(2.) On the other hand, the capital owned by persons who prefer lending it
at interest, or whose avocations prevent them from personally
superintending its employment, may be short of the habitual demand for
loans. It may be in great part absorbed by the investments afforded by the
public debt and by mortgages, and the remainder may not be sufficient to
supply the wants of commerce. If so, the rate of interest will be raised
so high as in some way to re-establish the equilibrium. When there is only
a small difference between interest and profit, many borrowers may no
longer be willing to increase their responsibilities and involve their
credit for so small a remuneration: or some, who would otherwise have
engaged in business, may prefer leisure, and become lenders instead of
borrowers: or others, under the inducement of high interest and easy
investment for their capital, may retire from business earlier, and with
smaller fortunes, than they otherwise would have done.
Or, lastly, instead of [capital] being afforded by persons not in
business, the affording it may itself become a business. A portion of the
capital employed in trade may be supplied by a class of professional
money-lenders. These money-lenders, however, must have more than a mere
interest; they must have the ordinary rate of profit on their capital,
risk and all other circumstances being allowed for. [For] it can never
answer, to any one who borrows for the purposes of his business, to pay a
full profit for capital from which he will only derive a full profit: and
money-lending, as an employment, for the regular supply of trade, can not,
therefore, be carried on except by persons who, in addition to their own
capital, can lend their credit, or, in other words, the capital of other
people. A bank which lends its notes lends capital which it borrows from
the community, and for which it pays no interest.
Of late years, however, banks are generally not permitted to issue
notes on their simple credit. That privilege has been so often
abused in this country that now, in the national banking system, a
separate part of the resources are set aside for the security of
the circulating notes (as is also true of the Bank of England
since 1844). It is not generally true, then, that banks now create
the means to make loans by issuing notes by which they borrow
capital from the community without paying interest. They do,
however, depend almost entirely on deposits.
A bank of deposit lends capital which it collects from the community in
small parcels, sometimes without paying any interest, and, if it does pay
interest, it still pays much less than it receives; for the depositors,
who in any other way could mostly obtain for such small balances no
interest worth taking any trouble for, are glad to receive even a little.
Having this subsidiary resource, bankers are enabled to obtain, by lending
at interest, the ordinary rate of profit on their own capital. The
disposable capital deposited in banks, together with the funds belonging
to those who, either from necessity or preference, live upon the interest
of their property, constitute the general loan fund of the country; and
the amount of this aggregate fund, when set against the habitual demands
of producers and dealers, and those of the Government and of unproductive
consumers, determines the permanent or average rate of interest, which
must always be such as to adjust these two amounts to one another.(286)
But, while the whole of this mass of lent capital takes effect upon the
_permanent_ rate of interest, the _fluctuations_ depend almost entirely
upon the portion which is in the hands of bankers; for it is that portion
almost exclusively which, being lent for short times only, is continually
in the market seeking an investment. The capital of those who live on the
interest of their own fortunes has generally sought and found some fixed
investment, such as the public funds, mortgages, or the bonds of public
companies, which investment, except under peculiar temptations or
necessities, is not changed.
§ 3. Circumstances which Determine the Fluctuations.
Fluctuations in the rate of interest arise from variations either in the
demand for loans or in the supply. The supply is liable to variation,
though less so than the demand. The willingness to lend is greater than
usual at the commencement of a period of speculation, and much less than
usual during the revulsion which follows. In speculative times,
money-lenders as well as other people are inclined to extend their
business by stretching their credit; they lend more than usual (just as
other classes of dealers and producers employ more than usual) of capital
which does not belong to them. Accordingly, these are the times when the
rate of interest is low; though for this too (as we shall immediately see)
there are other causes. During the revulsion, on the contrary, interest
always rises inordinately, because, while there is a most pressing need on
the part of many persons to borrow, there is a general disinclination to
lend.(287)
This disinclination, when at its extreme point, is called a panic. It
occurs when a succession of unexpected failures has created in the
mercantile, and sometimes also in the non-mercantile public, a general
distrust in each other’s solvency; disposing every one not only to refuse
fresh credit, except on very onerous terms, but to call in, if possible,
all credit which he has already given. Deposits are withdrawn from banks;
notes are returned on the issuers in exchange for specie; bankers raise
their rate of discount, and withhold their customary advances; merchants
refuse to renew mercantile bills. At such times the most calamitous
consequences were formerly experienced from the attempt of the law to
prevent more than a certain limited rate of interest from being given or
taken. Persons who could not borrow at five per cent had to pay, not six
or seven, but ten or fifteen per cent, to compensate the lender for
risking the penalties of the law; or had to sell securities or goods for
ready money at a still greater sacrifice.
