Chart XVII. Grain-Crops of the United States.

Year. Bushels. 1865 1,127,499,187 1866 1,343,027,868 1867 1,329,729,400 1868 1,450,789,000 1869 1,491,412,100 1870 1,629,027,600 1871 1,528,776,100 1872 1,664,331,600 1873 1,538,892,891 1874 1,455,180,200 1875 2,032,235,300 1876 1,962,821,600 1877 2,178,934,646 1878 2,302,254,950 1879 2,434,884,541 1880 2,448,079,181 1881 2,699,394,496 1882 2,699,394,496 1883 2,623,319,089

Not even Americans have any adequate knowledge of the productive capacity of the United States. The grain-fields are not yet all occupied; and we can easily produce the total cotton consumption of the world on that quantity of land in Texas alone by which the whole cultivable area of that State exceeds the corresponding area of the empire of Austria-Hungary (see Chart No. XVIII, which shows the remarkable proportion of land possessed by the United States as compared with European countries); and the exports of agricultural food from the United States are now six times what they were in 1850, about the time when Mr. Mill made the above statements. Immense areas of our soil have not yet been broken by the plow, and the quantities of cereals grown in the United States seem to be steadily increasing. In fact, the greatest grain-crop yet grown in this country was that of 1882. The comparison of the crops of late years with those just succeeding the war (as seen in Chart No. XVII) shows a very suggestive increase; since it indicates where employment has been given to vast numbers of laborers, and where investment has been found for our rapidly growing capital.(302)



7. —by the emigration of Capital.

This brings us to the last of the counter-forces which check the downward tendency of profits in a country whose capital increases faster than that of its neighbors, and whose profits are therefore nearer to the minimum. This is, the perpetual overflow of capital into colonies or foreign countries, to seek higher profits than can be obtained at home. I believe this to have been for many years one of the principal causes by which the decline of profits in England has been arrested. It has a twofold operation: In the first place, it does what a fire, or an inundation, or a commercial crisis would have done—it carries off a part of the increase of capital from which the reduction of profits proceeds; secondly, the capital so carried off is not lost, but is chiefly employed either in founding colonies, which become large exporters of cheap agricultural produce, or in extending and perhaps improving the agriculture of older communities.

In countries which are further advanced in industry and population, and have therefore a lower rate of profit, than others, there is always, long before the actual minimum is reached, a practical minimum, viz., when profits have fallen so much below what they are elsewhere that, were they to fall lower, all further accumulations would go abroad. As long as there are old countries where capital increases very rapidly, and new countries where profit is still high, profits in the old countries will not sink to the rate which would put a stop to accumulation: the fall is stopped at the point which sends capital abroad.



Chapter IV. Consequences Of The Tendency Of Profits To A Minimum, And The Stationary State.



1. Abstraction of Capital not necessarily a national loss.

The theory of the effect of accumulation on profits must greatly abate, or rather, altogether destroy, in countries where profits are low, the immense importance which used to be attached by political economists to the effects which an event or a measure of government might have in adding to or subtracting from the capital of the country. We have now seen that the lowness of profits is a proof that the spirit of accumulation is so active, and that the increase of capital has proceeded at so rapid a rate, as to outstrip the two counter-agencies, improvements in production and increased supply of cheap necessaries from abroad. A sudden abstraction of capital, unless of inordinate amount, [would not] have any real effect in impoverishing the country. After a few months or years, there would exist in the country just as much capital as if none had been taken away. The abstraction, by raising profits and interest, would give a fresh stimulus to the accumulative principle, which would speedily fill up the vacuum. Probably, indeed, the only effect that would ensue would be that for some time afterward less capital would be exported, and less thrown away in hazardous speculation.

In the first place, then, this view of things greatly weakens, in a wealthy and industrious country, the force of the economical argument against the expenditure of public money for really valuable, even though industriously unproductive, purposes. In poor countries, the capital of the country requires the legislator's sedulous care; he is bound to be most cautious of encroaching upon it, and should favor to the utmost its accumulation at home, and its introduction from abroad. But in rich, populous, and highly cultivated countries, it is not capital which is the deficient element, but fertile land; and what the legislator should desire and promote, is not a greater aggregate saving, but a greater return to savings, either by improved cultivation, or by access to the produce of more fertile lands in other parts of the globe.

The same considerations enable us to throw aside as unworthy of regard one of the common arguments against emigration as a means of relief for the laboring-class. Emigration, it is said, can do no good to the laborers, if, in order to defray the cost, as much must be taken away from the capital of the country as from its population. If one tenth of the laboring people of England were transferred to the colonies, and along with them one tenth of the circulating capital of the country, either wages, or profits, or both, would be greatly benefited, by the diminished pressure of capital and population upon the fertility of the land. The landlords alone would sustain some loss of income; and even they, only if colonization went to the length of actually diminishing capital and population, but not if it merely carried off the annual increase.



2. In opulent countries, the extension of machinery not detrimental but beneficial to Laborers.

From the same principles we are now able to arrive at a final conclusion respecting the effects which machinery, and generally the sinking of capital for a productive purpose, produce upon the immediate and ultimate interests of the laboring-class. The characteristic property of this class of industrial improvements is the conversion of circulating capital into fixed: and it was shown in the first book(303) that, in a country where capital accumulates slowly, the introduction of machinery, permanent improvements of land, and the like, might be, for the time, extremely injurious; since the capital so employed might be directly taken from the wages fund, the subsistence of the people and the employment for labor curtailed, and the gross annual produce of the country actually diminished. But in a country of great annual savings and low profits no such effects need be apprehended. It merely draws off at one orifice what was already flowing out at another; or, if not, the greater vacant space left in the reservoir does but cause a greater quantity to flow in. Accordingly, in spite of the mischievous derangements of the money market which have been occasioned by the great sums in process of being sunk in railways, I can not agree with those who apprehend any mischief, from this source, to the productive resources of the country. Not on the absurd ground (which to any one acquainted with the elements of the subject needs no confutation) that railway expenditure is a mere transfer of capital from hand to hand, by which nothing is lost or destroyed. This is true of what is spent in the purchase of the land; a portion too of what is paid to agents, counsels, engineers, and surveyors, is saved by those who receive it, and becomes capital again: but what is laid out in the bona fide construction of the railway itself is lost and gone; when once expended, it is incapable of ever being paid in wages or applied to the maintenance of laborers again; as a matter of account, the result is, that so much food and clothing and tools have been consumed, and the country has got a railway instead.

It already appears, from these considerations, that the conversion of circulating capital into fixed, whether by railways, or manufactories, or ships, or machinery, or canals, or mines, or works of drainage and irrigation, is not likely, in any rich country, to diminish the gross produce or the amount of employment for labor. There is hardly any increase of fixed capital which does not enable the country to contain eventually a larger circulating capital than it otherwise could possess and employ within its own limits; for there is hardly any creation of fixed capital which, when it proves successful, does not cheapen the articles on which wages are habitually expended.

As regards the effects upon the material condition of the wages-receiving class, since it seems clear that capital increases faster than improvements, and probably faster even than population, it follows that in countries where the laboring-classes are evidently growing in intelligence, they gain in wages with the progress of society. Such certainly seems to be the teaching of Mr. Giffen's late studies (see Book IV, Chap. III, 5).



3. Stationary state of wealth and population dreaded by some writers, but not in itself undesirable.

Toward what ultimate point is society tending by its industrial progress? When the progress ceases, in what condition are we to expect that it will leave mankind?

It must always have been seen, more or less distinctly, by political economists, that the increase of wealth is not boundless; that at the end of what they term the progressive state lies the stationary state, that all progress in wealth is but a postponement of this, and that each step in advance is an approach to it. We have now been led to recognize that this ultimate goal is at all times near enough to be fully in view; that we are always on the verge of it, and that, if we have not reached it long ago, it is because the goal itself flies before us. The richest and most prosperous countries would very soon attain the stationary state, if no further improvements were made in the productive arts, and if there were a suspension of the overflow of capital from those countries into the uncultivated or ill-cultivated regions of the earth. Adam Smith always assumes that the condition of the mass of the people, though it may not be positively distressed, must be pinched and stinted in a stationary condition of wealth, and can only be satisfactory in a progressive state. The doctrine that, to however distant a time incessant struggling may put off our doom, the progress of society must "end in shallows and in miseries," far from being, as many people still believe, a wicked invention of Mr. Malthus, was either expressly or tacitly affirmed by his most distinguished predecessors, and can only be successfully combated on his principles.

