Now it may happen that an individual may wish to increase his checking account at the bank, but that he has no actual cash with which to make a deposit with the bank. In this case he may give the bank his promissory note, together with stocks, bonds, or other forms of wealth, which the bank holds as security. In return, the bank credits him with a "deposit." This means that the bank extends its credit to the individual, by undertaking to honor checks for sums not actually received from the depositor.

The bank has received valuable security from the borrower and hence feels justified in extending him a deposit credit. But, why does a bank feel safe in undertaking to pay out sums of money which it does not actually have in its vaults? The answer is that the bank attempts to keep on hand a reserve fund sufficient to meet all demands for cash which may be made upon it. If the reserve fund is relatively large, the bank will ordinarily loan its credit freely. If the cash reserve is relatively low, the conservative bank may refuse further loans, on the grounds that its cash reserve is too low to justify the acceptance of additional obligations. The only safe alternative to this is for the bank in some way to increase its reserve fund, and then proceed to extend the amount of credit justified by this increased reserve.

383. DANGERS OF BANK CREDIT.—The integrity of these various operations rests upon the confidence which people have in the bank's ability to make good its promises. Confidence in the deposit credit of a bank exists when the past experience of depositors has taught them that the bank in question will habitually exchange either coin or bank notes for checks. Bank notes are ordinarily accepted in the place of coin, because people believe the credit of the bank issuing those notes to be so firmly established that the bank would be able and willing to exchange coin for its notes, upon demand. A bank is enabled to meet these obligations promptly, it should be remembered, because it keeps on hand, against the demands of depositors, a reserve fund of cash, or securities which by law it is allowed to count as cash. If all of the depositors of a bank suddenly and simultaneously demanded the full amount of their deposits in coin, the bank would be unable to accommodate them; as a matter of fact, business men normally leave in the bank that share of their deposits which they do not actually need. So long as men have confidence in a bank, they will prefer checks and bank notes to the less convenient coin, unless they need coin for some special purpose.

If properly managed a bank is a profitable business for everyone concerned. But even though properly managed, a bank may occasionally find itself in a precarious position. There are few matters which the average person comprehends as vaguely as banking, and few things which more vitally interest him than the safety of his money. These two facts combine to render banking extremely sensitive to every rumor of unsoundness. The careful regulation of banking by law is therefore necessary.

384. THE NATIONAL BANKING SYSTEM.—The Civil War plunged our government into serious financial straits. To improve the finances of the Federal government there was created, in 1863, a system of national banks. The original act of 1863 is still the basis of our banking system, though it has since been modified a number of times, notably in 1913.

We speak of a "national banking system," but as a matter of fact this term is inexact. From the beginning of their history, the so-called national banks were "national" only in the sense that they were chartered by the Federal government, and were subject to examination by Federal inspectors. These national banks constituted no definite system: they transacted business much as other banks did, they had no branches, and they had little to do with one another. There was little team-work, and no effective leadership, so that in time of a threatened panic the different parts of the "system" worked at cross- purposes instead of as a unit.

385. WHY A BANKING SYSTEM MUST BE ELASTIC.—A good banking system will be elastic, i.e. it will respond promptly to the varying needs of business. Money and credit constitute a mechanism by means of which business is handled, just as the labor force of a factory constitutes a means of handling the output of the factory. If the output of the factory increases, a larger labor force is needed; if the output dwindles, fewer laborers are needed. Similarly, if business increases in volume, an increased amount of money and credit is necessary to handle the increased volume of business. If, on the other hand, business declines, the volume of money and credit ought to decline also. Otherwise, there will be so much money and credit in circulation, relatively to the amount of goods, that high prices will result.

High prices will result for the following reason: Money and credit are used to exchange against goods. As a general proposition, all the available goods in a community are in a process of exchanging against all of the available money and credit in the community. If goods are relatively few and money and credit are relatively plentiful, a small amount of goods can command a large amount of money and credit, i.e. the goods will sell for high prices. A sound banking system, therefore, will allow an expansion of money and credit instruments when business is booming, and will permit the contraction of the mechanism of exchange when business is growing dull.

The old national banking system was inelastic in two ways: first, it provided an inelastic supply of deposit credit; second, it provided an inelastic supply of currency or bank notes.

386. INELASTICITY OF DEPOSIT CREDIT (RESERVES).—It will be recalled that the amount of loans which a bank may make depends upon the maintenance of an adequate reserve fund. From this it follows that the larger the reserve fund the more loans the bank will feel justified in making. Similarly, if the reserve fund shrinks, sound banking demands that loans be curtailed. Keeping these facts in mind, there were two reasons why the supply of deposit credit was inelastic before 1913.

In the first place, individual banks kept only a part of their reserves actually in their vaults. The remainder, and sometimes the larger part, of their reserves was maintained in the form of deposits in other banks. Banks in towns and small cities habitually kept part of their reserves in the form of deposits in the banks of large cities, and the latter in turn kept part of their reserves in the banks of New York City, the financial center of the country. Hence the cash reserves of the country tended to collect in New York, where they were utilized by New York banks as a basis for extending loans.

This was a dangerous arrangement. In the fall of the year large amounts of cash were demanded in the West, in order to pay farm hands and otherwise "move the crops." At such times the small western banks had to demand their deposits in larger banks, while these in turn had to call for their deposits in the New York banks. The New York banks were often embarrassed by these demands, because they made a practice of fully utilizing the funds left with them, as a basis for extending loans. The call in the West for cash meant a curtailment of these loans with a consequent demoralization of eastern money markets.

In the second place, individual banks were unable to extend loans to customers beyond the point justified by the amount of reserves in their vaults, or deposited to their credit in other banks. A bank with a total reserve of $10,000 might feel justified in loaning its credit to the extent of $100,000, but in case demands for additional loans were made upon it, sound banking practice would oblige it to refuse accommodation. Otherwise it might later find itself unable to get enough cash to pay out against claims made in the form of checks. This practice of curtailing loans when reserves were depleted was demoralizing to business, since the disappointed customer might find his entire business blocked, and this in turn would inconvenience or seriously injure all those who were connected with him in a business way. Before 1913, each bank stood as a unit, and when its reserves were depleted it could not secure temporary aid from other banks. There was no centralized control, and no method whereby national banks might secure help of one another.

387. INELASTICITY OF CURRENCY (BANK NOTES).—We have seen that an increased volume of business demands an increased volume of money and credit. In the previous section it was pointed out that before 1913 the volume of deposit credit in this country was inelastic. We must now notice that bank notes, or paper currency, are just as truly a part of the volume of money and credit as is deposit credit, and we must note, also, that just as deposit credit was inelastic before 1913, so the issue of bank notes was inelastic. Previous to 1913 it often happened that the supply of bank notes was smallest when business was expanding, and that the issue of bank notes increased during dull business periods. This statement requires some explanation.

The Act of 1863 provided that National banks might issue bank notes only after depositing in the Federal Treasury an amount of United States government bonds sufficient to render the bank notes absolutely safe. Naturally, the banks made heavy purchases of bonds when the bond market was depressed, and tended to purchase relatively few bonds when those securities were high in price. Since the only reason for purchasing bonds was to enable the b banks to issue notes, more notes were issued when bonds were low in price, and fewer were issued when bonds were high. Unfortunately, the same general conditions that stimulated business also tended to raise the price of bonds, while the causes of slack business often operated to lower bond prices. This means that when business was expanding, and more notes were needed, bonds were so high that few were purchased, and consequently few notes were issued. Similarly, when business was dull, more bonds were purchased, and more notes issued.

388. THE PANIC OF 1907.—The panic of 1907 attracted attention to these two great defects of the old national banking system, i.e. the inelasticity of deposit credit and the inelasticity of currency. In the fall of 1907, a bumper crop caused Western banks to make unusually large demands for cash upon the New York banks. Unfortunately, this depletion of reserves came at precisely the time when the demand upon New York banks for loans was greatest. There was thus increased pressure exerted upon New York banks for loans, but less justification for extending them. In response to the pressure for loans, some New York banks over-extended their credit. In October the inability of a few prominent banks to pay in cash all of the demands made upon them started a series of bank "runs." Even solvent institutions were unable to meet their obligations promptly and many failures occurred. A large number of banks were technically insolvent, that is to say, their assets were invested in forms which prevented their immediate conversion into cash, so that for the time being demands for cash could not be met. The lack of an effective banking system prevented these banks from securing temporary aid from banks more favorably situated.

389. REFORM.—The panic of 1907 stimulated financial experts to attempt to remedy the defects of our banking system. In 1908 a monetary commission was appointed to investigate banking experience at home and abroad. As the result of this investigation it appeared advisable to establish a system which should secure some of the advantages of such centralized banking systems as have long existed in many European countries. A single central government bank was at first recommended by experts, but this was deemed politically inexpedient. In view of this fact resort was had to a compromise between a centralized and a decentralized system. This compromise was effected by the Federal Reserve Act of 1913.

