International Trade and Tariff Policy
The beginnings of American foreign trade.
International Commerce: Its Beginnings.—Before the Revolution a considerable amount of trade was carried on between the American colonies and various European countries, chiefly Great Britain. After the winning of independence this foreign commerce began to grow rapidly because the hindrances that had formerly been imposed upon it were now removed. Moreover, the Napoleonic wars in Europe brought about an enormous increase in the demand for American foodstuffs. These wars retarded agriculture in Europe and forced the various countries to import supplies from overseas. American shipping developed greatly during the period 1790-1805, but it thereafter received a set-back owing to the blockades and the Embargo Act of 1807, followed a few years later by a four-years’ war with England.
Tariff Policy.—During the period immediately preceding the framing of the constitution each of the thirteen states was free to regulate its own commercial relations. Each determined for itself whether it would permit imports to come in freely from other states and other countries or whether it would impose duties on such imports. |The constitution empowers Congress to regulate foreign trade.| This arrangement proved altogether unsatisfactory and the constitution gave to Congress complete authority to control commerce with foreign countries and among the states. This action was taken primarily to afford Congress an adequate revenue in the way of taxes on imports, although it was also designed to put an end to undue commercial rivalry among the states themselves. In 1792, therefore, Congress passed our first tariff law, a measure designed mainly to bring forth income for the new federal government but also to afford protection to American industries. |This is done by tariffs.| This act of 1792 marks the beginning of a long line of tariff measures, some imposing high duties on imports and some setting these duties at lower rates.[[165]]
The Tariff Commission.
The making of the tariff is in the hands of Congress but the function of studying the industrial needs of the country is entrusted to a Tariff Commission of six members appointed by the President. This commission is empowered to make recommendations to Congress, but Congress is under no obligation to follow its advice nor has it usually done so. Tariff rates are fixed, for the most part, in obedience to political pressure.
The case for protection.
The Argument for Protective Tariffs.—Why should American industry be given protection by tariff duties against foreign competition? The answer to this question was first given by Alexander Hamilton in his famous Report on Manufactures (1790) and it has been elaborated by many writers since Hamilton’s time. |1. It develops young industries.| The chief arguments in favor of protection are that it helps home industry, develops a home market, raises wages and keeps them high, provides employment for a country’s own workmen, and makes a country independent of others. Protection, it is claimed, helps new industries or “infant industries” to get on their feet. These new industries, if not shielded against the pressure of foreign competition in their early stages would be unable to make headway, but if given adequate protection for a time they ultimately get well established and add to the nation’s industrial strength. This industrial growth, it is argued, helps the farmer by creating a home market for his agricultural produce. The growth of industry creates large cities and these centers of population form the farmer’s best market.
2. It keeps wages up.
Those who favor the policy of protection also argue that if high duties were not imposed upon imports from other countries, the wages of the American workman would fall and many would be out of employment. Until recent years the general rate of wages in European countries has been much lower than in the United States, but since the World War the disparity has not been so great. The lower wages of labor in Europe have enabled goods to be produced more cheaply there than in America, and were it not for the protective tariff, the United States would be flooded with these products of underpaid European workers. In the end the American scale of wages would be forced down to the same level—so the protectionists argue.
3. It promotes an all-around economic development.
Finally, there is the nationalist argument for protection. To be strong and independent a country ought to have an all-around economic development. Its people ought not to devote their entire energies to agriculture alone. All branches of economic life ought to be fostered together. A country should aim to provide, so far as possible, for all its own needs; it should not be dependent on other countries for its food supply, its manufactured goods, or its shipping. It is difficult for a country to reach this condition of affairs in any case, and even a near approach to it can only be achieved by the artificial nurture of the weaker economic activities, which is what the protective tariff endeavors to supply.
The case against protection:
The Argument for Free Trade.—Although the foregoing arguments for protection have carried great weight in the United States during the past fifty years there are many Americans who believe that trade with foreign countries ought to be free from all tariff duties, or, at any rate, free from all duties except such as may be needed to provide a revenue. |1. It creates artificial economic conditions.| Those who believe in “free trade”, or in a “tariff for revenue only” make the point that every country ought to devote itself to those industries which it can carry on most advantageously and should not try to produce for itself the things which can more cheaply be imported from other countries. Protection, they claim, merely diverts capital and labor into industries for which a country is not naturally adapted, and thus makes production expensive. |2. It keeps prices up.| It keeps wages up by keeping prices up, and thus deprives the workman of the advantage which high wages are supposed to bring. |3. It fosters industrial monopolies.| The policy of protection is also criticised on the ground that it fosters the creation of great industrial combinations, leads to the establishment of monopolies, and encourages corruption in politics by giving particular industries a financial interest in governmental action. The free traders believe that there is no more reason for protective duties upon trade between different nations than there is for similar duties upon trade among the several states of the Union.
Why foreign trade is important.
The Encouragement of Foreign Commerce.—The work of the national government is not confined to the regulation and restriction of commerce; it is concerned with the encouragement and promotion of trade as well. This promotion of foreign trade is an important branch of the government’s work because the prosperity of the United States depends to a considerable extent upon its commerce with other countries. America produces a large surplus of grain, meat, cotton, and other merchandise which must be marketed abroad. On the other hand there are many commodities, such as sugar, tea, coffee, rubber, and silk which cannot be produced in sufficient quantities here and hence must be imported. The aim of the government is to help our exporters find the best foreign markets for their goods and to facilitate the acquisition of such foreign products as the country requires. This help is rendered in various ways, by making commercial treaties with foreign countries, by maintaining a consular service, by giving encouragement to American shipping, and by the creation of a Department of Commerce in the national administration.[[166]]
Commercial Treaties.—From time to time the United States has established, by treaty, commercial relations with other countries. These treaties are made for the mutual advantage of both parties. They usually provide that citizens of each country may carry on trade with one another subject to the established tariffs, and that there shall be no governmental discrimination against such trade.[[167]] They allow each country to maintain consuls in the territory of the other. On a few occasions the United States has concluded reciprocity treaties providing for reciprocal free trade, in whole or in part, with other countries. An arrangement of this sort was made with Canada in 1854 but was brought to an end twelve years later.
The Consular Service.—Commerce with foreign countries is assisted and facilitated by the consular service. The United States maintains consuls in all important foreign countries and these countries, in turn, send their consuls here. There are several classes of officials in the consular service; the more important are consuls-general, consuls, and consular agents. Consuls-general are stationed at the larger foreign ports and exercise a general supervision over consuls in their respective districts. Consuls and consular agents are maintained in less important foreign centers of trade. |How consuls are appointed.| All members of the American consular service are appointed by the President, but since 1906 the selections have been made by competitive examinations for the lower grades and by promotion for the higher.
Their duties.
Members of the consular service gather information concerning trade opportunities and send this information to Washington where it is printed and distributed to American merchants and manufacturers. Consuls verify the invoices of goods shipped to the United States so as to avoid delay at the custom house. They assist American citizens who may be traveling abroad, particularly those who go abroad to buy merchandise. In a word they are the sentinels of American foreign commerce.
Until 1906 the American consular service was not highly efficient because the appointment of consuls was usually made on political grounds. Men who had rendered service in party politics were often given important consular positions although possessed of no real qualifications for the work which they were expected to do. Moreover, whenever a change of administration took place in Washington many consuls were removed from office and new ones appointed. This injured the service by preventing the development of experienced officials. Since 1906 the situation has greatly improved because appointments and promotions have been made upon a basis of merit alone.
