The Principles of Economics Part 10

[Sidenote: Increasing some rent-bearers reduces the rents of others]

5. _The betterment of the environment of society in some directions reduces the rent of other parts._ The wish of the individual is to raise his own rent-bearers in efficiency, but in doing that he affects the agents owned and controlled by others. The ideal from a social standpoint is to increase not rent but the welfare of society, and this is not always the ideal of individuals seeking their own interest.

However, as the efficiency of some agents rises, it becomes unnecessary and unprofitable to use the less fertile fields; they cease to be rent-bearers, and the rent of the richer fields falls under the influence of the new supply of products. Some inventions suddenly increase the efficiency of free goods to such a degree that the less efficient rented agents are thrown out of use, and the margin of utilization is moved to a higher plane than it was on before. Improved types of machinery more or less rapidly displace the older, less efficient types, which, therefore, more or less completely lose their rent-bearing power long before they are physically worn out. When improvements in agriculture that are applicable to a considerable area of land take place, and the product thus is increased and cheapened, the poorer land is abandoned. Inventions and improvements thus gradually becoming common property, increase the free goods and free uses not bearing rent and open to every one. One who improves the quality of a machine or the economy of a process may thus unintentionally injure some of the owners of low-rent agents, while unintentionally increasing the welfare of the ma.s.s of men for whom the margin of utilization is thus lifted.

-- II. EFFECTS OF SOCIAL CHANGES IN RAISING THE RENTS OF INDIRECT AGENTS

[Sidenote: Effect of decrease of the competing agents]

1. _Changes in the number and kind of competing resources may raise the rents of particular agents._ Rents may increase without increase in the quant.i.ty or number of a particular group of agents or without change in their technical efficiency. As changes in the conditions of society may reduce rents, so other changes may increase them. Agents of the same kind may diminish in number, either absolutely or relatively. If some of the competing machines are destroyed, the rents of the machines that remain rise, while if new supplies are found, either in nature or by improved industrial processes, the rents of the older agents fall.

[Sidenote: Effect of new uses for agents]

2. _The discovery of new uses for agents or for their products raises their rents._ Farm land of the poorest kind often is found to contain valuable mineral deposits. Such a lucky find has lifted the mortgage from a farm in eastern Pennsylvania, from which, in two or three years, has been taken feldspar exceeding in value the agricultural products of the same land in the last fifty years. The discovery of building stone, coal, natural gas, or oil land may make the annual rent (or royalty) of land tenfold its former total value. Fitness to produce nettles is not ordinarily a virtue in land, but the discovery that certain fields produce a superior quality of the nettle used for heckling cloth, causes them to take on a new value. A mineral spring, because of the supposed or proved healing properties of its waters, may be as good as a mine to the owner. Peculiar fitness for the cultivation of celery may convert marsh land into a substantial source of income.

Social changes are constantly causing agents to shift from lower to higher uses. As population grows and groups about new industries, farm land is used for residence lots, and in turn for business purposes.

Rents therefore rise, and this rise is reflected in the higher selling value of the land. If a new demand arises for the product of any machine, its rent rises, although it may continue to turn out the same product as measured by number or quant.i.ty. For, if consumers increase, a given supply of agents becomes relatively smaller than before.

[Sidenote: Sudden variations in demand]

3. _A rise in rents due to social changes may be relatively permanent or temporary._ Business conditions sometimes change quickly. An urgent demand for special machinery raises quickly its rent and value. It is said that lace machinery is sometimes thrown out of use for several years, until a sudden renewal of the demand for lace causes the rental to equal, in two years, more than the original cost. At such times the value of factories increases greatly, but after a few years of prosperity business again collapses. Such prosperous periods are the opportunity of the business man and of the promoter to sell the factory at its highest price. Machinery adapted only for a special product will not sell as readily when less needed for its special use, as that which, like a turning-lathe, can be used for many purposes; but the more special the appliances needed for a certain product, the higher, more abnormal will be their temporary value when they are suddenly needed.

Land near the site of an exposition takes on a very great value and again falls after the exposition is over. During the Boer War horses and mules rose in price in the United States on account of British purchases.