390. FRAMEWORK OF THE FEDERAL RESERVE SYSTEM.—The Act of 1913 is administered by the Federal Reserve Board, consisting of the Secretary of the Treasury and the Comptroller of the Currency, ex officio, and five other members appointed for ten years by the President. The country is divided into twelve districts, in each of which there is located a Federal Reserve bank. In each district every National bank must subscribe six per cent of its capital and surplus for stock in the Federal Reserve bank, and thus become a "member" bank. State banks and trust companies may, upon the fulfilment of certain conditions, become member banks. Each Federal Reserve bank is governed by a board of nine directors, six of whom are elected by the member banks of its district, and three of whom are appointed by the Federal Reserve Board. The Federal Reserve banks are bankers' banks, that is, they do not ordinarily deal directly with individuals, but with member banks only.

391. ELASTICITY OF DEPOSIT CREDIT (RESERVES).—The piling up of bank reserves in New York is impossible under the Federal Reserve system. The reserves of any member bank do not ordinarily move beyond the district, for a member bank may count as legal reserve only those funds which it has placed on deposit in the Federal Reserve bank of its district. There exists what may be called district centralization of reserves; that is to say, all of the legal reserves of all the member banks of a particular district are concentrated in the Federal Reserve bank of the district, and can be utilized as a unit by that Federal Reserve bank. If in time of stress the total reserves of the district are insufficient, the Federal Reserve Board may arrange for the temporary transfer of surplus funds from one Federal Reserve district to another. This secures one of the most important advantages of a central bank without actual centralization.

Elasticity of deposit credit is also provided for in the "rediscounting device." A bank discounts commercial paper when it loans an individual, say, $980, on the security of a $1000 promissory note. The $20 represents an amount which the bank counts out, or discounts, as payment for the service. A further operation, long known in Europe as rediscounting, was authorized by the Act of 1913. When the reserves of a member bank are too low to justify further extensions of deposit credit, the bank can send certain types of discounted paper to the Federal Reserve bank of its district, and receive in return either a deposit credit or a special form of paper currency called Federal Reserve notes.

392. ELASTICITY OF CURRENCY (BANK NOTES).—When, in return for discounted commercial paper, the Federal Reserve bank extends a deposit credit to the member bank, the deposit credit of the member bank is rendered more elastic. When, on the other hand, the Federal Reserve bank sends the member bank Federal Reserve notes in exchange for discounted paper, the result is a certain elasticity in the currency.

The Federal Reserve notes are a new type of currency. They are secured by the maintenance, in the vaults of the Federal Reserve banks, of a forty per cent gold reserve for their redemption. Since these notes are issued to member banks in return for rediscounted paper, the expansion of business and the resultant tendency of member banks to send discounted paper to the Federal Reserve bank for rediscount causes the volume of Federal Reserve notes to expand. When the need for additional currency has subsided, there is an arrangement whereby a certain amount of the Federal Reserve notes may be withdrawn from circulation. This is important, for if the amount of money in circulation continues to be enormous after business has declined, inflation and high prices result. A truly elastic banking system necessitates contraction as well as expansion.

393. THE OUTLOOK.—On the whole, it would seem that the Federal Reserve System is a happy compromise between the centralized banking systems of Europe and the highly decentralized system existing in this country prior to 1913. The Federal Reserve system allows us to secure the main benefits of a great central bank without the political difficulties attendant upon the existence of such a bank. It does a great deal to make elastic our supply of money and credit. The Federal Reserve Board can mobilize the entire banking strength of the country in time of stress, so that the strength of one member bank is the strength of the whole system. Since it controls not only a substantial proportion of the bank reserves of the country, but also the privilege of note issue on the security of rediscounted paper, the Federal Reserve Board can administer the member banks as a unit. The system may not eliminate panics, but it is fair to expect that it will reduce their number and lessen their violence.

QUESTIONS ON THE TEXT

1. Distinguish between money and credit.

2. Name and distinguish between the four types of banks.

3. What is the primary function of a commercial bank?

4. Explain clearly the nature of bank credit.

5. If the cash reserve of a bank is low, and the bank is confronted with demands for loans, in what two ways may it dispose of these demands?

6. What dangers attend the extension of bank credit?

7. Describe the national banking system.

8. Why should a banking system be elastic?

9. Explain the inelasticity of deposit credit before 1913.

10. Discuss the inelasticity of bank note issue under the old national banking system.

11. What was the significance of the panic of 1907?

12. Outline the framework of the Federal Reserve System.

13. Explain in detail how the Act of 1913 provides for elastic deposit credit.

14. Explain the "rediscounting device."

15. How does the Act of 1913 provide for an elastic bank note issue?

16. What is the present outlook with respect to our banking system?

REQUIRED READINGS

1. Williamson, Readings in American Democracy, chapter xxxi.

Or all of the following:

2. Ely, Outlines of Economics, chapter xv.

3. Fetter, Modern Economic Problems, chapter ix.

4. Seager, Principles of Economics, chapter xx.

5. Guitteau, Government and Politics in the United States, chapter xxx.

QUESTIONS ON THE REQUIRED READINGS

1. Outline the financial powers of Congress. (Guitteau, page 361.)

2. Describe the First and Second United States banks. (Guitteau, pages 369-370.)

3. What were the main functions of the national banks? (Guitteau, pages 371-373.)

4. What are collateral loans? (Seager, pages 346-347.)

5. What are the limitations upon the use of bank credit? (Seager, pages 352-353.)

6. In what ways are depositors in national banks protected? (Seager, pages 358-359.)

7. What is the Independent Treasury system? (Ely, pages 297-298.)

8. Explain the relation of "moving the crops" to bank credit. (Ely, pages 298-299.)

9. How does the Bank of England secure elastic reserves? (Ely, page 302.)

10. What was the Aldrich-Vreeland Act? (Ely, pages 305-306.)

11. Enumerate some of the powers of the Federal Reserve banks. (Fetter, page 121.)

TOPICS FOR INVESTIGATION AND REPORT

I

1. Write to a number of banks in your vicinity asking for literature describing the varied services which they offer the public.

2. Outline some of the more important banking laws of your state.

3. What are the limits of the Federal Reserve district in which you live? In what city is the Reserve Bank located? Why do you suppose it is located in this city?

4. List the banks in your vicinity that are members of the Federal Reserve system.

5. Interview an official of a bank belonging to the Federal Reserve System upon the advantages of such membership.

6. Interview a friendly official of a bank which does not belong to the system. Try to ascertain the reasons why this bank does not belong to the Federal Reserve System.

II

7. Nature and function of money. (Ely, Outlines of Economics, chapter xiv; Fetter, Modern Economic Problems, chapter iii.)

8. Functions of a bank. (White, Money and Banking, part iii, chapter i; Fetter, Modern Economic Problems, chapter vii; Fiske, The Modern Bank, chapter iv.)

9. The bank statement. (White, Money and Banking, part iii, chapter ii.)

10. The clearing house. (White, Money and Banking, part iii, chapter iii; Fiske, The Modern Bank, chapter x.)

11. The credit department of a modern bank. (Fiske, The Modern Bank, chapter xvii.)

12. Bank reserves. (Fiske, The Modern Bank, chapter xxii.)

13. Greenbacks. (White, Money and Banking, part ii, chapter iii.)

14. The check system. (Dunbar, Theory and History of Banking, chapter iv.)

15. Colonial finance. (Dewey, Financial History of the United States, chapter i.)

16. The First United States Bank. (White, Money and Banking, part iii, chapter vi.)

17. The Second United States Bank. (White, Money and Banking, part iii. chapter vii.)

18. The national banking system. (White, Money and Banking, part iii, chapter xiv; Dewey, Financial History of the United States, chapter iv; Fetter, Modern Economic Problems, chapter viii.)

19. The panic of 1907. (Coman, Industrial History of the United States, pages 335-337; Noyes, Forty Years of American Finance, chapter xv; White, Money and Banking, part iii, chapter xviii.)

20. The Bank of England. (Dunbar. Theory and History of Banking, chapter viii.)

21. The Bank of France. (Dunbar, Theory and History of Banking, chapter ix.)

22. The German bank. (Dunbar, Theory and History of Banking, chapter x.)

23. Organization of the Federal Reserve System. (Annals, vol. lxiii, pages 88-97.)

24. The Federal Reserve act and foreign trade. (Annals, vol. lxiii, pages 132-141; Kemmerer, The A B C of the Federal Reserve System, chapter ix.)

FOR CLASSROOM DISCUSSION

25. Should we adopt a centralized banking system such as exists in England, France and Germany? (See the Debaters' Handbook Series.)

