had the most objectionable rules and restricted materially
the amount of work that could be done in a day.”[17] These rules were
defended by the unions on the ground that they were necessary in order to
secure careful work and to prevent the “rusher” for setting the pace for a
fair day’s work. The practice has not been uncommon, especially in the
sweated trades, for an unscrupulous employer to pay a few particularly able
workmen to put extra speed into their work and so set a pace that the other
workmen would be compelled to maintain. This was especially objected to
by the unions in the case of team work. They claimed that when all the
workmen had come up to the new standard, particularly in piece work, the
wages were reduced so that even by working at the higher rate of speed,
they could only make a fair wage. One of the rules of the Chicago
carpenters’ union provided that “any member guilty of excessive work or
rushing on any job shall be reported and shall be subject to a fine of $5.”
Whatever the excuse it is clear that such limitations cannot be economically
justified. Not only does such dawdling undermine the industrial efficiency
of the worker, but it is unfair to the employer. If the latter bargains for the
union rate of wages and the normal working day, he is entitled to a full
return of the laborer’s best efforts. Otherwise there is no fairness in
collective bargaining. “So far as labor leaders are concerned,” said Mr. John
Burns, the English trade unionist, “we are all strongly opposed to the
restriction of production; we are all in favor of better and more
conscientious work.”

Laboring men have never been quite able to divest themselves of their old
antipathy to labor-saving machinery. They generally regard the introduction
of a new machine as a displacer of men, a creator of unemployment, a
depresser of wages. Some unions have successfully resisted the introduction
of machinery into their trades, as the stone cutters in Chicago,[18] but in
general they have recognized the impossibility of this attitude. In general
they now demand that when machinery is introduced it shall be operated by
union men and their wages shall be fixed so as to give the workers a share
of the increased production.
The policies and methods of the trade unions thus far discussed are those of
a militant nature, but the fraternal objects of these associations, though less
conspicuous, are none the less important. Labor organizations generally;
have insurance and benefit features, by which sick, injured, or unemployed
members are assisted. This is particularly true of the English organizations,
which developed these features before the rise of the militant new
unionism. They often possess large funds and have been rendered thereby
more conservative and responsible. The educative effect of trade unionism
among the members is marked; some of them possess libraries and all of
them promote discussion and thought upon economic problems, while the
administration of their affairs often gives valuable training. The older
unions did much to encourage co-operation among their members, but
today the tendency is to limit their activities to the essential one for which
they are organized, namely, collective bargaining.
Intelligent unionists realize that they can secure the various objects for
which they strive only by substituting collective bargaining for contracts
between employers and individual laborers. Where this plan is accepted by
employers, representatives of the two sides agree upon wage scales, usually
for a year; during this period the chief task of union officials is to see that
the agreement is lived up to, and if possible to add to their membership and
strengthen the union. In the United States relatively few trades have
adopted this method as a general practice, the employers still being able to
dictate wages and conditions of employment in most of them, while the
unions are still struggling for recognition, if not for existence. Employers
insist, in refusing to make collective bargains with the unions, that, as they
run all the risks, they must be permitted to manage their business as they
see fit and without interference from the business agent of the union. In

reply the unions insist that hours, wages, and conditions of employment are
as much their business as that of the employer. The latter also urges that the
trade unions as at present organized are too irresponsible and before they
ask for collective bargaining should be incorporated, so that they could be
sued for breach of contract if guilty of such. As yet, however, the unions
have preferred their present position of irresponsibility and immunity and
have almost invariably refused to be incorporated.
“In the minds of a large section of the public,” writes President Hadley,[19]
“labor unions are chiefly associated with strikes. It is believed by many who
ought to know better, that such organizations exist for the purpose of
striking, and that if the organizations were suppressed, industrial peace
would be secured. The first of these ideas is a distorted one; the second is
wholly unfounded.” Strikes are, however, a necessary concomitant of
collective bargaining. If the representatives of a union cannot come to terms
with an employer, they may compel their members to refuse to sell their
commodity, labor; such a concerted refusal to work is a strike. The “right to
quit work” has been regarded as a sacred one by trade unionists, but it
involves social consequences of great importance. For the workingman, it
means loss of wages and demoralizing idleness; to the employer, idle
capital, loss of profits, and depreciation of plant; and to the consuming
public, inconvenience and annoyance together with curtailed production.
Quite aside from all acts of violence and lawlessness, by which they are too
often accompanied, there is involved an enormous money waste. According
to a report of the Department of Labor, losses from strikes and lockouts in
the United States from 1881 to 1900 amounted to $449,342,000 or an
average loss per establishment involved of about $3,500.
The public is awakening to the realization that it suffers the greatest injury
as the innocent third party to every industrial dispute, and is insisting that
the industrial peace be kept or more reasonable methods of settling
differences be found than a strike or lockout. Such a method is found in
conciliation and arbitration. In the older and more strongly organized
unions strikes are infrequent and methods of joint discussion and agreement
are increasingly resorted to. Boards of conciliation are often provided for,
which endeavor by means of conference and concession to prevent a
dispute from arising; they succeed best where both employers and employes
are organized. Should the dispute come to a head, however, provision is

usually made for its reference to a board of arbitration, which may be
selected by the disputants themselves or may be created by the state; in the
latter case the acceptance of the award may be voluntary or compulsory. In
the United States most of the successful boards have been those selected by
the parties to the dispute; the state boards have usually the power only of
investigating the causes of the trouble, but this in itself has proved of
considerable value in more than one instance, notably in the case of the
Anthracite Coal Commission. Compulsory arbitration is being given a
thorough trial in Australasia and seems to be meeting with success there. In
this country, however, the trade unions are strongly opposed to compulsory
or enforced governmental arbitration. Writing of Great Britain, Mr. and
Mrs. Webb assert that the principle of arbitration, having been found
inconsistent with collective bargaining, is fast going out of favor. It would
seem from the experience of both England and the United States that the
chief virtue in these methods lies in the habit of joint conference and
conciliation between the representatives of labor and capital.

IX. WOMEN AND CHILDREN AT WORK.

While women and children have always assisted in the work of the home, it
was not until the development of the factory system that they began to work
for wages outside of the family. From the earliest days the preparation of
food, spinning and weaving and making up of garments, and other branches
of domestic economy had been the peculiar tasks of the housewife. With the
removal of the textile industries from the home to the factory and the
invention of light-running machinery, many women followed them and
employment was found also for young children. Thus with the inception of
the modern factory system and machine production there arose the problem
of woman and child labor. In England the evils of the early factory system
were incredibly bad. “The beginning of the present century,” wrote
President Walker,[20] “found children of five, and even of three years of age,
in England, working in factories and brickyards; women working
underground in mines, harnessed with mules to carts, drawing heavy loads;
found the hours of labor whatever the avarice of individual mill owners
might exact, were it thirteen, or fourteen, or fifteen; found no guards about
machinery to protect life and limb; found the air of the factory fouler than
language can describe, even could human ears bear to hear the story.”
Conditions were never so bad in this country as in England owing to the
later development of the system and prompter legislation against its evils,
and especially to the scarcity of labor which compelled employers to make
the conditions of labor more attractive.
The field of employment for women has been a constantly expanding one.
When Miss Harriet Martineau visited the United States in 1840 she found
only seven occupations open to women, namely, teaching, needle-work,
keeping boarders, work in the cotton mills, type-setting, book-binding, and
domestic service. Since that time the area has widened until there is
scarcely an occupation in which women are not found except those closed
to her by law or by physical inability. The number of females 10 years of
age and over engaged in gainful occupations was 2,647,000 in 1880 or 14.7
per cent of the total female population; this number more than doubled in

the next twenty years, being 5,319,000 in 1900 or 18.8 per cent of all. The
largest number employed was in domestic and personal service, and next to
that in manufacturing and mechanical pursuits, though even in that branch
they were most numerous in the traditional branches of woman’s work, as
dressmakers, seamstresses, etc. It is nevertheless in the manufacturing
industries that the most serious evils connected with woman and child labor
are found. The problems differ greatly in different sections of the United
States: in the Atlantic states the greatest proportion of women as compared
with men find employment and give rise to special problems of women’s
work; in the South child labor is more conspicuous; while in the West both
woman and child labor are of relatively small importance.
An interesting question suggests itself at this point: Is the increase in the
employment of women at the expense of men? Are the women crowding
the men out of their occupations and taking their places? At first inspection
the statistics of occupations would seem to lead to an affirmative answer,
for the percentage of women breadwinners increased from 13.5 per cent of
all such in 1880 to 16.6 per cent in 1900, while that of the men fell from 80
to 77.3 per cent, and that of the children remained about the same. The
cause of the change in the proportion of the sexes was not due, however, to
any falling off in the number of men, but to the great influx of women into
the ranks of wage-workers. In some lines of employment, like those of
bookkeepers, stenographers, typewriters, clerks, etc., there has undoubtedly
been an encroachment and men have been displaced. But on the other hand,
many occupations have been opened to men during the last fifty years that
were unknown before. Such have been the expanding fields of railroad
construction and operation, the steel industry, the utilization of electricity,
and other similar lines. In most of these the muscular effort involved or the
character of the work have kept women out, but in other lines where special
rapidity or lightness of touch are required the women outnumber the men,
as in the manufacture of cotton goods, hosiery, hats and caps, etc. The
development and improvement of machinery has of course favored the
employment of women. Mr. John A. Hobson[21] asserts that “in modern
machinery a larger and larger amount of inventive skill is engaged in
adjusting machine-tending to the physical and mental capacity of women
and children.” He concludes that if the exploitation of these forms of cheap
labor had not been prevented by factory legislation and by public

disapproval, “the great mass of the textile factories of this country
[England] would have been almost entirely worked by women and
children.” As a matter of fact one of the reasons for the great expansion of
woman labor in the United States as well as England is because it has been
found cheaper than man’s labor. We are thus brought face to face with a
fundamental question in the discussion of the problem—why are women
paid lower wages than men?
As to the fact there is no doubt; one comparison taken from the Census of
1900 will be sufficient to illustrate it: the annual average earnings of men in
mechanical and manufacturing industries were $490, and of women $272
per annum. The more important question is why this difference exists. A
number of reasons suggest themselves at once. In the first place women are
less efficient than men and produce less; hence they are paid less. In some
industries, particularly those requiring physical strength, women cannot
compete successfully, and those are usually the highest paid employments.
Other well-paid industries are regarded by men as essentially their own and
social pressure is applied to keep women out. Then, too, woman’s ambition
to attain industrial efficiency is not so great, owing to her expectation of
marriage and release from industrial life. Women are more often absent
from work owing to sickness and domestic claims upon their time; this
irregularity of employment tends to reduce their efficiency. But even in
employments where the efficiency of men and women are admittedly equal
the women receive lower wages in the majority of cases. According to a
report of the Bureau of Labor, out of 100 cases where the women did the
same work as the men and did it as well, they received lower wages than
the men in 80. This leads to the consideration of a second group of causes,
which have to do with woman’s standard of living. One reason why she
receives less is because she is able and willing to live on less.
Physiologically, Dr. Atwater has said, man needs one-fifth more nutriment
than woman. Women’s wages are less because of their somewhat lower cost
of subsistence. But even aside from this fact, the frequent partial
dependence of women upon other members of their family for support
makes them willing to accept less and consequently reduces their wages.
The average American workingwoman is young, only about twenty-two and
a half years old, and after the age of twenty-five is reached the number
declines rapidly. That is to say, working girls regard their employment as a

temporary affair, remaining only about five years on the average in the store
or factory; during this time they often live at home with their parents and
are content to receive a wage much smaller than a man would require as
head of a household.
The third reason is, however, the most important, because it explains at the
same time the low economic position which woman occupies in the
industrial world. The narrowing of the field within which women can
readily find employment has the effect of greatly intensifying the
competition within that field. There is also a great reserve army of potential
women wage-earners, whom a slight increase of wages or force of
circumstances—loss of employment by the male members of the family—
will bring into the field as competitors. There is, in other words, a constant
over-supply of labor in most women’s industries, which does not exist in
any men’s industries except the most unskilled. Women exhibit,
furthermore, a comparative lack of mobility from one industry to another, as
well as from one locality to another. According to Professor Smart, women
are so unready to leave home that their pay on one side of narrow Scotland
is 50 per cent lower than on the other side. In the same way, the flow of
labor from one occupation to another, which tends to equalize the
advantages and rates of pay of different employments, is far feebler among
women than among men. Finally, there is little organization among women.
Their individualistic, almost jealous, attitude to one another prevents their
combination and united action, while their submissive acceptance of what is
offered leads to apathy. They have only infrequently formed unions and
endeavored to substitute collective bargaining for individual action. Women
are therefore industrially in much the same situation as unskilled,
unorganized male laborers, and the remedy in both cases would seem to be
the same—education and organization.
The presence of a large supply of cheap woman labor undoubtedly has a
depressing effect upon men’s wages, and consequently upon the standard of
life of the whole laboring class. George Gunton[22] is authority for the
statement that “in proportion as the wife and children contribute to the
support of the family the wages of the father are reduced.” The family wage
tends to remain the same whether it is earned by the father alone, or by the
father with the assistance of his wife and children. It is, however, not quite
clear in most cases whether the men’s wages are low because the women

and children work, or whether the women and children work because the
men’s wages are low. It may fairly be concluded, however, that the evil
effects of low wages for women are not confined to themselves but are felt
by all with whom they come in competition.
What conclusion shall we draw then, in view of all these facts, as to the
desirability of employment of women? The fact of their low wages and
industrial dependence is not sufficient to lead one to condemn it. These are
transitional phenomena and can be remedied. Women have always worked
—on the farm, in the home, in making household supplies. When this work
was taken over by the factory woman became a wage-worker in the modern
sense. “The census records in respect to the labor of women, therefore, read
in the light of collateral facts, are a history of industrial readjustment rather
than a record of the relative extent of the employment of women, and it is
impossible to say, so far as the census figures are concerned, whether a
larger proportion of women are actively engaged in labor today than
formerly or not. The one fact which is clear is that factory or shop work is
displacing home work, and that this readjustment of industrial conditions is
leading to the employment of women outside the home in constantly
increasing numbers.”[23] The effect of this readjustment has been to increase
greatly the production of wealth. The production of household supplies was
removed from the family to the factory when it was handed over to
machinery and done better and more cheaply. If the work of women thus
released were expended for no useful purpose society would gain only in
the increased leisure of the women. But if these then took up other new
lines or set men free from old employments so that they could turn to still
different ones, then the production of goods could be greatly increased.
“Without women’s help,” says Mr. George L. Bolen,[24] “their work in stores
and offices would be done by men taken from other employment. The
latter’s present work would have to be stopped to that extent, lessening the
quantity of goods produced by men. The effect would be the same as if a
farmer had to stop plowing two hours before noon to go to the house and
cook his dinner.... Women behind the counter, and at the typewriter, release
men for work that women cannot do.” From the standpoint of woman
herself, industrial independence must be regarded as a great gain. Set free
from the necessity of contracting marriage for the sake of a home, and of
depending upon mere sex attraction to attain that end, she will develop her

capacities more fully and when she does enter upon marriage will do so as a
result of mutual attraction. The entrance of women into gainful occupations
must be regarded as an essential step in their own progress and the
improvement of society.
Quite different must be our attitude towards child labor, which can only be
condemned as a waste of labor power and as stunting the development of
the children. The Census of 1870 stated for the first time the number of
children at work in the United States; there were 739,164 between the ages
of 10 and 15 years, of whom 114,628 were employed in manufactures.
During the next decade the number increased over 58 per cent to 1,118,356
children at work in all occupations. The disclosure of such an undesirable
tendency called forth restrictive legislation in most of the states and the
number declined materially by 1890. Since 1890 however there has been a
reversal of this tendency back to the conditions of 1880, owing chiefly to
the industrial development of the South, where almost no factory legislation
exists as yet. In 1904 there were 1,752,187 children at work between the
ages of 10 and 15 years, or almost one-fifth of all the children of those ages.
The evils connected with child labor are the long hours—usually 11 or 12
hours a day where no restrictive legislation exists—and the exhausting and
often dangerous work. The effect on the health of the children of
monotonous and exhausting toil before their muscles are set and their
frames knit up is thoroughly bad; they are stunted and deformed and
prematurely aged. Many of the occupations, too, in which child laborers are
most numerous, are dangerous or injurious, as tin can factories, saw mills,
paper box factories, type foundries, and tobacco establishments. Second
only to the physical effects of child labor is the mental and moral injury
suffered not merely by the child but also by society in depriving these
youthful laborers of a thorough education. While it is well that children
should be kept busy, there is no compensating reward either in money wage
or preparation for adult life in such monotonous, profitless drudgery. The
influence of the competition of children upon wages is leveling, and their
employment indicates either a willingness on the part of employers and
parents to exploit this cheap and defenseless form of labor, or a backward
state of civilization. Such an evil can be cured only by determined public
opposition, by the passage of laws forbidding all labor by children under a
certain age, say 15 (except possibly in agricultural or housework),

compelling school attendance, and providing for careful inspection. Most of
all is needed an aroused public conscience.
Labor legislation is the most effective method of improving the conditions
of employment, and to a consideration of this subject we must devote the
remainder of this section. We have already seen that the fundamental
principle of our modern wage system is freedom of contract. This is
guaranteed in our federal and state constitutions as both a personal and a
property right. As a result of this fact the courts have generally declared
unconstitutional any legislation, designed to protect the interests of labor,
that seemed to abrogate this freedom of contract or that savored of class
legislation. Efforts to improve the condition of labor by legislation have
therefore met with especial obstacles in this country. On the whole,
however, means have been discovered of evading these constitutional
restrictions when it has seemed clearly demanded by the welfare of society,
and the history of labor legislation in this country is one of fairly steady
progress. The early laws were practically confined to imprisonment for
debt, mechanics’ liens, the hours of education of children employed in
factories, and similar matters. Nothing noteworthy was accomplished until
1866 when Massachusetts passed an eight-hour child labor law for children
under fourteen; in 1874 she passed a ten-hour law for women and children
under eighteen, engaged in manufacturing establishments, and in 1877
enacted the first factory inspection act, which has since been copied in
about twenty-four states, and without which mere legislation is of little
avail.
The factory acts may be divided into two classes, those that endeavor to
secure the safe or healthful manner of conducting a business, and those that
attempt to limit the occupations, the hours, and the methods of payment of
the workers. Under the first head come such matters as fire protection,
ventilation, guarding of machinery, inspection of boilers and mines, etc.
Such legislation and inspection have in many states been extended to
churches, schoolhouses, hotels, theaters and public buildings. The second
group includes those laws which are usually meant when factory acts are
referred to. In England there has been a very steady development and
extension of such legislation, beginning in 1802, when Peel’s Act tried to
protect the health and morals of the pauper apprentices in the cotton mills;
this was extended to all young people in textile industries in 1833, to

women in 1844, then to all large industries in 1864, and to smaller ones in
1867, and finally in 1878 these various provisions were codified into a
complete factory act, regulating the health and safety of the laboring people
generally. In the United States the movement was considerably later and has
not been so uninterrupted. But today laws limiting the number of hours of
labor to eight have been passed by the Federal Government and fifteen of
the states for all those engaged on public works. Attempts to fix the hours of
labor of adult male workers have usually been declared unconstitutional, for
the reasons stated above, except in especially dangerous or unhealthful
occupations, as bakeries, mines, smelters and similar lines. Consequently
the men have been forced to rely largely upon their own efforts for the
redress of industrial grievances; in this fact lies one explanation of the
growth and strength of labor organizations in this country. On the other
hand, legislation in behalf of women and especially children—wards of the
state—has usually been held constitutional by the courts, and has had a
more extended application. About twenty of the states have regulated the
length of the working day for women and children. Special child labor laws
limit the age below which employment is illegal, usually between ten and
fourteen years of age; and provide for a minimum of education before a
child can be employed. About half the states provide for factory inspection
to see that the provisions of the various acts are lived up to. In general we
may conclude that by the passage of such legislation society has definitely
decided that there are some conditions of employment that cannot be safely
left to free contract or to collective bargaining between employer and
employe, but that they must be regulated by society itself on the broad
grounds of social welfare.

X. UNEMPLOYMENT AND INSURANCE.

The greatest problem in modern industry as well as the greatest curse to the
laboring classes, is unemployment. While unemployment has always
existed under all systems of labor, it assumed added significance when the
introduction of the wage system threw every worker upon his own
resources and made him responsible for the care of himself and his family.
Modern industry is sensitive and unstable and its delicate mechanism, very
likely to get out of order; credit and fashion, to mention no others, are
factors that make for instability, and these are essentially modern. Professor
Marshall is of the opinion that the factory system has not increased
inconstancy of employment, but has simply rendered it plainer by localizing
it. But whether more or fewer than in earlier times, the number of the
unemployed in modern industry is appallingly great. It is not easy to
estimate correctly the extent and amount of this evil and we accordingly
find considerable variations in the statistical presentations of fact. In 1885
two investigations of the amount of employment were made, one by Carroll
D. Wright, in his report as United States Commissioner of Labor for 1886,
and the other by the Massachusetts Bureau of Labor in its report for 1887.
Mr. Wright defines the unemployed very narrowly as “those who under
prosperous times would be fully employed, and who, during the time
mentioned, were seeking employment”; using the term in this restricted
sense he concluded that 7½ per cent of the working population engaged in
manufacturing and mechanical pursuits, and trade and transportation were
idle during the year, which moreover he considered one of extreme
depression. The Massachusetts statistics, on the other hand, were presented
as indicative of general conditions in normal years and may safely be
regarded as such. According to this report, 30 per cent of the total number
of breadwinners in the state had been unemployed at their principal
occupations on an average of 4.11 months in the year covered; some of
these found work at other or secondary occupations. But the net result of
the investigation was well put in the terse statement of the report, that
“about one-third of the total persons engaged in remunerative labor were

unemployed at their principal occupation for about one-third of the working
time.” At the lowest estimate the whole working population lost on the
average almost one-tenth of their working time. The loss of such a
proportion of the community’s productive force, with all the demoralization
attendant upon irregular or no labor, is evidence of a problem of grave
import.
Unemployment is such a broad term and covers so many different ideas that
it will be well to classify the unemployed before proceeding further. They
may be logically divided into the following classes: I. The temporarily
unemployed, who comprise (a) those certain of work again, as efficient
workmen who are temporarily out of work owing to seasonal variations,
shut downs, etc.; (b) those without such prospect, a group which again
divides into two groups, namely, (1) efficient and industrious workmen who
have been thrown out of work by a change in fashion, the introduction of
new machinery, foreign competition, a prolonged depression, etc., and (2)
those whose work is essentially fluctuating and casual in its nature, as
casual day laborers, charwomen, etc. II. The permanently unemployed,
consisting in turn of (a) the “won’t-works,” as tramps, and (b) the “can’t-
works,” or the defective and dependent classes generally. Such a
classification renders much easier the analysis both of the causes and of the
cure of unemployment.
The first question that presents itself in any discussion of the causes of
unemployment is whether it is due primarily to personal causes, as
inefficiency or intemperance, or to industrial causes over which the
individual has no control. “Personal causes are those mental, moral, and
physical defects which show themselves either in the inability and
inefficiency of the workman or in his unwillingness to work. Here are
included all the varieties of personal inaptitude, ranging from idiocy,
intemperance, and vice to old age, sickness, and accident.”[25] Such a
comprehensive definition includes many cases, of course, where no blame
can be attached to the individual, and yet each one of these causes is
personal, that is, it does not affect at the same time a whole group, as an
industrial depression would do. Persons included in this group are always
on the margin of employment; in bad times the first to be discharged, in
good times they are the last to be employed. Nor is the cause of their lack of
employment always easy to give; it may be itself the result of industrial

accident or unhealthful occupation, or the result of heredity, evil habits and
associations, and defective education. We may present two tables giving
briefly the causes of poverty and unemployment. The first gives the causes
of poverty ascribed by the charity organization societies of New York,
Boston, and Baltimore to applicants for relief:
Causes of poverty: charity organization society records.[A]

Cause. Per cent.
Drink 13.7
Shiftlessness and inefficiency 7.5
Other moral defects 2.1
Total, Character 23.3
No male support 5.0
Lack of other normal support 3.6
Total, Support 8.6
Lack of employment 23.5
Insufficient employment 8.1
Poorly paid, etc. 3.3
Total, Employment 34.9
Sickness and death in family 21.1
Insanity and physical defects 4.1
Old Age 3.9
Other incapacity 3.2
Total, Incapacity 32.3
100. 100.

[A] Warner, American Charities, Rev. Ed., 53.

The first group of causes indicates misconduct, as the last group indicates
misfortune; the other two shade off into industrial causes, though lack of
employment—the largest single cause—may in turn be ascribed to any one
of several remoter causes according to the bias of the investigator. This
table is a record of the causes of failure on the part of those who have fallen
behind or dropped out altogether in the race of life. At the other end of the
scale stand the members of labor organization, on the whole, the elite of the

labor world. The following table gives the causes of unemployment of
31,339 cases at the end of September, 1900, as reported to the New York
Bureau of Labor Statistics:
Causes of idleness, members of trade unions, 1900.

Cause Per Cent
No work 75.5
Bad weather .5
Strike or lockout 13.0
Sickness 4.7
Superannuation 1.6
Other causes 4.7
Total 100.0

This table emphasizes very strongly the industrial causes of unemployment,
three-fourths of which is ascribed to lack of work. In some cases, as the iron
and steel workers, where there is a regular two months’ shut-down to make
repairs, and the building trades where the inclemency of the weather usually
prevents work during the winter, the lack of employment may be regarded
as a vacation rather than a hardship, for the rates of pay are high enough
during the remaining months to offset those of idleness. In other cases,
however, as in coal-mining, there is a large reserve army of workers on
hand and employment is secured for only one-half to two-thirds the time. In
1900, when the average number of days of employment was larger than it
had been in ten years, the bituminous miners were employed only 234 days
and the anthracite miners only 166 days in the year. This indicates a very
bad organization of the industry. The same thing was formerly true of the
London dockyards, where there was a reserve army of some 4,000 surplus
workers. Of course the effect of this is to depress wages. The clothing trade
is subject to seasonal fluctuations and the caprice of fashion, and offers very
irregular employment. Machinery and improved processes were frequently
spoken of by witnesses before the Industrial Commission as the leading
cause of unemployment. If the general conditions of business are good at
the time of the first introduction of machinery the displaced laborer is
reabsorbed again and the hardship is not so noticeable. But if it coincides

with a period of business depression the introduction of machinery appears
to be the cause of a large displacement of labor, which might more truly be
ascribed to industrial depression. This last cause is responsible for
enormous suffering among the laboring classes, for the method oftenest
resorted to by industrial enterprises to reduce expenses is the wholesale
discharge of laborers, who are thus made to bear the burden of industrial
disorganization. This was well illustrated by the economies effected by the
railroads in the year 1908, in their general reduction of the labor force and
of wages. But even in good years the inconstancy of employment is
startling. In the four years 1897-1900 the men in trade unions in New York
State lost 16.2 per cent of their time from unemployment, which is almost
exactly one day in every week. And these, it must be remembered, were
skilled and efficient workers in organized trades. Finally, strikes are given
as a cause of unemployment in the table; these are a peculiar feature of
modern industry, and do not call for further discussion, except to point out
that they are not as important as often represented.
The foregoing analysis of the causes of unemployment shows that they are
deep-seated in the nature of modern industry, and that it would be unjust to
the workingman to attribute them in any large measure to his incapacity or
indisposition to labor. The care of the unemployable must of course be
undertaken by society, and such persons prevented as far as possible from
depressing the wages of competent labor by their competition. Exceptional
periods of distress may and should be met by temporary relief measures.
But what we may call the normal unemployment in modern industry, which
amounts to 2-2½ per cent of the labor force, cannot be overcome by direct
methods. The remedy for this lies “in a better organization of employers
and employes, more steady expansion of trade, and greater stability of
industry and of legislation affecting industry. These are not problems
directly of unemployment, but rather of taxation, currency, monopoly,
immigration, over-production, and technical advances in industry. Their
treatment must be undertaken, not primarily as measures of providing for
the unemployed, but as measures for improving the conditions of
business.”[26] The problem of unemployment would thus seem to be a
permanent one, bound up in the very nature of a dynamic society; it may be
regarded as the price of progress. But the question may fairly be raised as to
whether the laboring classes should foot the bill, or whether the cost might

not fairly be borne by society as a whole. This has suggested, as a solution
of the problem, insurance of workingmen against unemployment, a
discussion of which, however, must be deferred to the end of the section.
Some methods of alleviation, if not of abolition, of the evils of
unemployment may be suggested. Free public employment bureaus and
agencies, national in scope and well integrated, would do much to secure a
better adjustment of demand and supply in the labor market, and secure a
better distribution of the labor force and greater mobility of labor. Better
organization and mutual understanding on the part of both employers and
employes is needed, to prevent the loss through strikes and lockouts. And
finally, improved industrial and technical education is essential, whereby
the loss in skill through the introduction of new inventions and machinery
may be minimized, and the productivity of the laboring class be increased.
Among the measures of relief for unemployment due to accident, sickness,
and old age, none is more important or more deserving of a hearing in the
United States than that of insurance against these evils. The earnings of the
average male wage-earner are so small—half of the number earn annually
less than $436, and half of the adult male factory workers earn less than
$400 a year—that the unemployment, sickness, disablement, or old age of
the breadwinner must throw a large proportion of families so afflicted into a
condition of periodic poverty. Any remedies that will alleviate the miseries
caused by fluctuations in employment, industrial accidents, diseases
incident to industry, etc., deserve a respectful hearing.
No adequate statistics of industrial accidents exist in the United States, but a
recent estimate by F. L. Hoffman[27] gave the number of fatal accidents
among occupied males in 1908 as between 30,000 and 35,000. An analysis
of the reports of the New York Bureau of Labor Statistics from 1901 to
1906, shows that of the total number (39,244) of industrial accidents
reported in that state a little over 2 per cent were fatal, almost 17 per cent
resulted in permanent disablement, and 81 per cent resulted in temporary
disablement. More than half of the accidents in industry are the result of
machinery in motion. Mr. Hoffman calculates that “it should not be
impossible to save at least one-third or perhaps one-half by intelligent and
rational methods of factory inspection, legislation, and control.” Prevention
of accidents rather than compensation to the workingman after they occur
should be the aim of society, in order to avoid the wasteful loss of

productive power, not to mention the suffering and misery entailed by such
accidents. “Immunity, not compensation,” has been the demand of the
British trade unions. Of first importance then is careful factory legislation,
safeguarding of machinery, and factory inspection. But here we are
interested primarily in the question of responsibility and compensation. In
the United States, legislatures and the courts have taken the position that the
workingman was responsible unless he could prove the employer
responsible for his injury. How impossible such proof is and consequently
how intenable such a position, is clear from the following table, compiled
by the German Government for purposes of accident insurance:
Accidents in German industries traceable to different causes.