The Merchant Marine.—In order that a country may build up a profitable foreign trade it should have vessels of its own in which to carry exports and imports. Trade that depends entirely upon the use of foreign vessels is insecure, because the outbreak of war between two or more foreign countries may keep these ships at home. So the development of American maritime commerce has seemed to make desirable the maintenance of a merchant fleet under the American flag. |Early American shipping.| Since the Revolution there has always been such a fleet; sometimes it has been large, but more often it has been small.[[168]] After 1915, when the German submarine campaign resulted in the wholesale sinking of British and French merchant vessels, the demand for ships became acute. |The building of ships during the war.| American shipyards once more grew busy and expanded rapidly. In 1916, moreover, Congress passed a Shipping Act, designed to foster the growth of the merchant marine, and when the United States entered the war in 1917 an Emergency Fleet Corporation was created to build a great flotilla of vessels at the public cost and a Shipping Board to operate them. The work was not completed when the war came to an end, nevertheless several hundred vessels were added to the list of America’s ocean carriers. As a result of these efforts the merchant marine of the United States is once more the second largest in the world; but the problem now is to keep these ships busy. Foreign trade began to fall off after the American forces had been brought back from Europe and hundreds of the new ships have remained tied up in American harbors. Some have been sold to private companies; others have been operated by private companies under lease; still others are being operated directly by the Shipping Board.[[169]]
The Bureau of Foreign and Domestic Commerce.—The progress of foreign commerce depends not only upon ships and ports but upon the possession of accurate knowledge concerning the course of markets and prices abroad. Data on such matters are gathered, as has been pointed out, by the American consular service. |Statistics of trade—their value.| This is supplemented, however, by statistics collected for the Bureau of Foreign and Domestic Commerce at Washington, an office which is maintained to provide American business men with accurate and up-to-date information concerning every branch of foreign commerce. The bureau collects and translates the tariff laws of foreign countries, makes investigations into the cost of producing goods both in America and abroad, and studies all possible methods of making American foreign trade more profitable. It affords a good illustration of the way in which the government, without itself engaging in trade, may assist the private enterprises of the people.
Future of Foreign Commerce.—Ocean transportation has made enormous strides forward during the past twenty years. |What new inventions may do for trade.| Wireless communication now enables ships to keep in touch with each other and with the shore, thus making navigation safer. It has been demonstrated by naval experiments that great ships can be steered and their machinery controlled by radio apparatus in the hands of men several hundred miles away. Then there is the airship and the airplane, in both of which it has been shown to be possible to cross the Atlantic far above the surface without a stop. It seems to be beyond doubt that air carriers will, even within our own generation, be used to carry mail overseas as they are now being used on land, and probably passengers as well. The day may come when goods, also, will be ferried through the air from continent to continent in less than a single day. The march of invention in this as in other fields is so rapid that no one can tell today what the morrow may bring forth.[[170]] But of one thing we may be hopeful: that even as the era of rail transportation served to bring all parts of the country into more intimate relation, so may it come to pass that the world of the future will find all its distant parts brought into more friendly contact by the development of these twentieth-century miracles of rapid transit.
Commerce and Peace.—Commerce between countries helps to promote international good-feeling and friendship. It is true that commercial rivalries have sometimes inspired international jealousy and have even paved the way to war; but legitimate trade, honestly carried on between nations, is far more likely to prove a means of drawing them together. From their commercial intercourse nations derive mutual profit. By trading with one another they learn to understand each other. Isolation makes for suspicion and war. World commerce makes for peace.
General References
H. G. Selfridge, The Romance of Commerce, pp. 230-239; 318-349;
C. F. Carter, When Railroads Were New, pp. 33-74;
E. R. Johnson and F. W. Van Metre, Principles of Railroad Transportation, pp. 492-534;
Clive Day, A History of Commerce, pp. 485-517; 564-579;
E. R. Johnson, American Railway Transportation, 2d ed., pp. 52-68; 367-385;
Isaac Lippincott, Economic Development of the United States, pp. 520-549; 611-634;
F. W. Taussig, Principles of Economics, Vol. I, pp. 508-545 (Protection and Free Trade); Vol. II, pp. 363-396 (Railway Problems);
James T. Young, The New American Government and Its Work, pp. 119-140 (The Regulation of Commerce); 187-202 (Federal Power Over Interstate Commerce);
W. B. Munro, Government of the United States, pp. 246-264 (The Commerce Power);
H. R. Burch, American Economic Life, pp. 273-296;
C. R. Van Hise, Concentration and Control, pp. 4-34; 170-192;
I. L. Sharfman, The American Railroad Problem, pp. 100-186.
Group Problems
1. The problem of American railroads—government operation—the Plumb plan—the Transportation Act—what of the future? The growth of American railroads. Railroad consolidation. Development of government supervision. The Interstate Commerce Commission and its work. Why railroads were not permitted to consolidate. The government’s experience with the railroads, 1917-1920. The Adamson law. Government operation. Labor problems under government operation. The Plumb plan. Why it was not adopted. The provisions of the Transportation Act (Esch-Cummins law). Difficulties now being encountered by the railroads. Proposed consolidations. The outlook for railroad transportation. References: John Moody, The Railroad Builders, pp. 211-241; J. J. Hill, Highways of Progress, pp. 114-139; C. F. Carter, When the Railroads Were New, pp. 226-258; E. R. Johnson and F. W. Van Metre, Principles of Railroad Transportation, pp. 564-577; W. Z. Ripley, Railroads, Rates and Regulation, pp. 441-455; 457-521; Otto H. Kahn, Our Economic Problems, pp. 67-118; I. L. Sharfman, The Railroad Problem, pp. 382-464.
2. What is commerce and how is it regulated? References: The Federalist, Nos. 7, 11, 12, 22, 42; John Fiske, Critical Period of American History, pp. 134-162; C. A. Beard, Readings in American Government and Politics, pp. 343-358; Everett Kimball, National Government of the United States, pp. 480-520; O. W. Knauth, The Policy of the United States towards Industrial Monopoly, pp. 66-92; L. H. Haney, Business Organization and Combination, pp. 383-414; 419-437 (The Sherman Act); A. H. Walker, History of the Sherman Law, passim.
3. The American Merchant Marine. How can it be developed? References: Clive Day, History of Commerce, pp. 481-483; 492-494; 513-515; 545-546; N. S. Shaler, The United States, Vol. I, pp. 538-558; W. W. Bates, American Navigation, pp. 234-299; 335-350; W. L. Marvin, The American Merchant Marine, passim.
4. How the tariff has helped the nation as a whole. References: F. W. Taussig, Tariff History of the United States, pp. 194-229; D. R. Dewey, Financial History of the United States, pp. 80-84; 161-164; 176-196; 237-238; 249-251; 262-266; 438-439; 463-464 and passim; Ida M. Tarbell, The Tariff in Our Times, pp. 294-330; E. Stanwood, American Tariff Controversies, Vol. II, pp. 243-295; E. R. Johnson, Ocean and Inland Water Transportation, pp. 257-310; Cyclopedia of American Government, Vol. III, pp. 476-481.
5. Our consular service: its present value and future development.[development.] References: P. S. Reinsch, Readings on American Federal Government, pp. 651-675; C. L. Jones, The Consular Service of the United States: Its History and Activities, passim; F. Van Dyne, Our Foreign Service, pp. 117-177; 217-284; F. J. Haskin, The American Government, pp. 14-26; Gaillard Hunt, The Department of State, pp. 331-349; A. H. Washburn, “Some Evils of Our Consular Service,” in Atlantic Monthly, Vol. LXXIV, pp. 241-252.
Short Studies
1. The commerce of colonial America. George L. Beer, The Commercial Policy of England toward the American Colonies, especially pp. 66-90; J. R. H. Moore, Industrial History of the American People, pp. 163-208.
2. The commercial relations of the states under the Confederation. John Fiske, The Critical Period of American History, pp. 134-162.
3. The embargo and non-intercourse policy of the years 1807-1811. Edward Channing, History of the United States, Vol. IV, pp. 379-400; 415; 421.