26. Should all State banks and trust companies be required by law to become members of the Federal Reserve System?

27. What would be the best method of acquainting the general public with the fundamental principles of banking?



CHAPTER XXXII

TAXATION

394. THE INCREASING COST OF GOVERNMENT.—In the United States, as in other modern civilized countries, the cost of government is steadily increasing. The settlement of the Great West, the depletion of natural resources and the transition from a primitive to an industrial economy have obliged our government to pay out larger and larger sums for the services of public officials, and for the materials and commodities used for public purposes. The growth—of our cities and the increasing complexity of our industrial life have greatly increased the number of activities which it is to our advantage to carry on, not individually, but collectively or through the agency of government. The spread of altruism and the widening of the concept of social service have caused the extension of governmental activity in such new fields as social insurance, recreation, and public health. Altogether, our total government expenditure is more than seventeen times as large as it was a half century ago, while the per capita expenditure is more than five times as great.

395. SOURCES OF PUBLIC REVENUE.—Writers on taxation generally enumerate as sources of public revenue, public industries, the public domain, gifts, confiscations, fees, special assessments, fines, and taxes. At various times and in different countries of the world, all of these have been important, but in the United States at the present time taxes are by far the most important source of public revenue.

A tax may be defined as a compulsory contribution exacted from the individual by the government, for the purpose of defraying expenses incurred for the common welfare. The government does not return to the individual taxpayer a definite commodity or service. In return for taxes the government indeed renders many valuable services, such as public education, the safeguarding of health, and protection from domestic violence and foreign war. But on account of the collective character of these services, no attempt is made to apportion the payment exacted of the individual to the benefit which he as an individual receives.

Until recently our national government secured most of its revenue from taxes on imports, and from excises or internal taxes on such commodities as tobacco and liquor. Since national prohibition went into effect (1919), the Federal revenues are derived mainly from taxes on imports, from income and inheritance taxes, and from taxes on corporations.

More than three fourths of the receipts of state and local governments are derived from the general property tax, the amounts collected from other sources being as yet relatively unimportant. The general property tax is supposed to be levied upon all the property in the possession of taxpayers, though as we shall see a little later, this tax works out very badly. The old "poll" or head tax was formerly important, but at present less than two thirds of one per cent of state and local revenues are derived from this source. In most states it is being abandoned because of its small yield, and because of the difficulty and expense in collecting it.

A. DEFECTS IN AMERICAN TAXATION

396. LACK OF A TAX SYSTEM.—The fundamental defect of American taxation is the lack of a definite and cordinated system. The tax laws of most states have been radically changed during the last few decades, and are still in a process of development. In many states old taxes are being modified or abandoned, and new taxes adopted. But too often this is being done without regard for the taxation reform of other states or of the Federal government. As a result, the tax burden weighs unequally upon different classes, while between state and state, or between state and Federal government, there is an overlapping of tax power. The effect of this overlapping is to create undue confusion, and to demoralize both tax officials and taxpayers.

397. LEGAL RESTRICTIONS UPON TAXING POWER.—A serious defect of American taxation is the lack of correspondence between taxing power and fiscal needs. Let us inquire into this.

The Federal government has important functions to perform, but has practically unlimited taxing power. So far as the national government is concerned, the problem of finding sources of revenue is relatively simple.

The functions assumed by the state governments are as yet relatively few and inexpensive, while the power of the state to tax is but slightly abridged by the Federal Constitution. States have relatively little difficulty in making both ends meet.

Local governments, and especially municipal governments, have a large number of functions which are increasingly important. Of the total government expenditure in this country, about 35 per cent is made by the Federal government, 10 per cent by the state governments, and 55 per cent by the local governments. But whereas Federal and state governments have relatively adequate taxing powers, the taxing powers of local governments are narrowly restricted by the state constitution and statutes. Such local functions as health, public school education, and recreation are constantly demanding greater expenditures, yet local governments as yet have few opportunities for securing necessary funds.

398. DEFECTS IN TAX ASSESSMENT.—The defects of tax assessment are clearly illustrated in the workings of the general property tax, called by some authorities the worst tax in the civilized world. The basis of levy is the work of local assessors, who are generally elective. The assessors estimate the value of millions of dollars' worth of property, and their estimates are the basis of the tax rates for not only township and county, but generally for the state as well. Incapable and dishonest assessors often work injustice by underestimating the value of some forms of property, and overestimating the value of other forms. In addition, political pressure is brought to bear upon the assessor to cause him to undervalue the property of the township or county as a whole, so that the local unit will bear a relatively small share of the taxes of the state.

The estimates of the local assessors are commonly subject to correction by a county, and sometimes by a state, board of equalization. The duty of such a board is to make assessments uniform and just, but notwithstanding the efforts of these bodies, unequal and unfair assessments have persisted.

399. DIFFICULTY OF TAXING INTABGIBLE PROPERTY.—Where taxation is on the basis of assessment, it often happens that the tax burden rests unequally upon different forms of property. Property in tangible form, such as land, cattle, and houses, is easily discoverable, and hence cannot easily evade the payment of taxes. But intangible property, such as bonds, stocks, or mortgage, can easily be hidden, so that owners of this type of property often evade their share of the tax burden.

This evasion is often practiced in the case of the general property tax, which is intended to reach both tangible and intangible property. The general property tax worked well a century ago when the greater share of wealth existed in tangible form, because local assessors could easily locate such things as land and live stock. But the rapid development of corporations, bringing with it a rapid increase in the proportion of intangible forms of property, has rendered the general property tax grossly unjust. The assessors of the general property tax cannot easily discover intangible property, unless taxpayers coperate with them. The all too frequent lack of such coperation causes a disproportionate share of the tax burden to fall upon tangible property. The general property tax is haphazard, ineffective, and demoralizing to both tax officials and taxpayers.

400. DOUBLE TAXATION.—By double taxation is meant the taxation of an individual or different individuals twice for the same thing. Double taxation is of two kinds.

The first type of double taxation is illustrated by the taxation of both tangible property and the paper claim upon that property. For example, a state may tax a land-owner on his land, and also tax another resident of the state on the mortgage which he holds against that land. Or it may happen that a state will tax the land, buildings and other tangible equipment of a corporation, and at the same time tax those of its residents who hold stock in that corporation, i.e. individuals who hold paper evidence of ownership in the tangible equipment of the corporation. More generally, however, this type of double taxation arises when the holder of the paper claim resides in one state, while the tangible property lies in another state. In such a case, it is common for one state to tax the paper claim, and for the other state to tax the property itself. This type of double taxation is manifestly unfair, and often imposes a ruinous burden upon property.

The second type of double taxation is illustrated by the overlapping of similar taxes between state and state, or between Federal and state governments. Because it is the practice of most states to seek revenue without regard to the taxing activities of other states, or of the Federal government, it may happen that corporations, incomes, or inheritances are taxed by more than one agency of government. If a scientific and cordinated tax system were deliberately to provide for this, the supposition would be that such taxation were reasonable and just, because intended to bear with equal weight upon all forms of property in the taxable class. But because such taxation is haphazard, it bears with unequal weight upon corporations and individuals, and is therefore unjust.

Moreover, it encourages the evasion of tax burdens. Individuals and corporations sometimes migrate from localities or states in which they are subject to double taxation, to localities or states in which the danger of such taxation is less. This in turn has the evil effect of tempting states and municipalities to neglect taxes on corporations, incomes, and inheritances for the sake of attracting wealthy individuals and large industrial organizations from neighboring areas.

B. SOME SUGGESTED TAX REFORMS

401. IDEALS OF TAXATION.—Summarizing the views of the more generally accepted writers on taxation, we may say that the following are the basic ideals in taxation:

Taxes should take as little as possible from the people and still meet the needs of government. Taxes should be uniform, that is, all taxable articles of the same class should be levied upon at the same rate. It is also important that the time, manner, and amount of the tax should not be arbitrary, but that the individual's convenience as regards the terms of payment should be considered. From the standpoint of the government, taxes should be easy to administer and economical to collect.

A good tax system will be elastic, so that taxes may easily be increased or decreased, according as the revenue needs of the government change. The ability to pay ought to have some influence upon the extent to which an individual is taxed. Taxes should adapt themselves somewhat to the local sentiment as to what is expedient or socially desirable.

Finally, taxation policies should be systematized and cordinated.

402. ESSENTIALS OF A TAX SYSTEM.—The construction of an ideal tax system in this country would involve three steps.

In the first place, each branch of government should be enabled to secure revenues actually needed for justifiable purposes. In this regard the greatest need is to increase the taxing powers of our municipalities. This is imperative if the cities of the future are to care for their citizens properly.

A second fundamental step relates to the separation of taxing power. Each branch of government should pretty well confine its use of the taxing power to definite types of taxable wealth. The Federal government, for example, might secure most of its revenue from import duties, excises, an income tax, and stamp taxes of various kinds. Many taxation experts believe that the states ought to confine themselves mainly to license, corporation, inheritance, and, possibly, income taxes. Local governments might well secure most of their revenue from taxes on franchises, licenses, and real estate. Such a separation of taxing power might aid in the adjustment of fiscal needs to taxing power, as well as helping to remedy the evil of double taxation. However, a complete separation of taxing powers is not necessarily desirable, and certainly it is not practicable, for there is a growing tendency toward duplication in income, inheritance, and other taxes. At the present time, for example, not only the Federal government, but many of the states levy income and inheritance taxes.

