Political economy Part 7

CHAPTER XIV.

CREDIT CYCLES.

#87. Industry is Periodic#. Everybody ought to understand that trade varies in activity, from time to time, in a periodic manner. #A thing is said to vary periodically, when it comes and goes at nearly equal intervals# like the sun, or rises and falls like the tides. Now, in industry, as Mr. William Langton pointed out twenty years ago, there are tides almost as regular as those of the sea. Shakespeare says truly-- "There is a tide in the affairs of men, Which, taken at the flood, leads on to fortune."

Some of these tides depend upon the seasons of the year; business is more active in the spring and summer, and falls off in winter. It is comparatively easy to borrow money in January, February, March, June, July, August, and September; October and November are particularly bad months; the rate of interest then often runs up rapidly, and the bankruptcies in these months are more numerous than at any other time of year. April and May are also dangerous months, but in a less degree. Men of business should always bear these facts in mind, and, by being prepared beforehand, they may escape disaster.

There is also a much longer kind of tide in business, which usually takes somewhere about ten years to rise and fall. The cause of this tide is not well understood, but there can be no doubt that in some years men become confident and hopeful. They think that the country is going to be very prosperous, and that if they invest their capital in new factories, banks, railways, ships, or other enterprises, they will make much profit. When some people are thus hopeful, others readily become so too, just as a few cheerful people in a party make everybody cheerful.

Thus the hopefulness gradually spreads itself through all the trades of the country. Clever men then propose schemes for new inventions and novel undertakings, and they find that they can readily get capitalists to subscribe for shares. This encourages other speculators to put forth proposals, and when the shares of some companies have risen in value, it is supposed that other shares will do so likewise. The most absurd schemes find supporters in a time of great hopefulness, and there thus arises what is called a bubble or mania.

#88. Commercial Bubbles or Manias.# When the schemes started during a bubble begin to be carried out, great quant.i.ties of materials are required for building, and the prices of these materials rise rapidly.

The workpeople who produce these materials then earn high wages, and they spend these wages in better living, in pleasure, or in buying an unusual quant.i.ty of new clothes, furniture, &c. Thus the demand for commodities increases, and tradespeople make large profits. Even when there is no sufficient reason, the prices of the remaining commodities usually rise, as it is called, #by sympathy#, because those who deal in them think their goods will probably rise like other goods, and they buy up stocks in the hope of making profits. Every trader now wants to buy, because he believes that prices will rise higher and higher, and that, by selling at the right time, the loss of any subsequent fall of prices will be thrown upon other people.

This state of things, however, cannot go on very long. Those who have subscribed for shares in new companies have to pay up the calls, that is, find the capital which they promised. They are obliged to draw out the money which they had formerly deposited in banks, and then the bankers have less to lend. Manufacturers, merchants, and speculators, who are making or buying large stocks of goods, wish to borrow more and more money, in order that they may have a larger business, the profit seeming likely to be so great. Then according to the laws of supply and demand, the price of money rises, which means that the rate of interest for short loans, from a week to three or six months in duration, is increased. The bubble goes on growing, until the more venturesome and unscrupulous speculators have borrowed many times as much money as they themselves really possess. #Credit is said to be greatly extended#, and a firm, which perhaps owns a capital worth ten thousand pounds, will have undertaken to pay two or three hundred thousand pounds, for the goods which they have bought on speculation.

