Part 13

The fundamental institution in our credit economy is the bank, and it is therefore essential that it be thoroughly safe and responsive to the needs of the business world. A bank may furnish its customers 143 with the ready means of payment they need in exchange for their future promises either in the form of bank notes or bank credit. The former are more largely used on the continent of Europe and in rural districts in this country, the latter by England and the United States, especially in the cities. The preference for one or the other seems to be a matter of geography. The issue of bank notes has been very carefully safeguarded since the establishment of the national banking system in 1863. They are based upon the purchase of government bonds and are absolutely safe. They lack, however, one essential quality of good bank money in that they are quite inelastic. That is to say, the amount of bank notes in circulation does not vary according to the needs of business, increasing to meet an increased demand, and then declining again when the demand has passed. Being based upon government bonds and not upon the value of business assets, they vary in amount only with the price of the former and not at all with the volume of the latter.

The main practical problem connected with our banking system is, therefore, to find some other basis for the issue of bank notes, especially as it is not desirable to maintain a permanent bonded indebtedness solely for this purpose. Various suggestions have been made, as the establishment of a central bank with sole power of issue, like the government banks in European countries. This is a favorite proposal with the big bankers, but is unlikely to be adopted as it is directly contrary to the spirit of the existing system. The Canadian system is held up as a model, with its system of branch banking and 5 per cent safety fund for the redemption of the notes of failed banks. Curiously enough this was copied after the system in operation in New York State, which was nipped in the bud by some early mistakes and by the development of the national banking system. It works admirably in Canada and is well worth careful study. The plan of asset currency 144 is another suggestion, according to which bank notes should be issued up to a certain percentage of the resources of the bank, but without pledging any specific property for their redemption as is done in the case of the national banks at present. It has finally been urged that our present bond deposit system should be modified by substituting state, municipal, railroad, or industrial bonds for those of the Federal Government, but that in other respects the system should be left intact. We may look for legislation along one or another of these lines in the next few years, as the subject is an urgent one whose solution cannot long be postponed.

Another problem is connected with the money reserves that the banks are required by law to keep on hand in order to meet demand liabilities. Under the national system in the United States the country banks may deposit three-fifths of their lawful reserves with banks in reserve cities, and these banks in turn may deposit one-half of their reserves in banks in central reserve cities (New York, Chicago, and St. Louis). Thus there is a massing, under this system, of the bank reserves of the country in the city of New York, and within that city in some twenty banks. While there is great economy in such a system the concentration of reserves is certainly attended by great dangers, not the least of which is its use by speculative influences in the New York money market, as a great part of it is loaned out to speculators on call.

Still another practical problem connected with the monetary and banking system of the United States is that of the independent treasury system. The Federal Government is to a large extent its own banker; it collects, disburses its revenue and keeps its money in its own vaults; it even, as we have seen, issues paper money and keeps a reserve therefor. By its action in withdrawing large amounts of money from use, or on the other hand making large disbursements, it can and 145 does affect the money market vitally and sometimes disastrously. While it is permitted to deposit funds in selected national banks and has recently made increasing use of this privilege, thus correlating in a measure the reserves of the Government and the needs of the business community, it is held by most students that the independent treasury system should be abolished, and that the banks should act as the intermediaries between the Government and the people in the collection and expenditure of its funds.

So far we have been discussing commercial banks, but there is another kind of institution which goes by the same name but serves quite a different purpose, namely, the savings bank. The essential and almost the only requirement of such an institution is safety. As we have seen, it is not only desirable for personal reasons to inculcate habits of saving and thrift in individuals, but it is also necessary to secure the accumulation of capital needed in modern industry. It is therefore important that such institutions should be widespread, accessible, and thoroughly trusted. These requirements seem to be best fulfilled by the postal savings banks in England and elsewhere, which have led to a great increase in savings on the part of the people. The introduction of such a system in the United States is greatly to be desired.