Even in a progressive state of capital, in old countries, a conscientious or prudential restraint on population is indispensable, to prevent the increase of numbers from outstripping the increase of capital, and the condition of the classes who are at the bottom of society from being deteriorated. Where there is not, in the people, or in some very large proportion of them, a resolute resistance to this deterioration—a determination to preserve an established standard of comfort—the condition of the poorest class sinks, even in a progressive state, to the lowest point which they will consent to endure. The same determination would be equally effectual to keep up their condition in the stationary state, and would be quite as likely to exist.

I can not, therefore, regard the stationary state of capital and wealth with the unaffected aversion so generally manifested toward it by political economists of the old school. I am inclined to believe that it would be, on the whole, a very considerable improvement on our present condition.

It is only in the backward countries of the world that increased production is still an important object; in those most advanced, what is economically needed is a better distribution, of which one indispensable means is a stricter restraint on population. On the other hand, we may suppose this better distribution of property attained, by the joint effect of the prudence and frugality of individuals, and of a system of legislation favoring equality of fortunes, so far as is consistent with the just claim of the individual to the fruits, whether great or small, of his or her own industry. We may suppose, for instance (according to the suggestion thrown out in a former chapter(304)), a limitation of the sum which any one person may acquire by gift or inheritance, to the amount sufficient to constitute a moderate independence. Under this twofold influence, society would exhibit these leading features: a well-paid and affluent body of laborers; no enormous fortunes, except what were earned and accumulated during a single lifetime; but a much larger body of persons than at present, not only exempt from the coarser toils, but with sufficient leisure, both physical and mental, from mechanical details, to cultivate freely the graces of life, and afford examples of them to the classes less favorably circumstanced for their growth. This condition of society, so greatly preferable to the present, is not only perfectly compatible with the stationary state, but, it would seem, more naturally allied with that state than with any other.

There is room in the world, no doubt, and even in old countries, for a great increase of population, supposing the arts of life to go on improving, and capital to increase. But even if innocuous, I confess I see very little reason for desiring it. The density of population necessary to enable mankind to obtain, in the greatest degree, all the advantages both of co-operation and of social intercourse, has, in all the most populous countries, been attained. If the earth must lose that great portion of its pleasantness which it owes to things that the unlimited increase of wealth and population would extirpate from it, for the mere purpose of enabling it to support a larger but not a better or a happier population, I sincerely hope, for the sake of posterity, that they will be content to be stationary, long before necessity compels them to it.

It is scarcely necessary to remark that a stationary condition of capital and population implies no stationary state of human improvement. Even the industrial arts might be as earnestly and as successfully cultivated, with this sole difference, that instead of serving no purpose but the increase of wealth, industrial improvements would produce their legitimate effect, that of abridging labor. Hitherto it is questionable if all the mechanical inventions yet made have lightened the day's toil of any human being. They have enabled a greater population to live the same life of drudgery and imprisonment, and an increased number of manufacturers and others to make fortunes. They have increased the comforts of the middle classes.

The statement that inventions have not "lightened the day's toil of any human being" has been persistently misquoted by many persons and has been taken out of its connection. Mr. Mill distinctly holds that the laborer's lot could have been improved had there been any limitation of population; that it is the constant growth of population as society progresses which destroys the gains afforded to the laboring-classes by improvements. But it is quite certain that the material facts of Mr. Mill's statement are no longer true. In the United States wages have risen, with an additional gain in lower prices; and Mr. Giffen shows the same progress in England. Moreover, travelers on the Continent speak of a similar movement already noticeable there. Mr. Giffen's statement in his comparison(305) with fifty years ago, is as follows:

"While the money wages have increased as we have seen, the hours of labor have diminished. It is difficult to estimate what the extent of this diminution has been, but collecting one or two scattered notices I should be inclined to say very nearly 20 per cent. There has been at least this reduction in the textile, engineering, and house-building trades. The workman gets from 50 to 100 per cent more money for 20 per cent less work; in round figures he has gained from 70 to 120 per cent in fifty years in money return. It is just possible, of course, that the workman may do as much, or nearly as much, in the shorter period as he did in his longer hours. Still, there is the positive gain in his being less time at his task, which many of the classes still tugging lengthily day by day at the oar would appreciate."



Chapter V. On The Possible Futurity Of The Laboring-Classes.



1. The possibility of improvement while Laborers remain merely receivers of Wages.

There has probably never been a time when more attention has been called to the material and social conditions of the working-classes than in the last few years. The great increase of literature and the extension of the newspaper has brought to every reader, even where public and private charities have not sent eye-witnesses into direct contact with distress, a more explicit knowledge of the working-classes than ever before. The revelation of existing poverty and misery is, often wrongly, taken to be a proof of the increasing degradation of the working-men, and the cause has been ascribed to the grasping cruelty of capitalists. Instances of injustice arising from the relations of employers and employed will occur so long as human nature remains imperfect. But the world hopes that some other relation than that of master and workman may be evolved in which not only many admitted wrongs may be avoided, but also new forces may be applied to raise the laborer out of his dependence on other classes in the community.

We are, at present, living under a regime of private property and competition. But certainly the progress of the laborer is not that which can excite enthusiastic hopes for the future, so long as he remains a mere receiver of wages. The progress of industrial improvements has resulted, says Mr. Cairnes, in "a temporary improvement of the laborer's condition, followed by an increase of population and an enlarged demand for the cheapened commodity.... Laborers' commodities, however, are for the most part commodities of raw produce, or in which the raw material constitutes the chief element of the value (clothing is, in truth, the only important exception); and of all such commodities it is the well-known law that an augmentation of quantity can only be obtained, other things being the same, at an increasing proportional cost. Thus, it has happened that the gain in productiveness obtained by improved processes has, after a generation, to a great extent been lost—lost, that is to say, for any benefit that can be derived from it in favor of wages and profits.... The large addition to the wealth of the country has gone neither to profits nor to wages, nor yet to the public at large [as consumers], but to swell a fund ever growing even while its proprietors sleep—the rent-roll of the owners of the soil.... The aggregate return from the land has immensely increased; but the cost of the costliest portion of the produce, which is that which determines the price of the whole, remains pretty nearly as it was. Profits, therefore, have not risen at all, and the real remuneration of the laborer, taking the whole field of labor, in but a slight degree—at all events in a degree very far from commensurate with the general progress of industry."(306)

Under these conditions, it seems that the only hope of an improvement for the laboring-classes lies in the limitation of population—or at least in an increase of numbers less than the increase of capital and improvements. It is possible, however, that Mr. Cairnes, with many others, has failed to recognize the full extent of the improvement which is taking place in the wages of the laborer under the existing social order. Although we hear much of the wrongs of the working-men—and they no doubt exist—yet it is unquestionable that their condition has vastly improved within the last fifty years; largely, in my opinion, because improvements have outstripped population, and because wide areas of fertile land in new and peaceful countries have drawn off the surplus population in the older countries, and because the available spots in the newer countries like the United States have not yet been covered over with a population sufficiently dense to keep real wages anything below a relatively high standard. The facts to substantiate this opinion, so far as regards Great Britain, are to be found in a recent investigation(307) by Mr. Giffen, the statistician of the English Board of Trade. For a very considerable reduction in hours of daily labor, the workman now receives wages on an average about 70 per cent higher than fifty years ago, as may be seen by the following table:

Occupation. Place. Wages Wages, Increase fifty present or years ago, time, per decrease, per week. week. amount, per cent. Carpenters Manchester 24 0 34 0 10 0 () 42 Glasgow 14 0 26 0 12 0 () 85 Bricklayers Manchester(308) 24 0 36 0 12 0 () 50 Glasgow 15 0 27 0 12 0 () 80 Masons Manchester(309) 24 0 29 10 5 10 () 24 Glasgow 14 0 23 8 9 8 () 69 Miners Staffordshire 2 8(310) 4 0(311) 1 4 () 50 Pattern-weavers Huddersfield 16 0 25 0 9 0 () 55 Wool-scourers " 17 0 22 0 5 0 () 30 Mule-spinners " 25 6 30 0 4 6 () 20 Weavers " 12 0 26 0 14 0 () 115 Warpers and " 17 0 27 0 10 0 () beamers 58 Winders and " 6 0 11 0 5 0 () 83 reelers Weavers (men) Bradford 8 3 20 6 12 3 () 150 Reeling and " 7 9 15 6 7 9 () warping 100 Spinning " 4 5 11 6 7 1 () (children) 160