The pernicious and hurtful custom exists in various States in this
country of making any interest beyond a certain rate illegal. When
it is remembered that legitimate business is often largely done on
credit—until the proceeds of goods sold on credit are
collected—the rate of interest from day to day is very important
to trade. So, when there is a sudden demand for loans, a rate
higher than the legal one will certainly be paid, and the law
violated, if the getting of a loan is absolutely necessary to save
the borrower from commercial ruin. The effect of a legal rate is
to stop loans at the very time when loans are most essential to
the business public. It would be far better to adopt such a
sliding scale as exists at great European banks, which allows the
rate of interest to rise with the demand. No one, then, with good
security, need want loans if he is willing to pay the high rates;
and those not really in need will defer their demand until the
sudden emergency is past. Already in New York the legal penalty
has been removed for loaning at higher than the legal rates when
charged upon call-loans; and it has mitigated the extreme
fluctuations of the rate in a market when financial necessity is
contending against the law.
Except at such periods, the amount of capital disposable on loan is
subject to little other variation than that which arises from the gradual
process of accumulation; which process, however, in the great commercial
countries, is sufficiently rapid to account for the almost periodical
recurrence of these fits of speculation; since, when a few years have
elapsed without a crisis, and no new and tempting channel for investment
has been opened in the mean time, there is always found to have occurred
in those few years so large an increase of capital seeking investment as
to have lowered considerably the rate of interest, whether indicated by
the prices of securities or by the rate of discount on bills; and this
diminution of interest tempts the possessors to incur hazards in hopes of
a more considerable return.
The demand for loans varies much more largely than the supply, and
embraces longer cycles of years in its aberrations. A time of war, for
example, is a period of unusual draughts on the loan market. The
Government, at such times, generally incurs new loans, and, as these
usually succeed each other rapidly as long as the war lasts, the general
rate of interest is kept higher in war than in peace, without reference to
the rate of profit, and productive industry is stinted of its usual
supplies.
The United States during the late war found that it could not
borrow at even six or seven per cent. By receiving depreciated
paper at par for its bonds it really agreed to pay six gold
dollars on each loan of one hundred dollars in paper (worth,
perhaps, at the worst only forty gold dollars), which was
equivalent to fifteen per cent. This high rate was largely due to
the weakened credit of the Government; but still it remains true
that the rate was higher because the United States was in the
market as a competitor for large loans. Now the Government can
refund its bonds at three per cent.
Nor does the influence of these loans altogether cease when the Government
ceases to contract others; for those already contracted continue to afford
an investment for a greatly increased amount of the disposable capital of
the country, which, if the national debt were paid off, would be added to
the mass of capital seeking investment, and (independently of temporary
disturbance) could not but, to some extent, permanently lower the rate of
interest.
The rapid payment of the public debt by the United States,
$137,823,253 in 1882-1883, and more than $100,000,000 in
1883-1884, has taken away the former investment for enormous sums
of loanable funds, and to the same extent increased the supply in
the market. Without doubt this aids in making the present rate of
interest a very low one. Whether the rate will remain “permanently
lower,” however, will depend upon whether the field of investment
in the United States is already practically occupied. We believe
it is not.
The same effect on interest which is produced by government loans for war
expenditure is produced by the sudden opening of any new and generally
attractive mode of permanent investment. The only instance of the kind in
recent history, on a scale comparable to that of the war loans, is the
absorption of capital in the construction of railways. This capital must
have been principally drawn from the deposits in banks, or from savings
which would have gone into deposit, and which were destined to be
ultimately employed in buying securities from persons who would have
employed the purchase-money in discounts or other loans at interest: in
either case, it was a draft on the general loan fund. It is, in fact,
evident that, unless savings were made expressly to be employed in railway
adventure, the amount thus employed must have been derived either from the
actual capital of persons in business or from capital which would have
been lent to persons in business.
§ 4. The Rate of Interest not really Connected with the value of Money,
but often confounded with it.