But the sudden rise which, sooner or later, occurs in the rate of interest, is very disastrous to such speculators; when they began to speculate interest was, perhaps, only two or three per cent.; but when it becomes seven or eight per cent., there is fear that much of the profit will go in interest paid to the lenders of capital. Moreover, those who lent the money, by discounting the speculators' bills, or making advances on the security of goods, become anxious to have it paid back. Thus the speculators are forced at last to begin selling their stocks, at the best prices they can get. As soon as some people begin to sell in this way, others who hold goods think they had better sell before the prices fall seriously; then there arises a sudden rush to sell, and buyers being alarmed, refuse to buy except at much reduced rates. The bad speculators now find themselves unable to maintain their credit, because, if they sell their large stocks at a considerable loss, their own real capital will be quite insufficient to cover this loss. They are thus unable to pay what they have engaged to pay, and #stop payment#, or, in other words, become bankrupt. This is very awkward for other people, manufacturers, for instance, who had sold goods to the bankrupts on credit; they do not receive the money they expected, and as they also perhaps have borrowed money while making the goods, they become bankrupt likewise. Thus the #discredit# spreads, and firms even which had borrowed only moderate sums of money, in proportion to their capital, are in danger of failing.

#89. Commercial Crisis or Collapse.# The state of things described in the last section is called a commercial collapse, because there is #a sudden falling in of prices, credit, and enterprise#. It is also called #a Crisis, that is, a dangerous and decisive moment# (Greek, krino, _to decide_), when it will soon be seen who is to become bankrupt, and who not. No sooner has such a crisis arrived, than everything changes. No one ventures to propose a new scheme, or a new company, because he knows that people in general have great difficulty in paying up what they promised to the schemes started during the bubble. #This bubble is now burst#, and it is found that many of the new works and undertakings from which people expected so much profit, are absurd and hopeless mistakes. It was proposed to make railways where there was nothing to carry; to sink mines where there was no coal nor metal; to build ships which would not sail; all kinds of impracticable schemes have to be given up, and the capital spent upon them is lost.

Not only does this collapse ruin many of the subscribers to these schemes, but it presently causes workpeople to be thrown out of employment. The more successful schemes indeed are carried out, and, for a year or two, give employment to builders, iron-manufacturers, and others, who furnish the materials. But as these schemes are completed by degrees, no one ventures to propose new ones; people have been frightened by the losses and bankruptcies and frauds brought to light in the collapse, and when some people are afraid, others readily become frightened likewise by sympathy. In matters of this kind men of business are much like a flock of sheep which follow each other without any clear idea why they do so. In a year or two the prices of iron, coal, timber, &c., are reduced to the lowest point; great losses are suffered by those who make or deal in such materials, and many workmen are out of employment. The working cla.s.ses then have less to spend on luxuries, and the demand for other goods decreases; trade in general becomes depressed; many people find themselves paupers, or spend their savings acc.u.mulated during previous years. Such a #state of depression# may continue for two or three years, until speculators have begun to forget their failures, or a new set of younger men, unacquainted with disaster, think they see a way to make profits. During such a period of depression, too, the richer people who have more income than they spend, save it up in the banks. Business men as they sell off their stocks of goods leave the money received in the banks; thus by degrees capital becomes abundant, and the rate of interest falls. After a time bankers, who were so very cautious at the time of the collapse, find it necessary to lend their increasing funds, and credit is improved. Then begins a new credit cycle, which probably goes through much the same course as the previous one.

#90. Commercial Crises are Periodic.# It would be a very useful thing if we were able to foretell when a bubble or a crisis was coming, but it is evidently impossible to predict such matters with certainty. All kinds of events--wars, revolutions, new discoveries, treaties of commerce, bad or good harvests, &c.--may occur to decrease or increase the activity of trade. Nevertheless, #it is wonderful how often a great commercial crisis has happened about ten years after the previous one#. During the last century, when trade was so different from what it now is, there were crises in or near the years 1753, 1763, 1772 or '3, 1783, and 1793.

In this century there have been crises in the years 1815, 1825, 1836-9, 1847, 1857, 1866, and there would probably have been a crisis in 1876 or 1877 had it not been for an exceptional collapse in America in 1873.

There is at present (February, 1878) the great depression of trade which marks the completion of one cycle and the commencement of a new one.

