basis of local conditions and for particular utilities. The successful
ownership of street railways in one city does not necessarily mean
that a second city may be equally successful in operating this
utility. Nor does the successful administration of a gas works by one
city necessarily mean that the same city can effectively administer
its street railways.
B. NATIONAL OWNERSHIP OF RAILROADS
343. DEVELOPMENT OF RAILROADS IN THE UNITED STATES.--The railroad
history of the United States began when the Baltimore & Ohio was
opened to traffic in 1830, but until the middle of the century
transportation in this country was chiefly by wagon roads, rivers, and
canals. After 1850 the westward expansion and the development of
industry throughout the country greatly stimulated railway building.
Encouraged by lavish land grants and other bounties extended by both
state and Federal governments, railroad corporations flung a network
of railroads across the continent. Local roads were transformed, by
extension and consolidation, into great trunk lines embracing
thousands of miles. From 9,021 in 1850 our railway mileage increased
to 93,267 in 1880, to 193,345 in 1900, and to approximately 260,000 in
1922.
344. THE PRINCIPLE OF DECREASING COST.--While the rapid development of
American railroads has had an inestimable effect upon our national
prosperity, railway development has brought with it serious evils. In
order to understand the nature of these evils, let us notice that with
railroads, as with municipal utilities, the cost per unit of product
or service declines with an increase in the number of units furnished.
A railroad must maintain its roadbed, depots, and terminals whether
one or an hundred trains are run, and whether freight or passenger
cars run empty or full. Many of the railroad's operating expenses also
go on regardless of the volume of business. Thus the cost of handling
units of traffic declines as the volume of that traffic increases.
These circumstances influence rate-making in two ways. In the first
place, railroads can afford to accept extra traffic at a relatively
low rate because carrying extra traffic adds relatively little to the
railroad's expenses. In the second place, rates in general cannot be
definitely connected with the expense of carrying specific
commodities, hence rates are often determined on the basis of
expediency. This means that high rates are charged on valuable
commodities because those commodities can pay high rates, while low
rates are charged on cheap goods, because those goods cannot stand a
high charge. This is called "charging what the traffic will bear."
345. EVILS ATTENDING RAILROAD DEVELOPMENT.--Since many of the expenses
of the railroad go on regardless of the amount of traffic carried,
railroads are constantly searching for extra business. Competition
between railroads has tended to be very severe. Rate-wars have been
common, because of the small cost of handling extra units of traffic.
In the struggle for business, railroads once habitually offered low
rates on competitive roads or lines, and then made up for this
relatively unprofitable practice by charging high rates on non-
competitive roads. The desire for extra business, together with the
pressure exerted by trusts and other large shippers, encouraged
railroads to make rates which discriminated between products, between
localities, and even between individuals. The ruinous character of
competition often led to monopolistic combinations which proceeded to
charge the general public exorbitant rates, but which rendered poor
service.
346. EARLY STATE LEGISLATION.--During the early stages of railroad
development, the railroads were generally regarded as public
benefactors for the reason that they aided materially in the
settlement of the West. But after about 1870 the railroads began to be
accused of abusing their position. A greater degree of legal control
over the roads was demanded.
The first attempts at the regulation of railroad corporations were
made by several of the states. For fifteen years various commonwealths
tried to control the railroads through state railway commissions armed
with extensive powers. These commissions eliminated some of the more
glaring abuses of railroad combination, but for several reasons state
regulation was relatively ineffective. The states had, of course, no
authority over interstate business, and most railroad revenues were
derived from this type of business. State laws regulating railroads
were often declared unconstitutional by the courts. Lastly, powerful
railroad corporations often succeeded in bribing state legislatures to
refrain from taking action against them. Due to these influences,
state regulation was generally conceded to be a failure.
347. FEDERAL LEGISLATION.--The failure of state laws effectively to
control the railroads led to the enactment by Congress of the
Interstate Commerce Act of 1887. This Federal act created an
Interstate Commerce Commission of seven members, appointed by the
President, and charged with the enforcement of the Act. The Act also
prohibited discriminations, and forbade unjust and unreasonable
rates. It required that railroads should make rates public, and that
they should not change rates without due notice. Pooling was
forbidden, that is to say, railroads apparently competing with one
another were no longer to merge or pool their combined business with
the understanding that each was to get a previously determined share
of the joint profits. The objection to pooling was that it suppressed
competition and encouraged monopoly.
In the years that followed, however, the Interstate Commerce Act
checked railroad abuses very little. The machinery of the Act was so
defective as to render difficult the successful prosecution of
offenders. Railroad interests exerted an evil influence upon
government officials who were attempting to enforce the Act. The
administration of the law was also markedly impeded by the fact that
the courts tended to interpret the Act of 1887 in such a way as to
limit the powers of the Commission.
To a considerable extent discriminations and unnecessarily high rates
continued until after the opening of the twentieth century. Then in
1903 the Elkins Act revived some of the waning powers of the
Commission. Three years later (1906) the Hepburn Law increased the
membership of the Commission, improved its machinery, and extended and
reinforced its control over rates. In 1910 the Mann-Elkins Act
strengthened the position of the Commission in several particulars.
In spite of this additional legislation, however, the rather sorry
record of railroad regulation up to the time of the World War
repeatedly raised the question of national ownership of railroads.
348. ARGUMENTS IN FAVOR OF NATIONAL OWNERSHIP OF RAILROADS.--The
arguments in favor of national ownership of railroads are similar to
those advanced in behalf of the municipal ownership of local
utilities.
The failure of regulation, coupled with the social importance of the
railroads, is said to render ownership imperative. Government
ownership of railroads is said to have succeeded in several of the
countries of Europe, notably in Prussia.
It is believed by many that government ownership would attract a high
grade of public official. It is also thought that with the change to
public ownership the corruption of state legislatures by railroads
would cease. Since the roads would be taken out of private hands and
administered as a unit by the Federal government, discriminations and
other unfair practices would cease.
It is also held that under public ownership service rather than
profits would become the ideal. Since profits would no longer be
necessary, lower rates could be offered. Government ownership would
allow the elimination of duplicating lines in competitive areas, and
would permit the extension of new lines into areas not immediately
profitable. Thus railroads now operated solely for private gain would
become instruments of social as well as industrial progress.
349. ARGUMENTS AGAINST NATIONAL OWNERSHIP OF RAILROADS.--Opponents of
national ownership maintain that the experience of Prussia and other
European countries is no guide to railroad management in this country.
Differences in political organization between this and European
countries, for example, render unreliable the results of public
ownership in Prussia and other parts of Europe.
Many opponents of government ownership contend that the elimination of
private control would increase, rather than decrease, political
corruption. Various political interests, they say, would bring
pressure to bear in favor of low rates for their particular sections
of the country.
It is often maintained that the substitution of public for private
ownership would discourage personal initiative because public
officials would take little genuine interest in the railroads. It is
said that government administration of railroads would be marked by
waste and inefficiency. This would necessitate higher rates instead of
permitting rates to be reduced. The large initial cost of acquiring
the roads is urged against public ownership, as is the gigantic task
of administering so vast an industry.
A last important objection to public ownership is that it would cause
rates to be rigid. Rates would be fixed for relatively long periods
and by a supervisory agency, rather than automatically changing with
business conditions as under private ownership. This rigidity would
force business to adapt itself to rates, instead of allowing rates to
adapt themselves to business needs.
350. GOVERNMENT CONTROL OF RAILROADS, 1917-1920.--Shortly after our
entry into the World War, the congested condition of the railroads,
together with the urgent need for a unified transportation system, led
to a temporary abandonment of private control. On December 28, 1917,
President Wilson took over the nation's railroads under powers
conferred upon him by Congress. The roads were centralized under
Director-General McAdoo, assisted by seven regional directors who
administered the railroads in the different sections of the country.
The Act empowering the President to take over the railroads provided
that such control should not extend beyond twenty-one months after the
conclusion of the treaty of peace with Germany. But there has never
been a well-organized movement for government ownership of railroads
in this country, and when after the signing of the armistice in
November, 1918, the immediate return of the roads to private control
was demanded, there was little opposition. A number of plans proposing
various combinations of public and private control were rejected, and
on March 1, 1920, the roads were returned to their former owners.
351. RESULTS OF GOVERNMENT CONTROL DURING THE WORLD WAR.--Government
control of the nation's railroads between 1917 and 1920 resulted in a
number of important economies. Repair shops were co÷rdinated so as to
be used more systematically and hence more economically. The
consolidation of ticket offices in cities effected a substantial
saving. The co÷rdination of terminals allowed a more economical use of
equipment than had been possible under private control. The
unification of the various railroad systems allowed a more direct
routing of freight than would otherwise have been possible. There was
also a reduction in some unnecessarily large managerial salaries.
On the other hand, the quality of railroad service declined under
government control. The personal efficiency of many types of railroad
employees also decreased. Most important of all, there was a sharp
increase in both freight and passenger rates.
The period of war-time control was abnormal, hence the record of the
roads under government control during this period cannot be taken as
wholly indicative of what would happen under permanent government
control in peace time. But it should be noted that, on the whole, the
record of the Railroad Administration between 1917 and 1920 was good.
That the above-mentioned economies were effected cannot be denied.
Moreover, the decline in service and efficiency, as well as the
increase in rates, is at least partially explained by abnormal
conditions over which the Railroad Administration had no control. The
winter of 1917-1918 was the most rigorous in railroad history. This
circumstance, combined with the unusually heavy demands for the
transportation of war equipment, helped to demoralize the service from
the very beginning of the period of government control. For a number
of years previous to 1917 there had been an acute shortage of box cars
and other equipment, which also helps to explain the poor quality of
service furnished during the war. The labor force was demoralized by
the drafting for war service of many trained railroad employees. (It
is claimed that certain railroad officials sought to discredit
government control by hampering the administration of the roads, but
this charge cannot be proved.)
352. THE TRANSPORTATION ACT OF 1920.--Government control in war time
revealed the true status of the railroads as nothing else could. It
was seen that up to the period of the World War Federal legislation on
railroads had in some cases been too indulgent, but in other cases so
severe as to work a hardship upon the roads. To pave the way for a
fairer and more effective regulation of the nation's railroads, the
Transportation Act of 1920 was passed. At present the railroads are
privately owned, but publicly regulated by the Interstate Commerce
Commission, according to the provisions of the Interstate Commerce Act
of 1887, the Elkins Act of 1903, the Hepburn Law of 1906, the Mann-
Elkins Act of 1910, and the Transportation Act of 1920.
353. SUMMARY OF PRESENT LEGISLATION ON RAILROADS.--At the present time
all unfair discriminations are generally forbidden. But it is now
recognized that under certain conditions a discrimination may be
economically justified. Therefore, when the inability to levy a
discriminatory rate would work a hardship upon a railroad, the
Commission is authorized to suspend the rule. Pooling is likewise
generally forbidden, but here again the Commission may authorize the
practice at its discretion. Limitations are placed upon the power of
railroads to transport commodities in which they are interested as
producers.
All interstate rates are to be just and reasonable, and the Commission
is empowered to say what constitutes just and reasonable rates. In
order to prevent rate wars, the Commission is now empowered to fix
minimum as well as maximum rates. The Act of 1920 also gives the
Commission the power to establish _intra_-state rates, where such
rates unjustly discriminate against interstate or foreign commerce. An
_intra_-state rate, of course, is one which has to do only with
freight or passenger movements which begin and end within the borders
of a single state.
The Act of 1920 extended government control over the railroads in a
number of important particulars. To check certain financial abuses,
the Commission now has supervision over the issue of railroad
securities. For the purpose of increasing the social value of the
nation's railroads, the Act of 1920 instructs the Commission to plan
the consolidation of existing roads into a limited number of systems.