A third fundamental step would be the cordination of local, state, and Federal taxing authorities. The central aim of such cordination should be so to distribute tax burdens that no form of taxable wealth would escape its just burden, and so that no form of wealth would be subjected to unduly heavy taxation. There is a growing feeling that to prevent double taxation and similar evils, all local taxing bodies ought to be cordinated under the state authorities, while for similar reasons the Federal government ought to have some measure of direction or control over that share of state taxation which is interstate in its effects.

403. REFORM OR ABOLITION OF THE GENERAL PROPERTY TAX.—The reform of state and local taxation logically begins with the general property tax.

In many states attempts are being made to reform this tax. In some cases "tax ferrets" are employed to discover tax evaders, a policy which may easily lead to corruption and favoritism. In other states the conviction is growing that local elective assessors ought to be supplanted by a permanent corps of state assessors, appointed under the merit system. This would reduce the danger of unequal and unfair assessments.

In other states there is a tendency to abandon the general property tax altogether. In New York, Massachusetts, Pennsylvania, and other states, there is a marked tendency to turn over the general property tax to local governing bodies. In such cases it is intended that the state shall depend for most of its revenue upon income, corporation, inheritance, and license taxes.

The future will doubtless see a more widespread tendency toward the reform or abolition of the general property tax. In some states, however, such changes in the taxation system require constitutional amendment, and constitutional amendment is often a slow and tedious process.

404. REFORM IN LAND TAXATION.—Coupled with plans for the reform or abolition of the general property tax are proposals for the reform of land taxation. A primary aim of these proposals, some of which suggest elements of the single tax doctrine, is to secure a more correct assessment of land values. In many cases a state does not now tax the holder of a mortgage when the mortgaged land is also within the state and thus directly subject to taxation. This is a desirable development, but we ought to go still further, so that the holder of a mortgage would not be taxed whether or not he lived in the same state as the owner of the land. A mortgage is obviously not social wealth, but a paper claim on wealth, and this wealth ought not to be taxed twice.

Some authorities believe that the tax rate on land ought substantially to be increased, when it appears that such land is being held for speculative purposes. To encourage improvements, it is also proposed that certain permanent improvements on land be temporarily exempted from taxation. Lastly, it would appear socially desirable to levy special taxes on urban sites, so as to secure for the community some share of the future unearned increment.

405. THE INCOME TAX.—All taxes ultimately come out of income, but when we speak of an income tax we refer to a direct levy upon income as it arises, chiefly in the form of wages, salaries, and profits. A Federal income tax was levied during the Civil War, but in the nineties the Supreme Court held that such a tax violated the constitutional provision that Congress shall not lay direct taxes except in proportion to the population of the states. In 1913 the Sixteenth Amendment to the Constitution permitted Congress to lay and collect taxes on incomes without apportionment among the several states, and without regard to any census or enumeration.

Since 1913 Congress has passed several income tax laws, and a number of the states have also adopted this form of taxation. The essential features of these laws are as follows. Incomes below a certain amount are exempt from taxation. The limit of untaxable income is raised for married persons living together. In calculating their net income, individuals may make allowance for debts, business expenses, and certain other items. Upon all taxable income above a certain minimum there is then levied a flat rate, constituting a "normal" tax. Where incomes exceed a certain amount, there is an additional tax. Thus the income tax is said to be "progressive," that is, the larger the income the higher the tax rate.

Many benefits are claimed for the income tax. It falls upon those best able to pay, and it is not easily evaded or shifted by the person upon whom it is levied. It is elastic and can readily be increased or reduced according as revenue needs change. Its progressive character is a feature which is considered socially desirable.

The chief defects of the income tax are two. In the first place, the effectiveness of the tax depends upon the willingness of the individual to declare his full income. This is not always done, especially where the income tax is regarded as an undue interference in the private affairs of the individual. Second, wealthy individuals often migrate to states where there is either no income tax or only a relatively light one. This last defect of course applies only to the state income tax.

406. THE INHERITANCE TAX.—Taxes upon inheritances have come into prominence since the opening of the twentieth century. Since 1916 the Federal government has levied an inheritance tax. At the present time most of the states also levy this form of tax upon property passing by will or under the inheritance laws of the state. The essential features of the tax are everywhere the same. Small legacies are generally exempt. Legacies to direct heirs are either exempt, or are taxed at a lower rate than are legacies to collateral heirs. The rates are progressive, that is to say, they increase with the size of the legacy.

Many benefits are claimed for the inheritance tax. It brings in a large revenue, and falls upon those who are best able to pay. The tax cannot be shifted and it cannot easily be evaded. It is easily assessed and collected, because all wills must pass through the probate court. It is held that the state has a social claim upon the property of an individual who has amassed wealth under the protection of its laws, and that this property ought not to be transferred intact to those who did not aid in its accumulation.

If carried too far the inheritance tax would undoubtedly discourage the accumulation of wealth, but tax authorities are already guarding against this danger. On the whole, the inheritance tax is an important addition to our tax system. Its scope is being rapidly extended: rates are being raised, the principle of progression is being more frequently applied, and exemptions allowed direct heirs are being reduced. The tax is increasingly used in the effort to redistribute unearned wealth, though the extent to which this is true depends very largely upon local sentiment.

407. CORPORATION TAXES.—The rapid growth of American industry has been accompanied by an enormous increase in the number and importance of industrial corporations. The proper taxation of these bodies is now challenging the attention of both state and Federal governments.

The difficulties of taxing corporations are two: First, how to prevent that form of double taxation which results from the fact that several states may levy taxes of varying weight upon interstate corporations. Second, how to prevent that form of double taxation which imposes a burden both upon the tangible property of the corporation and upon the stocks and bonds representing ownership in that tangible property.

A number of taxation experts suggest meeting the last-named difficulty by exempting from taxation stocks, bonds, and other securities, and by imposing, instead, a tax directly upon the capitalization of the corporation itself. In the case of corporations which are local and of moderate size, this might be effected by the reform of tax laws within a single state. Where, on the other hand, corporations are distinctly interstate in character, such reform would require either a careful cordination of the tax laws of the several states, or a corporation tax which should be purely Federal in character.

The first difficulty mentioned above would likewise have to be met, either by the cordination of state tax systems, or by allowing taxes on interstate corporations to be levied solely by the Federal government.

It is claimed by some economists that the virtual impossibility of effectively cordinating the tax laws of the various states renders it imperative that all interstate corporations be taxed solely by the Federal government. In such a case the Federal government would be taxing interstate corporations partly for its own benefit, and partly as the agent of the various states. It is said also that such a Federal tax should be levied on corporations at the source, i.e. upon capitalization rather than upon stocks and bonds. Being applied at the source, it would reach all forms of corporation wealth. It would be easy and economical to administer. So far as corporations are concerned, a purely Federal tax on interstate corporations might prevent both forms of double taxation.

Even though the states consented to a purely Federal tax on interstate corporations, however, it might prove difficult for state and Federal governments to agree upon a fair division of the joint revenues derived from such a tax.

QUESTIONS ON THE TEXT

1. Why is the cost of government increasing?

2. Name some sources of public revenue.

3. What is a tax?

4. What is the fundamental defect of American taxation?

5. In what way is there an inadequate apportionment of taxing power to fiscal needs in American government?

6. What is the chief difficulty of tax assessment?

7. Why is it difficult to tax intangible property?

8. Enumerate the fundamental defects of the general property tax.

9. Distinguish between the two forms of double taxation.

10. Outline some fundamental ideals in taxation.

11. What are the three steps necessary in the formulation of a satisfactory tax system in this country?

12. To what extent is the general property tax being reformed or abolished?

13. Discuss the reform of land taxation.

14. Describe the nature of the income tax.

15. What are the benefits and defects of such a tax?

16. Describe the inheritance tax. What are its benefits? What are its dangers?

17. What are the two difficulties in the way of taxing corporations? What are some suggested methods of meeting these difficulties?

REQUIRED READINGS

1. Williamson, Readings in American Democracy, chapter xxxii.

Or all of the following:

2. Bullock, The Elements of Economics, chapter xv.

3. Ely, Outlines of Economics, chapter xxxiv.

4. Fetter, Modern Economic Problems, chapter xvi.

5. Guitteau, Government and Politics in the United States, chapter xvii.

QUESTIONS ON THE REQUIRED READINGS

1. Classify the purposes of public expenditures. (Guitteau, pages 187- 188.)

2. What is the "police function" of government? (Fetter, page 241).

3. What is a franchise tax? (Guitteau, pages 201-202.)

4. What is the "magic fund" delusion? (Bullock, page 370.)

5. Distinguish between proportional, regressive, and progressive taxation. (Bullock, page 373.)

6. What is an excess profits tax? (Bullock, pages 382-383.)

7. What is the importance of the license tax? (Bullock, pages 392- 393).

8. Distinguish between direct and indirect taxation. (Ely, pages 710- 711.)

9. What are "taxes on transactions"? (Ely, pages 719-720.) 10. What is meant by the shifting or incidence of taxation? (Fetter, pages 252- 253.)