From the preceding considerations it would be seen, even if it were not
otherwise evident, how great an error it is to imagine that the rate of
interest bears any necessary relation to the quantity or value of the
money in circulation. An increase of the currency has in itself no effect,
and is incapable of having any effect, on the rate of interest. A paper
currency issued by Government in the payment of its ordinary expenses, in
however great excess it may be issued, affects the rate of interest in no
manner whatever. It diminishes, indeed, the power of money to buy
commodities, but not the power of money to buy money. If a hundred dollars
will buy a perpetual annuity of four dollars a year, a depreciation which
makes the hundred dollars worth only half as much as before has precisely
the same effect on the four dollars, and therefore can not alter the
relation between the two. Unless, indeed, it is known and reckoned upon
that the depreciation will only be temporary; for people certainly might
be willing to lend the depreciated currency on cheaper terms if they
expected to be repaid in money of full value.
In considering the effect produced by the proceedings of banks in
encouraging the excesses of speculation, an immense effect is usually
attributed to their issues of notes, but until of late hardly any
attention was paid to the management of their deposits, though nothing is
more certain than that their imprudent extensions of credit take place
more frequently by means of their deposits than of their issues. Says Mr.
Tooke: “Supposing all the deposits received by a banker to be in coin, is
he not, just as much as the issuing banker, exposed to the importunity of
customers, whom it may be impolitic to refuse, for loans or discounts, or
to be tempted by a high interest; and may he not be induced to encroach so
much upon his deposits as to leave him, under not improbable
circumstances, unable to meet the demands of his depositors?”
In truth, the most difficult questions of banking center around
the functions of discount and deposit. The separation of the Issue
from the Banking Department by the act of 1844, which renewed the
charter of the Bank of England, makes this perfectly clear. After
entirely removing from their effect on credit all influences due
to issues, England has had the same difficulties to encounter as
before, which shows that the real question is concerned with the
two essential functions of banking—discount and deposit. Since
1844, there have been the commercial disturbances of 1847, 1857,
1866, and 1873. Although no expansion of notes, without a
corresponding deposit of specie, is possible.
§ 5. The Rate of Interest determines the price of land and of Securities.
Before quitting the general subject of this chapter, I will make the
obvious remark that the rate of interest determines the value and price of
all those salable articles which are desired and bought, not for
themselves, but for the income which they are capable of yielding. The
public funds, shares in joint-stock companies, and all descriptions of
securities, are at a high price in proportion as the rate of interest is
low. They are sold at the price which will give the market rate of
interest on the purchase-money, with allowance for all differences in the
risk incurred, or in any circumstance of convenience.
The price of land, mines, and all other fixed sources of income, depends
in like manner on the rate of interest. Land usually sells at a higher
price, in proportion to the income afforded by it, than the public funds,
not only because it is thought, even in [England], to be somewhat more
secure, but because ideas of power and dignity are associated with its
possession. But these differences are constant, or nearly so; and, in the
variations of price, land follows, _cæteris paribus_, the permanent
(though, of course, not the daily) variations of the rate of interest.
When interest is low, land will naturally be dear; when interest is high,
land will be cheap.
A lot of land, which fifty years ago gave an annual return of
$100, if ten per cent was then the common rate of interest, would
sell for $1,000. If the return from the land remains the same
($100) to-day, and if the usual rate of interest is now five per
cent, the same piece of land, therefore, would sell for $2,000,
since $100 is five per cent of $2,000.
The price of a bond, it may be said, also varies with the time it
has to run. At the same rate of interest, a bond running for a
long term of years is better for an investment than one for a
short term. The lumberman, who looks at two trees of _equal
diameter_ at the base, estimates the total value of each according
to the _height_ of the tree. Then, again, a bond running for a
short term may be worth less than one for a long term, even though
the first bears a higher rate of interest. That is, to resume the
illustration, one tree, not rising very high, although _larger_ at
the bottom, may not contain so many square feet as another, with
perhaps a _less_ diameter at the bottom, but which stretches much
higher up into the air.
Chapter XX. Of The Competition Of Different Countries In The Same Market.
§ 1. Causes which enable one Country to undersell another.
In the phraseology of the Mercantile System, there is no word of more
frequent recurrence or more perilous import than the word _underselling_.
To undersell other countries—not to be undersold by other countries—were
spoken of, and are still very often spoken of, almost as if they were the
sole purposes for which production and commodities exist.
Nations may, like individual dealers, be competitors, with
opposite interests, in the markets of some commodities, while in
others they are in the more fortunate relation of reciprocal
customers. The benefit of commerce does not consist, as it was
once thought to do, in the commodities sold; but, since the
commodities sold are the means of obtaining those which are
bought, a nation would be cut off from the real advantage of
commerce, the imports, if it could not induce other nations to
take any of its commodities in exchange; and in proportion as the
competition of other countries compels it to offer its commodities
on cheaper terms, on pain of not selling them at all, the imports
which it obtains by its foreign trade are procured at greater
cost.