Another clause in the Act of 1920 provides that no railroad may
abandon lines, build new lines, or extend old ones, without the
consent of the Commission. In times of national emergency, moreover,
the Commission may direct the routing of the nation's freight, without
regard to the ownership of the lines involved. Lastly, the Act of 1920
made provision for a permanent arbitration board for the settlement of
labor disputes in the railroad industry.
354. THE OUTLOOK.--In view of the defective character of regulatory
legislation previous to 1900, government ownership of railroads did
not seem unlikely. But since the acts of 1903, 1906, and 1910, and
especially since the passage of the Transportation Act of 1920, there
has been such high promise of efficient regulation as to minimize the
movement toward government ownership. Not only are old abuses now more
likely to be remedied, but the Interstate Commerce Commission is now
empowered to relieve the roads of many undeserved burdens. Especially
is the Commission keenly appreciative of the necessity of stabilizing
the credit of the railroads. Until this is done the investing public
will have little confidence in the railroad business, and the roads
will continue to be inadequately financed.
Perhaps the greatest problem now before the Commission is to complete
the "physical valuation" of the railroads begun in 1913. This
valuation aims to discover, by investigations conducted by expert
appraisers, the actual value of all railroad property in the United
States at the present time. On the basis of this valuation the
Commission believes that it can estimate the probable amount of
invested capital which the railroads represent. After this has been
done, the Commission can calculate what rates the railroads must
charge in order to earn a fair dividend on their money. The completion
of this physical valuation is, therefore, necessary if the Interstate
Commerce Commission is to fix rates which are just and reasonable from
the standpoint of the public on the one hand, and from the standpoint
of the railroads on the other.
QUESTIONS ON THE TEXT
1. What is the economic basis of natural monopoly?
2. Describe the regulation of local utilities.
3. Give the chief arguments in favor of municipal ownership.
4. What arguments are advanced against municipal ownership?
5. What is the extent of municipal ownership in this country?
6. Name some of the fundamental conditions of municipal ownership.
7. Outline briefly the development of railroads in this country.
8. How does the principle of decreasing cost apply to railroads?
9. Discuss the evils resulting from railroad development.
10. Why did State regulation fail to eliminate these evils?
11. Discuss the nature and effect of the Interstate Commerce Act.
12. Give the chief arguments in favor of national ownership of
railroads.
13. What are the chief arguments against this step?
14. When and why were the railroads taken over by the Government?
15. Explain clearly the nature of the results of government control
of railroads.
16. Enumerate the laws under which the Interstate Commerce Commission
now administers the railroads.
17. Summarize present railroad legislation with regard to
(a) discriminations,
(b) rates, and
(c) the extension of Federal control authorized under the Act of 1920.
18. What is the greatest problem now before the Commission?
REQUIRED READINGS
1. Williamson, _Readings in American Democracy_, chapter xxviii.
Or all of the following:
2. Ely, _Outlines of Economics_, chapter xxvii.
3. Fetter, _Modern Economic Problems_, chapters xxvii and xxx.
4. King, _Regulation of Municipal Utilities_, chapter i.
5. Seager, _Principles of Economics_, pages 419-431, and chapter xxiv.
QUESTIONS ON THE REQUIRED READINGS
1. What is meant by Transportation Economics? (Ely, page 557.)
2. Explain clearly why public utilities are natural monopolies.
(Seager, pages 419-426.)
3. What is the origin of the right to regulate public utilities in
the public interest? (King, page 4.)
4. Why must municipal utilities be regulated or controlled? (King,
pages 11-16.)
5. What is the relation of unregulated municipal utilities to bad
politics? (King, pages 17-19.)
6. What are the legal duties of corporations controlling municipal
utilities? (King, page 10.)
7. What forms may municipal ownership take? (Fetter, pages 461-462.)
8. How does uniformity of product favor monopoly? (Fetter, page 463.)
9. Why did the railroads receive liberal help from state and Federal
governments during the period of railroad development? (Fetter, page
413.)
10. Distinguish between local and personal discriminations. (Fetter,
pages 416-417.)
11. Discuss the nature of the early state railroad
commissions.(Fetter, pages 420-422.)
12. In what respects was the Interstate Commerce act amended by the
legislation of 1903, 1906 and 1910? (Seager, pages 442-443.)
13. What was the nature of the Commerce Court? (Seager, page 444.)
14. What is the most convincing argument against the public ownership
of the telegraph and the telephone? (Seager, page 445.)
TOPICS FOR INVESTIGATION AND REPORT
I
1. Make a list of the natural monopolies in your locality.
2. To what extent are the public utilities in your locality controlled
by the (a) municipality, the (b) state, the (c) Federal government?
3. The franchise-granting power in your state.
4. The regulation of local utilities in your municipality.
5. Extent of municipal ownership in your section. If possible, visit a
municipally owned utility and report upon it.
6. Interview an official of some local utility upon the desirability
of municipal ownership of that utility.
7. The history of railroad development in your section.
8. Outline the more important laws enacted by your state legislature
relative to railroads.
9. Service and rates in your locality during the period of government
control, 1917-1920.
II
10. Regulation of local utilities through the franchise. (King,
_Regulation of Municipal Utilities_, part ii.)
11. Regulation of local utilities through the utility commission.
(King, _Regulation of Municipal Utilities_, part iii.)
12. Standards of service for local utilities. (_Annals_, vol. liii,
pages 292-306.)
13. The case for municipal ownership. (King, _Regulation of Municipal
Utilities_; Thompson, _Municipal Ownership_)
14. The case against municipal ownership. (King, _Regulation of
Municipal Utilities_; Porter, _Dangers of Municipal Ownership_.)
15. Early development of railroads in the United States. (Coman,
_Industrial History of the United States_, pages 232-248; Bogart,
_Economic History of the United States_, chapters xxiv and xxv;
_Lessons in Community and National Life_, Series C, pages 217-233.)
16. Geographical distribution of railroads. (Semple, _American History
and its Geographic Conditions_, chapter xvii.)
17. Combinations in the railroad industry. (_Lessons in Community and
National Life_, Series A, pages 219-224; Bogart, _Economic History of
the United States_, chapter xxix; Johnson, _American Railway
Transportation_, chapter iii.)
18. Rate-making. (Johnson, _American Railway Transportation_, chapter
xx; Bullock, _Elements of Economics_, pages 212-217.)
19. Physical valuation of the railroads. (_Annals_, vol. lxiii, pages
182-190.)
20. Railroad regulation and the courts. (Johnson, _American Railway
Transportation_, chapter xxvii.)
21. War-time control of railroads in the United States. (_Annals_,
vol. lxxxvi, all; Dixon, _War Administration of the Railways in the
United States and Great Britain_, part i.)
22. Report of the Interstate Commerce Commission upon the desirability
of government ownership of railroads in the United States. (Cleveland
and Schafer, _Democracy in Reconstruction_, pages 382-396.)
23. War-time control of railroads in Great Britain. (Dixon, _War
Administration of the Railways in the United States and Great
Britain_, part ii.)
24. Railroad management in England and France. (Johnson, _American
Railway Transportation_, chapter xxiii.)
25. Railroad management in Italy and Germany. (Johnson, _American
Railway Transportation_, chapter xxiv.)
FOR CLASSROOM DISCUSSION
26. The success with which public utilities in your community have
been regulated.
27. Should the franchise-granting power in your state be still further
restricted?
28. The success of municipal ownership in your locality.
29. The relation of "stock watering" or "overcapitalization" to high
profits. (See Taussig, _Principles of Economics_, vol ii, page 385.)
30. Is public ownership of railroads more practicable under a
democratic or under an autocratic form of government?
CHAPTER XXIX
THE TARIFF
355. THE PRINCIPLE OF EXCHANGE.--In Chapters VII and VIII it was
pointed out that when individuals divide up their labor so that each
becomes a highly specialized workman there is a resultant increase in
the community's productivity. Similarly, when one section of the
country is adapted primarily to manufacturing, while another section
is peculiarly suited to farming, there is a gain in national
productivity when each of these areas specializes in those activities
which it can carry on most effectively, and is content to resort to
trade in order to secure the benefit of industries specialized in
elsewhere. So far as the economic principle is concerned, there is
likewise a gain when different countries specialize in those forms of
production at which their citizens are most effective, and are content
to secure through international trade the products of specialization
in other countries.
356. NATURE OF THE TARIFF.--But though all civilized nations allow and
even encourage the division of labor among their individual citizens
and among the various areas within their own boundaries, many
countries restrict the degree to which their citizens may exchange
their surplus products for the surplus products of foreign producers.
In the United States, for example, Congress has the power to levy a
duty or tariff on foreign-made goods which are brought into this
country for sale.
This tariff may be levied primarily to increase national revenue, in
which case the rate of duty is generally too low to keep foreign goods
out of our markets. When the tariff is purely a revenue measure, "free
trade" is said to exist. On the other hand, a tariff may be so high
that domestic goods will be protected in our markets against
competition from foreign-made goods of a similar grade. In this case a
protective tariff is said to exist, though such a measure also brings
in revenue. Most tariff measures, indeed, contain both "revenue" and
"protective" elements, and it is only when a tariff act is _primarily_
a protective measure that we speak of it as a protective tariff.
357. THE MEANING OF "PROTECTION."--Let us be sure that we understand
exactly what is meant by "protection." Suppose that in the absence of
a protective tariff an English-made shoe can be produced and brought
to this country at a total cost of $3.00. Let us assume that this shoe
competes in the American market with an American-made shoe which is of
similar grade, but which, for various reasons, it costs $3.50 to
produce. Suppose, further, that both English and American producer
must make a profit of $0.50 per pair of shoes, or go out of business.
In the resulting rivalry, the English shoe can sell for $3.50 and make
a profit. Competition would force the American producer to sell his
shoe for $3.50 also, but since this would give him no profit, he would
be forced out of business. In such a case the American manufacturer
might secure the passage of a protective tariff on this type of shoe,
so that the English shoe would be charged $0.75 to enter this country
for sale here. This would bring the total cost of the English shoe up
to $3.75, and to make a profit the shoe would have to sell for $4.25.
But since the American shoe can be sold for $4.00, the English shoe is
forced out of the market. [Footnote: If, in this example, the duty
were, say, $.25, the foreign shoe could continue to enter our markets
and compete with the American shoe. In this case the tariff would be a
_revenue_, and not a _protective_ measure.]
The tariff question arises primarily in connection with the matter of
protection, and may be stated as follows: Ought Congress to interfere
with international trade by levying protective duties on imports; and,
if so, just how and to what extent should such duties be levied?
358. TARIFF HISTORY OF THE UNITED STATES.--The first tariff measure in
our national history was the Act of 1789. This was a revenue measure,
though it gave some degree of protection to American industries. Down
to the close of the War of 1812 our tariff was mainly for revenue
purposes. After the close of that war a heavy duty on foreign iron and
textile products was imposed for the purpose of protecting domestic
producers against the cheaply-selling English goods which were
flooding our markets. After 1816 it became our policy to combine in
the same tariff act high protective duties with revenue duties. In
1824 the general level of duties was raised. In 1828 Congress
endeavored to lay a tariff which would suit all sections of the
country, but the attempt failed.
Between 1828 and 1842 the tariff was gradually lowered. Between 1842
and 1861 our tariff policy was unsettled, but in the latter year the
domestic disturbances brought on by the Civil War resulted in the
passage of a tariff which turned out to be highly protective. In the
period immediately following the Civil War the tariff continued to be
very high, due chiefly to pressure from industrial interests which had
secured protection from the war rates. In spite of attempted reform in
1870, 1873, and 1883, the tariff continued to be highly protective.