XVI. TRANSPORTATION AND COMMUNICATION.

Almost as important for the conduct of modern industry as machine methods and credit are the rapid means of transportation and communication furnished by our railroad, steamship, express, post office, telegraph and telephone systems. Indeed the development of industry on a national scale and its integration under centralized control has been made possible only by these improvements. But not only have these businesses rendered the centralization of industry possible; they themselves exhibit on a national scale concentration 146 of control. They are all industries of increasing returns and lend themselves naturally to monopolistic control. At the very beginning of railroad construction one of the most far-sighted managers enunciated the doctrine that “where combination is possible competition is impossible.” For years competition was regarded as the regulator of rates, pooling between railroads was forbidden, canals were advocated as competitors, and by every possible device it was sought to stimulate it. We are at last beginning to recognize the monopoly character of the railroad industry and to regulate it accordingly.

Consolidation in the railroad world is not a new phenomenon nor is it confined to that industry, but it has proceeded further there than in any other line of business. The first form which combination took was that of pooling, according to which the traffic was “pooled” and the earnings then divided among the companies entering into the pool according to some previous agreement. This was forbidden by the Interstate Commerce Act in 1887 and even more stringently by the Anti-Trust Act of 1890, and accordingly railroad managers next resorted to actual consolidation of competing lines. Where this has not been possible or desirable, virtual combination has been secured by the so-called “community of interests” arrangements, based on the acquisition by one road of enough stock in competing lines to secure representation on their boards of directors. Today some eight or nine groups of capitalists control over two-thirds of the railway mileage of the United States, and according to a recent widely-published statement the late Mr. E. H. Harriman was credited with controlling, directly or indirectly, a system aggregating over 67,000 miles. These great consolidations have followed mainly the territorial groupings of railroads; the United States has now been districted out by a few large transportation companies, much as France, Italy, England and other European countries had previously been divided up. Consolidation 147 has in many instances resulted in increased convenience to the public and in economies in management and operation, but it places a dangerous amount of power in the hands of a few men, which has not infrequently been abused, and should clearly be under strict government control.

The primary economic problem connected with railways is always the question of rates. This has been called in a recent book “the heart of the railroad problem.” The first fact that strikes the student of the subject is the great reduction in rates and fares in the past twenty-five years, especially in freight rates. From 1.24 cents in 1882 the average revenue per ton mile received by railroads in the United States has decreased to .748 cents in 1906. Freight rates, especially through rates for bulky traffic, are considerably lower in this country, and passenger fares somewhat higher, than in Europe. But the vital problem connected with rates is not as to their relative cheapness or extortionateness; it concerns rather the granting of discriminating rates. Discriminations may be of three kinds: those between different classes of goods, those between localities, and those between persons. The first group is based upon the classification of freight and rests upon differences in cost of shipment, in bulk, in risk, etc. If reasonably employed, this kind of discrimination is justifiable. Local discriminations, that is, charging different rates to different localities for substantially the same service, is not only unwarranted in most cases, but is short-sighted as well. Where superior facilities or especially keen competition exists, lower rates may be permitted for favored localities, but the arbitrary exercise of such powers by railway officials is thoroughly unjustifiable. Even less defensible is the practice, now happily less frequent, of granting discriminatory rates to favored individuals or corporations. They have been given by means 148 of secret rates and rebates, by under-billing and under-classification, by free passes, etc. Both of these latter evils have been forbidden or greatly restricted by the passage of the Interstate Commerce Act in 1887 and subsequent legislation.

The public nature of railroads is now fairly well recognized in our law and is beginning to be understood by the people at large. Railroads enjoy peculiar privileges in the grant of corporate franchises and charters, in the right of eminent domain, and in enormous grants of land and money which have been made to them in this country. Moreover in the functions they perform the social character of their duties is emphasized, and they are under the necessity of maintaining a constant service open to all. Though they are owned by private investors and managed as private enterprises, they are essentially public enterprises as to their privileges, functions, and duties. Consequently most of the states have now undertaken, through commissions, to regulate the railroads in the public interest. Some thirty-one have appointed commissions, which probably control four-fifths of the traffic originating and ending in a single state. These state commissions differ in power, those of the Mississippi Valley and the South usually having mandatory powers, that is, power to prescribe and enforce maximum rates. In the eastern and central states commissions with supervisory powers merely, of investigation and report, have been created. The only exceptions are found in the Far West where the need of improved transportation facilities is more pressing than regulation, and in five eastern states whose legislatures are controlled by the railroad interests. While the state commissions have done and are doing valuable service, it is clear that the growth of giant railroad combinations which traverse several states necessitates federal control. The appointment of the Interstate Commerce Commission in 1887 established the principle of federal regulation, but the application of the principle in active practice has 149 been slow and has been impeded by the courts. The final control of rates has not yet been given to the Commission.