[Sidenote: Cause efforts to increase the supply of agents]

A rise in the value of any agent at once causes an attempt to duplicate it or to find a subst.i.tute for it; this attempt, if successful, puts a check or sets a limit to the rise. In this search for new devices the man who can see most quickly and clearly has a key to wealth. Some kinds of agents, as rare minerals or tools that can be produced only by highly skilled labor, cannot be increased rapidly in number and remain high in price for a long period; and favorably located building sites ill.u.s.trate the same principle. In some cases, it is true, the demand may be due to some temporary cause, as in a period of unsound land speculation, but usually the growing value of location is due to a steady and abiding change in population or business.

[Sidenote: Franchises guard the growing rents from the influence of subst.i.tution]

4. _Such public utilities as are guarded from compet.i.tion by franchises, often rise in rental with increase in population._ The leading cla.s.ses of public utilities referred to are waterworks, gas-works, street-railways, ferries, and wharves. This evidently is only a special ill.u.s.tration of the principle just stated, where it is not easy to find a subst.i.tute for certain agents. Public franchises ent.i.tle the owners to special, sometimes exclusive, privileges, and protect them legally from compet.i.tion. Not all franchises are valuable; many street-railways are unfortunate ventures, the earnings being insufficient to pay expenses, to say nothing of interest on the investment. But when they pay greatly, their high value is due to the impossibility of compet.i.tion. The cars, mules, dynamos, steam-engines, and other agents combined to furnish transportation, have a special earning power because other similar agents are forbidden to be used in that market.

[Sidenote: Various kinds of "unearned increments"]

5. _Industry abounds with cases of unearned increments of value due to accidental and social causes raising the rents of wealth._ The term unearned increment may be defined as an increase in rents (or value) of agents, due to something other than the efforts or merits of the owner; in fact, it is that of which we have been speaking. In some cases powerful or wealthy men can bring about social changes in entirely legitimate ways. The owner of a large factory, moving it into the country, may buy up surrounding land and found a city, converting pasture lands and corn-fields into valuable building lots. Again, social changes are produced immorally, if not illegitimately, when wealthy men or influential politicians cause laws to be pa.s.sed which inure to their advantage but which may ruin many other citizens.

[Sidenote: Also many chances of loss]

In most cases, however, social changes are impersonally caused. The individual owner who profits by them is powerless to affect the result.

He can only adapt his conduct in some measure so as to reap an advantage. He can strive to increase the number and quality and to get control of such agents as he foresees will yield higher rents. In making such a forecast there is chance of loss as well as of gain. The term "unearned increment" has been frequently used in recent years. It is often a.s.sumed to be a peculiar thing, sharply in contrast to other changes in value. The foregoing hasty review may serve to suggest how manifold and complex are the instances of it, and what an important part it plays in modern industry.

DIVISION C--CAPITALIZATION AND TIME-VALUE

CHAPTER 13

MONEY AS A TOOL IN EXCHANGE

-- I. ORIGIN OF THE USE OF MONEY

[Sidenote: The consideration of money can no longer be postponed]

1. _The exchange of goods by barter is extremely difficult in most cases._ Thus far we have not considered the subject of money and have so far as possible avoided even the use of the term. Value in economics does not depend on money, and is not necessarily connected with it.

Things can be compared in their utility, their importance to our welfare can be estimated, without the use of money. Many problems of economics can be discussed pretty thoroughly and solved without the use of the word money or any term of similar meaning. But to-day it is impossible to go very far in the discussion of economic questions without using the concept of money, which is interwoven with every practical and theoretical problem in economics. We have delayed to the farthest limit the formal recognition of the subject; but we are now approaching the question of capital and interest, and it is no longer possible to avoid a preliminary consideration of the money concept.

[Sidenote: Exact measurement of utilities is not possible without some medium of exchange]

In considering the problem of exchange of consumption goods, we have a.s.sumed that it is possible to weigh small differences in the marginal utility of goods, and that such differences have influence on exchange.