One country (A) can only undersell another (B) in a given market, to the
extent of entirely expelling her from it, on two conditions: (1) In the
first place, she (A) must have a greater advantage than the second country
(B) in the production of the article exported by both; meaning by a
greater advantage (as has been already so fully explained) not absolutely,
but in comparison with other commodities; and (2) in the second place,
such must be her (A’s) relation with the customer-country in respect to
the demand for each other’s products, and such the consequent state of
international values, as to give away to the customer-country more than
the whole advantage possessed by the rival country (B); otherwise the
rival will still be able to hold her ground in the market.
Let us suppose a trade between England and the United States, in
iron and wheat. England being capable of producing ten cwts. of
iron at the same cost as fifteen bushels of wheat, the United
States at the same cost as twenty bushels, and the two commodities
being exchanged between the two countries (cost of carriage apart)
at some intermediate rate, say ten for seventeen. The United
States could not be permanently undersold in the English market,
and expelled from it, unless by a country (such as India) which
offered not merely more than seventeen, but more than twenty
bushels of wheat for ten cwts. of iron. Short of that, the
competition would only oblige the United States to pay dearer for
iron, but would not disable her from exporting wheat. The country,
therefore, which could undersell the United States, must, in the
first place, be able to produce wheat at less cost, compared with
iron, than the United States herself; and, in the next place, must
have such a demand for iron, or other English commodities, as
would compel her, even when she became sole occupant of the
market, to give a greater advantage to England than the United
States could give by resigning the whole of hers; to give, for
example, twenty-one bushels for ten cwts. For if not—if, for
example, the equation of international demand, after the United
States was excluded, gave a ratio of eighteen for ten—the United
States would be now the underselling nation; and there would be a
point, perhaps nineteen for ten, at which both countries would be
able to maintain their ground, and to sell in England enough wheat
to pay for the iron, or other English commodities, for which, on
these newly adjusted terms of interchange, they had a demand. In
like manner, England, as an exporter of iron, could only be driven
from the American market by some rival whose superior advantages
in the production of iron enabled her, and the intensity of whose
demand for American produce compelled her, to offer ten cwts. of
iron, not merely for less than seventeen bushels of wheat, but for
less than fifteen. In that case, England could no longer carry on
the trade without loss; but, in any case short of this, she would
merely be obliged to give to the United States more iron for less
wheat than she had previously given.(288)
It thus appears that the alarm of being permanently undersold may be taken
much too easily; may be taken when the thing really to be anticipated is
not the loss of the trade, but the minor inconvenience of carrying it on
at a diminished advantage; an inconvenience chiefly falling on the
consumers of foreign commodities, and not on the producers or sellers of
the exported article. It is no sufficient ground of apprehension to the
[American] producers, to find that some other country can sell [wheat] in
foreign markets, at some particular time, a trifle cheaper than they can
themselves afford to do in the existing state of prices in [the United
States]. Suppose them to be temporarily unsold, and their exports
diminished; the imports will exceed the exports, there will be a new
distribution of the precious metals, prices will fall, and, as all the
money expenses of the [American] producers will be diminished, they will
be able (if the case falls short of that stated in the preceding
paragraph) again to compete with their rivals.
The loss which [the United States] will incur will not fall upon the
exporters, but upon those who consume imported commodities; who, with
money incomes reduced in amount, will have to pay the same or even an
increased price for all things produced in foreign countries.
But the business world would regard what was going on under
economic laws as a great and dreaded disaster, if it meant that
prices were to fall, and gold leave the country. Those holding
large stocks of goods would for that time suffer; and so, at
first, it might really happen that “exporters,” in the sense of
exporting agents (not the producers, perhaps, of the exportable
article), would incur a loss. In the end, of course, the consumers
of imports suffer. But, temporarily, and on the face of it,
exporters do lose.
§ 2. High wages do not prevent one Country from underselling another.
According to the preceding doctrine, a country can not be undersold in any
commodity, unless the rival country has a stronger inducement than itself
for devoting its labor and capital to the production of the commodity;
arising from the fact that by doing so it occasions a greater saving of
labor and capital, to be shared between itself and its customers—a greater
increase of the aggregate produce of the world. The underselling,
therefore, though a loss to the undersold country, is an advantage to the
world at large; the substituted commerce being one which economizes more
of the labor and capital of mankind, and adds more to their collective
wealth, than the commerce superseded by it. The advantage, of course,
consists in being able to produce the commodity of better quality, or with
less labor (compared with other things); or perhaps not with less labor,
but in less time; with a less prolonged detention of the capital employed.