Agriculture Industry Mining
Causes.
(1891) (1887) (1887)
Fault of employer 18.2 19.8 1.3
Fault of injured workman 24.4 25.0 29.8
Fault of both 20.1 4.4 …
Fault of third person 2.8 3.3 4.3
Unavoidable or indeterminable 34.5 46.9 64.6
Total 100.0 100.0 100.0

Statistics from both Germany and Austria show that a full half or more of
all industrial accidents are due to causes for which neither employers,
injured workmen, nor fellow employes are responsible, but which are
incidental to the nature of the industry itself. But besides the danger of
injury from machinery, there are numerous specially dangerous or injurious
trades, in which injury by poisoning, disease, etc., is almost unavoidable as
trade processes are at present conducted. These have been classified as
follows: trades in which lead is a poisonous element, trades which produce
other chemical poisons, trades in which lockjaw is an incident, trades in
which the danger arises from injurious particles in the air, or from dust,
processes that require a sudden change from heat to cold and vice versa,
and those that require artificial humidity, and trades in which accidents are
so frequent as to demand special legislation. Before we try to decide who in
justice should bear the cost of sickness or injury arising from these causes,

let us inquire as to the practice in the United States and in other countries,
so as to have the data necessary for a fair conclusion.
The original legal doctrine regarding liability for accident in England and
America, which is still practically unmodified in the latter country, was
based on the principle of individual responsibility for acts of negligence.
Briefly stated the common law doctrine is that an employer must provide
reasonably safe conditions of employment, and that then the employe
assumes the risks incident to the occupation, or arising from the
carelessness of fellow-servants; moreover, even if the employer has been
remiss, the employe cannot collect damages if he has been guilty of
contributory negligence. These three doctrines—assumption of risk,
doctrine of the fellow-servant, and contributory negligence—have been
used practically to free the employer from all responsibility in cases where
injured employes have sought to secure damages. Moreover, as has been
shown above, many cases exist where it is impossible to fix the blame on
either employer, employe, or a third party, and in such cases no
compensation could be secured for injury under the law. The full rigor of
the common law, which has worked out so unfairly for the workingman in
modern machine production, has been modified in about twenty-seven
states by statutes defining more exactly the duties of the employer, and
repealing the fellow-servant doctrine in regard to railway employes and in a
few states in regard to all mechanical industries. With these exceptions,
however, the law of employers’ liability has not been changed, and
compensation for industrial accidents must be sought by injured employes
through a suit for damages against the employer. In 1906 and again in 1908
Congress passed a federal employers’ liability act, limited to common
carriers, which, however, represents only development along the lines of
negligence law. That is, we are still proceeding upon the assumption that in
every accident which occurs somebody is to blame. We shall have to look to
foreign countries for a practical application of the principle that the cost of
accidents in modern industry should be made a charge upon the industry
itself, and ultimately be incorporated in the higher price of the article
produced.
Germany was the first country to introduce the principle of compulsory
accident insurance in 1884. Employers are there organized into associations
and sections and are compelled to bear the expense of granting to injured

workingmen compensation, which amounts to about two-thirds their
average wages. England in 1897, by the passage of the Workmen’s
Compensation Act, adopted the principle “that a workman is entitled for all
accidents of occupation to a moderate and reasonable compensation.”
Twenty-three countries, or practically all the advanced industrial nations of
the world except the United States, have passed laws to compensate
sufferers for all accidents of industry, thus placing the burden of industrial
accidents upon the industry as such and not upon the laborer.
As we have seen, sickness and old age are still more usual causes of poverty
and unemployment than accident. All the arguments for compulsory
insurance therefore apply with redoubled force to these evils. Germany was
again the pioneer in the establishment of these forms of insurance. In 1883
sickness insurance was organized, being made compulsory for all persons
with incomes under $500; the expense is borne one-third by the workers
and two-thirds by employers, the main purpose being to secure a sufficient
relief—amounting to one-half the wage—for a period of thirteen weeks. In
1889 invalidity and old-age insurance was introduced for the same class;
contributions are made in equal proportion by employe and employer, the
state contributing about $12 a year to each annuity. Pensions are granted
after thirty years of payment or to those over seventy. In 1908 Great Britain
passed a still more comprehensive measure, providing for pensioning all
citizens of seventy years or over, who have been residents for twenty years,
in accordance with a sliding scale based upon private income, the pensions
ranging from five shillings weekly down to one shilling. The pensions were
expected to cost $35,000,000 the first year, but will probably entail double
that amount. Finally, insurance against unemployment was tried in
Switzerland in 1893 to 1897, but was finally abolished, owing to abuses and
difficulty of administration.
There are probably no more important practical economic problems than
those connected with unemployment and workingmen’s insurance. Slowly
the conviction has spread that under present conditions of industry
workingmen cannot fairly be held responsible for industrial accidents, and
that with prevailing wages they cannot be expected to save enough to
maintain themselves in sickness and old age. It therefore becomes the duty
of society so to organize industry and legislation that the terrors of
accidents, sickness, and old age, shall be reduced to a minimum.

XI. MACHINERY AND INDUSTRIAL EFFICIENCY.

So far in the discussion of modern capitalistic production and of the various
labor problems to which it has given rise we have not treated in detail the
question of machinery and its effects on labor. We cannot, however, leave
this subject without taking up this phase of it with considerable care. The
advantages of machinery have been more often emphasized than the evils,
so that we may profitably begin with the darker side of the picture.
President Hadley[28] enumerates three evils which are charged against
machinery, as now managed and operated: “1. That it displaces a large
amount of human labor, thus taking income away from employes and
giving it to employers. 2. That when it does not actually drive human labor
out of use, it employs it in circumstances unfavorable to efficiency, health,
and morals. 3. That under the best conditions it deprives the workman of
independence, making him a specialized machine instead of a broad-
minded man.” We cannot do better than take up these points one by one.
In answer to the first charge President Hadley flatly denies that machinery
has displaced labor, but insists that “there has been a most conspicuous
increase of employment in those lines where improvements in machinery
have been greatest,” giving the expansion of railroads as an illustration. But
it is not possible to generalize from this case without further analysis. The
immediate effect of improved machinery, especially if suddenly introduced,
is practically always to throw men out of employment. The extent to which
this will occur depends on the suddenness and extensiveness of the change,
but fortunately, as Professor Nicholson points out, new inventions seldom
come suddenly or are introduced all at once on an extensive scale. It took
almost a generation, for example, for American machine methods to
displace Swiss hand labor in the making of watches. But when such a
change does occur it hits hardest the least efficient and older men, those just
on the margin of employment, for a man past middle life can rarely learn a
new trade. The effect of displacement in causing suffering will also depend
somewhat upon the mobility of labor, both the knowledge of new
opportunities and the capital to make possible a change of location or

industry, and improvements in the means of transportation. It can easily be
shown that as a general principle the lump-of-labor theory is erroneous,
namely, that there is just so much work to be done and that if machinery is
introduced there will be less work for men to do. But there is this element
of truth in it, that the question whether men will be reabsorbed in the same
industry depends upon the fact as to whether the market for the goods
produced by the new machine can be expanded. If the demand is elastic,
that is, can be largely extended because of the fall in price brought about by
the cheaper production, as in the case of cotton goods, then the displaced
laborers will probably be re-employed to produce an enlarged supply. If,
however, the demand is inelastic, that is, will not be expanded by reason of
a fall in price, as in the case of salt or coffins, then the displaced labor will
not be reabsorbed in the same industry but must look elsewhere for
employment.
The elaborate investigation of the Department of Labor in 1898 regarding
the relative merits of hand and machine labor shows clearly the effect on
the displacement of labor by the introduction of machinery. A few cases will
serve as illustrations (see table on next page).
Hand and Machine Methods Compared.

Different Different Time worked.
Year of Labor
Article produced operations workmen
production Hours Minutes Cost
performed employed
1829-30 Wheat (hand) 8 4 61 5 $3.55
Wheat
1895-96 5 6 3 19 .66
(machine)
1859 Boots (hand) 83 2 1436 40 408.50
1895 Boots (machine) 122 113 154 5 35.40
1850 Carpet (hand) 15 18 4047 30 20.24
Carpet
1895 41 81 509 1 .29
(machine)
Loading ore
1891 1 1 200 0 40.00
(hand)
Loading ore
1896 3 10 2 51 .55
(machine)

These cases, chosen at random, all show an increase in the number of
different men employed, and an immense saving in time and in labor cost.
Nothing is indicated however as to the total amount of employment.
Optimistic writers like Carroll D. Wright claim that if machinery has
displaced labor in one direction it has created more employment for them in
others. He shows for instance[29] that the per capita consumption of cotton in
this country in 1830 was 5.9 lbs., while in 1890 it was 19 lbs., and gives
similar figures for iron and steel, and railroad traffic. It will be noticed that
all of his examples are chosen from industries in which the demand is
elastic. Mr. J. A. Hobson, a more careful and conservative writer, draws less
optimistic conclusions from a study of Great Britain. He says: “First, so far
as the aggregate of manufactures is concerned, the net result of the
increased use of machinery has not been to offer an increased demand for
labor in those industries commensurate with the growth of the working
population. Second, an increased proportion of the manufacturing
population is employed either in those branches of the large industries
where machinery is least used, or in the smaller manufactures which are
either subsidiary to the large industries, or are engaged in providing
miscellaneous comforts and luxuries.”[30] It must be said, however, in
modification of Mr. Hobson’s inferences, that it may be accounted as a
social gain if the demand for manufactured commodities can be met by the
labor of a smaller proportion of the population, since the energies of the rest
are then set free for professional or artistic or similar pursuits. A study of
the census reports of Great Britain seems to show that this is what has
happened in that country.
The amount of labor is not the only factor to be considered; the regularity of
employment, as we saw in the last section, is of hardly less importance.
“Another danger of an entirely opposite kind,” says Professor Nicholson[31] ,
“lurks in this immense power of machinery, which is continually showing
its reality and remedies for which will, it is to be feared, be the fruit of long
years of tentative adaptation to the new environment. What all sensible
workingmen desire, what the advocates of the trade unions say is their chief
object, is to get a “steady sufficient wage,” but it has been proved
inductively that great fluctuations in price occur in those commodities
which require for their production a large proportion of fixed capital. These
fluctuations in price are accompanied by corresponding fluctuations in

wages and irregularity of employment. But fluctuations in wages and
discontinuities in employment are two of the greatest evils which can befall
the laboring classes.” We have already seen how modern capitalistic
methods of production may lead to over-production and to a crisis. We now
see how machine methods may cause unemployment or irregular
employment. The men displaced directly by new machinery, those thrown
out of work by industrial depression resulting from over-production in
machine industries, and finally those irregularly employed in the new
occupations supplying luxuries—all of these may fairly attribute their
suffering in large measure to machine methods.
“The second great charge made against the factory system is that it
displaces a higher grade of labor by a lower grade; sometimes substituting
the work of women and children for that of men; sometimes substituting
work under conditions physically or morally unhealthful, for work under
healthful conditions; sometimes substituting specialized and mechanical
work for diversified occupation which contributes to general intelligence.”
The point as to the labor of women and children has already been discussed.
The charge that factory labor is physically unhealthful may in general be
denied. Mr. Wright, in an elaborate defense of the factory system in the
Tenth Census, concluded that the conditions of work in the modern factory
are much more conducive to good health than those under the preceding
domestic system, while morally they are far superior. The qualities
demanded by the machine production of the modern factory are punctuality,
steadiness, reliability, and sobriety, and it therefore makes against
intemperance and immorality. So far as these exist in factory towns, they
are the result of town life rather than of manufacturing. It must, however, be
said that while the factory system is not inherently unhealthful, the high
pressure at which operatives of steam-driven machinery are compelled to
work, particularly in this country, may and often does wear him out
prematurely. This again is partially offset by a shortening of the hours of
labor.
The final charge against the factory system is monotony of work. Many
writers, from Adam Smith down, take the view that it is more stupefying to
make a small part of an article, say the sixty-fourth part of a shoe, than to
make the whole article. Professor Marshall, who has considered the subject
carefully[32] , concludes that while it takes away manual skill, it substitutes

higher or more intellectual forms of skill. “The more delicate the machine’s
power the greater is the judgment and carefulness which is called for from
those who see after it.” But after all there is less danger from monotony of
work than from monotony of life, and the cure for this would seem to be in
an increase of machinery rather than in its abolition.
Let us now try to summarize our conclusions on this intricate question. The
first effects of the introduction of labor-saving machinery is to displace
particular laborers; these suffer real injury, though they are often reabsorbed
in the industrial organism. The social gain is undoubted, for the improved
methods lead to lower prices and thus to an increase in the real wages of
labor. To the improvement and wider use of machinery we must indeed look
for the ultimate relief of the human race from exhausting toil. Says a
socialist writer: “On mechanical slavery, on the slavery of the machine, the
future of the world depends.... All unintellectual labor, all monotonous, dull
labor, all labor that deals with dreadful things, and involves unpleasant
conditions, must be done by machinery. Machinery must work for us in coal
mines, and do all sanitary services, and be the stoker of steamers, and clean
the streets, and run messages on wet days, and do anything that is tedious or
distressing.” If labor today has a complaint to make against the use of
machinery, it is that labor has not shared sufficiently in the improvements
thus far effected. But the evil here is connected with the inequitable
distribution of wealth, not with the methods of its production. In justice
labor should share in the technical improvements which characterized the
nineteenth century and will revolutionize to a still greater extent the
industries of the twentieth. The practical question in this connection is as to
the best method for labor to secure its claim to a share in the increased
production. One answer, to which we will turn next, is by increasing its
efficiency through better industrial education and training.
The subject of industrial education has recently been receiving considerable
attention in the United States and the needs and shortcomings of our
country in this regard have been described. Under modern methods of
production, with their extreme specialization of labor and extended use of
machinery, it is practically impossible for a worker to secure an adequate
knowledge of a trade in the actual practice of it. In former days boys
acquired training in their trades by the system of apprenticeship under the
immediate charge of a master of the craft. The system of apprenticeship has

today almost disappeared; boys are taken into shops as helpers, not as
apprentices, and receive practically no systematic instruction in their trade,
especially in a modern large establishment. In consequence of these facts it
is insisted that school instruction should be given to make good the absence
of shop practice; that a general system of industrial education should be
developed to give our workingmen systematic training in the various trades.
The superiority of the opportunities for industrial education on the continent
of Europe, especially in Germany, have been frequently emphasized, and
their industrial advance has been credited in large measure to this fact. We
can probably not approach the subject better than by explaining the systems
in these other countries and then comparing them with that of the United
States.
Beginning with Germany as the country in which industrial education has
received the greatest attention, we find there three different kinds of
schools, which we may call the lower, middle, and higher. The lower group
includes artisan and specialized trade schools, and is intended to be a
substitute for the apprenticeship system. While they have an important
influence on the general industrial efficiency of the nation, they concern
chiefly the small handicrafts. The middle group comprises the trade schools
(gewerbeschulen), of which the most famous are the weaving and dyeing
schools at Chemnitz; other branches taught are soap-boiling, milling,
building, pottery, etc. These are the schools that provide technical
instruction for the large manufacturing industries, and are consequently of
great importance; they train the foremen, superintendents, managers, and
heads of establishments rather than the workingmen. The higher group is
formed of the technical high schools or technological institutes, where are
trained the scientific experts. The importance of the German system lies in
the development of the last two groups rather than in provision for the
training of the workmen. Germany’s recent industrial advance must be
credited to the training of the officers, not the rank and file, in the industrial
army, to the development of managerial ability rather than of manual skill.
In England the last twenty years have seen a marvelous development in
industrial education, brought about in part by the “made in Germany”
agitation. The English system differs from the German in educating
working-class boys, while at work in the mill or at the forge, into foremen,
managers, etc., mainly by means of evening classes in trade or technical

schools. The German system, on the other hand, trained men who already
had a superior general education. These schools are regarded as stepping
stones for the more ambitious and intelligent young workingmen. They give
a practical grasp of the subjects, but do not teach actual processes of
manufacture, owing to trade union objections. They thus come between the
lower and middle schools in Germany. The higher technical schools also
exist and have recently been greatly expanded.
The system of industrial education in the United States may be said to
resemble that of Germany more than England in that it supplies industries
from above rather than from below, but it is in a very chaotic state as yet.
The most important schools are institutes of technology and the technical
departments of the universities, but these train men only for the highest
positions. Provision for the industrial training of the workingman is almost
lacking except in a few manufacturing centers. Thus there are a few trade
schools resembling somewhat those in the Middle German group, as the
textile schools at Philadelphia, Lowell, and a few other cities. Lower trade
schools are found in New York City, but hardly anywhere else. That there is
a distinct need of and demand for instruction of this character is shown by
the enormous expansion of correspondence schools, a peculiarly American
institution, which endeavor to give the training afforded by the English
schools to the more ambitious young artisans.
So far in their industrial development the people of the United States have
been immensely aided by two factors: the rich natural resources of the
country, and the high quality of the labor. But as we have already seen, the
natural resources are being either rapidly exhausted or monopolized. As to
the character of the second factor, we may quote from the testimony of a
recent careful observer, Dr. A. Shadwell[33] : “The American method of work
in the industrial sphere is distinguished by the following features:
enterprise, audacity, push, restlessness, eagerness for novelty, inventiveness,
emulation, and cupidity. Employers and employed have exhibited the same
qualities in their degree.”... But they suffer “from the national defect of
want of thoroughness, which arises from the craving for short cuts.” Now
that American industries are entering the markets of the world in
international competition, it becomes important to correct any faults that
will cause us to fall behind. So far the movement for better industrial
education through the establishment of trade schools has met two obstacles

in this country. The first is the hostility of the trade unions, which fear to
see their control of the labor market disturbed by the annual turning out of
hundreds or thousands of workers from the trade schools without any
especial sympathy with trade union methods or policies. The other
difficulty lies in the satisfaction with prevailing methods, the belief that the
American workman without training possesses skill superior to that of his
European competitors, and a naïve national self-conceit in all things
American. Now that we are for almost the first time in a hundred years
measuring our industrial efficiency in foreign markets against our European
competitors, we shall be compelled to take stock of all the items that make
for industrial supremacy. There seems to be little doubt that when once this
is fairly done, the need of a better system of industrial education will be
recognized and met.

XII. PROFIT-SHARING AND CO-OPERATION.

Among the reforms suggested for remedying some of the evils incident to
the modern wage system those of profit-sharing and co-operation occupy a
prominent place. The separation of the community into capitalists and
laborers, classes different in conditions and ideals, constitutes a menace to
the peace and progress of industrial society. The wage system moreover is
thought by many to have broken down the former intimate relation of
employer and worker, and some scheme is needed to correlate their interests
again and to bind them together. To secure this result profit-sharing is
advocated. As defined by the International Co-operative Congress in 1897
this is “the agreement, freely entered into, by which the employe receives a
share, fixed in advance, of the profits.” It is not a change from the present
wage system, but simply a modification of that system according to which
the laborer receives a share in the profits in addition to his wages. The
purpose is to identify the interests of the employes with those of their
employer and thus to give him some of the same motives for energy, care,
and thrift in the conduct of the business. Three principal methods of profit-
sharing may be mentioned, though the variations are manifold. The favorite
method in England and the United States is the payment of a cash bonus at
the end of a fixed period, as a year. A second plan, which is the rule in
France, is a deferred participation by means of a savings bank deposit,
provident fund, or annuity, for the purpose of providing for old age and
disability. The third plan, which has recently grown in favor in this country,
is the payment in shares of stock of the company.
The economic theory of profit-sharing is that by inducing greater care and
diligence on the part of the employe he will himself create the fund from
which he is paid. It is claimed by its advocates that it increases both the
quantity and the quality of the product and that it promotes greater care of
implements and materials, thus reducing the cost at the same time that it
increases the output. The classic example of this is the case of the original
profit-sharing scheme, the Maison Leclaire, in Paris; the result of the first
six years’ experiment was a dividend on wages of $3,753 a year, derived

entirely from the increased economy and care of the workers. In some
cases, however, the object of the employers is to secure immunity from
strikes and other labor disturbances and a greater permanence of the labor
force; and participation in profits is conditioned on the men abstaining from
joining a trade union, or on uninterrupted service. In these cases the
deferred participation plan is used. The advantages claimed for the system
are not merely the increase in product already spoken of and the greatest
efficiency of the worker, but also the improvement in his material and moral
standards, and the promotion of industrial peace by lessening discontent and
friction. The main basis for the system, since it is economic and not
philanthropic in its nature, must of course be the increase in production
brought about by its adoption.
More weighty, however, appear the objections against profit-sharing, which
seem to have had sufficient force to cause the failure of a number of
ventures in this direction. In the first place, the relation between the
increased effort of a single workman and the success of a general business
is so remote, especially in our complicated modern industry, that it is
unlikely to act as a very powerful stimulus. But even if it should, the
savings thus effected might be swept away by the poor business
management of the employer. “It is quite possible that the workman who, in
the hope of earning ‘bonus to labor,’ has done work 10 per cent in excess of
the normal standard, may, even under a liberal scheme, find that, instead of
receiving an addition to his normal wages of, say, 7 per cent, the bad
management of his employer has reduced his bonus to so low a level that he
has to be content with a supplement equivalent to only 2 per cent on his
wages, or that, as has been the case in a large proportion of the schemes ...
no bonus whatever is forthcoming.”[34] It is undesirable to make the earnings
of the laborer dependent in any way upon the fluctuations of business or the
ability of the employer. The ordinary wage system has at least the merit that
the reward of the laborer is made dependent only on his own efforts. The lot
of the modern worker is too unstable and employment too unsteady to add a
new element of uncertainty in wages. If the laborer has really earned the
premium, say labor leaders, why not add it to his wages instead of adopting
this roundabout method. The sliding scale, or a system of premiums or
bonus payments for increased output, would be better than profit-sharing,
and is rapidly spreading.

This leads to the second objection, which is that profit-sharing paralyzes the
efforts of the laborers to better their own conditions through trade unions,
strikes or other methods. The trade union attitude was vigorously stated by
President Gompers of the American Federation of Labor in his testimony
before the Industrial Commission[35]: “There have been few, if any, of these
concerns which have been even comparatively fair to their employes....
They made the work harder, longer hours, and when the employes of other
concerns in the same line of trade were enjoying increased wages, shorter
hours of labor, and other improvements, tending to the material progress of
the worker, the employes of the concern where so-called profit-sharing was
the system at the end of the year found themselves receiving lower wages
for harder work than were those who were not under that beneficent
system.” As long as the system is viewed with suspicion by the laborer or
used as a weapon in industrial bargaining by employers, the plan is
foredoomed to failure. But even were it managed in the proper spirit, it is
after all applicable to only a comparatively few industries, those, namely, in
which labor makes up the largest part of the cost of production. In most
modern industries capital plays such an important role as compared with
labor that the field for this plan is comparatively limited.
In the actual practice of profit-sharing there have been many interesting
experiments, and not a few failures. It may be said to date from 1842, when
M. Leclaire, a Parisian painter and house decorator, introduced it into his
business, and has since spread over France and England; it has met with
little success in the rest of Europe. In the United States the movement has
also been more recent and of smaller proportions. The reason for this is
suggested by President Hadley as follows[36]: “Where the laborers under the
old wage system are not working up to a high standard of efficiency, there
is more chance for the success of profit-sharing. This seems to be the reason
why it works better on the Continent than in England, and better in England
than in America.” It was estimated in 1900 that there had been in the entire
world some 500 experiments in profit-sharing, of which about 400 were
still in existence: a more conservative estimate would place the latter
number at about 300.
More radical than profit-sharing, which involves only a change in the
method of payment of wages, is co-operation, which involves a change of
management as well. Its final goal, in the minds of its advocates, is the

radical modification if not ultimate abolition of the present wage system.
While profit-sharing is paternalistic and is directed to an increase of
production, co-operation may be said to be democratic, and to aim at a more
equitable distribution. Under this plan the laborers hope to divert to
themselves the large amount of profits which they now see going into the
possession of their employers. By eliminating the manager or enterpriser
they hope to save his profits for themselves. Two different kinds of co-
operation are usually distinguished—distributive or consumers’ co-
operation, and producers’ co-operation—which we may profitably take up
in turn.
Successful consumers’ co-operation may be said to have originated in Great
Britain when twenty-eight Rochdale workingmen founded their famous
society of Equitable Pioneers. The success and growth of this remarkable
experiment, starting with a capital of £28, to a great system of 8,000
members with a capital of £200,000 in 1874, is a most romantic story. It
was largely imitated and retail co-operative stores sprang up all over
England. In 1864 the English Co-operative Wholesale Society was started,
for the purpose of the joint purchase of supplies for the retail co-operative
stores on better terms than these could secure singly from ordinary
wholesalers. It effected large economies and was successful from the
beginning; by 1901 it had a capital of £2,500,000 and acted as purchaser for
over 1,000 retail societies. From buying, the society soon passed to making
its own goods and now manufactures directly a long list of commodities. In
1868 the Scottish Wholesale Society was inaugurated upon practically the
same plan. Consumers’ co-operation has met with considerable success in
Europe also. In the United States, however, experiments of this kind have in
general had only a brief existence. It is impossible to say how many such
societies exist today as no adequate statistics on the subject exist. Trade
union stores in New England, the grange stores of the Patrons of Husbandry
and later similar ones of the Sovereigns of Industry, and a few sporadic
movements since in different parts of the country, show what has been
attempted. The reasons for the lack of success in this country are not hard to
find. Co-operation requires a willingness to take considerable trouble for
small economies, which American workingmen, with their generally high
wages, have not yet been willing to take. It also requires a considerable
degree of homogeneity in thought and interests on the part of a people,

which is naturally less present in the United States with its large admixture
of foreign population than in England or the countries of Europe.
The methods of the Rochdale Society will serve as an illustration of the way
in which the savings effected by co-operation are distributed among the
members. Any one might become a member upon payment of one shilling
and was then entitled to trade at the store. The prices charged were those
current in the town, but purity of goods was assured; cash payments were
an essential feature. At the end of the year the profits were divided among
the members in proportion to the amount of their purchases. On the other
hand, it may be noted that no attempt was made to, introduce profit-sharing
with the employes, who are paid ordinary but good wages only. Other forms
of consumers’ co-operation are those which undertake to supply insurance,
or credit, like the co-operative insurance companies, banks, and building
and loan associations. The latter especially have had considerable success in
the United States and have helped many a laborer or man of small means to
the ownership of a home.
Producers’ co-operation differs from that just described in that it is a union
on the part of laborers to do away with the employer and to secure for
themselves the profits. The object of the first is to lower prices for the co-
operators as consumers; the object of the second is rather to secure higher
prices for themselves as producers by eliminating the profits of the
industrial manager. They hope to perform his function by their collective
effort, and to manage as well as labor; indeed, by diminishing friction and
strikes they even hope to increase the profits. Examples of successful co-
operation of this sort are not numerous, as it has great difficulties to contend
with. Most of the experiments have failed, though recently it would seem
that the movement is making substantial though slow progress, especially in
France and England. Most of those in the latter country, however, seem to
be of simple industries, as agriculture and dairy-farming. The most notable
example of successful productive co-operation in the United States has been
furnished by the coopers of Minneapolis, who organized a shop of their
own in 1868 and have steadily increased their business since that time.
Other instances often cited are the wood-workers in St. Louis and boot and
shoe companies in Massachusetts. More recently there has been a
considerable extension of co-operative creameries, cheese factories and
similar businesses of a simple kind.

The advantages of co-operation are summed up as follows by President
Walker.[37] From the laborer’s point of view: “First, to secure for the
laboring class that large amount of wealth, which ... goes annually in profits
to the employer. Second, to secure for the laborer the opportunity to
produce independently of the will of an employer.... In addition to these, the
political economist beholds in cooperation three sources of advantage. First,
co-operation would, by the very terms of the case, do away with strikes....
Second, the workman would be incited to greater industry and to greater
carefulness in dealing with materials and with machinery. Third, in no small
degree frugality would be encouraged.” To these may be added other
advantages, mostly realizable, however, in consumers’ co-operation. Saving
in store-room, clerk hire, advertising, book-keeping, etc., is effected, while
above all, the practice of cash payments saves all loss from bad debts. The
initial success of the Rochdale pioneers was in large part due to the
economy in this line, as a system of long credits burdened the retail trade of
England at the time they began. In this country the large department stores
have introduced this system and have thus been able to give their customers
lower prices, and by so much have lessened the motive for consumers’ co-
operation. The educative effects of successful co-operation upon the
participators in developing habits of thrift, careful management and a
knowledge of business principles, is one of the chief advantages of the
system. The ultimate ideal of enthusiastic co-operators does not, however,
stop short of a mere saving in price. The goal is stated as follows by the
Right Relationship League of America, which has several co-operative
stores in the Northwest: Consumers’ co-operation is merely the first step
which “will lead next to co-operative production, next to public ownership
of natural resources and finally to complete industrial and economic
equality, social and political right relationship—the Kingdom of God on
Earth.”
The defects of co-operation have already been suggested in the account of
their failure. In the first place, the importance and need of intelligent and
efficient management are usually underrated by workingmen. They are
unwilling to pay high salaries and as a consequence lose the best men and
secure inefficient service. Co-operation has therefore succeeded best in
retail trade where the processes are comparatively simple, or in those
branches of production where industry counts for most and management for

least. But even if it were possible to secure an efficient and progressive
manager for a co-operative shop, it is found very difficult for a man chosen
by the workmen to enforce discipline among them. A second disadvantage
is the difficulty of securing capital. Where, as in many branches of large-
scale manufacturing today, the average investment of capital amounts to
more than $1,000 per employe, the impossibility of obtaining this by the
contributions of the workers is obvious. Nor are capitalists usually willing
to lend to such organizations, as the risks are too great. To meet this
difficulty Ferdinand Lassalle, a German socialist, proposed that the state
should advance the necessary capital to associations of workmen. But the
experience so far with productive co-operation would seem to suggest that
the social benefits would not equal the waste of public capital. There is
danger also that if successful the co-operative associations would tend to
become monopolies; they are profit-seeking societies and would probably
not differ materially in their methods from ordinary joint stock enterprises.
It seems impossible, therefore, to expect from co-operation a final solution
of the labor problem, such as John Stuart Mill, for instance, hoped for.
Where successful, it has succeeded in distributing profits among a larger
number of persons than would otherwise have received them. Its educative
and moral effects, moreover, in the appeals which it makes to higher
motives and to character, are of the highest value. But as an industrial
system of enterprise it cannot supplant the present system as long as the
manager of industry is needed. Today he performs a useful social service
and profits are his pay therefor. If he is to be eliminated, society must first
be raised to a higher plane of efficiency, intelligence, and morality. But just
because it makes these high demands upon the members of the laboring
class, attempts at co-operation should receive all reasonable
encouragement.