4. The clipper ships. A. H. Clark, The Clipper Ship Era, pp. 173-194; R. D. Paine, The Old Merchant Marine, pp. 154-184.
5. Some great railroad builders. John Moody, The Railroad Builders, pp. 165-178 (James J. Hill); 193-210 (E. H. Harriman).
6. Railroads and land grants. E. L. Bogart, Economic History of the United States, pp. 348-360; J. B. Sanborn, Congressional Grants of Land in Aid of Railways, pp. 62-75.
7. Railroad rate discrimination. W. Z. Ripley, Railroads, Rates and Regulation, pp. 195-209.
8. The work of the Interstate Commerce Commission. P. S. Reinsch, Readings on American Federal Government, pp. 517-527.
9. The Sherman Act and the Northern Securities Case. James T. Young, The New American Government and Its Work, pp. 141-164.
10. Our foreign trade today. J. H. Hammond and J. W. Jenks, Great American Issues, pp. 195-209.
11. The effects of the tariff on trade. F. W. Taussig, Some Aspects of the Tariff, pp. 3-49; J. H. Hammond and J. W. Jenks, Great American Issues, pp. 174-194.
12. Our river and lake commerce. G. S. Callender, Economic History of the United States, pp. 313-326.
13. International trade. H. R. Burch, American Economic Life, pp. 372-384.
14. The Panama Canal. F. A. Ogg, National Progress, pp. 266-277; P. L. Haworth, The United States in Our Own Times, pp. 300-309; F. J. Haskin, American Government, pp. 209-220.
15. The Shipping Board and Emergency Fleet Corporation. W. F. Willoughby, Government Organization in War Time and After, pp. 121-165.
16. American commerce during the World War. F. A. Cleveland and Joseph Schafer, Democracy in Reconstruction, pp. 397-419.
17. Government operation of the Railroads. 1918-1920. I. L. Sharfman, The American Railroad Problem, pp. 100-131.
Questions
1. Explain the various ways in which a bushel of wheat could be transported from Albany to New York City in 1750; in 1850; in 1920. State the approximate time required in each case.
2. What commercial functions are now performed by wholesalers, jobbers, retailers, agents, brokers, and money-lenders, respectively.
3. Apportion the following into three columns according to whether they figure, for the most part, in the local, the interstate, or the foreign commerce of the United States: bread, tea, oranges, milk, spices, firewood, brick, dyestuffs, automobiles, shoes, paper, tin, jute, gravel, glass, straw, potash, poultry.
4. Name the successive stages in the development of agencies for the transportation of (a) passengers; (b) goods; (c) information. State their relative merits in regard to speed, dependability, and cost.
5. What objections would there be to giving Congress authority over local commerce? Will the new agencies of transportation increase the power of Congress or of the local authorities?
6. Is there in your state a commission with authority over local commerce? How is it appointed and what are its powers?
7. What sort of cases come before the Interstate Commerce Commission? The Railway Labor Board? Give an example in each case.
8. Among the various arguments for protection which one appears to be the strongest? Which seems the strongest argument for free trade? Can you suggest any argument on either side in addition to those given in the text?
9. Make a list of the reasons why the United States should have a large merchant marine, putting them in the order of their importance. Should the government sell or operate its ships?
10. If you were planning to fit yourself for the consular service, what subjects would you study? Show how each study would be of help to you in performing your duties as a consul. Why are appointments to the consular service made by competitive examination?
11. Explain what is meant by the following statements and give illustrations: “Trade follows the flag”; “Commerce makes for peace”; “Trade rivalries lead to war”; “Commerce does not create goods but values”.
12. During the World War, and for a time thereafter, the exports of the United States greatly exceeded the imports. What effects do you think this had (a) upon prices in this country; (b) upon our stock of gold; (c) upon tariff policy?
13. Suggest any ways, not already utilized, in which the national government could help the development of (a) interstate commerce; (b) foreign commerce.
Subjects for Debate
1. The national government should own and operate the railways.
2. Our protective policy has benefited (or injured) the farmer.
3. The national government should operate its own ships even if it must operate them at a loss.
THE SPIRIT OF VULCAN
By Edwin A. Abbey
From a mural decoration in the Pennsylvania State Capitol at Harrisburg.
In this crowded and clanging hive of industry, where no semblance of order appears visible to the onlooker, Vulcan sits aloft on the clouds of smoke and steam directing the actions and energies of the workers to a common end. It is the co-operation of the toilers, the guidance of their skill and strength, that makes their work productive. Like a mentor the mythical patron of industry, Vulcan, presides over the busy centers of human toil.
The general impression which the artist has sought to convey is that of industry reaching its results, not through the unguided work of individuals, but by mutual effort under wise and kindly direction.
THE SPIRIT OF VULCAN. By Edwin A. Abbey
Copyright by Edwin A. Abbey. From a Copley Print, copyright by Curtis & Cameron, Boston. Reproduced by permission.
CHAPTER XX
THE ORGANIZATION AND CONTROL OF INDUSTRY
The purpose of this chapter is to explain how American industry is organized and how the government has endeavored to regulate this organization in the public interest.
The broad scope of industry.
What is Industry?—Industry comprises the whole process of converting raw materials into finished products. It includes the production of goods by hand in the workshops, and by machinery in the factories. Agriculture, mining, and forestry furnish the raw materials; industry works them up; commerce distributes them. In its widest sense industry includes not only manufacturing, as we ordinarily understand the term, but mining, lumbering, the fisheries, shipbuilding, and many other great branches of economic activity. It engages the attention of more than one-third of the American workers and is steadily growing to greater relative importance. The United States is now entitled to be called one of the great “industrial” nations of the world. As such its people have many difficult problems to face, including such things as the proper organization and control of industry, the improvement of conditions under which it is carried on, and, most difficult of all, the maintenance of good relations between industrial labor and industrial management.
The Old Industry and the New.—One hundred and fifty years ago practically all industry was carried on by hand. The making of cloth was a home activity; the yarn was spun by hand and woven into fabric on the hand-loom. Shoes were made—soles, heels, and uppers—by the village cobbler. The local blacksmith made such agricultural implements as there were. Large factories did not exist. But with the application of steam power to industry all this began to change. Steam power began to be utilized in American industry right after the War of Independence; it was not widely used at the outset, but in the course of time it completely revolutionized the methods of industry throughout the world. It supplanted hand methods almost altogether, drove the village industries out of existence, and introduced factory production on a large scale. Factories containing machinery operated by steam power could produce cloth, shoes, implements, and almost every other sort of manufactured commodity more cheaply than they could be made by hand-industry in the homes or in small shops. So the factory system spread over the length and breadth of the land, drawing large investments of capital into its vortex, giving rise to great industrial corporations, creating a new labor class, fostering the growth of great cities, and compelling the government to take a hand in the regulation of industry. |The Industrial Revolution in America.| This great transformation in industry, which covered the course of the nineteenth century, is known as the Industrial Revolution, and a gigantic revolution it was. Nothing in modern times has exerted a more profound or far-reaching influence upon the general course of civilization. The factory is the symbol of a new economic order. It has been said, and rightly, that three things,—steam, steel, and credit,—have revolutionized industry during the past hundred years.
Industrial Organization of Today.—In the days of hand-industry men needed no large amounts of capital in order to engage in the production of goods. The tools used in hand-industry were not expensive; nor was it necessary to buy raw materials in large quantities. The things that the workman produced, moreover, were sold almost as soon as they were made. |The use of capital.| With the advent of the factory system, however, capital in large amounts became essential because buildings and machinery, both of which are costly, had to be provided. Large stocks of materials must also be kept on hand, and workmen have to be paid before the goods manufactured by them are sold. So, whereas one man of relatively small wealth could carry on an industry under the old system, the combined resources of many men are required under the new. This need of combining the contributions of many persons into a large capital fund has given rise to the modern industrial corporation.
Corporate organization.
