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ECONOMIC ESSAYS

LONDON: HUMPHREY MILFORD OXFORD UNIVERSITY PRESS

ECONOMIC ESSAYS

BY

CHARLES JESSE BULLOCK

CAMBRIDGE, MASS.

HARVARD UNIVERSITY PRESS

i 936

COPYRIGHT, 1936 BY THE PRESIDENT AND FELLOWS OF HARVARD COLLEGE

PRINTED IN THE UNITED STATES OF AMERICA

CONTENTS

Introductory Note vii

I

Direct and indirect taxes in economic literature i

Wage statistics and the federal census 36

Theory of the balance of trade 58

The variation of productive forces 84

Adam Smith's views on national defence 121

The need of endowment for economic research 130

(Commodity prices during the present decade 143

Business opinions and business conditions 157

The American money market 170

Foreign trade and the business cycle 178

International collaboration in the study of economic con- juncture 221

II

Direct taxes under the constitution 257

A classified property tax 310

Separation of state and local revenue 322

The general property tax in Switzerland 339

Local option in taxation 373

Taxation of property and income in Massachusetts 391

Increase of taxes on real estate in American cities 443

III -N

The legacy of Rehoboam : an Old Testament le^pn in tax- ation .Jj: ' * 465

Bank advertisements: ancient and modern 489

Dionysius of Syracuse — financier . fT. 502

The New Deal in Ancient Greece 520

Books and articles by Professor Bullock 545

INTRODUCTORY NOTE

WHEN Professor Bullock retired from active teaching, after serving thirty-one years as a member of the De- partment of Economics in Harvard University, his many former students and other friends were anxious to show their appreci- ation of his distinguished contributions to American scholarship in some appropriate way, and an informal committee was or- ganized to consider ways and means. After considerable discus- sion the committee came to the conclusion that nothing would be so fitting as the publication in book form of the many im- portant papers which had appeared over his name. So much of his best work was still scattered through the files of our learned journals, that such a volume would render double service: it would not only honor a great scholar but would make valuable material more conveniently available for his colleagues in the field. A preliminary survey soon made it obvious that this was too ambitious a plan — there were so many things which had a clear claim to being included. It was therefore decided to pub- lish only a part of the papers and to include a complete bibli- ography as evidence of the amount and variety of the others.

The problem of selection was of course a difficult one. It was desirable, on the one hand, to make the volume as representative as possible of Professor Bullock's many-sided interests and ac- tivities, and, on the other, to include those papers which scholars would find it most helpful to have in this form. This double criterion entailed many omissions which were serious from one or the other of these points of view. There was also the puzzling question of articles and reports of joint authorship, and here a conservative policy was adopted, only one such item being in- cluded. The papers finally selected have been grouped under three heads roughly indicative of the balance of Professor Bui-

Vlll INTRODUCTORY NOTE

lock's interests and arranged chronologically under each head. It is too much to hope that all the decisions will approve them- selves to those familiar with Professor Bullock's work, and the committee begs the indulgence of those readers who miss some well-remembered item.

The editors have considered their task a happy privilege and join the committee in thanking the guarantors whose prompt and generous response made the volume possible and the sev- eral publishers who kindly permitted republication of the papers.

ECONOMIC ESSAYS

DIRECT AND INDIRECT TAXES IN ECONOMIC LITERATURE1

fHTAHE distinction between direct and indirect taxes seems to J[ have originated in relatively modern times. In classical antiquity no trace of such a distinction can be discovered, while in mediaeval and modern Europe the terms are first found in a work written during the last half of the sixteenth century.2

The Greeks, like all other peoples, had various words that meant impost or tax; but no trace can be found of any usage that resembles our expressions direct and indirect taxes. { The most common word for a tax, TeXos, was used at Athens for all the ordinary imposts/ some of which we should call direct, such as the personal tax upon the metics, while others would now be styled indirect, as the customs and market duties. A second word, ?6pos, denoted primarily tribute from subject states.5 The Athenians generally would not use this word for their own taxes.6 In place of this hated term they often used

Reprinted from Political Science Quarterly, Vol. XIII (1898), pp 442-476 Reproduced by generous permission of the publishers.

2 On the history of these terms see Roscher, Finanzwissenschaft, Sec. 37, note 4 (Stuttgart, 1886) ; Neumann, Die Steuer, pp. 417 et seq. (Leipzig, 1887) ; also in Jahrbuch fur Gesetzgebung, Verwaltung und Volkswirthschaft, Vol. VI, pp. Q55 et seq.\ Handworterbuch der Staatswissenschaften, Vol. VI, pp. 96 et seq. (Jena, i8qo-95); Forstemann, Die direkten und indirekten Stcucrn (Nordhausen, 1808).

8 Cj. Forstemann, pp. i, 2.

4 Gilbert, Handbuch der griechischen Staatsalterthumer, Vol. I, p. 331 (Leipzig, 1881), says: "Die Hauptquelle der ordentlichen direkten Einnahmen bildeten die T£>.T), eine Bezeichnung, welche die Zolle und Steuern umfasst." Plato, Laws, viii, 1 1 [847], uses TE^og for export or import duties, as follows : TF^O^ 6£ EV Tfi JTO^XEI M,r|o£va u/n^EV TfiXEiv nTjtE ^(tyo\Jii\(Qv xp^^T^Y nrjTE ElaaYou-EYOY. Aristotle, Politics, v, ii, uses f| eiacpoga TOW TE/.COV for taxes in general.

8 Gilbert, Vol. I, pp. 393, 394. See Thucydides, i, 96: xai 'EX^voTaniai i6ie JTQCOTOV 'Afrrjvatois xaT^aTT] fx(>xT'l> 01 fSE/ovio TOY (fopov. ovra) Y«(? wvonaaflti TWV xQ^M-^wv f) cpopa.

9 Yet Demosthenes, Against Aristogeiton, i, 21 1 776, 9!: cpEoovTa TIJV ir\$

(pOOUV JlA,l']QT] Tfl JiaTQl6l.

2 DIRECT AND INDIRECT TAXES

euphemistically the word cruvTa&c.7 But the common word for the extraordinary property tax at Athens was et$<popa.8 This impost was levied reluctantly, and usually for war purposes solely. Thus it appears that the only distinction between these various words is that ?eXo<; was the common word for the ordi- nary taxes, <popo<; generally meant tribute and etafopa denoted the extraordinary property tax.

In Roman usage the case is similar.9 Vectigal was originally used to denote all dues and imposts gathered from lands or domains in the possession of the state: that is, tithes from cultivators of public lands, port dues, etc. Thus it was con- trasted with tributum civium Romanorum, the property tax collected from the possessions of citizens.10 Gradually the term vectigal broadened until it became the common word for a tax of any sort.11 The tributum civium Romanorum, or tributum, was originally the extraordinary property tax levied upon Ro- man citizens.12 Then in the provinces the tributum soli, or land tax, and tributum capitis, or poll tax, were imposed as the prin- cipal taxes.13 When Diocletian extended the provincial tributum to the lands of Italy, tributum came to mean strictly the im- perial land tax.14 Yet the word was sometimes used for other taxes besides those enumerated above.15 The absence of any single term for expressing the difference in the incidence of

7 See Harpocration, avvTa^i^. Also Demosthenes, On the Crown, 234 [305, 16 and 17] : xP^M-ftTow 8£ ovvxagiv els JieVre xal TeTTagdxovra idXavta. Cf. Demosthenes, On the Peace, 13 [60, n].

8 See Gilbert, Vol. I, pp. 345 et seq. Thucydides, Hi, 19, says: aviol e*a£VEYx6vT£i; TOTE JIQWTOV e*o(pooav 8iax6ma Todavta. See Xenophon, Oeconomicus, ii, 6.

9 Cf. Forstemann, p. 2.

to Marquardt, Romische Staatsverwaltung, Vol. II, pp. 155, 156 (Leipzig, 1876).

"Thus we may mention the tax on sales, vectigal rerum venalium. See Marquardt, Vol. II, p. 269. Cicero uses the term for the land tax. De Lege Agraria, ii, 21, 57: "agro pergrande vectigal imponitur"\ also Brutus, 36, 136: "agrum publicum vitiosa et inutili lege vectigali levavit."

"Marquardt, Vol. II, p. 157. For original references see Livy, xxiii, 31, i, and 48, 8.

18 Marquardt, Vol. II, pp. 178, 179, 191 et seq.

14 Ibid., pp. 217 et seq.

16 Thus Pliny, Panegyricus, 37, says of the inheritance tax: ftvicesima reperta est, tributum tolerabile"

DIRECT AND INDIRECT TAXES 3

direct and indirect taxes is well shown in the familiar passage in which Tacitus describes the effects of the remission of the old tax, formerly paid by the purchaser, of four per cent upon sales of slaves. Tacitus shows that the remission was merely nominal ; since at that time the seller was taxed, and the tax formed part of the price which had to be paid by the buyer.10

In the literature of the Middle Ages we cannot expect to find contributions to the doctrine of taxation. For a large part of this period there was a dearth of writings upon economic sub- jects. Then the schoolmen began to discuss such matters as fair price and usury, but had very little to say upon financial subjects.17 The few other writers of the thirteenth and four- teenth centuries whose works possess anything of financial interest merely touched upon questions of public expenditures, the management of domains, the farming of taxes and the like. In point of fact, financial problems were as yet seldom of suffi- cient importance to attract much attention from scholars.18

In the fifteenth and sixteenth centuries, in Italy, and espe- cially at Florence, such writers as Ghetti, Carafa, Savonarola, Guicciardini, Matteo Palmieri and others discussed financial topics more thoroughly.19 But it was in France that the germ of the distinction between direct and indirect taxes was first developed. Jean Bodin,20 in 1576, used the words, "payer les

ia Tacitus, Annals, 13, 31: "Vectigal quoque quintae et vicesimae venalium mancipiorum remissum, specie magis quam vi, quid cum venditor pendere juberetur, in partem pretii emptoribus accrescebat"

"Upon the schoolmen in general, see Cossa, Introduction to the Study of Political Economy, pp. 138-148 (London, 1893); Roscher, Geschichte der Natio- nalb'konomie in Deutschland, pp. 1-31 (Miinchen, 1874); Ricca- Salerno, Storia delle dottrine finanziarie in Italia, pp. 38 et seq. (Palermo, 1896). St. Thomas Aquinas may represent the views of the scholastics on taxes. See Baumann, Die Staatslehre des Thomas von Aquino, pp. 97-99 (Leipzig, 1873); Jourdain, Phi- losophic de Saint Thomas d'Aquin, Vol. I, pp. 429, 430 (Paris, 1858) ; Palgrave, Dictionary of Political Economy, Vol. I, p. 49 (London, 1894) ; Littlejohn, The Political Theory of the Schoolmen, pp. 184, 185 (New York, 1896) ; Brants, Esquisse des theories economiques professes par les taivains des XIIIme et XIVme siecles (Louvain, 1895).

18 Cossa, pp. 148-150; Ricca-Salerao, pp. 44-57.

19 Cossa, pp. 156-160; Ricca-Salerao, pp. 47-54, 57-82.

(Mumpelgart, 1592); into English by Richard Knolles (London, 1606); into

4 DIRECT AND INDIRECT TAXES

tattles et autres imposts directement ou indirect emcnt." It was, however, merely an incidental expression, applicable to nearly all taxes, which Bodin never thought of making the basis for a classification. This is apparent from his classification of public revenues, as follows: (i) from domains; (2) from confisca- tions; (3) from gifts; (4) from tributes; (5) from trade; (6) from tolls and customs, which he regards as paid by foreigners ; (7) from taxes upon subjects. This seventh branch of revenue is again subdivided into: (i) extraordinary; (2) ordinary; (3) casual.21 Although Bodin's work had a very great influence in Europe, his casual use of the phrase "to pay taxes directly or indirectly'' made little or no impression upon subsequent writ- ers, most of whom did not adopt it.

Giovanni Botero,22 writing under the influence of Bodin's ideas, does not make use of this suggestion. He divides public revenues into extraordinary and ordinary. The former arise from escheats, fines, confiscations, etc.; while the latter are derived from the products of the soil or of human industry. These ordinary revenues may be either immediate or mediate, the first division including incomes derived from the lands of the prince, the second comprising incomes derived from sub- jects. Christoph Besold23 favored what modern writers would call indirect taxes, holding that they are paid more easily than direct imposts; but he does not seem to utilize the suggestion of Bodin. The same is true of Antoine de Montchetien,24 who, however, discussed taxation merely incidentally. But the case

Latin (1586), as well as into other languages. On the character and influence of this work see H. Hallam, Introduction to the Literature of Europe, Vol. II, pp. 204-230 (London, 1837). Roscher, Forstemann and Neumann have been unable to trace the expression further back than this work.

21 See bk. vi, ch. ii. Cf. Hallam, Literature of Europe, Vol. II, pp. 226, 227. Hallam is mistaken in thinking that Bodin grouped excises with customs, and included only modern "direct taxes" under the seventh head.

22 Delia Ragione di stato (Venice, 1589). Cf. Ricca-Salerno, pp. 133, 134.

23 Discursus de aerario politico (Tubingen, 1620) . Cf. Roscher, Geschichte der Nationalokonomie in Deutschland, pp. 195-205.

24Traict£ de 1'^conomie politique (1615). Edited by Funck-Brentano (Paris, 1889).

DIRECT AND INDIRECT TAXES 5

is different with a number of other writers. Keckerman,25 in 1607, wrote that indirect taxes are those which a state receives through artifices that it tolerates — as, for instance, public lot- teries. Such authors as Lather, Faust and Klock,26 in whose work the influence of Bodin may be seen, speak of payments 11 per obliquum et indirectum"21

Yet it is certain that, until the time of Physiocrats, these vague expressions suggested to no one a new basis for a scien- tific classification of taxes;28 while some writers did not use them at all. Thus Pufendorff,29 who discussed taxes and argued that such imposts as customs duties are paid more readily since they are concealed in the prices of commodities, gives us no classification, and does not use the terms directly and indirectly. On the other hand, Seckendorff ° wrote :

. . . When taxes are not paid to the government immediately out of the purse of every subject, but a certain penny or share of the price is levied upon liquor, meat, salt, grain and similar objects of com- mon use.

But such terms are not found in Broggia,31 who formulated an elaborate plan for a system of taxes, composed of ( i ) a land

"Systema disciplmae politicae (1607). Cf. Roscher, Finanzwissenschaft, Sec. 37, note 4.

M Lather, De censu, tractatus nomico-politicus (Frankfurt, 1618); Faust, Consilia pro aerario (Frankfurt, 1641); Klock, Tractatus nomico-politicus de contributionibus (Niirnberg, 1634), Tractatus de aerario (Nurnberg, 1651). See Roschcr, Geschichte der Nationalokonomie in Deutschland, pp. 165-167, 207-218.

27 This statement is made upon the authority of Neumann, Die Steuer, p. 418. Of the works mentioned the writer has been able to secure only Klock's Tractatus de contributionibus.

28 In Germany, at least, such a classification would have been hindered, at that time, by the fact that various terms were applied to the different kinds of taxes, and no single word was used comprehensively to denote all forms of public imposts. Up to the close of the eighteenth century the word "Steuer" meant what we would now call a direct tax. Cf. Neumann, pp. 419, 420; Forstemann,

PP. 3, 4-

^De jure naturae et gentium (1672). Translated into English by B. Kennett (London, 1729). Bk. vii, ch. iv, Sec. 7; bk. viii, ch. v, Sees. 4-6. Cf. Roscher, Geschichte der Nationalokonomie, pp. 316-318.

^Teutscher Fiirstenstaat (Frankfurt, 1656), part iii, ch. viii, Sec, 3. Cf. Roscher, Geschichte der Nationalokonomie, p. 251.

31Trattato dei tributi (Naples, 1743). Contained in Scrittori classici Italiani, edited by Custodi, Vol. IV (Milan, 1804). See chs. ii, iv.

6 DIRECT AND INDIRECT TAXES

tax, (2) a tax on manufactured articles and upon fixed incomes, (3) imposts upon internal consumption and (4) customs du- ties;32 nor are they used by Pascoli and Bandini.53 A similar expression,34 however, occurs in the following passage from Montesquieu:35 "L'impot par tete est plus naturel a la servi- tude; Fimpot sur les marchandises est plus naturel a la liberte, parce qu'il se rapporte d'une maniere moins directe a la per- sonnel But, as Forstemann™ has noticed, this seems to refer rather to differences in the legal relations of the taxpayers to the state in the two cases.37 In any event, no idea concerning the shifting of taxes influenced Montesquieu's classification of imposts, which was: (i) taxes on persons; (2) taxes on land; (3) taxes on commodities.38

II

This brings us to the Physiocrats, who first formulated a scientific classification of taxes as direct and indirect, and gave these terms a definite place in economic terminology. The founder of the school, Frangois Quesnay, developed the famil- iar Physiocratic doctrine of taxation in 1758. Holding that all imposts ultimately fall upon the "produit net" of the earth, he declared that taxes can be most cheaply and easily collected directly from the land. Therefore he called all taxes indirect except that upon land, and advocated "Vimpot unique et direct" upon the net product of the soil.39 It is not necessary to follow

**Cf. Ricca-Salerno, pp. 228-234.

88 L. Pascoli, Testamento politico (Perugia, 1733). Cf. Ricca-Salerno, pp. 217- 222. S. Bandini, Discorso economico (1737, published at Florence, 1775).

"Neumann, p. 419, quotes from Boisguillebert and Vauban such passages as "passer immtdiatement de la main du peuple en celle du roi" etc. See Bois- guillebert, Detail de la France (1695); Factum de la France (1706). Edited by E. Daire (Paris, 1851), pp. 237, 238, 266. But these expressions seem to refer to the costs of collection, as is apparent from the expression used on p. 238.

ML'esprit des lois (Geneva, 1748), bk. xiii, ch. xiv.

"Op. cit., p. 7.

*7In the same chapter Montesquieu explains that taxes on commodities are advanced by the merchant but really paid by the purchaser. He does not use the words directly or indirectly in this connection.

38 L'esprit des lois, bk. xiii, ch. vii.

wThe works of Quesnay in question are: Tableau £conomique (1758) ; Second probleme economique (1767). These are contained in E. Daire's Physiocrates

DIRECT AND INDIRECT TAXES 7

this distinction of direct and indirect taxes through the works of all of the Physiocrats.40 Turgot, however, may be mentioned briefly. He differed in some points from the other members of the school, although he held to their central doctrines. His use of the distinction between direct and indirect taxes is not always uniform. Sometimes he says that all taxes fall directly or indirectly upon the proprietors of land, and seems to regard the land tax as the only direct tax.41 But elsewhere he says that there are three possible forms of taxes : ( i ) direct upon land ; (2) direct upon persons; (3) indirect upon consumption.42 Here he seems to have in mind the idea, suggested by Bodin, that some taxes are paid immediately or directly, while others are paid by other persons than the one who first advances the tax. With this notion he combines the classification of taxes formulated by Montesquieu. But he proceeds to discuss direct taxes43 at some length, and explains that taxes on persons, so far as they fall upon any kind of income except that derived from land, are really indirect imposts. Thus his position is not inconsistent with the doctrines of Quesnay.

Various circumstances contributed to stimulate the discus- sion, started by the Physiocrats, concerning the relative merits of direct and indirect taxation. In the Constituent Assembly such questions were debated, and Physiocratic ideas exercised a demonstrable influence, especially in the reform of the land tax.44 In January, 1790, an instruction, issued by the Assembly, defined a direct tax as follows :

(Paris, 1846) and Oncken's CEuvres de F. Quesnay (Paris, 1888). The passages referred to may be found on pp. 61, 83, 127-143 of Daire's edition and on pp 312, 332, 696-718 of Oncken's edition. Cf. Henry Higgs, The Physiocrats, pp. 43, 44 (London, 1897).

40 The most important citations are: Mirabeau, Theorie de I'impot (1760); Dupont de Nemours, Origine et progres d'une science nouvelle (1767); Mercier de la Riviere, L'ordre naturel et essentiel des sode'te's politiques (1767). See Daire's Physiocrates, pp. 351-358, 474-524.

"CEuvres de Turgot, Vol. I, pp. 409, 416, edited by E. Daire (2d ed., Paris,

1844).

43 Ibid., Vol. I, p. 3Q4. "Ibid., Vol. I, p. 306.

44 See R. Stourm, Les Finances de Tancien r6gime et de la revolution, Vol. I, pp. 136-143, 2Q5-302 (Paris, 1885).

8 DIRECT AND INDIRECT TAXES

Toute imposition fonciere ou personelle, c'est-^-dire assise directe- ment sur les fonds de terre ou assise directement sur les personnes, qui se leve par voies du cadastre ou des roles de cotisations, et qui passe immediatement du contribuable cotise au percepteur. . . ,46

This definition resembles the one formulated by Turgot, but contains an additional element — namely, the reference to the cadastres, or assessment rolls, by which direct taxes may be levied. This suggested an administrative basis for classifying direct and indirect taxes, which has been much favored by sub- sequent French economists and has become fixed in French public law.40 The same idea was further developed in the Code des Contributions of i8n.47 Direct taxes were there declared to be those raised "par des roles ou les contribuables sont nomina- tivement cotises" ; while indirect were those collected "en vertu des tarijs, sans denomination de personnes." The terms intro- duced by the Physiocrats lived on after their doctrines of taxa- tion had been rejected.

Of French writers on economic science, Canard48 may have been the first to formulate a new basis for the distinction of direct and indirect taxes, after Physiocratic doctrines had failed to gain acceptance. He held a tax to be direct when it reached the sources of an individual's income, as the income from land or from industry; while taxes collected from consumers, or from merchandise on the way to consumers, were indirect. A few years later J. B. Say49 made a similar distinction, defining direct taxes as those demanded from an individual's real or supposed income, while indirect are demanded on each act of consumption of certain specified objects. In 1808 Montyon50

45 M. Block, Dictionnaire de Tadministration franchise, p. 636 (2d ed., Paris, 1881).

46 C/. the present classification in <(U instruction generate" Say, Dictionnaire d'e"conomie politique, Vol. II, p. 25 (Paris, 1892).

47 Handworterbuch der Staatswissenschaften, Vol. VI, p. 97 (Jena, 1894) ; Neumann, p. 431.

48 Principes d'£conomie politique, p. 154 (Paris, 1801).

4'Traite d'economie politique (1803). ist Amer. ed., Vol. II, p. 268 (Boston, 1821).

MJ. B. R. A. Montyon, Quelle influence ont les diverses especes d'impots? (Paris, 1808). Contained in Melanges d'economie politique, Vol. II, pp. 365-496 (Paris, 1848).

DIRECT AND INDIRECT TAXES 9

offered a similar definition, and the phrases direct and indirect taxes may then be said to have found a place in French eco- nomic terminology.