XIII. PROBLEMS OF DISTRIBUTION.

So far we have discussed for the most part those economic problems that
center round the production of wealth, such as the use of natural resources,
large-scale production, trusts and monopolies, labor organizations,
unemployment, industrial education and co-operation. Now we shall
consider briefly a few of the problems that are connected with the
distribution of wealth. Professor Blockmar[38] says that the three great
problems of economic society are: “First, how to create the largest amount
of utilities or wealth; second, how justly to divide this amount; and third,
how to make the product minister to the permanent rather than to the
transient well-being of society.” The first problem we have already
discussed; the second forms the subject of the present section; while the
third will be taken up in the next section. Within the last century the center
of interest in the practical application of economic principles has decidedly
shifted from production to distribution. The earlier writers in economics, as
shown in the mercantile lists of the seventeenth and eighteenth centuries,
even Adam Smith, were chiefly interested in methods of increasing a
nation’s wealth. With the introduction of the factory system and the opening
up of vast natural resources by improvements in mining and transportation,
the production of wealth has enormously increased, and now the question of
the method of its distribution or division is felt to be more pressing.
Under the term distribution two different processes are included, which
should be distinguished before going further. The first is called functional
distribution, and concerns the distribution of the product of industry or the
income of society, among the different factors of production. That is to say,
land, labor, capital and managerial ability have contributed in varying
degrees to the production of a certain amount of current wealth, and the
problem of functional distribution is to ascertain how the net product
resulting from these joint efforts is divided. How much goes to rent, how
much to wages, how much to interest and how much to profits? The second
kind of distribution is the division of the wealth of society among
individuals or families; this is personal distribution, and raises the question

of poverty and great wealth. In discussing these problems, however, we
must remember that wealth production and distribution takes place in
modern society under conditions imposed by the social order in which we
live; these were defined as competition, private property and personal
liberty. If any modifications of the processes of distribution were desired, it
would undoubtedly be necessary to alter these fundamental institutions.
John Stuart Mill held that production was governed by natural laws, which
could be ascertained and stated, but that distribution was artificial and
hence that it was not possible to discover constant and certain laws
governing it. Beginning mainly with Mill, the ethical question has been
more and more asked as to what share each factor in production ought to
get, not merely what he does receive. “Hence the question is rising more
and more as to what should be the basis of division, and many proposals
have been made. It is proposed that laborers combine to get a larger share.
Hence we have trade unions, Knights of Labor, etc. It is proposed that
capitalists and landlords give a larger proportion of the produce to the
laborers than they are able to secure by mere private struggle. Hence we
have proposals for profit-sharing and various charities. It is proposed that
laborers combine to be their own capitalists and landlords; hence we have
all sorts of co-operative and communistic experiments. It is asserted that the
wealthy classes have so much power in their hands that private co-operation
cannot succeed in competing against them, and hence it is proposed that all
the people, through government (municipal, state, and national), secure all
the means of production (capital and land, so far at least as land is used for
production), and operate them collectively for the equitable good of all, the
people thus being their own employers, capitalists, and landlords. Hence we
have municipalism, nationalism, socialism. It is claimed that capitalists and
landlords have been able to secure, and are today able to maintain, their
large share in distribution, only through the favoritism of the Government.
Hence we have proposals for free trade, the single tax,... the extreme
proposals of the very great minimizing of the state in individualism, or the
abolition of the Government in anarchism.”[39] In view of this very
imperfect list it is not too much to say that most of the economic problems
that are stirring society today are connected with the distribution of wealth.
The first question that suggests itself in the discussion of functional
distribution is as to whether it is actually governed by natural law, so-called.

It is observable that the amounts which go to rent, to wages, to interest, and
to profits are regularly quite constant. What determines this? The socialists
contend that natural distribution is the only just method and insist that the
state should regulate this just distribution; they are not clear, however, as to
what this natural method is. Henry George uses the same phrase when he
says, “the just distribution of wealth is manifestly a natural distribution of
wealth, and this is that which gives to him who makes it and secures to him
who saves it.” All such statements beg the question for they all turn on the
use of the word natural. Many modern economists are inclined to assert that
the question of distribution is not an ethical one, not a question of what
ought to be but of what is. Thus Professor Tetter says[40] : “Distribution in
economics is the seasoned explanation of the way in which the total product
of a society is divided among its members. It is a logical question and not
an ethical one.” And Professor Clark writes, “There is, in short, a deep-
acting natural law at work amid the confusing struggles of the labor
market.” It will not be possible, in the brief limits of this section, to take up
all the theories as to the way in which this distribution is effected among the
claimants to a share of the product, but a few of the more important
practical results may be stated. We shall take up the four different factors in
turn.
Rent is usually defined as the return for the use of natural objects and
agencies. Rent has usually been low in the United States because of the
large amount of land and other natural agents available. In general it may be
said that when any factor of production is relatively abundant in comparison
with the other factors, its share of the product will be small.[41] Henry
George, however, argues that as the amount of land is limited and is now
practically all taken up, the future will see a constantly increasing demand
for land, and hence the landlords will absorb most of the future income of
society. This is true of most of land and other natural agents especially in
demand, as choice sites in our cities, anthracite coal mines, etc. The
practical problem that suggests itself is, do we wish private property in
land? The socialists answer no, but the individualists insist that the best use
has been and can be made of land only by reducing it to private ownership.
In practice, however, even in modern individualistic societies, the absolute
and unregulated use of land by the owner is restricted in various ways.

Interest is the amount paid for the use of capital. From the time of the
church fathers in the Middle Ages down to the present-day socialists,
interest and the private ownership of productive capital have formed
favorite objects of attack. The justification of interest lies in the fact that
men prefer present goods to future goods—a bird in the hand is worth two
in the bush—and interest is the difference in value between the two at the
present moment; it is time value. The justification of private property, on
the other hand, lies rather in its expediency than in any inherent and
unalterable law of nature. It has developed with civilization and has been,
without question, a fundamental cause of material progress. But moderate
individualists even, as John Stuart Mill, have attacked the institution of
inheritance while leaving the main edifice of private property untouched.
They would limit absolutely the amount of bequest or, as President
Roosevelt advocated, would use inheritance taxes as a means of breaking
up large fortunes.
Profits are the reward which the manager of a business receives for his
services in organizing and superintending the business. This share of the
social income was the last to be recognized by economists, and its
rightfulness is even yet denied by the socialists. They insist that profits are
really the earnings of labor which have been withheld from the laborer by
the superior skill and economic strength of the capitalist manager; they are
institutional robbery, the exploitation of labor. It is not possible to take up
the arguments on this point, but it may be said in a word that the manager of
business contributes a needed service to the work of society just as truly as
the laborer does, and receives his earned reward in the form of profits.
Wages are the reward of labor. It is often assumed that wages are lower than
they should be, that the laborer in some way is deprived of a portion of
what he has rightfully earned. It is worth while inquiring briefly how the
share of labor in the distribution of the social income is determined. Various
theories have been developed to explain the distributive process, of which
we may notice three. The oldest in point of time and the most pessimistic
theory held that wages were fixed by competition and the growth of
population at the bare subsistence minimum, a bare starvation level. If by
some happy chance wages were raised above this point, then the population
would speedily multiply and the increased competition thus brought about
among the laborers would depress wages again to the lowest amount

sufficient to support a family. Under the name of the “iron law of wages,”
this theory is still put forth by the socialists as the explanation—together
with the institution of private property—of wages. Historically, however,
this theory has happily been proven untrue, as the advance in the standard
of living among the working class during the past century testifies. It has
now been almost wholly superseded by the so-called productivity theory,[42]
which asserts that wages depend upon the productivity of labor; that the
laborer gets what he produces, and that this share is assured him by the
working out of the competitive process under free competition. If this
theory is true, there can be no ethical question raised; if labor is dissatisfied
with its share, then it must increase its productive efficiency. As a matter of
fact wages have always been high in the United States because labor has
been relatively scarce compared with land and capital, and consequently its
marginal productivity has been high. The third theory says that wages are a
result of bargaining, of competition in the labor market, a question of
supply and demand. Under these circumstances it is largely a question of
economic strength between labor and capital, and if labor is well-organized,
alert, and able to drive a good bargain, then wages will be high; otherwise
they will be low. While there is an element of truth in the last theory, the
second one seems the truest explanation of general wages; certain it is that
no monopoly power of labor, however great, could permanently maintain
wages at a level higher than the actual produce of labor. The element of
truth in the first theory is that wages can never, for any length of time, fall
below the cost of subsistence.
Of more practical interest are questions connected with the personal
distribution of wealth. In this connection arise such problems as the
increase of large fortunes, the causes of poverty, and similar questions. The
boast of our Republic has long been that here opportunity was open to all,
that wealth was widely diffused, and that such inequalities of fortune as
characterized the nations of the Old World were happily lacking. In the
fifty-five years, 1850-1904, the per capita value of all property in the
United States exactly quadrupled; how has this increase been distributed?
Unfortunately we have no complete statistics on this point, yet reliable
estimates by authoritative writers all tell the same story—of great
concentration of wealth in the possession of a comparatively few rich
families. In 1893 Mr. George K. Holmes concluded from a study of the

statistics of farm and home ownership in the United States that “91 per cent
of the families of the country own no more than about 29 per cent of the
wealth, and 9 per cent of the families own about 71 per cent of the wealth.”
A more accurate and satisfactory statement can be drawn from the income-
tax returns for Prussia, which tells almost the same story with regard to
income. The table on the following page is condensed from an article by
Professor A. Wagner:
Distribution of Income in Prussia, 1902

Per cent Per cent
Income
of persons of income
Below $214 70.7 33.0
$214 to $714 25.8 34.9
Over $714 3.5 32.1

According to these figures over two-thirds of the persons—heads of
families or single adults—had only one-third of the income, while 3½ per
cent had another third. Another striking fact shown by the table is the large
proportion of persons receiving incomes of less than $214 a year, the
minimum taxable income. It shows the poverty of the mass of the people as
well as the concentration of wealth among the few rich. In the United
States, where the natural resources have been so much richer than in
Germany, a similar table would probably show a much smaller proportion
under the Prussian minimum, but on the other hand it would probably show
a greater concentration of income in the hands of a few. Europe has as yet
no billionaire. The great fortunes of the United States have been made
possible by the unrivaled opportunities for the exploitation of rich natural
resources, the appropriation of natural monopolies, and to special privileges
and opportunities in manufactures and transportation. The importance of
monopoly privileges in the distribution of wealth is well shown by the
results of an investigation made in 1892 by the New York Tribune into the
sources of the fortunes of millionaires. It was undertaken to show that
protection was not the main cause; but while it proved this, it showed
clearly that most of them were built up on monopoly. “Of the 4,047
millionaires reported, only 1,125, or 28 per cent, obtained their fortunes in
protected industries.... About 78 per cent of the fortunes were derived from

permanent monopoly privileges, and only 22 per cent from competitive
industries unaided by natural and artificial monopolies.... Furthermore, if
the size of fortunes is taken into account it will be found that perhaps 95 per
cent of the total values represented by these millionaire fortunes is due to
those investments classed as land values and natural monopolies, and to
competitive industries aided by such monopolies.”[43] It is essential to the
stability of our democratic institutions that all special privileges be
absolutely prohibited, and that monopoly be brought under strict
government control and regulation. Improper methods of wealth
accumulation should certainly be prevented.
The opposite question of poverty has already been discussed and some of
the causes of poverty pointed out. It will be sufficient here to try to answer
the question which has often been asked: Are the rich growing richer and
the poor poorer? Though the first part of the question has just been
affirmed, the second part may be denied. The nineteenth century has
witnessed a vast improvement in the condition of the laboring man, who has
shared in the increasing wealth which he has helped to produce. Wages have
steadily increased, the hours of labor have been reduced, and the material
well-being of the wage-earner is greater today than it has ever been before.
It has more than once been pointed out by writers on this subject that with
an equal distribution of wealth no one would be well-to-do, while many
others insist that inequality in itself is a desirable thing. Greater diffusion of
wealth can come about only by very slow processes, and permanent plenty
can be secured only by a great increase in the accumulations of capital and
the efficiency of each worker. Any suggested reform, therefore, that would
weaken the motives to thrift and industry must be rejected.

XIV. SAVING AND SPENDING.

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

United
New York Great
Items States Prussia Average
City Britain
1903
Food 43.1 43.4 51.4 55.0 48.2
Clothing 13.0 10.6 18.1 18.0 14.9
Rent 18.1 19.4 13.5 12.0 15.8
Fuel and light 5.7 5.1 3.5 5.0 4.8
Miscellaneous 20.1 21.5 13.5 10.0 16.3
Total 100.0 100.0 100.0 100.0 100.0

From this table it is seen that practically half of the income of average
working-class families is expended for food, and five-sixths of it goes for
the bare necessaries. It is therefore of the utmost importance that this be
spent wisely. The remaining one-sixth, included here under the head
“miscellaneous,” comprises such items as education, care of health,
comfort, mental and bodily recreation, etc. It is manifest that this group can

be expanded in only one of two ways: either by enlarging the total income,
or by economizing on the other items by a wiser and better-ordered
expenditure. The former question has already been discussed; here we are
concerned only with the latter. Dr. Frederick Engel, a Prussian statistician,
laid down certain laws with regard to consumption: as the income of a
family increases a smaller percentage is spent for food and a larger
percentage for education, health, recreation, etc.; while the percentage spent
for clothing, rent, fuel and light remains approximately the same. A higher
civilization and culture for the mass of the people can only be secured by
expanding the group of culture expenditures. As long as these remain
unsatisfied for the ordinary family we cannot claim to have attained our
economic goal. The author of a recent study of conditions in New York
City, where the cost of living is high, concludes that a “fair living wage for
a workingman’s family in New York City should be at least $728 a year, or
a steady income of $14 a week.”[44] The actual earnings are certainly below
this figure.
One of the problems which has often proved very puzzling is the relation
between saving and spending. At what point should one stop spending in
order to save? If the satisfaction of our wants is the object of production,
why should we save at all? This is the point urged by the author of a
specious little book called “The Fallacy of Saving.” The problem can be
most easily solved by a more careful analysis of terms. In the popular view,
saving involves the withdrawal of goods or money from use, while
spending means putting them to immediate use. The spendthrift is
proverbially popular. “If the rich do not spend, the poor die of hunger,” said
Montesquieu. Saving may take the form of hoarding or withdrawing things
from use, but nowadays this is practised only by misers; saving ordinarily
takes the form of investment in some productive enterprise, either directly
or through a bank. In this way a demand is created for goods just as truly as
though the money had been spent for a dinner or a suit of clothes. Saving is
spending, but it is spending for the future rather than the present; it usually
causes the production of permanent material goods rather than transient or
immaterial pleasures. Another cause of the confusion of ideas on this
subject is that we always speak of money and thus lose sight of the acts of
production and consumption that lie back of the money transfer. We see that
money is transferred by spending and think that it increases trade.

Consequently, when a prodigal spends his money foolishly, it is excused on
the ground that it makes employment and puts money in circulation. We
forget that it would have been “put in circulation” just as effectively if he
had not spent it, but had placed it in a bank. If we look back of the money
transfer, we see that usually there has been a foolish or wasteful
expenditure, sometimes an absolute destruction of wealth. A fire which
burns down valuable buildings is an absolute social loss, even though
employment be given to masons and carpenters in putting them up again.
A third confusion of ideas that exists in the popular mind is due to an over-
emphasis of the desirability of work for its own sake. The man who “makes
work” is thought to be doing a desirable thing, even though this results from
the unnecessary destruction of useful things. Now the real goal of all
rational economic endeavor is not production for its own sake, but
consumption; not work, but the gratification of wants. Every destruction of
durable commodities which lessens the power to gratify wants is a loss to a
community and no juggling with words can make it anything else. If it
gives employment to labor, that means that the labor has been diverted from
the production of other things to which it would have been devoted. Edward
Atkinson several years ago calculated that every year fires destroyed
property in the United States to the amount $150,000,000.[45] That workmen
are employed to reproduce the buildings, etc., can surely not be reckoned as
a social gain. There is great danger in a commercial age like ours of
forgetting that work is not an end in itself, but simply a means to an end.
But it may be argued that unless these men had been given employment of
this sort, they would have starved. It is conceivable that during or after a
revolution industry would be so interrupted that ordinary employments
would not be open. But in ordinary times such a statement is simply an
assertion of the fallacious lump-of-labor theory, that there is just so much
work to be done and no more. New wants are continually pressing for
satisfaction, waiting only for the prior ones to be satisfied before they urge
their claims. So soon as the old ones are satisfied, additional employment is
provided in meeting the newer desires. The aim of society is to expand
continually the circle of gratified desires. As durable goods and agents are
accumulated by the process of saving, this becomes increasingly possible in
every progressive society. Useless destruction involves sheer waste and
cannot be justified on any grounds.

On the other hand, saving is socially necessary in every industrially
developed community in order to furnish the requisite capital for the
continued production of wealth. Professor Marshall has estimated that every
year one-fifth of the wealth of a nation is used up in the processes of
manufacture and production; just to keep machines, factories, railroads, and
other instruments of production up to the point of efficiency and restore loss
and depreciation would therefore require considerable saving. If the nation
is to grow wealthier and is to accumulate additional capital, manifestly still
more must be saved. This is done in all progressive countries. Saving is
carried on by individuals, however, and not by nations, and the motives that
lead to it are personal. The most important is probably the desire to provide
for wife and children or other relatives; next to that is the wish to lay by
sufficient for one’s old age. In our individualistic society, where each family
forms an independent unit and is assumed to be self-supporting, it is very
desirable that habits of thrift and saving be developed. Both from a social
and a personal point of view therefore saving must be approved, though it is
undesirable that it should proceed so far as to prevent spending for the
gratification of essential present needs.
But what shall we say about expenditures for luxuries? Here the spending is
for the gratification of a want, though it may be out of proportion to the
results. What shall be our attitude to it? This question is not so easy to
answer as the other. Three different schools have given as many answers to
the problem of luxury: the first condemns it utterly; the second approves it
wholly; and the third takes an intermediate position between the two
extremes. Luxury is condemned by the first school from three points of
view: as a question of individual morals, it is regarded as debasing and
enervating, thus preventing the highest development of the human faculties;
as a question of economics it is condemned as wasteful; and as a question
of right and justice it is incompatible with an equitable distribution of
wealth. It is upon this last point that the opponents of luxury lay the greatest
emphasis. As the quantity of existing wealth is insufficient to satisfy even
the primal wants of the large majority of our fellow-creatures, we should
endeavor to increase this available store as much as we can, and should
refrain from drawing upon it in a reckless manner in order to gratify
superfluous wants. Furthermore, the productive powers that we can use are,
as a matter of fact, limited; and therefore, if the wealthy classes divert a

portion of these forces towards the production of articles of luxury, there
will be so much the less available for the production of those staple articles
that the masses require for their consumption. In the case of a Robinson
Crusoe this would be perfectly clear: if he devoted several months to the
polishing of a diamond for ornament, he would have to go without a house
or other improvements he might have made in that time. Or, if he forced his
man Friday to spend half his time polishing diamonds for him, Friday might
be compelled to go without sufficient clothing or food or housing. The same
thing is true of organized society, only the truth is hidden by the phenomena
of exchange. It has been estimated[46] that the annual consumption of wealth
in the United States is divided somewhat as follows: necessaries, six billion
dollars; luxuries, three and one-half billion (of which $900,000,000 go for
liquor and $500,000,000 for tobacco); capitalistic uses, three and three-
quarter billion. It is manifest that if the expenditure for luxuries was
curtailed or abandoned, there would be more to devote to the other
categories.
The opposite school replies to these arguments that luxury is an
indispensable stimulus to progress; that really all economic progress is first
manifested in the form of a need of luxury, and that luxury therefore is a
necessary phase of its development. Since luxury is wholly relative, every
want or need is, on its first appearance in the world, regarded as
superfluous; first, because no one has hitherto wanted it, and secondly,
because its production probably requires a considerable amount of labor, on
account of man’s inexperience and the inevitable gropings in the dark that
attend all beginnings. The decencies of life today and even the necessities
were once regarded as luxuries—chimneys in houses, shoes, forks and
knives, linen for the body, bath tubs, etc. If all luxury had always been
sternly suppressed when it made its appearance, all the needs that constitute
civilization would have been nipped in the bud, and we should still be in the
condition of our ancestors of the Stone Age. Civilization depends on the
multiplication of wants. Economic progress is a process of converting
superfluities into conveniences, and conveniences into necessities.
The attitude taken by practically all economists today is intermediate
between these two extremes. Moderate luxury is justified, but lavish and
indiscriminate luxury is disapproved of. This justification of luxury rests
upon purely economic grounds. In so far as personal consumption is the

objective point of production, the prohibition of luxury would act as an
impediment to enterprise. If the desire to enjoy luxuries stimulates the
productive powers of economically important members of society, it is
justifiable as a necessary motive force. The introduction of luxuries and the
consequent raising of the standard of living seems often the only way to
secure progress. If the mass of the people live on the minimum of cheap
food, multiply as long as cheap food is to be had, and spend little for
comforts and luxuries, then most of the labor of such a community must be
spent in obtaining food for the masses. Such is the condition in India and
China. But if a large part of the community has a higher standard of living,
it will exercise self-restraint in the increase of its numbers, and the whole
level of intelligence and comfort will be raised, as in France or Switzerland
or New England. On the other hand, it is urged that “failure on the part of
any family to secure the necessaries of life is injurious, not only to it, but to
the whole community. Under-consumption means under-nutrition and loss
in industrial efficiency. If permitted to continue it must inevitably
undermine the standards which make a family self-supporting and self-
sufficient and reduce its members to dependency. The general interest
requires, therefore, acceptance of the maxim: the consumption of luxuries
should be deferred until all are provided with necessaries.... This suggests
that no one is justified in spending income for a luxury for himself or his
family that will afford less happiness than would the same income spent for
someone else.”[47]
But the difficult question at once suggests itself: How can the surplus
incomes of the rich be used so as to provide for the needs of the poor,
without undermining their independence or permanently lowering their
earning power? It has been suggested that there should be a socialization of
luxury; that the rich should use their wealth for the construction of public
art galleries, libraries, parks, baths, etc., which would thus gratify as great a
number as possible. The feeling is growing in the United States and in the
world that wealth is a social trust, and that the ownership of wealth imposes
upon a person certain moral obligations. While every man has a legal right
to spend his surplus income as he pleases, he is morally bound to spend it in
such a way as to increase the welfare of the whole community.
Let us now finally take up the problem of economy in consumption. It is
said that an American family will waste enough food for a French family to

live on. The farmer who leaves his implements out in the rain or his cattle
without proper shelter, is guilty of waste. We all waste clothing by frequent
changes in fashion. Such waste is as much due to a lack of knowledge and
training as to carelessness. The single example of the consumption of food
will illustrate this point. “If we place the average income of an American
family at $500—and it will not greatly exceed that figure—then nearly
$250 of this amount is expended each year for food. Waste occurs in any or
all of the following ways: (1) needlessly expensive foods containing little
real nutriment are used; (2) there is a failure to select the foods best suited
to the needs of the family; (3) a great deal is thrown away which ought to
be utilized; (4) bad preparation of the food causes it to lose much of the
nutriment which it does contain; (5) badly constructed ovens diffuse heat,
instead of confining it, and cause enormous loss of fuel. We shall state less
than the truth if we estimate that fully one-fifth of the money expended for
food is absolutely wasted, while the excessive expenditure often fails to
provide adequate nutrition.”[48] The remedy for such a waste as this clearly
lies in the teaching of domestic science in our public schools to the
daughters and future wives of the workingmen. As the ordinary household
expenses, as shown above, absorb from 80 to 90 per cent of the ordinary
income, the training of the housewife, under whose control they fall, is
almost as imperative as that of the wage-earner.
The economic evils of intemperance have already been partially stated in
the objections to luxury. There is, however, one additional objection to the
excessive use of intoxicating liquor which is not true of most indulgences: it
diminishes a man’s productive powers. It is harmful in its effects upon both
consumption and production. Other items of consumption appear, however,
not so clearly under the immediate control of the consumer. The housing
accommodations in many of our large cities have often been unsanitary and
unworthy of being called homes. Legislation has been necessary to compel
the erection of better tenements and prevent the exploitation of helpless
people. So too it has been found necessary to legislate against loan-sharks,
in order to protect people against their own improvidence and ignorance. In
addition to legislation against positive evils, we must of course look to
education as the great remedy of waste in consumption.
There is one other phase of the subject of consumption that may well be
mentioned before leaving this subject. Owing to the constant pressure of the

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

XV. MONEY AND BANKING.

Probably on no subject has there been such confused thinking or have such
widely varying views been held as on that of money. There is, however,
substantial unanimity of opinion on the important points among economists
today, though in practice there still remain many unsolved problems. The
modern industrial system has already been characterized as one of
capitalistic production, of large-scale enterprises with extended use of
machinery. Not less fundamental are the processes of valuation and
exchange made possible by the use of money and credit; and also by the
machinery for the geographical distribution of goods, our railroads and
steamship lines. The modern stage of economic development has been
described by Hildebrand as one of “credit economy,” as opposed to those of
barter and money economy, which preceded. It is inconceivable that the
modern complex system of exchange could be maintained without the
extended use of money and credit. Without attempting to define these terms
or to trace their historical development, we may proceed at once to state
some of the problems to which they have given rise.
The first question that suggests itself is, what determines the value of
money? The generally accepted answer may be briefly stated: it is, that the
value of money depends, other things remaining the same, upon its quantity.
According to the quantity theory an increase in the supply of money will
cause a fall in the value of each unit, just as an increase in the supply of
wheat or cotton will cause a fall in the value of each bushel or bale.
Conversely, a decrease in the quantity of money will cause a rise in the
value of money. It is simply an application of the general law of value to
money. The phrase “other things remaining the same” is however an
important one, for it assumes that the amount of business and the methods
by which it is conducted will remain substantially unchanged. Of course if
an increase in the amount of money is accompanied by an equivalent
expansion of trade, the one may offset the other and the value of money
remain unchanged. Now, inasmuch as the prices of all goods and services
are measured and expressed in terms of money, it is clear that a fall in the

value of money means a rise of general prices; the value of each commodity
is now expressed in terms of a larger number of less valuable units or
dollars. Prices will be high if the quantity of money in circulation in a
country is large; they will be low if the quantity is small. To the question,
which is better for a country, high prices or low prices, it may be answered
that it is a matter of indifference, provided only that there is enough money
to do the work of exchange efficiently and that fluctuations are prevented.
Just how much constitutes enough is, however, a matter of contention. In
the undeveloped sections of our country, where capital is scarce and
banking facilities undeveloped and where most of the people are debtors,
there has always been a demand for cheap and abundant money. Capital and
money have been confused and the need of one has led to a demand for the
other.
It is not a matter of indifference, however, whether prices be rising or
falling, that is, whether inflation or contraction of the currency is taking
place. A period of falling prices means hardship and injustice to debtors and
producers of goods, as farmers, manufacturers, etc. Having contracted
obligations and engaged in the production of commodities with the
expectation of a given price, they find their goods worth less when ready
for the market and themselves confronted with a loss instead of the
anticipated profit. Under such circumstances a contraction of the currency
and falling prices means lessened production of wealth. Consequently many
writers, and even so good an economist as President Walker, have urged
that a slow steady inflation of the currency would promote trade and “give a
fillip to industry.” The monetary history of the United States is filled with
attempts to realize this in practice: colonial and revolutionary bills of credit
were first issued; when these were forbidden by the new Constitution resort
was had to issues by state banks. When the Federal Government began the
issue of greenbacks and restricted the use of state bank notes, the
inflationists looked to this source for assistance. After the defeat of the
Greenback party, they turned finally to the coinage of silver, which was
now falling in price, and the question of bimetallism in the United States
was made a practical political issue.
Down to 1870 practically all the nations of Europe and America had the
system of bimetallism at ratios of 15½ or 16 to 1. About that date the great
increase in the supply of gold and the fall in the value of silver led one

country after another to abandon the latter and to adopt the system of gold
monometallism. This was vigorously resisted by many persons and several
fruitless efforts made to secure a system of international bimetallism.
Failing that, the friends of silver in this country endeavored to secure
independent action by the United States alone, and were ultimately
successful in obtaining the purchase by the Federal Government of
practically the entire silver output of the country during the years 1878-
1893.