In 1894 the Democrats reduced the tariff somewhat, and in 1909 the
Republicans attempted to satisfy a popular demand for lower rates by
the passage of the Payne-Aldrich Act. This measure reduced some rates,
but not enough to satisfy the popular mind. In 1912 the Democrats
returned to power, and the following year passed the Underwood-Simmons
Act, lowering the rates on many classes of commodities, and placing a
number of important articles on the free list. In 1920 the Republican
party again secured control of the government, and the tariff was
raised. At present our tariff is highly protective.
359. COMPROMISE CHARACTER OF TARIFF.--Our tariff history is full of
inconsistencies. The pendulum has swung first to low duties and then
to severely high duties. No tariff has satisfied all the interests
involved; indeed, no other issue, with the possible exception of
slavery, has provoked as much political strife as the tariff. Every
tariff is essentially a compromise, for a duty upon practically any
commodity which we might select will benefit some of our citizens,
while it will either prove of no use to other individuals or will
actually injure them. Animated by self-interest, the farmer, the
lumberman, the miner, or the manufacturer, each desires a protective
duty on the commodity which he produces, and a low rate, or no duty at
all, upon commodities which he consumes. As a result, the tariff has
become a sectional problem, in the solving of which Congressmen have
too often considered as paramount the economic interests of the
particular locality which they represent.
360. NATURE OF THE TARIFF ARGUMENT.--The tariff question generally
divides men into two camps, those favoring "free trade," and those
demanding duties that are highly protective. From the standpoint of
economics, the most vital argument against protection is that there is
no fundamental reason why there should not be free trade between
nations. Protection is economically wasteful because it diverts
capital and labor from industries in which we are relatively effective
to industries in which our productivity is relatively low. High
protection is thus said to decrease national productivity, and to
impose a burden upon the consumer by preventing him from purchasing
cheaper foreign-made goods.
In view of these facts, the free trader claims that to the extent that
the tariff is an economic proposition, the burden of proof rests upon
the protectionist. If this assertion is accepted, the tariff argument
consists of the attempts of the protectionist to outweigh the above
economic argument for free trade by putting forth economic arguments
for protection, and by developing social and political reasons for a
protective tariff.
361. AN EARLIER TARIFF ARGUMENT.--Formerly one of the most important
arguments for protection was the home market theory. This theory was
advanced in 1824 by Henry Clay. In the effort to win the agricultural
interests to protection, Clay maintained that a protective tariff on
manufactures would develop urban centers, and that this would increase
the purchasing power of the city dwellers. This increased purchasing
power, Clay declared, would assure the farmer of a steady domestic
market, not only for his staples, but also for perishable goods which
could not be shipped to foreign countries.
Though still heard in tariff discussions, this argument now exerts
less influence than formerly. Perfected means of transportation have
tended to place domestic and foreign markets on an equal footing.
Moreover, the population of our cities has increased so much more
rapidly than has the productivity of our farms, that it is unnecessary
artificially to create a home market for the farmer's produce.
362. THE WAGES ARGUMENT.--At the present time one of the most
important arguments in favor of a protective tariff is that it either
creates or maintains a relatively high level of wages for workmen
engaged in the protected industries. Those advancing this argument
believe that free trade would lower wages and depress the standard of
living for large groups of workmen.
The free trader maintains that high wages do not depend upon
protection, and this for three reasons: First, equally high wages are
often paid in protected and unprotected industries alike; second, high
wages do exist in a number of protected industries, but many of these
industries also paid high wages before protection had been secured;
third, there is nothing in a protective tariff to force employers to
pay more than the current wage. Rather than raising wages, Professor
Taussig maintains, "protection restricts the geographical division of
labor, causes industry to turn to less advantageous channels, lessens
the productivity of labor, and so tends to lower the general rate of
wages."
363. THE VESTED INTERESTS ARGUMENT.--An important argument in favor of
continued protection is that the introduction of free trade would ruin
valuable manufacturing businesses which have been built up under
protection, and which are unprepared or unable to maintain themselves
against foreign competition. In the case of such industries, it is
maintained, the removal of protection might result in economic
disaster. Factories would have to close, investments would depreciate,
and numerous laborers would be thrown out of employment.
There is great force in this argument. Even the most ardent free
trader will admit that a sudden removal of tariff duties might be
demoralizing to industries long used to protection. Nevertheless, the
vested interests argument is not so much an argument for continued
protection as it is a reason why there should be a gradual rather than
a sudden removal of protective duties. If protection were to be scaled
down gradually and wisely, there is no reason why capital invested in
industries unable to stand foreign competition could not be gradually
transferred to industries unaffected by foreign competition.
364. TARIFF ARGUMENTS ACCENTUATED BY THE WORLD WAR.--Three arguments
in favor of protection have taken on greater importance because of the
World War.
One of these is the anti-dumping argument. From the standpoint of the
American tariff, dumping is the practice which some foreign producers
have of temporarily selling their surplus goods in this country at an
abnormally low price. [Footnote: Some American producers in turn
"dump" in foreign markets, but with this practice we are not here
concerned.] If dumping were permanent, we would gain because we would
be getting goods at a much lower price than we could manufacture them.
The evil of dumping grows out of the fact that it tends to force
domestic producers out of business. Then later the foreign supply may
diminish, in which case we suffer from a shortage of goods. If foreign
producers do continue to supply the American market they may take
advantage of the fact that American competitors have been forced out
of business, and demand monopoly prices. The free trader admits the
force of the anti-dumping argument, and concedes that the intense
economic rivalry growing out of the World War rendered desirable
tariff rates which would protect domestic producers against dumping.
Another protectionist argument which has gained in strength because of
the War is the "infant industries" argument. Protectionists claim that
industries really adapted to this country may be prevented from
arising here because of their inability, while still in the
experimental stage, to meet strong competition from well-established
foreign producers. When an industry is in the experimental stage the
cost of production is relatively high, and the price will be
correspondingly high. Well established and economically-conducted
businesses can undersell these experimental or "infant" industries.
Protection for such "infant" industries is therefore sought until such
time as they will be able to stand foreign competition. The free
trader has generally replied that such protection may be desirable in
some cases, but maintains that care should be taken to make such
protection both moderate and temporary, otherwise protection will
perpetuate industries for which we are really unsuited. During the
World War American producers began to manufacture dyes and chemicals
formerly imported from Germany. The industrial importance of these
products gave weight to the belief that the new industries which
sprang up in this country during the War were entitled to protection
against foreign competition.
A third protectionist argument which was strengthened by the World War
is the military or self-sufficiency argument. It has long been the
claim of the protectionist that high tariff duties encourage the
development in this country of all industries producing the
necessities of life, as well as all supplies which are vital in war
time. High protection was thus defended on the grounds that it
permitted the United States to be nationally self-sufficing, thus
allowing us to be relatively independent of other countries,
especially in war time. Previous to the World War many free traders
scoffed at this argument as resting upon an unjustified fear of war,
but this attitude was changed by the dangers to which we were
subjected by the interruption of our foreign trade during the war. At
present the military or self-sufficiency argument is of great
importance.
365. THE TREND TOWARD PROTECTION.--Of late years, therefore, there has
been a distinct trend toward protection in this country. The fear of
dumping, the desire to protect infant industries established during
the World War, and the increased importance of the military or self-
sufficiency argument have been factors in this trend. Another factor
has been that the Republican party, traditionally committed to a
policy of high protection, returned to power in 1920. A last important
influence has been an increased need for Federal revenue. The World
War not only increased our indebtedness, but the advent of national
prohibition in 1919 cut off a source of Federal revenue formerly very
important.
366. TARIFF NEEDS.--From the standpoint of practical politics, one of
the greatest needs of our time is for an intelligent and public-
spirited handling of tariff problems. The tariff is a technical and
highly complex question, upon which politicians have heretofore had
too much to say, and trained economists too little. Too often, vague
claims and political propaganda have carried more weight than have
facts.
It is asserted by many that the tariff can never be taken out of
politics, but this is perhaps too strong a statement. In this
connection an interesting development was the establishment in 1916 of
the United States Tariff Commission. This Commission consists of six
members appointed by the President for twelve years. Not more than
three of the members may belong to the same political party. It is the
duty of the Commission to investigate conditions bearing upon the
tariff and to report its findings to Congress. It is hoped that this
plan will place at the disposal of Congress scientific data on which
to base tariff legislation. So far the Commission has not materially
reduced the influence of politics upon tariff legislation, though it
is perhaps too soon to expect results.
It is sometimes said that our tariff policy ought to be less
changeable. Certain it is that our tariff history is full of
inconsistencies and irrational fluctuations. But the question of a
tariff policy is a thorny one. Manifestly, business should not be
forced to accommodate itself to a purely political manipulation of the
tariff; on the contrary, the tariff ought to vary with changes in
business conditions at home and abroad. Whatever may be implied by a
tariff "policy," it is also certain that the tariff should somewhat
accommodate itself to revenue needs. Beyond these somewhat general
statements, however, it is hardly safe to say what should be the basic
elements in a national tariff policy.
QUESTIONS ON THE TEXT
1. Explain the gain from exchange.
2. What is meant by the tariff? Distinguish between a revenue and a
protective tariff.
3. State the tariff problem.
4. Outline briefly the tariff history of the United States.
5. Why is tariff practically always a compromise?
6. Discuss the home market argument.
7. What can be said for and against the wages argument?
8. What is the vested interests argument?
9. What effect did the World War have upon the anti-dumping argument?
10. What is the military or self-sufficiency argument?
11. How did the war affect the infant industries argument?
12. Why was there a trend toward protection after the World War?
13. What is the nature and purpose of the United States Tariff
Commission?
REQUIRED READINGS
1. Williamson, _Readings in American Democracy_, chapter xxix.
Or all of the following:
2. Carver, _Elementary Economics_, chapter xxvii.
3. Fetter, _Modern Economic Problems_, chapter xv.
4. Seager, _Principles of Economics_, chapter xxii.
5. Thompson, _Elementary Economics_, chapter xix.
QUESTIONS ON THE REQUIRED READINGS
1. What is the extent of the protective tariff throughout the world?
(Fetter, page 218.)
2. Distinguish between a specific and an ad valorem duty. (Fetter,
pages 219-220.)
3. What is meant by a free list? (Fetter, pages 220-221.)
4. What is the fundamental proposition of the free trader? (Carver,
page 244; Thompson, pages 262-263.)
5. What is the "no buying no selling" argument? (Thompson, page 263.)
6. What is the balance-of-trade argument? (Carver, page 245.)
7. What is the origin of the present tariff system? (Seager, pages
394-395.)
8. What is the political argument in tariff discussions? (Seager,
page 397.)
9. What is the relation of tariff to political corruption? (Seager,
page 405.)
10. What was the character of the Payne-Aldrich tariff of 1909?
(Fetter, pages 233-234.)
11. What was the character of the Underwood tariff of 1913? (Fetter,
pages 234-236.)
TOPICS FOR INVESTIGATION AND REPORT
I
1. The home market argument with reference to conditions in your
section.
2. The infant industries argument with reference to conditions in your
section.
3. Commodities essential to the prosperity of your community which are
imported from abroad.
4. The attitude of your section of the country toward the tariff. Has
this attitude changed in the past fifty years?
5. Write to your Representative in Congress for his opinion on the
need of a "fixed tariff policy."
6. Interview several friendly business men on their attitude toward
the tariff.
7. Interview a member of the Democratic party upon the attitude of his
party toward the tariff.
8. Interview a member of the Republican party upon the attitude of his
party toward the tariff.
II
9. The principle of international trade. (Taussig, _Principles of
Economics_, vol. 1, chapter xxxiv; Fetter, _Modern Economic Problems_,
chapter xiii.)
10. The gain from international trade. (Taussig, _Principles of
Economics_, vol. 1, chapter xxxv.)