With increased wages, prices are not much higher than fifty years ago. But the clearest evidence as to their bettered material condition is to be found in the following table, which shows the amount of food consumed per head by the total population of Great Britain:

Articles. 1840. 1881. Bacon and hams, 0.01 13.93 Pounds. Butter, Pounds. 1.05 6.36 Cheese, Pounds. 0.92 5.77 Currants and 1.45 4.34 raisins, Pounds. Eggs, No. 3.63 21.65 Potatoes, Pounds. 0.01 12.5 Rice, Pounds. 0.90 16.32 Cocoa, Pounds. 0.08 0.31 Coffee, Pounds. 1.08 0.89 Corn, wheat, and 42.47 216.92 wheat-flour, Pounds. Raw sugar, Pounds. 15.20 58.92 Refined sugar, Nil. 8.44 Pounds. Tea, Pounds. 1.22 4.58 Tobacco, Pounds. 0.86 1.41 Wine, Gallons. 0.25 0.45 Spirits, Gallons. 0.97 1.08 Malt, Bushels. 1.59 1.91(312)

The question then at once arises, whether capital has been shown by the statistics to have gained accordingly, or whether there has been a proportionally less increase than in wages. Says Mr. Giffen: "If the return to capital had doubled, as the wages of the working-classes appear to have doubled, the aggregate income of the capitalist classes returned to the income-tax would now be L800,000,000 instead of L400,000,000.... The capitalist, as such, gets a low interest for his money, and the aggregate returns to capital is not a third part of the aggregate income of the country, which may be put at not less than L1,200,000,000." It is found, moreover—as a suggestion that property is more generally diffused—that while there were 25,368 estates entered to probate in 1838, of an average value of L2,160 each, there were 55,359 estates in 1882 of an average value of L2,500 each.

But yet the vast increase of wealth made possible by improvements and the growth of capital would have bettered the condition of all still more had population been somewhat more limited. As it is, the material gain has been large in spite of an increase in the population from 16,500,000 in 1831 to nearly 30,000,000 in 1881. In other words, the landlords have been great gainers, while the laborers have intercepted much more than Mr. Cairnes supposed.

There are at hand some very striking data relating to the United States which point in the same direction as those of Mr. Giffen. Charts No. XIX and XX show vividly how far the increased productiveness of an industry, arising from greater skill and greater efficiency of labor in the connection of improved machinery, has enabled manufacturers to steadily lower the price of their goods, and yet increase the wages paid to their operatives. What was true of these two cotton-mills was true of others within New England; for the rate of wages paid by these mills was the rate current in the country in 1830 and in 1884. While each spindle and loom has become vastly more effective, we see by Chart No. XIX that the average production of each operative constantly increased from 4,321 yards per year in 1830, to 28,032 yards in 1884; and this it was which made possible the corresponding increase in the rate of wages from $164 in 1830, to $290 in 1884. The sum of $290 a year as an average for each operative, is a stipend too small to cause any general satisfaction; but he must be gloomy indeed who does not see that $290 is a cheerful possession as compared with $164. There is, then, abundant ground for believing that in the past fifty years the condition of the working-classes in the United States has been materially improved. The diminishing proportion of the price which goes to the capital is a significant fact, and illustrates the tendency of profits to fall with the increase of capital.(313) The same truth seems to be seen in the table given in a previous chapter,(314) where the wages have been increased, but the hours have fallen per day from thirteen to eleven since 1840.



2.—through small holdings, by which the landlord's gain is shared.

So far we have considered the chances for improvement in an industrial order in which the present separation of capitalists from laborers is maintained. But this does not take into account that future time when cultivation in the United States shall be forced down upon inferior land, and no more remains to be occupied, and when capital may no longer increase as fast as population. What must be the ultimate outlook for wages-receivers? Or, more practically, what is the outlook now for those who are wages-receivers, and for whom a more equitable distribution of the product seems desirable? How can they escape the thralldom of dependence on the accumulations of others?

In this connection, and of primary importance, is the avenue opened to all holders of small properties to share in the increase which goes to owners of land. It has been seen that owners of the soil constantly gain from the inevitable tendencies of industrial progress. If one large owner gains, why should not the increment be the same if ten owners held the property instead of one? The more the land is subdivided, the more the vast increase arising from rent will be shared by a larger number. This, in my opinion, is the strongest reason for the encouragement of small holdings in every country. The greater the extension of small properties among the working-class, the more will they gain a share of that part of the product which goes to the owner of land by the persistent increase of population. If, then, the gain arising from improvements is largely passed to the credit of land-owners, as Mr. Cairnes believes, it should be absolutely necessary to spread among the working-classes the doctrine that if they own their own homes, and buy the land they live on, to that extent will they "grow rich while they sleep," independently of their other exertions. Land worth $500 to-day when bought by the savings of a laborer, besides the self-respect(315) it gives him, will increase in value with the density of population, and become worth $600 or more without other sacrifice of his.



3. —through co-operation, by which the manager's wages are shared.

It will be found, however, that, of the various industrial rewards, profits tend to diminish, meaning by "profits" only the interest and insurance given for abstinence and risk in the use of capital; but that the manager's wages (wages of superintendence) are larger than is commonly supposed in relation to other industrial rewards, owing to the position of monopoly practically held by such executive ability as is competent to successfully manage large business interests. To the laborer this large payment to the manager seems to be paid for the possession of capital. This we now know to be wrong. The manager's wages are payments of exactly the same nature as any laborer's wages. It makes no difference whether wages are paid for manual or mental labor. The payment to capital, purely as such, known as interest (with insurance for risk), is unmistakably decreasing, even in the United States. And yet we see men gain by industrial operations enormous rewards; but these returns are in their essence solely manager's wages. For in many instances, as hitherto discussed, we have seen that the manager is not the owner of the capital he employs. To what does this lead us? Inevitably to the conclusion that the laborer, if he would become something more than a receiver of wages, in the ordinary sense, must himself move up in the scale of laborers until he reaches the skill and power also to command manager's wages. The importance of this principle to the working-man can not be exaggerated, and there flows from it important consequences to the whole social condition of the lower classes. It leads us directly to the means by which the lower classes may raise themselves to a higher position—the actual details of which, of course, are difficult, but, as they are not included in political economy, they must be left to sociology—and forms the essential basis of hope for any proper extension of productive co-operation. In short, co-operation owes its existence to the possibility of dividing the manager's wages, to a greater or less degree, among the so-called wages-receivers, or the "laboring-class." And it is from this point of view that co-operation is seen more truly and fitly than in any other way. For it is to be said that in some of its forms co-operation gives the most promising economic results as regards the condition of the laborer which have yet been reached in the long discussion upon the relations of labor and capital.



4. Distributive Co-operation.

It will be my object, then, to describe the chief forms in which the co-operative principle has manifested itself. These may be said, in general, to be four: (1) distributive co-operation, by which goods already produced are bought and sold to members without the aid of retail dealers; (2) productive co-operation, by which associations are formed for producing and manufacturing goods for the market; (3) partial productive co-operation in the form of industrial partnerships between laborers and employers, without dispensing with the latter; and (4) co-operative, or People's, banks. There are, of course, many other forms in which the principle of co-operation has been applied; but these four are probably the most characteristic.