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

Wealth.
Fiscal Year, ending Population Production of Raw wool
June 30— June 1. Per wool.[B] imported.
Total.
capita.
Dollars. Dollars. Pounds. Pounds.
1800 5,308,483 … … … …
1810 7,239,881 … … … …
1820 9,638,453 … … … …
1830 12,866,020 … … 35,802,114 669,883
1840 17,069,453 … … 52,516,959 9,898,740
1850 23,191,876 7,135,780,000 307.69 … 18,695,294
1851 23,995,000 … … … 32,607,315
1852 24,802,000 … … … 18,343,218
1853 25,615,000 … … … 21,616,035
1854 26,433,000 … … … 20,228,035
1855 27,256,000 … … … 18,599,784
1856 28,083,000 … … … 14,778,496
1857 28,916,000 … … … 16,505,216
1858 29,758,000 … … … …
1859 30,596,000 … … 60,264,913 …
1860 31,443,321 16,159,616,000 513.93 75,000,000 …
1861 32,064,000 … … 90,000,000 …
1862 32,704,000 … … 106,000,000 42,131,061
1863 33,365,000 … … 123,000,000 73,931,944
1864 34,046,000 … … 142,000,000 90,464,002
1865 34,748,000 … … 155,000,000 43,877,408
1866 35,469,000 … … 160,000,000 67,918,253
1867 36,211,000 … … 168,000,000 16,558,046
1868 36,973,000 … … 180,000,000 24,124,803
1869 37,756,000 … … 162,000,000 39,275,926
1870 38,558,371 30,068,518,000 779.83 160,000,000 49,230,199
1871 39,555,000 … … 150,000,000 68,058,028
1872 40,596,000 … … 158,000,000 122,256,499

1873 41,677,000 … … 170,000,000 85,496,049
1874 42,796,000 … … 181,000,000 42,939,541
1875 43,951,000 … … 192,000,000 54,901,760
1876 45,137,000 … … 200,000,000 44,642,836
1877 46,353,000 … … 208,250,000 42,171,192
1878 47,598,000 … … 211,000,000 48,449,079
1879 48,866,000 … … 232,500,000 39,005,155
1880 50,155,783 43,642,000,000 850.20 240,000,000 128,131,747
1881 51,316,000 … … 272,000,000 55,964,236
1882 52,495,000 … … 290,000,000 67,861,744
1883 53,693,000 … … 300,000,000 70,575,478
1884 54,911,000 … … 308,000,000 78,350,651
1885 56,148,000 … … 302,000,000 70,596,170
1886 57,404,000 … … 285,000,000 129,084,958
1887 58,680,000 … … 269,000,000 114,038,030
1888 59,974,000 … … 265,000,000 113,558,753
1889 61,289,000 … … 276,000,000 126,487,729
1890 62,622,250 65,037,091,000 1,038.57 285,000,000 105,431,285
1891 63,844,000 … … 294,000,000 129,303,648
1892 65,086,000 … … 303,153,000 148,670,652
1893 66,349,000 … … 298,057,384 172,433,838
1894 67,632,000 … … 309,748,000 55,152,585
1895 68,934,000 77,000,000,000 1,117.01 272,474,708 206,033,906
1896 70,254,000 … … 259,153,251 230,911,473
1897 71,592,000 … … 266,720,684 350,852,026
1898 72,947,000 … … 272,191,330 132,795,202
1899 74,318,000 … … 288,636,621 76,736,209
1900 76,303,387 88,517,306,775 1,164.79 302,502,328 155,928,455
1901 79,003,000 … … 287,450,000 166,576,966
1903 80,372,000 … … 291,783,032 177,137,796
1904 81,752,000 107,104,211,917 1,310.11 295,488,438 173,742,834
1905 83,143,000 … … 298,915,130 249,135,746
1906 84,216,433 … … 298,294,750 201,688,668
1907 85,817,239 … … 311,138,321 203,847,545
1908 87,189,392 … … … 125,980,524

Production Manufactures of cotton.
of cotton.
[B] Thousands of spindles in operation Thousands of bales of domestic
Fiscal Year,
on Sept. 1st. cotton taken by mills.
ending June (500-lb.
30— bales, In In Total In In Total
gross Southern Northern United Southern Northern United
weight.) States. States. States. States. States. States
Thou- Thou- Thou- Thou- Thou- Thou-
Number.
sands. sands. sands. sands. sands. sands.
1800 73,222 … … … … … …
1810 177,824 … … … … … …
1820 334,728 … … … … … …
1830 732,218 … … … … … …
1840 1,347,640 181 2,104 2,285 71 166 237
1850 2,136,083 265 3,733 3,998 78 497 575
1851 2,799,290 … … … 60 404 464
1852 3,130,338 … … … 111 588 699
1853 2,766,194 … … … 153 650 803
1854 2,708,082 … … … 145 592 737
1855 3,220,782 … … … 135 571 706
1856 3,873,680 … … … 138 633 771
1857 3,012,016 … … … 154 666 820
1858 3,758,273 … … … 143 452 595
1859 4,309,642 … … … 167 760 927
1860 3,841,416 324 4,912 5,236 94 751 845
1861 4,490,586 … … … 153 650 803
1862 1,596,653 … … … … … …
1863 449,059 … … … … … …
1864 299,372 … … … … … …
1865 2,093,658 … … … … … …
1866 1,948,077 … … … 127 541 668
1867 2,345,610 … … … 150 573 723
1868 2,198,141 … … … 168 800 968
1869 2,409,597 … … … 173 822 995
1870 4,024,527 328 6,804 7,132 69 728 797
1871 2,756,564 … … … 91 1,072 1,163
1872 3,650,932 … … … 120 977 1,097

1873 3,873,750 … … … 138 1,063 1,201
1874 3,528,276 … … … 128 1,192 1,320
1875 4,302,818 … … … 130 1,071 1,201
1876 4,118,390 … … … 134 1,220 1,354
1877 4,494,224 … … … 127 1,302 1,429
1878 4,745,078 … … … 151 1,345 1,496
1879 5,466,387 … … … 186 1,375 1,561
1880 6,356,998 561 10,092 10,653 189 1,382 1,570
1881 5,136,447 … … … 225 1,713 1,938
1882 6,833,442 … … … 287 1,677 1,964
1883 5,521,963 860 11,800 12,660 313 1,759 2,072
1884 5,477,448 1,050 12,250 13,300 340 1,537 1,877
1885 6,369,341 1,125 12,250 13,375 316 1,437 1,753
1886 6,314,561 1,150 12,250 13,400 381 1,781 2,162
1887 6,884,667 1,200 12,300 13,500 401 1,687 2,088
1888 6,923,775 1,250 12,300 13,550 456 1,805 2,261
1889 7,742,511 1,360 2,700 14,060 480 1,790 2,270
1890 8,562,089 1,570 12,814 14,384 539 1,979 2,518
1891 8,940,867 1,740 12,900 14,640 613 2,027 2,640
1892 6,658,313 1,950 13,250 15,200 684 2,172 2,856
1893 7,433.056 2,100 13,450 15,550 723 1,652 2,375
1894 10,025,534 2,200 13,500 15,700 711 1,580 2,291
1895 7,146,772 2,400 13,700 16,100 852 2,019 2,871
1896 8,515,640 2,850 13,800 16,650 900 1,605 2,505
1897 10,985,040 3,250 13,900 17,150 999 1,793 2,792
1898 11,435,368 3,550 13,900 17,450 1,254 2,211 3,465
1899 9,459,935 3,950 14,150 18,100 1,415 2,217 3,632
1900 10,266,527 4,368 15,104 19,472 1,523 2,350 3,873
1901 9,675,771 5,500 11,700 20,200 1,583 1,964 3,547
1902 10,827,168 6,400 15,000 21,400 2,017 2,066 4,083
1903 10,045,615 6,900 15,100 22,000 1,958 1,966 3,924
1904 13,679,954 7,650 15,200 22,850 1,889 2,046 3,935
1905 10,804,556 7,631 16,056 23,687 2,140 2,139 4,279
1906 13,595,498 8,995 16,255 25,250 2,373 2,536 4,909
1907 11,375,461 9,528 16,847 26,275 2,411 2,574 4,985

1908 13,587,306 10,201 17,304 27,505 2,187 2,352 4,539

Fiscal Year,
Exports. Unmanufactured Imports of
ending Imports.
(domestic) silk imported. crude rubber.
June 30—
Dollars. Dollars. Pounds. Pounds.
1800 … … … …
1810 … … … …
1820 … 7,812,326 … …
1830 1,318,183 5,774,013 … …
1840 3,549,607 6,504,104 … …
1850 4,734,424 20,781,346 … …
1851 7,241,205 22,164,442 … …
1852 7,672,151 19,689,496 … …
1853 8,768,894 27,731,363 … …
1854 5,535,516 33,949,503 … …
1855 5,857,181 17,757,112 … …
1856 6,967,309 25,917,999 … …
1857 6,115,177 28,685,726 … …
1858 5,651,504 18,584,810 … …
1859 8,316,222 26,976,381 … …
1860 10,934,796 33,215,541 … …
1861 7,957,038 25,271,382 … …
1862 2,946,464 8,890,119 … 2,125,561
1863 2,906,411 14,121,589 … 5,104,650
1864 1,456,901 14,341,501 407,935 …
1865 3,451,561 9,223,686 288,286 …
1866 1,780,175 27,502,194 567,904 …
1867 4,608,235 19,302,005 491,983 …
1868 4,871,054 17,335,406 512,449 8,438,019
1869 5,874,222 20,481,312 720,045 7,813,134
1870 3,787,282 23,380,053 583,589 9,624,098
1871 3,558,236 29,876,640 1,100,281 11,031,939
1872 2,304,330 35,307,447 1,063,809 11,803,437
1873 2,947,528 35,201,324 1,159,420 14,536,978

1874 3,095,840 28,193,869 794,837 14,191,320
1875 4,071,882 27,738,401 1,101,681 12,035,909
1876 7,722,978 22,725,598 1,354,991 10,589,297
1877 10,235,843 18,923,614 1,186,170 13,821,109
1878 11,438,660 19,081,037 1,182,750 12,512,203
1879 10,853,950 19,928,310 1,889,776 14,878,584
1880 9,981,418 29,929,366 2,562,236 16,826,099
1881 13,571,387 31,219,329 2,790,413 20,015,176
1882 13,222,979 35,719,791 3,549,404 22,712,862
1883 12,951,145 38,036,044 4,731,106 21,646,320
1884 11,885,211 29,074,626 4,284,888 24,574,025
1885 11,836,591 27,197,241 4,308,908 24,208,148
1886 13,959,934 29,709,266 6,818,060 29,263,632
1887 14,929,342 28,940,353 6,028,091 28,649,446
1888 13,013,189 28,917,799 6,370,322 36,628,351
1889 10,212,644 26,805,942 6,645,124 32,339,503
1890 9,999,277 29,918,055 7,510,440 33,842,374
1891 13,604,857 29,712,624 6,266,629 33,712,089
1892 13,226,277 28,323,841 8,834,049 39,976,205
1893 11,809,355 33,560,293 8,497,477 41,547,680
1894 14,340,886 22,346,547 5,902,485 33,757,783
1895 13,789,810 33,196,625 9,316,460 39,741,607
1896 16,837,396 32,437,504 9,363,987 36,774,460
1897 21,037,678 34,429,363 7,993,444 35,574,449
1898 17,024,092 27,267,300 12,087,951 46,055,497
1899 23,566,914 32,054,434 11,250,383 51,063,066
1900 24,003,087 41,296,239 13,073,718 49,377,138
1901 20,272,418 40,246,935 10,405,555 55,275,529
1902 32,108,362 44,460,126 14,234,826 50,413,481
1903 32,216,304 52,462,755 15,270,859 55,010,571
1904 22,403,713 49,524,246 16,722,709 59,015,551
1905 49,666,080 48,919,936 22,357,307 67,234,256
1906 52,944,033 63,043,322 17,352,021 57,844,345
1907 32,305,412 73,704,636 18,743,904 76,963,838
1908 25,177,758 68,379,781 16,662,132 62,233,160

[B] Calendar years.

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

Exports of
Production of
domestic
Year. copper &
Coal.[C] Copper.[C] manufactures
of.
Long tons. Long tons. Dollars.
1800 … … …
1810 20 … 17,426
1820 3,080 … 18,547
1830 285,779 … 36,601
1840 1,848,249 100 86,954
1850 6,266,233 650 105,060
1851 7,798,683 900 91,871
1852 8,764,879 1,100 103,039
1853 9,437,757 2,000 108,205
1854 10,698,841 2,250 91,984
1855 11,541,672 3,000 690,766
1856 12,095,469 4,000 534,846
1857 11,910,883 4,800 607,054
1858 12,477,213 5,500 1,985,223
1859 13,958,192 6,300 1,048,246
1860 13,044,680 7,200 1,664,122
1861 14,721,439 7,500 2,375,029
1862 15,612,353 9,000 1,098,546
1863 19,034,877 8,500 1,026,038
1864 21,076,003 8,000 251,272
1865 21,243,012 8,500 991,746
1866 25,896,056 8,900 143,761
1867 27,432,520 10,000 474,110
1868 29,341,036 11,600 479,488
1869 29,378,893 12,500 355,274
1870 29,496,054 12,600 504,741
1871 41,861,679 13,000 188,218

1872 45,940,535 12,500 185,983
1873 51,430,786 15,500 88,711
1874 46,969,571 17,500 356,758
1875 46,739,571 18,000 1,085,688
1876 47,571,429 19,000 3,441,939
1877 54,019,429 21,000 2,913,943
1878 51,728,214 21,500 2,319,901
1879 60,808,749 23,000 2,831,053
1880 63,822,830 27,000 793,455
1881 76,679,491 32,000 824,896
1882 92,456,419 40,467 658,941
1883 103,310,290 51,574 1,404,243
1884 107,281,742 64,708 2,664,964
1885 99,250,263 74,052 5,447,423
1886 101,500,381 70,430 2,602,869
1887 116,652,242 81,017 2,033,523
1888 132,731,837 101,054 3,812,798
1889 126,097,779 101,239 2,348,954
1890 140,866,931 115,966 2,349,392
1891 150,505,954 126,839 4,614,597
1892 160,115,242 154,018 7,226,392
1893 162,814,977 147,033 4,525,573
1894 152,447,791 158,120 19,697,140
1895 172,426,366 169,917 14,468,703
1896 171,416,390 205,384 19,720,104
1897 178,776,070 220,571 31,621,125
1898 196,407,381 235,050 32,180,872
1899 226,554,636 253,870 35,983,529
1900 240,789,310 270,588 57,852,960
1901 261,874,836 268,782 43,267,021
1902 269,277,178 294,423 41,218,373
1903 319,068,229 311,627 39,667,196
1904 314,121,784 362,739 57,142,081
1905 350,820,840 402,637 86,225,291
1906 369,783,284 409,735 81,282,664

1907 428,895,914 387,945 94,762,110
1908 … … 104,064,580

Production of Iron and steel Manufactures.
Year. Exports
Natural gas.[C] Iron ore.[C] Pig iron.[C] Steel.[C] Imports.
(domestic)
Dollars. Long tons. Long tons. Long tons. Dollars. Dollars.
1800 … … … … … 52,144
1810 … … 53,908 … … 91,914
1820 … … 20,000 … … 46,552
1830 … … 165,000 … 6,346,287 322,747
1840 … … 286,903 … 8,157,923 1,127,877
1850 … … 563,755 … 20,145,067 1,953,702
1851 … … … … 22,439,297 2,336,587
1852 … … … … 23,568,649 2,368,384
1853 … … … … 34,944,002 2,541,554
1855 … … 700,159 … 28,693,979 3,803,706
1856 … … 788,515 … 29,050,101 4,256,613
1857 … … 712,640 … 30,743,649 4,959,238
1858 … … 629,548 … 20,171,007 4,843,592
1859 … … 750,560 … 22,379,743 5,577,748
1860 … … 821,223 … 26,158,235 5,870,114
1861 … … 653,164 … 21,160,235 6,039,149
1862 … … 703,270 … 11,451,707 4,732,348
1863 … … 846,075 … 16,152,843 6,681,417
1864 … … 1,014,282 … 23,822,876 7,541,967
1865 … … 831,770 … 16,660,991 11,227,294
1866 … … 1,205,663 … 25,598,147 4,006,180
1867 … … 1,305,023 19,643 31,630,519 9,351,062
1868 … … 1,431,250 26,786 30,346,768 10,950,275
1869 … … 1,711,287 31,250 38,213,717 10,938,492
1870 … 3,031,891 1,665,179 68,750 40,273,682 13,483,163
1871 … … 1,706,793 73,214 53,024,075 21,189,692
1872 … … 2,548,713 142,954 67,852,616 11,463,880
1873 … … 2,560,963 198,796 74,302,102 13,655,087

1874 … … 2,023,733 389,799 31,432,380 19,534,215
1876 … … 1,868,961 533,191 23,197,417 15,449,846
1877 … … 2,066,594 569,618 19,320,927 16,501,638
1878 … … 2,301,215 731,977 18,987,130 16,053,571
1879 … … 2,741,853 935,273 19,594,608 15,133,493
1880 … 7,120,362 3,835,191 1,247,335 71,266,699 14,716,524
1881 … … 4,144,254 1,588,314 60,604,477 16,608,767
1882 215,000 … 4,623,323 1,736,692 67,976,897 20,748,206
1883 475,000 … 4,595,510 1,673,535 58,495,246 22,826,528
1884 1,460,000 … 4,097,868 1,550,879 40,147,053 21,909,881
1885 4,857,200 … 4,044,526 1,711,920 33,610,093 16,592,155
1886 10,012,000 … 5,683,329 2,562,503 37,534,078 15,745,569
1887 15,817,500 … 6,417,148 3,339,071 49,203,164 15,958,502
1888 22,629,875 … 6,489,738 2,899,440 48,992,757 17,763,034
1889 21,097,099 14,518,041 7,603,642 3,385,732 42,377,793 21,156,077
1890 18,792,725 16,036,043 9,202,703 4,277,071 41,679,591 25,542,208
1891 15,500,084 14,591,178 8,279,876 3,904,240 53,544,372 28,909,614
1892 14,870,714 16,296,666 9,157,000 4,927,581 28,928,103 28,800,930
1893 14,346,250 11,587,629 7,124,502 4,019,995 34,937,974 30,106,482
1894 13,954,400 11,879,679 6,657,888 4,412,032 20,925,769 29,220,264
1895 13,006,650 15,957,614 9,446,308 6,114,834 23,048,515 32,000,989
1896 13,002,512 16,005,449 8,623,127 5,281,689 25,338,103 41,160,877
1897 13,826,422 17,518,046 9,652,680 7,156,957 16,094,557 57,497,872
1898 15,296,813 19,433,716 11,773,934 8,932,857 12,626,431 70,406,885
1899 20,074,873 24,683,173 13,620,703 10,639,857 12,100,440 93,716,031
1900 23,698,674 27,553,161 13,789,242 10,188,329 20,478,728 121,913,548
1901 27,066,077 28,887,479 15,878,354 13,473,595 17,874,789 117,319,320
1902 30,867,863 35,554,135 17,821,307 14,947,250 27,180,247 98,552,562
1903 35,807,860 35,019,308 18,009,252 14,534,978 51,617,312 96,642,467
1904 38,496,760 27,644,330 16,497,033 13,859,887 27,028,312 111,948,586
1905 41,562,855 42,526,133 22,992,380 20,023,947 23,510,164 134,728,363
1906 46,873,932 47,749,728 25,307,191 23,398,136 29,053,987 160,984,985
1907 52,866,835 51,720,619 25,781,361 23,362,594 40,587,865 181,530,871
1908 … … 15,936,018 … 27,607,909 183,982,182

Prices of staple commodities.
Washed Ohio
Per ton.[C] fleece wool,
Year. Middling Standard per lb.,
Pig iron Steel rails, cotton sheetings in eastern
[C] [C] m’k’ts,
No. 1, standard per pound. per yard.
foundry. sections July 1.
Medium.
Dollars. Dollars. Cents. Cents. Cents.
1800 … … … … …
1810 … … … … …
1820 … … … … …
1830 … … … … 50
1840 27.88 … … … 39
1850 20.88 … 12.34 7.87 37
1851 21.38 … 12.14 7.08 42
1852 22.63 … .50 6.96 38
1853 36.13 … 11.02 7.92 53
1854 36.88 … 10.97 7.96 37
1855 27.75 … 10.39 7.64 40
1856 27.18 … 10.30 7.50 42
1857 26.34 … 13.51 8.90 50
1858 22.19 … 12.23 8.25 37
1859 23.33 … 12.08 8.50 40
1860 22.70 … 11.00 8.73 50
1861 20.26 … 13.01 10.00 30
1862 23.92 … 31.29 18.55 47
1863 35.24 … 67.21 36.04 70
1864 59.22 … 101.50 52.07 100
1865 46.08 … 83.38 38.04 73
1866 46.84 … 43.20 24.31 67
1867 44.08 166.00 31.59 18.28 49
1868 39.25 158.46 24.85 16.79 45
1869 40.61 132.19 29.01 16.19 48
1870 33.23 106.79 23.98 14.58 45
1871 35.08 102.52 16.95 13.00 60

1872 48.94 111.94 22.19 14.27 70
1873 42.79 120.58 20.14 13.31 48
1874 30.19 94.28 17.95 11.42 53
1875 25.53 68.75 15.46 10.41 49
1876 22.19 59.25 12.98 8.85 35
1877 18.92 45.58 11.82 8.46 44
1878 17.67 42.21 11.22 7.80 36
1879 21.72 48.21 10.84 7.97 38
1880 28.48 67.52 11.51 8.51 48
1881 25.17 61.08 12.03 8.51 44
1882 25.77 48.50 11.56 8.45 45
1883 22.42 37.75 11.88 8.32 41
1884 19.81 30.75 10.88 7.28 34
1885 17.99 28.52 10.45 6.75 31
1886 18.71 34.52 9.28 6.75 33
1887 20.93 37.08 10.21 7.15 37
1888 18.88 29.83 10.03 7.00 39
1889 17.76 29.25 10.65 7.00 39
1890 18.41 31.78 11.07 7.00 37
1891 17.52 29.92 8.60 6.83 35
1892 15.75 30.00 7.71 6.50 34
1893 14.52 28.12 8.56 5.90 26
1894 12.66 24.00 6.94 5.11 21
1895 13.10 24.33 7.44 5.74 21
1896 12.95 28.00 7.93 5.45 18
1897 12.10 18.75 7.00 4.73 23½
1898 11.66 17.62 5.94 4.20 29
1899 19.36 28.12 6.88 5.28 31½
1900 19.98 32.29 9.25 6.05 31½
1901 15.87 27.33 8.75 5.54 26
1902 22.19 28.00 9.00 5.48 26¾
1903 19.92 28.00 11.18 6.25 31½
1904 15.57 28.00 11.75 7.13 32½
1905 17.88 28.00 9.80 7.00 39
1906 20.98 28.00 11.50 7.25 37

1907 23.89 28.00 12.10 7.62 36
1908 17.70 28.00 10.62 6.75 38
[C] Calendar year.

The arguments in favor of bimetallism are as various as the motives of its
advocates, but two or three of the more important ones may be briefly
stated. It is urged because it would give a more stable measure of value than
either silver or gold alone could do; and the evil effects of fluctuations in
the value of gold since 1873 are pointed out to illustrate this contention.
Monometallists answer this by asserting that most of the price changes can
be accounted for by improvements in production; that even if they were
caused by a contraction of the currency, this was simply one of the risks of
business; and finally, that the evil effects of falling prices are offset by a
corresponding reduction in interest rates. A second argument of the
bimetallists was the alleged insufficiency of gold on which to do the world’s
business. As this has been practically met by the phenomenal increase in
gold production in the last decade, especially since the gold discoveries in
Alaska, it is not necessary to dwell upon this argument. On February 1,
1909, the per capita circulation of money in the United States reached
$35.00, the highest point in our history. A final argument of the bimetallists
concerns foreign trade: it would facilitate this by establishing a fixed par-of-
exchange between all countries. While the weight of this may be admitted,
it has been practically deprived of all force by the adoption of the gold
standard by virtually all the industrially developed nations of the world.
This last fact shows that the question has now been actually settled by the
logic of events and today the issue of bimetallism has only an academic
interest.
Another problem connected with money which has been removed from the
arena of oratory to that of calm discussion is that of government paper
money. It is urged, with much truth, that if a nation issued paper money
instead of gold or silver, it would save all the expense of mining these
metals. It would resemble, as Adam Smith said, the discovery of wagon
roads through the air in the realm of transportation. Another argument
advanced in favor of government paper money is that it would be possible
by a scientific adjustment of the issues to regulate the amount of money in
circulation and so to prevent all fluctuations in prices. Both contraction and
inflation would be prevented and a cheap and yet ideal system of money

would exist. Still others see in this form of money an instrument for the
creation of wealth; this last argument simply results from a confusion of
ideas and need not be dealt with. A sufficient answer to the other two is an
appeal to the lesson of history: no government which has embarked upon
the issue of paper money has ever been able to restrict the issues within
reasonable limits; often it has led to national bankruptcy and the repudiation
of the entire issues. The experience of the United States with the greenbacks
has been more fortunate than that of many countries, but does not tempt to
further experiment.
The monetary situation in the United States today may be regarded as fairly
well settled. Although we have a very heterogeneous assortment of different
kinds of money, a fairly distinct sphere is allotted to each, and as the basis
for all, the gold standard has been definitely established by law. Money of
large denominations consists of gold and gold certificates (lowest
denomination, $20), of greenbacks and national bank notes (lowest
denomination, $10, though one-third of bank notes may be $5); the needs of
retail trade are met by the issue of silver certificates and silver dollars, and
of fractional currency. The system would be much simplified by the
retirement and destruction of the $346,000,000 in greenbacks, but as there
is now a fifty-per cent reserve in gold back of them, little danger need be
apprehended from their presence. Many people have regarded the existence
of some $500,000,000 worth of silver dollars as a menace to the goodness
of our money supply, but as the amount of gold in circulation increases the
silver will form a constantly smaller percentage of the whole. It is a
cumbersome and not very valuable asset of the Government, but is now
almost powerless for good or ill.
Important as is the subject of money and essential as is the need of a
standard of undoubted goodness, it is overshadowed in practical
significance by the problems of banking and credit. An investigation by the
Comptroller of the Currency some years ago showed that over 90 per cent
of the receipts of the national banks consisted of credit instruments, while
probably 60 per cent of the trade of the country was carried on by credit
rather than by cash transactions. A credit transaction is a transfer of goods
or money for a future equivalent; the element of time is introduced. This
makes possible an enormous increase in the number of exchanges and
obviates the necessity, to a large extent, of using money. Most of us enjoy

personal credit, which is limited only by our ability to persuade other
people to trust in us. But this power of purchasing things without immediate
payment must be made readily available if the ordinary business man is to
make use of it. This is done through the medium of a bank, whose business
it is to discount the notes of its customers, which in turn is based upon
confidence in their prospective earnings. The bank credit thus obtained may
be transferred by means of checks to other persons and to other banks. It is
the most fluid and volatile means of payment yet devised, and is subject to
dangers and abuses. In the last analysis business based upon such a system
of credit rests upon confidence in the honesty of individuals and in the
enforcement of the law governing contracts, and also in the ability of those
who have pledged themselves to future payment to make good their
obligations. In times of panic credit fails and resort is had to money.
The fundamental institution in our credit economy is the bank, and it is
therefore essential that it be thoroughly safe and responsive to the needs of
the business world. A bank may furnish its customers with the ready means
of payment they need in exchange for their future promises either in the
form of bank notes or bank credit. The former are more largely used on the
continent of Europe and in rural districts in this country, the latter by
England and the United States, especially in the cities. The preference for
one or the other seems to be a matter of geography. The issue of bank notes
has been very carefully safeguarded since the establishment of the national
banking system in 1863. They are based upon the purchase of government
bonds and are absolutely safe. They lack, however, one essential quality of
good bank money in that they are quite inelastic. That is to say, the amount
of bank notes in circulation does not vary according to the needs of
business, increasing to meet an increased demand, and then declining again
when the demand has passed. Being based upon government bonds and not
upon the value of business assets, they vary in amount only with the price
of the former and not at all with the volume of the latter.
The main practical problem connected with our banking system is,
therefore, to find some other basis for the issue of bank notes, especially as
it is not desirable to maintain a permanent bonded indebtedness solely for
this purpose. Various suggestions have been made, as the establishment of a
central bank with sole power of issue, like the government banks in
European countries. This is a favorite proposal with the big bankers, but is

unlikely to be adopted as it is directly contrary to the spirit of the existing
system. The Canadian system is held up as a model, with its system of
branch banking and 5 per cent safety fund for the redemption of the notes of
failed banks. Curiously enough this was copied after the system in
operation in New York State, which was nipped in the bud by some early
mistakes and by the development of the national banking system. It works
admirably in Canada and is well worth careful study. The plan of asset
currency is another suggestion, according to which bank notes should be
issued up to a certain percentage of the resources of the bank, but without
pledging any specific property for their redemption as is done in the case of
the national banks at present. It has finally been urged that our present bond
deposit system should be modified by substituting state, municipal, railroad,
or industrial bonds for those of the Federal Government, but that in other
respects the system should be left intact. We may look for legislation along
one or another of these lines in the next few years, as the subject is an
urgent one whose solution cannot long be postponed.
Another problem is connected with the money reserves that the banks are
required by law to keep on hand in order to meet demand liabilities. Under
the national system in the United States the country banks may deposit
three-fifths of their lawful reserves with banks in reserve cities, and these
banks in turn may deposit one-half of their reserves in banks in central
reserve cities (New York, Chicago, and St. Louis). Thus there is a massing,
under this system, of the bank reserves of the country in the city of New
York, and within that city in some twenty banks. While there is great
economy in such a system the concentration of reserves is certainly
attended by great dangers, not the least of which is its use by speculative
influences in the New York money market, as a great part of it is loaned out
to speculators on call.
Still another practical problem connected with the monetary and banking
system of the United States is that of the independent treasury system. The
Federal Government is to a large extent its own banker; it collects,
disburses its revenue and keeps its money in its own vaults; it even, as we
have seen, issues paper money and keeps a reserve therefor. By its action in
withdrawing large amounts of money from use, or on the other hand
making large disbursements, it can and does affect the money market vitally
and sometimes disastrously. While it is permitted to deposit funds in

selected national banks and has recently made increasing use of this
privilege, thus correlating in a measure the reserves of the Government and
the needs of the business community, it is held by most students that the
independent treasury system should be abolished, and that the banks should
act as the intermediaries between the Government and the people in the
collection and expenditure of its funds.
So far we have been discussing commercial banks, but there is another kind
of institution which goes by the same name but serves quite a different
purpose, namely, the savings bank. The essential and almost the only
requirement of such an institution is safety. As we have seen, it is not only
desirable for personal reasons to inculcate habits of saving and thrift in
individuals, but it is also necessary to secure the accumulation of capital
needed in modern industry. It is therefore important that such institutions
should be widespread, accessible, and thoroughly trusted. These
requirements seem to be best fulfilled by the postal savings banks in
England and elsewhere, which have led to a great increase in savings on the
part of the people. The introduction of such a system in the United States is
greatly to be desired.

XVI. TRANSPORTATION AND COMMUNICATION.

Almost as important for the conduct of modern industry as machine
methods and credit are the rapid means of transportation and
communication furnished by our railroad, steamship, express, post office,
telegraph and telephone systems. Indeed the development of industry on a
national scale and its integration under centralized control has been made
possible only by these improvements. But not only have these businesses
rendered the centralization of industry possible; they themselves exhibit on
a national scale concentration of control. They are all industries of
increasing returns and lend themselves naturally to monopolistic control. At
the very beginning of railroad construction one of the most far-sighted
managers enunciated the doctrine that “where combination is possible
competition is impossible.” For years competition was regarded as the
regulator of rates, pooling between railroads was forbidden, canals were
advocated as competitors, and by every possible device it was sought to
stimulate it. We are at last beginning to recognize the monopoly character of
the railroad industry and to regulate it accordingly.
Consolidation in the railroad world is not a new phenomenon nor is it
confined to that industry, but it has proceeded further there than in any other
line of business. The first form which combination took was that of pooling,
according to which the traffic was “pooled” and the earnings then divided
among the companies entering into the pool according to some previous
agreement. This was forbidden by the Interstate Commerce Act in 1887 and
even more stringently by the Anti-Trust Act of 1890, and accordingly
railroad managers next resorted to actual consolidation of competing lines.
Where this has not been possible or desirable, virtual combination has been
secured by the so-called “community of interests” arrangements, based on
the acquisition by one road of enough stock in competing lines to secure
representation on their boards of directors. Today some eight or nine groups
of capitalists control over two-thirds of the railway mileage of the United
States, and according to a recent widely-published statement the late Mr. E.
H. Harriman was credited with controlling, directly or indirectly, a system

aggregating over 67,000 miles. These great consolidations have followed
mainly the territorial groupings of railroads; the United States has now been
districted out by a few large transportation companies, much as France,
Italy, England and other European countries had previously been divided
up. Consolidation has in many instances resulted in increased convenience
to the public and in economies in management and operation, but it places a
dangerous amount of power in the hands of a few men, which has not
infrequently been abused, and should clearly be under strict government
control.
The primary economic problem connected with railways is always the
question of rates. This has been called in a recent book “the heart of the
railroad problem.” The first fact that strikes the student of the subject is the
great reduction in rates and fares in the past twenty-five years, especially in
freight rates. From 1.24 cents in 1882 the average revenue per ton mile
received by railroads in the United States has decreased to .748 cents in
1906. Freight rates, especially through rates for bulky traffic, are
considerably lower in this country, and passenger fares somewhat higher,
than in Europe. But the vital problem connected with rates is not as to their
relative cheapness or extortionateness; it concerns rather the granting of
discriminating rates. Discriminations may be of three kinds: those between
different classes of goods, those between localities, and those between
persons. The first group is based upon the classification of freight and rests
upon differences in cost of shipment, in bulk, in risk, etc. If reasonably
employed, this kind of discrimination is justifiable. Local discriminations,
that is, charging different rates to different localities for substantially the
same service, is not only unwarranted in most cases, but is short-sighted as
well. Where superior facilities or especially keen competition exists, lower
rates may be permitted for favored localities, but the arbitrary exercise of
such powers by railway officials is thoroughly unjustifiable. Even less
defensible is the practice, now happily less frequent, of granting
discriminatory rates to favored individuals or corporations. They have been
given by means of secret rates and rebates, by under-billing and under-
classification, by free passes, etc. Both of these latter evils have been
forbidden or greatly restricted by the passage of the Interstate Commerce
Act in 1887 and subsequent legislation.