Good vintage years on the continent of Europe, and droughts in India, recur every ten or eleven years, and it seems probable that commercial crises are connected with a periodic variation of weather, affecting all parts of the earth, and probably arising from increased waves of heat received from the sun at average intervals of ten years and a fraction.

A greater supply of heat increases the harvests, makes capital more abundant and trade more successful, and thus helps to create the hopefulness out of which a bubble arises. A falling off in the sun's heat makes bad harvests and deranges many enterprises in different parts of the world. This is likely to break the bubble and bring on a commercial collapse.

Generally, #a credit cycle#, as Mr. John Mills of Manchester has called it, will last #about ten years#. The first three years will witness depressed trade, with want of employment, falling prices, low rate of interest, and much poverty; then there will be perhaps three years of active, healthy trade, with moderately-rising prices, a reasonable rate of interest, fair employment, and improving credit; then come some years of unduly-excited trade, turning into a bubble or mania, and ending in a collapse, as already described. This collapse will occupy the last of the ten years, so that the whole credit cycle will, on the average, be as follows:--

--------------------------------------------------------------- YEARS. --------------------------------------------------------------- 1 2 3 4 5 6 7 8 9 10 ----------- ----------- --------- ----------- -------------- DEPRESSED HEALTHY EXCITED _Bubble._ _Collapse._ TRADE. TRADE. TRADE. ----------- ----------- --------- ----------- --------------

#It is not to be supposed that things go as regularly as is here stated;# sometimes the cycle lasts only nine, or even eight years, instead of ten; minor bubbles and crises sometimes happen in the course of the cycle, and disturb its regularity. Nevertheless, it is wonderful how often the great collapse comes at the end of the cycle, in spite of war or peace or other interfering causes.

91. #How to avoid Loss by Crises.# Now, these bubbles and crises are very disastrous things; they lead to the ruin of many people, and there are few old families who have not lost money at one collapse or another.

The working-cla.s.ses are often much injured; many are thrown out of employment, and others, not seeing why their wages should be reduced, make things worse by strikes, which, after a collapse, cannot possibly succeed. It is most important, therefore, that all people--working-people, capitalists, speculators, and all connected with any kind of business--should remember that #very prosperous trade is sure to be followed by a collapse and by bad trade#. When, therefore, things look particularly promising, investors should be unusually careful into what undertakings they put their money. #As a general rule, it is foolish to do just what other people are doing, because there are almost sure to be too many people doing the same thing.# If, for instance, the price of coal rises high, and coal-owners make large profits, there are certain to be many people sinking new mines. Such a time is just the worst one for buying shares in a coal-mine, because, in the course of a few years, there will be a mult.i.tude of new mines opened, the next collapse of trade will decrease the demand for coal, and then there will be great losses in the coal business. This is what has happened in the last few years in England, and the same thing has happened over and over again in other trades. As a general rule, #the best time to begin a new factory, mine, or business of any kind, is when the trade is depressed, and when wages and interest are low#. Mining, building, or other work can then be done more cheaply than at other times, and the new works will be ready to start just when business is becoming active and there are few other new works opening.

This rule, indeed, does not apply to the schemers, speculators, or #promoters#, as they are called, who start so many companies. These people make it their business to have new schemes and shares to offer just when people are in a mind to buy, that is, during a bubble or time of excited trade. They take care to sell their own shares before the collapse comes, and it is their dupes who bear all the loss. A prudent man, therefore, would never invest in any new thing during a mania or bubble; on the contrary, he would sell all property of a doubtful or speculative value, when its price is high, and invest it in the very best shares or government funds, of which the value cannot fall much during the coming collapse. The wisest men have been deluded during manias; and in the Library of the Royal Society is shown a letter from Sir Isaac Newton requesting a friend to buy shares for him in the South Sea Company, just at the moment when the South Sea Bubble was at its worst. Let people take warning by Sir Isaac Newton, and never speculate in a thing because other people are doing the same; then these bubbles and collapses will be prevented, or will become much less disastrous.