This may arise from greater natural advantages (such as soil, climate,
richness of mines); superior capability, either natural or acquired, in
the laborers; better division of labor, and better tools, or machinery.
But there is no place left in this theory for the case of lower wages.
This, however, in the theories commonly current, is a favorite cause of
underselling. We continually hear of the disadvantage under which the
[American] producer labors, both in foreign markets and even in his own,
through the lower wages paid by his foreign rivals. These lower wages, we
are told, enable, or are always on the point of enabling, them to sell at
lower prices, and to dislodge the [American] manufacturer from all markets
in which he is not artificially protected.
It will be remembered that, as we have before seen, international
trade, in actual practice, depends on comparative prices within
the same country (even though the exporter may not consciously
make a comparison). We send wheat abroad, because it is low in
price relatively to certain manufactured goods; that is, we send
the wheat, but we do not send the manufactured goods. But, so far,
this is considering only the comparative prices in the same
country. Yet we shall fail to realize in actual practice the
application of the above principles, when we use the terms prices
and money, if we do not admit that there is in the matter of
underselling a comparison, also, between the absolute price of the
goods in one country and the absolute price of the same goods in
the competing country. For example, wheat is not shipped to
England unless the price is lower here than there. If India or
Morocco were to send wheat into the English market in close
competition with the United States, and the price were to fall in
London, it would mean that, if we continued our shipments of wheat
to England, we must part with our wheat at a less advantage in the
international exchange. In the illustration already used, we must,
for example, offer more than seventeen bushels of wheat for ten
cwts. of iron. The fall in the price of wheat, without any change
in that of iron, implies the necessity of offering a greater
quantity of wheat for the same quantity of iron, perhaps nineteen
or twenty bushels for ten cwts. of iron. If the price went so low
as to require twenty-one bushels to pay for ten cwts. of iron,
then we should be entirely undersold; and the price here as
compared with the price in London would be an indication of the
fact. So that the comparison of prices here with prices abroad is
merely a register of the terms at which our international
exchanges are performed; but not the cause of the existence of the
international trade. If the price falls so low in a foreign market
that we can not sell wheat there, it simply means that we have
reached in the exchange ratios the limit of our comparative
advantages in wheat and iron; so that we are obliged to offer
twenty or more bushels of wheat for ten cwts. of iron.
But in all this it must be noted that this price must include the
return to capital also, and that it must be equal to the usual
reward for capital in other competing industries, that is, the
ordinary rate of profit. In exporting wheat from the United States
the capital engaged will insist on getting the rate of profit to
be found in other occupations to which the capital can go, in the
United States. Now, the price, if it stands for the value (which
is supposed to be governed by cost of production in this case), is
the sum out of which wages and profits are paid. If the price were
to fall in the foreign market, then there might not be the means
with which to pay the usual rate of wages and the usual rate of
profit also. Then we should probably hear of complaints by the
shippers that there is no profit in the exportation of wheat, and
of a falling off in the trade. In other words, as the capitalist
is the one who manages the operation, and is the one first
affected, the diminution of advantage in foreign trade arising
from competition, generally shows itself first in lessened
profits. The price, then, is the means by which we determine
whether a certain article gives us that comparative advantage
which will insure a gain from international trade.
An exportable article whose price in this country is low—since it
is for this reason selected as an export—is one whose cost is low.
If the cost be low, it means that the industry is very productive;
that the same capital and labor produce more for their exertion in
this than in other industries. And yet it is precisely in the most
productive industries that higher wages and profits can be, and
are, paid. Although each article is sold at a low price, the great
quantity produced makes the total sum, or value, out of which the
industrial rewards, profits, and wages, are paid, large. That is,
the price may be very low (lower, also, in direct comparison with
prices abroad) and yet pay the rate of wages and profits current
in this country. Consequently, although wages and profits may be
very high (relatively to older countries) in those industries of
the United States whose productiveness is great, yet the very fact
of this low cost, and consequently this low price (where
competition is effective), is that which fits the commodity for
exportation. We are, therefore, inevitably led to a position in
which we see that high wages and low prices naturally go together
in an exportable commodity. In practice, certainly, the high wages
do not, by raising the price, prevent us, by comparing our price
with English prices, from sending goods abroad—because we send
goods abroad from our most productive employments. As an
illustration of this principle, it is found that the leading
exports of the United States, in 1883, were cotton, breadstuffs,
provisions, tobacco, mineral oils, and wood.