The public nature of railroads is now fairly well recognized in our law and
is beginning to be understood by the people at large. Railroads enjoy
peculiar privileges in the grant of corporate franchises and charters, in the
right of eminent domain, and in enormous grants of land and money which
have been made to them in this country. Moreover in the functions they
perform the social character of their duties is emphasized, and they are
under the necessity of maintaining a constant service open to all. Though
they are owned by private investors and managed as private enterprises,
they are essentially public enterprises as to their privileges, functions, and
duties. Consequently most of the states have now undertaken, through
commissions, to regulate the railroads in the public interest. Some thirty-
one have appointed commissions, which probably control four-fifths of the
traffic originating and ending in a single state. These state commissions
differ in power, those of the Mississippi Valley and the South usually
having mandatory powers, that is, power to prescribe and enforce maximum
rates. In the eastern and central states commissions with supervisory powers
merely, of investigation and report, have been created. The only exceptions
are found in the Far West where the need of improved transportation
facilities is more pressing than regulation, and in five eastern states whose
legislatures are controlled by the railroad interests. While the state
commissions have done and are doing valuable service, it is clear that the
growth of giant railroad combinations which traverse several states
necessitates federal control. The appointment of the Interstate Commerce
Commission in 1887 established the principle of federal regulation, but the
application of the principle in active practice has been slow and has been
impeded by the courts. The final control of rates has not yet been given to
the Commission.
Owing to the individualistic character of our institutions and law, public
ownership of railroads does not exist in the United States, which thus
forms, together with England, almost the sole important exception to the
world’s practice in this regard. On the continent of Europe government
ownership is the rule. Public control through either ownership or regulation
by commission is essential to secure an equitable adjustment of public and
private rights and to prevent the abuse of monopoly power inherent in the
very nature of railroads. Public ownership has many advantages and has
given satisfactory results in Europe. But for the United States the principle

of private ownership with stricter governmental regulation has been
definitely laid down; the problem of the future is simply how far that
control shall go.
The discussion of our steam railroads does not exhaust the subject of
transportation. A recent and important development is the growth of electric
interurban railways, which are opening up districts untouched by the more
expensive steam roads and exercising a marked influence in rural districts
upon business and social life. A more significant problem, both because of
its close relations to the railroads and its monopoly character, is offered by
the express companies. Organized at a time when railroads were new and
undeveloped they took over the safe and expeditious delivery of small and
valuable articles. They have since grown in importance and power; six large
companies now control over 90 per cent of the business. Since they are
generally in the form of partnerships and not of corporations it has not been
possible to bring them under legal control, and their rates are extremely
high—three or four times as much as freight rates. In some cases the
railroads, in order to gain the profits from these high rates, have themselves
organized express companies to operate over their lines, immune from
interference by the Interstate Commerce Commission. Even where that is
not done, the express companies are performing a service which could as
well be performed by the railroads themselves and at lower rates. These
facts have lent great strength to the demand for the establishment by the
Federal Government in connection with the post office of a parcels post,
such as exists in England and in most European countries. By the extension
of the maximum limit of mail packages to ten or fifteen pounds the
usefulness of the post office could be immensely increased without any loss
in rates. So far, however, the express companies have been strong enough to
resist the introduction of this reform, though it is warmly advocated by the
present Postmaster-General. A recent important improvement in our postal
service has been the extension of rural free delivery to the farming districts,
thereby breaking down to a great extent the isolation of country districts.
This and the rural telephone have been of great social value.
The importance of the telephone and telegraph in our modern industrial life
cannot be overestimated. As means of transmitting intelligence they have
served to bring the most distant parts of the world into almost instant touch,
and have made possible the modern centralization of business. Both offer

the same problems of monopoly that we have seen exist in other parts of
this field, the telegraph business being completely monopolized by two
large companies, the telephone business by one, all strongly entrenched
behind patents. The desirability of public ownership of these utilities rests
upon stronger grounds than in the case of railroads and is strongly urged by
many conservative writers.
Although attention has usually been centered upon the railroads in any
discussion of the transportation question in the United States, there are
important practical problems connected with both the inland and the ocean
water transportation. The questions of constructing artificial inland
waterways and of subsidizing our foreign merchant marine are vital
political and industrial issues. The United States is probably better provided
with internal navigable natural waterways than any other country. Her
navigable rivers comprise some 18,000 miles. Affording access to the very
heart of the continent both from the Atlantic coast and from the Gulf. They
form a cheap and convenient means of transportation, especially for bulky
and cheap articles; 30,000,000 tons a year are carried on the streams of the
Mississippi Valley alone, though much of the former traffic has been
diverted to the railroads. On the northern border of the country the Great
Lakes form an unrivaled series of inland seas. The traffic on these shows a
great increase every year, amounting now to over 60,000,000 tons annually.
The Federal Government has performed useful service in improving the
conditions of navigation along these natural waterways, and is now
considering a comprehensive scheme for their further improvement.
A very different problem is offered by our canal system. During the period
1820-1840 many canals were constructed by the states to connect existing
waterways and provide an outlet for produce from the interior. The best
examples of these were the Erie and the Ohio canals. After the development
of the railway, however, traffic began to be steadily and then rapidly
diverted from the canals to these quicker avenues of transportation. Many
of the canals were bought up by their rivals and permitted to fall into disuse,
while those retained by the state governments remained mere shallow
ditches, unimproved and ill-adapted to modern needs. The recent
appropriation by the people of New York State of over $100,000,000 for the
improvement of the Erie Canal, and the construction of the Panama Canal
by the Federal Government have brought the question of the rehabilitation

of our neglected canal system to the front again. It seems wasteful not to
connect the separate links in the magnificent system of natural waterways
already provided by nature, and this will probably be the first step taken.
And indeed a beginning has already been made by the construction of the
Hennepin Canal, the Des Plaines Canal, and others, and a company has
been formed to connect Pittsburg with Lake Erie and to cut through Cape
Cod. It must, however, be borne in mind that there are two distinct types of
canal: those which are simply short connecting links between navigable
waterways and which permit the passage of vessels used on those waters;
and those canals which are shallow, have extensive lockage, and permit the
use of only small boats, thus necessitating the transshipment of freight. One
might well advocate the construction and enlargement of the first type, and
yet hesitate to approve of the second. As yet, however, owing in part to the
opposition and clamor of railroad interests, the question of canals has not
received the attention it deserves in the United States.
The ocean merchant marine comprises two widely different branches, the
coastwise and the foreign trade. The former is open only to vessels flying
the American flag, and has shown a very steady growth; five-sixths of our
ocean merchant marine today is engaged in this branch of commerce. Coal,
lumber, cotton, and similar bulky commodities constitute the chief items
entering into the coastwise trade. The tonnage of American vessels engaged
in the foreign trade, on the other hand, has shown a steady decline ever
since the outbreak of the Civil War. Foreign vessels today carry fully 90 per
cent of the foreign commerce of the United States. The causes of this
decline are economic rather than political, for American legislation has on
the whole been very liberal to the shipping interests. At the time the western
part of our country began to be opened up and its great resources exploited,
our merchant marine was one of the best in the world. But now the other
opportunities for the investment of capital were so profitable and alluring,
and the need of it so great, that all the available labor and capital of the
American people began to be devoted to the development of their internal
resources. A nation cannot do everything with equal advantage at the same
time any more than an individual can. Accordingly we began to withdraw
our capital from shipping and devote it to agriculture, mining,
manufacturing, transportation, and similar more profitable enterprises.
Foreigners could build vessels and run them more cheaply than we could

and it paid us to hire them to do it. Recently, however, and especially since
the recent awakening of a national consciousness after the Spanish-
American War, the patriotism of many individuals has been hurt by the
thought that we had to depend upon foreign vessels for the carriage of our
foreign commerce, while in the minds of others a comprehensive naval
program demanded the building up of a native merchant marine. Two
questions suggest themselves here: Do we wish to stimulate this growth
artificially? And, if we do, what means shall we adopt? On the second point
the Merchant Marine Commission of 1904 recommended for the United
States a general bounty on all shipping, such as France has, and the
subvention of certain lines of steamers over ten specified routes, following
the example of Great Britain, Germany, and Japan. Without committing
ourselves on this point, it may be suggested that on political, geographical,
and economic grounds we may expect in the near future to see the natural
development of an American merchant marine. With the growth of our
foreign trade, the accumulation of capital at home, and the building up of a
strong navy, the conditions for American shipbuilding and shipping will
become steadily more favorable, and we may expect to see American
enterprise engage in this as in other lines of industry. Eventually we are
destined to become a maritime nation.

XVII. TAXATION AND TARIFF.

In no way does the State affect the interests of its citizens more vitally than
in the sphere of taxation. The State in modern society is the people
organized for certain collective purposes, as for the public defense, the
preservation of domestic peace, and the furtherance of the social and
industrial welfare. To carry out these objects money is needed and the State
has therefore to collect from its citizens sufficient revenue to defray its
expenditures. John Fiske has tersely defined taxes as “portions of private
property taken for public purposes.” Taxation thus implies a certain degree
of compulsion; by it the Government interferes with the free choice of the
individual and expends a part at least of his income for him in ways that he
himself might not have chosen. The social and industrial consequences of a
system of taxation may also be far-reaching and important. As Professor R.
T. Ely says: “Taxation may create monopolies, or it may prevent them; it
may diffuse wealth, or it may control it; it may promote labor or equality of
rights, or it may tend to the establishment of tyranny and despotism; it may
be used to bring about reform, or it may be used to aggravate existing
grievances and foster dissensions between classes.” It is evident therefore
that the utmost care should be exercised in framing a system of taxation.
Certain canons or rules of taxation were laid down by Adam Smith over a
hundred years ago and have been generally endorsed by economists ever
since. One was that taxes ought to be certain and not arbitrary, as to amount,
time and manner of payment; another was that taxes ought to be levied in
the manner most convenient to the tax-payer; and a third, that taxes ought to
take as little as possible out of the pockets of the tax-payer over and above
what is paid into the public treasury. These three maxims—certainty,
convenience, and economy—have been generally accepted, but less general
agreement exists in regard to the fourth, which states that the subjects of
every state ought to contribute to the support of the Government as nearly
as possible in proportion to their respective abilities. This rule has given rise
to two problems: first, is ability the most just basis of taxation; and
secondly, if so, how is ability to be measured? The theory of justice

generally accepted by legal writers and by the American courts is expressed
in the maxim that taxes should be proportioned to benefits received. The
benefit theory affords a good rule in the assessment of local property taxes,
but fails utterly in the domain of national and state affairs. Who can
measure the benefits to each individual of an appropriation for a new war
ship or for a state penitentiary or for the public school system? Probably the
benefits are in inverse proportion to the income or wealth of the individual,
and the heaviest taxes would then have to be apportioned to those least able
to pay. Most economists today agree that taxes should be apportioned
according to “faculty” or ability to pay. It satisfies better our sense of
fairness and is more readily applicable than the benefit theory. In the last
analysis, of course, it may be said that taxation in general must confer real
benefits upon society or it will not be tolerated. Here, however, we are
concerned with a rule of apportionment.
The second practical problem encountered is when we attempt to apply the
faculty principle in practice; how is ability to be measured? Three measures
have been suggested: expenditure, income, and property. Expenditure is
open to the objection that it would place an unduly large proportion of the
tax burdens on the poor, whose expenditures are larger in proportion to their
means than those of other classes of society. Property is objected to because
large classes of society, including professional men with large incomes,
would then escape taxation largely or altogether. Income on the surface
seems the fairest measure of ability, but is objected to because the incomes
of different individuals, both on account of source and size, really indicate
unequal and not similar abilities. In practice, however, all three methods are
employed in all advanced states, so it is not necessary to decide which is
theoretically the fairest.
Still another practical question confronts us after we adopt the ability
theory: Shall the rate of taxation be the same no matter what the amount of
the property or income, or shall it increase as the amount grows larger? In
other words, shall taxation be proportional or progressive? In general the
advocates of the ability theory also support progression, though there are
many exceptions to this statement. Three main arguments have been urged
in support of this method. First, progression is advocated in order to secure
equality of sacrifice; it is argued that each dollar of a $10,000 income
affords less gratification to the owner than each dollar of a $1,000 income,

and that consequently in order to equalize the sacrifices of the two
individuals a larger proportion of the first income should be taken than of
the second. Objection is made to this, that wants expand even more rapidly
than incomes and therefore the initial assumption is untrue. Progression is
urged, in the second place, by those who desire to use taxation as a method
of introducing social reforms or of bringing about a more equitable
distribution of wealth, as by the breaking up of large fortunes. It seems
inadvisable, however, to use the machinery of taxation for such purposes.
Other writers urge that the ability to earn or produce wealth increases at an
accelerating rate, and that taxation should therefore keep pace with it. “It is
the first thousand that counts.” The objection is made here that it would
penalize ability and energy. In general, while the arguments are not
conclusive, progression certainly secures a nearer approach to the ideal of
the ability theory than does proportional taxation. The practical application,
after we accept it, is still a difficult matter. It should be applied to the
revenue system as a whole by the careful selection of special taxes. As a
matter of fact we have just the opposite system in the United States, for the
poor man undoubtedly pays out a larger proportion of his income in taxes—
principally on articles of consumption—than do his wealthy neighbors.
In the main there has been a clear division in the United States between the
sources of income of the Federal Government on the one hand and those of
the state and local governments on the other. The Federal Treasury has
derived its revenue almost entirely from indirect taxes—excise and customs
—while the other governments have depended chiefly upon direct taxes
upon persons, property, business, corporations, and inheritances. The
division rests upon the constitutional allotment of powers, but it also
corresponds very closely to the industrial and political functions of each in
their relations to the individual citizens. The chief duty of the Federal
Government is that of national defense and foreign intercourse, relations
which are national in extent but which affect the individual only remotely;
so, too, its taxing area is national and its exactions are felt only distantly.
Few persons, it has been said, taste the tax in their tea or their whisky, yet
over one-third of all the taxes collected in the United States are derived
from either customs or excise duties. Whisky and tobacco contribute most
of the internal revenue, while import duties are levied on practically
everything brought into the country which could compete with any home

product. These two sources yield over $500,000,000 a year to the Federal
Treasury. During the Civil War these sources of revenue were supplemented
by a federal income tax, but as such a tax was later declared
unconstitutional by the Supreme Court, further recourse to this in the near
future seems improbable. From a purely economic and financial point of
view this is very regrettable, for the Federal Government should
unquestionably have at its command the means of quickly raising large
additional revenue with as little disturbance to industry as possible. Such a
means would be afforded by the income tax, which moreover can be
administered only by the Federal Government, as it must be national in its
operations to be fair.
The main reliance of the state and local governments in this country is the
general property tax, which amounted in 1902 to over $700,000,000 or
almost half of all the taxes collected. This really consists of two very
distinct parts, which present quite different problems, namely, the tax on
real property and that on personal property. Under our peculiar system, by
which property is assessed locally, and upon the basis of that assessment its
share of the state taxes distributed to each locality, there is every incentive
offered to the local assessor to under-value the land in his jurisdiction,
thereby escaping part of the state burdens. This evil of inequality between
localities could be obviated by the simple expedient of relieving real estate
of all state taxes and leaving it solely to the counties and cities for purposes
of taxation. In the case of personal property the great evil is evasion. Much
of our modern wealth exists in the form of securities, stocks, bonds,
mortgages, etc., and this is practically undiscoverable by assessors except
by the voluntary declaration of the tax-payer, which is only truthfully made
by trustees and a few conscientious persons. Most of our laws have been
directed to the discovery of this intangible property, as it is called, but
without avail. In a few of the most progressive states the effort has at last
been recognized as futile, and the attempt is now being made to reach these
sources of income indirectly, by taxes on corporations, on business,
franchises and other tangible evidences of wealth.
Not only are corporation, business, license and similar taxes being
developed, but increasing resort is had to inheritance taxes, over thirty
states now making use of this form of taxation. They are more frequently
imposed on collateral than direct inheritances, and in many states are

progressive, both as to amount and as to nearness of relationship. Thus in
Wisconsin the rates advance from one per cent for bequests under $25,000
to husband, wife, or lineal relation, to 15 per cent for sums over $500,000 to
very distant relatives or strangers. These various forms of taxation are
necessary to secure the needed revenues for the state governments,
especially if these forego further resort to taxation of realty. The tendency is
now sufficiently marked to make it possible to indicate with some certainty
the future of taxation in this country. To a certain extent, however, this must
be regarded as the expression of an ideal rather than the description of an
existing system. The Federal Government should have customs and excise
duties, supplemented by an income tax. The state governments should have
corporation and inheritance taxes. The cities and minor civil divisions
should have taxes on realty, and license and franchise taxes. Such a division
is logical and avoids duplication of taxation of the same source by two or
more grades of government. In view of the pre-emption of the field of
corporation taxation by the states, it is therefore doubly regrettable that the
Federal Government should now (August, 1909) have adopted a tax on
income of corporations for federal purposes.
Other problems connected with finance are suggested in connection with
the universal tendency to increase in governmental expenditures and in
public debts. The former is an expression of the growth and expansion of
state functions, which will be discussed in the next section. The latter is due
in part to this same fact, in part also to the development of credit and the
creation of a market for the sale of public and other securities, and finally to
the growth of constitutional government, which has made the people willing
to entrust their capital to a government which they themselves as citizens
really control.
The question of the tariff involves such important economic as well as
financial consideration that it seems best to discuss this form of taxation
somewhat more fully. For it has been used not merely as a means of raising
revenue but also as an instrument to develop particular industries and
prevent foreign competition. Any detailed discussion of this subject
therefore involves a statement of the pros and cons of protection and free
trade. It should be said, however, in advance that the real issue is not free
trade, for that is demanded by only a few doctrinaires, but freer trade
through an intelligent revision of the tariff downward. The system of

protection has prevailed in the United States for virtually one hundred
years, and could not be suddenly changed and abolished if one would. From
the financial standpoint, too, import duties are absolutely essential to the
support of our Federal Government; the question here is not absolutely free
trade, but the choice of articles for revenue purposes. Shall they be those
which are not produced in this country or those which enter into
competition with domestic products? If financial considerations alone
prevailed, the former would undoubtedly be selected as the more
convenient, certain, and economical. But in the determination of the tariff
policies of the United States economic considerations have been paramount
and to an examination of these we must now turn.
Historically the following arguments have played the main role in support
of protection at different times in the United States. The infant industries
argument was advanced by Hamilton in his celebrated Report on
Manufactures in 1791 and has always been important until recently when
the infants had grown to be so lusty that it was evident that other reasons for
protecting them must be discovered. This was found in the plea for
diversified production, which was necessary for a well-rounded economic
development; the need of creating a strong national government and
national spirit also played their part. In order to win over the farmers the
home market argument was early urged; this has taken various forms. In the
first place it was urged that the building up of manufacturing centers and
the consequent increase in population would give the farmers a better
market than the fluctuating foreign one. As set forth by Carey, it would keep
within the country the elements taken from the soil. It would also save the
freights on the transportation of goods back and forth across the ocean.
Each of these arguments has lost force with the development of the country
and the decrease in the cost of transportation. More important today is the
wages argument; at first protection was urged because wages were high in
the United States and the manufacturer needed to be protected against his
foreign competitor who employed cheap labor. Today it is argued that
protection has raised wages and must be continued in order to protect the
laborer against the pauper labor of Europe. Curiously enough, in France
protection is urged for French workmen against the highly paid and
efficient American. The effect of the tariff on wages has been greatly
exaggerated; wages are high in the United States because the productivity

of labor is high. Indeed so far as the tariff raises prices it may be argued that
the real wages of labor are lowered. More generally accepted as defensible
grounds for protection are the political arguments that a nation should be
able to produce its own military armaments and supplies, and that it should
be able to use the tariff as a retaliatory measure. Recently this latter has
received considerable force from the practice of “dumping,” by which is
meant the occasional sale of products abroad at prices lower than those
charged at home. Domestic manufacturers in the country thus treated are of
course seriously injured and have insisted upon protection against this
procedure which has been authorized in Canada.
In answer to these various arguments the free traders, or those desiring a
modification of present high rates, make their main appeal to the doctrine of
comparative costs. Briefly stated this asserts that nations, like individuals,
can do some things better than others. Like the individual lawyer therefore
who pays to have his boots blacked while he devotes himself to the law, the
nation should produce the things it is best fitted for and pay others to
produce other things which it can do less well. In this way each will obtain
the largest possible return. Protection, which interferes with this natural
international division of labor, simply diverts labor and capital from more
into less profitable industries. Practically, this purely abstract economic
argument has had little influence on the commercial policy of nations,
which have been moved more by political and industrial considerations.
Today, however, there is no question but that the freer movement of capital
and industry throughout the world would be advantageous. In answer to the
home market argument it is pointed out that with the growth of large-scale
production the profitable area of manufacture has greatly widened and now
in many cases transcends national boundaries. As home producers seek
foreign markets, as they are beginning to do, they themselves will demand a
reduction of the tariff, especially in the matter of raw materials. Free traders
also deny the need of artificially diversifying industry in a country as large
and varied as the United States, or of building up infant industries. Indeed,
on the latter point, they urge that many of our trusts are the result of the
tariff, and that the attempt to grant legislative favors has resulted only in
wholesale demoralization and a debauching of our national politics.
In conclusion it may be said that under certain conditions the policy of
protection is relatively defensible; that it has undoubtedly hastened the

industrial development of the United States, though it has not caused it; and
that, on the other hand, it is responsible for not a few evils in our political
and industrial life. The struggle of particular interests during the framing of
the Payne bill shows the impossibility of deciding this issue upon academic
grounds. It may be prophesied, however, that as our manufacturers reach
out more seriously after the foreign markets the tariff will be modified so as
to make this possible; but he would be a rash prophet who should predict a
sudden or great change in our tariff policy within the present generation.

XVIII. THE FUNCTIONS OF GOVERNMENT.

In the course of the preceding pages we have repeatedly referred to the
necessity or desirability of governmental action, and have emphasized the
important part which it plays in our economic life today. Every practical
economic problem that confronts us calls in some degree for the exercise of
state activity. It is necessary for us then, if we are to render sound judgment
on these questions, to have a clear opinion as to the proper sphere of
government action, as to how far the State should interfere in the economic
activities of private individuals. We cannot do better than to state first the
main functions of a modern state. The modern industrial system, as we saw
in the first section, is based upon certain fundamental institutions—personal
liberty, competition, and private property. The first function of government
is to guarantee to every individual the rights of freedom, property, and
contract; this involves the maintenance of peace and order. These are often
spoken of as “natural rights”; rather they are rational rights, based upon
expediency and human welfare, and are created and maintained by society.
Without the constant support and intervention of government they would
possess little reality or significance. But in addition to guaranteeing these
fundamental institutions, modern governments grant individuals certain
privileges, as patents, copyrights, trade-marks, franchises, etc., designed to
stimulate the economic activity of individuals.
A second group of functions undertaken by the modern state is regulative.
As we have seen, laws are made regulating the freedom of contract, the
conditions of labor, the conduct of business, methods of banking and
transportation, etc. The terms under which competitive business may be
conducted are laid down, and while freedom of industry prevails for every
individual it is only on condition that he conforms to the rules of the game
thus prescribed. But the conditions are not merely restrictive; sometimes
they are designed to promote enterprise, as in the case of gifts, subsidies,
protective duties, etc. In all these ways the State interferes with the action of
perfectly free competition for the purpose of securing better or more
equitable conditions. A third group of functions embraces the direct

participation in industry by the Government itself, as the post-office, gas,
electric, and water works, canals, roads, sewers, parks, etc. In other
countries, when the functions of government are more extended than in the
United States, it conducts railroads, telegraph and telephone systems,
tenements, pawn shops, theaters, industrial insurance, or various other
activities. The line which divides public from private enterprise varies
greatly in different countries.
This raises the general question, how far is it desirable that the economic
functions of government should extend? As to the necessity of state activity
in some form there can be no doubt. Production, exchange, distribution, and
to a smaller extent consumption, are all social processes; they concern the
whole of society, and must be brought under social control. Montesquieu
laid down the proposition in the middle of the eighteenth century that taxes
invariably increase with the growth of liberty. Historically this has been
verified: the development of freedom in government and industry has meant
the realization of self-restraint by the imposition of regulative law. But the
modern State has gone further than this: it has realized the necessity of
taking an active part in modern industrial life, for the equalization of the
terms of competition, the redress of grievances, and the furnishing of
utilities, either because it could do it better or because it was the only
agency capable of acting. The standpoint of this treatise has been one of
moderate individualism, believing in free competition and individual
initiative, but not frightened off by the bogey of socialism, if at any point
the interference of government seemed desirable or necessary. To present
the matter clearly it will be well to state briefly the main theories that have
been held as to the proper function of government, arranging them in their
logical, though not in their historical, order.
At one extreme stands anarchism, which must be thought of not as anarchy
and riot, but as a philosophical theory of society. Scientific anarchism
contemplates an ideal state of perfect freedom, in which the State, the
coercive exercise of authority by man over man, would not exist. According
to this theory only the individual has rights; there is no more divinity of
right in a majority than there is in kings. Government is an invasion of the
right of the individual to do as he will, and should be abolished; with its
abolition would vanish the various moral, social, and industrial evils to
which it has given rise, and human society would develop on a higher

plane. Stated in its extreme form anarchism is evidently too ideal for frail
human nature as at present constituted. Of more practical importance has
been the theory of extreme individualism as set forth by Herbert Spencer—
a view designated by Huxley as the night-watchman theory of the State.
According to this the functions of government should be limited to the
protection of life and property and the enforcement of contracts, but should
not include such things as education, regulation of industry, local
improvements, charities, coinage, etc. Private initiative and competition are
trusted to supply these things, while the economic harmony of the interests
of each individual with those of society will prevent any wrong from being
done. The keynote of the whole theory lies in the view that government is
an evil, though a necessary one, and should consequently be restricted.
Adam Smith’s system of “national liberty” went somewhat further, as it
added to the three functions named above, the construction of public works
and buildings, etc.; but it excluded such activities as education and the civil
courts, which we regard as most suited to government management. This
theory had its origin in the reaction against the undue interference with
industry by the Government under mercantilism and had thus a historic
justification and value.
The theory most generally held by economists and writers in the United
States is probably the modified individualism set forth by John Stuart Mill.
According to him, freedom of industry or “laissez faire should be the
general practice; every departure from it, unless required by some great
good, is a certain evil.” Industry, he said, should be left to individuals and
the Government should never interfere unless there is an antagonism
between social and private interests. Individuals following their own
interests will always conduct business better than the Government, which is
inefficient, corrupt, and can fall back on taxation to cover its mistakes.
Individualism should therefore be the rule and governmental action the
exception. But Mill himself admitted that there was no theoretical limit to
the extension of governmental functions, and in so doing is said to have
opened the door to socialism. Nevertheless, the basic idea is still that
government is an evil and an extension of its activities is on the whole
undesirable.
Opposed to this view is the culture state theory, enunciated by Roscher and
very generally held in Germany, which regards the State as a beneficent,

positive and constructive force in our industrial life. The advocates of this
theory point out that the functions of the Government change with progress,
and that in our complex modern industrial life it should seek to improve
conditions positively, and not leave the people to the mercies of a blind
competitive struggle; practically, it should regulate industry, conditions of
work, housing, etc., and should manage all public utilities which affect the
life or well-being of the citizens, as railroads, telegraphs, industrial
insurance, etc. Still further in the same direction goes the view known as
state socialism, of whom the best-known advocate is Professor Wagner.
This advocates individualism, but insists that it is responsible for many
injustices and evils, which it is consequently the duty of the State to redress.
For instance, the State should correct the inequalities of wealth brought
about by the distribution of the social income under the present competitive
system; this should be done by the progressive taxation of inheritances and
incomes, the limitation of inheritance and bequest, the government
ownership of public utilities, as railroads, telegraph, telephone, coal mines,
etc. This theory stops just short of socialism, but enlarges the functions of
the State to the largest degree compatible with individualism. Beyond this,
and at the farthest extreme from anarchism, stands socialism, which,
however, demands a more careful examination than the other views have
received because of its present prominence.
Socialism may be briefly defined in the words of Professor Ely[49] as “that
contemplated system of industrial society which proposes the abolition of
private property in the great material instruments of production, and the
substitution therefor of collective property; and advocates the collective
management of production, together with the distribution of social income
by society, and private property in the larger proportion of this social
income.” Four features are involved in this definition, namely, common
ownership, production, distribution, and private incomes. The cardinal and
distinctive element in socialism is the collective or social ownership of the
means of production, that is, of the land and capital. Instead of having these
owned privately as today, they would be owned by the people as a whole,
by the State, and used by them for production. Socialists do not oppose
capital, as is often said, but only the private ownership of capital. But under
such a system private business as we know it today, individual enterprise
for the sake of profit, could not exist. It is often urged that socialism means

a “grand divide,” and that in such an event the shrewder and more thrifty
would shortly have the wealth of the idle or stupid members of society. But
just that is guarded against under socialism, for there would be no private
ownership of capital, and hence no one could get his neighbor’s share; it
would all be held under collective ownership. With the abolition of private
capital, there would disappear of course all the economic institutions that
have grown up around it, as credit, banking, lease, hire, the stock and
produce exchanges, etc.
Socialism also means the collective or social organization and management
of industry. Socialists criticise severely our present methods of production,
which they call planless and wasteful. They point to the constant recurrence
of crises as an evidence of mistakes of the competitive system, which they
say could be obviated under a well-organized comprehensive scheme. They
also urge the wastes of modern capitalism, in the duplication of plants,
advertising (which amounts to $500,000,000 a year in the United States and
serves little useful purpose), traveling salesmen, multiplication of small
stores, etc. Finally, an artificial disharmony between the interests of society
and private individuals is promoted by our system of private property and
profit: a coal trust limits the supply, farmers rejoice over small crops, and
planters burn part of their cotton, in short the bounty of nature is regarded
as a calamity. Some truth may be admitted in these criticisms, but in answer
it may be said that some of them are being corrected under individualism,
while as to those that remain the remedy offered is worse than the disease.
The first and fundamental question is the effect of socialism on the amount
produced, for as we have seen any diminution would mean a worse
economic condition of society, even though it were offset by a more equal
distribution. Under individualism the appeal to industry and thrift is the
self-interest of the individual, and under the stimulus of this motive the
production of wealth has been increased enormously. It is doubtful whether
the motives of altruism, desire for social approbation, and similar ones
suggested by the socialists would promote industrial activity as efficiently
as the individualistic desire for pecuniary gain.
Moreover the difficulties of organizing and managing all industries would
be enormous. According to the socialist plan, statistics of consumption
would be gathered in advance, the idle changes of fashion would of course
disappear, and production could be accurately calculated. But aside from

the problem of securing an honest and efficient administration, the work of
organizing industry from a centralized bureau would probably prove
insurmountable. The distribution of the labor force among various
employments suggests another difficulty. Under individualism the necessary
distribution takes place through the agency of wage payments and the
choice of an occupation is left free to the individual. As the wage-system
would disappear with the abolition of private capital, some other means
would have to be devised, as allotment by the Government. But more
important would be the selection of the managers of industry; competition
provides a process whereby the inefficient are eliminated and the able put in
charge. As socialism would be an industrial democracy the selection of the
captains of industry under that system would probably be made by election.
Is it likely that the voters would place over themselves the ablest, that is the
strictest, most economical, and most energetic man? Taking men as we find
them today, this may well be doubted.
But it is as a scheme of distribution that socialism has been most warmly
urged. The inequalities and injustices of present methods are pointed out
and a more just system demanded. Socialists themselves, however, are not
agreed as to what constitutes justice. Needs and merits have both been
urged as bases of distribution, but suffer from vagueness and difficulty in
administration; most socialists today agree that equality of income would
best meet the requirements of justice. They claim that talented persons have
been endowed by nature with their abilities and should use them as a trust
for society and not expect greater rewards than their less talented brothers.
To this individualists answer that the practical question is, how to secure the
greatest exercise of these gifts, and that is now done by appealing to the
motive of self-interest. Some writers even go further and assert that the
desire for inequality is the chief stimulus to invention and enterprise. A
crucial point in every socialistic scheme is the determination of value under
such a system; most socialists follow Marx and say that this should be
determined by the “socially necessary labor time” required for the
production of an article. Such a measure leaves out of account entirely the
aspect of utility or demand, and would clearly be inadequate. Prices would
be fixed by the State and would be calculated in labor time, which would
probably be represented by labor checks, which would constitute the media
of exchange of the socialistic society.