Through the influence of the Physiocrats the distinction of direct and indirect taxes came into general use in Italy, Eng- land and Germany. It is found in the writings of the Italian economist, Gaetano Filangieri,51 who accepted many of the Physiocratic doctrines. He formally classified taxes as direct and indirect, and favored the single tax. Yet the terms were not used by Beccaria,52 who discussed taxation incidentally, or by Verri.53 The last-named writer treated at length the shifting of .taxation, holding that taxes tend to diffuse themselves among all citizens in proportion to consumption. Occasionally he speaks of taxes falling "immediately" upon subjects, but he does not classify taxes as direct and indirect. Giuseppe Palmi- eri,r>4 however, borrowed these terms from the Physiocrats, al- though he did not accept their doctrine that the single tax on land was the only proper form of taxation. Galanti/'5 who pre- ferred the land tax to other imposts, but not as the only form of taxation, used the distinction; and the same is true of Di Gennaro,56 who accepted the entire doctrine of the Physiocrats on this subject. The distinction occurs also in a work published at Naples in 1792.^ After this date the terms direct and indirect taxes may be regarded as well established in Italian economic literature,58 although the general rejection of the Physiocratic

51Delle lesgi politiche ed economiche (1780). Reprinted in Economisti classic!, edited by Custodi (Milan, 1804). See pp. 324-358.

"Element! di economia pubblica (1760). Reprinted by Custodi (Milan, 1804) See Vol. I, pp. 21, 22, 278, 270, 285.

MMeditazioni sulla economia politica (1771). Reprinted by Custodi (Milan, 1804). See chs. xxx, xxxi.

"Riflessioni sulla pubblica felicita (1788). Reprinted by Custodi (Milan, 1805). See Vol. I, pp. 212, 213; Vol. II, pp. 149, 150.

55 Discrizione delle stato antico ed attuale del Contado di Molise (Naples, 1781). Quoted by Fornari, Delle teorie economiche nelle provincie Napolitane, p. 413 (Milan, 1888).

M Piano per la riforma dei titoli dei legislazione relativi al tribute (Naples, 1792). Quoted by Fornari, Delle teorie economiche, p. 409.

57Esame critico delle due anonime operette. See Ricca-Salerno, p. 435.

08 Thus they are used by Azzariti-Stella, in De mali e rimedi politici (Naples, 1806). See Fornari, Delle teorie economiche, p. 573.

10 DIRECT AND INDIRECT TAXES

doctrines had left no scientific basis for such a distinction. In 1813 Cagnazzi, the popularizer of Smith and Say, classified taxes as direct and indirect, in a manner which suggests the definitions formulated by Canard and Say. He called those taxes direct which are levied in proportion to income, and fall directly upon some source of wealth, such as land and industry; while he considered indirect taxes to be those which are levied upon the circulation or consumption of wealth/'9

In Germany, Quesnay had a number of followers who advo- cated his doctrine of taxation.60 Naturally writers of such tend- encies used the terms direct and indirect taxes. Schlettwein may be cited as one of these.61 But some economists, who did not accept the tenets of the Physiocratic school, made no use of this distinction: Lith, von Thiele and Fischer are cases in point.62 J. H. von Justi, in a work63 written prior to the publica- tion of Quesnay's Tableau ficonomique, spoke of taxes being paid "mittelbarer Weise" an expression which we have met in the works of earlier writers. Yet Justi never conceived of this as a basis for the classification of taxes. He applied the expression even to the shifting of the land tax, which he considered pos- sible. In subsequent works64 Justi refutes the theory of the single tax, and does not adopt the terminology of the Physio- crats; while he continues to classify taxes as (i) taxes on immovables, (2) taxes on persons, (3) taxes on business.

Other writers, however, adopted the language of the Physio- crats, even when rejecting their doctrines. Thus Pfeiffer, who

09 L. Cagnazzi, Elementi di economia politica (Naples, 1813). Cf. Ricca- Salerno, p. 462; Fornari, Delle teorie economiche, pp. 579, 580.

60 On Physiocratic influence in Germany, see Roscher, Geschichte der National- okonomie in Deutschland, pp. 480-500; Higgs, The Physiocrats, ch. v; Jahrbucher fur Nationalokonomie und Statistik, Vol. XIX, pp. 1-63 (Jena, 1872).

61 For a list of the works of Schlettwein, see Handworterbuch der Staatswissen- schaften, Vol. V, pp. 576-578. In particular see Schlettwein's Grundfeste der Staaten, p. 615 (Giessen, 1778).

63 J. W. Lith, Abhandlung von denen Steuern (Ulm, 1766); C. G. von Thiele, Nachricht der markischen Contributions- und Landessteuerverfassung (2d ed., Halle, 1768); F. C. J. Fischer, Lehrbegriff sammtlicher Kameral- und Polizei- rechte von Deutschland (Frankfurt, 1784-86).

68 Staatswirthschaft (1755); 2d ed. (Leipzig, 1758), Vol. II, pp. 345-355- MPolitische und Finanzschriften (Kopenhagen und Leipzig, 1761); System des Finanzwesens (Halle, 1766).

DIRECT AND INDIRECT TAXES II

attacked Schlettwein as the representative of the French school, used such expressions as "direkte Auflagen," "direkt und indi- rekt besteuert" etc.65 Sonnenfels, also, when rejecting the single tax and attacking the treatment accorded by the Physiocrats to indirect taxes, uses continually the expressions "mittelbare Abgaben" "unmittelbare Gewerbsteuer," etc.™ With these Ger- man writers we may group Bielfeld, who incidentally uses the words direct and indirect when treating of taxes.*7 Finally, J. J. Moser wrote that a certain tax was paid "per indirectum"™ while J. G. Hunger contrasted direct taxes with taxes on trade and consumption.69

Such discussions served to fix the words direct and indirect taxation in German economic terminology. Beguelin employed these terms in 1797.™ Borowski used them, but with reference to Physiocratic discussions.71 They occur in Bosse's Grundzuge der Finanzwissenschajt, published in i8o4.72 Kroncke73 dis- cussed the various meanings of these terms. Schlozer used the words in a different sense. He divided taxes into "mittelbare" and "unmittelbare"1* The former he defined as taxes that fall upon the productive forces, gross income or production. Indirect taxes, in this view, would be those that fall upon consumption. Schlozer was a thorough student of Adam Smith's writings, and was acquainted with the works of Canard.75 This last circum- stance suggests that Schlozer's distinction was based upon that formulated by the French writer. In 1808 Eschenmayer wrote

65 J. F. von Pfeiffer, Der Anti-physiokrat, pp 212, 360, 361 (Frankfurt, 1780). ^Grundsatze der Polizei, Handlung, und Finanzwissenschaft (1763); 3d ed. (Vienna, 1777), Vol. Ill, pp. 269-272, 300-302, 309-311, 342, 343.

fl7Le B. de Bielfeld, Institutions politiques (La Haye, 1760). See part i, ch. xii.

08 Landeshoheit in Steuersachen (Frankfurt und Leipzig, 1773), p. 686.

09 Hunger wrote : "Diese Handels- und Consumptionsabgaben waren bei Weitem nicht so druckend als jene direkten Steuern" — Kurze Geschichte der Abgaben, ch. xi (Dresden, 1783). Cf, Neumann, p. 423.

70 F. W. von Beguelin, Historisch-Kritische Darstellung der Accise- und Zoll- verfassung (Berlin, 1797).

71 G. H. Borowski, Abriss des praktischen Kameral- und Finanzwesens (2d ed., Berlin, 1799). Quoted in Forstemann, p. 23.

72 Cf. Neumann, p. 421, note.

73 Das Steuerwesen (Darmstadt, 1804). Cf. Neumann, p. 424.

74 C. von Schlozer, Staatswirthschaft (1805). Quoted by Neumann, p. 417.

75 See Roscher, Geschichte der Nationalokonomie in Deutschland, pp. 795, 796.

12 DIRECT AND INDIRECT TAXES

that taxes may be divided into direct and indirect, according as they are raised mediately or immediately from the taxpayers.70 Also Theodor Schmalz, "the last Physiocrat," insisted that the terms direct and indirect had no meaning, when applied to taxes, except in the Physiocratic sense.77 In this year, finally, the words found their way into Prussian public law/8 and their use in German economic literature may be regarded as estab- lished.

In England the terms direct and indirect taxes came into use at a late day, and gained acceptance but slowly. Bodin's Six Books of the Republic, with its allusion to taxes paid "directly or indirectly," was translated into English in 1606, and was read widely.79 Montesquieu, who used a similar expression, was studied by such economists as Hume and Adam Smith. Yet the terms did not come into use from the influence of these French writers. German authors, moreover, were much less known in England, except as their works were accessible in Latin edi- tions.80 Probably the minor political writers and cameralists were never read. Pufendorff, who was well known through the Latin and English editions of his Law of Nature and Nations, does not use the terms direct and indirect. German influence may, therefore, safely be left out of our account.

In England discussions of the subject of taxation are old.81 We may begin with Thomas Hobbes,82 who treated of justice in taxation, favoring taxes on expenditure, but did not attempt

™ D. H Eschenmaycr, Vorschlag zu einem einfachen Steuer-Systeme, p. 12 (Heidelberg 1808).

"Handbuch der Staatswirthschaft, Sec. 410 (Berlin, 1808). Cf. Cohn, Finanz- wissenschaft, p. 441 (Stuttgart, 1889) ; Roscher, Geschichte der Nationalokonomie, pp. 408-500.

78 See Forstemann, p. 8.

n English translation by Richard Knolles (London, 1606). Cf. Hallam, Intro- duction to Literature of Europe, Vol. II, pp. 204, 205.

80 This is well shown in Adam Smith's library, which contained works in Latin, Greek, Italian and French, but no German works, except in Latin editions. See J Bonar, Catalogue of the Library of Adam Smith, pp. 57, Q2, 102, no (London, 1804)-

8*See Ricca-Salerno, pp. 172-185.

83 De cive (1642); Leviathan (1651). (English Works of Thomas Hobbes. Edited by W. Molesworth. London, 1830). See Vol. II, p. 174; Vol. Ill, pp. 333, 334; Vol. IV, pp. 216, 217.

DIRECT AND INDIRECT TAXES 13

any classification of imposts or use the terms direct and indi- rect. Sir William Petty, also, favored taxes on consumption. Holding that a land tax could be shifted only in part upon con- sumers of raw produce, he desired an excise on all consump- tion.83 While he does not classify taxes as direct and indirect, he speaks, in one of his works, of taxes paid "insensibly and indirectly."84 This is apparently the only case in which any English writer, prior to the time of Adam Smith, used any such expression. Thomas Mun, who devoted one chapter of his principal work86 to the subject of public revenues, does not classify taxes or use the words direct and indirect. John Locke .discussed taxation incidentally. Holding that all taxes "for the most part terminate upon land," he says it is vain for the land- owner to desire taxes laid upon commodities, because, "though he pays not this tax immediately out of his own purse," he will ultimately bear the burden of such excise taxes86 Charles D'Avenant, who accepted Locke's theory that all taxes are in the last resort a charge upon land, does not use the words direct and indirect.87

In the eighteenth century, discussions of the relative merits of a single land tax, a general excise system or a single excise upon houses, etc., continued; while the bitter controversies over Walpole's excise scheme of 1733 gave the question great practical interest.88 Prominent among the writers of this period were Vanderlint, who, following Locke, favored a single tax

88 Treatise on Taxes and Contributions (1662).

84Verbum Sapienti, Appendix to Political Anatomy of Ireland (London, 1691). The Verbum Sapienti was written in 1665. All editions have "insensibly and directly." Petty's manuscript shows this to be an error. For this fact I am indebted to Prof. C. H. Hull, who explains the matter in his forthcoming edition of the Economic Works of Sir William Petty.

M England's Treasure by Forraign Trade (1664). (Edited by W. J. Ashley. New York, 1895.) See ch. xvi.

M Considerations of the Lowering of Interest and Raising the Value of Money (1691). See Works of John Locke, Vol. V, p. 55 (nth ed., London, 1812).

"Ways and Means of Supplying the War (London, 1695); Discourses on the Public Revenues and Trade of England (London, 1698). See Political and Com- mercial Works of Charles D'Avenant (London, 1771).

88 See Palgrave, Dictionary of Political Economy, Vol. I, p. 788, for Walpole's scheme. On the entire controversy see Ricca-Salerno, pp. 197-210; Seligman, Shifting and Incidence of Taxation, pp. 12-27 (Baltimore, 1892).

14 DIRECT AND INDIRECT TAXES

upon land,89 and Sir Matthew Decker,90 who desired a single excise upon houses. But this controversy did not result in the development, in English economic literature, of the distinction between direct and indirect taxes.

The immediate predecessors of Adam Smith now claim atten- tion. David Hume9' classified taxes as (i) upon consumption, (2) upon possessions, (3) arbitrary imposts; and did not use the terms direct and indirect. Malachy Postlethwayt, in his Dictionary of Commerce*2 merely echoed Hume, and made the same classification. In another work93 he spoke of "our Taxes laid directly upon Trade, or in any other intermediate Shape." But this does not seem to be similar to the technical use of the terms direct and indirect. Moreover, Postlethwayt made no classification of taxes upon this basis. Sir James Steuart devoted two hundred pages of his Principles of Political Economy9* to the subject of taxation. He offered the following classification: (i ) taxes on alienation, or proportional taxes, as customs, excise and stamp duties; (2) taxes on possession, or arbitrary and cumulative taxes, as poll, window, land taxes, etc.; (3) per- sonal taxes, or "those exacted in service," as the road tax and militia duty. Steuart says that proportional taxes form parts of the prices of commodities, and are paid by the buyer. Taxes of the second class are intended to affect possessors in such a way that the taxes cannot be shifted.9* Here he touches upon the very circumstance that forms a basis for a formal distinction

MJ. Vandcrlint, Money Answers all Things (London, 1734). Cf. Seligman, op. cit., p. 22.

90 Serious Considerations on the Several High Duties (1743). Cf. Seligman, op. cit., pp. 17, 18; Palgrave, Dictionary of Political Economy, Vol. I, p. 519. The writer has been unable to secure a copy of this work. Decker also wrote Essay on the Cause of the Decline of the Foreign Trade (1744). This is contained in McCulloch's Select Collection of Scarce and Valuable Tracts on Commerce (Lon- don, 1859). In this later publication the terms direct and indirect do not occur.

"Essay on Taxes (1752). See Essays, Moral, Political, and Literary, by David Hume, Vol. I, p. 358 (London, 1882).

m Universal Dictionary of Trade and Commerce, Vol. II, p. 785 (London,

M Great Britain's True System, p. 307 (London, 1757). 04 Inquiry into the Principles of Political Economy (1767). Cf. Works of Sir James Steuart (London, 1805). "Ibid., Vol. IV, pp. 173-175.

DIRECT AND INDIRECT TAXES IS

between direct and indirect taxes but does not use those terms. On the contrary, he uses the words directly and indirectly in a non-technical sense that is opposed to any such scientific dis- tinction.90 Finally, it should be noted that J. Cunningham, in the two works in which he discussed taxation, did not use the terms direct or indirect and did not classify taxes.97

To Adam Smith, or, more properly, to the influence of the Physiocrats upon Adam Smith, is due the use in England of the terms direct and indirect taxes. Although Smith was familiar with the works of Bodin and Montesquieu,98 he had not, as late as 1763, adopted such expressions. In his lectures of that year he made the following classification : ( i ) taxes upon consump- tion; (2) taxes upon possessions, as land, stock, money." Here the terms direct and indirect do not occur. In February, 1764, Smith started upon his journey to France, where he remained two years and a half. There he became acquainted with Turgot and other Physiocrats, and attended the meetings of the sect.100 Although he rejected their doctrines of taxation, and could not have classified taxes as they did, he nevertheless retained the words direct and indirect taxes, using them in his most famous work. An examination of the passages in the Wealth of Nations, where these terms occur, leads to the following results :

(i) Smith did not formally classify taxes as direct and in- direct. The classification adopted by him is: (a) taxes on rent; (6) taxes on profits; (c) taxes on wages; (d) taxes which fall indifferently upon all three kinds of revenues. In this last class he placed, first, capitation taxes and, second, taxes on expendi- ture.101

96 Inquiry into the Principles of Political Economy, Vol. IV, p. 318. Here Steuart speaks of the impossibility of the land tax being shifted "directly," and considers whether it may be shifted "indirectly."

97 Essay on Trade and Commerce, Containing Observations on Taxes (London, 1770). This contains the substance of an earlier work on taxes.

98 See Bonar, Catalogue of the Library of Adam Smith, pp. 14, 70. Bielfeld's Institutions politiques was also in Smith's library. See Catalogue, p. 13.

99 Lectures on Justice, Police, Revenue, and Arms, p. 239. (Edited by E. Can- nan. Oxford, 1896).

100 John Rae, Life of Adam Smith, pp. 174, 202, 215, 216 (London, 1895).

101 Wealth of Nations. Edited by J. E. T. Rogers, Vol. II, pp. 413, 414 (2d ed., Oxford, 1880).

1 6 DIRECT AND INDIRECT TAXES

(2) The terms direct and indirect, as used by Smith, did not refer to the incidence of taxes. He applied the term direct to taxes upon the profits of stock and upon the wages of common labor, all of which, he held, are regularly shifted.102

(3) The distinction which Smith commonly had in mind seems to have been based upon the methods followed in the assessment of taxes. This will be evident from the following passages. He speaks of stock "taxed directly," "in proportion to the whole profit."103 Again, he says that transfers of immov- able property may be taxed directly, but that transfers of movables can be taxed only indirectly, either by stamp duties on legal instruments or by requiring a registration of such trans- actions and imposing duties upon registration.104 In all these cases he considers taxes direct when they are assessed accord- ing to revenue or property. When Smith first uses the word indirect, he says: "The state, not knowing how to tax, directly and proportionably, the revenue of its subjects, endeavors to tax it indirectly by taxing their expense."105 He therefore con- siders indirect taxes to be those which are assessed in propor- tion to expense. In accordance with this distinction, he speaks, in other places,106 of direct taxes upon salaries of public officials; while he calls capitation taxes on "the lower ranks of people" direct taxes upon the wages of labor ; and considers taxes upon interest and rent to be levied directly.

(4) But Smith suggested, in one passage,107 another idea which was to be used by subsequent writers in defining direct and indirect taxes. He said that capitation taxes and taxes upon consumable commodities are imposts "which it is intended should fall indifferently upon every different species of rev- enue." The intention of the legislator was to play an important part in subsequent definitions.

102 See Ibid., Vol. II, pp. 440, 441, 460, 463, 466.

108 Ibid., Vol. II, p. 440.

104 /Wd., Vol. II, p. 453-

105 Ibid., Vol. II, p. 466.

m Ibid., Vol. II, pp. 441, 442, 463, 466.

107 Ibid., Vol II, p. 463.

DIRECT AND INDIRECT TAXES 1 7

Even after these suggestions by Smith, the words direct and indirect taxes were slow in making their way into general use. Thomas Mortimer, who had published, in 1772, his Elements of Commerce, Politics and Finance, did not employ these terms in the second edition, which appeared in 1780. The same is true of Sinclair in the various editions of his work upon the Public Revenue.1™ The words do not occur in the Enquiry into the Principles of Taxation, published anonymously, at Dublin, in 1791, although the incidence of taxes upon consumption is here discussed at some length. There were at that time, moreover, no settled meanings for such words as duties, excises, etc. The law of 1799, establishing Pitt's income tax, is entitled an act "grant- ing certain duties upon income."109 Similar terms are used in subsequent income tax acts,110 and in the Annual Register for I803.111

The slowness of the process by which the distinction between direct and indirect taxes gained general acceptance is shown in the various editions of the Encyclopaedia Britannica. The first edition, published at Edinburgh in 1771, contained merely a brief treatment of the subject of taxation. The second and third editions, published in 1778 and 1797, show no trace of the influence of Smith's views. But the fourth edition, published in 1 8 10, contains an article, nearly twelve pages in length, by Hugh Murray. Taxes are classified as follows: (i) assessed taxes,112 "those which the subject is required to pay directly into the hands of the sovereign or commonwealth," e.g. income, capitalization and property taxes; (2) taxes upon commodities, which "are paid, in the first instance, not by the consumer, but by the producer, or importer," and "fall upon consumption."

In 1804 W. Frend113 applied the term indirect taxation to

08 J. Sinclair, History of the Public Revenue (Dublin, 1785; 3d ed., 1803).

09 39 George III, c. 13.

10 43 George III, c. 122.

n Annual Register, 1803, P- 633 (London, 1805).

12 This term has no reference to the "assessed taxes" of the English tax acts. Murray considers the latter as merely one kind of the assessed taxes of his general classification.

113 Principles of Taxation, p. 49 (London, 1804).

1 8 DIRECT AND INDIRECT TAXES

customs and excise duties. Ten years later John Craig114 form- ally defined direct and indirect taxes in such a way as to suggest the influence of Murray's article in the Encyclopedia. Craig said that direct taxes are "paid without recourse on others"; while indirect taxes "affect the enjoyments of persons altogether different from those by whom the money is originally ad- vanced." Yet Ricardo, writing in 1817, did not formally clas- sify taxes as direct and indirect. Although he sometimes made use of these terms, it seems to be impossible to reconcile the various passages of Ricardo's writings in which such words occur with any one definition of direct and indirect taxes.116 In 1821 James Mill116 reverted to the usage of Adam Smith and spoke of "the direct mode of deriving a revenue" from rent, profits and wages, and of "the expedients ... for deriving it from them indirectly." Thus Mill called taxes on rent, profits and wages direct; while he regarded taxes on commodities, etc., as indirect. From that time we may regard the distinction of direct and indirect taxes as established in English usage.

Ill

Without further consideration of the chronological details of its development, we may proceed to classify and examine criti- cally the different views advanced concerning this distinction between direct and indirect taxes. Forstemann and Neumann have recognized three classes of definitions, exclusive of the Physiocratic usage;117 but it seems impossible to reduce the divisions to so small a number, if all shades of opinion are to be included. In the following pages no attention has been paid to the long obsolete Physiocratic discussion. The reader will notice, also, that the names of some writers appear in more than

114 Elements of Political Science, Vol. Ill, p. 12 (Edinburgh, 1814).

115 See Principles of Political Economy and Taxation (1817) in McCulloch's edition of Works of Ricardo (London, 1886). See pp. 93-95, 119, 123, 141, 142, 144, 145. For example, on p. 141 Ricardo says that a rich consumer would pay a tax directly if it "were laid on income, on wine or on any other luxury."

116 Elements of Political Economy (1821). See p. 241 (2d ed., London, 1824). 117 Forstemann, p. 9; Neumann, pp, 425, 426.

DIRECT AND INDIRECT TAXES 1 9

one of the groups. This is because some economists have ex- pressed different opinions in their various works, or have attempted to base upon several characteristics their definitions of direct and indirect taxes.