Distributive co-operation is at once the simplest and the most successful form, not merely because it requires less for capital than any other for its inception, but also because it calls for less business and executive capacity. The number of persons capable of managing a small retail store is vastly greater than the class fit to assume control of the very complex duties involved in the care of wholesale houses—or, at all events, of mills and factories. Distributive co-operation has its origin in the fact that the expenses of a middle-man between the producer and consumer may be entirely dispensed with, and in the fact that more capital had collected in the business of distribution than could economically be so employed. Its educating power on the men concerned in teaching them to save, in showing the need of business methods, and in instilling the elements of industrial management, is of no little importance. It is, therefore, the best gateway to any further or more difficult co-operative experiments—such experiments as can be attempted only after the proper capital is saved, and the necessary executive capacity is discovered, or developed by training. In England co-operation began its history in distributive stores, and has finally led to such a stimulus of self-help in the laborer, that now co-operative gymnasiums, libraries, gardens, and other results have proved the wisdom of calling upon the laborers for their own exertions. Under the system which separates employers and the employed, high wages are not found to be the only boon which the receivers could wish; for it is sometimes found that the best-paid workmen are the most unwise and intemperate.(316) For the most ignorant and unskilled of the workmen in the lowest strata the object would seem to be to give not merely more wages, but give more in such a way as might excite new and better motives, a desire as well as a possibility of improvement. Self-help must be stimulated, not deadened by stifling dependence on a class of superiors, or on the state. The extraordinary growth of co-operation is one of the most cheering signs of modern times. Distributive co-operation originated in Rochdale, in England, about 1844, with a few laborers desirous of saving themselves from the high prices paid for poor provisions. By uniting, they purchased tea by the chest, sugar by the hogshead, which they sold to each member at market prices. They were surprised to find a large profit by the operation, which they divided proportionally to the capital subscribed. Others soon joined them; they took a store-room, and in 1882 there were 10,894 members, with a share capital of $1,576,215, and with realized profits in that year of $162,885. They have erected expensive steam flour-mills, and the society occupies eighteen branch establishments in Rochdale. Libraries containing more than 15,000 volumes, and classes in science, language, and the technical arts, attended by 500 students, have been maintained. The extension of the Rochdale store led to the necessity of a wholesale establishment of their own. It is now a large institution with branches in London and Newcastle. "It owns manufactories in London, Manchester, Newcastle, Leicester, Durham, and Crumpsall; and it has depots in Cork, Limerick, Kilmallock, Waterford, Tipperary, Tralee, and Armagh, for the purchase of butter, potatoes, and eggs. It has buyers in New York and Copenhagen, and it owns two steamships. It has a banking department with a turn-over of more than L12,000,000 annually."(317)

The following figures for England and Wales tell their own story as to the progress of co-operation:(318)

1862. 1881. Number of members 90,000 525,000 Capital: Share 428,000 5,881,000 Capital: Loan 55,000 1,267,000 Sales 2,333,000 20,901,000 Net profit 165,000 1,617,000

Several persons each subscribe a sum to make up the share capital of a store, and a person is selected to take charge of the purchase and care of the goods. The advantages of the plan are: (1) A division among the co-operators of all the net profits of the retail trade; (2) a saving in advertisements, since members are always purchasers without solicitation; (3) no loss by bad debts, since only cash sales are permitted; and (4) security against fraud as to the character of the goods, because there is no inducement to make gains by adulterations. It is often found that the capital is turned over ten times in the course of a year; while the cost of management in the wholesale Rochdale stores does not amount to one per cent on the returns.

The arrangement of obligations in due order of their priority, which has been recommended by Mr. Holyoake,(319) is as follows: of funds in the store, payment should be made, (1) of the expenses of management; (2) of interest due on all loans; (3) of an amount equivalent to ten per cent of the value of the fixed stock to cover the annual depreciation from wear and tear; (4) of dividends on the subscribed capital of the members;(320) (5) of such a sum as may be necessary for an extension of the business; (6) of two and a half per cent of the remaining profit, after all the above items are provided for, for educational purposes; (7) of the residue, and that only, among all the persons employed, and members of the store, in proportion to the amount of their wages, or of their respective purchases during the quarter.(321) The payment of dividends to customers on their purchases seems now to be considered an essential element of success.



5. Productive Co-Operation.

Productive co-operation presents many serious difficulties, the chief of which is the need of managing ability. Some one in the association must know the wholesale markets well, the expectation of crops connected with his materials used, the proper time to buy; he must know the processes of the special production thoroughly, the best machinery, the best adaptation of labor to the given end; he must know the whims of purchasers, and be ready to change his products accordingly—in short, a man eminently fitted for success in his own factory is essential to the profitable management of one belonging to a body of co-operators. It has been already seen how large a variation in profit is due to manager's wages; and it is very often only his skill, prudence, and experience that make the difference between a failure and a success in business. Unless co-operators are willing to pay as large a sum for the services of a good manager as he could get in his own establishment, they can not secure the talent which will make their venture succeed.(322)

In France the national workshops of Louis Blanc, established in 1848, were a failure. Nowhere has it been more clearly seen that state help has been disastrous than in France, where the Constituent Assembly voted 3,000,000 francs for co-operative experiments, all of which failed. Curiously enough, distributive co-operation has not succeeded in France, because, owing to a wide-spread dislike of the wages system, workmen will try nothing less than productive schemes. And their success in this has been no greater than might be expected, when inexperience is put to a task beyond its powers.(323)

In Great Britain and the United States there have been some successful experiments in production; and Mr. Holyoake(324) holds that, although workmen certainly do begrudge the manager's salary, productive associations are possible when managed by a board of elected directors. He urges, moreover, that, as in distributive co-operation, if profits are shared with customers, there will be insured both popularity and continuity of custom without the cost of advertising, and such expenses as those of travelers and commissions. The plan of actual operations upon which successes have been reached in England seems to be briefly this: (1) To save capital, chiefly through co-operative associations; (2) to purchase or lease premises; (3) to engage managers, accountants, and officers at the ordinary salaries which such men can command in the market according to their ability; (4) to borrow capital on the credit of the association; (5) to pay upon capital subscribed by members the same rate of interest as that upon borrowed capital; (6) to regard as profit only that which remains after making payment for rent, materials, wages, all business outlays, and interest on capital; and (7) to divide the profits according to the salaries of all officers, wages of workmen, and purchases of customers. Those mills and factories which have sprung out of the extension of distributive associations, as at Rochdale, seem, and naturally so, to have been most successful. They have gradually trained themselves somewhat for the work, and their customers were beforehand secured. That is, where the difficulties of the manager's function have been lessened, they have a better chance of success. And yet it must be said that productive associations will gain largely from the efficiency of the labor when working for its own interest; and this is an important consideration to be urged in favor of such associations.

The Sun Mill,(325) at Oldham, England, was established for spinning cotton in 1861 by the exertions of some co-operative bodies. Beginning with a share capital of $250,000, and a loan capital of a like amount, it set 80,000 spindles in operation. In 1874 they had a share capital of $375,000 (all subscribed except $1,000), and an equal amount of loan capital, while the whole plant was estimated as worth $615,000. Two and a half per cent per annum has been set apart for the depreciation in the value of the mill, and seven and a half per cent for the machinery; so that in the first ten years a total sum of $160,000 was set aside for depreciation of the property. The profits have varied from two to forty per cent; and, while only five per cent interest was paid on the loan capital, large dividends were made on the share capital. During the last few years the Sun Mill has on an average realized a profit of 12-1/2 per cent, although it is known that the cotton trade has suffered during this time from a serious depression.

Many experiments, however, have proved failures; and sometimes, when they are successful (as in the case of the Hatters' Association in Newark, New Jersey(326)), the workmen have no desire to share their benefits with others, and practically form a corporation by themselves. The mere fact that they do sometimes succeed is an important thing. Then, too, they have an opportunity of securing by salaries that executive ability in the community which exists separate from the possession of capital. And in these days, in large corporations, the manager is not necessarily (although he often is) a large owner of capital. The last annual report of the Co-operative Congress (1882) shows the existence in England and Scotland of productive associations for the manufacture of cloth, flannel, fustian, hosiery, quilts, worsted, nails, watches, linen, and silk, as well as those for engineering, printing, and quarrying; and these were but a few of them.(327)

In the United States there have been some successes as well as failures. In January, 1872, a number of machinists and other working-men organized in the town of Beaver Falls, Pennsylvania, a Co-operative Foundry Association for the manufacture of stoves, hollow-ware, and fine castings. On a small capital of only $4,000 they have steadily prospered, paid the market rate of wages, and also paid annual dividends, over and above all expenses and interest on the plant, of from twelve to fifteen per cent. In 1867 thirty workmen started a co-operative foundry in Somerset, Massachusetts, with a capital of about $14,000. In the years 1874-1875 the company spent $5,400 for new flasks and patterns, and yet showed a net gain of $11,914. In 1876 it had a capital of $30,000, and a surplus fund of $28,924.(328)



6. Industrial Partnership.

The difficulties of productive co-operation arising from the need of skilled management, together with the existing unsatisfactory relation between employers and laborers when wholly separate from each other, have led to a most promising plan of industrial partnership by which the manager retains the control of the business operations, but shares his profits with the workmen. The gain through increased efficiency, greater economy, and superior workmanship, recoups the manager for the voluntary subtraction from his share, and yet the laborers receive an additional share; but more than this, it educates the laborer in industrial methods, discloses the difficulties of management, and stimulates him to saving habits and greater regularity of work. This system is particularly adapted to reaching those laborers who would not themselves rise to the demands of productive co-operation.