11. The infant industries argument as applied to American industries.
(Taussig, _Tariff History of the United States_, Part 1, chapter i.)
12. The Civil War tariff. (Taussig, _Tariff History of the United
States_. Consult also any economic history of the United States, or
any standard text on economics.)
13. Tariff administration. (_Cyclopedia of American Government_.)
14. Political aspects of the tariff. (Tarbell, _The Tariff in Our
Times_, chapter xii.)
15. The history of any important tariff since the Civil War. (Consult
Taussig, _Tariff History of the United States_; Fetter, _Modern
Economic Problems_, chapter xv; any standard work on the economic
history of the United States; or any encyclopedia under "Tariff.")
16. The tariff in Germany. (Ashley, _Modern Tariff History_, part i.)
17. The tariff in France. (Ashley, _Modern Tariff History_, part iii.)
FOR CLASSROOM DISCUSSION
18. Why has the wages argument increased in importance within the last
half century?
19. How could our protective tariff be abolished without endangering
present investments in protected industries?
20. The question of a national tariff policy.
21. To what extent should the formulation of our tariff acts take into
consideration the wishes of foreign producers who desire to sell their
goods in this country?
CHAPTER XXX
CONSERVATION
367. ATTITUDE OF THE EARLY SETTLER TOWARD NATURAL RESOURCES.--The
chief concern of the early American settler was to turn a virgin
continent into homes as quickly and as easily as possible. During the
seventeenth, eighteenth, and most of the nineteenth century, our
natural resources were very abundant, while labor and capital were
relatively scarce. As the settlers spread across the Appalachians and
into the great West, it was to be expected, therefore, that the home-
maker should use labor and capital as carefully as possible and that
he should use generously such resources as forests, water power, and
soil fertility. Little blame attaches to the early settler for this
attitude, indeed he acted in accordance with sound economic law. This
economic law declares that under any particular set of circumstances
factors of production should be carefully used in proportion as they
are scarce, and generously used in proportion as they are abundant.
368. RESULT: GROWING SCARCITY OF NATURAL RESOURCES.--The rapid
settlement of the West was essential to our national unity and
development. Nevertheless, the extensive and even lavish use of
natural wealth since colonial times has lately called attention to the
scarcity of resources formerly considered overabundant.
More than three fourths of our original forest area has been culled,
cut over, or burned, since colonial times. Wholesale logging methods
have swept vast areas bare of valuable timber. Careless cutting has
wasted a quarter of our timber supply. In the lumber mill about 40 per
cent of the entire volume of the logs is lost by wasteful methods of
work. Since 1870 forest fires have annually destroyed more than
$50,000,000 worth of timber. Altogether our timber supply is
diminishing three or four times as fast as we are replenishing it.
By holding sod in place, forests furnish a sponge-like reservoir which
absorbs rainfall and then retains it sufficiently to insure that it
will be paid out only gradually. The process of cutting down forests,
called deforestation, destroys the sod, so that streams formerly fed
from forested areas by a steady process become dangerously swollen in
certain seasons and greatly reduced in size at other times. One effect
of this alternation of freshets with abnormally dry periods is a loss
of steady and dependable water power.
Deforestation has also an injurious effect upon agriculture. When
heavy rains wash valuable surface soil from the tops and sides of
hills these denuded areas are rendered less valuable for grazing,
while the overabundance of top soil in the valleys retards effective
cultivation. Agriculture also suffers from the fact that streams which
would ordinarily furnish a steady supply of irrigation water are often
either in a state of flood or practically dried up.
Despite the excellent work done by the Department of Agriculture,
American farming methods are in many sections of the country both
careless and wasteful. The abundance of land in past years seemed to
justify our free use of it, nevertheless such use has in many cases
resulted in a serious loss of fertility. Careless tillage and a
failure to rotate crops have resulted in a heavy loss of nitrogen,
potassium, phosphorus, and other essential soil elements.
Heretofore we have used coal very lavishly. Often as much coal has
been wasted as has been mined. Mining corporations have often
neglected low grade coal deposits, and have abandoned mines without
having first removed all of the accessible high grade coal. Imperfect
combustion, both in dwellings and in industrial establishments, is
said to waste more than a third of our coal, as well as creating a
costly and injurious smoke nuisance. Our consumption of coal is
doubling every ten years. In view of the fact that our coal deposits
are limited, this increasing consumption is a serious development.
Iron, too, has been used wastefully. The bog iron deposits of the
Atlantic coast were used up before 1800, and as the result of an
intense industrial development since 1850, the supply of high grade
ores is being speedily diminished. Oil and gas have been used
lavishly, and even, in some cases, deliberately wasted.
369. HIGH PRICES.--The lavish use of natural resources which has
characterized the American people since colonial times has been an
important factor in the cost of living. In early days there was an
abundance of resources and few people to use them; at present the
supply of many of our resources is greatly diminished, and there is a
much larger population seeking to use them. In the case of every
natural resource the supply is either limited or is failing to
increase as rapidly as are the demands upon it. The result is higher
prices for coal, wood, iron, oil, gas, and similar commodities. It is
at least partly due to the heavy drain upon our resources that the
cost of building homes, heating them, feeding the population, and
carrying on the varied activities of American industry is steadily
increasing.
370. MONOPOLY.--Throughout the history of our natural resources there
has been a strong tendency toward monopoly. Natural resources should
be safeguarded for the benefit of the people as a whole, yet much of
our natural wealth has been monopolized by individuals. Four fifths of
our timber lands are privately owned, and of that four fifths about
half is controlled by 250 companies. Two thirds of the developed water
power in this country is controlled by a small group of power
interests. Defective land laws, the lax administration of good laws,
and extravagant land grants to railroads have allowed private fortunes
to be built up without a proportionate advantage to the public. Coal
and petroleum deposits are controlled largely by a few corporations,
while a heavy percentage of our copper and iron deposits is in private
hands.
371. THE CONSERVATION MOVEMENT.--After the middle of the nineteenth
century the growing scarcity of many natural resources called
attention to the need of conserving them. Conservation means to
utilize economically, rather than to hoard. It means, furthermore,
that resources should be used so that both the present and future
generations will reap a proper benefit from America's great natural
gifts. Thus conservation seeks, Mr. Van Hise once said, "the greatest
good to the greatest number, and for the longest time." The dawn of
the conservation idea stimulated a reaction against the careless
administration of natural resources. Toward the end of the 19th
century, there was an increasing amount of legislation encouraging the
legitimate use of natural resources on the one hand, and repressing
monopoly on the other. After the opening of the twentieth century
interest in conservation increased. In 1908 President Roosevelt called
a conference of the governors of the various states for the purpose of
considering this vital problem, and from that meeting dates a definite
and nationwide conservation policy in this country.
Some of the effects of this changing attitude toward natural resources
may now be noted.
372. FORESTS AND WATER POWER.--In 1891 a Federal law provided for a
system of national forest reservations. These reservations now include
a substantial proportion of our forests, and are steadily extending
their limits. Since 1897 there has been a Bureau of Forestry which has
performed invaluable services. Forest fires have been reduced, denuded
areas have been reforested, forest cutting has been controlled, and a
constructive program of forest culture developed. Forest reserves
under the control of the individual states now total more than
10,000,000 acres. Of late years there has been an increasing use of
dams and reservoirs for the storage of flood waters and the
development of water power. This regulation of streams gives a uniform
flow of water both for navigation and for irrigation purposes.
373. THE LAND.--The desire to encourage the home-maker has long been
the motive power behind our public land policy, but unfortunately many
of our earlier land laws did not prevent peculators and large
corporations from fraudulently securing control of land intended for
the _bona fide_ or genuine settler. Within the last quarter of a
century our land laws have been reorganized, with the double aim of
doing justice to this type of settler, and of suppressing speculation
and monopoly. As the result of Land Office investigations in 1913,
more than 800,000 acres were returned to the public domain, on the
ground that they had been secured through fraud.
The Department of Agriculture has steadily extended its scope. Better
methods of cultivation, lessons in soil chemistry, and experiments
with new and special crops have helped conserve the resources of the
land. An elaborate system of experiment stations has been built up
since 1887. The Weather Bureau in the Department of Agriculture saves
millions of dollars' worth of property annually by sending out
warnings of frost, storm, and flood.
Reclamation is increasingly important. New crops are being developed
for the semi-arid areas of the West. Swamp lands in the East and South
are being drained. Levees and breakwaters along the Mississippi are
helping to prevent the loss of arable land through the river's changes
in course.
Even more important is the irrigation movement. In 1894 the Carey Act
gave Federal encouragement to several western states in irrigation
projects, and in 1902 the Reclamation Act provided for the
construction of irrigation works under the direction of the Secretary
of the Interior. The plan provided by the Act of 1902 is self-
supporting, the expense of the construction and improvement of the
irrigation system being met from the sale of public lands. The
administration of the Reclamation Act has already resulted in millions
of acres being brought under cultivation.
374. MINERALS.--Until 1873 coal lands were disposed of on practically
the same terms as agricultural lands. But after that date laws
restricting the purchase of coal lands began to be increasingly
severe. In 1910 Congress withdrew from public sale nearly 100,000,000
acres of coal, petroleum, and phosphate lands. At the present time the
discovery of coal on land secured by settlers for purely farming
purposes entitles the government to dispose of the coal deposits under
special conditions. There is also a tendency for the government to
demand higher prices of individuals buying public coal lands.
In some quarters there is a demand that all coal lands be leased
rather than sold. The Federal government has not yet yielded to this
demand, but Colorado and Wyoming now lease rather than sell their coal
lands. Under the lease system in these states, the state retains
ownership, but allows private individuals a definite commission per
ton of coal mined. The lease system is also advocated in the case of
lands containing iron, oil, and gas deposits, on the grounds that it
safeguards the interests of the public and at the same time allows the
mining corporations a fair profit.
375. REASONS FOR OPTIMISM.--In spite of the appalling waste which has
been characteristic of our administration of natural resources, the
outlook is distinctly encouraging. Resources used by past generations
are gone forever, but at last we are making rapid strides in
conserving what is left. Not only this, but we are perfecting plans
for an increased supply of those resources which can be replenished.
The admirable work of our Forest Service promises not only to reduce
the present waste of wood products, but actually to increase the
supply of timber. The Service deserves high praise both for its work
in saving and replenishing forests, and for its wise handling of
forest problems involving other resources. "By reasonable thrift,"
runs a report of the Forest Service, "we can produce a constant timber
supply beyond our present need, and with it conserve the usefulness of
our streams for irrigation, water supply, navigation, and power."
We now appear thoroughly awake not only to the necessity of
safeguarding what is left of the public domain, but also to the
necessity of increasing the productivity of inferior lands. There are
still in this country more than 300,000,000 acres of unappropriated
and unreserved land. Three fourths of this area is at present fit only
for grazing, but the rapid development of kaffir corn, durum wheat,
Persian clover, and other crops suitable for dry soils bids fair
greatly to increase the productivity of this land.
The irreplaceable character of our mineral deposits, together with the
tendency for large industrial interests to monopolize minerals. has
greatly stimulated the conservation of these resources. A valuable
step forward has been the reclassification of public lands to allow of
special treatment of lands containing mineral deposits. Coal is still
used lavishly, but nine tenths of our original deposits are still in
existence. Furthermore, water power, electricity, and other
substitutes for coal are being developed. Our high grade iron ores
will be exhausted in a few decades, but an iron shortage may be
prevented by more careful mining, the use of low grade ores, and the
use of substitutes.
376. DIFFERENT RESOURCES CALL FOR DIFFERENT TREATMENT.--A wise
conservation policy will take note of the fact that different
resources call for different types of treatment. Coal, petroleum, oil,
and gas are limited in extent and are practically irreplaceable. These
should be taken from the earth and utilized as economically as
possible. The same is true of the metallic minerals, such as iron and
copper, though here the use of substitutes is of greater importance
than in the case of non-metallic minerals.