(i) The first of our groups of definitions is the oldest and the most familiar of all. Direct taxes are said to be those which are collected, in the first instance, from the persons who are to bear them, while indirect taxes are those which are collected from persons who shift the burden upon others. This distinction is an elaboration of the idea contained in the old expression, "to pay taxes directly or indirectly," and was first developed by the Physiocrats into a scientific classification of taxes. When the doctrines of the French school were finally overthrown, the terms direct and indirect remained in use,118 and were employed by writers who believed that other taxes besides the tax upon the income from land were finally borne by the payer upon whom they were first placed. With tLe further development of the theory of the shifting of taxation, the classification of taxes as direct and indirect, according to their final incidence, re- mained a favorite one with students of finance.119

Such a classification seems to be logically clear and con-

118 In Germany, in 1808, Theodor Schmalz, "the last Physiocrat," insisted that these expressions had no meaning apart from the Physiocratic doctrine of taxa- tion/— Quoted by Cohn, Finanzwissenschaft, p. 441.

11UD. H. Eschenmayer, Vorschlag zu einem einfachen Steuer-Systeme, p. 12 (Heidelberg, 1808) ; B. F. B. Weber, Lehrbuch der politischen Oekonomie, Vol. II (Breslau, 1813), quoted by Forstemann, pp. 21, 22 ; J. Craig, Elements of Political Science, Vol. Ill, p. 12 (Edinburgh, 1814) ; L. H. von Jakob, Staatsfinanzwissen- schaft, Vol. I, p. 420 (Halle, 1821); W. Phillips, Manual of Political Economy, p. 276 (Boston, 1828); J. Schon, Grundsatze der Finanz, p. 86 (Breslau, 1832); H. Passy, "Impot," in Dictionnaire de 1'economie politique, Vol. I, p. 901 (Paris, 1852); R. E. Thompson, Social Science and National Economy, pp. 193, 194 (Philadelphia, 1875) ; H. Fawcett, Manual of Political Economy, p. 547 (5th ed., London, 1876) ; J. E. T. Rogers, Manual of Political Economy, chs. xxi, xxii (Oxford, 1876) ; J. L. Laughlin, Elements of Political Economy, p. 273 (New York, 1887); K. Umpfenbach, Lehrbuch der Finanzwissenschaft, p. 195 (ad ed., Stuttgart, 1887); C. Gide, Principles of Political Economy, p. 563 (Amer. trans., Boston, 1892). M. H. Baudrillart, Manuel d'e*conomie politique, p. 501 (4th ed., Paris, 1878), combines this classification, to some extent, with the administrative classification discussed in the next group. W. Roscher, Finanzwissenschaft, p. 155, is inclined to follow this definition.

20 DIRECT AND INDIRECT TAXES

sistent. Moreover, it is based upon a most important economic fact. If our actual taxes could be classified with certainty as direct and indirect, the definition would prove most useful. But, unfortunately, it was soon apparent that difficulties must arise at just this point. Von Jakob pointed out, in 1821, that a wine tax might be direct, if collected from the consumer, and indi- rect, if collected from tradesmen or producers. The same is true, of course, of import duties. When consumers import goods directly, without resorting to middlemen, customs duties may be collected from the persons who finally bear them. But, more than this, the facts of incidence are often uncertain or varying. A house tax is surely direct, if the owner is also the occupier; but it may be shifted from the owner upon a tenant, especially if it is an exclusive tax. Such considerations long ago made it apparent that many taxes could not with scientific accuracy be assigned a definite place, in a classification based upon the actual facts of incidence.

A realization of this difficulty led to a modification in this definition of direct and indirect taxes: the supposition or inten- tion of the taxing authorities was substituted for the actual facts of incidence. John Stuart Mill may represent the advocates of such a modification. He wrote:

A direct tax is one which is demanded from the very persons who, it is intended or desired, should pay it. Indirect taxes are those which are demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another. . . .

Such definitions as this have during the last forty years gained wide acceptance.120

120 E. Baumstark, Kameralistische Encyclopadie, Sec. 487 (Heidelberg, 1835) ; K. S. Zacharia, Abhandlungen aus dem Gebiete der Staatswirthschaftslehre, p. 29 (Heidelberg, 1835) J J- S. Mill, Principles of Political Economy, bk. v, ch. iii, Sec. i (London, 1848) ; K. H. Rau, Grundsatze der Finanzwissenschaft, Vol. I, pp. 441, 442 (5th ed., Leipzig, 1864) ; C. J. Bergius, Grundsatze der Finanzwissenschaft, pp. 263, 264 (Berlin, 1865) ; A. Walker, Science of Wealth, p. 312 (Boston, 1866) ; F. Bowen, American Political Economy, p. 436 (New York, 1870) ; A. L. Perry, Elements of Political Economy, p. 585 (New York, 1878) ; P. Leroy-Beaulieu, Trait6 de la science des finances, Vol. I, pp. 225, 226 (4th ed., Paris, 1888); H. Denis, L'impot, pp. 136, 137 (Brussels, 1889); J. A. R. Helferich, in Schonberg's Handbuch der politischen Oekonomie, Vol. Ill, pp. 155, 156 (3d ed., Tubingen,

DIRECT AND INDIRECT TAXES 21

But this formulation of the distinction between direct and indirect taxes is open to criticism. It is urged correctly that the intention of the legislator is "too uncertain an element for the characterization of a scientific conception."121 It is asked whether Congress intended to burden the producer or the con- sumer by the tax formerly imposed on bottles of patent medi- cine, and for whose benefit the tax was repealed. We must concede that the legislator often has considered not at all the incidence of taxes, but merely the easiest or quickest way of raising money. Moreover, it is certain that tax laws do not always operate in accordance with the expectations or intentions of the legislator. While Wagner122 is right in claiming that the intention of the legislator has been an important element in shaping reforms in modern tax systems, it is true that the un- certainties of this classification are so great as to leave it no strict scientific validity.

This definition, accordingly, has been subjected to a second modification. Admitting that direct taxes are occasionally shift- ed from the people whom they are supposed to burden upon persons whom they are not assumed to reach, and conceding that our knowledge of the facts of incidence is sometimes insufficient to enable us to be certain that direct taxes will stay where they are first placed, it is claimed, nevertheless, that we may retain with advantage the distinction based upon the incidence of taxation. Thus Bastable writes:

Whether a duty is assessed directly on the ultimate bearer or is passed through various intermediaries before reaching him, may not be capable of being precisely determined in all cases. There are no hard and fast lines in fact, and the instances on the margin may be

1897); J- S. Nicholson, Principles of Political Economy, Vol. I, p. 214 (New York and London, 1893); K. T. Eheberg, Finanzwissenschaft, p. 150 (4th ed., Leipzig, 1895). Perhaps we should include here S. Newcomb, Principles of Political Economy, pp. 484, 485 (New York, 1885). J. Gamier, Traite* de finances, pp. 47, 48 (4th ed., Paris, 1883), combines, in part, this distinction with the administrative classification mentioned in the second group.

121 R. T. Ely, Taxation in American States and Cities, p. 67 (New York, 1888). See also Neumann, pp. 485 et seq.

m Finanzwissenschaft, Vol. II, pp. 244, 245 (2d ed., Leipzig, 1890).

22 DIRECT AND INDIRECT TAXES

numerous, but if we take the terms, not as giving a complete classifica- tion of taxes, but as marking the presence or absence of a certain characteristic, they may be employed with advantage, but rather to suggest reasons for discrimination than to definitely settle results.123

This is to admit that actual imposts can not be fitted into our distinction with absolute scientific accuracy. But there may still remain a justification for using the terms in this sense, to denote large groups of taxes that possess normally, in a large majority of cases, the same important characteristics. No error or con- fusion can arise, if care is taken to note all possible exceptional cases. Wagner well says:

In the most important practical cases this is not disputed. Income taxes, property taxes, direct taxes on luxuries, many taxes on trans- actions and inheritance taxes are demanded and formulated because we believe that we can assume, as a rule, that they finally fall on the payer and therefore are direct. Customs duties and internal excise duties are demanded and formulated in a given manner because we presuppose that they do not finally fall upon the actual payer, except in so far as he is also the consumer, but are shifted by him . . . upon the consumer.124

(2) The second group of definitions may be designated the administrative classification. According to it, direct taxes are those levied at stated periods by means of assessment rolls of names; while indirect are levied only under certain circum- stances or situations, and by means of tariffs or schedules of charges.

The earliest suggestion of such a classification is probably found in an instruction issued by the French Constituent As- sembly in January, 1790. This defined a direct tax as follows: "Toute imposition . . . qui se l&ve par les votes du cadastre on des roles de cotisations"1'25 This was practically repeated in the Code des Contributions™* in 1811. French financial practice has

^Bastable, Public Finance, p. 326 (2d ed., London and New York, 1895). See also T. E. Cliffe Leslie, Essay on Financial Reform, Cobden Club Essays, Second Series, p. 188 (London, 1872).

124 Wagner, Finanzwissenschaft, Vol. II, p. 244.

121 Handworterbuch der Staatswissenschaften, Vol. VI, p. 97.

128 Neumann, p. 431.

DIRECT AND INDIRECT TAXES 23

retained a similar classification down to the present day,127 while German administrative terminology has sometimes been influenced by the same idea.128 Among economists, a number of French and German writers have followed this distinction,129 and in France it has been used rather more often than any other.

This distinction is primarily of administrative importance. Its usefulness for economic purposes has never been demon- strated, as Block and Courcelle-Seneuil have admitted. The mode of administration is clearly an external matter that has little or nothing to do with the intrinsic nature and economic effects of tax systems. We may therefore reject this distinction as useless for purposes of economic investigation.

Moreover, it can be shown that the administrative definition leads to a grouping of taxes that is positively harmful for economic purposes. On this basis, taxes upon successions and gifts must be classified, with customs and excise duties, as indi- rect taxes. This is actually done in the administrative nomen- clature of Prussia, Bavaria and Baden.130 Little reflection is necessary to show the unfortunate results that must arise from grouping together taxes which differ so diametrically in their purpose, as well as in their economic effects.

Again, it may be noted, certain taxes do not always accommo-

127 See M. Block, Dictionnaire de 1'administration franchise, p. 1087 (2(1 ed , Paris, 1881); L. Say, Dictionnaire d'economie politique, Vol. II, p. 25 (Paris, 1891).

128 Neumann, pp. 434-436; Handworterbuch dcr Staatswissenschaften, Vol VI, p. 97-

mL. F. Wiederhold, Wissenschaft der indirekten Steuern (Marburg, 1820), quoted by Neumann, p. 438; F. G. Schimmelpfennig, Die preussischen direkten Steuern (1831), quoted by Neumann, p. 439; F. J. Schmitthenner, Grundlinien des allgemeinen Staatsrechtes (Giessen, 1843, 1845), quoted by Neumann, p. 439; K. F. Dieterici, Ergebnisse der Verwaltung (1849), quoted by Neumann, p. 440; M. H. Baudrillart, Manuel d'economie politique, p. 501 (4th ed., Paris, 1878) ; E. de Parieu, Traite des impots, Vol. I, p. 10 (Paris, 1866) ; J. G. Courcelle- Seneuil, Traite* d'economie politique, Vol. I, p. 452 (2d ed., Paris, 1867) ; J. Gamier, Traite* de finances, pp. 47, 48 (4th ed., Paris, 1883) ; M. Block, Progres de la science £conomique depuis Adam Smith, p. 415 (Paris, 1890); P. Cauwes, Cours d'economie politique, Vol. IV, p. 293 (3d ed., Paris, 1893).

180 See Wagner, in Schonberg's Handbuch der politischen Oekonomie, Vol. Ill, p. 169; Neumann, p. 435; Wagner, Finanzwissenschaft, Vol. II, p. 241.

24 DIRECT AND INDIRECT TAXES

date themselves to the administrative classification. Von Hock131 has urged that some duties on consumption, which according to this definition are indirect taxes, may be paid by composition, and may therefore become direct in the administrative sense. Such cases are exceptional, and it may be claimed that the definition need consider only the conditions that prevail in a majority of cases. This may be conceded, as it was in the first classification of direct and indirect taxes; but it remains true that all actual taxes cannot be fitted into the administrative definition with perfect scientific accuracy.

A final point demands consideration. Baudrillart132 and Gar- nier133 have attempted to combine, in some measure, the admin- istrative classification with the one based on the incidence of taxes. Such a procedure is manifestly impossible. Taxes upon inheritances or gifts are certainly direct, within the meaning of the first definition; while they are surely indirect, according to the criteria established by the administrative classification. In the case of these taxes the two definitions do not correspond at all, and they should not be combined.

(3) The third classification relates to the nature of the ob- jects taxed — of the things which are made the bases of assess- ments. A. de Foville has stated it as follows:

A direct tax reaches in the payer taxable elements which are of a durable, constant and continuous character, such as existence, possession or profession. To exist, to possess, to carry on trade or industry, these are permanent facts. . . . Indirect taxes do not reach qualities or possessions, but circumstances, particular or intermittent facts.134

In 1811 F. J. H. von Soden defined direct taxes as those which reach an object, and indirect as casual imposts which depend upon circumstances or events. In 1829 J. G. Hoffmann

131 Die offentlichen Abgaben und Schulden, p. 89 (Stuttgart, 1863). Wagner, Finanzwissenschaft, Vol. II, pp. 241, 242, has presented other difficulties of a similar sort.

112 Manuel d'e'conomie politique, p. 501.

13STraite de finances, pp. 47» 48.

m Quoted by R. Stourm, Systemes generaux d'impots, p. 281 (Paris, 1893).

DIRECT AND INDIRECT TAXES 25

wrote that direct taxes reach something that is, while indirect reach something that happens. In Germany, Murhard and Neu- mann, and in France, Parieu, de Foville and Stourm, have favored similar definitions.186

This distinction seems logically clear and admissible. But it is based upon criteria which, when applied to the facts of economic life, enable us to distinguish, in most cases, differences in degree of permanence only, not differences in the nature of the objects taxed. For this reason the practical application of the definition is not so easy as it might appear at first thought. Thus, production is considered to be a permanent or continuous fact, when taxes are classified upon the basis of this distinction. But it seems clear that a man's general activities in consumption constitute a fact of equal permanence, and that a general excise on consumption must be a direct tax within the meaning of the definition. Again, the systematic importation of raw materials from a foreign country seems to be a permanent and continuous part of the conduct of many productive enterprises. Why, then, are we not obliged to classify customs duties upon such mate- rials as direct? Are they not imposed upon elements that are as permanent or continuous as the products, or net produce, upon which product taxes (Ertragssteuern} are levied?

The writers who favor this distinction consider that the use of a person's property or faculties in economic production is a fact of a permanent nature, and call taxes direct when they are levied on income or business.136 It would seem that all taxes levied on producers as such, or upon goods regularly turned out by producers, must be considered direct, if this definition is to be consistently applied. This would necessitate the classifica- tion of excise taxes as direct when they are levied upon pro-

188 F. J. H. von Soden, Die Staatsfinanzwisscnschaft, p. 283 (Leipzig, 1811); J. G. Hoffmann, in Preussische Staatszcitung, Nr. 304, 1820; also in Nachlass kleiner Schriften, pp. 461-471 (Berlin, 1847) ; K. Murhard, Theorie und Politik der Besteuerung, pp. 170-173 (Gottingen, 1834) ; E. de Parieu, Traite" des impots, Vol. I, p. 118 (2d ed., Paris, 1866) ; Neumann, ch. x; R. Stourm, in Dictionnaire d'£conomie politique, Vol. II, p. 26.

mSee Neumann, pp. 426-446.

26 DIRECT AND INDIRECT TAXES

ducers, as is the case with duties on beer, spirits and tobacco in the United States.

The adoption of this definition has never led to results that can be considered important for the investigation of economic questions. Further than this, it seems obvious that a grouping of taxes according to the criteria here suggested leads to un- usual and even harmful consequences. By this method of clas- sification we are compelled to call many customs and excise duties direct, while taxes upon inheritances and gifts must be considered indirect. Such a grouping under a common name of taxes whose economic effects are so diverse cannot conduce to scientific insight.

Some economists, as Stourm and Neumann, have sought to combine this third classification with the second, or administra- tive, definition of direct and indirect taxes. They hold that taxes on permanent facts are collected by means of periodical assess- ments and rolls of names, while taxes on intermittent facts are levied by tariffs of charges. This combination of the two defini- tions is inadmissible. Excise taxes levied upon producers, or upon commodities as they are produced, are imposed upon relatively stable and permanent facts, as has been shown. Such duties must be called direct, in the sense of the third definition. But in their collection tariffs of charges, not assessment rolls, may be employed ; so that they must be considered indirect in the administrative classification. The same is true of such cus- toms duties as strike regular and continuous importations.

(4) According to a fourth definition, direct taxes fall upon possession and indirect reach consumption. This classification considers the objects upon which taxes are levied — that is, things possessed or things consumed — and does not refer to the sources of taxation. It has been adopted by a number of econo- mists in various countries.137

mF. J. H. von Soden, Die Nationalokonomie, Vol. Ill, p. 155 (Leipzig, 1805- 1808) ; F. C. Fulda, Handbuch der Finanzwissenschaft, Sec. 154 (Tubingen, 1827); J. G. Hoffmann, Lehre von den Steuern, pp. 69-73 (Berlin, 1840); W. Roscher, Grundriss der Staatswissenschaften, p. 101 (1843); M. von Prittwitz, Theorie der Steuern und Zolle, p. 176 (Stuttgart, 1842); F. Wayland, Elements

DIRECT AND INDIRECT TAXES 27

This distinction may be assailed upon logical grounds. Pos- session and consumption, things possessed and things consumed, are not logical opposites. Our possessions include both capital goods, used in the process of production, and durable consump- tion goods, such as dwelling houses, furniture, clothing, car- riages, etc. These durable consumption goods are not to be distinguished from food or fuel, except in respect of the length of time required to destroy or consume the satisfactions which they can afford. No scientific distinction can be based upon the criteria offered by this definition.

The objection just raised is fatal to such a classification, but it may also be pointed out that the definition is not sufficiently inclusive. In this grouping poll taxes can find no place. They are imposed upon persons as persons, not upon either posses- sion or consumption as such. They may be paid by sacrificing property or by retrenching in one's consumption, but not nec- essarily in either way. Moreover, this definition considers, not the source whence arise the resources for paying the tax, but merely the objects upon which imposts are levied. The same difficulty occurs with inheritance taxes, which fall not upon property as such, but upon particular transfers of property. Similarly, taxes on sales occasion trouble. They are imposed upon acts, not upon property or consumption as such.

Some of these difficulties have been met by changing slightly the basis of the definition. Thus Soden, Levasseur and Cauwes include persons with property as the objects upon which direct taxes fall. Such a procedure may provide a place for poll taxes, but it does not obviate the difficulties that arise from the fact that possession and consumption are not logically opposite

of Political Economy, p. 3Qi (4th ed , Boston, 1851); E. Levasseur, Precis d'^conomie politique, p. 345 (Paris, 1883). E. Peshine Smith implies a similar distinction in his Manual of Political Economy, p. 265 (Philadelphia, 1853). E. Sax, Grundlegung der theoretischen Staatswirthschaft, p. 544 (Vienna, 1887), is perhaps to be classified with this group of writers, in spite of the pains he has taken to make his ideas appear so involved as to differentiate him from other economists. Finally, P. Cauwes brings this distinction into his definition of direct and indirect taxes: see his Cours d'£conomie politique, Vol. IV, p. 293 (3d ed., Paris, 1803).

28 DIRECT AND INDIRECT TAXES

terms. The same is true of Fulda's attempt to include income with possession as the basis of direct taxation.

Sometimes the word actions has been substituted for con- sumption, as in the cases of Soden, Hoffmann, Roscher, Pritt- witz and Levasseur. Probably this has been done in order to make a place for taxes on sales, gifts, inheritances and various imposts on transactions. This change makes the definition more inclusive, but does not remedy the original logical difficulty. As applied to consumption, actions cannot be the logical opposite of possessions. My actions in acquiring and using a dwelling house differ from my actions in acquiring and using fuel only in respect of the length of time over which the use may extend. However this definition may be amended, it seems absolutely untenable.

(5)The fifth group of distinctions is based upon the opposi- tion between production and consumption. Taxes which reach production are held to be direct, and imposts upon consumption are called indirect. Such a definition was partially formulated by Schlozer, in 1805, and has been adopted by several later economists.138

This distinction seems to be founded upon ideas that are logical opposites, but it cannot be made inclusive of all taxes. Poll taxes do not fall primarily upon production or consump- tion. Taxes on inheritances and gifts cannot, by any use of these terms, be brought under such a classification. Other diffi- culties arise when it is attempted to classify certain important kinds of imposts. Taxes on property that is not used in produc- tion certainly fall upon consumption goods. Hence, upon this basis, indirect taxes must include taxes upon dwelling houses, furniture, etc. — a result that is highly unusual and unfortunate. Taxes upon transfers must cause further trouble. These may be

188 C. von Schlozer, Staatswirthschaft, p. 167 (1805), quoted by Neumann, p. 417; J. B. Montyon, Quelle influence ont les diverses especes d'impots? (Paris, 1808), contained in Melanges d'economie politique, Vol. II, pp. 365-496 (Paris, 1848) ; J. F. E. Lotz, Handbuch der Staatswirthschaftslehre, Vol. Ill, p. 176 (Er- langen, 1821); T. C. Banfield, The Organization of Industry, p. 136 (London, 1848); P. De Luca, La Scienza delle finanze (Naples, 1858). See Ricca- Salerno, pp. 548, 549.

DIRECT AND INDIRECT TAXES 29

collected either from producers or consumers. While they may ultimately tend to burden the consumer, this definition does not allow us to consider the facts of incidence and to classify such imposts as taxes on consumption. Again, it is impossible to determine where taxes on checks or bills of exchange should be placed. These may be paid by producers or consumers in the first instance, and we are not allowed to consider their final incidence. It is clear, therefore, that the fifth definition offers no certain or useful classification of taxes.

(6) The sixth method of classification contrasts income and expenditure. It groups taxes that fall upon income under the head of direct taxes and applies the term indirect to imposts that fall upon consumption. This definition is found in the writings of Canard and Say, as well as in recent works upon finance.™9 This grouping of taxes is somewhat similar to that based upon the opposition between production and consumption; but it is more inclusive, since it makes a place for taxes on inheritances, gifts and all possible forms of acquisition. Perhaps even poll taxes may be considered as uniform taxes upon income. More- over, this classification seems to be based upon criteria that are clearly logical opposites. Nevertheless, it is open to criticism in some directions.