Now in exchange by barter such a small estimate is impossible. In barter things are exchanged directly for each other in kind. If the two things do not chance to coincide in value, the exchange cannot be completed. An equivalent must be found, or a multiple, if the marginal utility of two goods is to be equalized for either party by exchange. As in most cases this adjustment must be very incomplete, many exchanges that otherwise would be advantageous cannot take place. In the earlier stages of development, this careful estimate of value is not found. Children do not make it. The typical trade of the small boy is a "trade even"; Johnny exchanges his gingerbread for Jimmie's jack-knife. It marks an epoch in the industrial development of the boy when he begins to keep store with pins, and no longer trades candy for apples, but both for pins, which have become the medium of exchange in his boy world. He then can express values in much more exact terms. In our society most children begin early to grow familiar with this conception; but travelers find some savage tribes still in the earlier childish stage of development, unable to grasp the thought of a general medium of exchange. When, through lack of a medium of exchange, there is a failure to adjust utilities, there is a loss of the possible advantage in each defeated exchange. There is a further waste of time and of vain efforts to find something that will be accepted in exchange, and the loss offsets a large part of the gain even when the barter is effected.

[Sidenote: Money is found to serve as a general medium of exchange]

2. _Some kind of enjoyable good in general use comes to be money, that is, to be accepted as a medium of exchange._ The difficulties just mentioned are met by the use of a medium of exchange. A medium of exchange is simply one kind of wealth which is taken, not for itself, but to pa.s.s along, in the belief that it will enable the taker to gratify his wants and distribute his purchasing power in a more effective way. Money is an "invention" in that it is a means of exchange that came into use independently in a great number of communities. It is not an invention in the sense of a mechanical device suddenly hit upon, but rather in the sense of a social custom that grows as its convenience is tested by practice. Money is used, in some degree, everywhere except in the most primitive tribes. Historically viewed, the money first used in any community is seen in every case to be a commodity capable of giving immediate gratification, a direct good in immediate use. It then gradually comes to be used as money, which is an indirect agent. Still later, when the money habit is well established, a kind of material having no utility except as a medium of exchange may come to be used.

[Sidenote: Qualities of the primitive money]

3. _Money in its origin is that good which best unites the qualities that make it easy to sell, to carry, to know, to keep, to divide, and unite._ It is evident that if some one commodity is gradually to take on this use as a medium of exchange there will be a choice; some things will be better fitted than others. First, this thing must have the quality of salability, or marketability. In the channels of exchange it is taken not because it is wanted for itself, but because it will help to get something else that is wanted. To be sure of a ready sale in a primitive community it must, however, be something that is generally desired. Food and clothing, which supply the fundamental physical needs, are the most generally used and desired of all goods. But they do not have the second quality of a good money material, that of great value in small bulk, transportability. Food is bulky. The carrying of a venison or of a bag of wheat on one's back a short distance requires an effort as great as that for the procuring of the food. Furs, however, have this quality in a high measure, united with other qualities of money, as is shown by their general use in the exchanges of northern tribes. Thirdly, a thing must be recognizable; counterfeits must be easily avoided, and the quality must be easy to test: this is the quality of cognizability.

The love of ornament is universal in human societies, and gives value to many materials combining in a high degree the qualities thus far named.

Fourthly, the money material, when taken in exchange, must remain without loss of quality, perhaps for long periods, until it can be exchanged again. Food does not answer to this requirement, being organic and perishable. But some of the metals, having value in small bulk, salability, cognizability, and durability, step by step displaced other forms of money. Finally, money must be made of a material easy to divide and unite. It is a great convenience in small transactions to be able to represent a fractional value by a small coin. The money material thus, likewise, is easily shifted to and from its money use. It is a very poor money that has not this quality, yet a thing may serve for money in larger transactions without it. Cattle, slaves, and land have been thus used, although they answer in a very rough way these fundamental requirements of the money material.

[Sidenote: Industrial changes affect the convenience of certain money forms]

4. _The changing material and industrial conditions of society change the kind of money that is used._ The money use, as has just been shown, is a resultant of a number of different motives in men. Things that have the highest claim to fitness for money with a people at one stage of development would have a low claim at another. As each of these stages is pa.s.sed, the thing used as money either increases or decreases in its fitness. The final choice depends on the resultant of all the advantages. The use of a material may become more general or less so.