But, since a direct comparison is in practice made between prices
here and prices in England (for example), in order to determine
whether the trade can be a profitable one, we constantly hear it
said that we can not send goods abroad because our labor is so
dear. It need scarcely be observed that we do not hear this from
those engaged in any of the extractive industries just mentioned
as furnishing large exports, which are admittedly very productive;
it is generally heard in regard to certain kinds of manufactured
goods. The difficulty arises not with regard to articles in which
we have the greatest advantage in productiveness, but those in
which we have a less advantage. If the majority of occupations are
so productive as to assure a generally high reward to labor and
capital throughout the country, these less advantageously situated
industries—not being so productive as others (either from lack of
skill or good management, or high cost of machinery and materials,
or peculiarities of climate, or heavy taxation)—can not pay the
usual high reward to labor, and at the same time get for the
capitalist the same high reward he can everywhere else receive at
home. For, at a price low enough to warrant an exportation, the
quantity made by a given amount of labor and capital does not
yield a total value so great as is given in the majority of other
occupations to the same amount of labor and capital, and out of
which the usual high wages and profits can be paid. The less
productiveness of an industry, compared with other industries in
the same country, then, is the real cause which prevents it from
competing with foreign countries consistently with receiving the
ordinary rate of profit. It is the high rate of profits as well as
the high rate of wages common in the country which prevents
selling abroad. It is absurd to say that it is only high wages: it
is just as much high profits. Of course, if the less productive
industries wish to compete with England, and if they pay—as we
know they must—the high rate of wages due to the general
productiveness of our country’s industries, they must submit to
less profits for the pleasure of having that particular desire. It
is not possible that we should produce everything equally well
here; nor is it possible that England should produce everything
equally well. If we wish to send any goods at all to England, we
must receive some goods from her. In order to get the gain arising
from our productiveness, we must earnestly wish that England
should have some commodity also in which she has a comparative
advantage, in order that any trade whatever may exist. It is not,
however, worth while, in my opinion, to go on in this discussion
to consider the position of those who would shut us off from any
and all foreign trade.
Our present high wages should be a cause for congratulation,
because they are due to the generally high productiveness of our
resources, or, in other words, due to low cost; and it is to be
hoped that they may long continue high. We do not seem to be in
imminent danger of not having goods which we can export in
quantities which will buy for us all we may wish to import from
abroad. (See Chart No. XIII, and note the vast increase of exports
at the same time that wages are known to be higher in this country
than abroad.) So long as wages continue high, we may possibly be
unwilling to see gratified that false and ignorant desire which
leads some people to think that we ought to produce, equally well
with any competitor in the world, everything that is made. If, as
was pointed out under the discussion on cost of labor,(289) we
must necessarily connect with efficiency of labor all natural
advantages under which labor works, it is easy to see that high
wages are entirely consistent with low prices; and that high wages
do not prevent us to-day from having an hitherto unequaled export
trade. Even if all wages and all profits were lower, it would,
however, affect all industries alike, and some would still be more
productive relatively to others, and the same inequality would
remain. If, however, we learn to use our materials better, use
machinery with more effect on the quantity produced, adapt our
industries to our climate, get the raw products more cheaply, free
ourselves from excessive and unreasonable taxation, it would be
difficult to say what commodities we might not be able eventually
to manufacture in competition with the rest of the world. For we
have scarcely ever, as a country, had the advantage of such
conditions to aid us in our foreign trade.
Mr. Mill now goes on to consider the suggestive fact that wages
are higher in England than on the Continent, and yet that the
English have no difficulty in underselling their Continental
rivals.
Before examining this opinion on grounds of principle, it is worth while
to bestow a moment’s consideration upon it as a question of fact. Is it
true that the wages of manufacturing labor are lower in foreign countries
than in England, in any sense in which low wages are an advantage to the
capitalist? The artisan of Ghent or Lyons may earn less wages in a day,
but does he not do less work? Degrees of efficiency considered, does his
labor cost less to his employer? Though wages may be lower on the
Continent, is not the Cost of Labor, which is the real element in the
competition, very nearly the same? That it is so seems the opinion of
competent judges, and is confirmed by the very little difference in the
rate of profit between England and the Continental countries. But, if so,
the opinion is absurd that English producers can be undersold by their
Continental rivals from this cause. It is only in America that the
supposition is _prima facie_ admissible. In America wages are much higher
than in England, if we mean by wages the daily earnings of a laborer; but
the productive power of American labor is so great—its efficiency,
combined with the favorable circumstances in which it is exerted, makes it
worth so much to the purchaser—that the Cost of Labor is lower in America
than in England; as is proved by the fact that the general rate of profits
and of interest is very much higher.