First, it may be shown that some taxes fall, now upon income, now upon expenditure. Taxes upon checks and bills of exchange may certainly lead to such results. The same is true of many other taxes on transactions. Excise taxes, when collected from producers, fall primarily upon the acquisition of income. Such

189 N. F. Canard, Principes d'economie politique, p 154 (Paris, 1801); J. B. Say, Political Economy, Vol. II, p. 268 (ist Amer. ed , Boston, 1821) ; L. Cagnaz- zi, Element! di economia politica (Naples, 1813) ; see Ricca-Salerno, pp. 461, 462. C. A. von Malchus, Handbuch der Finanzwissenschaft, Vol. I, p. 168 (Stuttgart, 1830) ; F. Lieber, in Encyclopaedia Americana, Vol. XII, p. 155 (Philadelphia, 1832) ; C. Rusconi, Prolegomeni della economia politica (Turin, 1852) ; see Ricca- Salerno, p. 538. Perhaps, also, we should place in this group of writers, J. Mill, Elements of Political Economy, p. 241 (2d ed., London, 1824) ; J. R. McCulloch, The Principles of Taxation, Vol. I (London, 1845). L. von Stein holds that direct taxes fall upon net income, while indirect are imposed upon expenditure. Then he adds, as a third kind of impost, the general income tax.— Lehrbuch der Finanzwissenschaft, Vol. II, p. 499 ($th ed., Leipzig, 1885).

30 DIRECT AND INDIRECT TAXES

imposts may regularly be shifted upon consumers and may be called taxes on consumption. But this definition does not allow for the ultimate incidence of taxation; and, if this should be attempted, would lead to most singular consequences. There- fore, some excise taxes must be considered direct in this classifi- cation.

In the second place, the definition provides no satisfactory place for taxes on durable consumers' goods. If these are not a source of income, then imposts levied upon them must be considered as indirect; and thus taxes on houses and many other forms of property become indirect taxes — a result not contem- plated or desired by the advocates of this definition. It may be argued, however, that such goods are a relatively permanent investment from which the owner draws part of his annual in- come, in the form of satisfactions derived from the use of such consumers' goods. But such a claim does not entirely remedy the difficulty. House taxes may be collected from occupiers in all cases, and many of the occupiers may be tenants. Such taxes, therefore, fall primarily upon the tenant's expenditure and must be considered indirect. In this case we are prevented by the definition from considering the question of final incidence; but, if this should be regarded, we know that house taxes often fall upon tenants — regularly so, in fact, if the taxes are exclusive and not parts of a general property tax. There seem to be sufficiently strong reasons, therefore, for rejecting as useless, if not mis- leading, this sixth definition of direct and indirect taxes.

(7) A seventh definition has been developed, perhaps out of ideas suggested by the last classification. It has been held that direct taxes reach ascertained ability to bear public burdens and therefore strike wealth in its immediate manifestations, while indirect taxes are based upon the mere presumption of such ability and touch wealth in its secondary manifestations. In the first case, the ability is ascertained directly; in the second case, indirectly and by inference from some external sign. Persons, property and income are considered the immediate manifesta- tions of wealth, while transfers of property and acts of consump- tion are the mediate manifestations. Perhaps a suggestion of

DIRECT AND INDIRECT TAXES 31

such a definition is found in the following words of Adam Smith : "The state, not knowing how to tax, directly and proportion- ably, the revenue of its subjects, endeavors to tax it indirectly by taxing their expense."140 Possibly one of Say's works has influenced somewhat the more recent writers who have devel- oped this distinction.141

Such a definition seems logically clear and unassailable, but its scientific value must depend upon the ease with which actual taxes fit into the classification and upon the results obtained by a rigorous adherence to the criteria established for our guidance. Here objections arise at the very start. The various manifestations of wealth upon which taxes are assessed cannot be sharply divided into mediate and immediate. The possession of a funded income may be a more immediate manifestation of wealth than the purchase of common food and fuel, but in many instances the line cannot be so readily drawn.

Let us consider a few such cases. Is the possession of a dwell- ing house a more immediate manifestation of wealth than the purchase and use of such luxuries as velvets, diamonds or cham- pagne? Is not such a transfer of property as is involved in inheritances or gifts an immediate manifestation of ability to pay taxes? Yet, in this definition, it is proposed to consider taxes on transfers as indirect. Is the ownership of property always a source of income and an immediate manifestation of ability? Clearly not, for men may be "land poor" and many investments may prove unproductive. In cases like these a property tax is

140 Wealth of Nations (Rogers's ed ), Vol. II, p. 466.

141 J. B. Say, Cours complet d'economie politique, Vol. Ill, p. 401 (ed. by H. Say, Paris, 1852); J. J. Clamageran, Histoire de 1'impot en France, Vol. I, pp. xiv, xv (Paris, 1867) ; Forstemann, op. dt., pp. 12, 13 ; K. Knies, Lectures, quoted by R. T. Ely, Taxation in American States and Cities, p. 67; L. Cossa, Taxation, p. 66 (Amer. ed., New York, 1888) ; A. Roncali, Corso elementare, pp. 238, 239 (Parma, 1887). A. Schaffle distinguishes between direct and indirect methods of reaching a person's ability to pay taxes. According to him, direct taxes are assessed according to the measure of a person's average or general ability — that is, the size of a person's income; while indirect taxes reach facts connected with the processes of consumption or acquisition that indicate special or individualized ability. It is hard to see how this definition differs materially from those included in this class. At any rate, Schaffle classifies actual taxes in the same manner as Cossa and the other economists of this seventh group, calling taxes on inherit- ances, gifts, etc., indirect. See Die Steuern, Vol. I, pp. 58-73 (Leipzig, 1895).

32 DIRECT AND INDIRECT TAXES

levied upon the presumption that the possession of such property is a source of income. It seems impossible to call all possessions immediate manifestations of wealth or ability and to consider all transfers and consumption as mediate manifestations. Again, the advocates of this classification propose to consider the poll tax as direct, since they regard a person's existence as an imme- diate manifestation of ability. Here they do not adhere rigor- ously to the criteria established by their own definition. The uniform poll tax has been gradually discarded by civilized peoples, precisely because it does not regard differences in ability to bear public burdens. In its assessment the government does not consider manifestations of wealth, but proceeds on the assumption that the mere fact of existence implies ability to pay. Enough considerations have been adduced to show the impos- sibility of constructing a consistent and useful classification of taxes upon this basis.

(8) An eighth definition is based upon the old idea that imposts upon consumption are paid voluntarily, since they form part of the prices of commodities that citizens are free to pur- chase or to refrain from purchasing. Such a distinction between direct and indirect taxes was made as early as lySy.142

Criticisms of this distinction need be directed only at the alleged voluntary nature of indirect taxes, such as impost or excise duties and taxes upon transactions. Mill has shown that this notion is erroneous, and Leroy-Beaulieu has given it the coup de grace.1*3 Taxes on salt, sugar and staple articles of clothing cannot be altogether avoided by a retrenchment of one's consumption. In so far as the use of these articles is dimin- ished, the imposition of the tax compels the citizen to sacrifice

142 F. W. von Ulmenstein, Von Steuern und Abgaben, p. 161 (Erlangen, 1794) ; sec Roscher, Finanzwissenschaft, p. 157; A. Ressi, Dell' Economia della specie umana (Pavia, 1820), quoted by Ricca-Salerno, p. 471; D. A. Wells, Principles of Taxation; see Popular Science Monthly, Vol. LI, pp. 173, 174 (New York, 1897). Forstemann, p. 27, quotes Prussian decisions, of the year 1837, to the same effect. In 1787 the same idea was advanced by Hugh Williamson, who wrote: "The capi- tation tax and land tax, such as are usual among us, are inevitable and positive taxes: they are not to be averted. . . . But the excise is a negative or indirect lax." — American Museum, Vol. II, p. 122 (Philadelphia, 1787).

148 Principles of Political Economy, bk. v, ch. vi, Sec. i ; Traite* de la science des finances, Vol. I, p. 279. Cf. Bastable, Public Finance, p. 330.

DIRECT AND INDIRECT TAXES 33

desired enjoyments. This is all that the payment of a direct tax necessitates, so that the position of the citizen is practically identical in both cases. The result is the same when taxes are levied solely upon so-called luxuries. Moreover, direct taxes can be avoided with equal readiness and in a similar manner. The citizen can live in a poor house located in an undesirable quarter, and can thereby avoid the direct tax levied upon the comfortable dwelling which he would otherwise have desired to occupy. He can cease to accumulate wealth, and may escape paying an in- come tax levied upon incomes that exceed five hundred dollars. Leroy-Beaulieu seems to be entirely justified in remarking: "Mais, d'abord, c'est faire une plaisanterie que de dire que les impots indirects soient volontaires."

(9) A ninth distinct group may be recognized, although it is of slight historical and even less scientific importance. Direct taxes are defined as those imposts which are demanded from citizens in definite amounts and indirect taxes as those paid according to special circumstances, without a determination of the exact sums due from each individual.144 This definition has no significance for scientific purposes.

(10) Finally, it may be noted that our nine groups of defini- tions do not include all the economists who have employed this distinction. Thus, A. Marescotti146 has defined direct taxes as imposts which fall upon immovables and indirect as imposts that reach movables — a definition which has no possible economic value and must lead to a most singular grouping of taxes.

Prof. R. T. Ely has retained the distinction, while he has appreciated the shortcomings of the various methods of formu- lating it. Without attempting to find a new scientific basis for the classification, he has called taxes direct when they reach

144 G. H. Borowski combines this element with others in his definition of direct and indirect taxes. See Abriss des praktischen Kameral- und Finanzwesens (Ber- lin, 1799), quoted by Forstemann, p. 23. A. H. L. Heeren formulated the dis- tinction more clearly in his Ideen uber die Politik, Vol. I, p. 227 (2d ed., Got- tingen, 1804), quoted by Forstemann, p. 23. M. von Prittwitz also used this defi- nition in his Grenzen der Civilisation, p. 301 (2d ed., 1853), quoted by Forste- mann, p. 24. Finally, J. B. Say and others have spoken of direct taxes as demands of definite portions of an individual's revenue, etc. ; see Say, Treatise on Political Economy, Vol. II, p. 268 (ist Amer. ed.).

148 Sulla economia sociale (Florence, 1856), quoted by Ricca-Salerno, p 541.

34 DIRECT AND INDIRECT TAXES

real property or income and indirect when they are laid upon articles of drink, food and clothing. Around these principal taxes he has grouped as direct all taxes upon trades, occupations, persons and all forms of property except common articles of consumption, while he includes all imposts on transactions with the indirect taxes.146 This classification seems to follow closely the usage that has been most common in the United States, and makes it possible to contrast the familiar points of difference in the effects of various forms of taxation; but it cannot be con- sidered a rigorous, scientific definition.

IV

The difficulties and uncertainties of all attempted classifica- tions have induced many economists to abandon altogether such a distinction. J. C. L. Simonde, as early as 1819, declared that the terms had no meaning outside of the Physiocratic doc- trines.147 A few years later Lieber, who offered a definition of direct and indirect taxes, admitted that the division was not a consistent one.148 In 1862 Cherbuliez complained of the differ- ent meanings given to the words, and made no use of such a distinction.149 Dudley Baxter then urged that the definition cannot furnish a trustworthy classification.150 Henry Sidgwick abandoned the terms, considering that they were "liable to mis- lead the student, by ignoring the complexity and difficulty of the problem of determining the incidence of taxation.'7151 W. Vocke adopted a similar course, because such a twofold division of taxes cannot be adjusted to his threefold grouping of public imposts.152 Cohn says that, since the time of the Physiocrats, all writers have departed from this simple scheme of classifica- tion in proportion as they have acquired a greater knowledge of the facts of taxation.153 Block concedes that the distinction has

Taxation in American States and Cities, pp. 66-69. 47Principes d'e*conomie politique, Vol. II, p. 479 (2d ed., Paris, 1827).

Encyclopaedia Americana, Vol. XII, p. 155. 40 Precis de la science e"conomique, Vol. II, p. 405 (Paris, 1862). "Taxation of the United Kingdom, p. 21 (London, 1869).

Principles of Poltical Economy, p. 567 (London, 1883).

Die Abgaben, die Auflagen, und die Steuer, p. 7 (Stuttgart, 1887). 58 Finanzwissenschaft, Sees. 326-332.

DIRECT AND INDIRECT TAXES 35

merely an administrative importance, while Cauwes holds that it is not precise enough to serve as a basis for a logical classifi- cation.'54 Most recently Eheberg has said that it would be best to abandon entirely this distinction.155

It has been shown that all attempts to distinguish direct from indirect taxes offer more or less serious difficulties and fail to attain that exactness and completeness which are necessary for purposes of strictly scientific definition. Some of the distinctions are not tenable for a moment; others promise well, but lead us into trouble sooner or later. Of all the definitions only those of the first group are based upon criteria that have sufficient eco- nomic importance to lead to useful scientific results. But the distinction here suggested cannot be applied with entire preci- sion and consistency.

In view of such facts it would seem best for economists to abandon the terms direct and indirect taxes. But such a course is not free from difficulty. The words have been so long fixed in popular usage, and have been given such importance in administrative, and even constitutional, law, that it is doubtful whether the near future will see such a radical change effected in our terminology. Under such circumstances the economist may be obliged to retain these troublesome terms. If so, he should never fail to emphasize the difficulties and uncertainties of the definition. If such a compromise with popular and legal usage compels the retention of the distinction, it seems best to follow the definition based upon the usual and normal facts of incidence, as Wagner and Bastable have counseled. This definition offers convenient terms for describing large groups of taxes, and need not lead to error, if care is taken to consider individual cases. For American and English writers such a course offers a manifest advantage, in that it follows closely the usage that has prevailed since the early years of the present century.

1MProgres de la science 6conomique, Vol. II, p. 415; Cours d'dconomie poli- tique, Vol. IV, p. 346.

155 Finanzwissenschaft, p. 153 (4th ed., Leipzig, 1895).

WAGE STATISTICS AND THE FEDERAL CENSUS1

IN THE United States, the Federal census presents the earli- est official data concerning statistics of wages. The censuses of 1850 and i86o2 made exactly the same inquiries upon this subject. In both cases the schedules3 called for "the average number of hands employed/7 male and female, and the "aver- age monthly cost" of male labor and of female.

It must be remembered that in these censuses, as well as in that of 1870, the enumeration was conducted by the United States marshals, who, upon their regular rounds, called upon manufacturers and gathered data. No prior schedules were used, and the marshals received only fifteen cents for each manu- facturing establishment enumerated.4 Under the circumstances the work of collecting data relating to employees and wages could not be carefully and intelligently done, except in the rarest cases, while the enumerators failed to visit any establishments that it seemed convenient to omit. No great value, therefore, can be attached to statistical tables based upon such uncertain materials.

In explanation of the schedules employed, the enumerators in the seventh census were given the following instructions.5 "Un- der the general heading 'hands employed,' is to be inserted . . . the average number of each sex employed during the year in the manufacture or business. These numbers are to be esti-

1 Reprinted from American Economic Association, Publications, New Series, No. 2, pp. 343-68. Reproduced by generous permission of the publishers.

2 It is not necessary to refer to the questions asked in 1820 and 1840 con- cerning hands employed and total wages paid. For the schedules used in these censuses see Report on a Permanent Census Bureau, pp. 140, 145, Senate Execu- tive Documents, Vol. I, 52d Congress, ist Session.

9 Idem, pp. 148, 152. See also Seventh Census, p. xxiv.

4 See remarks of General Walker, in Ninth Census, Vol. 3, p. 3Qi.

6 Seventh Census, p. xxiv.

WAGE STATISTICS AND THE FEDERAL CENSUS 37

mated either by an average of the whole year, or by selecting a day when about an average number was employed, and insert- ing the number on such a day as the average." "Under heading 10 and n, entitled 'Wages/ is to be inserted the average monthly amount paid for all the labor of all the hands, male and female, employed in the business or manufacture during the course of the year. In all cases where the employer boards the hands, the usual charge of board is to be added to the wages; so that cost of labor is always to mean the amount paid, whether in money, or partly in money and partly in board; and the average number of hands and the average monthly wages are to be returned, so that by dividing the latter by the former the result will show the average earnings of individuals. This is also to include the individual labor of a producer, working on his own account, whose productions are separately enumer- ated." '

If the enumerators attempted to follow these instructions, it is evident that the average number of employees reported must be in most cases a mere estimate, not a true average. In the next place, the directions given for a determination of average monthly wages were highly unfortunate. In most cases the total yearly wages can be easily and quickly ascertained. To at- tempt to estimate average monthly wages with a staff of un- trained and underpaid enumerators must lead only to confu- sion. Remembering, finally, that most of the marshals did their part of the work as carelessly and hastily as possible, we can conclude only that the number of hands employed and the average monthly wages could not have been ascertained with even reasonable accuracy. The average yearly earnings deduced from such data must have been grossly inaccurate. The study of subsequent censuses will serve to reinforce this conclusion concerning the wage statistics of 1850 and i86o.6

In addition to the materials just described, the seventh and eighth censuses provided, in the schedules of social statistics,

6 In the census of 1850 the tables of manufactures have been found "arith- metically imperfect," but it is not known whether the errors are in the items, or the totals, or in both. See Ninth Census, Vol. 3, p. 303, note.

38 WAGE STATISTICS AND THE FEDERAL CENSUS

general questions concerning the average wages of farm hands, laborers, carpenters, and domestics.7 In the eighth census the results were published.8 Of course the answers consisted mainly of conjectural averages, and can possess but slight value, at least for purposes of comparison. In 1870 these inquiries were wisely omitted.

In 1870 the questions asked in the census schedules of manu- factures were greatly changed, and alterations were made in the form of inquiry concerning employees and wages. General Gar- field's report had recommended that a sharp separation of firm members and hired laborers should be enforced, and that the schedules should call for the "Amount of wages paid during the year."9

The wisdom of both recommendations is too apparent to need any discussion. The schedules finally adopted10 called for the average number of hands employed, males above 16, females above 15, children and youth; and for the total amount paid in wages during the year.

In the ninth census, as in the eighth and seventh, the reports of the enumerators brought in results that were obviously de- fective. General Walker caused special investigation to be made by the Census Office, with the result that thousands of establish- ments omitted by the marshals were included in the report upon manufactures.11 The final tables were admittedly defective, al- though much more complete than those of any previous census. This is apparent from the enormous increase in the total num- ber of establishments reported.12 We must now consider the

7 Report on a Permanent Census Bureau, pp. 149, 153.

8 Eighth Census, Mortality and Miscellaneous Statistics, p. 512.

* Report of Committee on Census, 1870, p. 55. House Report, Vol. 3, 4ist Congress, 2d Session.

10 Report on Permanent Census Bureau, p. 167 ; Ninth Census, Vol. i, p. xxxi.

11 Ninth Census, Vol. 3, p. 374. "This number at each census was:

1850 123,025

1860 140433

1870 252,148

1880 253,852

1890 3SS4I5

Eleventh Census, Manufacturing Industries, Vol. i, p. 67.

WAGE STATISTICS AND THE FEDERAL CENSUS 39

manner in which the statistics of wages were affected by the inclusion of this large number of establishments not previously enumerated. This is a matter of importance because the statis- tics collected by one census have been compared with those pre- sented in the others. From such data, average rates of yearly earnings have been deduced, and misleading results have been reached.13

With the frankness characteristic of its superintendent, the Ninth Census states explicitly that the enumeration of indus- trial establishments had been much more thorough than ever before, although it was still far from complete. It was shown that in 1860 the census had returned, in its tables of occupations, 450,634 artisans employed as painters, carpenters, blacksmiths, and coopers.14 Of these, only 39,389, or nine per cent, were accounted for in the statistics of manufacturing and mechanical pursuits. Now the total number of employees enrolled in the tables of all manufactures was 1,311,246. The omission of 411,000 skilled artisans in these four trades removed from the statistics of wages a number of high-priced laborers that amounted to 31 per cent of all the persons enumerated. The census returns showed an average wage of $289 for all persons employed: while carpenters received $429; painters, $415; blacksmiths, $307; and coopers, $311. It is evident, therefore, that the average wages computed from the eighth census are smaller than they would have been if these classes of skilled laborers had been more fully enumerated. Now in the ninth census General Walker took pains to secure more complete returns of persons employed in manufacturing and mechanical industries. As a result, 1 55,000 artisans were enumerated in these

"The census volumes usually have compared total wages paid and the ag- gregate number of hands employed from decade to decade. Prior to the eleventh census, the writer can find no actual computation of the average rate of wages of the entire country. See Eleventh Census, Manufacturing Industries, Vol. i, p. 19. But many writers have computed average rates of wages from these census figures, and such computations have been widely quoted as official statistics. See Carroll D. Wright, in Atlantic Monthly, Vol. 80, p. 305, Industrial Evolution of the United States, p. 191; Mulhall, in North America Review, Vol. 160, p. 647; Jeans, in Fortnightly Review, Vol. 58, p. 752.

14 Ninth Census, Vol. 3, p. 373.

40 WAGE STATISTICS AND THE FEDERAL CENSUS

trades as given in the statistics of manufactures. This was over 25 per cent of the whole number of such workmen included in the statistics of occupations. This fact, alone, must have tended to increase the average wage that has been deduced from the wage statistics of the ninth census, and to render difficult a comparison with the rates of the earlier censuses.

Great changes were introduced into the methods adopted by the tenth census in collecting the statistics of manufactures. The superintendent was authorized to withdraw the collection of such data from the regular enumerators, and to employ special agents where he considered such a method advisable. Accord- ingly, in 279 principal cities and towns, the statistics of manu- factures were gathered by special agents.15 As a result manu- facturing establishments in these largest industrial centers were more fully enumerated than ever before.

From the copies of the schedules that have been published1'' it would appear that the tenth census asked for the " total amount paid in wages during the year" and the "average num- ber of hands employed," males above 16, females above 15, children and youths. These questions were the same as those used in the preceding census. In addition, the tenth census called for the "greatest number of hands employed at any one time during the year," and asked for estimates concerning the "average day's wages" for a skilled mechanic and for an ordi- nary laborer. Such answers as were received to these last ques- tions seem not to have been published.

Is it evident that the superintendent of the tenth census thought that the statistics gathered concerning the number of hands employed represented the average number for the census year.17 But this was clearly a mistake. An examination of the original schedules of the tenth census has shown that the figures of the average number of hands employed, for nearly one-half of the establishments, were the same as the greatest number of hands employed at any one time during the year. In the re-

" Tenth Census, Vol. 2, p. viii.

1(1 Report on Permanent Census Bureau, p. 167.

17 Tenth Census, Vol. 2, p. xxviii.

WAGE STATISTICS AND THE FEDERAL CENSUS 41

maining establishments the statistics of the average number of hands represented the number employed during the weeks of the busiest season. As a result, the tenth census failed to get the average number of persons employed in manufactures; and, instead, secured a number "almost always more than the aver- age and often several times the average."18 This is conceded in the eleventh census, which states:19 "The questions used in 1880 tended to obtain a number of employees that would be in excess of the true average, while it is believed that the questions used in 1890 have obtained, as nearly as possible, the average number/7

A comparison of the tenth census with the Massachusetts census of 1885 will make it evident that the tenth census secured a number of employees far in excess of the average number. The Massachusetts census ascertained the total hands employed during the year, and the total wages paid to the 419,966 employees thus enumerated. From these figures an average wage of $351.02 was computed.20 The census of 1880 enumer- ated 352,255 employees in the State of Massachusetts; and from its statistics, the average wages for the state appear to be $364.^ These results correspond fairly well, when it is remembered that the Federal census secured in some cases a number of employees less than the total number employed during the year, and therefore used a smaller divisor than was employed by the Massachusetts census. Now, in 1886, the Massachusetts bureau began the publication of its annual re- ports upon manufactures. In these the bureau ascertained the average number of hands employed, and used this number as a divisor in computing average wages for the state. As a result, an average wage of $395.89 was computed in i886,22 or $44.87 more than the average wages in 1885 as shown by the state cen-

18 Letter of Frederic C. Waite, who made the examination. Published in American Journal of Sociology, Vol. 3, pp. 360-361. See also the quotation from Carroll D. Wright, upon same page.

