_Capital distinguished from wealth._—Whenever material wealth is used not
directly in meeting present wants, but to produce more wealth suited to
future wants, it is called capital. Any store of good things devoted only
to meeting wants as they come is thought of as wealth, as well as possible
capital, since at any time it may be made the means of creating other
wealth to more than take its place. The distinction grows wholly out of
the uses of wealth, not its forms. A horse used, or to be used, as a force
in production by drawing loads is counted as capital; but if used for mere
pleasure-riding is only wealth, which leaves no material return when
consumed. Thus the same horse may, in the hands of a breeder, a trainer,
or a liveryman be capital, but in the hands of a fancier or a pleasure
seeker be only wealth, to be used as wanted.
Wealth in dwellings or public buildings constructed for enjoyment rather
than protection of a working community is not capital, and may be
destroyed by fire or storm without serious disturbance of industry. The
loss is bravely met, the hardship endured and extra energy put into
restoration. A farmer may lose a fine house and by living in less comfort
for a time restore it, while the loss of his teams or his barns may
cripple his industry. In the great Chicago fire of 1871 the wealth
destroyed is estimated at $50,000,000, while the loss of actual capital
may have been only $5,000,000. An energetic use of the capital remaining
wrought apparent wonders in the restoration of wealth. Indeed, the total
capital of our country is supposed to be only three times the annual
product of industry, though a century of labor could not restore it if
destroyed entirely, because effective tools would be wanting.
The capital of an individual is such a portion of his wealth as he is
using to maintain and increase his wealth. The capital of a country
includes all the farms, so far as they are made such by improvements
directly or indirectly, including all ways and means of communication and
transportation, for roads contribute to all goods drawn over them; all
buildings devoted to systems of production, including necessary protection
of laborers themselves; all tools, machines and contrivances for power;
all animals employed in connection with industry; all materials of
construction or growth; all materials consumed in securing and maintaining
power, as fuel, lubricating oil, etc., or in performing operations of
manufacture, as dye stuffs; subsistence for the workers, the brutes they
use, and the families which keep up the life and comfort of the people;
the necessary stock in trade, that all wants may be readily supplied; all
the machinery of trade for ready transfers, including any actual wealth in
form of money; all the governmental machinery for protection and
maintenance of order, as a first essential to wealth-producing.
All these are more simply grouped in their different relations to labor
under three classes: first, as sustaining labor by food, clothing,
protection and material on which to work; second, as aiding efficiency by
tools, machines and stored up forces; third, as stimulating exertion by
reducing present anxieties and arousing more far-reaching plans for future
undertakings, illustrated by possession of satisfactory stocks of goods or
comfortable homes for families.
_Capital a time-saver._—All these forms of wealth serve in production by
extending the possible waiting between an effort of any kind and the
greater satisfaction secured by it. No community could begin farming as a
business until it had secured housing and seeds and tools and provisions
in some form for most of a year’s sustenance. All the capital that
constructs a great thoroughfare is used in getting ready to satisfy wants
in many future years. Capital furnishes subsistence for laborers of every
kind during those years of waiting for a product. This is true capital,
because the object of its use is a greater product of wealth; but the
product may be long delayed. So all accumulated wealth in every form
represents sustained labor during the past. Professor Taussig estimates
the accumulation of subsistence in all existing goods at five years of
labor for the community. The total value of farms in our country is just
about five times the average annual product of the farms, though a large
portion of the land is unused.
_Capital circulating or fixed._—A further distinction is desirable between
capital in food, fuel or stock in trade, which may be turned at a single
use into new wealth, and capital in buildings, bridges, roads and farms,
which may be used many times in adding new wealth before they entirely
disappear or give place to new forms of capital. The first is called
circulating capital, and the last fixed capital.
The degree of permanence in fixed capital is indefinite of course—even
drains vary in permanence—and the line between the two is not always
easily drawn, yet the distinction is real. Most men distinguish “the
plant” in any enterprise from “the current supplies,” and realize that
some fit proportion exists between them. A farm well equipped can not be
handled to advantage without a proportional investment in current
supplies. Many a renter cannot pay his rent for want of means to work his
farm profitably. If the farm were given him, he would still be hampered by
the same lack of consumable goods to turn at once into larger products.