Credit cycles will go on until the public learn to look out for them, and act accordingly. Business men must become bold during depressed trade, careful during excited trade, instead of acting exactly in the opposite way. It is only a knowledge of these credit cycles which can prevent them, and this is the reason why I have said so much about them in this Primer.

CHAPTER XV.

THE FUNCTIONS OF GOVERNMENT.

92. Functions mean performances (Latin, _fungi_, _functus_, to perform), and the functions of government mean those things which a government ought to do,--the duties which it undertakes to perform, or the services which it may be expected to render to the people governed. These functions are commonly divided into two cla.s.ses--

(1) The necessary functions.

(2) The optional functions.

The #necessary functions# of a government are such as it is obliged to undertake; thus it must defend the nation against foreign enemies, it must keep the peace within the country, and prevent insurrections which might threaten the existence of the government itself; it must also punish evildoers who break the laws, and try to become rich by robbery; it must also maintain law courts in which the disputes of its subjects can be fairly decided, and set at rest. These are far from being all the necessary functions.

The #optional functions# of government consist of those kinds of work which a government can execute with advantage, such as providing a good currency, establishing a uniform system of weights and measures, constructing and maintaining the roads, carrying letters through a national post office, keeping up a national observatory and a meteorological office, &c. The optional functions are in fact very numerous, and there is hardly any end to the things which one government or another has provided for the people. It would be a most important work, if it were possible, to decide exactly what undertakings a government should take upon itself, and what it should leave to the free action of other people; but it is impossible to lay down any precise rules upon this subject. The characters and habits and circ.u.mstances of nations differ so much, that what is good in one case might be bad in another. Thus in Russia the government makes all the railways, and the same is the case in the Australian States; but it does not at all follow that, because this is necessary or desirable in those countries, therefore it is desirable in England, or Ireland, or the United States.

Experience shows that though the English Post Office is very profitable, the Postal Telegraphs cannot at present be made to pay. There can be no doubt that #it would be altogether ruinous to put the enormous system of English railways under the management of government officers#. Each case has thus to be judged upon its own merits, and all that the political economist can do is to point out the general advantages and disadvantages of government management.

#93. The Advantage of Government Management.# There is often immense economy in having a single establishment to do a certain kind of work for the whole country. For instance, a weather office in London can get daily telegraphic reports of the weather in all parts of the kingdom and many parts of Europe; combining and comparing these reports it can form a much better opinion about the coming weather than would be possible to private persons, and this opinion can be rapidly made known by the telegraph and newspapers. The few thousand pounds spent by the government yearly on the meteorological office are inconsiderable compared with the services which it may render to the public by preventing shipwrecks, colliery explosions, and other great disasters and inconveniences which often arise from our ignorance of the coming weather. It is certainly proper then to make meteorological observation one of the functions of government.

Great economy would arise, again, if an establishment like the post-office were created in Great Britain in order to convey small goods and parcels. At present there are a great number of parcel companies, but they often send a cart a long way to deliver a single parcel. In London some half a dozen independent companies send carts all over the immense town; each of the chief railway companies has its own system of delivering parcels, and the larger shops have their own delivery vans as well. Thus there is an enormous loss of horse power and men's time. If a government postal system undertook the work, only one cart would deliver goods in each street, and as there might be a parcel for almost every house, or sometimes several, there would be an almost incredible saving in the distance travelled and the time taken up. This ill.u.s.trates the economy which may arise from government management.

#94. The Disadvantage of Government Management.# On the other hand there is great evil in the government undertaking any work which can be fairly done by private persons or companies. Officers of the government are seldom dismissed when once employed, or, if turned away, they receive pensions. Thus when the government establishes any new work, it cannot stop it without great expense, and the work is usually carried on whether it is done economically or not. Then again, government officers, knowing that they will not be dismissed without a pension, are commonly less active and careful than men in private employment. For the work which they do they are paid at a higher rate than in private establishments.