19 Eleventh Census, Manufacturing Industries, Vol. i, p. 14.

20 Massachusetts Census, 1885, Vol. 2, p. xci. 31 Tenth Census, Vol. 2, p. 15 (folio page). "Statistics of Manufactures, 1886, p. 51.

42 WAGE STATISTICS AND THE FEDERAL CENSUS

sus. This difference is due, of course, to the employment in 1886 of a smaller divisor than was used in 1885. The state census of 1885 took pains to ascertain not only the total number of hands employed during the year, but also the number employed upon June 30, i88s.23 If we assume that the number employed upon June 30 approximated the average for the year, and use it for a divisor, we can deduce an average wage of $389 from the census of 1885. This differs from the average wage computed for 1886, in the statistics of manufactures, by only six or seven dollars. A study of these figures will make it apparent that the Federal census of 1880, like the state census of 1885, really secured for Massachusetts a number of operatives far in excess of the aver- age number, and differing but slightly from the total number employed during the census year.

One other matter should be mentioned at this point. The tenth Federal census did not ask for the number of "officers and clerks" except in a few of the textile industries.24 Its figures represent, therefore, the number of laborers and the wages re- ceived by them in nearly all cases, except those in which the persons who filled out the schedules reported the number of officers and clerks with the other employees. When this was done, Mr. Waite found that the officers and clerks "were not credited with any wages except in exceedingly few cases."25

In addition to the data contained in the statistics of manu- factures, the tenth census devoted a special volume to the sub-

28 Massachusetts Census, 1885, Vol. 2, p. xci. The total number employed dur- ing the year was 419,966; while the number employed on June 30 was 379,328.

24 In some of the textile industries the schedules called for information con- cerning the number of "officers and clerks." See Eleventh Census, Manufacturing Industries, Vol. i, p. 13; Journal of Political Economy, Vol. 4, p. 89. In the cotton industry the number of such persons as "officers and clerks" is given as 2,115; but their wages are not included in the total wages, and they are ex- cluded from the total number employed. Tenth Census, Vol. 2, p. 955 (folio page). In the woolen industry, on the other hand, 1,302 officers and clerks are included in the table of total employees, and probably their wages are also included. Tenth Census, Vol. 2, p. 967 (folio page).

28 American Journal of Sociology, Vol. 3, p. 360. This point is discussed, but not clearly, in the Eleventh Census, Report on Manufacturing Industries, Vol. i, pp. 13-14. See also American Journal of Sociology, Vol 3, p. 626.

WAGE STATISTICS AND THE FEDERAL CENSUS 43

ject of wages.20 This was prepared under the careful direction of Mr. Joseph D. Weeks. It related to wages in fifty-three of the more important manufacturing industries, and also pre- sented much valuable information concerning methods of re- muneration, regularity of employment, and similar subjects. Some of the materials were drawn from as early a period as the decade from 1830 to 1840, and possess considerable historical interest.

Mr. Weeks attempted to select, in each industry, typical establishments of recognized credit and standing, and to make the returns as accurate as possible. The various classes of employees were carefully distinguished, and only those classes were finally selected whose work had not materially changed in character during the period covered by the report. Thus it is probable that the data collected are thoroughly comparable. The schedules called for "rates of wages or average earnings" for each class of employees, by the day, week, month, or year, or by the piece. It was found that the "rates of wages at the several works of the same class in a given district do not vary much for a given class of labor7'; and Mr. Weeks expressed the belief that the report would "furnish the means for obtaining a fair average for the whole country.'7

With all the care that was taken in selecting establishments for investigation, the first sets of returns were often unsatis- factory. In these cases Mr. Weeks called attention to defects, and asked for corrected data. The chief difficulty seemed to be in securing a uniform classification of employees in establish- ments of the same class, and uniform units of payment. Some- times schedules were "passed backward and forward several times before a final adjustment was reached."

Mr. Weeks confined his attention to the collection of trust- worthy and comparable materials, and did not attempt to com- pute average rates of wages for all establishments. Thus the report presents materials rather than final results. It collects

26 Tenth Census, p. 20. Report on the Statistics of Wages in Manufacturing Industries.

44 WAGE STATISTICS AND THE FEDERAL CENSUS

as many facts as possible concerning wages in important estab- lishments, and leaves to the reader the work of comparison and combination. The report undoubtedly deserves high praise. If any criticism can be passed upon the materials here presented, it grows out of a circumstance that was beyond the control of Mr, Weeks. The average wages of each class of laborers in each establishment were generally computed in the counting rooms; and under these conditions there must have been some danger that the book-keepers would select an arithmetical mean instead of computing a true average.

The eleventh census devoted no special report to the subject of wage statistics. The establishment of the United States De- partment of Labor in 1885 rendered such an investigation less necessary for the Federal census. The statistics of manufac- tures, however, contained the customary inquiries concerning employees and wages.

In 1890 the investigation into manufacturing industries was much more complete in towns and cities than it had ever been in earlier censuses. The superintendent was able to place 1,042 cities in the hands of special agents, as against 279 cities so treated in the tenth census. In country districts, on the other hand, the canvass was far less thorough;27 and there is reason for thinking that in these cases the eleventh census was more defective than the tenth. The official who was in charge of this branch of investigation has written:28 "I am confident that

27 On this point the census says: "Under these circumstances, the canvass of the cities was more thorough than that of the rural districts, and the apparent decrease in some industries and some states is due, in part at least, to the less efficient canvass by the general enumerators. The defective canvass of the enu- merators is more apparent in the totals for states in which there are com- paratively few large cities, such as Nevada, or for industries conducted largely by establishments located in the rural districts, of which 'Leather, tanned and curried' is an example." Eleventh Census, Manufacturing Industries, Vol. i, p. i. Mr. Robert P. Porter says concerning the returns of manufactures furnished by the regular enumerators who operated in country districts: "Except in a few isolated cases the returns of productive industry secured by these enumerators have proved utterly valueless, and hence the Census Office, in order to obtain accurate data, has been subjected to heavy outlay in securing correction and reproduction of the returns." Report on a Permanent Census Bureau, p. 18, f.

* American Journal of Sociology, Vol. 3, p. 624. See also letter by Carroll D. Wright, quoted in Journal of Political Economy, Vol. 4, p. 89.

WAGE STATISTICS AND THE FEDERAL CENSUS 45

in the rural districts, as a whole, the canvass of 1880 resulted in securing a larger number of reports than did that of 1890." These facts have an important bearing upon the comparability of the wage statistics of the two censuses.

The schedules used in iSgo29 called for a more minute classi- fication of laborers than had been attempted before that time. As published, the tables distinguish three classes of workers, (i) officers, firm members, and clerks; (2) operatives, skilled and unskilled; (3) pieceworkers. Each of these classes is sub- divided into, (i) males above 16, (2) females above 15, and (3) children.30 The schedules called for the average number em- , ployed throughout the year, and the total wages paid to each class of workers. The tenth census had called for the average number of hands, but had failed to secure such data. The eleventh census carefully defined what should be considered the average number; and probably succeeded, in large measure, in obtaining it.31 This fact, also, is important in any comparison of the tenth and eleventh censuses upon these points.

The schedules called, also, for weekly rates of wages and the average number of hands employed at each rate, as well as for information concerning the number of months that the establishments were in operation.32 These questions were more important than any of the others, for the student of wage statistics, and were in line with the best results of recent investigations. But to secure such data for the whole United States was a work of great difficulty, and one that went far beyond anything that had been attempted in previous censuses. The plan seems to have been carried out successfully in many of the more important industries. In the third volume of the report, classified wage tables are given for such industries as

29 Eleventh Census, Manufacturing Industries, Vol. i, p. 13; Report on a Permanent Census Bureau, p. 178, f.

^Eleventh Census, Manufacturing Industries, Vol. i, p. IQ. In Table 8 of Vol I, there is given a still more minute clasification of employees in selected industries. Clerks are separated from firm members and officers, while operatives are divided into skilled and unskilled.

31 Eleventh Census, Manufacturing Industries, Vol. i, p. 14.

"Idem, Vol. i, p. 13.

46 WAGE STATISTICS AND THE FEDERAL CENSUS

woolens, cottons, silks, glass, petroleum, iron and steel, etc.33 Such statistics possess great value for the student of wages.84 For him the importance of the report lies mainly in these classi- fied wage tables. The use which the census made of the statistics :oncerning yearly earnings and the average number of employ- ees is open to criticism in one respect.

The eleventh census used its data concerning hands employed ind wages paid, for the purpose of computing average yearly earnings. When this is done for all classes of laborers in the United States, the average thus obtained falls so far short of Deing typical that it possesses little value for scientific purposes. For this reason, perhaps, the eleventh census computed also ,he average earnings for each class of employees; and, within >ach class, gave separate data for men, women, and children.85 Such tables are open to far less objection. The census then :ompared the data concerning average earnings in four different vays. First it presented tables that contrasted the wages paid to employees, men, women, and children, in fifteen industries that employed a large proportion of females, and wages paid in ifteen industries that employed a small proportion. Then it jave the average annual earnings of each class of employees in he various states and territories. Next it gave similar data for ;ach class of workers by specified industries, and finally it pre- sented in a single table the statistics for six of the largest ndustries. Such a treatment of the materials tended to secure nore homogeneous classes of operatives, so that the wages computed are far less unreal averages, and must be more typical >f the average condition of the laborers in each class. Moreover, ince in these selected branches of business the statistics were, or the most part, gathered at centers of industry, and by com- )etent agents, we may fairly assign considerable value to the nvestigation.

"Idem, Vol. 3, pp. 146, 150, 208, 230, 302, 338, 346, 356, 361, 372, 390, 397.

84 In Table 8 of the first volume on manufactures, the census gives the aver- ige weekly earnings of each class of employees in selected industries, as well as he total yearly wages.

85 Idem, Vol. i, pp. 20-28.

WAGE STATISTICS AND THE FEDERAL CENSUS 47

In the report upon manufactures, however, there is one fea- ture that calls for criticism. The average annual earnings per employee, exclusive of officials and clerks, are contrasted with the average annual earnings that may be computed from the tenth census. Thus we are told that the average annual wages in 1880 were $346.91, while in 1890 they were $444.83.3G The report is careful to add that: "Owing to differences in the form and scope of the inquiry of 1890, as compared with that of 1880, previously referred to, neither of these average annual earnings for 1890 should be accepted as the exact increase dur- ing the decade." Some of these "differences in the form and scope of the inquiry" had been explained on a previous page,87 where it was declared that "a comparison of the average annual earnings for all classes of employees as obtained from the re- ports of the two censuses" was "impracticable." But others were not sufficiently explained, so that it seems necessary to con- sider the matter at some length. If the census officials deemed the two sets of figures entirely incomparable, it was unfortunate to make any comparison of averages. For, although it is certain that any person who attempts to use the census should examine all the explanations that accompany the figures, it is equally sure that the average popular writer or newspaper scientist will not do anything of the sort. And, as a matter of fact, emi- nent statisticians have compared the average wages for 1890 with the census figures for 1880, 1870, 1860, and 1850. Folio pages of census statistics that invite comparison seem to possess

86 Idem, Vol. i, p. 19. Including officers and clerks, the average for 1890 was $484.49. But, as such persons were not included in 1880, they were excluded from this comparison. It is interesting to notice that Mr. Mulhall blundered into the very error against which the census had given warning. He takes $4844g as the average wages for 1890; and compares this figure with $346.91, the average wages for 1880. See North American Review, Vol. 160, p. 647.

"Eleventh Census, Manufacturing Industries, Vol. i, p. 14. In his report upon the textile industries, Mr. S. N. D. North makes a somewhat similar explanation: "The increase in wages and average annual earnings for each employee, as in other items, may be due in part to the change in the form oi inquiry and the more perfect enumeration at the census of 1890. The large de- crease in the number of children employed also has considerable bearing on the increase in the average annual earnings." Idem, Vol. 3, p. 10.

48 WAGE STATISTICS AND THE FEDERAL CENSUS

powers of attraction that no amount of caution and explanation can be expected to exercise.

The errors and omissions of the returns of manufactures in 1870 and previous census years are so notorious that it can- not be necessary to repeat what has already been said con- cerning the mistakes that must arise from the attempt to compare rates of yearly wages deduced from such materials. With the tenth and eleventh censuses, however, greater ac- curacy and completeness were secured, so that the incompar- able character of their statistics of wages is not so easily seen. But the writer believes, nevertheless, that the attempt to com- pare the average wages computed for 1880 and 1890 can lead only to most erroneous and mischievous results.38

The first reason for considering the wage statistics of 1880 wholly incomparable with those of 1890 is that the later census was far more complete in the cities and large towns, while the earlier census was probably more complete in the country districts. Upon this point the facts have already been stated. The necessary result is that the average wages computed from the eleventh census are based upon figures that include a far larger proportion of city laborers, who receive higher money wages; while the census of 1880 probably included a larger proportion of country laborers, whose money wages are lower.

The importance of this consideration can be shown most readily by studying the average wages for the various counties of Massachusetts, as given in the state census of 1885. The figures are as follows : 39

Plymouth county . $396.97

Suffolk county . . .. 369.13

Essex county . 365.61

State oj Massachusetts . . .. 351.02

Franklin county . 348.56

Norfolk county 348.1 1

38 Thus Mr. J. S. Jeans, using such data, came to the conclusion that wages had advanced more during the decade from 1880 to 1890 than they had in the thirty years prior to 1880. Fortnightly Review, Vol. 58, p. 752.

39 Massachusetts Census of 1885, Vol. 2, p ci.

WAGE STATISTICS AND THE FEDERAL CENSUS 49

Worcester county $342.85

Hampden county . . . . 341.61

Middlesex county . . . 330.77

Bristol county . .324.16

Berkshire county . . 305.68

Hampshire county . . 283.38

Nan tucket county . 277.98

Barnstable county . 238.97

Dukes county . ... 106.79

Plymouth county, which heads the list, is only in appearance an exception to the statement that the highest wages are found in the counties having the largest proportion of urban popula- tion. In that country there is one large city, Brockton, where the average wages were $433. In the rest of the county the average was $65 less than in the city of Brockton. The same thing is noticeable in Worcester county, where the city of Worcester is the only large center of population. In this city wages averaged $382; while in the rest of the county they average only $324. It is evident that if one census of the state should be made far more complete for the cities than any pre- vious census, while its enumeration of country laborers should be less complete, there would result an apparent increase of the average wages for the state in a period when wages might actu- ally have remained stationary.

In the Federal census of 1890 a comparison of the average earnings in the fifty principal cities with the average for the entire country 40 shows that thirty-six out of the fifty cities were credited with wages that exceeded the average for the country. Of the fourteen cities where the average wages were less than the average for the United States, many showed figures that were far above the wages for the rest of the states in which they were situated. If we select the principal class of wage-earners, males above sixteen years, and exclude officers and clerks, the results are still more striking. The writer has made such a com- putation for the eight largest cities, with the following results : The United States, $498; Baltimore, $503; Philadelphia, $568;

40 Eleventh Census, Manufacturing Industries, Vol. 2, p. xxxviii.

50 WAGE STATISTICS AND THE FEDERAL CENSUS

St. Louis, $569; Chicago, $587; Brooklyn, $636; Boston,$6s4; New York, $702 ; San Francisco, $709. In Baltimore, where the wages show the smallest excess over the figures for the United States, it appeared that the average for the city was $226 higher than the average wages for the same class of workers in the rest of the state.

The class of employees last mentioned, viz., males above sixteen years, is the more important in this connection because it was among just such laborers that the enumeration of the eleventh census was especially complete. The census explains41 that: "The great increase shown in statistics for industries known as 'hand trades' is largely due to the fact that no previous census has obtained so complete a report regarding such in- dustries as masonry, carpentering, blacksmithing, cooperage, painting, plumbing, and similar trades using machinery to a limited extent. " In four classes of laborers, viz., masons, paint- ers and papcrhangers, plumbers, and carpenters, the eleventh census enumerated 357,000 persons, against 97,000 enumerated in i88o.42 This was an increase of 260,000 laborers, or 266 per cent, during a decade when the whole population of the country increased less than 25 per cent. Now these particular trades receive wages that are far above the average for the United States. Excluding officers and clerks, the average wage of the country is given as $444.83. In these four trades very few women and children are employed; and the males above sixteen years, who form nearly the entire number of workers enumerated, are credited with the following wages: plumbers, $627; masons, $628; painters and paperhangers, $644; car- penters, $648. 43 We find, therefore, that the eleventh census enumerated more than 2oo,ooo44 workmen who were omitted from these trades in 1880. These 200,000 or more workers

"Idem, Vol. i, p. 2.

"Idem, Vol. i, pp. 74, 7Q, 80, 81.

"Idem, Vol. i, pp. 23-27.

"This figure allows for more than fifty per cent increase in these particular trades. The employees in all manufactures increased fifty per cent from 1880 to 1890, excluding officers and clerks.

WAGE STATISTICS AND THE FEDERAL CENSUS 51

formed 5 or 6 per cent of all persons engaged in manufacturing occupations in 1890, excluding officers and clerks. Their wages exceeded the average wages of all classes of laborers by amounts that varied from $182, in the case of plumbers, to $203, in the case of carpenters. This one body of employees, excluded in 1880 and included in 1890, would tend to increase the average wages for all persons engaged in manufactures by ten to twelve dollars, if not more.45

But there is a second reason, of still greater weight, for hold- ing the results of the two censuses to be incomparable. There is no room for doubting that in 1890 the total wages paid were divided by a number of employees that was much smaller than it would have been if the same methods had been followed that were used in 1880. Upon this subject the census says:40 "The questions used in 1880 tended to obtain a number of employees that would be in excess of the true average, while it is believed the questions used in 1890 have obtained, as nearly as possible, the average number." Attention has already been called to this fact. It is the more important since it had the same result as the first cause of difference between the figures of the two censuses. It tended to produce a larger average wage in 1890.

We have seen that the Massachusetts census of 1885, using as a divisor the total number of hands employed during the year, computed an average wage of $351.02 for the year 1885. It has also been shown that in 1886, when the publication of the annual reports on manufactures was begun, the average number of employees was taken as a divisor, and the average wages were thereby increased to $395.89. Precisely the same thing occurred in the Federal statistics when the eleventh cen- sus actually ascertained the average number of employees, and used this as a divisor. Further light is thrown upon this question

45 Since the writer made this estimate, the official who had charge of these statistics in the eleventh census has stated that, if the trades that were im- perfectly enumerated in 1880 should be excluded from the tables for 1890, the average wages for the United States would be $429 instead of $444. See American Journal of Sociology, Vol. 3, p. 627.

^Eleventh Census, Manufacturing Industries, Vol. i, p. 14.

52 WAGE STATISTICS AND THE FEDERAL CENSUS

by the Massachusetts census for 1895, which has appeared during the past year. This census ascertained the total wages paid to all employees in manufacturing industries, and divided this sum by the average number of hands employed. Thus an average wage of $446.41 was computed.47 This shows a magnif- icent increase over the average rate of $351.02 computed in 1885; but the larger wage was secured by using a smaller divisor, and the later census makes no attempt to compare the two results. No one would claim that the wages of laborers em- ployed in manufacturing industries in the state had increased from $351 to $446 between 1885 and 1895. I*1 the very year in which the last state census appeared, the bureau of labor statistics published the results of an investigation into com- parative rates of wages paid in 1881 and 1897.^ This covered twenty three industries, and showed an increased average wage in fifteen cases and a decreased wage in the eight other instances. These results may justify the claim that wages in Massachusetts showed on the whole a tendency to increase during the period in question; but they demonstrate also the atrocity of the error that would be committed by any one who should compare the censuses of 1885 and 1895, and should then claim that wages had increased on the average by $95 during the decade.

There has been considerable discussion of the question whether the average number of employees, or the total number of persons employed during the year, should be selected as the divisor in determining yearly earnings. It is clear that if the total number is taken, the divisor will be swelled unduly by the transient laborers who drift from one establishment to another, and are sure to be enumerated more than once. Such a divisor would give average yearly earnings that would be too low. On the other hand, when we select the average number employed, we use as a divisor the average number of positions filled throughout the year. This gives average yearly earnings

47 Census of Massachusetts, 1805, Vol. 5; pp. 240, 280.

^Twenty-Eighth Annual Report of the Bureau of Statistics of Labor, pp. 1-42.

WAGE STATISTICS AND THE FEDERAL CENSUS 53

that represent what the individual laborers would receive if employment were continuous throughout the year. Average wages computed in this manner are more than the actual income of individual laborers, especially in trades where employment is irregular. It does not fall within the scope of this article to con- sider whether the census ought to inquire for the average number of employees, or for the total number. The statistics of manu- factures are not designed primarily to furnish statistics of an- nual average wages. This particular question should be framed in such a manner as will be most useful for the primary purposes for which the investigation into manufactures is conducted. But we must insist that wage statistics computed with one kind of divisor must not be compared with data secured by the use of a different divisor.

Some of the criticisms that have been directed against the wage statistics of the eleventh census can be accounted for by remembering that the rates of annual wages given there repre- sent, not the actual earnings of all persons employed, but the amounts paid annually to the occupants of a certain number of positions. Thus the average wages of carpenters in New York city are computed at $896. This would mean $3 per day for nearly 300 days of employment. A critic who has exceptional facilities for securing information concerning actual conditions in that city, writes: "The average wages of good, steady, thor- oughly competent carpenters never exceeded $650 for the entire year."

Some of the results of comparing the average wages given in the two censuses are so ridiculous as to show the absolute incom- parability of the two sets of data. Thus the same critic points out that, according to the census data, carpenters' wages in New York City increased from $640 in 1880 to $896 in 1890. For the city of Poughkeepsie we are asked to believe that carpenters' wages advanced from $357 in 1880 to $729 in 1890. These re- sults are so absurd as to show that we are dealing with data that are either totally erroneous or else collected by such dif- ferent methods as to be wholly incapable of bearing comparison.

54 WAGE STATISTICS AND THE FEDERAL CENSUS

It remains to be considered what the twelfth census should attempt to accomplish in this field of wage statistics. The writer will assume that the purpose of such statistics should be to investigate the conditions under which the large masses of our population who are dependent upon the receipt of wages are actually living. In the present condition of statistical science we can not hope that such investigation will throw much light upon what is technically called the problem of share distribution. Moreover, since the census can not well undertake to collect comprehensive statistics concerning the prices of commodities, it must confine itself to the question of money wages.