American industry of today is carried on for the most part, therefore, by corporations or companies. An industrial corporation or company is a group of persons, each of whom contributes a portion of the capital needed to carry on the business. These contributors receive shares in the corporation proportionate to the amounts of money which they invest. The man who contributes one hundred dollars becomes the owner of one share; the man who invests a thousand dollars receives ten shares.[[171]] An industrial corporation with a capital of a million dollars is able to allot among its stockholders ten thousand shares of the par value of one hundred dollars each. It may have only a few shareholders, or it may have a great many. These shareholders, be they many or few, control the management of the business. They elect each year a board of directors, who, in turn, appoint the officers and managers. The latter purchase the raw materials, engage the workmen, supervise their labor, sell the finished goods, and distribute the profits among the shareholders in the form of a dividend declared upon each share. Every corporation has as its legal basis a charter, which is a document issued by the governmental authorities, usually by the state. This charter states the purpose of the corporation and authorizes it to do business. Charters of corporations may be revoked if the powers conferred by the charter are misused.
Ways of avoiding industrial competition
Industrial Agreements and Pools.—With large numbers of industrial corporations engaged in the same line of business it is inevitable that they should compete with one another for the sale of their respective products. This competition, quite naturally, tends to keep prices down, because each corporation does its best to get trade by underselling its rivals. But competition which forces down prices also results in reducing profits, and the industrial corporations often find that higher profits can be earned for their shareholders if some arrangement is made to limit this competition. Thus it came to pass that the men who controlled large corporations in the same line of business got together and made informal agreements not to compete in such way as to force prices down. |Gentlemen’s agreements.| These “gentlemen’s agreements”, so-called because they had no legal force but merely rested upon the honor of the various corporations, usually provided that a certain scale of prices would be maintained and that no concern would sell its products below this stipulated scale.
Pools.
These agreements, however, were not altogether satisfactory to the corporations. At the fixed scale of prices some companies, by reason of special advantages, were able to make large profits while others earned very little and became dissatisfied. Hence a new method, commonly known as pooling was devised to give every corporation its fair share in the earnings of the entire trade. Under this plan each company was allotted a certain territory within which it might sell its products without competition on the part of the others. Then, at the end of the year, the profits of all the companies were put into a “pool” or common fund and so distributed that no company would have a higher rate of earnings than the others. This was an ingenious method of ensuring substantial profits to each corporation, no matter how well or how badly it was managed. Incidentally, it deprived the public of the benefits which would have come to it, in reduced prices, if competition had been freely carried on. For this reason the practice of “pooling” was soon forbidden by law as an unreasonable restraint of trade.
Trusts.
Trusts, Holding Companies, and Mergers.—Not to be balked in this way the corporations devised a new plan for checking competition. This took the form of a trust. Corporations agreed to place their shares in the hands of trustees and these trustees, by virtue of holding the shares, controlled the business of all.[[172]] Through this control the trustees were able to make sure that no price-cutting would result from competition among the various companies comprised within the trust. |Holding companies.| Another plan, not widely different, was to organize a “holding company”, in other words a large corporation to hold all the shares of the smaller corporations not merely in trust but as the actual owner.[[173]] |Mergers.| Finally in some cases, the smaller companies were merged or consolidated outright into a single giant corporation. In such instances the smaller concerns passed out of existence and their former owners received shares in the new corporation.
Combinations stifle competition.
Why Industrial Combinations are Objectionable.—The chief objection to all these combinations, whether by informal agreement, pooling, trusts, holding companies, mergers is that they seek to restrain trade, to create monopolies, and to prevent the public from obtaining the advantages in the way of reduced prices and better quality which arise from free competition. So long as free competition exists the rise of prices is automatically checked. But when competition is stifled by monopoly, the public gets fleeced. When a monopoly is once created, moreover, free competition is difficult to establish again. The reason for this is that when anyone enters the monopolized line of business the holders of the monopoly cut their prices temporarily below the profit-making point and thus make it impossible for the new competitor to continue. Then, when they have driven him out of business, they put prices up once more.
The value of large-scale production.
On the other hand we must not lose sight of the fact that large-scale production is more economical than production in small quantities, and that large-scale production almost inevitably leads to industrial combinations. Most manufactured commodities are produced under what economists call “the law of increasing returns”, that is to say the larger the quantity produced, the smaller the cost per article. There is a great deal of overlapping and waste when goods are manufactured in small independent shops or factories. Large industrial combinations can obtain capital more easily; they can buy raw materials in larger quantities and at better prices; they are in a position to secure and use modern machinery; and they can create better facilities for selling their goods. Large-scale production also permits a profitable use of by-products, such as coke in the manufacture of gas or scraps of leather in the making of shoes. Where industries are small these by-products are not sufficient to make their sale worth while; but large-scale industries realize considerable sums from the sale of their by-products. From almost every point of view the large manufacturing establishments have a great advantage, and if we were to insist that all industry be carried on in small concerns, the public would be the loser in the end. Large-scale production is not in itself to be frowned upon but rather encouraged. The trouble arises from the misuse of the power over prices which results from monopoly, and this misuse of power is what the laws are endeavoring to prevent.
Federal and state control.
The Legal Control of Industrial Corporations.—The right to exercise control over industrial corporations, and thereby to protect the public against extortion, rests partly with the states and partly with the national government. Most corporations are created by state charters and this gives the state authority over them. So long, therefore, as a corporation confines its business within the limits of the state in which its charter was obtained, the national government has no control over it. But most large corporations, such as steel and oil companies, woolen and cotton companies, carry on their business in more than one state. They have factories scattered over several states. They buy materials in one state, manufacture them in another, and sell the products in a third. Wherever this is the case the national government does have authority over them, for the constitution gives to Congress the power “to regulate commerce among the several states”.
Industrial Corporations and the Sherman Law.—To understand the relation of the laws to combinations and monopolies it is necessary to go back a little way into legal history. |The common law rule against combinations in restraint of trade.| By the common law of England, which was introduced into the colonies before the Revolution and became the basis of the American legal system, it was provided that combinations were illegal when formed to restrain trade unreasonably. This was the prevailing legal doctrine in the United States for a hundred years after the formation of the Union, but it did not suffice to prevent the steady growth of monopolies. In 1890, therefore, Congress decided to draw the line more strictly and to this end enacted the Sherman Anti-Trust Law, which declared every contract or combination, in the form of a trust or otherwise, or conspiracy in restraint of trade or commerce among the several states, to be illegal. |The rule in the Sherman Law.| No distinction was made by the words of this law between reasonable and unreasonable restraint of trade; the Sherman Law simply forbade all trade-restraining combinations in interstate business. It applied to railroads and industries alike, but it was not enforced widely until 1904, when the Supreme Court applied its provisions in the Northern Securities Case (see p. [365]).
This decision caused a great stirring among the dry bones of corporate industry. Many combinations and mergers had been formed in all parts of the country during the closing years of the nineteenth century, and it was argued that to tear these combinations apart would be exceedingly difficult. But the government proceeded against other consolidations, notably the Standard Oil Company and the American Tobacco Company, and secured their dissolution as well.[[174]] |The rule of reason.| In these latter cases, however, the Supreme Court gave hope for a less drastic interpretation of the Sherman Law by avowing its intention to decide each future case in accordance with the “rule of reason”. In other words the court stated its belief that the Sherman Law was not intended to break up all combinations, good, bad, and indifferent, but only those which were contrary to the public interest. By this dictum the Supreme Court re-established in effect the old common law principle that a combination may be legal or illegal according as its purpose is reasonable or unreasonable. And such is the law of the land today.[[175]]
The Practice of Price-Fixing.—Meanwhile some new abuses on the part of various large industrial corporations had arisen. Many manufacturers began the habit of dictating to retail merchants the prices at which goods should be sold. If a merchant refused to maintain these prices and sold goods at lower figures, the manufacturer would thereupon decline to supply him with any more merchandise. This was an effective way of bringing a merchant to terms, particularly in the case of patented articles which are made by only one firm and which cannot be obtained from anyone else. |The Clayton Act.| Here, again, the of the Clayton Act intervened by forbidding price discriminations wherever the effect of such action tends to lessen competition or to create a monopoly. The Clayton Act also prohibited manufacturers and wholesalers from dictating to retail merchants the sort of goods they may sell. The makers of a particular brand of flour, for example, are not permitted to say to the merchant: “You must sell our brand only, otherwise we will not sell to you.”