TOPICS FOR INVESTIGATION AND REPORT

I

1. Make a list of enterprises supported out of public funds and providing services free to all, regardless of the payment of taxes.

2. Discover which of the following taxes are levied in your state: general property tax, income tax, inheritance tax, poll tax, license tax, transaction tax, sales tax, luxury tax, mortgage tax, franchise tax, excess profits tax.

3. Are tax assessors in your locality appointed or elected? Are there county or state boards of equalization in your state? How are these boards chosen?

4. Interview a friendly tax assessor concerning the difficulties of determining property values. Does he believe that people systematically undervalue their own property? What proposals does he make for the reform of the present method of assessment?

5. Interview a friendly taxpayer. What is his attitude toward the poll tax? the general property tax? the income tax? What proposals does he make for the reform of taxation in your state?

6. The general property tax in your state.

7. Status of the income tax in your state.

8. Status of the inheritance tax in your state.

9. The taxation of corporations in your state.

II

10. Federal revenues. (Guitteau, Government and Politics in the United States, chapter xxix.)

11. Public expenditures. (Ely, Outlines of Economics, chapter xxxi; Seager, Principles of Economics, chapter xxvi; Plehn, Introduction to Public Finance, Part II, chapter i; Bullock, Selected Articles on Public Finance, chapter iii; Ford, The Cost of Our National Government.)

12. The power of Congress to tax. (Young, The New American Government and its Work, chapter v; Beard, American Government and Politics, chapter xiii.)

13. Taxation in American cities. (Annals, vol. xxviii, pages 155- 172.)

14. Personal taxes. (Fetter, Modern Economic Problems, chapter xviii.)

15. The poll tax. (Bullock, Selected Articles on Public Finance, chapter x.)

16. Breakdown of the general property tax. (Taussig, Principles of Economics, vol. ii, chapter lxix.)

17. Protection against improper state taxation. (Young, The New American Government and its Work, chapter xxv.)

18. Double taxation. (Seligman, Essays in Taxation, chapter iv.)

19. The corporation tax. (Seligman, Essays in Taxation, chapters vi and vii.)

20. Separation of state and local revenues. (Seligman, Essays in Taxation, chapter xi; Bullock, Selected Articles on Public Finance, pages 445-460.)

21. Excises. (Plehn, Introduction to Public Finance, chapter vi.)

22. Customs duties. (Plehn, Introduction to Public Finance, chapter vii.)

23. The excess profits tax. (Annals, vol. lxxvii, pages 147-159.)

24. The incidence of taxation. (Plehn, Introduction to Public Finance, chapter xi.)

25. Financing the United States in the World War. (Plehn, Introduction to Public Finance, Part iv; Annals, vol. lxxvii, all.)

FOR CLASSROOM DISCUSSION

26. As a principle of taxation, which is more important, the payment of taxes according to the benefit derived, or payment according to ability?

27. What is the remedy when individuals conceal from the tax authorities the amount of their intangible wealth?

28. Does the income tax constitute an undue interference in the private affairs of the individual?

29. To what extent does the inheritance tax tend to discourage the accumulation of wealth?

30. To what extent should the poor be taxed?

31. Can the adequate taxation of corporations be secured without resorting to a corporation tax which shall be purely Federal in character?

32. Should the national debt be paid? (See Bullock, Selected Articles on Public Finance, chapter xxiv.)



B. MAKING GOVERNMENT EFFECTIVE

CHAPTER XXXIII

WHO SHALL SHARE IN GOVERNMENT?

408. DISTINCTION BETWEEN CITIZENSHIP AND THE SUFFRAGE.—Citizenship implies membership in a nation. A citizen owes allegiance to his government, and in return is entitled to the fundamental advantages of organized government, such as the protection of life, liberty and property at home and abroad. Suffrage, on the other hand, is the privilege of sharing in government by the exercise of the vote. Most voters are also citizens, but less than a third of the citizens of the United States are voters. Citizenship is determined by the Federal authorities, the Constitution declaring that all persons born or naturalized in the United States are citizens thereof. The suffrage is a privilege which is controlled by the individual states, subject to certain regulations imposed by the Federal government.

409. SIGNIFICANCE OF THE SUFFRAGE.—In a representative democracy such as the United States, the question of the suffrage is of fundamental importance. Public officials are agents which have been chosen to administer the affairs of government. Every public official in the United States is either chosen directly by the people, or is chosen by agents who themselves have been selected at the polls. The right to vote is thus the right to share in the control of government. And not only are voters making rules and regulations for their own government, but they are governing those citizens to whom the suffrage has not been extended. It is because of this double responsibility resting upon the American voter that a fundamental problem of effective government is concerned with the suffrage.

410. SUFFRAGE IN THE SEVENTEENTH AND EIGHTEENTH CENTURIES.—In colonial times the American suffrage was narrowly restricted. Though the theory that all men were free and equal was known in political circles, the actual conduct of government was largely in the hands of the propertied classes. With a few exceptions, no Negro was allowed to vote. As a general rule, women were also debarred from the suffrage. Even white adults were denied the exercise of the suffrage unless they could meet certain property and religious qualifications.

The Declaration of Independence laid emphasis upon the principle that governments derive their just powers from the consent of the governed. Nevertheless this principle was not held to apply to the internal politics of the American states, and so there was at this time no widespread feeling that all adults had an equal right to share in government. In an important sense, the American Revolution was fought to maintain the principle that England could not govern the colonies without their consent. But here again it should be noted that none of the states that won independence interpreted that principle to mean that all of their free adult citizens had a right to govern themselves through the vote. Colonial standards of suffrage were largely carried over into our earlier national history, and in 1789 probably less than five per cent of the American people were voters. Interpreted in terms of the suffrage, American democracy was still very narrowly restricted.

411. SUFFRAGE AS A NATURAL RIGHT.—According to the doctrine of natural rights, all men are born free and equal, and are entitled to certain fundamental rights of which they may not be deprived. Many of the colonists were familiar with this theory, but not until after 1800 did it constitute an important basis for maintaining that all adult white males were entitled to the suffrage. After the opening of the nineteenth century, however, it was more common for propertyless men to maintain that just as they had a natural right to life, liberty, and the pursuit of happiness, so they had a natural right to the suffrage. The principle that governments derive their just powers from the consent of the governed was by many interpreted to mean that men possessing property had no right to govern men who could not meet the property qualifications accompanying the suffrage. The cry of "No taxation without representation," was also raised in the interests of white adult males who paid taxes, but who were not allowed to vote.

412. EXTENSION OF THE SUFFRAGE IN THE NINETEENTH CENTURY.—During the first three quarters of the nineteenth century, the suffrage widened steadily. Religious qualifications practically disappeared before 1850. After a long drawn out struggle most of the eastern states practically eliminated the property qualification from their suffrage laws. This change was due, in large part, to the influence of the doctrine of natural rights. There were additional factors, of course. In many places along the Atlantic seaboard, for example, the extension of the suffrage was somewhat in response to the influence of the doctrine of natural rights, but it was also partly due to the economic pressure exerted by the increasing number of landless laborers who were crowding into the manufacturing cities and towns.

The extension of the suffrage during this period is closely associated with the development of the West. Whereas the eastern states removed property and religious qualifications only after a struggle, many western states imposed few or no restrictions upon the suffrage, but from the start were committed to the principle of equality at the polls. The doctrine that governments derive their just powers from the consent of the governed was popular in the West; indeed, it was here that the doctrine was first applied to the problem of suffrage in a definite and practical manner. In the more sparsely settled portions of the country, able-bodied men were more important than social distinctions and religious ties, so much so, in fact, that some of the western states attracted settlers by giving the vote to aliens who had announced their intention of becoming citizens. After the Civil War some of the southern states made similar advances to European immigrants.

After the Civil War the suffrage movement was profoundly affected by the Negro question. The Thirteenth Amendment, adopted in 1865, had merely abolished slavery. In the subsequent discussion over the status of the Negro, some white men held that the theory of natural rights entitled the freed Negroes to the suffrage. This view was opposed by many, particularly in the South. Nevertheless, in 1868 the Fourteenth Amendment to the Constitution provided that any state denying any of its male adult citizens the right to vote might suffer a reduction in its congressional representation. Two years later (1870) the Fifteenth Amendment went a step further, and declared that the right of citizens of the United States to vote might not be denied or abridged on account of race, color, or previous condition of servitude.

The nineteenth century also witnessed an increased interest in woman suffrage. The proposition was not unknown even in colonial times, but the earlier state constitutions and statutes had almost invariably excluded women from the vote. After the middle of the century the woman suffrage movement grew rapidly, stimulated, to a considerable extent, by the movement for abolition and Negro suffrage. In 1852 Susan B. Anthony assumed leadership of the woman suffrage movement, and in 1875 she drafted a proposed amendment to the Federal Constitution which would provide for woman suffrage throughout the country. The territory of Wyoming had extended women full suffrage in 1869, and a decade later the right to vote in school elections had been extended the women of Michigan, Minnesota, and several other States. By 1896 Colorado, Idaho, and Utah had extended full suffrage to women.