It is therefore very undesirable that the Government should take any kind of work into its own hands, unless it is perfectly clear that the work will be done much better, and more cheaply than private persons could do it. There is a balance of advantages and disadvantages to be considered: the advantage of a single great establishment with plenty of funds; and the disadvantage that work is always done more expensively by Government. In the case of the post-office, the advantages greatly outweigh the disadvantages; the same would probably be the case with a well-arranged parcel post; in the postal telegraphs, there are many advantages, but they are obtained at a considerable loss of revenue. If the state were to buy up and manage the railways of Great Britain, the advantages would be comparatively small, but the losses would be enormous. In America the express or parcel companies are so admirably managed that they do the work more safely and better than the Government post office. There can be little doubt, too, that the American railways and telegraphs are far better managed now than they would be if acquired by the Federal Government.

CHAPTER XVI.

TAXATION.

#95. There must be Taxes.# Whether governments undertake more or less functions, it is certain that we must have some kind of government, and that this government will spend a great deal of money. This money, too, can very seldom be obtained in the form of real profit on the work done, so that it must be raised by taxation. We generally apply the name tax to any payment required from individuals towards the expenses of the local or general government. We may easily indeed be taxed without being aware of it; thus, nearly the half of every penny paid for posting a letter is a tax, and a town may be taxed through the price of gas or water.

At one time or another, and in one country or another, taxes have been raised in every imaginable way. The #Poll Tax# was a payment required from every poll or head of the population, man, woman, or child. This was considered a very grievous tax and has never been levied in England since the reign of William III. The #Hearth Tax# consisted of a payment for each hearth in a house; then a rich family with a large house and many hearths paid far more than a poor family with only one or two hearths. But as people did not like the tax-gatherer coming into the house to count the hearths, the window tax was subst.i.tuted, because the tax-gatherer could walk round the outside of the house, and count the windows. Now, in England, we do not tax the light of heaven at all, but we fix a man's payments by the rent of his house, the amount of his income, or the quant.i.ty of wine and beer he drinks.

#96. Direct and Indirect Taxes.# Taxes are called #direct taxes# when the payment is made by the person who is intended to bear the sacrifice.

This is the case generally with the a.s.sessed taxes, or the charges made upon people who have menservants, private carriages, &c. As most people keep carriages only for their own comfort, they cannot make other people repay the cost of the tax. But if a carrier or tradesman were taxed for his carts, he would be sure to make his customers repay it; thus the tax would not be direct, and carriages employed in trade are therefore exempt from taxation. Other taxes in England, which are generally direct ones, are the income-tax, the dog-tax, the poor-rates, the house-duty; but a tax which is usually direct, may sometimes become indirect, and it is often impossible to say what is really #the incidence of a tax#, that is, the manner in which it falls upon different cla.s.ses of the population.

#Indirect taxes# are paid in the first place by merchants and tradesmen, but it is understood that they recover the amount paid from their customers. The princ.i.p.al part of such taxes in England consist of the #customs duties# levied upon wine, spirits, tobacco, and a few other articles, when they are imported for use in this country. #Excise duties# are similar duties levied upon like goods produced within the kingdom. These were called #excise#, because it was originally the practice actually to cut off a portion of the goods themselves, and take it as the duty. In England, excise duties are now levied on a few things only, such as spirits and beer; and care is taken to make the excise duty as nearly as possible equal to the customs duty on the same kind of imported goods. English brandy pays a duty equivalent to that on French brandy, and the matter is arranged so that the duty shall neither encourage nor discourage the making of English brandy. Thus the trade is left as free as it can be, consistently with raising a large revenue.

Another important cla.s.s of indirect taxes consist of #the stamp duties#, which are payments required from people when they make legal agreements of various kinds. According to law, deeds, leases, cheques, receipts, contracts, and many other doc.u.ments are not legally valid unless they be stamped, and the cost of the stamp varies from a penny up to hundreds or even thousands of pounds, according to the value of the property dealt with. Stamp duties are probably in most cases indirect taxes, but it would be very difficult to say who really bears the cost; this must depend much upon circ.u.mstances.