The principle was tried on one of the Belgian railways. "Ninety-five kilogrammes of coke were consumed for every league of distance run, but this was known to be more than necessary; but how to remedy the evil was the problem. A bonus of 3-1/2d. on every hectolitre of coke saved on this average of ninety-five to the league was offered to the men concerned, and this trifling bonus worked the miracle. The work was done equally well, or better, with forty-eight kilogrammes of coke instead of ninety-five; just one half, or nearly, saved by careful work, at an expense of probably less than one tenth of the saving."(329)

The experiment which has attracted most attention in the past has been that of the Messrs. Briggs, at their collieries in Yorkshire, England.(330) The relations between the owners and the laborers were as bad as they could well be. "All coal-masters is devils, and Briggs is the prince of devils," ran the talk of the miners, when they did not choose to send letters threatening to shoot the owners. In 1865 Messrs. Briggs tried the plan of an industrial partnership with their men, purely from business considerations. Seventy per cent of the cost of raising coal consisted of wages, and fully fifteen per cent of materials which were habitually wasted. The whole property was valued, and divided into shares of $50 each, of which the owners retained two thirds, together with the control of the business. The remaining one third of the shares was offered to the employes. If any subscriber was too poor to pay $50 for a share, the subsequent dividends and payments were to be applied to purchasing the share. After reserving a fair allowance for expenses, like the redemption of capital, whenever the remaining profits exceeded ten per cent on the capital, that excess was to be divided into two equal parts, one of which was to be distributed among all persons employed by the company in proportion to their wages, and the other was to be retained by the capital. In previous years but once had they made ten per cent profit on their capital, and twice only five per cent. In the first year after the new system came into operation, the total profits were fourteen per cent, and the four per cent of excess was divided, two to the laborers' bonus, and two to the capital, so that capital received twelve per cent. In the second year the profits were sixteen per cent, in the third year seventeen per cent; the first year the work-people received in addition to their wages $9,000, in the second $13,500, in the third $15,750. The moral effect was striking. Work was done regularly, forbearance was exercised, habits improved, and the faces of the men were set toward improvement in life. The scheme worked successfully for years, but was finally ended by the pressure of the outside trades-unions, who compelled the workmen to give up the arrangement.

A similar experiment was tried by the Messrs. Brewster, carriage-manufacturers, of New York. They offered to their workmen ten per cent of their profits, before any allowance was made for interest on the capital invested, or before any payment was made for the services of the firm as managers. In one year as much as $11,000 was divided among the laborers. Again, as in the case of the Briggs colliery, the experiment was brought to an end by an unreasoning submission to the pressure of outside workmen during a strike.(331)

But, all in all, industrial partnership(332) offers a great field for that kind of improvement which is worth more than a mere increase of wages, and seems to make it possible to reach the heavy weight of sluggishness among the lower and more hopeless strata of society. And it is possible that it will stir in them the powers which may afterward find employment in the harder problems of productive co-operation.(333)



7. People's Banks.

In Germany the struggle between the two theories—self-help and state-help—was fought out by Schultze-Delitsch—that is, Schultze of Delitsch, a town in Saxony—and Lasalle, and the victory given to the former. Schultze-Delitsch, as a consequence, was successful in directing the co-operative principle in Germany to giving workmen credit in purchasing tools, etc., when he had no security but his character. This form of co-operation works to give the energetic and industrious workmen a lever by which, through the possession of credit, they can raise themselves to the position of small capitalists, and thus widen the field of possible improvement. While the former schemes of co-operation described above have given the wages-receivers a share of the unearned increment from land, and tend to give them a share of the manager's wages, the plan of Schultze was to assist them to gain a share in the advantages belonging to the possession of capital. The capital was to be accumulated by their own exertions, and, in his scheme depended on the principle of self-help. The following is the plan of banks adopted:

"Every member is obliged to make a certain weekly payment into the common stock. As soon as it reaches a certain sum he is allowed to raise a loan exceeding his share in the inverse ratio of the amount of his deposit. For instance, after he has deposited one dollar, he is allowed to borrow five or six; but, if he had deposited twenty dollars, he is allowed only to borrow thirty. The security he is compelled to offer is his own and that of two other members of the association, who become jointly and severally liable. He may have no assets whatever beyond the amount of his deposits, nor may his guarantors; the bank relies simply on the character of the three, and the two securities rely on the character of their principal; and the remarkable fact is, that the security has been found sufficient, that the interest of the men in the institutions and the fear of the opinion of their fellows has produced a display of honesty and punctuality such as perhaps is not to be found in the history of any other banking institutions. Such is the confidence inspired by these institutions that they hold on deposit, or as loans from third parties, an amount exceeding by more than three fourths the total amount of their own capital. The monthly contributions of the members may be as low as ten cents, but the amount which each member is allowed to have in some banks is not more than seven or eight dollars, in none more than three hundred dollars. He has a right to borrow to the full amount of his deposit without giving security; if he desires to borrow a larger sum, he must furnish security in the manner we have described. The liability of the members is unlimited. The plan of limiting the liability to the amount of the capital deposited was tried at first, but it inspired no confidence, and the enterprise did not succeed till every member was made generally liable. Each member, on entering, is obliged to pay a small fee, which goes toward forming or maintaining a reserve fund, apart from the active capital. The profits are derived from the interest paid by borrowers, which amounts to from eight to ten per cent, which may not sound very large in our ears, but in Germany is very high. Not over five per cent is paid on capital borrowed from outsiders. All profits are distributed in dividends among the members of the association, in the proportion of the amount of their deposits—after the payment of the expenses of management, of course—and the apportionment of a certain percentage to the reserve-fund. Every member, as we have said, has a right to borrow to the extent of his deposit without security; but then, if he seeks to borrow more, whether he shall obtain any loan, and, if so, how large a one, is decided by the board of management, who are guided in making their decision just as all bank officers are—by a consideration of the circumstances of the bank as well as those of the borrower. All the affairs of the association are discussed and decided in the last resort by a general assembly composed of all the members."(334) The main part of the capital loaned by the banks is obtained from outside sources on the credit of the associations. In 1865 there were 961 of these institutions in Germany; in 1877 there were 1,827, with over 1,000,000 members, owning $40,000,000 of capital, with $100,000,000 more on loan, and doing a business of $550,000,000.(335)



BOOK V. ON THE INFLUENCE OF GOVERNMENT.



Chapter I. On The General Principles Of Taxation.



1. Four fundamental rules of Taxation.

One of the most disputed questions, both in political science and in practical statesmanship at this particular period, relates to the proper limits of the functions and agency of governments.

We shall first consider the economical effects arising from the manner in which governments perform their necessary and acknowledged functions.

We shall then pass to certain governmental interferences of what I have termed the optional kind (i.e., overstepping the boundaries of the universally acknowledged functions) which have heretofore taken place, and in some cases still take place, under the influence of false general theories.

The first of these divisions is of an extremely miscellaneous character: since the necessary functions of government, and those which are so manifestly expedient that they have never or very rarely been objected to, are too various to be brought under any very simple classification. We commence, [under] the first head, with the theory of Taxation.

The qualities desirable, economically speaking, in a system of taxation, have been embodied by Adam Smith in four maxims or principles, which, having been generally concurred in by subsequent writers, may be said to have become classical, and this chapter can not be better commenced than by quoting them:(336)

"1. The subjects of every state ought to contribute to the support of the government, as nearly as possible in proportion to their respective abilities: that is, in proportion to the revenue which they respectively enjoy under the protection of the state. In the observation or neglect of this maxim consists what is called the equality or inequality of taxation.

"2. The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person. The certainty of what each individual ought to pay is, in taxation, a matter of so great importance, that a very considerable degree of inequality, it appears, I believe, from the experience of all nations, is not near so great an evil as a very small degree of uncertainty.