Finally, in the definition given above, it was stated that private property
would exist in the larger proportion of the social income after it was
divided. There is no reason why this should not be true, for, though private
capital would be abolished, the State would not interfere with the individual
in the use of his income after it was earned. If one man preferred fine
clothes and another pictures and books, it would be possible for the latter
person to accumulate such articles of enjoyment or consumption. He could
even have tools for private carpentering or a horse for riding, but under no
circumstances would he be permitted to use these for production or as
instruments of private gain. Socialism must stand or fall as a system of
production and distribution; it is not necessary to criticise minor points. On
these broad grounds it must be rejected, although it may fairly be admitted
that socialists have often proved themselves keen and useful critics of
existing institutions.
Many persons in this and other countries, who do not approve of socialism,
nevertheless believe in the extension of state ownership or activity along
particular lines. Thus Henry George, though in other respects an
individualist, did not believe in the private ownership of land. Land is
limited in quantity and yields, because of its monopoly character, an
“unearned increment” or rent, quite apart from the return due the owner for
improvements. He proposed that the Government should confiscate this
unearned increment by levying a single tax on all land equal to it. He
thought that this would provide revenue sufficient for all government needs
without resorting to other forms of taxation; in this he was undoubtedly
mistaken, but the main interest in the scheme for us is economic, and not
financial. The reason for the scheme was that land, being a limited
monopoly, would be increasingly in demand as society progressed, and that
consequently the landlords would absorb in their increased rents most of the
enlarged production of the future. This assumes that rents always increase
and never decrease, which is historically untrue. Nor does the growth and
progress of society necessarily increase the demand for land; it may be
directed to other things, while improvements in the arts of agriculture may
actually decrease this demand. We must, however, admit that there are
many instances of unearned increments, not only in the case of ground
rents, but also of monopoly profits from various sources; these might very
properly be secured to society by means of special and heavy taxes.

The municipalization of local public utilities has been advocated by many
persons who are not socialists, except in so far as they desire an extension
of governmental activity along these lines. They urge this because the
utilities in question—gas, water, electricity, telephone, street railways, etc.
—are by their very nature monopolies, and because under private control
they are often inefficiently or dishonestly managed. A less drastic remedy
for these abuses might of course be found in regulation. Unrestricted private
control of municipal monopolies is advocated by few; the real issue is
between public regulation and public management. And this issue will
depend in the last analysis upon the question which can give the best results
to society.

XIX. ECONOMIC PROGRESS.

At the conclusion of a study of this character we are inevitably led to
summarize our conclusions and to try to answer the question as to what the
lessons of the past have taught us. In what direction are the forces of
economic life taking us? The conclusion of this text is that they are making
for economic progress, and it will be worth while to justify as far as
possible this belief. It is, however, impossible to do this except in very
general terms, for definite data for measuring this improvement do not
exist, and economic progress itself is a somewhat vague conception. Even
such comparatively simple facts as the rate of wages or the hours of labor
can be stated only very generally. But both of these show a decided
improvement in the condition of the working class. A careful investigation
for Great Britain by Mr. A. L. Bowley[50] shows that if wages for the decade
1890-1900 be represented as 100 then the course of wages during the
nineteenth century would have run somewhat as follows:
Relative
Decade
Wages
1800-10 55-65
1810-20 65-70
1820-30 65
1830-40 60
1840-50 60
1850-60 65
1860-70 75
1870-80 95
1880-90 90
1890-1900 100

Without investigating the validity of the figures too closely, it may safely be
affirmed that the movement of wages has been distinctly upward, and that

the rise was certainly not less than 50 per cent. For the United States the
increase has not been so great, probably because wages started at a higher
level. According to the Aldrich report, if wages and prices in 1860 in the
United States be taken as 100, relative wages in 1840 were 82.5 and relative
prices 98.5; in 1880, they were respectively 143 and 103.4; in 1903, they
were 187 and 103. That is to say, relative wages showed a marked advance
and real wages, owing to the fact that general prices remained almost
stationary, an even greater improvement. So, too, the hours of labor appear
to have been shortened in Great Britain about two hours a day (from 10 to
14 hours to 8 to 12), and in the United States probably as much, the average
length of the working day in certain employments decreasing from 10.3
hours in 1880 to 9.6 hours in 1903.
In the field of production the most dramatic and striking advances have
been achieved. The application of steam and more recently of electricity as
the motive power for the newly invented and constantly improved
machinery has permitted an enormous expansion of production, which has
been made still greater by the opening up of new mines and new lands and
improvements in the machinery of transportation and exchange and in the
organization of business. Especially in the United States where the natural
resources were especially rich and the people energetic and ingenious, has
the growth of wealth been marvelous. And yet almost a century after the
beginning of the Industrial Revolution in England, Mill alleged that labor-
saving inventions had not lightened the toil of any human being; they have
only enabled a greater number to live the same life of drudgery and
imprisonment. What answer can we make to this indictment today? Why is
it that the working class still has so little of this vast increase of wealth and
still lives so close to the border line of poverty?
To answer this question thoroughly would require an analysis of the subject
of distribution, but a few reasons may be briefly suggested.[51] While the
social income has been greatly increased by these improvements the
amount paid in rent to owners of land, water powers, etc., has also grown. If
we approve of private property in land as best adapted to stimulate its use
for society, then we must admit the justice of rent, and of its payment to
present land owners. Similarly, too, the payment of interest to the owners of
capital has absorbed a large part of the increased income of society, though
the proportion going to this factor is probably growing smaller owing to the

fall in the rate of interest. But as we have seen, modern industry is
essentially capitalistic, that is, it depends upon the use of capital for its
operations. Since we allow private property in capital and believe that to be
the best method yet devised for securing its accumulation, we must justify
interest. Profits in general are fairly earned by industrial organizers and
others who manage our businesses, and are necessary to enlist their
services. Probably in most cases society does not overpay these leaders of
industry. But some forms of profit, as those derived solely from monopoly,
especially from the monopoly of limited natural resources, are both too
large and socially unearned. These society should clearly control and
absorb.
One reason then why labor has not profited more by the great increase in
wealth is that the other factors in production have laid claim to their shares
also. There is good reason for believing, however, that the share of labor
has been steadily growing greater all the time, and that it today gets a larger
proportion of the social income than ever before. This fact is obscured by
the great growth in population, which has more than doubled in the last
hundred years in Europe and has shown a twentyfold increase in the United
States. The larger income is divided among more people, and though each
today gets more than his grandfather, there is not yet enough produced to
make all rich. Indeed, if the wealth of the United States were divided
equally, it would not provide a competence for anybody. The difficulty is
not merely that there is inequality in distribution, but that the need of a
much greater production of wealth must also be met. Inequalities may be
adjusted by such measures as progressive inheritance taxes, but resort to
this or similar methods must not be so severe as to weaken the motives for
the accumulation of capital. That must form one of the strongest reasons for
rejecting the drastic proposals of socialism.
Improvements in production have, however, not merely increased the total
output; they have greatly reduced the cost of many articles and have
brought within the reach of the poorest consumers others which a century
ago would have been unattainable. Improvements in transportation have
served to bring an ever-increasing variety of products to market. The
material progress of a people can be gaged fairly well by their consumption
of certain semi-luxuries, such as tea, coffee, sugar, tobacco, beer, etc.; these
show a steady increase during the past century. “Thus in the United States

between 1871 and 1903 inclusive, the per capita consumption of coffee
increased from 7.91 to 10.79 pounds, that of sugar from 36.2 pounds to 71.1
pounds, that of malt liquors from 6.1 gallons to 18.04 gallons, that of wheat
and flour from 4.69 bushels to 5.81 bushels.”[52] A similar investigation for
Great Britain shows an average increase in a considerably larger list of the
same character of 40 per cent between 1860-64 and 1895-96. It must be
admitted that there is much lack of economy in present consumption; there
is often wasteful and positively injurious consumption, an illustration of
which would be found by many persons in the increased consumption of
malt liquors cited above. From a purely economic standpoint the enormous
waste of war and the burdensome cost of military and naval armament must
also be condemned.
The task of prophecy is usually a fruitless one, but at least it is now possible
for us to indicate some of the lines along which reform is needed, and the
goal towards which the future of progress will probably move. The natural
resources of the nation must be more carefully conserved and reckless
destruction prevented; at the same time the monopolization of limited
resources by private individuals or corporations must be rigidly restricted.
The growth of trusts seems but the last step in a steady growth in size of the
business unit and may be accepted as an economical method of industrial
organization, but the evils of corporate financial management must be
carefully guarded against. The growth of labor organizations, on the other
hand, must be admitted to be equally logical and desirable. While they often
display monopolistic tendencies, yet our main reliance must be placed upon
these agencies to secure bargains for laborers on terms of equality with their
employers. But on behalf of wage-earners not easily organized we must
resort to state interference by means of factory and labor legislation in order
to secure equitable labor contracts. Free competition which exposes women
and children to the greed of unscrupulous employers is defended by no one
today, and it is clearly recognized that legislation along these lines must be
further extended, as for instance in the direction of industrial insurance, old
age pensions, adequate care for the unemployable, etc.
Reforms in our banking and currency laws, an extension of banking
facilities to the working classes, the more careful regulation of railroad
rates, reforms in methods of taxation, and a reduction in the tariff—all are
called for by the development and readjustment of industry. On the other

hand, much remains to be done in the education of the mass of the people to
habits of rational living and enjoyment. In the great cities housing
conditions should be effectively regulated, sweatshops suppressed,
intemperance discouraged, and where possible a love of art and outdoor life
promoted. A more rational use of income would increase the material well-
being of the people considerably. Problems of distribution are still more
insistent. No one who has the welfare of the laboring classes or of our
democratic society at heart can view with approval the existence of widely
separated classes, with disproportionate political and economic power.
Greater equality in fortunes—a leveling up of incomes—must certainly be
regarded as a sound social ideal. On the other hand, we have seen reason to
reject the drastic remedies of socialism as a cure for the injustices of present
methods of distribution or production. Improvement must come by
conservative reform along the lines of our past development. In the last
analysis all attempts to improve conditions permanently depend upon the
character and capacity of the individual. Because of this fact education
assumes great importance—education not merely in the art of production
but also in that supreme art, the art of living.

[1] Tarr, Economic Geology of the U. S., pp. 7, 119.

[2] In Quarterly Journal of Economics, Vol. XIX, p. 3.

[3] McVey, Modern Industrialism, p. 145.

[4] The Truth About the Trusts, p. 469.

[5] Tetter, Principles of Economics, p. 321.

[6] Bogart, Economic History of the U. S., p. 412.

[7] XIX, 645.

[8] Seager, Introduction to Economics, 176.

[9] Evolution of Modern Capitalism, 35.

[10] Economics, 121.

[11] F. J. Stimson, Labor in its Relation to Law, 51.

[12] Bullock, Introduction to the Study of Economics, 428.

[13] Stimson, op. cit., 71.

[14] A. H. Ruegg, Law of Employer & Workman in England, 99.

[15] Rep. of U. S. Ind. Com., XVII. 1.

[16] Rep. Ind. Com., XVII, xlii.

[17] E. L. Bogart, The Chicago Building Trades Dispute, in Pol. Sci. Quart., XVI., 134;
also in Commons, Trade Unionism & Labor Problems, p. 107.
[18] Bogart, op. cit., p. 137.

[19] Economics, 353.

[20] Political Economy, 381.

[21] Evolution of Modern Capitalism, 297.

[22] Wealth & Progress, 171.

[23] Report Industrial Commission, XIX, 926.

[24] Getting a Living, 475.

[25] Report Industrial Commission, XIX, 746.

[26] Ind. Com., Rep: XIX, 757.

[27] Bull. of U. S. Bur. of Lab., Sept., 1908, p. 418.

[28] Economics, 337.

[29] Industrial Evolution of the United States, ch. 28.

[30] Evol. of Mod. Cap., 229.

[31] The Effects of Machinery on Wages, 65.

[32] Principles of Economics, I, 315.

[33] Industrial Efficiency, II, 451.

[34] Schloss, Methods of Industrial Remuneration, 305.

[35] Report, VII, 644.

[36] Economics, 377.

[37] Political Economy, 344, 345.

[38] Economics, 133.

[39] Bliss, Encyclopedia of Social Reform, art. Distribution, p. 501.

[40] Economics, 360.

[41] Stated technically, its marginal productivity is small and hence its reward is also
small.
[42] More truly, the marginal productivity theory.

[43] J. R Commons, the Distribution of Wealth, 252.

[44] More, Wage-earners’ Budgets, 269.

[45] Today the loss is probably double this sum.

[46] Gide, Political Economy, Rev. Ed., 663.

[47] Seager, Introduction to Economics, 73.

[48] Bullock, Introduction to Study of Economics, 106.

[49] Socialism and Social Reform, 19.

[50] Wages in the United Kingdom in the Nineteenth Century.

[51] Acknowledgment should be made at this point of indebtedness to the excellent final
chapter in Prof. H. R. Seager’s Introduction to Economics.
[52] Adams and Sumner, Labor Problems, 523.

MANUFACTURING.
BY O. P. AUSTIN.
[Chief of Bureau of Statistics, Department of Commerce and Labor. Native of Illinois. Engaged in
newspaper work on arriving at manhood, and so continued in Chicago, Cincinnati and Washington,
as reporter, editor and Washington correspondent, until appointed Chief of the Bureau of Statistics in
1898. Author of many official monographs, including: “Commercial Orient,” “Commercial Porto
Rico, Hawaii and Philippine Islands,” “Commercial Alaska,” “American Commerce,” “Submarine
and Land Telegraphs of the World,” “Transportation Routes and Systems of the World,” “National
Debts of the World,” “Great Canals of the World,” “Colonies of the World and Their Government,”
“Colonial Administration,” “Territorial Expansion of the United States,” etc., etc. Also author of
publications for instruction of youth in national and international affairs. Member of American
Academy of Political and Social Science, American Association of Geographers, American
Economic Association, International Union for Comparative Jurisprudence and Political Economy,
Central Statistical Commission of Belgium, Associate Editor National Geographic Magazine;
Lecturer.]

INTRODUCTION.

The production of manufactures for the requirements of the world’s
population is conducted in a comparatively small section of its land surface.
Just as the manager of a great estate devotes one section of his estate to the
production of certain articles, and other sections to certain other articles, so
the great business instinct which rules the business of the world carries on
in its various sections the varied industries best suited to the physical,
ethnological and financial conditions of its various sections.
The people of western Europe and eastern United States are, for various
reasons better able to produce the manufactures required by the world than
are those of South America, Africa or the Orient; while, on the other hand,
the people of South America, the Orient, Australia, Canada, the western part
of the United States or the eastern part of Europe are better able, for various
reasons, to produce the raw materials of manufacturing and the food

supplies required by those engaged in the manufacturing industry than are
the people of western Europe or eastern United States. South America and
Australia produce wool in large quantities; Africa and the Amazon Valley
produce the chief supply of india rubber; the Malayan peninsula and
adjacent islands produce the bulk of the world’s tin; India produces jute; the
Philippines, Manila hemp; Mexico, sisal; China and Japan, the bulk of the
world’s silk; Egypt, India and the United States, the world’s cotton; Russia,
Austria-Hungary, India, Australasia, South America, Canada, the central
and western parts of the United States produce the bulk of the world’s
wheat, corn and meats, at least the bulk of that in excess of the requirements
for local consumption; Europe, the West Indies, the East Indies and the
tropical sections of India, China and Central and South America produce
the bulk of the world’s sugar.
The manufacturing industries of the world—confining this term for the
moment to those industries in which the great proportion of the work is
performed by machinery—are conducted chiefly in, it might almost be said
confined to, western Europe and eastern United States. True, the exclusive
application of the word “manufactures” to that portion of the world’s
product of this character made by the use of machinery in conjunction with
large sums of capital—the factory method—carries one beyond the original
meaning of the word “manufactures,” which primarily meant, of course,
made by the hand (from manus, the hand; and facere, to make); but the
industrial habits of the world have also passed beyond that stage in which
manufacturing for the masses is carried on by hand methods.
It must not be understood from this that all of the world’s manufactures are
produced in western Europe and eastern United States, or produced by
modern machine methods in conjunction with the investment of great sums
of money—the factory system. On the contrary, large quantities of
manufactures are still produced by hand in various parts of the world other
than those in which manufactures by modern machine methods are a
leading characteristic of the occupations of the people. Nor must it be
assumed that the areas designated as the non-manufacturing sections are
entirely dependent upon the manufacturing sections for their manufactures.
On the contrary, large quantities of manufactures are still produced in the
Orient, in Africa, South America, Australia and the islands of the sea by
those simple processes which prevailed in Europe and the United States

prior to the development of the modern methods less than two centuries
ago. The industrious population of China, of India, of Japan, the millions of
people in Africa, in South America and in the islands of the sea produce by
simple methods large quantities, and in many cases a large proportion, of
the simple manufactures which they require for their daily life. The cloth
with which they cover their bodies, the simple requirements of household
life and of agriculture are, in many cases, largely of their own production
and made in keeping with the original meaning of the word
“manufacture”—made by hand.
But the statement is still true, that the great manufacturing areas of the
world—the areas which give their chief attention, or the continuous
attention of a large part of their population, to the production of those
requirements of man other than the natural products and do this through the
application of power, machinery and capital, and the operations thereof
under the factory system, are western Europe and the eastern part of the
United States, though the systems which prevail there are gradually
extending to other parts of the world—eastern Europe, central, southern and
western United States, Japan, India, Australia, Canada and South America.
As to the relative share of the world’s manufactures now produced by the
use of machinery, power and capital—the factory method—and by the hand
process, respectively, no exact statement can be made; nor are there
facilities for even offering an intelligent estimate of the relative production
by these two methods. There is reason to believe that two-thirds of the
cotton cloth consumed in China is still made by the hand process, and if this
be true it may be estimated that perhaps two-thirds of the other
manufactures consumed in that country are still made by hand; while in
those other sections of the world in which railroads and the other methods
which the people of the Occident are pleased to term “modern” do not yet
prevail, a large proportion of the simple manufactures of the people, are still
those produced by hand methods. The fact, however, that the sections which
produce manufactures by modern methods are also supplied with modern
facilities of transportation—the railroad and the steamship; and of
communication—the telegraph, and also supplied with ample sums of
capital and that other important quality born of long experience and the
energy supplied by a temperate zone climate and the judicious admixture of
the most energetic populations of the world—Europe and the United States

—has enabled them to distribute their factory products in great quantities to
those sections not producing by the factory method, and whose peoples are
willing to exchange their natural products, food and raw materials, for the
finished products of the factory.
This brings us to a consideration of the exchanges of the world—the
exchanges of natural products for the products of the factory. This
exchange, as already intimated, occurs chiefly in the requirements of the
manufacturing section—raw materials and food—for manufactures.
Western Europe, the great manufacturing section of that grand division,
does not produce cotton, jute, or a sufficient supply of wool, silk, or hemp.
For its india rubber, its tin, its copper and the numerous articles of tropical
production required for manufacturing, it is dependent wholly or chiefly
upon other parts of the world. The United States, while producing a large
share of the world’s cotton and copper and iron, and a considerable supply
of wool, must rely upon other parts of the world for its hemp and jute and
sisal and india rubber and silk and many other of its tropical requirements.
As a result the Orient exchanges its raw silk, its jute, its Manila hemp, its
tin, and numerous less important articles, for the factory products of Europe
and the United States. Australia exchanges its wool, its meats and its gold
for the products of the manufacturing sections. Africa sends its india rubber,
its ostrich feathers, its gold and diamonds in exchange for factory products
of those sections in which the manufacturing system has developed. South
America offers as its exchangeable products wool, wheat, corn, meats,
coffee and india rubber. Canada gives in exchange for her factory
requirements timber, ores, wheat and other agricultural products.
Thus the business intelligence that rules the world, adapting one to another
those various conditions which prevail in its varying sections, has built up
in certain sections of its great area—Europe and the United States—a great
factory system, operated by the great supplies of power (coal) which there
exist in conjunction with the wealth, the intelligence, the climatic
conditions and the quality of population, which system, besides supplying
its own six hundred millions of people with their own requirements, sends
to the other ten hundred millions of people in other parts of the world its
surplus products and takes in exchange the natural products, the
manufacturing material and food required by its own people and its own
industries.

George J. Chisholm, in the Introduction to Bartholomew’s Atlas of the
World’s Commerce, outlines the history of the development of
manufactures and the relation thereof to commerce as follows:
“In the latter part of the eighteenth century there took place in
England a number of inventions which have brought about a change
in the conditions of manufacturing industry and of commerce, and
an acceleration of the rate of the economic development of the
world, to which all previous history presents no parallel or approach
to a parallel. It is a change that has affected the entire world,
bringing about an entirely new trade with the New World and the
antipodes, and completely altering the character of the trade with the
East, depriving spices of the peculiar value which they held in
commerce for so many centuries, and developing a trade of
incomparably greater magnitude with the East than was at one time
ever dreamt of, and largely in commodities of a bulky character
yielding comparatively little profit on small quantities. The
revolution was inaugurated by the inventions in connection with the
cotton industry between 1769 and 1785 and the concurrent
improvements in the steam engine by James Watt, who thereby first
made this a generally serviceable machine. These were followed by
the introduction of steam locomotion by land and water in the first
quarter, and the rapid extension of these modes of transport in the
remainder of the nineteenth century. The result of these inventions
was to give a new value to the stores of coal and iron in the United
Kingdom, and ultimately a new value to undeveloped land in new
countries. It was railways that first made it possible to fill great
ships with bulky produce like grain drawn from the far interior. The
remarkable expansion of commerce thus brought about greatly
increased the commercial advantages of Great Britain due to its
situation and local facilities for shipping. In so far, however, as the
unexampled development of British manufacturing industry and
commerce in the period immediately following the Industrial
Revolution was due not to geographical conditions but merely to the
fact that the great inventions originated there and consequently the
resources of Great Britain for carrying on manufactures by the new
methods were developed first, the expansion of British

manufactures and commerce was bound to be affected by the
development of similar resources elsewhere; and the more rapid
growth of manufactures in some rival countries resulting from this
cause, and partly, it may be, from other causes, has been one of the
marked features of recent economic history.”

I. MODERN MANUFACTURING SYSTEMS OF THE WORLD.

The manufacturing systems of the world have developed from mere hand
and household industries to those of the machine and factory in less than
two centuries. For thousands of years the simple requirements of men—of
clothing, of domestic life, of agriculture and of transportation—were met
with articles produced by hand labor, performed for the greatest part in the
household or in simple workshops adjacent thereto. Then, in the latter half
of the eighteenth century, man discovered that he could harness the power
of the waterfall and, by making the wheels which it turned turn other
wheels, could utilize that power in performing many tasks which he had
hitherto performed laboriously by hand. The turning wheels twisted the
wool and flax and cotton into threads stronger and finer and better than his
wife had been accustomed to twist with the spinning wheel and distaff, and
produced in a single day as much of this yarn as a hundred industrious
women could produce in a week or a fortnight. By gearing the wheels to
operate a loom he could weave the yarn into cloth with a small fraction of
the labor and time which had been required to weave it by the hand loom
and obtain better results.
Thus arose the custom of manufacturing by machinery operated by the
power of the waterfall the cloth which had hitherto been manufactured by
hand labor in the household; this was the beginning of the modern
manufacturing industry.
To do this, however, it was necessary to plant the machines beside the
waterfall and bring to them the raw material and the persons necessary to
operate them, for the machine was unable to perform its task unless assisted
by the intelligent labor and guidance of experienced men and women. Thus
arose the system of performing in a single workshop, with the aid of a
considerable number of people and machines, the manufacturing which had
been hitherto performed by many people in many households and with
many machines of simpler form and operated by human power—the factory
system.