Owing to the individualistic character of our institutions and law, public ownership of railroads does not exist in the United States, which thus forms, together with England, almost the sole important exception to the world’s practice in this regard. On the continent of Europe government ownership is the rule. Public control through either ownership or regulation by commission is essential to secure an equitable adjustment of public and private rights and to prevent the abuse of monopoly power inherent in the very nature of railroads. Public ownership has many advantages and has given satisfactory results in Europe. But for the United States the principle of private ownership with stricter governmental regulation has been definitely laid down; the problem of the future is simply how far that control shall go.

The discussion of our steam railroads does not exhaust the subject of transportation. A recent and important development is the growth of electric interurban railways, which are opening up districts untouched by the more expensive steam roads and exercising a marked influence in rural districts upon business and social life. A more significant problem, both because of its close relations to the railroads and its monopoly character, is offered by the express companies. Organized at a time when railroads were new and undeveloped they took over the safe and expeditious delivery of small and valuable articles. They have since grown in importance and power; six large companies now control over 90 per cent of the business. Since they are generally in the form of partnerships and not of corporations it has not been possible to bring them under legal control, and their rates are extremely high--three or four times as much as freight rates. In some cases the railroads, in order to gain the profits from these high rates, have themselves organized express companies to operate over their lines, 150 immune from interference by the Interstate Commerce Commission. Even where that is not done, the express companies are performing a service which could as well be performed by the railroads themselves and at lower rates. These facts have lent great strength to the demand for the establishment by the Federal Government in connection with the post office of a parcels post, such as exists in England and in most European countries. By the extension of the maximum limit of mail packages to ten or fifteen pounds the usefulness of the post office could be immensely increased without any loss in rates. So far, however, the express companies have been strong enough to resist the introduction of this reform, though it is warmly advocated by the present Postmaster-General. A recent important improvement in our postal service has been the extension of rural free delivery to the farming districts, thereby breaking down to a great extent the isolation of country districts. This and the rural telephone have been of great social value.

The importance of the telephone and telegraph in our modern industrial life cannot be overestimated. As means of transmitting intelligence they have served to bring the most distant parts of the world into almost instant touch, and have made possible the modern centralization of business. Both offer the same problems of monopoly that we have seen exist in other parts of this field, the telegraph business being completely monopolized by two large companies, the telephone business by one, all strongly entrenched behind patents. The desirability of public ownership of these utilities rests upon stronger grounds than in the case of railroads and is strongly urged by many conservative writers.

Although attention has usually been centered upon the railroads in any discussion of the transportation question in the United States, there are important practical problems connected with both the inland and 151 the ocean water transportation. The questions of constructing artificial inland waterways and of subsidizing our foreign merchant marine are vital political and industrial issues. The United States is probably better provided with internal navigable natural waterways than any other country. Her navigable rivers comprise some 18,000 miles. Affording access to the very heart of the continent both from the Atlantic coast and from the Gulf. They form a cheap and convenient means of transportation, especially for bulky and cheap articles; 30,000,000 tons a year are carried on the streams of the Mississippi Valley alone, though much of the former traffic has been diverted to the railroads. On the northern border of the country the Great Lakes form an unrivaled series of inland seas. The traffic on these shows a great increase every year, amounting now to over 60,000,000 tons annually. The Federal Government has performed useful service in improving the conditions of navigation along these natural waterways, and is now considering a comprehensive scheme for their further improvement.