At the outset the question may fairly arise whether, in view of the establishment of the Department of Labor at Washington, the Federal census should continue to gather statistics of wages. This bureau was created for the purpose of investigating labor problems. It has already published much information relating to wages; and is, at the present time, preparing a report upon wages paid in the leading countries of the world.49

If a permanent census bureau should be established and should undertake the systematic collection of wage statistics, it would appear to be duplicating the work of the Department of Labor. If, on the other hand, the Census Office should remain a temporary affair, we may fairly doubt whether this particular field of investigation could not be covered more satisfactorily by the Department of Labor with its permanent organization. There is reason for thinking that even the special agents ap- pointed by the census to collect statistics of manufactures do not always have the time or training for the work of gathering accurate data concerning wages. It seems probable that better results could be secured by placing additional funds at the dis- posal of the permanent labor bureau. Such an investigation might not cover as much ground as the census, but the im- proved quality of the materials might well counterbalance the greater quantity of the census returns. This would be especially

49 Am. Stat. Ass'n Publications, Vol. 5, p. 373; Eleventh Annual report of the Commissioner of Labor, Vol. 5.

WAGE STATISTICS AND THE FEDERAL CENSUS 55

true of that portion of the census statistics that may have to be left in the hands of the ordinary enumerator.

One other point is worthy of consideration. The census returns necessarily cover but single years at intervals of a decade. The periods when the census materials are gathered may happen to be abnormal, so that by this fact alone any comparison of re- sults from one decade to another may be vitiated. Then, too, important fluctuations may take place within each decade, and upon these the census can give no information. Such considera- tions induced Massachusetts to provide for annual statistics of manufactures. Finally, the publication of census returns seems to be necessarily such a slow process that no inconsiderable advantage might result from the prompter methods of the De- partment of Labor.

Assuming, however, that the census, in its investigations con- cerning manufactures, is to continue to gather data concerning wages, we may consider what should be attempted. In doing this, we should remember that the principal purpose of the census investigations is to gather information concerning manu- factures. The questions relating to total wages and employees should, therefore, be framed with this primary object in view.

For this last reason, the census should continue to investigate the total wages paid, as an important element in the expenses of manufacturing industry. But it may be doubted whether the data thus gathered should be used for the purpose of computing average yearly earnings of laborers. In any event, the utterly incomparable character of the statistics of the eleventh and pre- ceding censuses should be set forth so clearly as to offer no possible excuse for the further misuse of their figures.

If the computation of the average yearly earnings is con- tinued, the twelfth census should carry on the work, commenced by the eleventh, of ascertaining the average earnings of workers in each occupation, separating in all cases men, women, and children. Such data could be used for some purposes, since the averages thus computed would be based upon units of some de- gree of homogeneity. The results would be further improved if

56 WAGE STATISTICS AND THE FEDERAL CENSUS

they could be more fully classified by sections of the country. Furthermore, a separate table might be prepared, from which the notoriously incorrect materials gathered by the ordinary enumerators outside of the cities and towns could be excluded. This was accomplished in the eleventh census in the separate volume devoted to the principal industrial centers. For all these purposes it would matter less whether the divisor should be the average number of employees or the total number, provided that future censuses should adopt a uniform method of pro- cedure.

It has been suggested that wage statistics should investigate only the earnings of laborers steadily employed in each estab- lishment, because other workers are largely migratory or incapa- ble.50 It is urged that we should endeavor to ascertain primarily the earnings of capable laborers who are steadily employed dur- ing the months that each establishment is in operation. The importance of studying the numbers and condition of transient employees is not denied, but it is considered best to make this the object of an independent investigation. This point seems to be well taken, provided that it is feasible to separate the two classes of laborers. But it may be impossible to introduce such a feature into the investigation concerning manufactures, and an independent inquiry might be needed in order to accomplish such a result.

The writer has already expressed the belief that the most valuable wage statistics contained in the eleventh census are to be found in the tables of classified weekly rates. The advantage of such a method is that it deals largely with actual facts, and does not employ averages that may be unreal and misleading. Such statistics, when properly tabulated, enable the student to ascertain exactly what rates of remuneration the great mass of the laborers is receiving.

Besides tabulating such returns so as to show, for each class of laborers, the numbers employed at each rate, and the per cent

60 See Mayo-Smith, in Quarterly Journal of Economics, Vol 2, p. 397, f. ; Von Meyr, in Allgemcines statistisches Archiv, Vol. 2, p. 135.

WAGE STATISTICS AND THE FEDERAL CENSUS 57

which such numbers bear to the total number of persons in each group, the results might be presented graphically according to the method suggested by Dr. Venn.51 This consists in drawing a base line that shall represent the different rates of wages, and then constructing ordinates denoting the relative numbers of laborers receiving such specified rate. This plan would make it possible to plot a curve that would represent accurately the con- dition of the wage earners at a given time. Between different periods, changes in the shape of the curve would indicate the course of weekly rates of wages.

Tables of weekly wages need to be supplemented by statistics showing the number of weeks of full working time the oper- atives are able to secure in the course of the year. Such inquiries fall easily within the scope of the census of manufactures. With their use, the tables of weekly rates would furnish most valuable information concerning the course of wages in manufacturing industries.

61 Journal of Royal Statistical Society, Vol. 64, p 445.

THEORY OF THE BALANCE OF TRADE1

F | AHE rapidity with which exports of American products JL have increased in recent years has served, naturally enough, to stimulate discussion concerning the unprecedented balance of trade which now stands in "favor" of the United States. Not a few writers seem to believe that the extraordinary excess of exports over imports has made our foreign trade pe- culiarly profitable to the country, and there has been a marked revival of some of those theories which are associated with the name of the mercantile school of the seventeenth and eigh- teenth centuries. Such conditions will justify renewed study of that time-worn topic, the "Balance of Trade.77

I

Mercantilism arose in the period when the precious metals discovered in the New World began to find their way into circu- lation in the various countries of Europe. One cardinal tenet of the school was that the statesman must exercise especial care to secure for his country a sufficient stock of treasure in silver and gold. Spain and Portugal received directly from their colo- nies the riches that the treasure ships brought each year from the Indies; but England and other countries, whose dependen- cies contained no mines of the precious metals, could, mani- festly, obtain new supplies of specie only by way of trade. For this reason, an excess of exports over imports, which might be settled by an inflow of gold or silver, was considered a "favor- able" balance of trade, and became an object of solicitude to statesmen and to writers upon economic subjects.

Two circumstances aroused endless discussion of the balance

Reprinted from North American Review, Vol. 173 (July, 1901), pp. 111-33. Reproduced by generous permission of the publishers.

THEORY OF THE BALANCE OF TRADE 59

of trade in England from the early decades of the seventeenth century. The East India Company was obliged to export specie each year to pay for the goods it obtained from the East, where there was little demand for English products. Then, the trade with France was believed to result in a balance unfavorable to England, so that it was thought that her traditional political rival was draining the country of its treasure. Partisans of the East India Company, such as Thomas Mun, insisted that the exportation of treasure to the East did no harm, because it was exchanged for products that were sold, at a still larger gain, in many countries of Europe; but the unfavorable balance in the French trade occasioned serious anxiety. Several times, com- merce with France was absolutely prohibited ; and at all periods heavy duties were imposed upon the staple imports from that country. Yet this branch of trade was long viewed with jealous eye; and writer after writer made elaborate calculations of the amount of treasure lost by the dealings with France, prophesy- ing the utter ruin of the kingdom. "Make a law," they said, "to prohibit French trade: you need no wine and few of his commodities; and France will grow poor, while we grow rich." Meanwhile, various Tory writers, such as Child, North and Davenant, less hostile to France, had argued that an unfavor- able balance in dealings with a particular country need cause no alarm, because commerce with other countries resulted in a net excess of exports on the entire trade of the nation. But the theories of the mercantilists were not effectually controverted until the time of David Hume and Adam Smith. Hume con- tended that money, whenever the means of communication are open, brings "itself nearly to a level," and that its purchasing power cannot vary greatly in different nations. Spain and Portu- gal, he said, could not by any laws keep within their borders all the treasure brought from the Indies, since such a course would merely lower its purchasing power in those countries, and hasten its export to other places where it would command more commodities. Prices south of the Pyrenees could not be much higher than in France, since otherwise gold and silver would

60 THEORY OF THE BALANCE OF TRADE

flow northward in exchange for cheaper products. He said that, if the various states of the old Saxon Heptarchy had maintained separate existences, each kingdom would have worried over the balance of trade. Moreover, Hume attacked that insane "jeal- ousy of trade" which marked the commercial relations of the various European states; and insisted that, since a wealthy man or country is a better customer than a poor one, "the increase of the riches and commerce in any one nation, instead of hurt- ing, commonly promotes the riches and commerce of all its neighbors."

It remained for Adam Smith to deal the death-blow to the theories of the mercantilists. He contended that all natural trade is profitable, and that its profit consists, not in the specie it may bring into the country, but in the addition it makes to the annual produce of the land and labor of the nation. The mercantilists, he said, had prophesied the ruin, through an unfavorable balance of trade, of every commercial country in Europe; and their forecasts had been discredited invariably. All the treasure that flowed from Peru and Brazil could not be re- tained by Spain and Portugal; and every attempt of those coun- tries to check the outflow of specie merely tended to increase prices and to give other nations "double advantage" in their commerce with the Peninsula, by raising the prices obtainable for imports sent thither, while making domestic products dearer and more difficult to export at a profit. Since the publication of the "Wealth of Nations" few economists have thought it neces- sary to trouble themselves over imaginary evils resulting from the balance of trade.

But recent developments in our foreign trade have led to the expression of views that differ but slightly, if at all, from the theories of the old mercantilists. We are said to be now creating a favorable balance of trade equal to $1,300 for every minute of the day; while England, Germany and France are "writing a total of over one billion on the wrong side of the ledger" for each year's transactions. In foreign trade, we are told, it is, as in the philosophy of Mr. Micawber: "Annual income twenty pounds,

THEORY OF THE BALANCE OF TRADE 6 1

annual expenditures nineteen six, result happiness. Annual in- come twenty pounds, annual expenditures twenty pounds ought and six, result misery." Then we read passages like the follow- ing:

Never before in the history of the United States were the profits from foreign business so large as in 1898 and 1899. By profits, I mean the excess in value of the goods sold — that is, exported — over those bought — that is, imported.

When the country imports more than she exports, she is said to be "a loser by her foreign trade," and "all the great nations of the earth," with the exception of Russia and the United States, are declared to suffer enormous "losses" by importing more than they export. True, an occasional writer recognizes that our excess of exports is offset, to some extent at least, by invisible items of international indebtedness; while sometimes it is realized that the unfavorable balances of older countries mean cheaper food and raw materials for the people, and rep- resent also the return upon foreign investments of capital or the earnings of merchant marines. But the revival of mercantilist theories is sufficiently marked to deserve recognition as a gen- eral tendency in the thought of the day.

II

With this general subject of international trade, it is noto- riously true that the average man does not look with great favor upon reasoning based upon principles of a general and abstract character; while immediate results or events lying upon the surface of things create a far more powerful impression than the ultimate consequences of underlying forces. For this reason, the attention of the reader is now invited to a survey of the foreign exchanges of the United States during the years that have elapsed since the establishment of American independence. By such a study of simple historical facts, it may be possible to en- force more successfully than in any other manner some element- ary truths concerning the real significance of the balance of trade.

A preliminary word is necessary regarding the sources of in-

62 THEORY OF THE BALANCE OF TRADE

formation. Statistics of international commerce always contain an element of error, and this is especially true of the only data available for the early decades of our national existence. Prior to 1821 imports admitted free of duty were not reported at all, and the rest were not valued in a satisfactory manner; while the valuation of exports did not receive sufficient attention from the customs authorities. The statistics now accepted as official for this period were made up in 1835. Beginning in 1821, the Annual Reports on Commerce and Navigation were published with greater or less regularity, and there has probably been a constant improvement in the character of our commercial statis- tics. For many of the items, other than exports or imports of merchandise, that contribute to the international dealings of the United States, no official data are obtainable, and we are com- pelled to rely upon mere estimates that sometimes have a de- cidedly conjectural character. Precise computation, therefore, is impossible. The most that can be done is to demonstrate what the general tendencies have been in each epoch investigated.

(A.) The first period that we shall study extended from 1789 to 1820. It witnessed a rapid growth of our commerce up to the year 1807, when such events as the Embargo, Non-Inter- course Acts, and the War of 1812 affected all industry most in- juriously. After the restoration of peace in 1815, a period of wild speculation, fostered by an inflation of the currency, en- couraged large importations of foreign products. These were viewed as a sign of prosperity while the "boom" lasted, but were styled an inundation of European goods as soon as the specula- tive fever abated. The reaction, however, lowered prices and checked the flow of imports, which decreased automatically from $147,000,000 in 1816 to $74,000,000 in 1820.

For the entire period of thirty-one years, the estimated im- ports of merchandise and specie amounted to $2,350,000,000, while exports were placed at $1,839,000,000, an "unfavorable" balance of $511,000,000. Nor was this our only item of inter- national indebtedness. Foreign capital was largely represented in the debt of the federal government, and had been invested in

THEORY OF THE BALANCE OF TRADE 63

the stocks of the first Bank of the United States and in other enterprises. For interest on all such investments we owed, for the entire period, a sum that is estimated at $200,000,000 or more. But the amount due for the excess of imports and the interest on foreign capital had been balanced readily by the earnings of our merchant marine. The tonnage of the ships regis- tered for the foreign trade amounted for the entire period to 20,000,000 tons engaged in traffic for one year. One estimate places the "balancing power,77 or international earnings, of our shipping at $20,000,000 annually from 1789 to 1815; and an- other reckons the earnings at $800,000,000 for the period now under consideration. The neutral position of the United States during the wars that engaged the attention of Europe for so many years had enabled American vessels to carry the larger part of our exports and imports, besides earning large sums in trade between different foreign ports. By this means, therefore, we had paid our international indebtedness, and had been en- abled probably to import a considerable net balance of gold and silver.2 So far, then, from the country being drained of its money in payment for the balance of imported merchandise, the banks held not less than $20,000,000 of specie in the year 1820; while Gallatin and Crawford estimated that there had never been more hard cash in circulation.

The situation was analyzed correctly by Timothy Pitkin in 1817. He showed that a cargo of flour shipped to Spain in an American vessel would be valued at $47,500 at domestic prices, and would figure at this amount in the returns of our exports. If the flour were sold in Spain at the usual advance necessary to cover freight, insurance, commissions, and a fair profit, it might command as much as $75,000. Then, if the proceeds from the sale were invested in a return cargo that would be valued at our custom houses according to the prescribed methods, the final result of the voyage would be the importation of com-

2 The balance of $511,000,000 due on the excess of imports does not show the facts regarding the movement of specie, since the estimates do not separate the two items of merchandise and specie prior to 1821.

64 THEORY OF THE BALANCE OF TRADE

modities that exceeded very greatly the value of the original exports. Therefore, he contended that, if the imports had not shown an excess, our ships would have incurred a loss on their voyages.

(B.) From 1821 to 1830, our commerce showed no material increase over the first period. For this decade, imports of mer- chandise aggregated $729,000,000 and exports were placed at $694,000,000, an "unfavorable" balance of $35,000,000, which was slightly reduced by a net exportation of $2,400,000 in specie. The indebtedness of the country was increased still fur- ther by whatever sums were due to foreign investors. Although the United States was reducing its public debt and returning considerable amounts of capital to foreign owners, the States had began to contract debts, and borrowed during the decade $26,469,000. We may assume, therefore, that the sums returned to foreigners by the federal government were reinvested in State securities, and that the annual interest charge against the coun- try remained nearly stationary. Moreover, Americans were be- ginning to indulge more extensively in foreign travel, so that a new item of indebtedness affected the exchanges. The sums ex- pended by our travellers, however, were offset in part by the money brought here by immigrants, who numbered 150,000 during the decade.

Whatever the indebtedness of the country may have been on these various accounts, the earnings of our merchant marine sufficed to pay it, and to turn the exchanges in favor of the United States at the close of the period. After 1821, we have statistics showing the amounts of exports and imports carried in American and in foreign vessels. From this time, the net result of the carrying trade can be computed upon the following basis. Since American consumers must bear the expense of bringing merchandise to this country, the freight charges on goods brought in foreign vessels will be reckoned as an element in our international indebtedness; while the sums earned by American vessels in the import trade will be considered to have no effect upon the foreign exchanges. Similarly, with our ex-

THEORY OF THE BALANCE OF TRADE 65

ports, we shall estimate that other countries are indebted to the United States for freights on goods carried in American vessels, and that cargoes shipped in foreign bottoms may be omitted from our computations. Estimates of the probable proportion between freight charges and the values of the products carried range from ten to fifteen per cent. We may, therefore, place the cost of ocean carriage at twelve and a half per cent; and this estimate may continue to be used until, for recent decades, it becomes possible to replace it by a better one.

From 1821 to 1830, exports carried in American vessels ag- gregated $666,090,000, on which the freight charges would be about $83,000,000; while imports brought in foreign bottoms were placed at slightly more than $51,000,000, which would be subject to a charge of something more than $6,000,000. Thus, our merchant marine earned from foreign countries about $77,000,000, which would be somewhat increased by the profits from carrying goods between foreign ports. Again, therefore, our ships earned enough to balance the indebtedness incurred on other accounts; and, in 1829 and 1830, the net imports of specie amounted to $8,400,000, while foreign exchange was quoted in favor of the United States.

(C.) The third period extends from 1831 to 1840. For the first six or seven years the country was engaged in an extraor- dinary speculative movement, which was followed by the in- evitable reaction and business depression. Population ad- vanced at a rapid rate, immigration became very large, and sales of public lands increased greatly. The State banks were enabled to expand their note issues from $61,000,000 in 1830 to $103,000,000 in 1835, the notes being used in payment for the lands occupied by settlers. Then, in 1836, the federal gov- ernment distributed $28,000,000 of surplus revenue among the States, this money finding its way into the banks which in- creased their issues to $149,000,000 by the year 1837. Such an inflation of the currency raised prices and invited large im- portations of merchandise. Thus, our imports rose from $62,720,000 in 1830 to $176,579,000 in 1836; while exports in-

66 THEORY OF THE BALANCE OF TRADE

creased much less rapidly. When the speculative mania ended in the crisis of 1837, imports immediately decreased; but, for the entire decade, importations of merchandise exceeded ex- ports by $159,700,000.

More than this, the movement of specie showed for the ten year an excess of imports amounting to $50,650,000; so that on these two accounts the balance of importations was not less than $210,000,000. This sum was far larger than the earnings of our merchant marine, which amounted to $90,000,000. How shall we account for the unsettled balance of $120,000,000?

The explanation is found in the large investments of Euro- pean capital that were placed in the United States during this period. Between 1830 and 1838, various States that had under- taken internal improvements created debts amounting to $147,835,000. For this purpose, bonds were sold in other coun- tries, and foreigners became indebted to America for the princi- pal of the loans. Two circumstances, however, contributed to re- duce the claims which the country held against foreigners on this account. The debt of the federal government, which amounted to $39,123,000 in 1831, had been paid in full by the year 1835; and a considerable part of these securities had been owned in Europe. As a result, foreign investors had been able to pur- chase some of the State bonds by the simple reinvestment of funds already standing to their credit in the United States. In the second place, no small amount of interest had accrued upon federal and State securities during the decade, and this item may have amounted to thirty or forty millions.3 Foreign in- vestors, therefore, owed the United States $147,835,000, less that part of the principal of the federal debt, and of the interest accruing upon all securities, for which this country was indebted to European capitalists. After making such deductions, it is evident that our large imports of merchandise and specie had been made necessary by the movement of foreign capital toward the United States.

'Lest this estimate should appear too small, it will be well to add that, of the $147,835,0x50 invested in state bonds, $107,823,000 was placed in this coun- try after 1835

THEORY OF THE BALANCE OF TRADE 67

(D.) The next decade opened with two or three years of continued depression, but conditions improved after 1844, and subsequently the foreign commerce of the country began to show a decided increase. In 1847, the exchanges were affected greatly by the famine that followed the failure of the potato crop in Ireland. This event caused a remarkable increase in our ex- ports of breadstuffs, which rose from $7,445,000 in 1845 to $53,262,000 in 1847. The result was that our exports of mer- chandise exceeded imports, in the year last mentioned, by $34,317,000. Such a sudden disturbance of trade caused a net importation of specie amounting to $22,214,000. This large inflow of money altered the condition of the exchanges; so that in 1848, imports increased by $26,000,000, while exports de- clined more than $18,000,000, and a balance of $9,481,000 of specie was exported.

From 1841 to 1850 the imports of merchandise aggregated $1,180,000,000, and exports were estimated at $1,195,000,000. Thus a small balance of something less than $15,000,000 stood to the credit of the United States. At the same time, imports of gold and silver had exceeded exports by $21,830,000; so that the movements of merchandise and specie had reached ap- proximately a condition of equilibrium. From this fact, one would infer that the invisible items of exchange must show a similar balance. Now, what are the facts?

The panic of 1837 had checked the growth of State debts. In 1841, the aggregate indebtedness of the State and local gov- ernments was not much more than $216,000,000. When the States retired from industrial undertakings, the field was left open for business corporations, which constantly increased in number, and began to find in Europe a market for a part of their securities. Thus investments of foreign capital, which were estimated at $200,000,000 in 1840, were supposed to amount to $261,000,000 in 1853. F°r the decade they may have averaged $225,000,000, upon which the aggregate inter- est charges would amount to $135,000,000.

But this debt to holders of American securities was di- minished by the $40,000,000 or $50,000,000 of new capital that

68 THEORY OF THE BALANCE OF TRADE

sought investment in this country; so that our foreign indebted- ness on this account was $85,000,000 or $95,000,000.

Upon the other hand, our merchant marine carried away from our shores exports that exceeded by $690,000,000 the imports that were brought to this country in foreign vessels. Therefore, on account of ocean freights, the United States was entitled to a credit of $86,000,000, which would balance approximately the interest due to foreign holders of American securities. Car- goes carried by our ships between foreign ports increased the earnings of the merchant marine; and were sufficient, perhaps, to balance any foreign outlays occasioned by the operations of our army during the Mexican War. Since specie exports ex- ceeded imports in 1850 and 1851, we may conclude that some debts remained unadjusted at the close of this period.

(E.) In the ensuing decade our foreign commerce increased nearly 125 per cent over the figures for any previous period of equal length, and merchandise imports exceeded exports by $3S5,8oo,ooo.

Passing over, for the moment, the movement of specie, we find that State and local debts increased by $100,000,000 dur- ing the decade; while 21,000 miles of railroad were constructed, for which large amounts of iron rails were imported in exchange for newly issued securities. Foreign investments may have amounted to some $300,000,000 or $350,000,000, upon an aver- age; but it is difficult to secure any satisfactory estimates. The annual interest charges may have been some $18,000,000 to $21,000,000, and, if we deduct $80,000,000 for new invest- ments, we may place the debt due to foreign capitalists at from $100,000,000 to $130,000,000 for the decade. Thus, the United States was a debtor for $355,000,000 of imported merchandise, for $100,000,000 to $130,000,000 on interest charges, and, per- haps, for an unsettled balance from the year 1850.