Water can best be conserved by the wise development of water power
sites, and by the careful utilization of streams.
Forests may be renewed, but slowly. Their conservation requires the
prevention of fires, the reduction of waste in cutting and milling,
the use of by-products, and scientific reforestation.
Soil elements may also be renewed, though slowly and with difficulty.
Reforestation prevents erosion and thus conserves soil fertility.
Systems of crop rotation designed to retain nitrogen, potassium, and
phosphorus are valuable.
377. SOME CONSERVATION NEEDS.--The above considerations indicate some
of our conservation needs. It is believed by most students of
conservation that the Federal forest holdings should be extended and
consolidated. There is need for more stringent forest fire
regulations, especially in the case of private forests. In order to
reforest the denuded areas and to grow timber scientifically some such
plan as the German system of forest culture might be adopted. There is
urgent need of a systematic development of our inland Waterways. The
construction of more dams and reservoirs, the dredging of rivers and
harbors, the co÷rdination of canals and inland waterways, and the
improvement of the Mississippi-Great Lakes system, all these would be
helpful measures. Irrigation and other reclamation projects, including
the drainage of swamp lands, should be developed systematically.
American farming methods ought still further to be improved. We are in
need of laws penalizing wasteful methods of mining and prohibiting
uneconomical methods of combustion. Probably the system of leasing
rather than selling mineral lands should be extended.
A last vital need in conservation is co÷peration between state and
Federal authorities, and between private individuals and public
agencies. This is of great importance. Where rivers course through
several states, and where forest fires in one section threaten
adjacent forest areas, co÷peration must be secured. The Governors'
Conference of 1908 stimulated co÷peration between the states and the
Federal government, and since 1909 the National Conservation
Association has been a means of co÷rdinating the work of all persons
and agencies interested in conservation. There is still, however,
little co÷peration between state or Federal governments on the one
hand, and private owners on the other. It is a matter of special
regret that although four fifths of our forests are privately owned,
both fire prevention and scientific forestry are little developed on
private estates.
378. THE QUESTION OF ADMINISTRATION.--Though it is conceded on all
sides that our natural resources ought to be utilized economically,
there is much discussion as to whether the states or the Federal
government ought to dominate the conservation movement.
Those favoring the extension of Federal control over conservation
point out that forest control, irrigation, conservation of water
power, and similar projects are distinctly interstate in character,
and are thus properly a Federal function. Federal administration is
said to be necessary in order to insure fair treatment of different
localities. Finally, it is maintained, the states have either
neglected the question of conservation, or have handled it in their
own interests rather than with regard to the national welfare.
A strong party maintains, on the other hand, that conservation is
primarily a state function. The movement is said to be too large for
the Federal government to handle. It is contended that there is no
specific warrant in the Constitution for the Federal control of
conservation. It is also claimed that Federal administration of
natural resources has been accompanied by waste and inefficiency.
Conservation is said to be a local question, best administered by
those most interested in the problem, and, by reason of their
proximity to it, most familiar with it.
The problem of administration is a difficult one. In a number of cases
the claims for and against Federal control are obviously sound. But
from the standpoint of the public the whole matter is of secondary
importance: the problem of administration ought to be decided on the
basis of what is best under particular circumstances. Some phases of
conservation are probably best looked after by the states, others by
the Federal government, still others by the state and Federal
governments jointly. The problem of conflicting authority ought
somehow to be solved. Conservation is too vital a matter to be
hampered by the question of method or means.
QUESTIONS ON THE TEXT
1. What was the attitude of the early settler toward natural
resources?
2. Discuss the growing scarcity of natural resources.
3. What is the relation of lavish use of natural resources to the cost
of living?
4. What part has monopoly played in the history of our natural
resources?
5. Describe the origin and early development of the conservation
movement.
6. Outline the conservation of forests and water power.
7. How is land being conserved?
8. What is the purpose of the Reclamation Act of 1902?
9. What measures have recently been taken to safeguard our mineral
deposits?
10. Why may the present outlook for conservation be said to be
optimistic?
11. Outline our conservation needs.
12. Why is co÷peration essential to the conservation movement?
13. Give the chief arguments for and against Federal administration of
conservation.
REQUIRED READINGS
1. Williamson, _Readings in American Democracy_, chapter xxx.
Or all of the following:
2. Coman, _Industrial History of the United States_, chapter xi.
3. Reed, _Form and Functions of American Government_, chapter xxxiii.
4. Van Hise, _Conservation of Natural Resources in the United States_,
Introduction.
QUESTIONS ON THE REQUIRED READINGS
1. Into what two classes may natural resources be divided? (Van Hise,
page 1.)
2. Discuss the sale of the public domain under the early land acts.
(Reed, page 382.)
3. Outline the destruction of fur-bearing animals by the early
settlers. (Coman, page 377.)
4. Explain the effects of depleted pasturage in the West. (Coman,
pages 381-382.)
5. What are the aims of the Inland Waterways movement? (Coman, page
394.)
6. What part did Gifford Pinchot play in the Conservation movement?
(Van Hise, pages 4-5.)
7. What is the origin of the National Conservation Commission? (Van
Hise, pages 7-8.)
8. What is the nature of the North American Conservation Conference?
(Van Hise, page 9.)
9. Describe the character of the National Conservation Association.
(Van Hise, pages 12-13.)
10. Why should the Conservation movement be carried forward as rapidly
as possible? (Van Hise, page 14.)
TOPICS FOR INVESTIGATION AND REPORT
I
1. Interview an old resident with regard to the relative abundance of
forests, cheap land, and wild game in your locality a half century
ago.
2. Extent and utilization of forests in your state.
3. Draw up a comprehensive plan for the prevention of forest fires.
4. Extent of unused land in your state. What is being done to make
this land more productive?
5. Classify the mineral deposits of your state. By whom are they
controlled?
6. List the water-power sites in your locality. Draw up a plan for
reforestation which would include constructive measures for the
conservation of land and water power as well as forests.
7. If possible, visit a lumber camp or a mine, and observe the methods
of work.
8. Outline a plan for a local conservation club, to be affiliated with
the National Conservation Association.
II
9. The principles of conservation. (Van Hise, _Conservation of Natural
Resources_, pages 359-362.)
10. Relation of population to conservation. (Van Hise, _Conservation
of Natural Resources_, pages 375-380.)
11. The use of our forests. (Van Hise, _Conservation of Natural
Resources_, pages 218-260.)
12. Water power. (Van Hise, _Conservation of Natural Resources_, pages
106-185; Huntington and Gushing, _Principles of Human Geography_,
chapter ix.)
13. Irrigation. (Van Hise, _Conservation of Natural Resources_, pages
185-202; Huntington and Gushing, _Principles of Human Geography_,
chapter xvii.)
14. Inland waterways. (Huntington and Gushing, _Principles of Human
Geography_, chapter vi.)
15. Federal control of water in Switzerland: (_Annals_, vol. xxxiii,
No. 3, pages 113-121.)
16. Land laws of the United States. (Van Hise, _Conservation of
Natural Resources_, pages 279-297.)
17. Legal problems of reclamation. (_Annals_, vol. xxxiii, No. 3,
pages 180-192.)
18. The work of Gifford Pinchot. (Consult an encyclopedia.)
19. The Congress of Governors, 1908. (Van Hise, _Conservation of
Natural Resources_, appendix i.)
20. The North American Conservation Conference. (Van Hise,
_Conservation of Natural Resources_, appendix ii.)
21. The National Conservation Association. (Van Hise, _Conservation of
Natural Resources_, appendix iii.)
FOR CLASSROOM DISCUSSION
22. To what extent should state governments regulate private forests?
(Consult _Annals_, vol. xxxiii, No. 3, pages 26-37.)
23. Should all mineral lands be leased rather than sold?
24. Is the adoption of a program of scientific forest culture at this
time economically justified?
25. Under our present laws is it possible effectively to co÷rdinate
the conservation work of state and Federal governments?
26. Are higher prices an effective check to the excessive use of
forest and mineral products?
27. State versus Federal administration of conservation. (Consult the
Debaters Handbook Series.)
CHAPTER XXXI
CREDIT AND BANKING
379. SOME PRELIMINARY DEFINITIONS.--Money may be defined as anything
that passes freely from hand to hand as a medium of exchange. Money is
of two types: first, coin, including gold, silver, nickel, and copper
coins; and second, paper money, including several kinds of
certificates and notes. Both types of money, coin and paper, are
called "cash." Credit refers to a promise to pay money or its
equivalent at a future date. A bank is an institution which makes it
its special business to deal in money and credit. A check is a written
order directing a bank to pay a certain sum of money to a designated
person. A bank note is a piece of paper money or currency which
constitutes the bank's promise to pay in coin and on demand without
interest, the sum named on the face of the note. A reserve fund is an
amount of money or securities which a bank habitually keeps on hand as
a partial guarantee that it will be able to meet its obligations.
380. TYPES OF BANKS.--Of the several types of banks, the savings bank
is perhaps the most familiar to young people. A savings bank will
receive deposits of one dollar or more, and will pay interest on these
amounts. But the savings bank does not pay out money on checks drawn
against deposits. Indeed, it may require a formal notice of several
days before deposits can be withdrawn.
In many states there are trust companies. In addition to performing
the function of a commercial bank, trust companies take care of
valuable papers, execute trusts and wills, and sometimes guarantee
titles to land.
The investment bank is usually a private institution, conducted
chiefly in the interests of certain large industrial organizations.
A fourth type of bank is the commercial bank, with which this chapter
is chiefly concerned. The commercial bank derives its name from the
fact that it deals largely with business men. If classified on the
basis of their charters, rather than on the basis of function,
commercial banks may be either National, State, or private banks.
381. PRIMARY FUNCTION OF THE COMMERCIAL BANK. [Footnote: Throughout
the remainder of this chapter the word "bank" should be taken as
referring to the commercial bank.]--The primary function of a
commercial bank is to receive the deposits of persons who have saved
sums of money for which they have no immediate use, and to make loans
to persons who desire them. Of course, those who have deposited sums
with a bank may draw on their accounts at any time, either themselves
demanding sums of the bank, or directing the bank, by means of checks,
to pay specified sums to others. But experience has taught the bank
that if it keeps on hand a reserve fund equal to from five to about
thirty-five per cent of the sums for which it is liable to depositors,
it will ordinarily be able to meet all the demands for cash which
depositors will be likely to make upon it. The bank may then loan out
to business men the remainder of the money deposited with it. This not
only encourages production, but it allows the bank to secure a reward
for its services. This reward is in the form of interest paid by those
who borrow of the bank.
382. THE NATURE OF BANK CREDIT.--When an individual actually deposits
with a bank $100 in cash, the bank becomes owner of the $100, and in
turn writes down on its books the promise to pay to the depositor, as
he shall direct, amounts totaling $100. The depositor receives a
check book, and may draw part or all of the $100, as he likes.
Now it may happen that an individual may wish to increase his checking
account at the bank, but that he has no actual cash with which to make
a deposit with the bank. In this case he may give the bank his
promissory note, together with stocks, bonds, or other forms of
wealth, which the bank holds as security. In return, the bank credits
him with a "deposit." This means that the bank extends its credit to
the individual, by undertaking to honor checks for sums not actually
received from the depositor.
The bank has received valuable security from the borrower and hence
feels justified in extending him a deposit credit. But, why does a
bank feel _safe_ in undertaking to pay out sums of money which it does
not actually have in its vaults? The answer is that the bank attempts
to keep on hand a reserve fund sufficient to meet all demands for cash
which may be made upon it. If the reserve fund is relatively large,
the bank will ordinarily loan its credit freely. If the cash reserve
is relatively low, the conservative bank may refuse further loans, on
the grounds that its cash reserve is too low to justify the acceptance
of additional obligations. The only safe alternative to this is for
the bank in some way to increase its reserve fund, and then proceed to
extend the amount of credit justified by this increased reserve.