A very different problem is offered by our canal system. During the period 1820-1840 many canals were constructed by the states to connect existing waterways and provide an outlet for produce from the interior. The best examples of these were the Erie and the Ohio canals. After the development of the railway, however, traffic began to be steadily and then rapidly diverted from the canals to these quicker avenues of transportation. Many of the canals were bought up by their rivals and permitted to fall into disuse, while those retained by the state governments remained mere shallow ditches, unimproved and ill-adapted to modern needs. The recent appropriation by the people of New York State of over $100,000,000 for the improvement of the Erie Canal, and the construction of the Panama Canal by the Federal Government have brought the question of the 152 rehabilitation of our neglected canal system to the front again. It seems wasteful not to connect the separate links in the magnificent system of natural waterways already provided by nature, and this will probably be the first step taken. And indeed a beginning has already been made by the construction of the Hennepin Canal, the Des Plaines Canal, and others, and a company has been formed to connect Pittsburg with Lake Erie and to cut through Cape Cod. It must, however, be borne in mind that there are two distinct types of canal: those which are simply short connecting links between navigable waterways and which permit the passage of vessels used on those waters; and those canals which are shallow, have extensive lockage, and permit the use of only small boats, thus necessitating the transshipment of freight. One might well advocate the construction and enlargement of the first type, and yet hesitate to approve of the second. As yet, however, owing in part to the opposition and clamor of railroad interests, the question of canals has not received the attention it deserves in the United States.

The ocean merchant marine comprises two widely different branches, the coastwise and the foreign trade. The former is open only to vessels flying the American flag, and has shown a very steady growth; five-sixths of our ocean merchant marine today is engaged in this branch of commerce. Coal, lumber, cotton, and similar bulky commodities constitute the chief items entering into the coastwise trade. The tonnage of American vessels engaged in the foreign trade, on the other hand, has shown a steady decline ever since the outbreak of the Civil War. Foreign vessels today carry fully 90 per cent of the foreign commerce of the United States. The causes of this decline are economic rather than political, for American legislation has on the whole been very liberal to the shipping interests. At the time the western part of our country began to be opened up and its great resources exploited, our merchant marine was one of the best in the 153 world. But now the other opportunities for the investment of capital were so profitable and alluring, and the need of it so great, that all the available labor and capital of the American people began to be devoted to the development of their internal resources. A nation cannot do everything with equal advantage at the same time any more than an individual can. Accordingly we began to withdraw our capital from shipping and devote it to agriculture, mining, manufacturing, transportation, and similar more profitable enterprises. Foreigners could build vessels and run them more cheaply than we could and it paid us to hire them to do it. Recently, however, and especially since the recent awakening of a national consciousness after the Spanish-American War, the patriotism of many individuals has been hurt by the thought that we had to depend upon foreign vessels for the carriage of our foreign commerce, while in the minds of others a comprehensive naval program demanded the building up of a native merchant marine. Two questions suggest themselves here: Do we wish to stimulate this growth artificially? And, if we do, what means shall we adopt? On the second point the Merchant Marine Commission of 1904 recommended for the United States a general bounty on all shipping, such as France has, and the subvention of certain lines of steamers over ten specified routes, following the example of Great Britain, Germany, and Japan. Without committing ourselves on this point, it may be suggested that on political, geographical, and economic grounds we may expect in the near future to see the natural development of an American merchant marine. With the growth of our foreign trade, the accumulation of capital at home, and the building up of a strong navy, the conditions for American shipbuilding and shipping will become steadily more favorable, and we may expect to see American enterprise engage in this as in other lines of industry. Eventually we are 154 destined to become a maritime nation.

XVII. TAXATION AND TARIFF.

In no way does the State affect the interests of its citizens more vitally than in the sphere of taxation. The State in modern society is the people organized for certain collective purposes, as for the public defense, the preservation of domestic peace, and the furtherance of the social and industrial welfare. To carry out these objects money is needed and the State has therefore to collect from its citizens sufficient revenue to defray its expenditures. John Fiske has tersely defined taxes as “portions of private property taken for public purposes.” Taxation thus implies a certain degree of compulsion; by it the Government interferes with the free choice of the individual and expends a part at least of his income for him in ways that he himself might not have chosen. The social and industrial consequences of a system of taxation may also be far-reaching and important. As Professor R. T. Ely says: “Taxation may create monopolies, or it may prevent them; it may diffuse wealth, or it may control it; it may promote labor or equality of rights, or it may tend to the establishment of tyranny and despotism; it may be used to bring about reform, or it may be used to aggravate existing grievances and foster dissensions between classes.” It is evident therefore that the utmost care should be exercised in framing a system of taxation.