This new system developed new occupations. The buildings in which the
work was carried on must be constructed. The machinery required for
operating the factory must be made and kept in repair, and new machines
made to take the place of those worn out. So there came occupation for
mechanics and skilled machinists in manufacturing and repairing the
machines, and for others skilled in operating them. The material used in
manufacturing the cloth must be transported to the factory, instead of being
used at the place where it was grown as formerly; and the cloth must again
be transported to the consumer; and thus there were new occupations for
man and beast in transportation and in constructing and maintaining the
roads over which the material was transported. Still another, and equally
important, industry developed was that of supplying the food and other
requirements of the men and women engaged in the factory, and this gave
new activity to the agricultural industries near the factory and further
occupation to those engaged in transportation.
To supply the wants of those employed in the factories, who were so busily
engaged that they could not find time to grow their own food, or make their
own clothing, other enterprising men and women established themselves
near the factory to sell the required food and household supplies, to supply
the fuel with which they cooked their daily food, to buy small portions of
the cloth made in the factory and turn it into clothing to sell to the
operatives, to shave their rough beards and occasionally trim their hair—
and thus arose the factory town.
So the factory system, which at first threatened to take away the occupation
of thousands who had formerly devoted their time to making yarn and cloth
by hand labor, developed new occupations and new industries, and brought
portions of the hitherto scattered people into groups, and these groups in
time developed better accommodations for themselves and their families in
homes, in comforts of life, in educational facilities, and in hours of labor;
and in doing this they also supplied the masses with cloth at a less cost of
labor than they had formerly expended in obtaining it.
Meantime man was learning another important lesson, one which was to
develop even more rapidly the art of manufacturing. He found through a
long series of experiments that power could be generated by heating water
until it turned into an expansive vapor which he called steam, and that this

expansive force could be controlled in such manner as to put in operation a
machine which he called the steam engine, which could in turn transmit its
power to that machinery formerly operated exclusively by the power of the
waterfall.
This discovery again revolutionized the manufacturing industry, which had
hitherto been limited in the scope of its operations by the supply of water
power so located that the raw material could be transported to it and the
finished products in turn transported thence to market. With this new force,
steam, by which the manufacturing machinery could be made entirely
independent of the waterfall, the factories were located at points convenient
to the natural supply of fuel and manufacturing material or to the market for
the finished products. Where this was not practicable the factories were
located at places to which the materials could be readily and cheaply carried
by water transportation, either on some navigable stream or the sea-coast.
Another important contribution made by steam power to the development
of the manufacturing industry was the decrease in cost of transportation.
Before the development of the railway and the steamship the material of
manufacture, unless produced within a short distance of some navigable
water, canals, rivers, lakes or oceans, was of comparatively little value. It
was not always practicable to plant the factory in the section which most
readily produced the wool or cotton or flax or hemp or silk, or to place it
alongside the iron or copper mine; and even if this were done the
manufactured material was valueless unless it could be transported to those
requiring it. Even the lighter articles of manufacture, such as wool or cotton
or fibers or silk, could not be transported any considerable distance without
greatly increasing the cost to the manufacturer, and thus proportionately
advancing the cost of the manufactured article. But when, in the middle of
the nineteenth century, the railways began to penetrate the continents and
the steamships began to cross the ocean and extend their tours to the
commercially undeveloped sections of the world, the manufacturers found
new sources of supply open to them and quantities of raw material reaching
them from distant lands at such comparatively low cost as to enable them to
enlarge their output, increase the variety of their productions and reduce the
cost of both the necessities and conveniences and luxuries which they were
offering to the public. The railways of the world grew from 25,000 miles in
1850 to 500,000 miles in 1900 and 600,000 in 1909. The tonnage of steam

vessels on the navigable waters of the world grew from less than one
million tons in 1850 to 24 million in 1909; and the carrying power of the
sail and steam vessels of the world, measured in sail tons, grew from 15
million tons in 1850 to 100 million in 1909. The general reduction in freight
rates meantime is illustrated by the fact that the price of transporting wheat
from Chicago to New York by rail fell from 33½ cents per bushel in 1872 to
10 cents per bushel in 1900, and the charge for transporting wheat from
New York to Liverpool fell from 17 cents per bushel in 1875 to 3 cents per
bushel in 1905; and similar reductions were made in the charges for
transporting manufacturers’ materials.
Thus the application of steam to manufacturing and transportation
multiplied the power of production. The area over which it could be
performed was greatly enlarged, the cost of materials was reduced through
cheaper transportation, new devices and processes were developed as a
result of the competition, cheaper raw material was obtained from countries
where plentiful supplies and cheap labor give low prices, and the
opportunity of locating the factory near the place of production or at some
convenient meeting point between the various places of production—all
these contributed to reduction of cost and increase of supplies of material of
manufacture. The great iron and steel works of western Pennsylvania, and
northern Ohio, Indiana and Illinois, for example, are located not at the iron
mines or the coal fields, but at places between these two fields to which
these materials can be cheaply carried from their respective places of
production. The iron ore is chiefly produced in the Lake Superior region
and carried at a very low cost by vessels especially constructed for this
purpose to the southern shores of Lake Erie. The coal is chiefly produced in
western Pennsylvania and central Ohio, Indiana and Illinois. The cost of
transporting the coal from the mine to the lake shore, or the ore from the
lake shore to the mine, or both coal and ore to some mutually convenient
meeting point by river or canal or railroads constructed for this purpose
across a comparatively level country, is extremely small, less in many cases
than that of carrying material to the waterfall which is not infrequently
located at places difficult of access. The vessels carrying the manufactures
of the United States or the manufacturing countries of Europe to South
America, Africa and the Orient, bring back at a very low cost the india
rubber, the tin, the fibers, the wool, the silk, the Egyptian cotton of those

distant countries; and the manufacturer who a century ago was limited in
his supply of raw materials to the immediate vicinity of his factory may
now bring his material from all parts of the world, while the area in which
he may sell his products has been correspondingly enlarged.
One very recent contribution to the convenience and cheapness of
manufacture is found in the transmission of power in the form of electricity.
Formerly the machines of the factory were operated by power obtained
from the steam engine or the water wheel through lines of shafting, gearing,
belts, friction pulleys, etc. This made it necessary that the factory operated
by water power be placed alongside the waterfall, or at least within a
comparatively short distance of the source of power. Recent inventions have
made it possible to transform power into electricity, carry that electricity
hundreds of miles on a wire, and transform it back into power for the
operation of the machinery of the factory or the transportation of the raw
material or the finished product. This has increased greatly the value of the
world’s water power in its relation to manufacturing. Formerly only a small
part of the waterfalls of the world were used at all, largely because of their
comparative inaccessibility and the cost of transporting the raw material to
them and the finished product from them. Now that power, generated at any
point, however inaccessible for freight handling, may be transmitted in the
form of electricity on a simple piece of wire to any convenient point within
a hundred or even two hundred miles of the place of production, and by a
simple process applied to the operations of machines small or large, simple
or complex, the possibilities of the waterfall in supplying power for the
manufacturer are greatly enlarged.
Not only is this true of the waterfalls now in existence but of those which
may be brought into existence, for now that man has found a way to use the
power thus generated he may readily increase the number of waterfalls by
constructing dams at many places, and using the water over and over again
in its flow from the place of origin to the ocean level. The great quantities
of water stored up in the form of snow and ice in the mountain ranges of the
world, and gradually liberated by melting may supply almost untold
quantities of power as they flow down the mountain sides used not merely
once but many times. The manufacturing power of Italy, Switzerland and
southern France is now being greatly augmented by this process.

Another possibility of the use of this new distributor of power, electricity, is
the multiplying of workshops and the return in some instances and certain
articles to household or small shop manufacture. It is now so easy to
introduce the electric wire and a small electric motor into the household or
the shop adjoining the household and to so operate small machines for the
various processes in many of the manufacturing industries, that this new use
of electricity for the transmission of power is already making visible
changes in the factory systems of the world, and promises still greater
changes. In many lines of manufacture in which the machinery occupies
small space and requires little power and the quantity of material handled is
not great, such as watch and clock making, the manufacture of clothing,
boots and shoes, toys, etc., a part or all of the work can now be performed
in the household or small shop through the power generated miles away and
brought into the workman’s home on a simple piece of wire.
On the other hand the use of electricity in the great factory or
manufacturing establishment is equally important. Instead of transmitting
the power of the engine to the various classes of machinery by belts,
shafting and gearing, much of it is now transmitted and applied in the form
of electricity. Great cranes which handle many tons of material are operated
by the electric motor without the intervention of the costly shafting, belting
and gearing; and the great magnet, made such by electricity, picks up its ton
of steel rails with the same ease that the toy magnet picks up the needle, and
is managed with no greater physical exertion than the other.
Cassier’s Magazine, an accepted authority on engineering matters,
publishes with favorable editorial comment, in its issue of September, 1909,
a statement by Sylvester Stewart that “we could take out in regions where
water power is needed at least a hundred times as much water power as is
now employed, furnishing a safer and cleaner power than steam, at a lower
cost, and thus prolong the existence of our coal fields. * * * A running
stream may be compared to an endless driving belt only awaiting
connection to the machinery it is capable of driving, but it has not been
appreciated because we have become so familiar with it; if it had suddenly
been discovered, doubtless it would have been harnessed immediately. Coal
is passing away, but water flows continuously. A hundred thousand
horsepower may be taken from a river and its place is still filled, but the
coal vein once emptied is emptied forever.” Mr. Stewart adds that probably

not one-thousandth part of the water power of the world is now utilized, and
that while the greater part of this power is not at present available, because
of its existence in out-of-the-way places, or in rivers so deep and sluggish
that the energy obtainable from them would cost more than steam power, at
least a hundred times as much water power as is now used could be, under
present conditions, utilized in a manner to supply it at less than the cost of
coal at present prices.

II. THE USE OF MACHINERY IN MANUFACTURING.

The statements made in this discussion that the great expansion in the
production of manufactures came with the adoption of machinery for
manufacturing must not be understood as meaning that no machinery was
used in manufacturing prior to the period of expansion. Machines have been
used in manufacturing for many centuries.
The spinning wheel, used many hundred years ago, was a machine, and so
was the hand loom, by which the threads spun by the wheel were woven
into cloth. Flax and wool were originally turned into thread by the use of
the distaff, a stick to which the spinner attached a small portion of the fiber,
and by revolving the stick against his body twisted the fibers into a thread.
Then by letting the end of the stick drop downward he drew out the thread,
and with another roll of the stick against his body again twisted the fibers
and lengthened the thread, which he then wound around the distaff. After
many years of this process it occurred to somebody that by setting the
distaff in a frame and passing a cord or a piece of rawhide around it and
also around a large wheel and turning the wheel he could get a much more
rapid and regular revolution of the distaff. This was the beginning of the use
of the “machine” in the making of yarn, for the spinning wheel was a
machine, of a crude type, to be sure, but a machine. This served many
generations of men and women for the manufacture of thread and yarn,
from flax, from wool and from cotton.
To turn this thread or yarn into cloth another “machine” was used, the loom,
which, by fixing the thread on certain frames and passing other threads back
and forth as the frames were raised or lowered, formed the cloth. But this
“machine,” the loom, was operated by human power, as was that other
machine, the spinning wheel. The women and children spun the thread or
yarn, the father and sons operated the loom, chiefly in the winter months in
which they had no occupation in the fields. If a man chose to give his time
to weaving and became a weaver by trade he lightened his heavy labors at
times by attention to the garden surrounding his workshop, performing the

necessary work for the production of his food supply. “The workshop of the
weaver,” says Ure in his History of the Cotton Manufactures, “was a rural
cottage from which, when he was tired of the sedentary labor, he could sally
forth into his little garden and with the spade or hoe attend to his culinary
products. The cotton which was to form his weft was picked clean by the
fingers of his younger children and was carded and spun by the older girls
assisted by his wife, and the yarn was woven by himself assisted by his
sons.” In the manufacture of woolen goods conditions were similar. “The
work,” says James in his History of the Worsted Manufactures, “was
entirely domestic, and its different branches widely scattered over the
country. The manufacturer had to travel on horseback to purchase his wool
among the farmers or at the great fairs or markets, and the wool, after being
sorted and combed, was distributed among the peasantry and received back
as yarn. The machine used by them was still the old one-thread spinning
wheel, and in summer weather on many a village green might be seen the
housewives plying their busy trade. Returning with his yarn the
manufacturer had to seek out his weavers, who ultimately delivered to him
his camelets or russells or calimancoes ready for sale to the merchant or
delivery to the dyer.”
These are pictures of the manufacturing industry in England as late as 1770.
“Machines” were in use, but of the simplest type, and all operated by the
power of the man or woman using them, or at the best by human or animal
power, and in most cases the work was performed in the household or a
small shop adjoining the household.
The transformation to the “machine method” or factory system began when
some power greater than that of man or beast was applied to the operation
of the machines, and the machines themselves were so enlarged as to
multiply their producing power. “In tracing the effect of the application of
modern machinery to English industry,” says Hobson in his Evolution of
Modern Capitalism, “there appear two prominent factors, the growth of
improved mechanical apparatus, and the evolution of extra-human motor
power. We speak of the industry which has prevailed since the middle of the
eighteenth century as ‘machine production’ not because there were no
machines before that time but, firstly, because a vast acceleration in the
invention of complex machinery applied to almost all industrial arts dates
from that period, and secondly, because the application upon an extended

scale of non-human motor powers manifested itself then for the first time.”
“The water frame, the carding engine, and the other machines which
Arkwright brought out, in a finished state,” says Cooke Taylor in his
History of the Factory System, “required both more space than could be
found in a cottage and more power than could be applied by the human arm.
Their weight required them to be placed in strongly built walls, and they
could not be advantageously turned by any power then known but that of
water. Further, the use of machinery was accompanied by a greater division
of labor, and therefore a greater co-operation was necessary to bring all the
processes under a central supervision.”
The new and enlarged machines which were thus operated by water power
and brought together in factories had been invented chiefly during the
eighteenth century. John Kay, in 1738, invented what was known as the
flying shuttle, which doubled the amount of weaving which could be
performed by one man in a given time. Hargreaves, in 1764, invented the
spinning jenny, a machine which operated a number of spindles for
spinning yarn, and so did many times as much as one spinner with a
spinning wheel could do. Arkwright, a few years later, devised the water
frame, by which the spinning jenny could be operated by water power.
Crompton, a little later developed the “spinning mule,” which combined the
important qualities of the spinning jenny and the water frame. Before the
end of the century the steam engine began to supply power and was utilized
in many cases where water power was not available. Then, in 1792, came
Whitney’s cotton gin, by which the seeds were readily extracted from the
cotton, and that valuable fiber rendered much more available for
manufacturing purposes.
The effect of the development of the machine and factory system, through
the devices of these thoughtful men, enormously increased the
manufacturing industries of England and later of the other parts of the
world. The importations of cotton into England prior to the invention of the
spinning jenny averaged less than 2 million pounds per annum. With the
invention of the spinning jenny and the water frame the importation of
cotton and cotton manufacture quickly doubled and trebled and then grew at
such rapid rate that by 1800 the importation was about 40 million pounds,
by 1830, 260 million pounds and by 1840 over 400 million pounds. The
importation of wool grew from less than 2 million pounds in the latter part

of the eighteenth century to 150 million pounds in 1860 and over 700
million pounds in 1890, though in this article of manufacture the growth in
importation was less strongly marked than in cotton because of the fact that
much of the wool used in manufacture was produced at home, while all of
the cotton used was imported.
In the iron and steel industry the growth in the use of machinery was even
more closely connected with the great development of recent years than in
that of textiles. It was quite natural that man should seek the use of
machinery in the iron and steel industry. The material to be handled was of
such great weight that it could not be handled in quantities without the aid
of extra-human power, and the fact that it must be manipulated while at an
intense heat necessitated the use of devices of some sort for its handling.
Yet a long time, a very long time, elapsed after the beginning of the
manufacture of iron and steel before men developed the machinery which
has resulted in such a wonderful development in the manufacture. The slow
rate of growth in the earlier centuries, and the rapid rate in the past century
may be measured in some degree by the world’s production of pig iron, the
basis of all iron and steel manufactures. Mulhall estimates the world’s
production of pig iron in the year 1500 at 60,000 tons, in 1700 at 100,000
tons, and in 1800 at 460,000 tons. Then the increase began to be more
sharply defined, the production reaching 1 million tons in 1820, 2½ million
in 1840, 7 million in 1860, 18 million in 1880, 40 million in 1900 and
nearly 60 million in 1907. The increase in the eighteenth century was about
one third of a million tons, and that of the nineteenth century was 39½
million tons, or more than 100 times as much as that of the eighteenth
century. The great development in the transformation of iron into steel did
not come until the second half of the nineteenth century, the world’s
production of steel in 1850 being, according to Mulhall, 71,000 tons, in
1870, 540,000 tons, in 1880, 4 million tons, in 1890,12 million, in 1900,
approximately 20 million, and in 1907 about 40 million. The growth in
production of pig iron and steel was more rapid in Europe than in the
United States in the earlier part of the nineteenth century, but in the latter
part of that century the United States outstripped all her rivals, and her
production of iron and steel is now more than that of any other two
countries of the world.

These wonderful developments in the production of iron and steel were
even more dependent upon the development of machinery for transporting
the material and handling it in the factory than was the case with the
textiles. Pig iron cannot be made without having in immediate conjunction
three natural materials, iron ore, limestone and some material to produce
intense heat. The iron is only found in the form of “ore,” being iron mixed
with rocks, earth or other matter which must be removed in order to use the
iron. To do this the ore must be heated. Formerly this was done by placing
small quantities of charcoal in a hole in the ground and placing the iron on
top of it, and then more charcoal on top of the ore. By fanning the burning
charcoal or blowing the fire from the lungs through a reed the heat was
increased and the ore was softened, and by hammering it while hot the
useless material was worked out. Then by further heatings it could be
hammered into such form as desired. After a while it occurred to men to
build a wall of stones and mud and place the ore and charcoal in this, and to
make a bellows of the skin of some animal (the prototype of those which
blacksmiths and other workers in metals now use), and so force the air into
the bottom of the mass of charcoal and iron. With this the iron could be so
heated that it actually melted and ran to the bottom of the furnace, and when
cooled was ready for the finer processes by which it was made into the
desired articles. After a time the walls of the furnace were built higher and
if it could be located near to a waterfall the shaft of the water wheel was so
adjusted as to operate the bellows and keep the stream of air flowing into
the fire, for the heat of the burning charcoal was not sufficient to melt the
iron without this forced draft.
This was the process by which men made iron for many generations. But it
was a very expensive process, for the quantity of wood which must be used
to produce the charcoal was so great that the forests were soon depleted,
especially in England, where iron making became active. Efforts were made
to use coal instead of charcoal, but the weight of the iron ore was so great
that it crushed out the fire in the coal which softened as it burned. Then
after a time it occurred to somebody to treat the coal in a manner somewhat
similar to that by which the wood had been transformed into charcoal, and
coke was produced and successfully substituted for charcoal in heating the
iron ore and making iron.

In the United States the charcoal process was used until a period much later
than that of its abandonment in England, for the supplies of timber were
very great and men who were clearing the land for use in agriculture were
glad to turn the wood into charcoal and find a market for it. The simple
charcoal furnace and forced draft by a simple process furnished the iron-
making systems of the world until the early part of the nineteenth century.
As a result there were hundreds of small furnaces, simply operated, and
turning out small quantities of iron, in various sections of the United States.
Meantime somebody discovered that if the air which was forced into the
furnace was heated before being sent into the fire it would greatly increase
the heat-giving power of a given quantity of charcoal or coke, and the hot
blast became a part of the larger furnaces. Then it was found that the
anthracite coal of the United States was hard enough to bear the weight of
the ore and would produce a heat sufficiently intense to melt it; and so a
great iron industry developed in the anthracite region of the United States.
Then it was found that certain bituminous coal in western Pennsylvania
would make excellent coke for the manufacture of iron, and the
Connellsville coke became a successful competitor of anthracite coal, and
later other cokes were also used. Later came the natural gas discoveries and
they contributed to iron making and working. Meantime railways were built
to carry the ore to the coal or the coal to the ore or both the ore and coal to
some convenient meeting point, and machinery began to be introduced for
handling the ore and the coal along the railway and at the furnace. This led
to the devising of other machinery for handling the iron after it left the
furnace and of rollers for rolling the iron into bars and for giving it the sort
of manipulation that the hammer of the earlier iron maker had given it when
produced in the primitive furnaces. Then great deposits of iron ore, the
richest known to the world, were discovered in the Lake Superior regions;
and steam-driven machinery was devised to scoop it up from the beds in
which it was found, place it in cars, which in turn carried it to the water’s
edge, and dumped it into great receptacles from which it could run by the
force of gravity into the hold of the steamer. Then other machinery operated
by steam was devised to take it from the hold of the steamer and load it
again on the cars which transported it to the furnace where it met the coal or
the coke, produced, transported and handled by similar machine processes,
and was turned into iron to also be handled by great machines.

While all this was happening—indeed long before the later happenings
above mentioned—workers in iron had found that the pig iron coming from
the furnaces contained so much carbon that it could not be successfully
worked. So they managed to get rid of the carbon, by melting the iron in an
open hearth and passing flames over it, and as the carbon is combustible it
was gradually burned out. This made soft malleable iron, but not of the
consistency to have the required strength or serve the purposes that are now
served by steel. To bring it to the proper condition it was necessary to
reintroduce a very small quantity of carbon so evenly that both the quantity
and the distribution could be determined. This was done for many years by
placing the bars of iron in a crucible or other closed receptacle surrounded
by charcoal, and subjecting them to intense heat for several hours or days.
So the making of steel was a slow and expensive process until about the
middle of the nineteenth century. Then Sir Henry Bessemer, an Englishman,
discovered that by forcing air into the bottom of a great retort containing
molten iron the oxygen of the air would combine with the carbon of the iron
and in a few minutes the objectionable carbon would be all burned out, and
that by then reintroducing in this molten mass of pure iron the required
amount of carbon in the form of spiegel iron or ferro manganese, steel
could be made much more cheaply and quickly than before. William Kelly,
an American, also devised a similar process about the same time. Thus
began the process of modern steel making, which has in a single half
century increased tenfold the world’s consumption of steel and thus of iron,
for a very large proportion of the iron now utilized in the world is
transformed into steel before being applied to the service which it is to
perform for men.
In all the processes by which iron and steel making have been transformed
from the simple methods of a century or two centuries ago to the present
system by which a single establishment may now make in a week or month
or year as much iron or steel as the whole world then made in an equal
length of time, machinery and capital have been the great causes of the
development—machinery for digging iron and coal, for transporting them
to the place of manufacture, for handling the material in the natural state,
for handling it in the furnace, for handling it in the molten state, for rolling
and shaping it after it passes from the molten state to that in which it begins
to take the form of the finished product, and capital to purchase this

machinery and the great quantities of material required. “The very richness
of our resources,” says J. Russell Smith in The Story of Iron and Steel, “has
made such a wealth of opportunity for occupation in the United States that
labor is and has been scarce. As a consequence the American iron industry
has been driven over to a machine basis, and its very success has arisen
from the fact that a scarcity of labor has compelled the introduction of
machinery which has surpassed the dreams of its inventors. In the iron and
steel industry of America man does little more than touch levers, while the
balance is done by steam and electricity. Four large Bessemer converters,
holding 15 or 20 tons of molten iron do their work by an air blast driven
through the molten material by the force of an engine. The electric cranes
swing the 20-ton charges and the heavy converters as easily as a schoolboy
swings his dinner pail, and pours the new made steel into a metal mold
which stands on a tram ready to take it to the hydraulic machine which
draws the mold off the red-hot ingot. The manless way in which this great
steel ingot is turned into a useful piece of steel never ceases to be a marvel.
The great machines are seen but the plant seems to be deserted. Then there
arises a rumble and roaring noise and the great piece of red-hot metal is
seen to travel with all the independence of a serpent across a lot of black
rollers and dive into the jaws of the rollers which squeeze it into flatter
shape. Then it stops, turns over and dives again through the same rollers,
which flatten it still more. After this has been repeated a few times you
discover, standing on a high platform, a man or two pulling the levers
which start the machinery of the six or seven thousand horsepower engines
that drive the knowing rollers which are crushing and rolling the ingot into
the shapes which man can use.”
“Perhaps the greatest difference between English and American steel
works,” said an English writer on this subject, “is the absence of laborers in
the American mills. The large and growing employment of propelling and
directing machinery is responsible for this. In a mill rolling three thousand
tons of rails in a day not a dozen men are to be seen on the mill floor. To
witness in such a mill the conversion in a half hour of a red-hot steel ingot
weighing several tons into finished stamped steel rails ninety feet long, and
all this perfectly, by the agency of unseen hands, is to gain new ideas of the
possibilities of mechanism, of the subservience of matter to mind.”

These are some of the steps by which the systems of the manufacturing
world have been, in the past 150 years, transformed from household work,
or that of the small shop, into that of the factory—and the factory developed
into enormous establishments through the investment of great sums of
money in the purchase and installation of ever-improving machinery, more
ingenious, more productive, more costly, but turning out more and better of
the finished product with each new device and new investment of capital.

III. DEVELOPMENT OF THE FACTORY SYSTEM.

The inventions by which the manufacturing of the world was transformed
from the household and the workshop to the great factory were the result of
years, generations indeed, of study of conditions one by one as they arose.
“No one of the inventions which were greatest in their effect,” says Hobson,
“was in the main attributable to the effort or ability of a single man: each
represented in its successful shape the addition of many successive
increments of discovery; in most cases the successful invention was the
slightly superior survivor of many similar attempts. This is the history of
most inventions. The pressure of industrial circumstances directs the
intelligence of many minds toward the comprehension of some single point
of difficulty, the common knowledge of the age induces many to reach
similar solutions, that solution which is slightly better adapted to the facts
comes out victorious, and the inventor, purveyor or in some cases the
robber is crowned as a great inventive genius.”
England was the earliest scene of the development of the factory system,
the bringing together of great buildings and centers of great masses of
machinery operated by water or steam power and manned by great numbers
of people—for however ingenious the machine a certain amount of human
intelligence is necessary for its management and the conduct of the work
which it is to perform. The reasons for the earlier development in England
are not difficult to find. It had its colonies in all parts of the world, from
which to draw the raw material and in which to market the manufactures,
for it for many years discouraged or prohibited manufacture in the colonies;
it had great shipping facilities for transporting its products to all parts of the
world, and to bring raw material and food supplies to its workers at home;
the ownership of its lands in great estates had a tendency to send to the
cities and manufacturing centers that part of the population which under
other circumstances would have employed itself in agriculture; the laboring
population yielded more readily to the methods of the manufacturing
interests than in other countries where trade guilds determined more
definitely the occupations and methods of occupation of the working

classes; and the comparative freedom from wars permitted a more rapid
growth than that of other countries in which disturbances of this character
were more frequent and more liable to frequency than in an insular country,
England. “When Crompton’s mule, Cartwright’s power loom and Watt’s
engines were transforming the industry of England,” says Hobson, “her
continental rivals had all their energies absorbed in wars and political
revolutions.”
Much of the wool and flax required in the English industries was produced
at home. The colonies supplied the other fibers; the ships returning from
their voyages to the colonies brought the raw silk; the absence of mountains
to separate the country and the people into districts and classes enabled the
interchange of labor and materials; the early development of rivers and
canals gave cheap transportation; the plentiful supply of coal encouraged
the development of steam power; and the proximity of iron ore and coal
aided in developing that other great manufacturing industry, iron and steel.
Mr. Mulhall, the celebrated statistician, estimates the value of the
manufactures of the United Kingdom in 1780 at 177 million pounds
sterling, France 147 million, Germany 50 million, Austria 30 million,
Russia, Italy and Spain 10 million each, and the United States 15 million. In
1896 he estimated the value of the manufactures of the same countries as
follows: United Kingdom, 876 million pounds sterling; France, 596 million;
Germany, 690 million; Austria, 328 million; Russia, 380 million; Italy, 190
million; Spain, 121 million; and the United States, 1,980 million. According
to his estimate the gain in the 116 years, from 1780 to 1896, was: United
Kingdom, from 191 to 876 million pounds sterling; France, from 115 to 596
million; Germany, from 50 to 690 million; Austria, from 30 to 328 million;
Russia, from 10 to 380 million; and the United States, from 15 to 1,980
million. Mr. Mulhall’s estimates put the total value of the manufactures of
continental Europe in 1780 at about 1½ times those of the United Kingdom;
in 1896 at about 3 times those of the United Kingdom. His estimates put the
value of manufactures in the United States in 1870 at about 3⅓ per cent that
of all Europe; in 1896 at about 55 per cent that of all Europe.
It must not be supposed, however, that this transformation was, by any
means, instantaneous. It was, in fact, a matter of slow growth, even in the
older countries, and still more so in those countries which had not yet
developed their natural products or their agricultural industries. In the case

of the United States, for example, the transformation from the hand to the
machine methods did not come until many years after that of the leading
countries of Europe. The reason for this slow movement on the part of the
United States is not difficult to understand. Her people were chiefly
engaged in agriculture, in felling the trees and clearing the lands in the
eastern part of the country, and in opening farms on the prairies of the great
West. Those who had capital to invest in enterprises other than that of
agriculture gave their attention to the construction of methods of
transportation, first, toll roads, stage coaches and pack trains, then, canals,
and finally railways. This occupied the attention of the people of this new
country for a generation after the people of Europe and especially England
were engaged in developing their manufacturing industries.
So it is not surprising to see that Mr. Mulhall’s figures show that English
manufactures in 1820 were nearly 6 times as much as those of the United
States, and in 1840, 4 times as much as those of this country; and even in
1860, considerably exceeded our own. But in the next twenty-year period
there came a great change. The Civil War in the United States, with the
home demands in the manufacturing section, the North, rapidly developed
the manufacturing industries, and the development thus created continued
after the close of that unhappy period. So his figures indicate that in 1888,
the next date which his table touches, that our manufactures were 1¾ times
as much as those of the United Kingdom, and in 1896, 2¼ times as much in
value as those of the United Kingdom and half as great as those of all
Europe. Accepting the figures of Eugene Parsons, elsewhere referred to, for
the European countries in 1904, and accepting the official figures of the
United States for that same year, we find that the figures of the value of
manufactures in the United States are nearly 3 times those accredited to the
United Kingdom and but little less than those of all Europe.
It is proper to say, however, that these statements, whether of Mulhall,
Parsons, or other authorities on this subject, are liable to be extremely
misleading unless carefully and intelligently considered. The reason of this
is found chiefly in the fact that the official figures of the United States are
made up on a materially different basis from those of the other countries in
question. To be sure, the figures of the United States are official and
therefore may be considered reliable as to the facts which they purport to
show, but in fact some of the things which they purport to show are

presumably quite different from those quoted for the other countries
included in these estimates—for they can be only estimates for the other
countries, since no country other than the United States takes a census of
manufactures (England is taking one as this text is being issued, but has not
yet completed it), and the figures quoted regarding their manufactures are
necessarily estimates. Generally speaking, it may be said that the census of
the United States includes certain articles which are not usually classified as
manufactures in other countries, such as products of slaughtering, canning,
the milling industry, etc. Aside from this it must also be remembered that
the usually quoted figures of the United States’ manufactures include many
duplications, due, as elsewhere explained, to the fact that the total so quoted
is merely an aggregation of the product of all factories; and as the product
of one factory often becomes the manufacturing material of another, its
value is again reported by the manufacturer who reports merely the total
value of his products. These duplications are so numerous and prevail in
such important and costly articles that the census estimates the net or true
value of our manufactures at but about two-thirds as much as the usually
quoted figures of gross products. It would appear, therefore, that the usually
quoted figures of “manufactures in the United States,” when compared with
the estimate of manufacturing in other countries, should be reduced about
one-third to make them properly comparable with those usually quoted for
the other countries of the world. Even if this were done, however, it would
show the value of the United States’ manufactures probably about twice as
great as those of the United Kingdom and probably little less than those of
continental Europe.
Taking Mulhall’s figures for the other countries which he includes, as
presented in a table on another page of this text, it will be seen that the chief
growth in manufacturing during the 116 years covered by the table under
consideration has occurred in the last third of the period. English
manufactures, he says, grew from 177 million pounds sterling to 290
million in the 40-year period from 1780 to 1820; from 290 to 577 million in
the next 40 years, from 1820 to 1860; and from 577 to 976 million in the 36
years from 1860 to 1896—a growth of 113 million pounds sterling in the
first 40 years, of 287 million in the second 40 years, and of 400 million in
the third period of 36 years. Germany showed a more rapid growth in the
third period; the growth in the first 40-year period being from 50 million

pounds sterling to 85 million; in the second 40-year period, from 85 to 310
million; and in the third period, of 36 years only, from 310 to 690 million.
France has not made as rapid a gain as Germany, the figures showing her
products in 1780, 147 million pounds sterling; in 1840, 220 million; in
1860, 380 million; and in 1896, 596 million.
The total of Mulhall’s table, including the somewhat over-estimated figures
of the United States, and relating chiefly to the products of Europe and the
United States, show total manufactures of all the countries named, in 1780,
480 million pounds sterling; in 1820, 865 million; in 1860, 2,404 million;
and in 1896, 5,710 million, again indicating that the chief growth has
occurred in the last third of the period under consideration, the period of
transformation from the hand industries to those of machine production in
conjunction with vast sums of capital and plentiful transportation facilities
for collecting the raw material and distributing the finished product.
When we consider nations or groups of people and their use of modern
methods of manufacturing, we may properly say that the principal
manufacturing sections of the world are western Europe and the United
States, and that, as above indicated, the bulk of the world’s manufactures by
the factory process are now produced in those two sections of the world.
Manufacturing by machinery may perhaps be said to have originated in
England, spreading thence to France, to Germany, and westward to the
United States. More recently it has extended in a somewhat limited form
into Canada in the west and India and Japan at the extreme east. India has
utilized modern methods of manufacture, especially in cottons and certain
other industries, for more than a score of years, while the one other country
of the Orient which has as yet entered the field of machine manufacture,
Japan, though somewhat later in adopting machine methods, has been more
active and extended modern manufacturing to a much greater variety of
industries than have the people of India.
While certain of the European countries were earlier in the manufacturing
field than the United States, the larger population, the greater supply of
natural materials, the larger supplies of fuel for cheap power, the ingenuity
of the American workman, and the enormous domestic demand of an active
and prosperous people, have brought the United States clearly to the head of
the list of manufacturing nations. It may safely be said that the value of