413. DECLINE OF THE NATURAL RIGHTS THEORY.—During the latter half of the nineteenth century the doctrine of natural rights was of declining importance as a basis of the suffrage. The doctrine was illogical, for not even its most ardent advocates would go so far as to maintain that paupers and mental defectives had an inherent right to vote. Nor did anyone claim that persons under twenty-one years of age had such a right.

As time went on, the connection between the suffrage and the doctrine of natural rights seemed more and more remote. Men came gradually to believe that the suffrage was not a right but a privilege, and that the capacity of the individual to use the vote in the public interest was the factor which should determine whether or not he should enjoy the suffrage. This changed viewpoint reflected itself in several important shifts in the suffrage movement.

414. SHIFTS IN THE SUFFRAGE MOVEMENT.—To a considerable extent the decline of the doctrine of natural rights was accompanied by increased restrictions upon the right to vote. We have noted that many western and a few southern states formerly made a practice of extending the vote to aliens who had announced their intention of becoming citizens. After the seventies there was a tendency for such states to withdraw this privilege, and to make citizenship a prerequisite to voting. One reason for this changed attitude was that as time went on immigrant labor was less in demand in the West and South. Still another factor, however, was the abuse of the ballot among unassimilated immigrant groups in our cities.

After the middle of the nineteenth century, there was a growing feeling, originating in New England and spreading westward, that illiterate voters were a menace to sound government. Accordingly, educational tests were imposed in a number of states. These tests generally require voters to be able to read and write.

The enfranchisement of the Negro was followed by reaction. The exercise of the suffrage by ignorant Negroes suddenly admitted to full suffrage, resulted in gross abuses of political power. As a result many southern states eventually passed laws which virtually deny the vote to the larger part of the possible Negro electorate. In some cases white election officials administer the educational test so strictly as to exclude most Negroes. In other cases a property or poll tax qualification has been used to exclude large groups of shiftless Negroes. In still other cases a "grandfather clause" in the state constitution exempts from the educational test all who are descendants of persons voting before the Civil War. This allows white illiterates to vote, but excludes illiterate Negroes.

On the other hand, the cause of woman suffrage was greatly stimulated by the decline of the doctrine of natural rights and the rise of the theory that civic capacity should determine the suffrage. Particularly after 1900 did the agitation take on national importance. A national Woman Suffrage Association was organized, and powerful pressure was brought to bear upon persons of political influence. Between 1910 and 1912 Washington, California, Oregon, Kansas, and Arizona were won to the cause of woman suffrage. Finally in August, 1920, the amendment which Miss Anthony had drafted in 1875 was ratified and declared in force. Women are now allowed the vote on the same terms as men.

415. PRESENT RESTRICTIONS ON THE RIGHT TO VOTE.—The suffrage in the several states at the present time may be summarized as follows:

In every state voters must be at least 21 years of age. In a few states the vote is extended to aliens who have declared their intention of becoming citizens. In every state a period of residence is required of voters, the usual period being between six months and a year. Educational qualifications are imposed in about a third of the states. A number of southern and a few northern states require voters to be assessed for a poll tax. In practically every state such abnormal persons as the feeble-minded, the insane, paupers in institutions, and certain types of criminals are excluded from the suffrage. Untaxed Indians, and foreign-born Chinese and Japanese do not enjoy the suffrage.

416. PRESENT STATUS OF THE SUFFRAGE MOVEMENT.—The suffrage movement has steadily increased the number of potential voters until at the present time there are more than 30,000,000 persons in the United States who are entitled to the vote. The important groups of the adult population have been enfranchised, but the suffrage movement still involves important problems. In view of our changing attitude toward the suffrage we face four unanswered questions:

First, should the present restrictions on the suffrage be lowered? Second, should they be made more severe? Third, in view of the fact that naturalization automatically makes voters of many individuals, to what extent ought the grant of citizenship to be determined by the individual's promise as a voter? Fourth, what should be our attitude toward Negro suffrage?

Let us summarize the fundamental considerations which must be borne in mind in discussing the four problems suggested above. This done, we may briefly consider the most pressing of these questions, i.e. that involving Negro suffrage.

417. THE SUFFRAGE IS A PRIVILEGE AND NOT RIGHT.—The significance of the difference between citizenship and the suffrage should be clearly understood. Citizenship is a fundamental matter. In return for allegiance to his government, the citizen may be considered as being entitled to that measure of protection which is deemed necessary to his safety and well-being. But though we speak loosely of the "right" of suffrage, the suffrage is a privilege, not a right. The individual cannot claim it as a corollary of citizenship. Nor does mere residence in a democratic country entitle the individual to the ballot. The safety and well-being of the citizen are not necessarily dependent upon his exercise of the vote. Indeed, incapable persons may be better off if they are excluded from the suffrage, provided, of course, that the voting class holds itself responsible for the government of the excluded groups. Fitness alone justifies the suffrage.

418. WHAT CONSTITUTES FITNESS?—The ballot cannot be exercised by the unfit without endangering the whole fabric of government. But what is the standard of fitness? The history of the suffrage in the United States throws some light upon this question. In colonial times the plea of the propertied classes was that fitness was primarily a matter of racial origin, the ownership of property, or church affiliation. According to the theory of natural rights, fitness was vaguely associated with manhood and citizenship. More recently we have come to believe that while many factors influence the capacity of the voter, such factors as religion, racial origin, and ownership of substantial amounts of property, are not vital. A definite standard of fitness has never been established, but at least we can say that fitness means both the desire and the capacity to serve the state by an honest and intelligent use of the ballot.

419. THE QUESTION OF NEGRO SUFFRAGE.—We are beginning to suspect that the attention attracted by Negro suffrage is due, not so much to the injustice of disfranchising the Negro as to the spectacular circumstances surrounding the American Negro. It is unjust, of course, to exclude the Negro from the vote merely because of his race. But exclusion of Negroes not qualified to make an intelligent use of the ballot is no more unfair than are the educational tests imposed by many northern states. To exclude illiterate Negroes from the vote, and at the same time to allow illiterate whites the ballot, is, on the other hand, manifestly unfair. But far more productive of good than debating this unfairness is the attempt to fit the Negro for the vote as a prerequisite to his exercise of it. During this preparation the Negro should have before him the incentive of securing the ballot when he has made sufficient progress in education and civic responsibility.

420. PROBLEM OF AN INTELLIGENT ELECTORATE.—The problem of building up an intelligent electorate gives rise to two additional questions: First, how may the enfranchised classes be trained to a full realization of their civic responsibilities? Second, to what extent is intelligent voting dependent upon actual exercise of the suffrage? The first question has been treated elsewhere, and we may close this chapter with a brief consideration of the second question.

It is maintained by some that no one should be admitted to the suffrage who has not first demonstrated his capacity to use the vote intelligently. Others reply that this capacity comes only through actual exercise of the vote. The solution of this problem probably lies in a judicious combination of theory and practice. A boy cannot learn to swim by standing on the bank and forever listening to theoretical instruction; on the other hand, it may prove fatal to push him into deep water without preparation for that step. Instruction and practice must go hand in hand, wisely interwoven and harmonized.

Similarly, it would seem, one way to secure an intelligent electorate is to admit individuals to the suffrage only when they demonstrate a minimum capacity for civic service, but at the same time to recognize that full moral development can come only through actual exercise of the vote.

QUESTIONS ON THE TEXT

1. Distinguish between citizenship and the suffrage.

2. Why is the suffrage important in a representative democracy?

3. Discuss the suffrage in colonial times.

4. What was the probable extent of the suffrage in 1789?

5. What is the doctrine of natural rights?

6. How was this doctrine applied to the question of the suffrage?

7. Why was the suffrage in the eastern states widened in the nineteenth century?

8. Discuss the suffrage in the new West.

9. Describe the enfranchisement of the Negro.

10. Outline the early development of the woman suffrage movement.

11. Discuss the decline of the natural rights theory.

12. Outline some recent shifts in the suffrage movement.

13. Enumerate the present restrictions on the right to vote.

14. What is the present status of the suffrage movement?

15. What is meant by saying that the suffrage is a privilege and not a right?

16. What is meant by saying that "fitness" is the basis of the suffrage?

17. What can be said as to the question of Negro suffrage?

18. To what extent does intelligent voting depend upon actual exercise of the ballot?

REQUIRED READINGS

1. Williamson, Readings in American Democracy, chapter xxxiii.

Or all of the following:

2. Beard, American Citizenship, chapter vi.

3. Cleveland, Organized Democracy, chapters x and xii.

4. Porter, A History of Suffrage in the United States, chapter i.

5. Seymour, How the World Votes, vol. i, chapters i and ii.

QUESTIONS ON THE REQUIRED READINGS

1. What is the relation of political to civil liberty? (Beard, pages 64-65.)

2. Name some groups of people who were excluded from the suffrage in colonial times. (Porter, page 5.)

3. What were some of the early arguments for giving propertyless men the vote? (Beard, pages 66-67.)

4. What was Dorr's Rebellion? (Beard, page 69.)

5. What is the significance of the "foreign vote"? (Beard, pages 73- 74.)

6. What are the four theories of suffrage? (Seymour, pages 1-2.)

7. In what form did the suffrage enter the American colonies? (Seymour, page 9.)

8. What theory of suffrage supplanted the theory of natural rights? (Seymour, pages 13-14.)

9. What effect has the suffrage upon the individual? (Seymour, pages 15-16.)

10. Discuss the educational test. (Cleveland, pages 172-174.)

11. To what extent is bearing arms against the country a disqualification for voting? (Cleveland, page 176.)

12. What is the purpose of compulsory voting? (Cleveland, pages 176- 178.)

TOPICS FOR INVESTIGATION AND REPORT

I

1. Civil rights guaranteed by the constitution of your state.

2. History of woman suffrage in your state.

3. Citizenship as a prerequisite for voting in your state.

4. Present restrictions on the right to vote in your state.

5. List the groups or classes of people in your community who are not allowed to vote. What is the proportion of these classes to the total population of the community? What per cent of these excluded classes are aliens? What is the basis for exclusion in each case? Would you favor the extension of the vote to any of these groups? Explain.