§ 3. Low wages enable a Country to undersell another, when Peculiar to
certain branches of Industry.
But is it true that low wages, even in the sense of low Cost of Labor,
enable a country to sell cheaper in the foreign market? I mean, of course,
low wages which are common to the whole productive industry of the
country.
If wages, in any of the departments of industry which supply exports, are
kept, artificially or by some accidental cause, below the general rate of
wages in the country, this is a real advantage in the foreign market. It
lessens the _comparative_ cost of production of those articles in relation
to others, and has the same effect as if their production required so much
less labor. Take, for instance, the case of the United States in respect
to certain commodities. In that country tobacco and cotton, two great
articles of export, are produced by slave-labor, while food and
manufactures generally are produced by free laborers, who either work on
their own account or are paid by wages. In spite of the inferior
efficiency of slave-labor, there can be no reasonable doubt that, in a
country where the wages of free labor are so high, the work executed by
slaves is a better bargain to the capitalist. To whatever extent it is so,
this smaller cost of labor, being not general, but limited to those
employments, is just as much a cause of cheapness in the products, both in
the home and in the foreign market, as if they had been made by a less
quantity of labor. If the slaves in the Southern States were emancipated,
and their wages rose to the general level of the earnings of free labor in
America, that country might be obliged to erase some of the slave-grown
articles from the catalogue of its exports, and would certainly be unable
to sell any of them in the foreign market at the present price. Their
cheapness is partly an artificial cheapness, which may be compared to that
produced by a bounty on production or on exportation; or, considering the
means by which it is obtained, an apter comparison would be with the
cheapness of stolen goods.
[Illustration: Chart XV.]
Chart XV.
How far Mr. Mill was in error may be seen by Chart No. XV, which
shows the enormous increase of cotton production under the
_regime_ of free labor as compared with that of slave-labor in the
United States. The abolition of slavery has been an economic gain
to the South. Moreover, the exports of raw cotton have increased
from 644,327,921 pounds in 1869, to 2,288,075,062 pounds in 1883;
while for corresponding years the exports of tobacco increased
from 181,527,630 to 235,628,360 pounds. In other words, exports of
tobacco were increased by 30 per cent, and those of raw cotton by
no less than 255 per cent. Besides, the prices of cotton and
tobacco are no higher now than before 1850.
An advantage of a similar economical, though of a very different moral
character, is that possessed by domestic manufactures; fabrics produced in
the leisure hours of families partially occupied in other pursuits, who,
not depending for subsistence on the produce of the manufacture, can
afford to sell it at any price, however low, for which they think it worth
while to take the trouble of producing. The workman of Zurich is to-day a
manufacturer, to-morrow again an agriculturist, and changes his
occupations with the seasons in a continual round. Manufacturing industry
and tillage advance hand in hand, in inseparable alliance, and in this
union of the two occupations the secret may be found why the simple and
unlearned Swiss manufacturer can always go on competing and increasing in
prosperity in the face of those extensive establishments fitted out with
great economic and (what is still more important) intellectual resources.
In the case of these domestic manufactures, the comparative cost of
production, on which the interchange between countries depends, is much
lower than in proportion to the quantity of labor employed. The
work-people, looking to the earnings of their loom for a part only, if for
any part, of their actual maintenance, can afford to work for a less
remuneration than the lowest rate of wages which can permanently exist in
the employments by which the laborer has to support the whole expense of a
family. Working, as they do, not for an employer but for themselves, they
may be said to carry on the manufacture at no cost at all, except the
small expense of a loom and of the material; and the limit of possible
cheapness is not the necessity of living by their trade, but that of
earning enough by the work to make that social employment of their leisure
hours not disagreeable.
§ 4. —But not when common to All.
These two cases, of slave-labor and of domestic manufactures, exemplify
the conditions under which low wages enable a country to sell its
commodities cheaper in foreign markets, and consequently to undersell its
rivals, or to avoid being undersold by them. But no such advantage is
conferred by low wages when common to all branches of industry. General
low wages never caused any country to undersell its rivals, nor did
general high wages ever hinder it from doing so.