383. DANGERS OF BANK CREDIT.--The integrity of these various
operations rests upon the confidence which people have in the bank's
ability to make good its promises. Confidence in the deposit credit of
a bank exists when the past experience of depositors has taught them
that the bank in question will habitually exchange either coin or bank
notes for checks. Bank notes are ordinarily accepted in the place of
coin, because people believe the credit of the bank issuing those
notes to be so firmly established that the bank would be able and
willing to exchange coin for its notes, upon demand. A bank is
enabled to meet these obligations promptly, it should be remembered,
because it keeps on hand, against the demands of depositors, a reserve
fund of cash, or securities which by law it is allowed to count as
cash. If all of the depositors of a bank suddenly and simultaneously
demanded the full amount of their deposits in coin, the bank would be
unable to accommodate them; as a matter of fact, business men normally
leave in the bank that share of their deposits which they do not
actually need. So long as men have confidence in a bank, they will
prefer checks and bank notes to the less convenient coin, unless they
need coin for some special purpose.
If properly managed a bank is a profitable business for everyone
concerned. But even though properly managed, a bank may occasionally
find itself in a precarious position. There are few matters which the
average person comprehends as vaguely as banking, and few things which
more vitally interest him than the safety of his money. These two
facts combine to render banking extremely sensitive to every rumor of
unsoundness. The careful regulation of banking by law is therefore
necessary.
384. THE NATIONAL BANKING SYSTEM.--The Civil War plunged our
government into serious financial straits. To improve the finances of
the Federal government there was created, in 1863, a system of
national banks. The original act of 1863 is still the basis of our
banking system, though it has since been modified a number of times,
notably in 1913.
We speak of a "national banking system," but as a matter of fact this
term is inexact. From the beginning of their history, the so-called
national banks were "national" only in the sense that they were
chartered by the Federal government, and were subject to examination
by Federal inspectors. These national banks constituted no definite
system: they transacted business much as other banks did, they had no
branches, and they had little to do with one another. There was little
team-work, and no effective leadership, so that in time of a
threatened panic the different parts of the "system" worked at cross-
purposes instead of as a unit.
385. WHY A BANKING SYSTEM MUST BE ELASTIC.--A good banking system will
be elastic, _i.e._ it will respond promptly to the varying needs of
business. Money and credit constitute a mechanism by means of which
business is handled, just as the labor force of a factory constitutes
a means of handling the output of the factory. If the output of the
factory increases, a larger labor force is needed; if the output
dwindles, fewer laborers are needed. Similarly, if business increases
in volume, an increased amount of money and credit is necessary to
handle the increased volume of business. If, on the other hand,
business declines, the volume of money and credit ought to decline
also. Otherwise, there will be so much money and credit in
circulation, relatively to the amount of goods, that high prices will
result.
High prices will result for the following reason: Money and credit are
used to exchange against goods. As a general proposition, all the
available goods in a community are in a process of exchanging against
all of the available money and credit in the community. If goods are
relatively few and money and credit are relatively plentiful, a small
amount of goods can command a large amount of money and credit, _i.e._
the goods will sell for high prices. A sound banking system,
therefore, will allow an expansion of money and credit instruments
when business is booming, and will permit the contraction of the
mechanism of exchange when business is growing dull.
The old national banking system was inelastic in two ways: first, it
provided an inelastic supply of deposit credit; second, it provided an
inelastic supply of currency or bank notes.
386. INELASTICITY OF DEPOSIT CREDIT (RESERVES).--It will be recalled
that the amount of loans which a bank may make depends upon the
maintenance of an adequate reserve fund. From this it follows that the
larger the reserve fund the more loans the bank will feel justified in
making. Similarly, if the reserve fund shrinks, sound banking demands
that loans be curtailed. Keeping these facts in mind, there were two
reasons why the supply of deposit credit was inelastic before 1913.
In the first place, individual banks kept only a part of their
reserves actually in their vaults. The remainder, and sometimes the
larger part, of their reserves was maintained in the form of deposits
in other banks. Banks in towns and small cities habitually kept part
of their reserves in the form of deposits in the banks of large
cities, and the latter in turn kept part of their reserves in the
banks of New York City, the financial center of the country. Hence the
cash reserves of the country tended to collect in New York, where they
were utilized by New York banks as a basis for extending loans.
This was a dangerous arrangement. In the fall of the year large
amounts of cash were demanded in the West, in order to pay farm hands
and otherwise "move the crops." At such times the small western banks
had to demand their deposits in larger banks, while these in turn had
to call for their deposits in the New York banks. The New York banks
were often embarrassed by these demands, because they made a practice
of fully utilizing the funds left with them, as a basis for extending
loans. The call in the West for cash meant a curtailment of these
loans with a consequent demoralization of eastern money markets.
In the second place, individual banks were unable to extend loans to
customers beyond the point justified by the amount of reserves in
their vaults, or deposited to their credit in other banks. A bank with
a total reserve of $10,000 might feel justified in loaning its credit
to the extent of $100,000, but in case demands for additional loans
were made upon it, sound banking practice would oblige it to refuse
accommodation. Otherwise it might later find itself unable to get
enough cash to pay out against claims made in the form of checks. This
practice of curtailing loans when reserves were depleted was
demoralizing to business, since the disappointed customer might find
his entire business blocked, and this in turn would inconvenience or
seriously injure all those who were connected with him in a business
way. Before 1913, each bank stood as a unit, and when its reserves
were depleted it could not secure temporary aid from other banks.
There was no centralized control, and no method whereby national banks
might secure help of one another.
387. INELASTICITY OF CURRENCY (BANK NOTES).--We have seen that an
increased volume of business demands an increased volume of money and
credit. In the previous section it was pointed out that before 1913
the volume of _deposit credit_ in this country was inelastic. We must
now notice that _bank notes_, or _paper currency_, are just as truly a
part of the volume of money and credit as is deposit credit, and we
must note, also, that just as deposit credit was inelastic before
1913, so the issue of bank notes was inelastic. Previous to 1913 it
often happened that the supply of bank notes was smallest when
business was expanding, and that the issue of bank notes increased
during dull business periods. This statement requires some
explanation.
The Act of 1863 provided that National banks might issue bank notes
only after depositing in the Federal Treasury an amount of United
States government bonds sufficient to render the bank notes absolutely
safe. Naturally, the banks made heavy purchases of bonds when the bond
market was depressed, and tended to purchase relatively few bonds when
those securities were high in price. Since the only reason for
purchasing bonds was to enable the b banks to issue notes, more notes
were issued when bonds were low in price, and fewer were issued when
bonds were high. Unfortunately, the same general conditions that
stimulated business also tended to raise the price of bonds, while the
causes of slack business often operated to lower bond prices. This
means that when business was expanding, and more notes were needed,
bonds were so high that few were purchased, and consequently few notes
were issued. Similarly, when business was dull, more bonds were
purchased, and more notes issued.
388. THE PANIC OF 1907.--The panic of 1907 attracted attention to
these two great defects of the old national banking system, _i.e._ the
inelasticity of deposit credit and the inelasticity of currency. In
the fall of 1907, a bumper crop caused Western banks to make unusually
large demands for cash upon the New York banks. Unfortunately, this
depletion of reserves came at precisely the time when the demand upon
New York banks for loans was greatest. There was thus increased
pressure exerted upon New York banks for loans, but less justification
for extending them. In response to the pressure for loans, some New
York banks over-extended their credit. In October the inability of a
few prominent banks to pay in cash all of the demands made upon them
started a series of bank "runs." Even solvent institutions were unable
to meet their obligations promptly and many failures occurred. A large
number of banks were technically insolvent, that is to say, their
assets were invested in forms which prevented their immediate
conversion into cash, so that for the time being demands for cash
could not be met. The lack of an effective banking system prevented
these banks from securing temporary aid from banks more favorably
situated.
389. REFORM.--The panic of 1907 stimulated financial experts to
attempt to remedy the defects of our banking system. In 1908 a
monetary commission was appointed to investigate banking experience at
home and abroad. As the result of this investigation it appeared
advisable to establish a system which should secure some of the
advantages of such centralized banking systems as have long existed in
many European countries. A single central government bank was at first
recommended by experts, but this was deemed politically inexpedient.
In view of this fact resort was had to a compromise between a
centralized and a decentralized system. This compromise was effected
by the Federal Reserve Act of 1913.
390. FRAMEWORK OF THE FEDERAL RESERVE SYSTEM.--The Act of 1913 is
administered by the Federal Reserve Board, consisting of the Secretary
of the Treasury and the Comptroller of the Currency, _ex officio_, and
five other members appointed for ten years by the President. The
country is divided into twelve districts, in each of which there is
located a Federal Reserve bank. In each district every National bank
must subscribe six per cent of its capital and surplus for stock in
the Federal Reserve bank, and thus become a "member" bank. State banks
and trust companies may, upon the fulfilment of certain conditions,
become member banks. Each Federal Reserve bank is governed by a board
of nine directors, six of whom are elected by the member banks of its
district, and three of whom are appointed by the Federal Reserve
Board. The Federal Reserve banks are bankers' banks, that is, they do
not ordinarily deal directly with individuals, but with member banks
only.
391. ELASTICITY OF DEPOSIT CREDIT (RESERVES).--The piling up of bank
reserves in New York is impossible under the Federal Reserve system.
The reserves of any member bank do not ordinarily move beyond the
district, for a member bank may count as legal reserve only those
funds which it has placed on deposit in the Federal Reserve bank of
its district. There exists what may be called district centralization
of reserves; that is to say, all of the legal reserves of all the
member banks of a particular district are concentrated in the Federal
Reserve bank of the district, and can be utilized as a unit by that
Federal Reserve bank. If in time of stress the total reserves of the
district are insufficient, the Federal Reserve Board may arrange for
the temporary transfer of surplus funds from one Federal Reserve
district to another. This secures one of the most important advantages
of a central bank without actual centralization.
Elasticity of deposit credit is also provided for in the
"rediscounting device." A bank discounts commercial paper when it
loans an individual, say, $980, on the security of a $1000 promissory
note. The $20 represents an amount which the bank counts out, or
discounts, as payment for the service. A further operation, long known
in Europe as rediscounting, was authorized by the Act of 1913. When
the reserves of a member bank are too low to justify further
extensions of deposit credit, the bank can send certain types of
discounted paper to the Federal Reserve bank of its district, and
receive in return either a deposit credit or a special form of paper
currency called Federal Reserve notes.
392. ELASTICITY OF CURRENCY (BANK NOTES).--When, in return for
discounted commercial paper, the Federal Reserve bank extends a
deposit credit to the member bank, the _deposit credit_ of the member
bank is rendered more elastic. When, on the other hand, the Federal
Reserve bank sends the member bank Federal Reserve notes in exchange
for discounted paper, the result is a certain elasticity in the
_currency_.