"3. Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it. Taxes upon such consumable goods as are articles of luxury are all finally paid by the consumer, and generally in a manner that is very convenient to him. He pays them little by little, as he has occasion to buy the goods. As he is at liberty, too, either to buy or not to buy, as he pleases, it must be his own fault if he ever suffers any considerable inconvenience from such taxes.

"4. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state. A tax may either take out or keep out of the pockets of the people a great deal more than it brings into the public treasury in the four following ways: First, the levying of it may require a great number of officers, whose salaries may eat up the greater part of the produce of the tax, and whose perquisites may impose another additional tax upon the people." Secondly, it may divert a portion of the labor and capital of the community from a more to a less productive employment. "Thirdly, by the forfeitures and other penalties which those unfortunate individuals incur who attempt unsuccessfully to evade the tax it may frequently ruin them, and thereby put an end to the benefit which the community might have derived from the employment of their capitals. An injudicious tax offers a great temptation to smuggling. Fourthly, by subjecting the people to the frequent visits and the odious examination of the tax-gatherers it may expose them to much unnecessary trouble, vexation, and oppression": to which may be added that the restrictive regulations to which trades and manufactures are often subjected, to prevent evasion of a tax, are not only in themselves troublesome and expensive, but often oppose insuperable obstacles to making improvements in the processes.



2. Grounds of the principle of Equality of Taxation.

The first of the four points, equality of taxation, requires to be more fully examined, being a thing often imperfectly understood, and on which many false notions have become to a certain degree accredited, through the absence of any definite principles of judgment in the popular mind.

For what reason ought equality to be the rule in matters of taxation? For the reason that it ought to be so in all affairs of government. A government ought to make no distinction of persons or classes in the strength of their claims on it. If any one bears less than his fair share of the burden, some other person must suffer more than his share. Equality of taxation, therefore, as a maxim of politics, means equality of sacrifice. It means apportioning the contribution of each person toward the expenses of government, so that he shall feel neither more nor less inconvenience from his share of the payment than every other person experiences from his. There are persons, however, who regard the taxes paid by each member of the community as an equivalent for value received, in the shape of service to himself; and they prefer to rest the justice of making each contribute in proportion to his means upon the ground that he who has twice as much property to be protected receives, on an accurate calculation, twice as much protection, and ought, on the principles of bargain and sale, to pay twice as much for it. Since, however, the assumption that government exists solely for the protection of property is not one to be deliberately adhered to, some consistent adherents of the quid pro quo principle go on to observe that protection being required for persons as well as property, and everybody's person receiving the same amount of protection, a poll-tax of a fixed sum per head is a proper equivalent for this part of the benefits of government, while the remaining part, protection to property, should be paid for in proportion to property. But, in the first place, it is not admissible that the protection of persons and that of property are the sole purposes of government. In the second place, the practice of setting definite values on things essentially indefinite, and making them a ground of practical conclusions, is peculiarly fertile in the false views of social questions. It can not be admitted that to be protected in the ownership of ten times as much property is to be ten times as much protected. If we wanted to estimate the degrees of benefit which different persons derive from the protection of government, we should have to consider who would suffer most if that protection were withdrawn: to which question, if any answer could be made, it must be, that those would suffer most who were weakest in mind or body, either by nature or by position.



3. Should the same percentage be levied on all amounts of Income?

Setting out, then, from the maxim that equal sacrifices ought to be demanded from all, we have next to inquire whether this is in fact done, by making each contribute the same percentage on his pecuniary means. Many persons maintain the negative, saying that a tenth part taken from a small income is a heavier burden than the same fraction deducted from one much larger; and on this is grounded the very popular scheme of what is called a graduated property-tax, viz., an income-tax in which the percentage rises with the amount of the income.

On the best consideration I am able to give to this question, it appears to me that the portion of truth which the doctrine contains arises principally from the difference between a tax which can be saved from luxuries and one which trenches, in ever so small a degree, upon the necessaries of life. To take a thousand a year from the possessor of ten thousand would not deprive him of anything really conducive either to the support or to the comfort of existence; and, if such would be the effect of taking five pounds from one whose income is fifty, the sacrifice required from the last is not only greater than, but entirely incommensurable with, that imposed upon the first. The mode of adjusting these inequalities of pressure which seems to be the most equitable is that recommended by Bentham, of leaving a certain minimum of income, sufficient to provide the necessaries of life, untaxed. Suppose [$250] a year to be sufficient to provide the number of persons ordinarily supported from a single income with the requisites of life and health, and with protection against habitual bodily suffering, but not with any indulgence. This then should be made the minimum, and incomes exceeding it should pay taxes not upon their whole amount, but upon the surplus. If the tax be ten per cent, an income of [$300] should be considered as a net income of [$50], and charged with [$5] a year, while an income of [$5,000] should be charged as one of [$4,750]. An income not exceeding [$250] should not be taxed at all, either directly or by taxes on necessaries; for, as by supposition this is the smallest income which labor ought to be able to command, the government ought not to be a party to making it smaller.

Both in England and on the Continent a graduated property-tax (l'impot progressif) has been advocated, on the avowed ground that the state should use the instrument of taxation as a means of mitigating the inequalities of wealth. I am as desirous as any one that means should be taken to diminish those inequalities, but not so as to relieve the prodigal at the expense of the prudent. To tax the larger incomes at a higher percentage than the smaller is to lay a tax on industry and economy; to impose a penalty on people for having worked harder and saved more than their neighbors. It is not the fortunes which are earned, but those which are unearned, that it is for the public good to place under limitation. With respect to the large fortunes acquired by gift or inheritance, the power of bequeathing is one of those privileges of property which are fit subjects for regulation on grounds of general expediency; and I have already suggested,(337) as the most eligible mode of restraining the accumulation of large fortunes in the hands of those who have not earned them by exertion, a limitation of the amount which any one person should be permitted to acquire by gift, bequest, or inheritance. I conceive that inheritances and legacies, exceeding a certain amount, are highly proper subjects for taxation; and that the revenue from them should be as great as it can be made without giving rise to evasions, by donation inter vivos or concealment of property, such as it would be impossible adequately to check. The principle of graduation (as it is called), that is, of levying a larger percentage on a larger sum, though its application to general taxation would be in my opinion objectionable, seems to me both just and expedient as applied to legacy and inheritance duties.

The objection to a graduated property-tax applies in an aggravated degree to the proposition of an exclusive tax on what is called "realized property," that is, property not forming a part of any capital engaged in business, or rather in business under the superintendence of the owner; as land, the public funds, money lent on mortgage, and shares in stock companies. Except the proposal of applying a sponge to the national debt, no such palpable violation of common honesty has found sufficient support in this country, during the present generation, to be regarded as within the domain of discussion. It has not the palliation of a graduated property-tax, that of laying the burden on those best able to bear it; for "realized property" includes the far larger portion of the provision made for those who are unable to work, and consists, in great part, of extremely small fractions. I can hardly conceive a more shameless pretension than that the major part of the property of the country, that of merchants, manufacturers, farmers, and shopkeepers, should be exempted from its share of taxation; that these classes should only begin to pay their proportion after retiring from business, and if they never retire should be excused from it altogether. But even this does not give an adequate idea of the injustice of the proposition. The burden thus exclusively thrown on the owners of the smaller portion of the wealth of the community would not even be a burden on that class of persons in perpetual succession, but would fall exclusively on those who happened to compose it when the tax was laid on. As land and those particular securities would thenceforth yield a smaller net income, relatively to the general interest of capital and to the profits of trade, the balance would rectify itself by a permanent depreciation of those kinds of property. Future buyers would acquire land and securities at a reduction of price, equivalent to the peculiar tax, which tax they would, therefore, escape from paying; while the original possessors would remain burdened with it even after parting with the property, since they would have sold their land or securities at a loss of value equivalent to the fee-simple of the tax. Its imposition would thus be tantamount to the confiscation for public uses of a percentage of their property equal to the percentage laid on their income by the tax.