The Federal Trade Commission.—The foregoing statutes, the Sherman and Clayton Acts, are examples of our attempt to regulate industry by law. The trouble with regulation by law, however, is its stiffness. Laws are hard and fast while the scope and methods of modern business are continually and rapidly changing. A law which is sufficient to meet one problem today proves quite inadequate to cope with another problem tomorrow. The strictest legal provisions, moreover, can usually be circumvented or evaded by some new device. Accordingly, the national government has reached the conclusion that it is better to have the laws lay down the general principles of industrial regulation, leaving the details to be applied by an administrative board or commission. In conformity with this idea Congress in 1914 authorized the establishment of a Federal Trade Commission, the duty of which is to investigate all complaints regarding unfair methods of competition in interstate commerce (except in the case of banks and railroads) and to order that such unfair methods, if found to be in existence, shall be discontinued.[[176]] Decisions of the Federal Trade Commission are reached after a hearing at which both sides may be represented. The commission is also given power to compile and publish information concerning the organization, management, and policy of any industrial corporation engaged in interstate trade. Since 1914 it has rendered signal service in protecting the business men of the country, and the general public as well, against economic injustice.
The Control of Industrial Corporations by the States.—What has been said in the preceding pages relates only to corporations which are engaged in interstate business. This includes most of the largest industrial concerns. Smaller corporations which keep their operations within the bounds of a single state, are not subject to the provisions of the Sherman or Clayton Acts, neither do they come within the jurisdiction of the Federal Trade Commission. This does not mean, however, that the smaller industrial corporations are exempt from regulation altogether. Most of the states have their own anti-trust laws and their own legal regulations to prevent the growth of local monopolies. These rules differ from state to state; in some they are much more strict than in others. State regulation is beset with serious difficulties everywhere because in all the states industries are to some extent carried on by corporations which have obtained their charters from some other state and thus cannot be fully controlled except by the national government.
The Greatest Problem of Modern Industry.—The most difficult industrial problems of today, however, are not connected with the question of government control. So far as the protection of the public against combinations and monopolies is concerned the government is bound to be, in the long run, successful in its efforts although even the strictest laws can work no miracle over night. Far more perplexing is the problem of determining the proper relations between industrial employers on the one hand and industrial workmen on the other. Although labor is a great and essential factor in industry it has hitherto had practically no direct voice in determining the conditions under which industry shall be carried on.
Taking American industry as a whole, labor has had no share in ownership or management. |The human relation in industry.| The relation of the worker to industry has been strictly that of a hired employee who does his job, takes his pay, and calls the account square. But of late years it has been becoming apparent that this relation does not satisfy the workman altogether and that he does not regard wages alone as a sufficient recompense for his share in industrial production. His leaders are asking, in some cases, for a share in the profits, for a voice in determining the conditions of labor and, ultimately, for some share in the management.
The representation of the workers.
Industrial Democracy.—In some large industrial concerns representation has already been given to the workers. They are permitted and encouraged to select a committee from among themselves whose function it is to take up with the management, in an official way, all questions of wages, hours of labor, discipline, and conditions of work. In case of disagreement between the committee and the management impartial arbiters are called in. Thus the employees are given a fair share in the settlement of all matters affecting their work and welfare.
The success of such schemes will depend, of course, upon the degree of fairness which both sides display in conference. Just as the success of political democracy depends upon the exercise of tolerance on the part of those to whom power is given, so in any form of industrial democracy the abuse of power, whether by employers or workmen, will surely spell failure. It is essential to the well-being of the nation that the workers in industry shall receive their rightful share from the earnings of industry, that they shall have just conditions of employment and be treated like men. But it is also essential that the management of industry shall not be subjected to unreasonable demands and that a system of production which the world has spent a century in building up shall not be broken down until something well tried and tested by experience can be put in its place.
Profit Sharing as a Step toward Industrial Harmony.—One of the ways suggested for ensuring to the workman his full share in the earnings of industry is known as profit sharing. The usual provision is that after the current rates of interest, wages, and salaries are paid the surplus earnings shall be divided between the employers and the workers on some fair basis determined in advance. But the amount which goes to the workers is not necessarily paid in cash. Either in part or in whole it may be given to them in the form of shares in the business and on these shares they receive thereafter the regular rate of earnings.
It was hoped that an arrangement of this sort would bring the employer and his workers more closely together. Profit sharing, indeed, was at one time proclaimed to be a solution of the whole labor problem. But on the whole it has not fulfilled expectations. For this there are several reasons. |Why profit sharing has not made great headway.| Some workers did their best, others scamped their work; but all shared alike. The employers did not find that labor responded with increased efficiency when a share of profits was given. The workers, on their part, found that profits sometimes declined greatly in spite of their hardest efforts. Bad judgment on the part of the management would offset hard work on the part of the men. Not having access to the books and figures the workers often suspected that their rightful share of the profits was being withheld from them. The trade unions, moreover, looked askance at the whole proposal and insisted, among other things, that no one who was not a member of the union should be a profit-sharer. So the movement has slackened, although it still has some strong advocates and seems to be losing none of the ground that it has gained.
Other Remedies for Industrial Unrest.—Several other remedies for industrial unrest have been suggested, and some of them are being given a trial. The relations of labor to industry constitute a large and difficult problem, however, and cannot be made clear in a single paragraph. They are, in fact, of sufficient importance to have a chapter to themselves.
Industrial opportunities.
Industry and the Individual.—The opportunities for capable young men and women in industry were never greater than they are today. The operations of industry have become so complex that they afford openings for every type of individual skill and proficiency. The management of American business is no longer conducted by hit-or-miss methods; everything is worked out with scientific precision in buying materials, merchandising, manufacturing, marketing, and financing. American industry in all its branches is hiring brains as well as muscle.
The choice of a vocation
The success of the young man or woman who goes from school into industry depends in the first instance upon a wise selection at the start. Different types of industrial work call for altogether different tastes and abilities on the part of the individual. Some individuals are of a distinctly mechanical temperament; their interests run to machinery and the processes of working with material things. Others have no interest at all in that direction; but they may be tactful in dealing with other people, able to use their imaginations, with perhaps a penchant for figures. Others, again, have none of these qualities but are punctual, industrious, and can always be depended upon to carry out instructions to the letter. American industry has openings which exactly fit individuals of all temperaments and capacities; the big problem is to bring the man and the opportunity into touch with each other. A square peg will not go into a round hole; no amount of patience will put it there. But there are many square pegs trying to fit themselves into the round holes of industrial employment today because so many young men and women have taken the first job offered to them without reference to its real suitability. These first jobs very often lead up a blind alley. The time spent in them by thousands of young men and women is time wasted.
Vocational guidance.