manufactures produced in the United States is approximately twice as great
as that of any other manufacturing nation, and that the stated value of our
manufactures is nearly as great as the estimated value of the manufactures
of all Europe. The latest official figures on the value of the manufactures of
the United States are those of the Census Bureau, which put the value of
manufactures produced in the calendar year 1904, as recorded by the
Census of 1905, at 16,867 million dollars, including in this an estimate of a
little more than 2 billion dollars’ worth of manufactures classed as
“mechanical and neighborhood industries,” which were included in all
former census reports, but not recorded by the Census of 1905, which was
by law merely a census of manufactures produced under “the factory
system.”
No other country than the United States takes a periodic census of its
manufactures. The United Kingdom is at the present time about taking for
the first time a census of its manufactures, but no figures with reference
thereto are as yet available. As a consequence all statements regarding the
value of manufactures of European countries, or indeed of any country
other than the United States, are estimates and estimates only. True, they are
based upon certain known facts of quantities of raw materials consumed in
manufacturing, values of manufactures exported, and the estimated
proportion which these form of the total manufactures; but in no other
country than the United States are there available official statements of the
total value of manufactures produced in the country in question. Therefore
the estimates of the value of the manufactures produced by European
countries which are quoted from time to time and which are presented
elsewhere in this text, must be accepted as merely estimates. A
comparatively recent estimate, and one which has been given wide
publicity, and appears to have been generally accepted, is that of William J.
Clark, published in The Engineering Magazine in 1904, which put the value
of the manufactures of the United Kingdom at 5 billion dollars, Germany
4,600 million, France 3,450 million, Austria-Hungary 2 billion, Russia
1,980 million, Italy 1,700 million, Belgium 750 million. These estimates, if
accepted, would bring the value of the manufactures of the countries
enumerated to a figure slightly in excess of that officially reported by the
Census Office as the value of the product of all manufacturing
establishments of the United States in 1904. The figures above quoted for

certain European countries present however no estimate of the value of the
product of Switzerland, Spain, Holland and the Scandinavian countries, so
that it probably might be said with greater accuracy that the stated value of
the manufactures of the United States is about equal to the estimated value
of continental Europe, and about three times as great as the estimated value
of the manufactures of the United Kingdom.
It is proper, however, before leaving this question of the relative value of
the manufactures of the various countries, to again call attention to the fact
that the official figures of the value of manufactures produced in the United
States include certain articles not classed in certain other countries as
manufactures, and in addition to this contain many duplications due to the
fact that the products of one manufacturer frequently become the raw
material of another, and thus the grand totals which merely combine the
stated value of the product of each manufacturer necessarily include a
second and in some cases a third valuation of the products thus utilized. The
manufacturer of yarn, for example, reports to the Census Office the full
value of the product of his factory. The manufacturer of cloth, who utilized
that yarn, also reports the full value of the product of his factory, and thus
includes in that valuation the value of the yarn purchased by him but
already reported by the manufacturer of yarn. The manufacturer of clothing,
in stating the value of the product of his factory, includes the sums which he
paid for the cloth already reported by the manufacturer of clothing and
included in his statement. Thus many duplications occur in our census
statement of the gross value of the products of the manufacturing industries
of the United States. “This gross value,” says the Census Report of 1900,
page cxxxix, “does not represent the final value of the manufactured
products of the country. It does fairly represent the total value of
commercial transactions involved in manufacturing enterprises.... As the
finished products of one branch of manufacture are constantly used as
materials in other branches, in the ascending scale of modern industry, it
follows that they are counted over and over again, swelling in this manner
the gross total value of products. Thus in cotton manufacture, the product of
the yarn mill, manufacturing yarn for sale as the material of the cloth mill,
and the product of the cloth mill as the material for the manufacturer, so that
by the time the aggregate is made the value of the yarn has been counted
three times and the value of the cloth twice.... Duplications and re-

duplications of this sort run all through the total value of products as
reported by this (the Census) office. * * * The net or true value of the
products is found by subtracting from the gross value the cost of all
materials purchased in a partially manufactured form. In 1900 the cost of
these manufactures was $4,633,804,967 and” (subtracting this sum from the
gross value, $13,004,400,143), “the net value of products was therefore
$8,370,595,176.”
When it is further considered that the Census of Manufactures in the United
States includes in its list of manufactures all products of slaughtering and
meat-packing establishments wholesale, valued in 1905 at 112 million
dollars, the product of printing and publishing newspapers and periodicals
only, valued at 309 million, and the product of canning and preserving fish,
oysters and vegetables, valued at over 100 million—it will be seen that an
effort to determine even approximately the share of the world’s
manufactures produced by the United States or by the various
manufacturing nations of the world is a difficult—an impossible—task.
It may safely be asserted, however, that the United States is the world’s
greatest manufacturing nation, and that the value of our manufactures
exceeds those of any other country. This is due, as already indicated, to the
fact that our supply of raw materials is greater than that of any other
country, our supply of materials for producing power also greater than that
of any other country, our use of machinery for manufacturing far in advance
of that of any other nation, the activity of our inventors and the skill of our
workmen quite equal to those of any other part of the world, and the
demands of our home population upon our own manufacturers far in excess
of those of any other country, both by reason of the large population and
high purchasing power of a people prosperous and active in all lines of
industry—agriculture, transportation, manufacture. The country which
produces three-fourths of the world’s cotton, twice as much iron and steel as
any other single nation, as much copper as all of the remainder of the world
combined, more of wood suitable for use in manufacturing than any other
country, more wool than any other of the manufacturing nations, and a
population much larger than that of any other country actively engaged in
the manufacturing industries, has quite naturally and almost necessarily
become the leading manufacturer of the world.

The growth of the manufacturing industry in the United States has been
phenomenal. Stated in the methods of valuation followed by the census
above referred to—the gross valuation—the value of manufactures
produced in the United States has been, speaking in round terms, in 1850, 1
billion dollars, in 1860, a little less than 2 billion, in 1870, 4¼ billion, in
1880, 5⅓ billion, in 1890, 9⅓ billion, in 1900, 13 billion, and in 1905, a
little less than 17 billion, though the figures usually quoted for 1905 are
14.8 billion, owing to the fact that the Census of 1905 only included factory
products, and added parenthetically an estimate of 2 billion as the probable
value of the “mechanical and neighborhood industries,” thus bringing up to
nearly 17 billion the total properly comparable with the totals of earlier
periods, which in all cases included the mechanical and neighborhood
industries.
That this rapid growth in the value of manufactures has been far in excess
of the consuming capacity of the home population is evidenced by the
growth in exportation of manufactures, which aggregated in 1880, 122
million dollars, in 1890, 179 million, in 1900, 484 million, and in 1908, 750
million. Manufactures formed in 1880 but 15 per cent of the total exports,
in 1890, 23 per cent, in 1900, 35 per cent, and in 1908, 41 per cent of the
total merchandise exported from the United States.

IV. CAPITAL IN MANUFACTURING.

Another factor which entered into the modern system of production, and a
very important one, was that of capital. The factory could not be established
or operated without considerable amounts of money or its equivalent,
credit. The machinery which transformed the raw material into the finished
product, the material itself, the very buildings in which the work was
performed, the payment for the transportation which brought it together, the
wages of the men and women engaged in the work, all required capital, and
in large sums. The accumulation of this capital, its management, the
keeping of accounts of cost of material and labor and of the finished
product, required financial skill and acquaintance in the markets in which
this capital could be obtained; for often the sums required were in excess of
the quantity possessed by the individual who had invested his all in the
buildings and machinery, and must needs borrow of some other capitalist
the additional sums required for purchasing material and paying the wages
of his workmen. Sometimes the owner of the capital preferred to supply it
and take a proportionate share in the earnings of the factory, and thus
developed the company. Then, as the business grew and the investments of
various men in a single establishment increased, it became necessary for
them to take an active share in the management either in person or by
representatives who became known as the “directors” of the work.
Thus arose the successors of the individual manufacturer, the company, and
the corporation. Man must die and the death of an individual manufacturer,
or the manager of a manufacturing firm or partnership, must affect
disadvantageously the interests of the factory and its employes. Thus the
importance of organizations which would continue unchanged in form and
general management in case of the absence or death of any individual. This
was one of the reasons for the establishment of the corporation. More
important than this was the facility which it offered to holders of capital in
sums large or small to invest their money in manufacturing without being
compelled to give their individual attention to the industry in which the
money was invested. The board of directors, which the investors might

choose, managed the business either by personal attention or by the
selection of competent and experienced persons for that service, and the
investor felt assured that his money would be properly managed by the
competent business men forming the board of directors and the experts
whom these directors might employ to manage the details. Hence the
corporation, under which the manufacturing establishments grew to
enormous proportions, employing thousands and tens of thousands of
people, and bringing material from the places in which it could be most
cheaply obtained, investing money if need be in facilities for transporting
and even producing the raw material, and cheapening the cost of
production.
Another step which increased the importance of capital as a factor in the
great manufacturing industries of the world came in more recent
combinations of great corporations, in which a number of great
manufacturing establishments agree to operate under one general
management, thus adjusting production in the various lines of manufacture
to the general demand, existing supply and prospective consuming power of
the markets, establishing systematic methods for exploiting and selling the
finished product, and so further minimizing cost of production and
distribution. This last combination, the corporation of corporations, is
generally known as the “trust” or “combine,” and under it the great
manufacturing industries of the world have reached their greatest
development, the cost of production has been minimized, the field for the
selection of the materials has been enlarged, and the area in which the
products are offered for sale also greatly extended.
While these great organizations, made up by placing under one general
management a number of great establishments manufacturing articles of
like character, are doubtless able to reduce the cost of production and
distribution and prevent production in excess of probable demand, it is also
true that they are in many cases able to exercise a greater control over
prices of labor, of material and of finished product than when operating
singly.
Meantime the world’s supply of money for investing in manufacturing, and
the industries which contribute thereto, greatly increased. The world’s gold
production in the decade ending with 1840 averaged but 13½ million

dollars per annum. Then, owing to the gold discoveries in California and a
little later in Australia, the production so much increased that the annual
average in the decade ending with 1860 was 135 million dollars per annum,
or ten times as much as on the average in the decade ending with 1840. For
the next 35 years the production averaged about 125 million per annum.
Then, suddenly, through the discoveries of great gold deposits in Africa and
Alaska, the production began to exceed 200 million per annum, then 300
million, and in 1906, 1907, 1908 and 1909 averaged more than 400 million
per annum, or as much in a single year as in the 40 years from 1800 to
1840.
Gold, unlike most other productions prized by man, is not consumed. It has
enduring qualities; and the facility with which it can be transformed without
material loss from one form for use to any other required form enables man
to retain and accumulate a large part of the products of a long period. The
wheat produced in one year is eaten before the next year is ended. The
cotton crop of one summer is turned into clothing and worn to rags by the
time another crop is ready for the factory and workshop. But the gold is
conserved and utilized as money or the basis of money, and the
accumulations of the recurring years merely increase the stock of that
generally accepted medium of exchange. To be sure a small share, perhaps
one-fifth, is used in manufacturing and the arts, and a small percentage lost
in various ways; but probably three-fourths of the gold product enters
circulation in the form of money or its equivalent, and thus increases very
rapidly the world’s money supply.
Meantime the systems built up in the business world by which business is
performed with mere pieces of paper which represent the gold and silver
accumulations have greatly multiplied the available stock of money; and the
ease with which it may be transferred from place to place, from country to
country, and from continent to continent also adds to its availability and
frequency of use in the world’s transactions. The supply of that article
which the manufacturing and business world terms “money,” whether in the
form of gold, silver, paper, credits, instruments of exchange, or otherwise,
has increased beyond accurate computation. The world’s stock of gold has,
according to the estimates of experts, doubled in the last 25 years; and it is
probable that the supplies of other forms of currency; which serve as
money; have increased quite as rapidly.

All of this increase in the world’s supply of money has increased the
amount available for investment in manufacturing, and the increased use of
machinery meantime in that industry has required great increases in the
investment. While there are no ways of accurately measuring the world’s
investments in manufacturing, it is practicable to do so in the case of the
United States, the only country which regularly takes a census of its
manufacturing industries. Its figures for the census years from 1850 to
1905, as to number of establishments, persons employed, wages paid,
capital invested and value of product, are as follows:

Wages Cost of Value of
Establish- Capital, Wage-
Census Paid, Material, Product,
ments, million earners,
year. million million million
number. dollars. number.
dollars. dollars. dollars.
1850 123,025 533 957,059 237 555 1,019
1860 140,433 1,010 1,311,246 379 1,032 1,886
1870 252,148 2,118 2,053,996 776 2,488 4,232
1880 253,852 2,790 2,732,595 948 3,397 5,370
1890 355,415 6,525 4,251,613 1,891 5,162 9,372
1900 512,254 9,817 5,308,406 2,322 7,345 13,004
1905 533,769 13,872 6,157,751 3,017 9,498 16,867

It will be seen from a study of this statement, which compares conditions in
the manufacturing industries at each recurring census from 1850 to 1905,
that while the number of establishments in 1905 was four and one-third
times as many as in 1850 the number of wage-earners was six and one-half
times as many, the wages paid twelve and one-third times as much, the
value of the product sixteen and one-half times as much and the capital
employed twenty-six times as much.
This gives at least a suggestion as to the growth of investment in
manufacturing. So far as relates to the United States, the only country for
which we have statistics on this subject, the enormous increase in the use of
costly machinery in manufacturing has increased the sums required for
carrying on the industry, and machinery has in a marked degree been
substituted for man in the factory operations. The number of wage-earners
employed increased, it will be seen, a little more than fivefold while the

capital employed increased twenty-fivefold. The tendency to bring the
manufacturing industries into large establishments is also shown in some
degree in the fact that while the number of establishments increased but
about threefold the number of employes increased fivefold and the value of
the manufactures turned out increased twelvefold.
Even these figures do not, however, give a complete view of the relative
growth in the number of large manufacturing establishments, the capital
invested and the product turned out, because of the fact that the census
enumeration of “manufacturing establishments” includes hand and
household industries, such as blacksmith shops, wheelwright and wagon
repair shops, boot and shoe repairers, harness makers, tailor shops, dress
making, millinery, carpenter shops, custom, saw and gristmills, etc., etc., in
all of which the capital invested or the product per establishment at this
time averages probably little more than formerly. It is in the greater
establishments, the factories, that the increase in investment and in
producing power per factory has occurred. The Census of 1905, which was
by law confined to manufacturing establishments conducted under the
factory system, and that exclusive of neighborhood and mechanical
industries, found that the number of establishments manufacturing for the
general market and not merely for local orders or neighborhood
consumption, and which could thus be considered as manufacturing
establishments conducted under the factory system, was but 216,262, while
under the former method of including hand and neighborhood industries the
number of establishments would, it is estimated by the census, have been in
1905, 533,769. The 216,262 establishments enumerated as “conducted
under the factory system” employed $12,686,000,000 capital and 5,470,321
wage-earners, or an average of 25 each, and turned out $14,802,000,000
worth of manufactures; while the 317,506 smaller establishments, the “hand
and neighborhood industries” formerly included in the general census
returns, are estimated as having employed $1,186,000,000 of capital and
687,430 wage-earners, or an average of about 2 employes each, and turned
out $2,066,000,000 worth of manufactures.
It will thus be seen that the larger manufacturing establishments, those
“conducted under the factory system producing articles for the general
market as distinguished from the product made upon order for a customer,”
are those proper to be included in a study of the development, capital

invested, persons employed, wages paid, material used and value of the
product turned out. Unfortunately a study in this form cannot be extended
over any considerable term of years, because of the fact that the United
States census only began in 1905 to make this distinction or separation of
the true “factory” from the great mass of establishments turning out
manufactured products. It did, however, present in 1905 an estimate for the
year 1900 of the number of establishments properly comparable with those
enumerated in the factory census of 1905. This estimate puts the total
number of “establishments conducted under the factory system” in 1900 at
207,562, and in 1905 at 216,262, an increase of but 4.2 per cent in the
number, while the capital employed in 1900 was $8,979,000,000, and in
1905, $12,686,000,000, an increase of 41.3 per cent; the wage-earners in
1900, 4,715,023, and in 1905, 5,470,321, an increase of 16 per cent; wages
paid in 1900, $1,736,000,000, and in 1905, $2,266,000,000, an increase of
30.5 per cent; materials used in 1900, $6,578,000,000, and in 1905,
$8,504,000,000, an increase of 29.3 per cent; value of product in 1900,
$11,411,000,000, and in 1905, $14,802,000,000, an increase of 29.7 per
cent.
It will thus be seen that even in the recent period, 1900 to 1905, the
percentage of growth in “capital invested” was greater than in any other
important branches of the industry, the increases being: in capital 41.3 per
cent, in wages paid 30.5 per cent, in value of product 29.7 per cent, and in
number of wage-earners 16 per cent, while the number of establishments
increased meantime but 4.2 per cent. It is thus apparent that although the
tendency of the past thirty years has been distinctly toward an enlargement
of the factory through the increase in capitalization rather than an increase
in the number of establishments, that tendency still continues as the most
distinctly marked characteristic of the development of the period 1900 to
1905.
Unfortunately the facilities for comparing the capitalization, product, etc.,
in 1905 with that of earlier years only extends, in its relation to all the
factory industries, to the Census of 1900. In a few of the important
industries, however, it is possible to compare conditions in 1900 with those
of earlier censuses. The Census of 1900 shows that the number of boot and
shoe factories in the United States fell from 1,959 in 1880 to 1,600 in the
year 1900, while the capitalization increased from an average of $21,957

per factory to $63,622 per factory, the number of wage-earners from 57 to
89 per factory, the wages paid from $21,951 to $36,985 per factory, and the
value of the year’s product turned out from $84,763 per factory to $163,142
per factory. In cotton goods the number of establishments in 1880 was
1,005, and in 1900, 1,055, the capital per establishment in 1880, $218,412,
and in 1900, $442,882, the number of wage-earners in 1880, 185 per
establishment, and in 1900, 287, the wages paid in 1880, $45,387 per
establishment, and in 1900, $80,180, the value of product in 1880, $209,901
per establishment, and in 1900, $362,349. In iron and steel the number of
establishments was in 1880, 699, and in 1900, 668, average capital per
establishment in 1880, $294,652, and in 1900, $858,371, wage-earners per
establishment in 1880, 197, and in 1900, 333, wages paid per establishment
in 1880, $78,020, and in 1900, $180,869, value of product turned out per
establishment in 1880, $418,583, and in 1900, $1,203,545. In woolen goods
the number of factories fell from 1,990 in 1880 to 1,035 in 1900, the capital
per establishment increased from $48,289 in 1880 to $120,180 in 1900, and
the value of the product increased from $53,755 per establishment in 1880
to $114,425 in 1900.
It will be seen from the figures above presented that in these four great
industries the tendency from 1880 to 1900 was distinctly in the direction of
reduction of the number of factories, and a greater increase in capitalization
than in that of persons employed, wages paid or in value of product turned
out; while the figures covering the operations of the entire factory system
for the period 1900 to 1905 also show a continuation of this same tendency
toward a greater growth in capital than in persons employed, wages paid or
value of product turned out.

V. TRUSTS AND COMBINATIONS.

The great increase in the size of the manufacturing establishment and of the
capital invested in the manufacturing industry which necessarily followed
the adoption of expensive machinery for manufacturing purposes was
followed by a tendency toward co-operation and mutual agreements among
the great organizations engaged in similar lines of work, the purpose being
to reduce expenses, increase profits and control prices. Originally the
persons, firms or companies engaged in manufacturing disposed of their
products as best they could and in direct competition with others in their
own line of manufacture. If the market for their product was good they
demanded higher prices. If there was an oversupply they sold for whatever
profit they could get, or if necessary at cost or even lower than cost, in order
to prevent accumulations of stocks or the closing of their factories. The
competition thus grew intense. In order to dispose of their goods they must
put many salesmen into the field, they must advertise freely, and often their
orders came from such distances that the cost of delivery formed a large
percentage of the cost of the goods by the time they reached the purchaser.
This competition of one manufacturer with another making the same line of
goods was not only expensive but resulted in working at cross purposes in
many ways, and in loss of energy and money. So certain of the companies
or corporations engaged in like industries began to make agreements among
themselves by which they could co-operate in distributing their supplies to a
given field and reduce the expenses of supplying that field. It was argued
that the people of any section would only use a given amount of any
standard product, and that the expense which the various manufacturers
were incurring in competing among themselves for their respective shares
in that trade might be materially reduced by an agreement through which
the extraordinary efforts to sell in competition with each other should be
abandoned and each manufacturer receive the share of the sales to which
his proportion of production would entitle him. Not only would this reduce
unnecessary expenses but it would in some degree render possible the
maintenance of prices as they might be mutually agreed upon.

The first steps in combinations or agreements of this sort are known as
“pools.” “This form of agreement,” says J. Russell Smith, “provides that
each of the makers of a certain material for a certain territory should make a
stipulated proportion of the product to be sold at an agreed price. If a
factory made more than its share the owner made a cash payment to the
pool and the money went to some manufacturer who had made less than his
share. The weak spot of these pools was their absolute lack of power of
coercion and that no member had faith in the others.” Often members took
advantage of technicalities to violate the spirit of the agreement, and the
agreements were short-lived. The system, while it is still working
satisfactorily in Germany under the name of the “cartel,” failed to give
satisfactory results in the United States, and also met with disaster in the
fact that the courts held it to be a combination in restraint of trade and
therefore unlawful.
To overcome these defects and create a system of division of production,
control of prices and distribution of profits in proportion to the value of the
plants co-operating, a new form of agreement was devised. It provided that
the companies or corporations entering the agreement for mutual operation
and proportionate distribution of profits should transfer the shares of their
respective properties to a new corporation with full powers to manage the
same, receiving in lieu thereof certificates which should entitle the holder to
his proportionate share of the net earnings of the new corporation. “Under
this form of organization,” says the Universal Encyclopedia, “the
stockholders of each of the separate companies assigned their stock to a few
trustees, giving thus an irrevocable power of attorney. In lieu of the stock
assigned the trustees issued stock certificates to the stockholders of the
separate companies and upon these trust certificates profits were divided.
All of the earnings of the different members of the company were pooled
and each manufacturer received his proportionate share as evidenced by the
certificates, regardless of the question whether his establishment was
running or closed. The trustees, having in their hands the voting power of
all the stockholders, elected whatever persons seemed to them best as
officers of the separate companies. In this way the management was
absolutely unified and the interests of all parties concerned became as one.
The courts finally holding that this trust agreement was illegal, the plan was
later adopted of organizing a new company which should buy up all of the

separate plants of the different companies entering the combination, so that
in this way a unified management was secured within the law. In order that
a more convenient form of handling the properties of the different
companies might be secured, a third form of organization was later adopted
in which a new company is organized as a stockholding company. This
company then buys up all, or a large proportion of, the stock of each of the
companies coming into the organization and controls these stocks. The
officers of the central organization are thus in a position, by voting the
stocks of different companies, to elect the directors and officers of those
companies and thus control their policy.”
The advantages of this combination over competition are summed up by the
Encyclopedia Britannica, in its 1902 edition, as follows: (1) The cost of
selling may be greatly lessened; (2) the salaries of commercial travelers and
their traveling expenses can be largely reduced; (3) if different
manufacturing establishments, scattered throughout the country, are brought
under one management it will be possible for orders for goods to be
distributed so that goods can be dispatched to customers in each case from
the nearest establishment and freight expenses reduced; (4) when several
establishments are combined the most skillful of the managers can be
selected for the general manager; (5) each business manager is likely to
have some special excellence in his methods of management, and by
combining the establishments it is possible to so distribute this managerial
skill as to give to each branch of the work the man best suited to its
conduct; (6) it is also possible to distribute the various branches of the
manufacturing to the various mills or factories of the combination best
suited for that particular branch of the work; (7) the advantages of unifying
in one establishment the machinery of selling the product of all; (8) the
ability of an establishment to fill large orders on short notice gains and
retains business; (9) the great financial and business strength and skill of the
combined organization gives it special facilities for pushing its goods into
foreign markets, as is shown by the success abroad of the Standard Oil
Company, and the American Tobacco Company; (10) better facilities for
dealing with credits and thus aiding the business community.
Whether trusts, through their control of prices of the particular commodities
which they manufacture, have actually advanced the selling price to the
consumer, has been and is still the subject of much discussion. It has been

urged that the mere reduction of the cost of production and distribution
which results from the combinations would enable them to realize larger
profits than formerly, even if the manufactures are sold at former prices, and
that although their profits have doubtless been large it has not been
accomplished through an actual advance in prices to the public, but rather
through economies of production and sale. Nelson’s Encyclopedia, issued in
1908, discussing this subject, says, “The weight of evidence indicates that,
judged from the margin between price and finished product and cost of raw
materials, prices are increased somewhat by the existence of trusts. It is a
fair conclusion that the actual prices of goods have as a rule been somewhat
increased by trusts, although not in the measure that was anticipated at the
inception of the trust movement.” The Encyclopedia Britannica of 1902 in
discussing this subject says, “Experience seems to show beyond question
that whenever the combinations are powerful enough to secure a
monopolistic control it has usually been the policy to increase the prices
above those obtained during the period of competition which preceded the
formation of the combination.”
As to the effect of trusts upon wages it may be said that up to the present
time no very strongly marked change is perceptible in the matter of rates of
wages paid by the trusts as compared with other employers in the same line.
Doubtless the combinations of numerous establishments under one general
management have reduced the numbers of employes in certain lines, but in
those lines in which the trusts require labor for the carrying on of their work
no marked changes in the rates of wages have been developed as a result of
the combinations. In steadiness of employment for the men and women
engaged in the work of the establishments it seems probable that the trusts
or great combinations of this character offer certain advantages, since their
business is less liable to fluctuations than that of the smaller, and even in
the absence of orders they are more likely to continue work accumulating
stocks for future use than is the small manufacturer with limited capital or
credits. In the matter of relations with the labor organizations certain of the
trusts have made long time agreements with the labor organizations, thus
adding to the steadiness of employment, though in some cases the trusts
have declined to recognize the demands of labor organizations.
An example of the causes and methods of the combination of kindred
manufacturing interests under one general central organization is found in

the United States Steel Corporation as described by J. Russell Smith, in his
“The Story of Iron and Steel.” No industry, he says, is naturally so uncertain
and consequently so competitive as the steel industry. The demand for the
product is fitful and uncertain because most of it goes into new
constructions and new enterprises, and these are notorious for the spurts and
depressions of demand which affect them.... The uncontrolled iron and steel
market can make wild rises unknown to many commodities, because it is
difficult to suddenly increase the amount of manufactures in response to
sudden demand. A wave of prosperity sends a thousand industries which
must have iron and steel clamoring, begging for steel. When the industrial
sky darkens purchases of iron and steel cease as suddenly as they began and
the price must tumble if the output is sold. These were the normal
conditions through which all steel makers lived down to the depression of
1893-98. The numerous independent manufacturers thought that if they
could get together and agree upon prices they could improve their
condition. Attempts to achieve this in the form of pools provided that each
of the makers of a certain material should make a stipulated proportion of
the product to be sold at an agreed price, and if a factory made more than its
share, the owner made a cash payment to the pool. The weak part of these
pools was their absolute lack of power of coercion, and the further fact that
no member had faith in the other.
The failures in the attempt at price control resulted in the consolidation of
many companies, formerly rivals, under one control. The chief companies
which later became members of the United States Steel Corporation formed
two distinct groups, each group classified according to the product. One
group included the manufacturers of unfinished steel, such as ingots, billets,
plates and slabs, and included the Carnegie Steel Company, the Federal
Steel Company, and the National Steel Company. Other companies which
purchased the product of these manufacturers of unfinished steel and turned
it into the finished state included the American Tin Plate Company, the
National Tube Company, the American Steel and Wire Company and
others. The first thought which came to the minds of this finishing group
when hard times compelled them to cut down costs was to cheapen their
raw material (such as pig iron, steel ingots, billets, etc.) by becoming
manufacturers of their own pig iron. The Carnegie Steel Company had
already done this and had obtained facilities for transporting the ore to the

coal fields of Ohio and Pennsylvania and facilities for transforming the ore
into the classes of material which it supplied. The Carnegie Steel Company
thus became independent of other companies in the supply of its fuel, its
ore, and the transportation of the same, and all of the requirements of
operation. When the finishing companies announced their purpose to also
supply themselves with the same facilities for producing their own raw
material through the ownership of ore lands, transportation, facilities for
smelting, manufacture of pig iron and the steel which they themselves
required, the raw materials group could not view this operation with
unconcern. It meant the loss of their market and necessity of seeking new
markets in the United States or in foreign countries. As a consequence, the
companies designated as the raw materials group, making pig iron, steel
billets, etc., announced that they would establish their own finishing plants
and thus compete directly with the group of companies which had formerly
occupied the field without interference by the great organizations
transforming the ore into the earlier processes of pig iron and steel billets.
Mr. Carnegie announced that he would build a finishing mill in northern
Ohio at the end of his ore railway which would eclipse anything that the
world had ever seen and would be in equipment without a rival in the
world. The Federal Steel Company increased its holdings of ore and coal, of
upper-lake railways, and of lake steamers, and prepared to establish its
plants for turning out finished products. Thus was threatened a doubling of
the capacity of production of iron and steel in all of its stages, a capacity
already far beyond that of the markets of the United States. Pools had
failed, and the earlier trusts, aiming at monopolizing each line of the iron
trade, had in the first temporary depression come face to face with the
immediate prospect of ruinous competition among themselves. Then came
the supreme effort at controlling prices through the creation of the most
stupendous corporation that man has yet dared to launch—the United States
Steel Corporation. This combination included most of the companies of
both groups referred to—the producers of unfinished steel and those
transforming the same into the finished product. The combination formed
under the leadership of Mr. J. Pierpont Morgan controlled two-thirds of the
steel output of the country.
The new company began business in April, 1901, and a comparison of
prices since that date with those of earlier years shows regularity and

steadiness of prices rather than any marked decline or advance. “This price-
steadying,” says J. Russell Smith, “is of incalculable benefit to the
independent manufacturer (as well as to the combinations) even when it
limits the heights to which a price spurt will go. Rapidly rising prices start a
feverish, intoxicated condition of the market very pleasant while it lasts, but
followed by a more unpleasant reaction; therefore the Trust tries to keep
sober and keep its little brothers sober also, and all are profiting by the new
temperance.... Despite its efforts at control, the Trust is not as near
monopoly as it was the day it began. The four full years of its operation,
1902-1905, inclusive, did not indicate any increased share of production.
The bulletin of the American Iron and Steel Association shows that during
these four years there was an almost universal decline in the percentages of
iron and steel products made by the Trust.”