To meet these claims, the profits of the merchant marine proved wholly inadequate. The net earnings of our ships amounted to no more than $158,000,000. Evidently, some new cause had been operating to disturb the exchanges, and to in-

THEORY OF THE BALANCE OF TRADE 69

crease our obligations beyond the point where the earnings of our ships could establish an equilibrium.

We must now return to the movement of gold and silver. Upon the opening of the California mines, our domestic gold output suddenly rose, from insignificant proportions, to $50,000,000 in 1850; and subsequent years showed a still larger product, which was several times as great as the amount secured annually from all countries of the world prior to 1845. From 1851 to 1860, the aggregate production of gold in the United States equalled $550,000,000, and this was five or six times the estimated specie circulation of the country in any year be- fore the discoveries in California. The money in circulation in 1850, including bank notes as well as specie, was no more than $285,000,000, or about $12 per capita. If the new gold could have been retained in the country, our circulating medium would have risen to $835,000,000 for the year 1860, or $26.60 per capita. Such a sudden inflation as this would have raised prices far above the level prevailing in other parts of the world, put an end to the exportation of many products, and attracted imports from all quarters of the globe. Therefore, the new gold began to flow out of the country, after prices had been raised to a point at which the import trade could increase suffi- ciently to produce this result; and, from 1851 to 1860, we exported a net balance of $417,608,000. By 1860, our specie circulation had risen to $235,000,000, an increase of $81,000,000 in ten years; while the issues of bank notes had grown to $207,000,000, giving the country a supply of money that averaged $14.06 per capita. The United States had be- come one of the leading gold producing regions, and the course of the exchanges was inevitably altered.

(F.) Even more instructive was the period that extended from 1861 to 1873. The fiscal year 1860 had been marked by great prosperity, and both exports and imports were larger than at any former time. But the Civil War wrought havoc with our foreign trade, which, in the space of two years, shrank to little more than one-half of the proportions reached in 1860. Espe-

70 THEORY OF THE BALANCE OF TRADE

dally marked was the decline in our exports of cotton, which decreased from $191,800,000 in 1860 to an average of $11,700,000 from 1861 to 1865. But in 1863 the volume of for- eign trade began to increase; and, after the restoration of peace, the expansion was very rapid.

In 1862, the federal government began to issue inconvertible paper, which produced an inflation of the currency, raising prices and intensifying the speculative movement naturally in- duced by the enormous public expenditures for military pur- poses. The inevitable result was a large increase of merchan- dise imports, which rose from $243,000,000 in 1863 to $642,000,000 ten years later. While it is true, as Cairnes con- tended, that high prices in inconvertible paper would not tend to favor the growth of imports because foreigners did not ex- change commodities for depreciated greenbacks but received payment in gold, it is certain, also, that the speculative mania had raised gold prices somewhat above the level prevailing in other countries, so that the inflow of commodities was greatly stimulated. For the thirteen years ending in 1873, imports of merchandise aggregated $5,107,00,000, while exports were placed at $3,952,000,000, a balance of nearly $1,155,000,000 against this country.

But this was not the only account which foreigners held against the United States. Our merchant marine had suffered irreparable damage from the ravages of the Confederate cruis- ers, and the proportion of our foreign trade carried in American vessels had greatly decreased. For this entire period the im- ports brought to our shores in foreign ships exceeded the ex- ports carried in our own vessels by $1,500,000,000. This gave rise to a debt of $187,500,000. For the first time in our history, we were indebted to foreigners on account of the carrying trade; and the aggregates of our obligations for merchandise and freight amounted to $1,342,000,000.* Moreover, it was esti-

4 The sum due for freight should, however, be considerably reduced; because many American vessels had been registered under foreign flags, and the earn- ings of such ships should not be credited to foreign account.

THEORY OF THE BALANCE OF TRADE 71

mated by David A. Wells, in 1869, that American travellers were then spending $25,000,000 annually in foreign countries, and the money brought here by immigrants could not have counterbalanced such an outlay. But there were other inter- national transactions that restored the exchanges to an equilib- rium.

In the first place, the net exports of specie during the thirteen years had amounted to no less than $677,822,000, this sum rep- resenting nearly nine-tenths of the output of our mines at this period. The rest of our foreign indebtedness was settled by the flow of European capital into the United States. From 1861 to 1863, there seem to have been large withdrawals of foreign in- vestments on account of the disturbed conditions caused by the war, but, during the next ten years, the movement of capital turned in the other direction. The federal government had in- curred an interest-bearing debt of $2,381,000,000, State and local indebtedness had increased by some $500,000,000, while 39,642 miles of railways had been constructed. Foreign in- vestors were attracted by the securities issued for these purposes.

In 1868, Secretary McCulloch estimated the foreign invest- ments at $850,000,000, exclusive of railway stocks. The follow- ing year, Mr. Wells computed that $1,100,000,000 of federal and local securities were held in other countries, while $365,000,000 of European capital had been placed in railway and other enterprises. Even if this estimate was too large in 1869, we may be certain that not less than $1,500,000,000 of foreign investments had been made by 1873; because the in- flow of capital had been very rapid during the interval, amount- ing to $100,000,000 for the first eight months of the latter year. Now, if we place the withdrawals of the years 1861 and 1862 at $200,000,000, it may be considered that foreign capitalists were indebted to the United States for $1,300,000,000 on account of the principal of new investments. This debt would be decreased by the interest charges that had accrued prior to 1873, but the precise amount of this allowance cannot be determined. Re- membering, however, that most of the capital came to the

72 THEORY OF THE BALANCE OF TRADE

country after 1863 and that the interest was stated at $88,000,000 in 1869, we may estimate it as equivalent to some $80,000,000 annually for a period of six years. Thus, the aggre- gate indebtedness of foreign investors would be reduced to about $820,000,000. This was the item, therefore, which, in addition to the $677,000,000 of specie exports, furnished the means of settling the enormous balance due on merchandise, freights, and travellers' expenses.

Manifestly, such a condition of the exchanges could not con- tinue. Even if nothing had occurred to check the inflow of for- eign capital, the growing interest charges would have exceeded ultimately the annual investment of principal. In 1869, Mr. Wells had prophesied that exports of merchandise must in- crease, sooner or later, in order to pay for the interest accruing to European capitalists. More explicitly still, in 1873, Professor Cairnes wrote :

These considerations lead me to the conclusion, that the present condition of the external trade of the United States is essentially ab- normal and temporary. If that country is to continue to discharge her liabilities to foreigners, the relation which at present obtains between exports and imports in her external trade must be inverted. . . . This, it seems to me, is a result which may be predicted with the utmost con- fidence. The end may be reached by an extension of exportation, or by a curtailment of importation, or by combining both these processes, but by one means or the other reached it will need to be.

Proceeding a step further, Cairnes showed that the excess of exports over imports could not be established unless the high prices then ruling in this country should be materially lowered, or prices in Europe should show a considerable advance; and he considered it probable that the change would come about by a fall of prices in the United States sufficient to make importa- tion more difficult and exportation more profitable. Such a de- cline of the price level would probably "come with a crash," so that he looked forward "to the immediate future of American trade as a period of much disturbance and fluctuation, culminat- ing, it is possible, from time to time, in commercial crises.'7

THEORY OF THE BALANCE OF TRADE 73

Before his book appeared, these prophecies were in course of literal fulfillment.

(G.) The last period extends from 1874 to 1896, subsequent years being reserved for discussion in our final paragraphs. In September, 1873, the whole fabric of ten years7 speculation utterly collapsed, while prices fell to a point at which imports must decrease and exports could expand. In 1874, for the first time in twelve years, exports of merchandise exceeded imports; and this condition was maintained in eighteen out of the next twenty-two years. By the close of the fiscal year 1896, the ex- ports for the entire period stood at $17,479,000,000, while im- ports were placed at $15,190,000,000, a "favorable" balance of $2 ,2 89,000,000. In addition to this, exports of specie showed an excess of $529,000,000 over imports; so that the United States was entitled to a total credit of $2,818,000,000. This meant simply that the country had assumed its normal position as a debtor nation on the various items of invisible exchanges, and was paying annually something like $122,500,000 on such accounts.

In the first place we owed foreign nations for interest upon a mass of invested capital, which was not less than $1,500,000,000 in 1874, and increased to some $2,000,000,000 before the close of this period. The rate of interest upon these investments de- creased from six to perhaps four per cent, as the years passed, and may have averaged about five per cent. This would make the annual interest charge stand at $80,000,000 or $90,000,000 upon the average amount of capital invested; so that, for the twenty-three years, this country owed from $1,840,000,000 to $2,070,000,000. But this sum would be decreased by the new investments made during the period, which aggregated $500,000,000.

Secondly, our foreign merchant marine showed a continual decline, so that imports brought in foreign vessels exceeded ex- ports carried in American ships by $9,267,000,000. At the pres- ent time it is thought that freight charges upon imports are about ten per cent of the value of the cargoes, while upon ex-

74 THEORY OF THE BALANCE OF TRADE

ports the estimated charges are as high as fifteen per cent. Upon this basis, the net earnings of foreign ships would ag- gregate $805,000,000. This item of indebtedness tended to in- crease, as the proportion of imports in American bottoms de- clined.

Finally, there were several kinds of debt that cannot be ascer- tained with much accuracy. In 1869, the annual expenditures of American travellers were placed at $25,000,000, but for re- cent years they have never been estimated at less than $50,000,000. Upon this account, however, a certain reduction should be made for the money brought into the country by immigrants and foreign travellers. Then, it is known that con- siderable amounts of real estate are owned by foreign capital- ists, and that the rentals upon such property are no small item. Also, various foreign corporations, such as insurance compa- nies, conduct a large business in this country; and their annual profits go to swell the volume of our international indebted- ness. When all allowances are made for the uncertainty of the data, enough facts have been presented to account for the constant excess of exports of merchandise and specie from 1873 to 1896. At the close of the period under consideration, the invisible elements of indebtedness must have amounted to $80,000,000 interest upon $2,000,000,000 of foreign capital; $52,000,000 due to foreign ships; something less than $50,000,000 expended by American tourists; and indefinite sums that must have carried the debt up to $200,000,000 per annum.

Ill

From this survey of the progress of American commerce, cer- tain important conclusions may be drawn concerning the theory of the balance of trade.

(i.) Exports and imports of merchandise may throw no light upon the movement of specie, so that a favorable balance may not result in an inflow of gold nor an unfavorable balance cause an outflow. From 1831 to 1840, merchandise imports exceeded exports by $159,900,000, while the net imports of specie

THEORY OF THE BALANCE OF TRADE 75

amounted to $50,650,000. On the other hand, from 1873 to 1896, a favorable balance of trade amounting to $2,289,000,000 was accompanied by a net exportation of $529,000,000 in specie.

(2.) Many items that are not included in the customs statis- tics enter into the determination of the foreign exchanges; and over a period of years, all these elements regulate themselves in such a manner that the total credits of a nation equal the aggre- gate of the accounts upon which it stands a debtor.

(3.) Whether imports shall exceed exports or exports rise above imports, depends wholly upon the position of the country as a producer of precious metals, or as a debtor or creditor on account of the movements of capital, of the carrying trade, of foreign travel, and the like. If capital is seeking investment in a new country, as was the case in the United States from 1831 to 1837 and from 1863 to 1873, imports must exceed exports; and this condition will be desirable or undesirable according to the advantages or disadvantages of the situation that invites foreign investments. When the inflow of capital ceases, exports must be sent to pay for the interest that accrues each year ; and a favor- able balance of trade caused in this way will point simply to the fact that the country is able to pay its debts, and will not indi- cate a peculiarly profitable condition of trade. If a country en- gages extensively in ocean carrying, imports of commodities will tend to exceed exports; and the unfavorable balance will be the measure of the profits derived from the merchant marine. Finally, in a country that mines an unusual quantity of the precious metals, gold and silver will be exported constantly to other nations where they are less abundant; and this will force larger imports of commodities. This was the condition produced by the Californian discoveries, and it continued until our grow- ing indebtedness to foreign capitalists and ship-owners exceeded the annual product of our mines and caused an enormous excess of exports after 1874.

(4.) In all cases, the precious metals are used chiefly to pay balances, and they form but a very small element in the interna-

76 THEORY OF THE BALANCE OF TRADE

tional exchanges. From 1821 to 1896, the merchandise exports and imports of the United States aggregated more than $53,000,000,000, while the entire shipments of gold and silver were less than $5,000,000,000.

All of these conclusions could be reinforced by a study of the commerce of other countries. In general, it is the younger and poorer nations that show an excess of exports over imports, while the opposite condition prevails in older countries that possess greater accumulations of wealth. Great Britain has had an enormous "unfavorable" balance of trade for many years, and must continue to do so as long as the earnings of her mer- chant marine and the interest on her foreign investments remain as large as they are at the present time.

The general conclusion is, therefore, that the movements of merchandise indicate nothing more than the position which a country occupies as a debtor or a creditor upon account of the invisible exchanges that form so important an element in inter- national transactions.

But this statement of the case is not wholly complete, and needs to receive one important qualification before it can be ac- cepted by the practical financier. From his point of view an excess of imports or of exports is frequently a matter of great important. Both domestic and foreign exchanges are conducted by means of a complicated system of credit, the volume of which greatly exceeds the reserves of ready money that serve as its foundation. At those seasons of the year when our exports of staple products are largest, exchange usually turns in favor of this country, and gold imports are to be expected. At other seasons, when imports of merchandise are heaviest, exchange may turn in the opposite direction and cause an outflow of gold. Such fluctuations in the exchanges have always existed, and are natural and inevitable under any system of monetary or com- mercial policy; but they may be important to the world of finance.

A favorable turn in the exchanges that results in a temporary inflow of gold, increases the reserves of the banks, making

THEORY OF THE BALANCE OF TRADE 77

money plentiful and cheap in the financial centers; and such conditions are favorable to business activity. Upon the other hand, a movement of specie away from the country tends to decrease the reserves, harden the money market, and raise the discount rate. All this, however, is a matter of temporary im- portance if the currency of the nation is upon a thoroughly sound basis, and if the general condition of business is healthful. When gold imports lower the rate of discount, prices of mer- chandise and securities rise, and conditions are favorable for increased importations of foreign goods. Moreover, this tend- ency is accentuated by the concomitant fall in the rate of sterling exchange, which increases the profits that importers derive from their transactions. The result is that the tide soon turns in the opposite direction, and the inflow of gold is checked automatically. When, however, exchange rises to the point that makes gold exports necessary, discount rates are increased, prices tend toward a lower level, foreign bills drawn against ex- ports yield a larger profit, and trade is given a counter impulse that restores the equilibrium.

But the case may be different. If business has been moving onward upon a course of mad speculation, straining to the ut- most the delicate mechanism of credit, an unfavorable turn of the foreign trade may cause exports of gold at a time when specie reserves are all too small to withstand such a strain. Thus it is that panics are precipitated. If, in addition, the currency of the country is unsound, the importance of a rise in sterling exchange is greatly magnified. From 1878 to 1893, the United States was engaged in reckless experiments with its paper and silver money. The federal treasury had undertaken to circulate, at a parity with gold, a mass of debased currency the amount of which steadily increased under the operation of our laws calling for purchases of silver; while the banks, which had formerly supplied whatever specie might be needed for export, felt com- pelled in 1892 to draw upon the precarious gold reserve which the government endeavored to maintain. As soon as this oc- curred, every demand for gold needed in foreign shipments

78 THEORY OF THE BALANCE OF TRADE

caused a drain on the slender reserve upon which the stability of our monetary system depended. Under such circumstances, an unfavorable turn of the exchanges was fraught with the direst peril.

But with these qualifications, the conclusions reached in the earlier part of our discussion will stand as correct beyond all reasonable doubt. There can be no greater error than to measure the advantages derived from the commerce of a nation by the excess of exports over imports, or to suppose that an unfavor- able balance is a certain proof that the trade has become un- favorable. At the same time, a highly speculative market may well apprehend the consequences of an adverse turn in the ex- changes; while a nation with an unsound monetary system will always be the sport of every fluctuation in foreign transac- tions. Moderation in business activity and the establishment of a standard of value that cannot be shaken, would rob the balance of trade of its last vestige of significance.

IV

It remains for us to consider briefly the tendencies that have manifested themselves in our foreign commerce during the last five years. Exports have increased enormously during this period, while there has been no corresponding movement in the import trade. Nearly all branches of exports have shown a note- worthy increase; but the most remarkable phenomenon has been the expansion in the sales of domestic manufactures, which have risen from $183,595,000 in 1895 to $433,851,000 in 1900. For the four fiscal years ending June 30, 1900, our total ex- ports aggregated $4,903,000,000, while imports amounted to no more than $2,927,000,000, a balance of $1,976,000,000 on the side of the exports. Moreover, the returns for the first eight months of 1901 show a further excess of exports to the amount of $491,000,000.

No statistical data that have been produced offer an adequate explanation of this phenomenon. For the four fiscal years ending in June, 1900, exports had exceeded imports by $1,976,000,000;

THEORY OF THE BALANCE OF TRADE 79

while the net importation of specie had amounted to only $94,670,000, leaving a balance of $1,881,000,000. This would be reduced by the interest due on foreign investments, which may have ranged from $80,000,000 to $100,000,000 per annum, a total of $320,000,000 to $400,000,000 for the four years. The sums paid to foreign ship-owners aggregated some $191,000,000 during this period. In recent years, the expenditures of American tourists may have risen above $50,000,000 a year, so that, for the four years under consideration, our indebtedness on this account may have equalled $250,000,000. If the other items of invisible debts averaged $25,000,000 a year, we can make a further deduction of $100,000,000. But all of these items, even if we place interest paid to foreign investors at the highest figures, would amount to no more than $941,000,000, against a balance to our credit of $1,881,000,000.

Events growing out of the Spanish War may have contributed somewhat to reduce the unsettled claims standing apparently to the credit of the United States. For about two and one-half years, we have maintained an army of some 60,000 men in the Philippines, and have incurred in this manner debts which have been increased by the $20,000,000 paid to Spain and by the expenditures of American warships on foreign stations. Yet with this deduction, there would remain a balance, apparently unset- tled, of over $800,000,000 upon the trade of the four years.

In financial circles, two explanations have been offered to account for this extraordinary situation. In the first place, it has been suggested that the official statistics have overestimated the value of our exports. As a general thing, customs statistics undervalue both imports and exports, and this tendency is usu- ally more marked in the case of the latter than of the former. But when domestic prices are very high, it is easy to estimate the exports at higher figures than are realized upon the actual sales in foreign markets. Yet a study of the export prices offici- ally reported shows that our statisticians have, in most cases at any rate, valued the exports at less than domestic prices; and it would be hard to demonstrate that overvaluation has actually

80 THEORY OF THE BALANCE OF TRADE

occurred. We know, however, that many of the trusts have sold their surplus stocks in foreign markets at prices that are very far below the charges exacted from domestic customers, and that some manufacturers not connected with combinations have done the same thing. This would make it probable that exports may have been overvalued to a certain extent.

A second explanation is that, in recent years, American money has been seeking investment abroad, while a consider- able amount of foreign capital has been withdrawn from the United States. Since March, 1900, no less than $118,000,000 of British, German, and Swedish securities have been sold in this country, and it is entirely possible that other investments have gone unrecorded. Concerning the alleged withdrawal of capital formerly invested in the United States, no reliable information is accessible in the writer, but leading financial authorities have declared that Wall Street has had no knowledge of such an influx of securities during the last two or three years. Upon the whole, it seems probable that this country now holds un- settled claims to a considerable amount against foreign nations. But, since it is not to be supposed that we have given away the surplus of exported commodities, our outstanding credits cannot exceed greatly the balances carried by international banking houses.

A word concerning the probable development of American commerce during the next decade may not be out of order. In the first place we may enquire whether conditions will remain such as to allow the enormous balance of exports to continue. There are only three forces that may operate to produce this result. If the accumulated wealth of the United States has now become so great that our investors can find better openings in other lands, as, for instance, in colonial dependencies, an excess of exports will result from the outward flow of capital, until the time is reached when the interest charges exceed the annual increment of principal. This force, therefore, will, at the most, prove to be of comparatively short duration. Another possibility is the withdrawal of foreign investments now placed in the

THEORY OF THE BALANCE OF TRADE 8 1

United States, which would be a second cause of an excess of exports. This force, however, would spend itself in the course of a few years; and, moreover, the removal of uncertainty con- cerning our standard of value ought to lessen the motive for the withdrawal of capital. Finally, there is the chance that our new foreign policy may entail the continued support of large armies in distant parts of the globe, which would tend toward a balance of exports. But the desire for strenuous living seems, upon the whole, more likely to show an abatement than an increase; and, if this forecast proves correct, military outlays will not intensify permanently the forces making for an excess of exports over imports.

Upon the other hand, counteracting causes may develop that will contribute to reduce our annual indebtedness to foreigners on account of the invisible items of the exchanges, and eventu- ally will make an excess of exports an impossibility. First among these influences will be the revival of our foreign carry- ing trade.

The flourishing conditions of our merchant marine from 1790 to 1855 was mainly due to our possessing a cheap and abundant supply of ship timber. With the advent of the iron and then the steel vessel, this industry was certain to decline, so long as the American price of iron ranged above that prevailing in England. Recent years have reversed conditions in this respect, and the astonishing development of our iron and steel production will furnish shipbuilders with an opportunity which, as recent events show, they are likely to improve. To the extent by which, during the next decade, American vessels recover their share of the carrying trade, our indebtedness to foreigners upon this account will tend to decrease, and one cause for an annual excess of exports will be removed. A second influence will become opera- tive if investments of American capital in other countries show, as they are likely to do, a tendency to increase. Temporarily, this movement will cause an outflow of commodities; but, sooner or later, the annual interest will be sufficient to produce an opposite tendency. So far, then, as indebtedness on account

82 THEORY OF THE BALANCE OF TRADE

of capital is concerned, we may expect that conditions in the United States will come to resemble those which prevail in older nations which receive each year large imports of commodi- ties that represent the earnings of invested capital. Finally, it should never be forgotten that this country furnishes a large part of the world's annual supply of gold and silver. If the interest upon our own foreign investments and the earnings of our ships ever equal or exceed the claims which are due to other countries upon these two accounts, then the product of our mines will turn the scale in favor of imports and put an end to the present excess of exports.