It is to help eliminate this enormous waste of human effort that facilities for vocational guidance are now provided by a great many schools. But no vocational counsellor can properly plan the start in life without assistance from the boy or girl immediately concerned. It is the duty of everyone to make a personal study of the opportunities which the various forms of industry afford, to reflect upon his own tastes, abilities, and ambitions, and to look at the problem as one of supreme importance to himself. A right start is half the victory.[[177]]
General References
R. T. Ely, Outlines of Economics, pp. 26-62 (The New Industrial System);
W. Z. Ripley, Trusts, Pools, and Corporations, pp. 78-96; 703-734;
F. W. Taussig, Principles of Economics, Vol. II, pp. 419-442 (Industrial Combinations);
F. A. Ogg, National Progress, pp. 58-75 (The Legal Control of Industrial Combinations);
L. H. Haney, Business Organization and Combination, pp. 81-116;
E. D. Durand, The Trust Problem, pp. 9-30;
J. R. Commons, Labor and Administration, pp. 120-148;
F. A. Fetter, Modern Economic Problems, pp. 427-457;
Isaac Lippincott, Economic Development of the United States, pp. 469-490. See also U. S. Bureau of the Census: Abstract of the Census of Manufacturers, 1914, ch. vi, vii.
Group Problems
1. The advantages and defects of large industrial organizations. Advantages of large-scale production. Are large organizations essential to large-scale production? Large industrial organizations and monopoly. Some examples. The distinction between “good trusts” and “bad trusts”. Can large organizations be effectively regulated? Summary of merits and defects. References: F. W. Taussig, Principles of Economics, Vol. II, pp. 419-442; L. H. Haney, Business Organization and Combination, pp. 365-382; E. D. Durand, The Trust Problem, pp. 60-85; W. Z. Ripley, Trusts, Pools, and Corporations, pp. 324-355; J. T. Young, The New American Government and Its Work, pp. 141-186; John Moody, The Truth about the Trusts, pp. 102-132; E. S. Meade, Trust Finance, pp. 193-217; Theodore Roosevelt, Autobiography, pp. 476-515.
2. The position of women in industry—past, present, and future. References: Edith Abbott, Women in Industry, especially pp. 1-9; 215-245; 307-323; T. S. Adams and H. L. Sumner, Labor Problems, pp. 19-67; J. A. Hobson, Evolution of Modern Capitalism, pp. 290-321; John Mitchell, Organized Labor, pp. 131-141; B. L. Hutchins, Women in Modern Industry, pp. 239-265.
Short Studies
1. The far-reaching effects of machine industry. L. C. Marshall and L. C. Lyon, Our Economic Organization, pp. 106-126.
2. Evils of the factory system. W. C. Taylor, The Modern Factory System, pp. 177-227.
3. The power of Congress to regulate corporations. S. P. Orth, Readings on the Relation of Government to Prosperity and Industry, pp. 208-220.
4. Roosevelt and the trusts. F. A. Ogg, National Progress, pp. 40-75; Theodore Roosevelt, Autobiography, pp. 476-515; Otto H. Kahn, Our Economic Problems, pp. 317-322.
5. The Clayton Act. James T. Young, The New American Government and Its Work, pp. 173-178.
6. The work of the Federal Trade Commission. W. H. S. Stevens, Unfair Competition, pp. 217-244.
7. Politics and big business. J. G. Brooks, The Social Unrest, pp. 46-67.
8. Competition and big business. J. H. Hammond and J. W. Jenks, Great American Issues, pp. 160-173.
9. Profit sharing in industry. T. S. Adams and Helen Sumner, Labor Problems, pp. 333-378.
10. The contribution of American industry to the winning of the war. W. F. Willoughby, Government Organization in War Time and After, pp. 67-120.
Questions
1. Show why the rise of the factory system is entitled to be called a “revolution.” Are people better or worse off as a result?
2. “Machinery has made life more varied,” “Machinery has reduced life to routine.” With which of these statements do you agree and why?
3. Make a diagram showing how a corporation is organized. If you owned one or more shares in a corporation, what would be your rights? Your duties? Your risks? What is meant by the statement that a corporation has “legal immortality”?
4. What is the difference between a pool, a trust, a holding company, and a merger? Is it better to forbid these things or to regulate them?
5. Why is it that the Chicago meat-packing concerns have been able to sell dressed meat to marketmen in the towns of the Eastern states more cheaply than it can be procured and slaughtered locally?
6. Explain what President Roosevelt meant when he said that there are good trusts and bad trusts. What service can a good trust perform? What harm can a bad trust do?
7. What are the chief provisions of the Sherman Law? The Clayton Act?
8. Show how regulation by a commission is likely to be more effective than regulation by law.
9. In determining a choice of a vocation what considerations are you going to keep in view? What tests have you applied to make sure that you know your own tastes and abilities? Have you made yourself acquainted with the industrial opportunities? See foot note on p. 397.
10. To what extent should the workers share in the management of industry?
Topics for Debate
1. The Sherman Law should be repealed.
2. The government should have the power to fix maximum prices in the case of all goods produced by industrial organizations which possess a monopoly.
CHAPTER XXI
LABOR AND LABOR PROBLEMS
The purpose of this chapter is to describe the organization, rights, claims, and problems of the American wage-earner.
Hand-industry created no labor problem.
Labor in the Old and the New Industrial Order.—So long as the system of hand-industry was in existence there was no sharp division of employers and laborers into two separate classes. The employer was himself a workman at the loom, the bench, or the forge. He might have as helpers a couple of apprentices who were learning the trade, and perhaps a journeyman or two; but rarely were there more than a half dozen men or women employed in a single establishment. The apprentices and journeymen, moreover, expected in due course to set up in business for themselves. There was no hard-and-fast labor class, and no labor problem as we have it at the present day. The employer and his helpers worked together, often lived together; no great gulf separated them in wealth, education, or social position.
THE CROWNING OF LABOR. By John W. Alexander
From a Thistle Print, copyright by the Detroit Publishing Company. Reproduced by permission.
THE CROWNING OF LABOR
By John W. Alexander
This picture forms one of the panels in a series of mural decorations, representing the achievements of labor, at the head of the great staircase in the Museum of the Carnegie Institute at Pittsburgh.
Pittsburgh, a great industrial community, is depicted as a knight in steel armor, emblematic of strength and power. Labor having reached its highest expression in the prosperous industrial community, the city is being crowned with a laurel wreath and heralded by the winged figures which have arisen out of the smoke and steam. The whole picture is symbolic of the immense energy which is guided by labor into productive channels.
Labor problems came with the Industrial Revolution.
The advent of steam power, factories, and clanging machinery changed all this. The number of employers diminished; the number of employees increased. Hundreds and even thousands of workmen were brought together into great brick factories, working long hours, destined to be laborers throughout their entire lives, with no hope of ever being anything else. With this new organization of industry the relation of the employer to his helpers was completely changed. The old personal relation disappeared; the employer no longer possessed even a passing acquaintance with his men.[[178]] The new relation was simply one of dollars and cents. He gave them so much wages; they gave him so much work. Being only one among a hundred, or one among several hundred, the individual employee lost his industrial independence. Whether he liked his work or not there was little for him to do but take the wages that were offered; he could no longer leave his employer and set up in business for himself as he could in the older days of hand-industry. The Industrial Revolution thus brought into being a new labor class, new conditions of labor, and a new labor problem.
Why Labor Organizes.—Organizations of workmen, now commonly known as trade unions or labor unions, were not in existence prior to the Industrial Revolution. There was no need for such associations then. But when the workers found that as individuals they could not bargain with their employers on terms of equality, they naturally sought to achieve this position of equality by combining together into groups or unions. The original purpose of a labor organization, therefore, was to enable its members to act unitedly in the interest of the worker, making a collective bargain with the employers. |The aims of labor organizations.| By this process of collective bargaining they aim to secure fair wages, reasonable hours of work, sanitary conditions in factories, and security against dismissal except for proper cause. In addition to seeking these advantages the labor organizations try to promote the social and intellectual interests of their own members.[[179]] They have supported the policy of free, public, education and have urged the prohibition of child labor in order that the children of the workers may be kept at school. They have advocated wholesome forms of public recreation, particularly the establishment of play-grounds. In a word the policy of organized labor is to support every movement which aims to make the worker self-respecting and independent while opposing everything that tends to reduce him to the ranks of a mere cog in the great industrial mechanism.[[180]]
Unions and federations.