The Federal Reserve notes are a new type of currency. They are secured
by the maintenance, in the vaults of the Federal Reserve banks, of a
forty per cent gold reserve for their redemption. Since these notes
are issued to member banks in return for rediscounted paper, the
expansion of business and the resultant tendency of member banks to
send discounted paper to the Federal Reserve bank for rediscount
causes the volume of Federal Reserve notes to expand. When the need
for additional currency has subsided, there is an arrangement whereby
a certain amount of the Federal Reserve notes may be withdrawn from
circulation. This is important, for if the amount of money in
circulation continues to be enormous after business has declined,
inflation and high prices result. _A truly elastic banking system
necessitates contraction as well as expansion._
393. THE OUTLOOK.--On the whole, it would seem that the Federal
Reserve System is a happy compromise between the centralized banking
systems of Europe and the highly decentralized system existing in
this country prior to 1913. The Federal Reserve system allows us to
secure the main benefits of a great central bank without the political
difficulties attendant upon the existence of such a bank. It does a
great deal to make elastic our supply of money and credit. The Federal
Reserve Board can mobilize the entire banking strength of the country
in time of stress, so that the strength of one member bank is the
strength of the whole system. Since it controls not only a substantial
proportion of the bank reserves of the country, but also the privilege
of note issue on the security of rediscounted paper, the Federal
Reserve Board can administer the member banks as a unit. The system
may not eliminate panics, but it is fair to expect that it will reduce
their number and lessen their violence.
QUESTIONS ON THE TEXT
1. Distinguish between money and credit.
2. Name and distinguish between the four types of banks.
3. What is the primary function of a commercial bank?
4. Explain clearly the nature of bank credit.
5. If the cash reserve of a bank is low, and the bank is confronted
with demands for loans, in what two ways may it dispose of these
demands?
6. What dangers attend the extension of bank credit?
7. Describe the national banking system.
8. Why should a banking system be elastic?
9. Explain the inelasticity of deposit credit before 1913.
10. Discuss the inelasticity of bank note issue under the old national
banking system.
11. What was the significance of the panic of 1907?
12. Outline the framework of the Federal Reserve System.
13. Explain in detail how the Act of 1913 provides for elastic deposit
credit.
14. Explain the "rediscounting device."
15. How does the Act of 1913 provide for an elastic bank note issue?
16. What is the present outlook with respect to our banking system?
REQUIRED READINGS
1. Williamson, _Readings in American Democracy_, chapter xxxi.
Or all of the following:
2. Ely, _Outlines of Economics_, chapter xv.
3. Fetter, _Modern Economic Problems_, chapter ix.
4. Seager, _Principles of Economics_, chapter xx.
5. Guitteau, _Government and Politics in the United States_, chapter
xxx.
QUESTIONS ON THE REQUIRED READINGS
1. Outline the financial powers of Congress. (Guitteau, page 361.)
2. Describe the First and Second United States banks. (Guitteau, pages
369-370.)
3. What were the main functions of the national banks? (Guitteau,
pages 371-373.)
4. What are collateral loans? (Seager, pages 346-347.)
5. What are the limitations upon the use of bank credit? (Seager,
pages 352-353.)
6. In what ways are depositors in national banks protected? (Seager,
pages 358-359.)
7. What is the Independent Treasury system? (Ely, pages 297-298.)
8. Explain the relation of "moving the crops" to bank credit. (Ely,
pages 298-299.)
9. How does the Bank of England secure elastic reserves? (Ely, page
302.)
10. What was the Aldrich-Vreeland Act? (Ely, pages 305-306.)
11. Enumerate some of the powers of the Federal Reserve banks.
(Fetter, page 121.)
TOPICS FOR INVESTIGATION AND REPORT
I
1. Write to a number of banks in your vicinity asking for literature
describing the varied services which they offer the public.
2. Outline some of the more important banking laws of your state.
3. What are the limits of the Federal Reserve district in which you
live? In what city is the Reserve Bank located? Why do you suppose it
is located in this city?
4. List the banks in your vicinity that are members of the Federal
Reserve system.
5. Interview an official of a bank belonging to the Federal Reserve
System upon the advantages of such membership.
6. Interview a friendly official of a bank which does not belong to
the system. Try to ascertain the reasons why this bank does not belong
to the Federal Reserve System.
II
7. Nature and function of money. (Ely, _Outlines of Economics_,
chapter xiv; Fetter, _Modern Economic Problems_, chapter iii.)
8. Functions of a bank. (White, _Money and Banking_, part iii, chapter
i; Fetter, _Modern Economic Problems_, chapter vii; Fiske, _The Modern
Bank_, chapter iv.)
9. The bank statement. (White, _Money and Banking_, part iii,
chapter ii.)
10. The clearing house. (White, _Money and Banking_, part iii,
chapter iii; Fiske, _The Modern Bank_, chapter x.)
11. The credit department of a modern bank. (Fiske, _The Modern
Bank_, chapter xvii.)
12. Bank reserves. (Fiske, _The Modern Bank_, chapter xxii.)
13. Greenbacks. (White, _Money and Banking_, part ii, chapter iii.)
14. The check system. (Dunbar, _Theory and History of Banking_,
chapter iv.)
15. Colonial finance. (Dewey, _Financial History of the United
States_, chapter i.)
16. The First United States Bank. (White, _Money and Banking_, part
iii, chapter vi.)
17. The Second United States Bank. (White, _Money and Banking_,
part iii. chapter vii.)
18. The national banking system. (White, _Money and Banking_, part
iii, chapter xiv; Dewey, _Financial History of the United States_,
chapter iv; Fetter, _Modern Economic Problems_, chapter viii.)
19. The panic of 1907. (Coman, _Industrial History of the United
States_, pages 335-337; Noyes, _Forty Years of American Finance_,
chapter xv; White, _Money and Banking_, part iii, chapter xviii.)
20. The Bank of England. (Dunbar. _Theory and History of Banking_,
chapter viii.)
21. The Bank of France. (Dunbar, _Theory and History of Banking_,
chapter ix.)
22. The German bank. (Dunbar, _Theory and History of Banking_,
chapter x.)
23. Organization of the Federal Reserve System. (_Annals_, vol.
lxiii, pages 88-97.)
24. The Federal Reserve act and foreign trade. (_Annals_, vol. lxiii,
pages 132-141; Kemmerer, _The A B C of the Federal Reserve System_,
chapter ix.)
FOR CLASSROOM DISCUSSION
25. Should we adopt a centralized banking system such as exists in
England, France and Germany? (See the Debaters' Handbook Series.)
26. Should all State banks and trust companies be required by law to
become members of the Federal Reserve System?
27. What would be the best method of acquainting the general public
with the fundamental principles of banking?
CHAPTER XXXII
TAXATION
394. THE INCREASING COST OF GOVERNMENT.--In the United States, as in
other modern civilized countries, the cost of government is steadily
increasing. The settlement of the Great West, the depletion of natural
resources and the transition from a primitive to an industrial economy
have obliged our government to pay out larger and larger sums for the
services of public officials, and for the materials and commodities
used for public purposes. The growth--of our cities and the increasing
complexity of our industrial life have greatly increased the number of
activities which it is to our advantage to carry on, not individually,
but collectively or through the agency of government. The spread of
altruism and the widening of the concept of social service have caused
the extension of governmental activity in such new fields as social
insurance, recreation, and public health. Altogether, our total
government expenditure is more than seventeen times as large as it was
a half century ago, while the per capita expenditure is more than five
times as great.
395. SOURCES OF PUBLIC REVENUE.--Writers on taxation generally
enumerate as sources of public revenue, public industries, the public
domain, gifts, confiscations, fees, special assessments, fines, and
taxes. At various times and in different countries of the world, all
of these have been important, but in the United States at the present
time taxes are by far the most important source of public revenue.
A tax may be defined as a compulsory contribution exacted from the
individual by the government, for the purpose of defraying expenses
incurred for the common welfare. The government does not return to the
individual taxpayer a definite commodity or service. In return for
taxes the government indeed renders many valuable services, such as
public education, the safeguarding of health, and protection from
domestic violence and foreign war. But on account of the collective
character of these services, no attempt is made to apportion the
payment exacted of the individual to the benefit which he as an
individual receives.
Until recently our national government secured most of its revenue
from taxes on imports, and from excises or internal taxes on such
commodities as tobacco and liquor. Since national prohibition went
into effect (1919), the Federal revenues are derived mainly from taxes
on imports, from income and inheritance taxes, and from taxes on
corporations.
More than three fourths of the receipts of state and local governments
are derived from the general property tax, the amounts collected from
other sources being as yet relatively unimportant. The general
property tax is supposed to be levied upon all the property in the
possession of taxpayers, though as we shall see a little later, this
tax works out very badly. The old "poll" or head tax was formerly
important, but at present less than two thirds of one per cent of
state and local revenues are derived from this source. In most states
it is being abandoned because of its small yield, and because of the
difficulty and expense in collecting it.
A. DEFECTS IN AMERICAN TAXATION
396. LACK OF A TAX SYSTEM.--The fundamental defect of American
taxation is the lack of a definite and co÷rdinated system. The tax
laws of most states have been radically changed during the last few
decades, and are still in a process of development. In many states old
taxes are being modified or abandoned, and new taxes adopted. But too
often this is being done without regard for the taxation reform of
other states or of the Federal government. As a result, the tax burden
weighs unequally upon different classes, while between state and
state, or between state and Federal government, there is an
overlapping of tax power. The effect of this overlapping is to create
undue confusion, and to demoralize both tax officials and taxpayers.
397. LEGAL RESTRICTIONS UPON TAXING POWER.--A serious defect of
American taxation is the lack of correspondence between taxing power
and fiscal needs. Let us inquire into this.
The Federal government has important functions to perform, but has
practically unlimited taxing power. So far as the national government
is concerned, the problem of finding sources of revenue is relatively
simple.
The functions assumed by the state governments are as yet relatively
few and inexpensive, while the power of the state to tax is but
slightly abridged by the Federal Constitution. States have relatively
little difficulty in making both ends meet.
Local governments, and especially municipal governments, have a large
number of functions which are increasingly important. Of the total
government expenditure in this country, about 35 per cent is made by
the Federal government, 10 per cent by the state governments, and 55
per cent by the local governments. But whereas Federal and state
governments have relatively adequate taxing powers, the taxing powers
of local governments are narrowly restricted by the state constitution
and statutes. Such local functions as health, public school education,
and recreation are constantly demanding greater expenditures, yet
local governments as yet have few opportunities for securing necessary
funds.
398. DEFECTS IN TAX ASSESSMENT.--The defects of tax assessment are
clearly illustrated in the workings of the general property tax,
called by some authorities the worst tax in the civilized world. The
basis of levy is the work of local assessors, who are generally
elective. The assessors estimate the value of millions of dollars'
worth of property, and their estimates are the basis of the tax rates
for not only township and county, but generally for the state as well.
Incapable and dishonest assessors often work injustice by
underestimating the value of some forms of property, and
overestimating the value of other forms. In addition, political
pressure is brought to bear upon the assessor to cause him to
undervalue the property of the township or county as a whole, so that
the local unit will bear a relatively small share of the taxes of the
state.
The estimates of the local assessors are commonly subject to
correction by a county, and sometimes by a state, board of
equalization. The duty of such a board is to make assessments uniform
and just, but notwithstanding the efforts of these bodies, unequal and
unfair assessments have persisted.
399. DIFFICULTY OF TAXING INTABGIBLE PROPERTY.--Where taxation is on
the basis of assessment, it often happens that the tax burden rests
unequally upon different forms of property. Property in tangible form,
such as land, cattle, and houses, is easily discoverable, and hence
cannot easily evade the payment of taxes. But intangible property,
such as bonds, stocks, or mortgage, can easily be hidden, so that
owners of this type of property often evade their share of the tax
burden.
This evasion is often practiced in the case of the general property
tax, which is intended to reach both tangible and intangible property.
The general property tax worked well a century ago when the greater
share of wealth existed in tangible form, because local assessors
could easily locate such things as land and live stock. But the rapid
development of corporations, bringing with it a rapid increase in the
proportion of intangible forms of property, has rendered the general
property tax grossly unjust. The assessors of the general property tax
cannot easily discover intangible property, unless taxpayers co÷perate
with them. The all too frequent lack of such co÷peration causes a
disproportionate share of the tax burden to fall upon tangible
property. The general property tax is haphazard, ineffective, and
demoralizing to both tax officials and taxpayers.