The above proposition has been extended, by those in the United States who appeal to class prejudice, to a proposal to tax the incomes of those who hold government bonds. It so happened that, for example, the six dollars income on a one-hundred-dollar bond of the United States was not, in the war period, deemed a sufficient equivalent for the risk of loaning one hundred dollars to the state; and Congress, therefore, agreed to relieve them of taxation. It is the same thing to a lender if he receive six per cent directly from the Government, or if he receive seven per cent, and is obliged to pay back one per cent to the treasury in the form of taxation; but to the Government it is another thing, because if it sell a taxed bond at seven per cent interest, it does not receive back the whole of the one per cent tax, but the one per cent tax less the expense of levying it. In other words the Government, in the latter case, pays six per cent interest plus the cost of levying the tax; and consequently borrowed more cheaply in the form of an untaxed bond, as was the hope when the provision was made. If, then, a tax were now to be put upon the bonds, it would fall exclusively on the present holders of them; for, since it diminishes the net income from the bond, it lowers the selling price of the bond itself, as before explained.(338)



4. Should the same percentage be levied on Perpetual and on Terminable Incomes?

Whether the profits of trade may not rightfully be taxed at a lower rate than incomes derived from interest or rent is part of the more comprehensive question whether life-incomes should be subjected to the same rate of taxation as perpetual incomes; whether salaries, for example, or annuities, or the gains of professions, should pay the same percentage as the income from inheritable property.

The existing tax [in England] treats all kinds of incomes exactly alike,(339) taking its [fivepence] in the pound as well from the person whose income dies with him as from the landholder, stockholder, or mortgagee, who can transmit his fortune undiminished to his descendants. This is a visible injustice; yet it does not arithmetically violate the rule that taxation ought to be in proportion to means. When it is said that a temporary income ought to be taxed less than a permanent one, the reply is irresistible that it is taxed less: for the income which lasts only ten years pays the tax only ten years, while that which lasts forever pays forever. The claim in favor of terminable incomes does not rest on grounds of arithmetic, but of human wants and feelings. It is not because the temporary annuitant has smaller means, but because he has greater necessities, that he ought to be assessed at a lower rate.

In spite of the nominal equality of income, A, an annuitant of L1,000 a year, can not so well afford to pay L100 out of it as B, who derives the same annual sum from heritable property; A having usually a demand on his income which B has not, namely, to provide by saving for children or others; to which, in the case of salaries or professional gains, must generally be added a provision for his own later years; while B may expend his whole income without injury to his old age, and still have it all to bestow on others after his death. If A, in order to meet these exigencies, must lay by L300 of his income, to take L100 from him as income-tax is to take L100 from L700, since it must be retrenched from that part only of his means which he can afford to spend on his own consumption. Were he to throw it ratably on what he spends and on what he saves, abating L70 from his consumption and L30 from his annual saving, then indeed his immediate sacrifice would be proportionally the same as B's; but then his children or his old age would be worse provided for in consequence of the tax. The capital sum which would be accumulated for them would be one tenth less, and on the reduced income afforded by this reduced capital they would be a second time charged with income-tax; while B's heirs would only be charged once.

The principle, therefore, of equality of taxation, interpreted in its only just sense, equality of sacrifice, requires that a person who has no means of providing for old age, or for those in whom he is interested, except by saving from income, should have the tax remitted on all that part of his income which is really and bona fide applied to that purpose.

If, indeed, reliance could be placed on the conscience of the contributors, or sufficient security taken for the correctness of their statements by collateral precautions, the proper mode of assessing an income-tax would be to tax only the part of income devoted to expenditure, exempting that which is saved. For when saved and invested (and all savings, speaking generally, are invested) it thenceforth pays income-tax on the interest or profit which it brings, notwithstanding that it has already been taxed on the principal. Unless, therefore, savings are exempted from income-tax, the contributors are twice taxed on what they save, and only once on what they spend. To tax the sum invested, and afterward tax also the proceeds of the investment, is to tax the same portion of the contributor's means twice over.

No income-tax is really just from which savings are not exempted; and no income-tax ought to be voted without that provision, if the form of the returns and the nature of the evidence required could be so arranged as to prevent the exemption from being taken fraudulent advantage of, by saving with one hand and getting into debt with the other, or by spending in the following year what had been passed tax-free as saving in the year preceding. But, if no plan can be devised for the exemption of actual savings, sufficiently free from liability to fraud, it is necessary, as the next thing in point of justice, to take into account, in assessing the tax, what the different classes of contributors ought to save. In fixing the proportion between the two rates, there must inevitably be something arbitrary; perhaps a deduction of one fourth in favor of life-incomes would be as little objectionable as any which could be made.

Of the net profits of persons in business, a part, as before observed, may be considered as interest on capital, and of a perpetual character, and the remaining part as remuneration for the skill and labor of superintendence. The surplus beyond interest depends on the life of the individual, and even on his continuance in business, and is entitled to the full amount of exemption allowed to terminable incomes.



5. The increase of the rent of land from natural causes a fit subject of peculiar Taxation.

Suppose that there is a kind of income which constantly tends to increase, without any exertion or sacrifice on the part of the owners: those owners constituting a class in the community, whom the natural course of things progressively enriches, consistently with complete passiveness on their own part. In such a case it would be no violation of the principles on which private property is grounded, if the state should appropriate this increase of wealth, or part of it, as it arises. This would not properly be taking anything from anybody; it would merely be applying an accession of wealth, created by circumstances, to the benefit of society, instead of allowing it to become an unearned appendage to the riches of a particular class.

Now, this is actually the case with rent. The ordinary progress of a society which increases in wealth is at all times tending to augment the incomes of landlords; to give them both a greater amount and a greater proportion of the wealth of the community, independently of any trouble or outlay incurred by themselves. They grow richer, as it were, in their sleep, without working, risking, or economizing. What claim have they, on the general principle of social justice, to this accession of riches? In what would they have been wronged if society had, from the beginning, reserved the right of taxing the spontaneous increase of rent, to the highest amount required by financial exigencies? The only admissible mode of proceeding would be by a general measure. The first step should be a valuation of all the land in the country. The present value of all land should be exempt from the tax; but after an interval had elapsed, during which society had increased in population and capital, a rough estimate might be made of the spontaneous increase which had accrued to rent since the valuation was made. Of this the average price of produce would be some criterion: if that had risen, it would be certain that rent had increased, and (as already shown) even in a greater ratio than the rise of price. On this and other data, an approximate estimate might be made how much value had been added to the land of the country by natural causes; and in laying on a general land-tax, which for fear of miscalculation should be considerably within the amount thus indicated, there would be an assurance of not touching any increase of income which might be the result of capital expended or industry exerted by the proprietor.

With reference to such a tax, perhaps a safer criterion than either a rise of rents or a rise of the price of corn, would be a general rise in the price of land. It would be easy to keep the tax within the amount which would reduce the market value of land below the original valuation; and up to that point, whatever the amount of the tax might be, no injustice would be done to the proprietors.

In 1870 Mr. Mill became President of the Land Tenure Association, one of whose objects was: "To claim for the benefit of the State the Interception by Taxation of the Future Unearned Increase of the Rent of Land (so far as the same can be ascertained), or a great part of that increase, which is continually taking place, without any effort or outlay by the proprietors, merely through the growth of population and wealth; reserving to owners the option of relinquishing their property to the state at the market value which it may have acquired at the time when this principle may be adopted by the Legislature." It is urged against this plan that, if the Government take for itself the increase from rent, it should also make compensation for loss arising from declining rents, whenever there happens to be any readjustment of values in land.(340)



6. Taxes falling on Capital not necessarily objectionable.

In addition to the preceding rules, another general rule of taxation is sometimes laid down—namely, that it should fall on income and not on capital.

To provide that taxation shall fall entirely on income, and not at all on capital, is beyond the power of any system of fiscal arrangements. There is no tax which is not partly paid from what would otherwise have been saved; no tax, the amount of which, if remitted, would be wholly employed in increased expenditure, and no part whatever laid by as an addition to capital. All taxes, therefore, are in some sense partly paid out of capital; and in a poor country it is impossible to impose any tax which will not impede the increase of the national wealth. But, in a country where capital abounds and the spirit of accumulation is strong, this effect of taxation is scarcely felt. To take from capital by taxation what emigration would remove, or a commercial crisis destroy, is only to do what either of those causes would have done—namely, to make a clear space for further saving.