Certain canons or rules of taxation were laid down by Adam Smith over a hundred years ago and have been generally endorsed by economists ever since. One was that taxes ought to be certain and not arbitrary, as to amount, time and manner of payment; another was that taxes ought to be levied in the manner most convenient to the tax-payer; and a third, that taxes ought to take as little as possible out of the pockets of the tax-payer over and above what is paid into the public 155 treasury. These three maxims--certainty, convenience, and economy--have been generally accepted, but less general agreement exists in regard to the fourth, which states that the subjects of every state ought to contribute to the support of the Government as nearly as possible in proportion to their respective abilities. This rule has given rise to two problems: first, is ability the most just basis of taxation; and secondly, if so, how is ability to be measured? The theory of justice generally accepted by legal writers and by the American courts is expressed in the maxim that taxes should be proportioned to benefits received. The benefit theory affords a good rule in the assessment of local property taxes, but fails utterly in the domain of national and state affairs. Who can measure the benefits to each individual of an appropriation for a new war ship or for a state penitentiary or for the public school system? Probably the benefits are in inverse proportion to the income or wealth of the individual, and the heaviest taxes would then have to be apportioned to those least able to pay. Most economists today agree that taxes should be apportioned according to “faculty” or ability to pay. It satisfies better our sense of fairness and is more readily applicable than the benefit theory. In the last analysis, of course, it may be said that taxation in general must confer real benefits upon society or it will not be tolerated. Here, however, we are concerned with a rule of apportionment.

The second practical problem encountered is when we attempt to apply the faculty principle in practice; how is ability to be measured? Three measures have been suggested: expenditure, income, and property. Expenditure is open to the objection that it would place an unduly large proportion of the tax burdens on the poor, whose expenditures are larger in proportion to their means than those of other classes of society. Property is objected to because large classes of society, 156 including professional men with large incomes, would then escape taxation largely or altogether. Income on the surface seems the fairest measure of ability, but is objected to because the incomes of different individuals, both on account of source and size, really indicate unequal and not similar abilities. In practice, however, all three methods are employed in all advanced states, so it is not necessary to decide which is theoretically the fairest.

Still another practical question confronts us after we adopt the ability theory: Shall the rate of taxation be the same no matter what the amount of the property or income, or shall it increase as the amount grows larger? In other words, shall taxation be proportional or progressive? In general the advocates of the ability theory also support progression, though there are many exceptions to this statement. Three main arguments have been urged in support of this method. First, progression is advocated in order to secure equality of sacrifice; it is argued that each dollar of a $10,000 income affords less gratification to the owner than each dollar of a $1,000 income, and that consequently in order to equalize the sacrifices of the two individuals a larger proportion of the first income should be taken than of the second. Objection is made to this, that wants expand even more rapidly than incomes and therefore the initial assumption is untrue. Progression is urged, in the second place, by those who desire to use taxation as a method of introducing social reforms or of bringing about a more equitable distribution of wealth, as by the breaking up of large fortunes. It seems inadvisable, however, to use the machinery of taxation for such purposes. Other writers urge that the ability to earn or produce wealth increases at an accelerating rate, and that taxation should therefore keep pace with it. “It is the first thousand that counts.” The objection is made here that it would penalize ability and energy. In general, while the arguments are not 157 conclusive, progression certainly secures a nearer approach to the ideal of the ability theory than does proportional taxation. The practical application, after we accept it, is still a difficult matter. It should be applied to the revenue system as a whole by the careful selection of special taxes. As a matter of fact we have just the opposite system in the United States, for the poor man undoubtedly pays out a larger proportion of his income in taxes--principally on articles of consumption--than do his wealthy neighbors.