400. DOUBLE TAXATION.--By double taxation is meant the taxation of an
individual or different individuals twice for the same thing. Double
taxation is of two kinds.
The first type of double taxation is illustrated by the taxation of
both tangible property and the paper claim upon that property. For
example, a state may tax a land-owner on his land, and also tax
another resident of the state on the mortgage which he holds against
that land. Or it may happen that a state will tax the land, buildings
and other tangible equipment of a corporation, and at the same time
tax those of its residents who hold stock in that corporation, _i.e._
individuals who hold paper evidence of ownership in the tangible
equipment of the corporation. More generally, however, this type of
double taxation arises when the holder of the paper claim resides in
one state, while the tangible property lies in another state. In such
a case, it is common for one state to tax the paper claim, and for the
other state to tax the property itself. This type of double taxation
is manifestly unfair, and often imposes a ruinous burden upon
property.
The second type of double taxation is illustrated by the overlapping
of similar taxes between state and state, or between Federal and state
governments. Because it is the practice of most states to seek revenue
without regard to the taxing activities of other states, or of the
Federal government, it may happen that corporations, incomes, or
inheritances are taxed by more than one agency of government. If a
scientific and co÷rdinated tax system were deliberately to provide for
this, the supposition would be that such taxation were reasonable and
just, because intended to bear with equal weight upon all forms of
property in the taxable class. But because such taxation is haphazard,
it bears with unequal weight upon corporations and individuals, and is
therefore unjust.
Moreover, it encourages the evasion of tax burdens. Individuals and
corporations sometimes migrate from localities or states in which they
are subject to double taxation, to localities or states in which the
danger of such taxation is less. This in turn has the evil effect of
tempting states and municipalities to neglect taxes on corporations,
incomes, and inheritances for the sake of attracting wealthy
individuals and large industrial organizations from neighboring areas.
B. SOME SUGGESTED TAX REFORMS
401. IDEALS OF TAXATION.--Summarizing the views of the more generally
accepted writers on taxation, we may say that the following are the
basic ideals in taxation:
Taxes should take as little as possible from the people and still meet
the needs of government. Taxes should be uniform, that is, all taxable
articles of the same class should be levied upon at the same rate. It
is also important that the time, manner, and amount of the tax should
not be arbitrary, but that the individual's convenience as regards the
terms of payment should be considered. From the standpoint of the
government, taxes should be easy to administer and economical to
collect.
A good tax system will be elastic, so that taxes may easily be
increased or decreased, according as the revenue needs of the
government change. The ability to pay ought to have some influence
upon the extent to which an individual is taxed. Taxes should adapt
themselves somewhat to the local sentiment as to what is expedient or
socially desirable.
Finally, taxation policies should be systematized and co÷rdinated.
402. ESSENTIALS OF A TAX SYSTEM.--The construction of an ideal tax
system in this country would involve three steps.
In the first place, each branch of government should be enabled to
secure revenues actually needed for justifiable purposes. In this
regard the greatest need is to increase the taxing powers of our
municipalities. This is imperative if the cities of the future are to
care for their citizens properly.
A second fundamental step relates to the separation of taxing power.
Each branch of government should pretty well confine its use of the
taxing power to definite types of taxable wealth. The Federal
government, for example, might secure most of its revenue from import
duties, excises, an income tax, and stamp taxes of various kinds. Many
taxation experts believe that the states ought to confine themselves
mainly to license, corporation, inheritance, and, possibly, income
taxes. Local governments might well secure most of their revenue from
taxes on franchises, licenses, and real estate. Such a separation of
taxing power might aid in the adjustment of fiscal needs to taxing
power, as well as helping to remedy the evil of double taxation.
However, a complete separation of taxing powers is not necessarily
desirable, and certainly it is not practicable, for there is a growing
tendency toward duplication in income, inheritance, and other taxes.
At the present time, for example, not only the Federal government, but
many of the states levy income and inheritance taxes.
A third fundamental step would be the co÷rdination of local, state,
and Federal taxing authorities. The central aim of such co÷rdination
should be so to distribute tax burdens that no form of taxable wealth
would escape its just burden, and so that no form of wealth would be
subjected to unduly heavy taxation. There is a growing feeling that to
prevent double taxation and similar evils, all local taxing bodies
ought to be co÷rdinated under the state authorities, while for similar
reasons the Federal government ought to have some measure of direction
or control over that share of state taxation which is interstate in
its effects.
403. REFORM OR ABOLITION OF THE GENERAL PROPERTY TAX.--The reform of
state and local taxation logically begins with the general property
tax.
In many states attempts are being made to reform this tax. In some
cases "tax ferrets" are employed to discover tax evaders, a policy
which may easily lead to corruption and favoritism. In other states
the conviction is growing that local elective assessors ought to be
supplanted by a permanent corps of state assessors, appointed under
the merit system. This would reduce the danger of unequal and unfair
assessments.
In other states there is a tendency to abandon the general property
tax altogether. In New York, Massachusetts, Pennsylvania, and other
states, there is a marked tendency to turn over the general property
tax to local governing bodies. In such cases it is intended that the
state shall depend for most of its revenue upon income, corporation,
inheritance, and license taxes.
The future will doubtless see a more widespread tendency toward the
reform or abolition of the general property tax. In some states,
however, such changes in the taxation system require constitutional
amendment, and constitutional amendment is often a slow and tedious
process.
404. REFORM IN LAND TAXATION.--Coupled with plans for the reform or
abolition of the general property tax are proposals for the reform of
land taxation. A primary aim of these proposals, some of which suggest
elements of the single tax doctrine, is to secure a more correct
assessment of land values. In many cases a state does not now tax the
holder of a mortgage when the mortgaged land is also within the state
and thus directly subject to taxation. This is a desirable
development, but we ought to go still further, so that the holder of a
mortgage would not be taxed whether or not he lived in the same state
as the owner of the land. A mortgage is obviously not social wealth,
but a paper claim on wealth, and this wealth ought not to be taxed
twice.
Some authorities believe that the tax rate on land ought substantially
to be increased, when it appears that such land is being held for
speculative purposes. To encourage improvements, it is also proposed
that certain permanent improvements on land be temporarily exempted
from taxation. Lastly, it would appear socially desirable to levy
special taxes on urban sites, so as to secure for the community some
share of the future unearned increment.
405. THE INCOME TAX.--All taxes ultimately come out of income, but
when we speak of an income tax we refer to a direct levy upon income
as it arises, chiefly in the form of wages, salaries, and profits. A
Federal income tax was levied during the Civil War, but in the
nineties the Supreme Court held that such a tax violated the
constitutional provision that Congress shall not lay direct taxes
except in proportion to the population of the states. In 1913 the
Sixteenth Amendment to the Constitution permitted Congress to lay and
collect taxes on incomes without apportionment among the several
states, and without regard to any census or enumeration.
Since 1913 Congress has passed several income tax laws, and a number
of the states have also adopted this form of taxation. The essential
features of these laws are as follows. Incomes below a certain amount
are exempt from taxation. The limit of untaxable income is raised for
married persons living together. In calculating their net income,
individuals may make allowance for debts, business expenses, and
certain other items. Upon all taxable income above a certain minimum
there is then levied a flat rate, constituting a "normal" tax. Where
incomes exceed a certain amount, there is an additional tax. Thus the
income tax is said to be "progressive," that is, the larger the income
the higher the tax rate.
Many benefits are claimed for the income tax. It falls upon those best
able to pay, and it is not easily evaded or shifted by the person upon
whom it is levied. It is elastic and can readily be increased or
reduced according as revenue needs change. Its progressive character
is a feature which is considered socially desirable.
The chief defects of the income tax are two. In the first place, the
effectiveness of the tax depends upon the willingness of the
individual to declare his full income. This is not always done,
especially where the income tax is regarded as an undue interference
in the private affairs of the individual. Second, wealthy individuals
often migrate to states where there is either no income tax or only a
relatively light one. This last defect of course applies only to the
state income tax.
406. THE INHERITANCE TAX.--Taxes upon inheritances have come into
prominence since the opening of the twentieth century. Since 1916 the
Federal government has levied an inheritance tax. At the present time
most of the states also levy this form of tax upon property passing by
will or under the inheritance laws of the state. The essential
features of the tax are everywhere the same. Small legacies are
generally exempt. Legacies to direct heirs are either exempt, or are
taxed at a lower rate than are legacies to collateral heirs. The rates
are progressive, that is to say, they increase with the size of the
legacy.
Many benefits are claimed for the inheritance tax. It brings in a
large revenue, and falls upon those who are best able to pay. The tax
cannot be shifted and it cannot easily be evaded. It is easily
assessed and collected, because all wills must pass through the
probate court. It is held that the state has a social claim upon the
property of an individual who has amassed wealth under the protection
of its laws, and that this property ought not to be transferred intact
to those who did not aid in its accumulation.
If carried too far the inheritance tax would undoubtedly discourage
the accumulation of wealth, but tax authorities are already guarding
against this danger. On the whole, the inheritance tax is an important
addition to our tax system. Its scope is being rapidly extended: rates
are being raised, the principle of progression is being more
frequently applied, and exemptions allowed direct heirs are being
reduced. The tax is increasingly used in the effort to redistribute
unearned wealth, though the extent to which this is true depends very
largely upon local sentiment.
407. CORPORATION TAXES.--The rapid growth of American industry has
been accompanied by an enormous increase in the number and importance
of industrial corporations. The proper taxation of these bodies is now
challenging the attention of both state and Federal governments.
The difficulties of taxing corporations are two: First, how to prevent
that form of double taxation which results from the fact that several
states may levy taxes of varying weight upon interstate corporations.
Second, how to prevent that form of double taxation which imposes a
burden both upon the tangible property of the corporation and upon the
stocks and bonds representing ownership in that tangible property.
A number of taxation experts suggest meeting the last-named difficulty
by exempting from taxation stocks, bonds, and other securities, and by
imposing, instead, a tax directly upon the capitalization of the
corporation itself. In the case of corporations which are local and of
moderate size, this might be effected by the reform of tax laws within
a single state. Where, on the other hand, corporations are distinctly
interstate in character, such reform would require either a careful
co÷rdination of the tax laws of the several states, or a corporation
tax which should be purely Federal in character.
The first difficulty mentioned above would likewise have to be met,
either by the co÷rdination of state tax systems, or by allowing taxes
on interstate corporations to be levied solely by the Federal
government.
It is claimed by some economists that the virtual impossibility of
effectively co÷rdinating the tax laws of the various states renders it
imperative that all interstate corporations be taxed solely by the
Federal government. In such a case the Federal government would be
taxing interstate corporations partly for its own benefit, and partly
as the agent of the various states. It is said also that such a
Federal tax should be levied on corporations at the source, _i.e._
upon capitalization rather than upon stocks and bonds. Being applied
at the source, it would reach all forms of corporation wealth. It
would be easy and economical to administer. So far as corporations are
concerned, a purely Federal tax on interstate corporations might
prevent both forms of double taxation.
Even though the states consented to a purely Federal tax on interstate
corporations, however, it might prove difficult for state and Federal
governments to agree upon a fair division of the joint revenues
derived from such a tax.
QUESTIONS ON THE TEXT
1. Why is the cost of government increasing?
2. Name some sources of public revenue.
3. What is a tax?
4. What is the fundamental defect of American taxation?
5. In what way is there an inadequate apportionment of taxing power to
fiscal needs in American government?
6. What is the chief difficulty of tax assessment?
7. Why is it difficult to tax intangible property?
8. Enumerate the fundamental defects of the general property tax.
9. Distinguish between the two forms of double taxation.
10. Outline some fundamental ideals in taxation.