Sh.e.l.ls used for ornament in poor communities cease to be so used in a higher state of advancement, and thus their salability ceases. Furs, used at some stage of development as money in all northern climes, cease to be generally marketable when the fur-bearing animals are nearly killed off and the fur trade declines. Tobacco was at one time in Virginia a great staple. Merchants were always ready to take it, and its market price was known by all; but as it ceased to be the almost exclusive product of the province, it lost the knowableness and marketability it had before. In agricultural and pastoral communities where every one had a share in the pasture, cattle were a fairly convenient form of money, but to-day would be a most inconvenient one; a city merchant exchanging goods for Poland China pigs and Texas steers would envy the proverbial owner of a white elephant.

[Sidenote: The proved fitness of gold and silver as money]

The value of the money material may fall so greatly as a result of greater production, as in the case of iron, tin, copper, that it becomes unsuitable. Again, as wealth grows, as exchanges increase, as the use of money develops, as commerce extends to more distant lands, the heavier, less precious metals fail to serve the money need, especially in the larger transactions. Thus, in a sense, different commodities compete, each trying to prove its fitness to be a medium of exchange; but only one, or two, or three at the most, can at one time hold such a place.

Silver and gold, step by step, often making little progress in a century, have displaced other commodities, and are the staple and dominant forms of money in the world to-day. Every community has witnessed some stage of this evolution. Now nations are divided into two great groups, silver- and gold-using, in accordance with the metals they use as standards. The gold-using countries are the most advanced industrially, requiring the most valuable money metal. Many countries have pa.s.sed in the last century from the silver to the gold standard, and in an intermediate period have tried to use both standards. The Asiatic and South American countries mainly use silver, while most of those in North America and Europe use gold.

While industrial changes thus affect the choice of money, in turn money reacts upon the other industrial conditions. If a new and more convenient material is found, or the value of the money metal changes to a degree that affects the generalness of its use, industry is greatly affected. The discovery of mines in America brought into Europe, in the sixteenth century, a great supply of the precious metals, and this change in the use of money reacted powerfully on industry. Money being itself one of the most important of the industrial conditions, is affected by and in turn affects all others.

-- II. NATURE OF THE USE OF MONEY

[Sidenote: Money is an indirect agent, a tool to effect exchanges]

1. _Money in all its money uses is an indirect agent, to be judged just as other indirect agents are._ The key to this section is the thought that the function of money is to serve as an indirect agent. Money is often, by a figure of speech, called a tool. Literally a tool is a bit of material which, taken in the hand, is used to apply force to other things, to shape them or move them. Figuratively, this is just what money does. A man takes it in his hand not to get enjoyment out of it, but to apply force, to move something, and that which he moves is the other commodity. Adam Smith aptly likened money to the road and wagons that transport goods, thus gratifying wants by putting things into a more convenient place. Money is only one of a mult.i.tude of forms of wealth. It is not even the most "valuable"; it has value just as other indirect agents have. The loss caused by taking away an indirect agent entirely is greater than the benefit usually attributed to it. Its utility in the extremest conditions is greater than its marginal utility under ordinary conditions. Food is not credited in the market with enormous value, but if starvation threatened, all else would be given for food. In a like manner, each individual values money according to the importance of the marginal service it renders, but the marginal service is far from measuring the loss that would be caused by the entire disuse of money. In a society without money, industrial processes would be very different, and exchange would be hampered in almost inconceivable ways. It is true, therefore, that money is an economic factor of high importance, but it is not so indispensable as many other factors to which far less value is attributed.

[Sidenote: Why a poor community lacks money]

A poor community has little money because it cannot afford more; it gets along with less money than is convenient just as it gets along with fewer indirect agents of every other kind than it could use. Pioneers in a poor community where the average wealth is low, cannot afford to keep a large number of wagons, plows, good roads, or school-houses. If the community were wealthy enough it would have more of these and of other things, and great as is the convenience of money, poorer communities have to do with little of it. It is, therefore, a confusion of cause and effect for poor communities to imagine that their poverty is due to lack of money.

[Sidenote: The use of money as a common denominator]