Organization Methods.—Trade unions are composed of the wage-earners in a particular trade or occupation.[[181]] A local union is formed among the wage-earners of each city or town. These unions, usually called “locals”, hold regular meetings, elect their own officers, and collect small monthly dues from each member. In the earlier stages of the labor movement these local unions were not federated into any national body, but in 1866 the National Labor Union was formed by uniting many of the local associations. This national organization became too much involved in politics, however, and soon went to pieces. In its place arose another national organization known as the Knights of Labor, which gained considerable strength during the twenty years from 1870 to 1890. The Knights of Labor did not attempt to federate the local unions but took individual members directly into their own ranks. In the end the organization became involved in several unsuccessful strikes and gradually weakened, although even today it still maintains a nominal existence. Since 1890 the most important national organization in labor circles has been the American Federation of Labor. Meanwhile, however, the unions in particular trades (such as garment workers, mine workers, railroad trainmen, etc.) had begun to affiliate into individual national unions of their own. State and city federations had also been formed, made up of all the unions in a given state or city. All this made more easy the rise of a giant national federation.
How the A. F. of L. is organized.
The American Federation of Labor.—The American Federation was organized in 1881 but at first its growth was slow. Today it claims a membership of about four million workers. It is a federal organization comprising various national unions in particular trades, state federations of labor, city federations, and a large number of directly affiliated unions. Directly or indirectly the American Federation of Labor has brought into affiliation nearly thirty thousand local organizations throughout the United States and Canada. Every year it holds a convention made up of delegates from the component organizations, and this convention determines the Federation’s policy. The annual convention also elects the Federation’s general officers. The Federation has no compulsory authority of its own but merely exercises such powers as the organizations of which it is composed may concede to it. Its chief function is to bring representatives of unions together once a year for the discussion of common problems, to secure general agreement upon a common program, to give the labor movement greater strength through united action, and to represent the interests of labor before the public authorities.
The demands of “organized labor”.
The Federation’s Program.—The Federation’s program comprises both economic and political aspirations. Among the former are included the demand for a rate of wages in all trades sufficient to enable the worker to live and bring up his family in accordance with “American standards of living”; the establishment of an eight-hour workday in all occupations, with a half holiday on Saturdays; the prohibition of paid labor by children under sixteen years of age; the more effective inspection of workshops, factories, and mines in order that proper sanitary conditions may be ensured and industrial accidents prevented; and the establishment of a system of social insurance against sickness, disability, accident, and old age. Among the political changes advocated by the Federation are the nation-wide use of the initiative, referendum, and recall; the election of a President by direct popular vote; the restriction of the Supreme Court’s right to declare laws unconstitutional; the prohibition of injunctions in labor disputes; and the extension of government control over railroads. The Federation also urges that greater attention be given to vocational training in the schools. It should be understood that the foregoing program is not fixed and inflexible; it may be changed by the annual convention at any time and is being constantly modified.[[182]]
The radical element in labor’s ranks.
Revolutionary Labor Organizations.—In recent years it has become apparent that the relatively moderate program and the strictly peaceful methods of the American Federation do not satisfy the more radical elements in its own ranks. Repeated attempts have been made at the annual convention to displace Mr. Gompers, the head of the Federation, in favor of some leader with more radical views, but thus far these attempts have failed. In some of the labor organizations the radicals have from time to time got out of hand and have gone on strike in defiance of their leaders. Strikes of this sort are commonly known as “outlaw strikes”.
The I. W. W.—its history and aims.
But more particularly the drift to radicalism in labor’s ranks has been shown by the organization and progress of the Industrial Workers of the World (the I. W. W.), which aims to supplant the American Federation of Labor and to combine all the workers of the country into “one big union”. The history of the I. W. W. goes back to 1898, but it gained little strength as an organization until about 1910. Estimates as to the extent of its present membership are uncertain. The program of the I. W. W. includes the abolition of all capitalism, the control of all industry by the workers, and the union of workers throughout the world. The I. W. W. opposes the making of agreements with employers and is at war with the whole existing economic system. It favors the overthrow of the present system of government and the establishment of a proletarian dictatorship.
What “collective bargaining” means.
Methods and Policies of Labor: Collective Bargaining.—The prime purpose of the regular labor organizations, as has been said, is to enable the workers to bargain with the employers upon equal terms. Where the unions have acquired strength, therefore, they insist that all agreements as to wages, hours, and conditions of labor shall be made by the employer on the one hand and the officers of the unions on the other. That is to say they insist that the members of the union shall deal with the employers collectively, not individually, and that the employers shall agree to this method of determining all labor questions. The unions insist upon collective bargaining because they believe it to be the only way in which the workers can be prevented from competing among themselves and thus reducing the rate of wages below a reasonable minimum. The labor of today cannot be sold tomorrow. If it is not sold today, it perishes and brings the worker no return. This inexorable fact places the workman in a position where, if left without protection, he would have to accept whatever terms are offered him. Many large employers of labor throughout the country have accepted the principle of collective bargaining, but many others decline to do so on the ground that it interferes with freedom of contract and restricts employment to the members of labor unions. Collective bargains between employers and workmen are made at joint conferences between the representatives of both sides, and the matters agreed upon at these conferences are embodied in trade agreements, which usually run for a term of months or years.
The theory and practice of strikes.
The Right to Strike.—The chief weapon in the hands of organized labor is the right to strike. A strike is a “concerted withdrawal from work by a part or all of the employees in an establishment, or several establishments, to enforce a demand on the part of the employees”. Strikes are called by officials of the unions when it appears that the demands of the workers cannot be enforced in any other way. This can be done, as a rule, only after a vote of the members has been taken, and in most cases the approval of the national officers of the union must also be secured. While the men are “on strike” it is customary to grant them a small daily allowance for the support of themselves and their families. This is paid out of the treasury of the union where funds have been accumulated from monthly membership fees paid by the men. |Picketing| When a strike is called, “pickets” are stationed near the factory or plant against which the strike is being conducted. These pickets or watchers are furnished from among the strikers; their purpose is to intercept “strike-breakers” or persons who may be going to take the places of the strikers, and to persuade them against doing this. So long as picketing is conducted peacefully and no intimidation or violence is practiced, the laws do not, as a rule, interfere.
Boycotts.
In addition to picketing, the strikers often persuade members of other unions to “boycott” the products of the establishment against which the strike is being conducted, in other words to refuse to transport materials for it or to buy from merchants any of its manufactures. It is becoming the general practice of organized labor to buy no goods which do not bear the “union label”, which is a sticker or tag certifying that the merchandise was made by members of a union.
How the employer strikes back.
Lockouts and Blacklists.—But if the worker has his weapons, so has the employer. When the employer believes the demands of his workmen to be excessive he can shut down the establishment and lock the workers out. Then, if he can find men and women to work for him on more favorable terms, he takes them into his employ and starts up again. Lockouts are not now as common as they used to be. Another weapon of the employer is the blacklist, which contains the names of workmen who have been prominent in fomenting labor troubles and who are, accordingly, regarded by the employers as undesirable. This list is circulated by the employers from one to another and no workman whose name is on it will be given employment. When a worker’s name goes in the blacklist it means that he has the greatest difficulty in finding employment in his own trade anywhere.
Labor and the courts.