Many a “land poor” farmer would gain at once by exchange of acres for more
“current supplies” for his farming, such as food for help, feed for teams
and stock, seed or fertilizers for his crops, or young stock to consume
the raw product of his fields. In the fourteenth century the stock of
European farms was worth three times the value of the farms. Similar
conditions are found now in some newer portions of the United States. It
is impossible to estimate exactly the existing ratio between fixed and
circulating capital from statistics at hand. Farmers in older, more
developed regions can use, without suffering, a larger per cent of fixed
capital than pioneers can, because the circulation is more rapid. For the
same reason the raising of staple annual crops gives place to double
cropping, dairying and full feeding as land grows more valuable, frequent
returns serving instead of large circulating capital.
In general, the wealth of a community is better judged by its fixed
capital, while its thrift is known from its circulating capital. Fixed
capital is always secured by consumption of circulating capital. The
extension of railroads always implies great reduction of ready supplies.
Money _between_ individuals and communities ranks as circulating capital,
but _within_ any community the stock of money needed for domestic trade
may be thought of as a permanent machine. Even machinery may be
circulating capital in the hands of one who manufactures or sells it,
though fixed when located in its work, and for the whole community is
“fixed” as soon as its destined use is determined by its form. Thus the
distinction, though real, is flexible. Its importance in discussing the
industries of a country, or in understanding the relations of various
industries to each other and to the world, will appear later in the book.
_Capital unproductive._—Capital is sometimes said to be unproductive in
contrast with _productive_, although the very nature of capital requires
productiveness. The occasion for this distinction is in the fact that
means devoted to future production of wealth in a particular way may be
years in returning the product; the destination is evident and the return
confidently expected, yet the owner is without income or near prospect of
income. Such ventures are seen in the reclaiming of waste lands by
drainage, the equipment of extensive mines, and the construction of dykes
and levees. Land held for sale or use in the indefinite future is a most
common illustration of unproductive capital.
If wealth in some readily exchangeable form is intended for productive
use, but is held for a satisfactory opportunity, it is sometimes called
free or _floating capital_. It may be available for any temporary use, and
so afloat among a variety of investments. Some great enterprises, like the
building of the Suez canal, are begun in view of attracting floating
capital. Borrowers generally look to such accumulations for their supply
of funds.
_Capital in farming._—A clear view of the uses of capital may be gained
from estimating the needs of a young farmer just starting out for himself.
For all his equipments he must depend upon the time and effort of somebody
embodied in form of tools, material and sustenance, for capital in any
form is simply this. A farm of 160 acres improved, or already out of the
crude pioneer stage, represents about ten years of one man’s time, say
$3,000. A house suitably furnished for himself and his young wife means
three years of time, $1,000. His barns and corrals and intersecting fences
cost two years of time, $600. His team and stock and the necessary tools
make nearly three years of time again, $900. Seed, feed, provisions,
clothing, insurance and wages for help, all to be used before his first
year’s crop is sold, require at least $500 worth of time, or nearly two
years more. The needed capital for such a farm thus represents full
eighteen years of the time of an able-bodied man, or $6,000. If we add to
this the cost of bringing to mature age and intelligence the three able
and efficient workers needed to manage and work that farm, we shall credit
the past, without counting the time and energy of the young people
themselves in growing and learning and gaining their skill, with thirty
years of labor; $10,000, put into the farm and its occupants as they stand
ready for a year’s work. This accumulation is likely to show all the forms
of capital described.
_Capital conservative._—Capital, especially in fixed forms, being in its
nature the conserving of energy, is necessarily an incentive to
conservatism in society, since any great and sudden changes in the habits
of a community involve rapid consumption or destruction of capital.
Capital is said to be “timid.” This statement means simply that all owners
and users of capital who realize the time required for accumulating it
hesitate to risk its destruction in doubtful enterprises, uncertain
confidence or venturesome experiments in government or financiering. War,
riots, or even revenue laws, may destroy fixed capital that has been the
growth of a century. A small change in tariff laws has rendered useless
immense factories. For the same reason farmers, having so large a fixed
capital in farms and farm machinery, do not take kindly to political
changes involving doubtful consequences. States where the capital is still
circulating may readily venture upon experiments financial or political,
since little time is lost even in destructive results. People in new
countries take risks readily because they have less to risk.