In the main there has been a clear division in the United States between the sources of income of the Federal Government on the one hand and those of the state and local governments on the other. The Federal Treasury has derived its revenue almost entirely from indirect taxes--excise and customs--while the other governments have depended chiefly upon direct taxes upon persons, property, business, corporations, and inheritances. The division rests upon the constitutional allotment of powers, but it also corresponds very closely to the industrial and political functions of each in their relations to the individual citizens. The chief duty of the Federal Government is that of national defense and foreign intercourse, relations which are national in extent but which affect the individual only remotely; so, too, its taxing area is national and its exactions are felt only distantly. Few persons, it has been said, taste the tax in their tea or their whisky, yet over one-third of all the taxes collected in the United States are derived from either customs or excise duties. Whisky and tobacco contribute most of the internal revenue, while import duties are levied on practically everything brought into the country which could compete with any home product. These two sources yield over $500,000,000 a year to the Federal Treasury. During the Civil War these sources of revenue were supplemented by a federal income tax, but as such a tax was later declared unconstitutional by the Supreme Court, further recourse to 158 this in the near future seems improbable. From a purely economic and financial point of view this is very regrettable, for the Federal Government should unquestionably have at its command the means of quickly raising large additional revenue with as little disturbance to industry as possible. Such a means would be afforded by the income tax, which moreover can be administered only by the Federal Government, as it must be national in its operations to be fair.

The main reliance of the state and local governments in this country is the general property tax, which amounted in 1902 to over $700,000,000 or almost half of all the taxes collected. This really consists of two very distinct parts, which present quite different problems, namely, the tax on real property and that on personal property. Under our peculiar system, by which property is assessed locally, and upon the basis of that assessment its share of the state taxes distributed to each locality, there is every incentive offered to the local assessor to under-value the land in his jurisdiction, thereby escaping part of the state burdens. This evil of inequality between localities could be obviated by the simple expedient of relieving real estate of all state taxes and leaving it solely to the counties and cities for purposes of taxation. In the case of personal property the great evil is evasion. Much of our modern wealth exists in the form of securities, stocks, bonds, mortgages, etc., and this is practically undiscoverable by assessors except by the voluntary declaration of the tax-payer, which is only truthfully made by trustees and a few conscientious persons. Most of our laws have been directed to the discovery of this intangible property, as it is called, but without avail. In a few of the most progressive states the effort has at last been recognized as futile, and the attempt is now being made to reach these sources of income indirectly, by taxes on corporations, on business, franchises and other tangible evidences of wealth.

Not only are corporation, business, license and similar taxes being 159 developed, but increasing resort is had to inheritance taxes, over thirty states now making use of this form of taxation. They are more frequently imposed on collateral than direct inheritances, and in many states are progressive, both as to amount and as to nearness of relationship. Thus in Wisconsin the rates advance from one per cent for bequests under $25,000 to husband, wife, or lineal relation, to 15 per cent for sums over $500,000 to very distant relatives or strangers. These various forms of taxation are necessary to secure the needed revenues for the state governments, especially if these forego further resort to taxation of realty. The tendency is now sufficiently marked to make it possible to indicate with some certainty the future of taxation in this country. To a certain extent, however, this must be regarded as the expression of an ideal rather than the description of an existing system. The Federal Government should have customs and excise duties, supplemented by an income tax. The state governments should have corporation and inheritance taxes. The cities and minor civil divisions should have taxes on realty, and license and franchise taxes. Such a division is logical and avoids duplication of taxation of the same source by two or more grades of government. In view of the pre-emption of the field of corporation taxation by the states, it is therefore doubly regrettable that the Federal Government should now (August, 1909) have adopted a tax on income of corporations for federal purposes.

Other problems connected with finance are suggested in connection with the universal tendency to increase in governmental expenditures and in public debts. The former is an expression of the growth and expansion of state functions, which will be discussed in the next section. The latter is due in part to this same fact, in part also to the development of credit and the creation of a market for the sale of 160 public and other securities, and finally to the growth of constitutional government, which has made the people willing to entrust their capital to a government which they themselves as citizens really control.