II

6. Colonial suffrage. (McKinley, The Suffrage Franchise in the Thirteen English Colonies in America; Cleveland, Organized Democracy, chapter x.)

7. Dorr's Rebellion. (Consult any standard text on American history or an encyclopedia.)

8. Suffrage and the frontier. (Seymour, How the World Votes, vol. i, chapter xi.)

9. Property and tax-paying qualifications in the nineteenth century. (Porter, A History of Suffrage in the United States, chapters ii- iv.)

10. Woman suffrage in the nineteenth century. (Consult Porter, Seymour, or the Cyclopedia of American Government. [Footnote: Throughout the remainder of this text the student will find it to his advantage to make frequent use of the Cyclopedia of American Government, edited, in three volumes, by A. C. McLaughlin and A. B. Hart. N.Y. 1914. Appleton and Company. This cyclopedia will furnish considerable material for students seeking either general information on political subjects, or special information for topic work. ])

11. History of the Nineteenth Amendment. (Consult American Yearbooks, and also newspaper files for August, 1920.)

12. Effect of the Fourteenth and Fifteenth Amendments upon the suffrage. (Kaye, Readings in Civil Government, pages 113-116.)

13. Negro suffrage. (Consult an encyclopedia, or any standard work on American government.)

14. Types of individuals who are excluded from the suffrage. (Cleveland, Organized Democracy, chapter xii.)

15. Duties of the American voter. (Forman, The American Democracy, pages 14-15.)

FOR CLASSROOM DISCUSSION

16. To what extent is the doctrine of natural rights still influential in American political discussions?

17. Do you favor an amendment to the Federal Constitution, providing that no state may extend the suffrage to persons who are not citizens of the United States?

18. How long should a potential voter be required to live in a state before being allowed to exercise the ballot?

19. To what extent does the educational test show the fitness of the individual to make the right use of his vote?

20. Should all convicted criminals be denied the vote during the remainder of their lives?

21. Just what constitutes fitness for the suffrage?



CHAPTER XXXIV

THE POLITICAL PARTY

421. NATURE OF THE POLITICAL PARTY.—A political party may be defined as a voluntary association of voters, entered into for the purpose of influencing elections to public office. The individuals comprising a party have certain broad political principles in common, and these they seek, by organized effort, to have applied to actual government. Just as individuals differ on matters of business or religion, so it is human nature for the voters of a community to form varying opinions as to the nature, functions, and methods of government. And just as men tend to draw away from those with whose opinions they do not agree, so they tend to draw toward those with whom they are in agreement, and with whose coperation they may advance principles of mutual interest. It is this natural tendency of men, first, to differ with one another, and second, to form associations for the advancement of mutual aims, that has led to the formation of political parties.

422. DEVELOPMENT OF PARTIES IN THE UNITED STATES.—The American political party is older than the nation. Differences of political opinion divided the American colonists into Whigs and Tories. Later, party spirit was manifested in the formation of the Revolutionary committees of correspondence. The struggle over the Constitution of 1787 divided men into Federalists and Anti-Federalists. The question of a broad or a strict construction of the constitution, the tariff, and the problem of slavery in the territories,—these are a few of the great national issues that have influenced party lines. Before the Civil War party spirit had extended to all parts of the country, evidencing itself in a number of party organizations. Many of these organizations proved temporary, but since the Civil War party lines have been relatively fixed. For more than a half century there have been two great parties, the Democratic and the Republican. Third parties have been either temporary or relatively unimportant.

423. PARTY ORGANIZATION.—There is no constitutional basis or provision for American political parties, nevertheless each of the great parties has built up a powerful organization which cordinates party members in every part of the country. In practically every township, village, election district, and city ward there are party agents and local committees whose work it is to promote the interests of the party both at election time and between elections. The local party workers constitute a link between individual voters and the county or State committees, while these latter groups in turn connect with the national committee of the party.

It is the work of all those officially connected with this centralized organization to win adherents to the party standard, to place issues before the voters, to stimulate interest in candidates, to organize meetings and clubs, to collect funds for party support, to secure the registration of voters, and to see that they get to the polls. Party opinion is formed by means of personal contacts, campaign literature, speeches, parades, and every manner of propaganda. Party opinion is formally expressed through the caucus, the primary, the convention, and the regular election. (See Sections 435-438.)

424. SERVICES PERFORMED BY THE POLITICAL PARTY.—The political party performs three great services. [Footnote: The following arrangement of the services of the political party was suggested to me by Professor W. B. Munro, of Harvard University. For a fuller discussion see Chapter XXII of his The Government of the United States, The Macmillan Company, New York, 1919.]

The first of these is that the party provides machinery which bridges over the gaps between local, state, and National government. Similarly, it often serves to bring the executive, legislative, and judicial branches of government into harmony with one another. The check and balance system so divides authority in American government that in many ways the different branches and divisions of government are uncordinated. The party facilitates the working of American government because party members affiliated with one division of government will tend to coperate with members of the same party who may be in control of other divisions of government. For example, a Democratic governor tends to coperate with the Democratic members of the state legislature. Similarly, a Republican President will tend to work in harmony with those members of his party who are in control of purely state government.

The second great service performed by the party is that it formulates public issues and presents them in concrete shape to the voters. Just as in industry it is the function of the entrepreneur to cordinate the other factors of production, so in government it is the function of the politician to act as a cordinator. Indeed, President Lowell calls the politician a broker, without whose services popular government would be impossible. If voters went to the polls with no previous agreement as to candidates or issues, but each determined to vote for whomever he liked, thousands of names might be found on the ballot. If a majority were required to elect, no individual would be chosen. The party thus performs a valuable service by formulating those principles which will attract the greatest number of voters, and by definitely associating those principles with particular candidates. These issues and these candidates the party places squarely before the electorate, to the exclusion of minor issues and unimportant candidates. The party is thus a means whereby democracy makes up its mind, and expresses that mind with a minimum of confusion and disorder.

The third great service of the political party is that it provides a means of collective and continuing responsibility in politics. If a candidate were not affiliated with any political party, misbehavior in office might result in his removal or in his failure to secure relection. But here responsibility would end. When, on the other hand, the party selects, supports, and vouches for a candidate, the party constitutes a definite and permanent pledge to the voters. Thus the party is stimulated to select its candidates carefully, lest their incompetence or dishonesty fatally injure the reputation of the party. The past exploits of the party are appropriated for future campaigns; conversely, the failure or misbehavior of an officeholder will be pointed out by his political enemies as typical of the party to which the unfortunate man belongs.

425. THE ABUSE OF PARTY POWER.—Though party government confers substantial benefits, it is likewise true that the power of the political party has been frequently abused. American party organizations sprang up silently, and developed largely without legal control. Increased power has been accompanied by diffused responsibility; increased power and diffused responsibility have led to the abuse of power. The evils of the party are numerous, and only those of fundamental importance can be discussed in this text. Some of these evils will appear in successive chapters; a few may be treated here. In every case, it should be borne in mind, the basic defect of party government is that the party has tended to use its power primarily for private rather than public ends.

426. CAMPAIGN CONTRIBUTIONS.—Throughout much of our national history one of the great evils of the political party has had to do with contributions to the campaign fund. A few decades ago it was the custom of parties, not only to accept large sums of money from special interests, but actually to demand substantial contributions from railroad and other corporations on pain of unfriendly legislation when the party got into power. In our cities gambling houses and other vicious interests habitually contributed to the campaign fund of the party, with the understanding that the party so supported would, if successful at the polls, protect these unlawful businesses. Large amounts were also secured from officeholders who feared to incur the ill will of the party by refusing to contribute to the campaign fund. The enormous sums got together from these various sources were used to finance election contests, the peak being reached when in the presidential election of 1896 the Republican party is said to have spent more than $7,000,000. The source of most of this sum was unknown to the general public.