#97. Maxims of Taxation.# Adam Smith first stated certain rules, or maxims, which should guide the statesman in laying on taxes; they are such good rules that everybody who studies political economy ought to learn them. They are as follows--

(1) The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.

This we may call the #maxim of equality#, and equality consists in everybody paying, in one way or another, about an equal percentage of the wages, salary, or other income which he receives. In England the taxes amount to something like ten per cent., or one pound in every ten pounds, and this is pretty equally borne by different cla.s.ses of society. It is probable, however, that the very rich do not pay as much as they ought to do. At the same time those who are too poor to pay income tax, and who do not drink nor smoke, are almost entirely free from taxation in this country; they pay very little, except poor rates.

It would be impossible to invent any one tax which could be equally levied upon all persons. The income tax is a tax of so many pence in every pound of a person's income, but it is impossible to make people state their income exactly, and poor people could never be got to pay such a tax. Hence it is necessary to put on a certain number of different taxes so that those who manage to escape one tax shall be made to pay in some other way.

(2) The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quant.i.ty to be paid, ought all to be clear and plain. This is the #maxim of certainty#, and it is very important, because, if a tax is not certainly known, the tax-gatherers can oppress people, requiring more or less as they choose. In this case it is very probable that they will become corrupt, and will receive bribes to induce them to lower the tax.

On this account duties ought never to be levied according to the value of goods, or _ad valorem_, as it is said. Wine, for instance, varies in value immensely according to its quality and reputation, but it is impossible for the custom-house officer to say exactly what this value is. If he takes the statement of the people who import the wine, they will be tempted to tell lies, and say that the value is less than it really is. And as it would not be easy to prove the guilt either of the customs officer or of the importers, it is to be feared that some officers will receive bribes. But if the wine is taxed simply according to its quant.i.ty, the amount of duty is known with great certainty, and fraud can easily be detected. The same remarks apply more or less to every kind of goods which varies much in quality.

(3) Every tax ought to be levied at the time, and in the manner, in which it is most likely to be convenient for the contributor to pay it.

This is #the maxim of convenience#, and the reason for it is sufficiently obvious. As government only exists for the good of the people at large, of course it ought to give the people as little trouble as possible. And as the Government has immensely more money at its command than any private person, it ought to arrange so as to demand a tax when the taxpayer is likely to be able to pay it. Thus there seems to be no sufficient reason why the government should make people pay the income-tax in January, when they are likely to have plenty of other bills to pay. In respect of this maxim, the customs and excise duties are very good taxes, because a person pays duty whenever he buys a bottle of spirits or an ounce of tobacco. If he does not want to pay taxes, let him leave off drinking and smoking, which will probably be better for him in every way. At any rate, if he can afford to drink spirits and smoke tobacco, he can afford something for the expenses of government. The penny receipt duty, again, is in this respect a good tax, because when a person is receiving money he is sure to be able to spare one penny for the State, and he is generally so glad to get his money that he thinks nothing of the penny.

(4) Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury. This is the #maxim of economy#. Thus, a tax ought not to be imposed if it would require a great many officers to collect it, and thus waste much of what is collected, or if it disturbs trade and makes things dearer than they would otherwise be. Again, the government ought not to cause people to lose time and money in paying the taxes, because this is just as bad for them as if they paid so much more taxes. In this respect the stamp-duties are very bad taxes, because in many cases it is requisite for a person to take his deeds and other doc.u.ments to the stamp-office and lose his time, or else employ lawyers and agents to do it for him, who charge considerable fees. So troublesome are some of the stamp-duties that in many cases people neglect to have their agreements stamped, and prefer to trust to the honesty of those they deal with.