The question of the tariff involves such important economic as well as financial consideration that it seems best to discuss this form of taxation somewhat more fully. For it has been used not merely as a means of raising revenue but also as an instrument to develop particular industries and prevent foreign competition. Any detailed discussion of this subject therefore involves a statement of the pros and cons of protection and free trade. It should be said, however, in advance that the real issue is not free trade, for that is demanded by only a few doctrinaires, but freer trade through an intelligent revision of the tariff downward. The system of protection has prevailed in the United States for virtually one hundred years, and could not be suddenly changed and abolished if one would. From the financial standpoint, too, import duties are absolutely essential to the support of our Federal Government; the question here is not absolutely free trade, but the choice of articles for revenue purposes. Shall they be those which are not produced in this country or those which enter into competition with domestic products? If financial considerations alone prevailed, the former would undoubtedly be selected as the more convenient, certain, and economical. But in the determination of the tariff policies of the United States economic considerations have been paramount and to an examination of these we must now turn.

Historically the following arguments have played the main role in support of protection at different times in the United States. The infant industries argument was advanced by Hamilton in his celebrated Report on Manufactures in 1791 and has always been important until recently when the infants had grown to be so lusty that it was evident that other reasons for protecting them must be discovered. This was 161 found in the plea for diversified production, which was necessary for a well-rounded economic development; the need of creating a strong national government and national spirit also played their part. In order to win over the farmers the home market argument was early urged; this has taken various forms. In the first place it was urged that the building up of manufacturing centers and the consequent increase in population would give the farmers a better market than the fluctuating foreign one. As set forth by Carey, it would keep within the country the elements taken from the soil. It would also save the freights on the transportation of goods back and forth across the ocean. Each of these arguments has lost force with the development of the country and the decrease in the cost of transportation. More important today is the wages argument; at first protection was urged because wages were high in the United States and the manufacturer needed to be protected against his foreign competitor who employed cheap labor. Today it is argued that protection has raised wages and must be continued in order to protect the laborer against the pauper labor of Europe. Curiously enough, in France protection is urged for French workmen against the highly paid and efficient American. The effect of the tariff on wages has been greatly exaggerated; wages are high in the United States because the productivity of labor is high. Indeed so far as the tariff raises prices it may be argued that the real wages of labor are lowered. More generally accepted as defensible grounds for protection are the political arguments that a nation should be able to produce its own military armaments and supplies, and that it should be able to use the tariff as a retaliatory measure. Recently this latter has received considerable force from the practice of “dumping,” by which is meant the occasional sale of products abroad at prices lower than those charged at home. Domestic manufacturers in the country thus treated are of course seriously injured and have 162 insisted upon protection against this procedure which has been authorized in Canada.

In answer to these various arguments the free traders, or those desiring a modification of present high rates, make their main appeal to the doctrine of comparative costs. Briefly stated this asserts that nations, like individuals, can do some things better than others. Like the individual lawyer therefore who pays to have his boots blacked while he devotes himself to the law, the nation should produce the things it is best fitted for and pay others to produce other things which it can do less well. In this way each will obtain the largest possible return. Protection, which interferes with this natural international division of labor, simply diverts labor and capital from more into less profitable industries. Practically, this purely abstract economic argument has had little influence on the commercial policy of nations, which have been moved more by political and industrial considerations. Today, however, there is no question but that the freer movement of capital and industry throughout the world would be advantageous. In answer to the home market argument it is pointed out that with the growth of large-scale production the profitable area of manufacture has greatly widened and now in many cases transcends national boundaries. As home producers seek foreign markets, as they are beginning to do, they themselves will demand a reduction of the tariff, especially in the matter of raw materials. Free traders also deny the need of artificially diversifying industry in a country as large and varied as the United States, or of building up infant industries. Indeed, on the latter point, they urge that many of our trusts are the result of the tariff, and that the attempt to grant legislative favors has resulted only in wholesale demoralization and a debauching of our national politics.