I can not, therefore, attach any importance, in a wealthy country, to the objection made against taxes on legacies and inheritances, that they are taxes on capital. It is perfectly true that they are so. As Ricardo observes, if L100 are taken from any one in a tax on houses or on wine, he will probably save it, or a part of it, by living in a cheaper house, consuming less wine, or retrenching from some other of his expenses; but, if the same sum be taken from him because he has received a legacy of L1,000, he considers the legacy as only L900, and feels no more inducement than at any other time (probably feels rather less inducement) to economize in his expenditure. The tax, therefore, is wholly paid out of capital; and there are countries in which this would be a serious objection. But, in the first place, the argument can not apply to any country which has a national debt and devotes any portion of revenue to paying it off, since the produce of the tax, thus applied, still remains capital, and is merely transferred from the tax-payer to the fund-holder. But the objection is never applicable in a country which increases rapidly in wealth.



Chapter II. Of Direct Taxes.



1. Direct taxes either on income or expenditure.

Taxes are either direct or indirect. A direct tax is one which is demanded from the very persons who, it is intended or desired, should pay it. Indirect taxes are those which are demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another: such as the excise or customs. The producer or importer of a commodity is called upon to pay tax on it, not with the intention to levy a peculiar contribution upon him, but to tax through him the consumers of the commodity, from whom it is supposed that he will recover the amount by means of an advance in price.

Direct taxes are either on income or on expenditure. Most taxes on expenditure are indirect, but some are direct, being imposed, not on the producer or seller of an article, but immediately on the consumer. A house-tax, for example, is a direct tax on expenditure, if levied, as it usually is, on the occupier of the house. If levied on the builder or owner, it would be an indirect tax. A window-tax is a direct tax on expenditure; so are the taxes on horses and carriages.

The sources of income are rent, profits, and wages. This includes every sort of income, except gift or plunder. Taxes may be laid on any one of the three kinds of income, or a uniform tax on all of them. We will consider these in their order.



2. Taxes on rent.

A tax on rent falls wholly on the landlord. There are no means by which he can shift the burden upon any one else. It does not affect the value or price of agricultural produce, for this is determined by the cost of production in the most unfavorable circumstances, and in those circumstances, as we have so often demonstrated, no rent is paid.

This, however, is, in strict exactness, only true of the rent which is the result either of natural causes, or of improvements made by tenants. When the landlord makes improvements which increase the productive power of his land, he is remunerated for them by an extra payment from the tenant; and this payment, which to the landlord is properly a profit on capital, is blended and confounded with rent. A tax on rent, if extending to this portion of it, would discourage landlords from making improvements; but whatever hinders improvements from being made in the manner in which people prefer to make them, will often prevent them from being made at all; and on this account a tax on rent would be inexpedient unless some means could be devised of excluding from its operation that portion of the nominal rent which may be regarded as landlord's profit.



3. —on profits.

A tax on profits, like a tax on rent, must, at least in its immediate operation, fall wholly on the payer. All profits being alike affected, no relief can be obtained by a change of employment. If a tax were laid on the profits of any one branch of productive employment, the tax would be virtually an increase of the cost of production, and the value and price of the article would rise accordingly; by which the tax would be thrown upon the consumers of the commodity, and would not affect profits. But a general and equal tax on all profits would not affect general prices, and would fall, at least in the first instance, on capitalists alone.

There is, however, an ulterior effect, which, in a rich and prosperous country, requires to be taken into account. It may operate in two different ways: (1.) The curtailment of profit, and the consequent increased difficulty in making a fortune or obtaining a subsistence by the employment of capital, may act as a stimulus to inventions, and to the use of them when made. If improvements in production are much accelerated, and if these improvements cheapen, directly or indirectly, any of the things habitually consumed by the laborer, profits may rise, and rise sufficiently to make up for all that is taken from them by the tax. In that case the tax will have been realized without loss to any one, the produce of the country being increased by an equal, or what would in that case be a far greater, amount. The tax, however, must even in this case be considered as paid from profits, because the receivers of profits are those who would be benefited if it were taken off.

But (2.) though the artificial abstraction of a portion of profits would have a real tendency to accelerate improvements in production, no considerable improvements might actually result, or only of such a kind as not to raise general profits at all, or not to raise them so much as the tax had diminished them. If so, the rate of profit would be brought closer to that practical minimum to which it is constantly approaching. At its first imposition the tax falls wholly on profits; but the amount of increase of capital, which the tax prevents, would, if it had been allowed to continue, have tended to reduce profits to the same level; and at every period of ten or twenty years there will be found less difference between profits as they are and profits as they would in that case have been, until at last there is no difference, and the tax is thrown either upon the laborer or upon the landlord. The real effect of a tax on profits is to make the country possess at any given period a smaller capital and a smaller aggregate production, and to make the stationary state be attained earlier, and with a smaller sum of national wealth.

Even in countries which do not accumulate so fast as to be always within a short interval of the stationary state, it seems impossible that, if capital is accumulating at all, its accumulation should not be in some degree retarded by the abstraction of a portion of its profit; and, unless the effect in stimulating improvements be a full counterbalance, it is inevitable that a part of the burden will be thrown off the capitalist, upon the laborer or the landlord. One or other of these is always the loser by a diminished rate of accumulation. If population continues to increase as before, the laborer suffers; if not, cultivation is checked in its advance, and the landlords lose the accession of rent which would have accrued to them. The only countries in which a tax on profits seems likely to be permanently a burden on capitalists exclusively are those in which capital is stationary, because there is no new accumulation. In such countries the tax might not prevent the old capital from being kept up through habit, or from unwillingness to submit to impoverishment, and so the capitalists might continue to bear the whole of the tax.



4. —on Wages.

We now turn to Taxes on Wages. The incidence of these is very different, according as the wages taxed as those of ordinary unskilled labor, or are the remuneration of such skilled or privileged employments, whether manual or intellectual, as are taken out of the sphere of competition by a natural or conferred monopoly.

I have already remarked that, in the present low state of popular education, all the higher grades of mental or educated labor are at a monopoly price, exceeding the wages of common workmen in a degree very far beyond that which is due to the expense, trouble, and loss of time required in qualifying for the employment. Any tax levied on these gains, which still leaves them above (or not below) their just proportion, falls on those who pay it; they have no means of relieving themselves at the expense of any other class. The same thing is true of ordinary wages, in cases like that of the United States, or of a new colony, where, capital increasing as rapidly as population can increase, wages are kept up by the increase of capital, and not by the adherence of the laborers to a fixed standard of comforts. In such a case, some deterioration of their condition, whether by a tax or otherwise, might possibly take place without checking the increase of population. The tax would in that case fall on the laborers themselves, and would reduce them prematurely to that lower state to which, on the same supposition with regard to their habits, they would in any case have been reduced ultimately, by the inevitable diminution in the rate of increase of capital, through the occupation of all the fertile land.

Some will object that, even in this case, a tax on wages can not be detrimental to the laborers, since the money raised by it, being expended in the country, comes back to the laborers again through the demand for labor. Without, however, reverting to general principles, we may rely on an obvious reductio ad absurdum. If to take money from the laborers and spend it in commodities is giving it back to the laborers, then, to take money from other classes, and spend it in the same manner, must be giving it to the laborers; consequently, the more a government takes in taxes, the greater will be the demand for labor, and the more opulent the condition of the laborers—a proposition the absurdity of which no one can fail to see.

In the condition of most communities, wages are regulated by the habitual standard of living to which the laborers adhere, and on less than which they will not multiply. Where there exists such a standard, a tax on wages will indeed for a time be borne by the laborers themselves; but, unless this temporary depression has the effect of lowering the standard itself, the increase of population will receive a check, which will raise wages, and restore the laborers to their previous condition. On whom, in this case, will the tax fall? A rise of wages occasioned by a tax must, like any other increase of the cost of labor, be defrayed from profits. To attempt to tax day-laborers, in an old country, is merely to impose an extra tax upon all employers of common labor; unless the tax has the much worse effect of permanently lowering the standard of comfortable subsistence in the minds of the poorest class.

We find in the preceding considerations an additional argument for the opinion, already expressed, that direct taxation should stop short of the class of incomes which do not exceed what is necessary for healthful existence. These very small incomes are mostly derived from manual labor; and, as we now see, any tax imposed on these, either permanently degrades the habits of the laboring-class, or falls on profits, and burdens capitalists with an indirect tax, in addition to their share of the direct taxes; which is doubly objectionable, both as a violation of the fundamental rule of equality, and for the reasons which, as already shown, render a peculiar tax on profits detrimental to the public wealth, and consequently to the means which society possesses of paying any taxes whatever.