To demonstrate this, we must turn to an elementary principle which was
discussed in a former chapter.(290) General low wages do not cause low
prices, nor high wages high prices, within the country itself. General
prices are not raised by a rise of wages, any more than they would be
raised by an increase of the quantity of labor required in all production.
Expenses which affect all commodities equally have no influence on prices.
If the maker of broadcloth or cutlery, and nobody else, had to pay higher
wages, the price of his commodity would rise, just as it would if he had
to employ more labor; because otherwise he would gain less profit than
other producers, and nobody would engage in the employment. But if
everybody has to pay higher wages, or everybody to employ more labor, the
loss must be submitted to; as it affects everybody alike, no one can hope
to get rid of it by a change of employment; each, therefore, resigns
himself to a diminution of profits, and prices remain as they were. In
like manner, general low wages, or a general increase in the
productiveness of labor, does not make prices low, but profits high. If
wages fall (meaning here by wages the cost of labor), why, on that
account, should the producer lower his price? He will be forced, it may be
said, by the competition of other capitalists who will crowd into his
employment. But other capitalists are also paying lower wages, and by
entering into competition with him they would gain nothing but what they
are gaining already. The rate, then, at which labor is paid, as well as
the quantity of it which is employed, affects neither the value nor the
price of the commodity produced, except in so far as it is peculiar to
that commodity, and not common to commodities generally.
However, without there being any change in the productiveness of
any industry, if the price of the article should rise, for
instance, from an increased demand, that would make the total
value arising from the products of the industry larger in its
purchasing power, and so there would be a larger sum to be divided
among labor and capital. If there be free competition, more
capital would move into this one industry under the hope of larger
profits, and so wages would rise. Therefore, it is possible that
high wages and high prices may go together, but not as cause and
effect. In fact, the change in price generally precedes the change
in wages. On the other hand, while low wages are not the cause of
low prices nor high wages of high prices, yet the two may be found
together, as both due to a common cause, viz., the small or great
value of the total product.(291)
Since low wages are not a cause of low prices in the country itself, so
neither do they cause it to offer its commodities in foreign markets at a
lower price. It is quite true that, if the cost of labor is lower in
America than in England, America could sell her cottons to Cuba at a lower
price than England, and still gain as high a profit as the English
manufacturer. But it is not with the profit of the English manufacturer
that the American cotton-spinner will make his comparison; it is with the
profits of other American capitalists. These enjoy, in common with
himself, the benefit of a low cost of labor, and have accordingly a high
rate of profit. This high profit the cotton-spinner must also have: he
will not content himself with the English profit. It is true he may go on
for a time at that lower rate, rather than change his employment; and a
trade may be carried on, sometimes for a long period, at a much lower
profit than that for which it would have been originally engaged in.
Countries which have a low cost of labor and high profits do not for that
reason undersell others, but they do oppose a more obstinate resistance to
being undersold, because the producers can often submit to a diminution of
profit without being unable to live, and even to thrive, by their
business. But this is all which their advantage does for them; and in this
resistance they will not long persevere when a change of times which may
give them equal profits with the rest of their countrymen has become
manifestly hopeless.
§ 5. Low profits as affecting the carrying Trade.
It is worth while also to notice a third class of small, but in this case
mostly independent communities, which have supported and enriched
themselves almost without any productions of their own (except ships and
marine equipments), by a mere carrying-trade, and commerce of entrepot; by
buying the produce of one country, to sell it at a profit in another. Such
were Venice and the Hanse Towns.
When the Venetians became the agents of the general commerce of Southern
Europe, they had scarcely any competitors: the thing would not have been
done at all without them, and there was really no limit to their profits
except the limit to what the ignorant feudal nobility could and would give
for the unknown luxuries then first presented to their sight. At a later
period competition arose, and the profit of this operation, like that of
others, became amenable to natural laws. The carrying-trade was taken up
by Holland, a country with productions of its own and a large accumulated
capital. The other nations of Europe also had now capital to spare, and
were capable of conducting their foreign trade for themselves: but
Holland, having, from the variety of circumstances, a lower rate of profit
at home, could afford to carry for other countries at a smaller advance on
the original cost of the goods than would have been required by their own
capitalists; and Holland, therefore, engrossed the greatest part of the
carrying-trade of all those countries which did not keep it to themselves
by navigation laws,(292) constructed, like those of England, for the express purpose. |
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