Upon the whole, it may be predicted that the existing condi- tion of our foreign exchanges cannot continue for many years, and that, possibly before the present decade has passed, the relation between our import and export trades must be radically altered. This is not to say that exports must necessarily show an actual decrease, since the exchanges may be corrected by an increase of imports. But if conditions are such as to make the latter process difficult or impossible, then the former alternative will be forced upon us. Every dollar earned by foreign invest- ments of American capital, or by a renascent merchant marine, will cancel an equal debt now owed to other nations upon these accounts, and will make it impossible to sell our present volume of exports without receiving a larger quantity of imports. The present balance of exports is due to our position as a debtor country on the many invisible accounts of the foreign ex- changes; and, as we advance to the rank of a creditor nation, we must consent to receive our payment in the products that will represent the profits of our ships or of our capital.

Our recent unbounded prosperity has culminated in a specu- lative movement that has surpassed previous records. Unques- tionably the rage of speculation has exceeded all reasonable bounds, and is likely to be followed by a reaction of equal inten- sity. While prudent men are even now putting their houses in order, the larger number will continue their overtrading until the storm bursts upon them. At such a time the foreign ex-

THEORY OF THE BALANCE OF TRADE 83

changes will assume a position of great temporary significance. While various European markets have experienced for some months the reaction that is certain to be felt in this country before the accounts of recent years can finally be closed, our own prosperity has suffered no material abatement, and we are able as yet to detect no certain signs of danger. To the firm con- dition of our markets the recent developments of our foreign commerce have contributed most powerfully, because our inter- national position is so strong that no slight shock could start an outflow of gold sufficient to test the strength of the gigantic fabric of speculation; and, as long as present conditions con- tinue, our day of reckoning may be postponed. In such matters it is usually the unexpected that happens, and no one can foresee the precise course of the events that will ultimately precipitate the crisis; but of one thing we may be assured. Unless untoward domestic occurrences intervene to cause the initial shock, the next turn of the foreign exchanges will put to the severest test our highly sensitive markets, in which the substantial profits of prosperous years have been given fictitious valuations. When- ever our excess of exports falls to a point where it will not counterbalance the debts incurred on the invisible foreign transactions, we shall probably witness the end of the present era of speculation.

THE VARIATION OF PRODUCTIVE

FORCES'

NEARLY a century has elapsed since the law of dimin- ishing returns became an integral part of classical political economy; and, despite all criticisms, it remains today one of the corner-stones of the science. But important additions have been made, notably during the last twenty years, to the accepted statement of the theory. In some industries the exist- ence of a tendency to constant or increasing returns is predi- cated, so that commodities are now divided into three classes, — those produced under the conditions of diminishing returns, those which can be supplied with a constant expenditure of labor and capital, and those obtained at a decreasing cost, as the supply is enlarged. Such a mode of classification is widely employed in current discussions of value, monopolies, and the incidence of taxation, as well as in the study of the law of population.

It is the opinion of the author that, in developing what are now known as the laws of diminishing, constant, and increasing returns, economists have fallen into serious confusion of ideas at several points; and not a few writers have shown some appre- ciation of this fact.2 But as yet no one has undertaken a critical examination of the relation of modern theories to the substance of the old doctrines, and offered a systematic statement of the results reached by a century of discussion.3 To this end it is hoped that the present essay may contribute something of value.

'Reprinted from Quarterly Journal of Economics, Vol. XVI (1901-02), pp. 473-5I3- Reproduced by generous permission of the publishers.

aSee Marshall, Economics, 4th edition, pp. 511, 512; Hadley, Economics, pp. 154, 155; Seligman, Shifting and Incidence of Taxation, 2d edition, pp. 199- 201.

'For the best effort yet made in this direction, see Commons, The Distribu- tion of Wealth, p. 116, et seq.

VARIATION OF PRODUCTIVE FORCES 85

I

A brief survey of the early development of the theories in question will throw no little light upon the nature of the prob- lems to be attacked, and will suggest, furthermore, a convenient method of procedure. Thanks to the labors of Mr. Cannan, it will be possible to state very briefly the history of the doctrines down to the year i848.4

As every economist is now aware, the law of diminishing returns was originally formulated in the course of the discus- sions aroused in England by the high price of corn that ruled during the early years of the nineteenth century. As stated by Malthus, West, and Ricardo, the principle was applied to agri- culture; and it was held5 that, ain the progress of the improve- ment of cultivation, the raising of rude produce becomes pro- gressively more expensive, or, in other words, the ratio of the net produce of land to its gross produce is continually diminish- ing." In manufacturing industry, however, it was believed that a different law prevailed, so that additional investments of labor and capital would yield a proportionate increase of product/' And, until comparatively recent times, economists have con- tinued to express similar opinions.

But, as originally stated, the law of diminishing returns admitted of two interpretations: it might mean that, at any given stage of agricultural knowledge or skill, a point is soon reached at which increased investment begins to yield a smaller proportionate product; or it might be considered to imply that, as a matter of historical fact, mankind has had to expend a larger relative amount of labor and capital in order to provide

* E. Cannan, History of Theories of Production and Distribution. See also Economic Journal, March, 1892 ; Palgrave's, Dictionary of Political Economy, Vol. I, pp. 585, 586; Quarterly Journal of Economics, Vol. IX, pp. 170 et seq.

6 West, "Essay on the Application of Capital to Land" (1815) ; Malthus, "Na- ture and Progress of Rent" (1815) ; Ricardo, "Essay on the Influence of a Low Price of Corn on the Profits of Stock" (1815).

8 This is true of Malthus, West, Senior, McCulloch, and Mill. Palgrave, Dic- tionary of Poltical Economy, Vol. II, p. 381. In treating of the rent of mines, it was held that diminishing returns were the rule. Note Ricardo, Principles, chap, iii.

86 VARIATION OF PRODUCTIVE FORCES

the additional food necessary to support a growing population. Upon at least one occasion Ricardo made the former application of the principle, basing his argument upon the assumption that no improvements are introduced in agricultural methods; but usually the early writers adopted the latter interpretation of the law, and held that, despite all discoveries and inventions, the growth of population must ultimately increase "the quantity of labor and capital necessary to procure the last addition that has been made to the raw produce of a rich and advancing coun- try/77 Against such a dismal view of the future of the race, several protesting voices were raised before many years had passed.

Thus, in 1828, Senior declared that, while unwise laws might have such an effect, "under wise institutions" the tendency was not what economists had alleged, but precisely the reverse.8 In 1832 Thomas Chalmers contended that, while the law of dimin- ishing returns may have driven men to the utilization of inferior soils, nevertheless improvements in the arts of agriculture have made the labor now employed upon poorer margins of cultiva- tion as productive as that formerly expended upon lands of superior fertility.9 Finally, Henry C. Carey attacked the as- sumption, often implicit in the statements of Ricardo and others, that the richest soils are historically the first to be occupied, and that the growth of numbers forces men to utilize less fertile lands.10 But all such criticisms did not prevent most economists from holding to the belief that, although the opening up of new countries and the progress of invention might serve to retard the process, yet, in the end, a continuous increase of population would inevitably result in a decreased return to the labor and capital devoted to the production of the additional food supply.

'The quotation is from Malthus, Nature and Progress of Rent, p. 45. But citations might be given to the writings of West, Ricardo, James Mill, and McCulloch.

8 Senior, Two Lectures on Population (1828).

9 Political Economy, chap. i. (1832).

10 H. C. Carey, Political Economy (1837-40) ; Past, Present, and Future (1848) ; Social Science (1858-59).

VARIATION OF PRODUCTIVE FORCES 87

Although Senior, in his Political Economy (1836), made im- portant additions to the statement and applications of the law of diminishing returns, we may pass on to the consideration of the views of John Stuart Mill, who adopted Senior's ideas, and made further contributions to the subject. The attention of the reader is invited, therefore, to MilPs treatment of agricultural production, large-scale industry, value, and taxation.

"Af ter a certain, and not very advanced, stage in the progress of agriculture," says Mr. Mill,11 "it is the law of production from the land that, in any given state of agricultural skill and knowl- edge, by increasing the labor the produce is not increased in equal degree." Here the application of the law is limited to "any given state of agricultural skill and knowledge," that is, to static conditions. But most of Mill's discussion relates to the actual or prospective progress of population and of agricultural produc- tion; and, although his statements may not always seem con- sistent, there can be no doubt that he considered that discovery and invention could control only temporarily the tendency to- ward diminishing returns, so that ultimately additional food must be procured "on progressively harder terms."12 And this he believed to be true of mining and other extractive industries, as well as of agriculture.13 With manufactures, however, the case was supposed to be different.14 So far, indeed, as the supply of raw materials is concerned, manufacturing industry was ad- mitted to be subject to the law of diminishing returns; but the labor of converting materials into finished goods was thought to tend "constantly and strongly towards diminution, as the amount of production increases," so that "the causes tending to increase the productiveness of industry, preponderate greatly over the one cause which tends to diminish it."

A second topic, which has played an important part in subse-

11 Principles of Political Economy, Book I, chap, xii, Sec. 2 (1848). Note the similarity to Senior's statement in his Political Economy, p. 82.

13 Principles, Book I, chap, xii, Sec. 3; Book IV, chap, iii, Sec. 5. 19 Principles, Book I, chap, xii, Sec. 3.

14 Principles, Book I, chap, xii, Sec. 3; Book IV, chap, ii, Sec. 2. Cf. Senior, Political Economy, pp. 81-83.

88 VARIATION OF PRODUCTIVE FORCES

quent discussions, was treated by Mill in a separate chapter devoted to a comparison of large-scale and small-scale produc- tion. The subject was suggested to him, perhaps, by the well- known work of Mr. Babbage, who, better than any previous writer, comprehended the economic effects of the factory sys- tem.15 Drawing many of his facts from this source, Mill dis- cussed the advantages and disadvantages resulting from the en- largement of the size of an industrial undertaking,10 and held that, as a general rule, "the expenses of a business do not in- crease by any means proportionally to the quantity of business. " In referring to such industries as railroads and gas or water companies, he said that all "enlargement in the scale of produc- tion is generally an unqualified benefit," thus anticipating the modern theory of natural monopolies.

In presenting the theory of value, Mill divides commodities into three classes: (a) those "of which it is physically impossible to increase the supply beyond certain narrow limits"; (b) those "which are susceptible of indefinite multiplication without in- crease of cost"; and (c) those "which are susceptible of indefinite multiplication, but not without increase of cost."17 This classification, which is but an elaboration of distinctions drawn by Ricardo,18 is based, obviously, upon particular appli- cations of the theory of monopoly, the economy of large-scale production, and the law of diminishing returns. With more or less important modifications, it has played a significant part in modern discussions of the theory of value.

And, finally, in treating of the incidence of taxation, Mill makes an important distinction between the effects of a tax

16 Babbage, Economy of Machinery and Manufactures (1832).

16 Principles, Book I, chap. ix.

17 Principles, Book III, chap, ii, Sec. 2. Cf. also the table of contents.

18 Ricardo recognized commodities "the value of which is determined by their scarcity alone," and commodities which "are procured by labor.'' The second class would subdivide into manufactured products and raw produce, the latter being secure under conditions of decreasing returns. I shall pass over Senior's somewhat peculiar classification, which has not been followed by later writers. Political Economy, p. vii. But, in discussing the effect of increased demand upon supply, Senior distinguished between raw produce and manufactured commodities.

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imposed upon raw products, secured under conditions of dimin- ishing returns, and other commodities that are free from such limitations of supply.19 Here, again, subsequent theories have found a new point of departure.

For two reasons Mill's discussion of these topics possesses peculiar significance. In the first place it summed up nearly all the results reached by earlier writers; and then it left the theory in a position that was certain, in the course of time, to lead to important modifications and extensions. It is evident that the subjects treated by Mill included two things that far trans- cended the scope of the original law of diminishing returns. That principle had related to the productivity of labor and capital when employed in the cultivation of land or the utiliza- tion of other natural resources. But Mill proceeded to discuss the efficiency of productive agents when organized in manufac- turing establishments of varying size, thus introducing a very different problem, as economists are now coming to realize. Finally, in treating of the law of value and the incidence of taxation, Mill looked at the process of production from still another point of view, — the conditions that govern the entire supply of any particular commodity; and this involved a third set of considerations that needs to be carefully distinguished from the other two. Subsequent writers have discussed all three problems, but have seldom appreciated the fact that different principles are involved in every case, and that, in each instance, we are obliged to study the process of production from a dif- ferent point of view. For this reason, in presenting the later history of the theories in question, we shall treat separately each of the three problems considered by Mr. Mill.

II

First in order of both logical and historical development comes the law of diminishing returns. This principle, as we have

19 Principles, Book V. chap. iv. In this matter, Mill follows the argument of Senior. Cf. Senior, Political Economy, pp. 120 et seq. Cournot, in his treatment of taxes on commodities, had considered the influence of diminishing and increas- ing returns. Curnot, Thtorie des Richesses (1838).

go VARIATION OF PRODUCTIVE FORCES

seen, admits of two interpretations, the static and the dynamic, of which we shall now consider the former.20 Assuming a par- ticular state of the arts of production, economists have had little difficulty in recognizing that in the extractive industries the continued investment of labor and capital upon any given tract of land will, after a certain point is reached, yield a diminishing proportionate return. But, in considering manufactures and commerce, most writers have followed Senior and Mill in hold- ing that these industries are governed by a different law.21

Yet, as Professor Commons has so clearly shown,22 when we study the investment of labor and capital upon a given tract of land, we find that all industries show a diminishing return after the investment of labor and capital has been carried to a certain point.23 Under given technical conditions, factories, and even office buildings in large cities, will not be raised beyond a certain number of stories, since better results can finally be secured by resorting to construction upon other land. Oversight of this fact is due to a failure to consider agriculture and manufactures from the same point of view, namely, the possible extent of invest- ments upon a given area.24

20Ricardo, in his "Essay on the Influence of a Low Price of Corn," con- sidered static conditions. So did Senior and Mill when they made the assump- tion, "agricultural skill remaining the same." Senior, Political Economy, 82 ; Mill, Principles, Book I, chap, xii, Sec. 2. For later writers see Marshall, Economics, p. 227; Nicholson, Political Economy, Vol. I, p. 152.

21 Cairnes, Leading Principles, pp. 118, 132-134; Sidgwick, Political Economy, 2d edition, p. 144; Walker, Political Economy, 3d edition, pp. 38, 39; Gide, Political Economy, p. 329; Clark, Philosophy of Wealth, pp. 97, 100. Some writers, without expressly stating that manufactures are governed by a different principle, apply the law only to agriculture and mining. Fawcett, Manual of Political Economy, 6th edition, p. 74; Newcomb, Political Economy, p. 242.

22 Commons, Distribution of Wealth, pp. 116, 117; also, in Publications of the American Economic Association, Vol. VIII, p. 101.

23 This is recognized by Marshall, Economics, pp. 246, 247; Nicholson, Political Economy, Vol. I, pp. 159, 160; Commons, Distribution of Wealth, pp. 132-134; Bullock, Introduction to Economics, 2d edition, pp. 167-170.

24 Ricardo and Malthus applied the law of diminishing returns to the cultiva- tion of given tracts of ground, when they spoke of land of the first quality, land of the second quality, etc. Senior explicitly applies the law to "additional labor employed on the land in a given district." Political Economy, p. 82. Mill discusses "the quantity of produce capable of being raised on any given piece of land." Principles, Book I, chap, xii, Sec. i. Later writers do the same thing. Walker, Political Economy, p. 35 ; Newcomb, Political Economy, p. 242 ; Hadley, Economics, p. 43; Clark, Distribution of Wealth, p. 165; Palgrave, Dictionary

VARIATION OF PRODUCTIVE FORCES QI

Without doubt an important difference exists between the in- dustries in question. In agriculture it is possible to invest only a small or moderate amount of labor and capital upon a definite area before the point of diminishing returns is reached, while in manufactures and commerce enormous investments can be made even upon a single acre. Yet the only difference is one of degree, and the same law ultimately applies in both cases. No exception can be taken to Mr. Cannan's statement25 that the "fact that a certain amount of space is required for productive labor in other branches of industry is of little practical im- portance as regards the effect of variations of population on the productiveness of all industry taken together, because these branches of industry require very little space compared with agriculture.'7 But for the study of other questions it is very necessary to remember that investments upon a given area of land are subject to diminishing returns in all industries.

This will become evident when we consider that the classical theory of rent is based upon a comparison of the productivity of investments made upon definite tracts of land. So far as agri- cultural rent is concerned, this statement is a mere common- place. But the traditional formula for the determination of rent could not apply to land used in manufactures and commerce unless a law of diminishing returns governed investments made upon given areas employed for such purposes.20 For the study of distribution, therefore, the static aspect of this principle is of most fundamental importance.

Under static conditions, then, the law of diminishing re- turns governs investments of labor and capital made in any

of Political Economy, Vol. I, p. 585. But, when manufacturers are considered, no such limitation is implied ; and writers consider either a manufacturing estab- lishment that is free to extend its operations over additional land or the industry of manufactures as a whole.

28 Cannan, Elementary Political Economy, pp. 24, 25. Cf. Hadley, Economics, p. 155, note.

26 This is recognized by Marshall and Commons. The former (Economics, pp. 246, 247), after showing that ''building land does give a diminishing return," says that "the theory of ground rents is substantially the same as that of farm rents." The latter (Distribution, p. 134) says that, if "diminishing returns apply only to agriculture, there can be no law of rent for manufacturing and mercantile sites."

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industry upon a given area of land.27 This principle has usually been proved by showing that, if it were not true, all production would be conducted upon a few favored tracts,28 but there are not wanting actual experiments that seem to confirm the law.20 This much, at least, of the traditional body of economic doctrine has successfully withstood both earlier and later criticism.30

Passing now to the dynamic applications of the law of dimin- ishing returns, we find that this aspect of the principle has always been of the greatest interest to economists, who have been especially concerned with the probable effects of an in- crease of population upon the conditions that control the supply of food. Even when they have not believed that the productivity of agriculture has actually decreased in the past, writers have generally held that the future growth of numbers must ultimately compel mankind to procure the means of subsistence upon "progressively harder terms. "31

But it is evident that, in order to study the influence of increased population upon social prosperity, it is necessary to

27 Few economists, probably, would refuse to accept the law as stated. Pro- fessor Patten's "law of limited returns" has been criticized by Sidgwick, and has been rejected by one of his own disciples. Patten, Premises of Political Economy, pp. 155, 182; Sidgwick, Political Economy, p. 203; Devine, Economics, pp. 346,

347-

28 Professor Patten says that Mill "was the first to try to prove the law of diminishing returns." But Senior had advanced in 1836 the line of proof referred to in the text. Political Economy, p. 85. To this method of proving the law, Professor Patten objects that his own "law of limited returns" would explain the fact that men have recourse to poorer soils. This may be granted. Premises of Political Economy, pp. 152-154. But if, as Professor Patten contends, the returns increase proportionately up to the point where no additional product can be secured by any increase of the investment, then men would not resort to poorer lands until the absolute limit of productivity had been reached on the better soils. And this is not the case.

20 For pertinent estimates by Von Thiinen, see Der isolirte Staat, Vol. II, chap i, p. 179 (quoted by Roscher, Political Economy, Vol. II, p. 17, note 5). See refer- ence given by Marshall, Economics, p. 232, note.

80 It is impossible to consider here Professor Commons's application of the prin- ciple to the value of the product of a given area as well as to the quantity. Distribution of Wealth, pp. 138-140. I believe, however, that the essential facts for which Commons here contends can be stated satisfactorily without intro- ducing this refinement of the theory. Cf. Marshall, Economics, pp. 22Q, 230.

81 Mill, Principles, Book I, chap, xii, Sec. 3; Book IV, chap, iii, Sec 5; Cairnes, Leading Principles, p. TIQ; Walker, Political Economy, pp. 313, 314; Macvane, Political Economy, p. 314.

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pass from our present standpoint, — the productivity of invest- ments made upon a definite tract of land, — and consider the productivity of the agricultural industries of an entire country or of the civilized world. When the latter question is raised, we at once involve ourselves in problems that cannot be solved by the sole aid of the laws applicable to the investments upon any given area. Manifestly, these principles are one factor in the situation; but they are not the only thing involved, so that we cannot hope to discuss adequately the question of social pros- perity from the narrow point of view now under consideration.

All that can be done, so long as we confine ourselves to the productivity of investments upon a given area, is to say that in agriculture the point of diminishing returns seems to be reached when a relatively small amount of labor and capital has been expended, so that, as population increases, a much larger amount of land must be taken into cultivation. And, upon the other hand, in manufactures and commerce the intensity of profitable investment upon a small area is so great that the need of resorting to additional land in order to secure more standing room, is not likely to exercise any material influence upon the productivity of these industries. To the question of social pros- perity the study of our first standpoint can contribute nothing more decisive than this; but for the theory of distribution, which involves primarily the static aspects of the principle, the law of diminishing returns from investments upon a given area is of far-reaching importance.

In order to avoid any possible confusion in the use of terms, the expression "diminishing returns" will be applied hereafter solely to the productivity of labor and capital upon a definite tract of land. In discussing the problems that remain to be con- sidered, we shall find that the operation of other principles is involved besides the law just mentioned. For these other prin- ciples different names should be used; and it is hoped that a consequent gain in clearness of thought and presentation will justify our insistence upon the need of greater precision in terminology.

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III

After the publication of Mill's Principles it became almost the fashion for treatises on economics to devote one or more chapters to the subject of production upon a large and upon a small scale,32 and in recent years many special studies have been made of the "size of the modern business unit" or of "the structure of modern industry."33 As Professor Commons has clearly shown,84 and one or two other writers have suspected,35 this problem is very distinct from that involved in the law of diminishing returns. Instead of studying the results obtained from investments upon a given area of land, we have now to investigate the efficiency of the productive process when carried on in establishments of various sizes that occupy as much or as little land as may be required. The important difference between the two points of view will be made increasingly apparent in the following paragraphs.

The growing importance of capital, especially of the fixed variety, during the nineteenth century led to a marked increase in the size of the average business unit; and, naturally enough, attracted the attention of economists. In recent years this en- largement of the scale upon which single firms or companies operate has gone so far as to produce actual monopoly in many industries, and to appear to threaten it in many others. No one doubts that, within certain limits at least, "the expenses of a business," to use the words of Mr. Mill, "do not increase by any means proportionally to the amount of business done." But diversities of opinion exist concerning the extent of the economies realized after an undertaking has assumed a certain size.

"Fawcett, Political Economy, chap, vi; Gide, Political Economy, Part II, chap, i; Marshall, Economics, Book IV, chap, xi; Nicholson, Political Economy, Book I, chaps, viii and ix.

"Taylor, History of the Factory System; Wells, Recent Economic Changes; Schultze-Gaevernitz, Der Grossbetrieb ; Hobson, Evolution of Modern Capital- ism. The earlier work of Babbage has already been cited. See, finally, Willoughby, in Vale Review, Vol. VII, pp. 72-94.

84 Distribution of Wealth, Vol. 117, pp. 130-132.

"Marshall, Economics, pp. 511, 512; Hadley, Economics, pp. 154, 155, note.

VARIATION OF PRODUCTIVE FORCES QS

Doubtless differences exist between the various classes of undertakings. In the field of transportation and of the so-called distrib