Fortunately, recent legislation has remedied a considerable measure of the evils attending unrestricted contributions to the campaign fund. Laws now prohibit party agents from seeking contributions from the holders of Federal civil service offices. In 1910 and 1911 Congress passed Acts providing that a candidate for Representative to Congress may not expend more than $5000 toward his election, while a United States Senator may not spend more than $10,000 for a similar purpose. Other laws specify the purposes for which campaign money may be spent. In presidential and congressional elections the treasurer of the national committee of each party must now report the entire campaign fund contributed and expended, giving the name of every individual contributing over $1000, and also furnishing an itemized statement of all expenditures over $10. This report is filed with the clerk of the House of Representatives, and is open to the public.

There can be no doubt but that these and similar laws have operated to deprive the campaign fund of many of its illegitimate features. Most of the money now expended by parties is secured from a large number of small contributions. This not only lessens the control of party policies by special interests, but it also serves to make the party more responsible to the rank and file of the organization.

427. PARTY DOMINATION OF NOMINATIONS AND ELECTIONS.—A great problem of party government is to prevent parties from unduly influencing the choice of public officials. Leaving until later the general question of nominations and elections, it may be pointed out here that very often the whole weight of party power is directed toward securing the election to office of candidates deemed desirable by the party machine. The political "boss" has consistently used his power to manipulate the caucus or the primary so as to advance his own interests at public expense. Caucuses have been held without proper notice being given, and party henchmen have been employed to work for an inside clique or ring. Formerly the rolls of party members were padded with the names of men dead or absent. Too often elections were characterized by the stuffing of ballot boxes, the intimidation or bribery of voters, and the practice of voting more than once. The effect of these and similar practices has been to thwart the will of the majority of party members, and to elevate self-interest above the general welfare.

The last few decades of American political history have been characterized by a number of laws designed to safeguard the process of nomination and election. In practically every state in the Union there are corrupt practices acts which aim not only to prevent the misuse of the campaign fund, but to control the party in other respects also. In all but two states registration is a prerequisite to voting. The introduction into this country of the Australian ballot, and its rapid spread among the states after 1890, has made the ballot secret. By preventing the intimidation of the voter, and by otherwise safeguarding his rights at the polls, ballot reform has remedied many abuses which formerly resulted in illegal and unrepresentative elections. Bribery and illegal voting are no longer glaring evils. It is now the general practice for state laws to provide definite polling places, and to guard the receiving and counting of the ballots.

428. THE SPOILS SYSTEM.—During the first forty years of our national life it was taken for granted that subordinate executive officials should continue in office during good behavior, regardless of a change of administration. After President Jackson's first term, however, it became the general practice for the incoming party to use offices to reward party supporters. Senator Marcy's original declaration that "to the victor belongs the spoils," was accepted by both Democratic and Republican parties. Each party, upon coming into power, habitually turned out appointive officials placed in office by the opposition party. The positions thus made vacant were filled by individuals from the ranks of the victorious party.

The spoils system is a serious evil for which party spirit must be held accountable. By virtue of their patronage, party leaders have exercised an undue influence over the rank and file of the party. Frequently a candidate has been named for office, not because he possessed marked capacity for public service, but because he showed promise of being a good vote-getter at election time. Very frequently, therefore, officeholders have secured their positions as the reward of party support, rather than because of merit. The spoils system has encouraged the holders of executive offices to pay more attention to the political fortunes of their party than to their public duties. Knowing that with a change of administration they would probably be ousted to make room for the supporters of the rival party, officials have been tempted to use public office for personal ends.

The spoils system still constitutes a defect in American government. Nevertheless something has been done toward eliminating its worst features. The Civil Service Act of 1883 provided that more than 12,000 Federal executive offices should be filled by competitive examinations rather than by political appointment. The Federal Civil Service System has been subsequently extended until at the present time about two thirds of the administrative offices in the Federal government are filled on the merit plan. In many sections of the country the merit plan has also been used to fill state and municipal offices. Though as yet limited in scope, it would appear that the future will see a steady expansion of the merit plan in local and state as well as in the National government.

The essential feature of this system, whether in local, state or National government, is that officeholders secure their positions on the basis of individual merit. In theory at least, they are little affected by changes of administration. Both retention of office and promotion are on the basis of merit, though the standards by which appointees are judged have not yet been perfected.

429. EXTENSION OF FAVORS TO SPECIAL INTERESTS.—The tendency of the political party to extend special favors to private corporations has constituted a serious evil in American politics. In some instances powerful corporations have corrupted party politics; in other cases party organizations have blackmailed corporations under the threat of unfriendly legislation; in many other cases both party and corporations have been to blame. In every case, however, the essential fact is that often the party has been used for the advancement of special interests rather than to promote the general welfare. Unfavorable legislation has been bought off and favorable laws secured by trusts, public service corporations, and other large industrial interests. Exemption from prosecution has been purchased by gambling houses and other illegal businesses. Public service corporations have secured valuable franchises for inadequate consideration. Contracts for paving and other public works have many times been awarded, not to firms offering the best work at the lowest price, but to incompetent or dishonest corporations. Such contracts have been secured by these corporations because of favoritism shown them by political henchmen holding office under the spoils system.

Notable headway has been made in checking these evils. The regulation of the railroads by the Interstate Commerce Commission renders it difficult for railroad corporations unduly to influence party policies. Anti-trust legislation has similarly checked the political activities of other great industrial combinations. There is a growing tendency for states to pass laws forbidding or restricting the maintenance of lobbies in legislative halls. Many recent state constitutions narrowly restrict the franchise-granting power. Corrupt practices acts forbid party contributions from corporations. The Civil Service System renders less easy the unfair award of government contracts to private corporations.

430. DECLINE OF PARTY ABUSES.—It is clear that the development of party government in this country has been attended by important benefits and serious evils. But the best authorities agree that the merits of the party system outweigh its defects. Hence our problem is not how to destroy the system, but how to regulate it so that we may secure the benefit of its services and avoid the evil results of its defects. The experience of the last half century is heartening, and it must be admitted, not only that party abuses have declined, but that there is good reason to believe that they will continue to decline. In our attitude toward the political party we must distinguish, as Burke distinguished, between the legitimate form of the party and its perverted form. The perverted forms of party organization call for censure and attack; the legitimate features of the party deserve our appreciation and support.

431. DUTY OF PARTY SUPPORT.—Parties seem to be inevitable, for no one has yet shown how representative government can be carried on without them. Since the average voter cannot make his influence felt except through organization and mass action, it is, as a rule, as futile for the individual to cast his vote regardless of party affiliations as it is for a soldier to fight without regard for army discipline and organization. Parties are the result of compromises, and the individual must be willing to shelve minor issues for the sake of uniting with his fellows upon vital issues. Ordinarily, the individual will best perform his civic duties by affiliating himself with some political party.

But we are coming to believe that the necessity of party support in National and state elections does not imply that party support is necessary in local elections. In National politics each party generally has a definite policy with regard to taxation, the tariff, armaments, and other debatable issues. Support of the party for the realization of its program on these matters may be justifiable; on the other hand, loyalty to party in local politics may be an evil. There is no Democratic way of cleaning a street, and no Republican method of fighting a fire. Thus the same citizen who may be under a moral obligation to support some party in National and state politics, may be under a similar obligation to make his choice of local candidates independent of party. A desirable development, in this regard, is the recent tendency for some municipal elections to be decided regardless of the party affiliations of the candidates.

432. INTEGRITY IS ABOVE PARTY.—Young people are commonly advised to affiliate themselves with that political party which seems most adequately to express their political ideals. But though this is a method of conserving political energy, no citizen ought to support a party which has ceased to represent him on matters which he considers of vital importance. When the party machine sets itself up as an end rather than a means, and when it emphasizes gain to a few rather than benefits to the party as a whole, then it is time for honest men to abandon their party. Integrity is above party. The slogan, "My party right or wrong" is not only stupid but treasonable. Let the citizen be eager to coperate with his fellows for the advancement of common political views, but let the corrupt party be abandoned.

433. RESPONSIBILITY OF THE INDIVIDUAL FOR PARTY ABUSES.—Nothing could be more mistaken than the belief that defective government is due primarily to the existence of an entity known as the political party. The party is merely an association of individuals, and if it is corrupt it is so because of the corruption of the individuals comprising it. It is time that political pessimists stopped blaming the party for the defects of party government, and time they began to see that the indifference and shortsightedness of the individual voter is at the bottom of the trouble. One of the greatest sources of corruption in American life is the knowledge of political bosses that many of their adherents will follow the party standard regardless of its platform and no matter what the character of its candidates. The party boss is given an opening when individuals neglect to perform their civic duties. The failure to vote, or to serve in office when the opportunity offers, the failure either to protest against candidates chosen unfairly, or to demand an accounting of officeholders, spell corruption and inefficiency in government.