The Use of Injunctions in Labor Disputes.—A much-discussed question affecting the interests of labor relates to the use of injunctions in controversies between employers and workmen. An injunction is a writ or order issued by a court of equity. It commands a person or a corporation to do something, or not to do something. A court, for example, may by the issue of an injunction order an employer to reinstate a workman who has been wrongfully dismissed, or it may forbid the calling of a strike by the officers of a union if such action involves the breach of an agreement with the employer. |Contempt of court.| Anyone who disobeys an injunction is guilty of “contempt of court” and in most cases may be clapped into jail without formal trial by a jury. Members of labor organizations feel that injunctions are frequently used in the interest of the employers. The American Federation of Labor has strongly opposed the use of injunctions in labor disputes so long as men are not given a trial by a jury before being adjudged in contempt of court. The Clayton Act of 1914 provided that, in the federal courts, alleged violations of an injunction issued in connection with labor controversies should be determined by a jury trial. In the courts of most of the states, on the other hand, no such provision has yet been made and there is strong opposition to making it. Many people believe that labor is asking a special privilege in demanding that controversies in which it is especially interested shall have an exemption from the usual process of the courts.
The Closed Shop and the Open Shop.—The most hotly-debated question in the whole range of labor problems today concerns the policy of the open versus the closed shop. Shall all shops and factories be closed to those who are not members of the union? Shall non-union men be virtually required to join the union or be refused employment unless they do? Or shall shops and factories be open to all competent workers no matter whether they belong to the union or not? A closed shop, so-called, is a factory or other industrial plant in which none but members of a labor union are employed.[[183]] An open shop is one in which the employer makes no distinction between those who are members of the union and those who are not. The unions insist upon the closed shop as the only way of maintaining the effectiveness of their organizations and of upholding the principles of collective bargaining. They believe it to be impracticable to have union men and non-union men working efficiently, side by side, in the same establishment. Many employers, on the other hand, maintain the open shop because they believe it is essential to proper discipline and gives every workman an equal opportunity. They believe that it is the inalienable right of every American to work for whom he pleases, on such terms as he pleases, without the necessity of joining any organization. Hence they have adopted the habit of calling the open shop system the “American plan” of industrial organization. In those trades where practically all the workers have become unionized the controversy over the open or closed shop does not usually arise; it is chiefly in those trades where a substantial proportion of the workers are not organized.
The amicable settlement of labor disputes.
Conciliation and Arbitration.—The frequency of strikes and lockouts has been diminished in recent years by an increasing resort to the settlement of industrial disputes by conciliation and arbitration. By conciliation is meant the action of some public authority, usually a state board, in tendering its assistance to smooth out the difficulty and effect a settlement. This assistance both sides often accept, although they are under no obligation to do so. By arbitration is meant an agreement to submit the dispute to some one man or group of men, and to abide by whatever decision may be rendered. An arbitration board is commonly made up of three members, one chosen by the employers, one by the workers, and a third mutually agreed upon as neutral. Some states maintain official boards of arbitration to which industrial disputes may be referred at any time by consent of the disputants. Even in cases where they are not called upon to arbitrate disputes these boards usually have the right to investigate the questions at issue and to make known their findings for the information of the public.
Industrial courts.
Compulsory Arbitration—The Kansas Plan.—Although the compulsory arbitration of industrial disputes has existed for some years in a few other countries[[184]] it has not been looked upon with favor by labor leaders in the United States. These leaders feel that compulsory arbitration would take from the worker his most effective weapon—the right to strike at an opportune time. In 1919, however, the legislature of Kansas passed a law establishing in that state an Industrial Court, with judges appointed by the governor.[[185]] This court is empowered to fix rules, regulations, and practices for the operation of essential industries.[[186]] All industrial disputes, of whatever sort in these essential industries, must be submitted to it, and its decisions are binding upon employers and employees alike. If either side declines to accept the award, the state government is empowered to take over the industry and operate it until the controversy is settled. The Kansas law substitutes adjudication before a state tribunal for the usual method of redress by strikes and lockouts. It is based upon the doctrine that neither capital nor labor has the right to carry on industrial warfare at the expense of the public and that essential industries must be kept in operation because the whole community depends on them. The law has been held to be constitutional, but it is still bitterly opposed by the leaders of organized labor.
Are the laws unfriendly to labor?
Labor and the Law.—It is often alleged that the laws of the land are largely on the side of the employer. This may have been true of the common law which grew up in the days of hand-industry, but the statutes passed by Congress and by the state legislatures during recent years have done a great deal to ensure the just and humane treatment of the American worker. These laws have been concerned with such matters as the prevention of industrial accidents and the establishment of workmen’s compensation, the limitation of the hours of labor for women, the prohibition of child labor, and the establishment of minimum wages in certain industries. In addition the laws have made provision for proper sanitary conditions in shops and factories, and have eliminated many of the abuses which grew up in the earlier days of the factory system. The general tendency of American legislation during the past twenty-five years has been in the direction of protecting the workman in all cases where he cannot be counted upon to protect himself.
The old plan of dealing with injured workmen.
Industrial Accidents and Employers’ Liability.—The use of high-powered and complicated machinery in modern times has greatly increased the danger of accident to the workers. By the terms of the common law an employer was obliged to grant compensation to any workman who met with an accident because of defects in the machinery or because of any other negligence on the employer’s part. But he was not obliged to grant compensation when the accident was due to the employee’s own negligence or to the negligence of a fellow-employee. In any event the only way in which an injured workman could get compensation, in case the employer declined to give it, was by bringing a suit in the courts, an expensive and uncertain method. This meant that large numbers of the workers who were disabled every year by accidents were left without any means of support for themselves and their families. It availed very little to say that they were themselves to blame for their plight, or that some fellow-employee was to blame. Placing the blame did not save the worker or his family from starvation. A great amount of hardship and suffering was caused in past generations by putting so much of the burden upon the hapless employee.
Why we have changed it.
When machines break down the employer has to pay the cost of replacing or repairing them. He, in turn, adds this expense to his cost of production and in this way passes it to the public which buys his product. But men break down as well as machines. Every great industry has many human accidents each year. No matter how well the machinery is guarded or how careful the workmen may be, accidents are inevitable. An enormous amount of attention has been given to making railroad-operation safe by means of automatic couplers, air-brakes, electric signals, interlocking switches, and so on, yet it is said that one railroad employee is killed or injured each year for every mile of trackage operated. Why not, therefore, require the employer, and through him, the consumers of the finished products, to pay for what is an inevitable item in the cost of transportation and manufacture? The answer to this question is that it should be done, and in most of the states it is now being done, through the medium of workmen’s compensation laws.
The new plan.
Workmen’s Compensation.—The usual arrangement established by workmen’s compensation laws is as follows: Every injured worker is entitled to compensation, according to the extent of his injury, no matter how the accident may have been caused. If the accident results in the death of the workman, his dependents are entitled to compensation. The amount of the compensation is either fixed by law, or adjusted to the amount of wages which the employee has been receiving, or determined by a state board. It is paid in installments, so much per week for a set period of time. In addition, an injured workman receives medical attention without any expense to himself. The employer usually arranges with a liability insurance company or with the state insurance department to pay this compensation in return for an annual premium which he remits to the company or to the insurance department as the case may be. The cost of the insurance, in other words the amount of the annual premium, becomes one of the regular expenses of conducting business, like taxes, fire insurance, or interest. If the employer does not arrange for liability-insurance, he must pay the compensation from his own pocket. These workmen’s compensation laws have been of incalculable service to the employees; at the same time the cost to the public, in the way of higher prices, has been so small as to be almost unnoticeable.
The need for special laws to regulate the employment of women.
Limitations on the Working Hours of Women in Industry.—The various industries of the United States now employ several million women, and the special protection of the laws has been extended to them in various directions. The reason for this is that women cannot work long hours without detriment to their physical welfare, and any break-down in the physical well-being of several million women would result in a serious injury to the physique of the whole race. Women in industry, moreover, are not as well able to protect their own interest as men are and for that reason also the laws have intervened in their behalf. Most of these laws have been directed towards limiting the hours of labor for women to a certain maximum per week, forbidding work at night, and improving the conditions under which women are employed. Factories, for example, have been required in some states to provide rest rooms, and stores are under obligation to furnish seats for the use of saleswomen whenever they are not busy at the counters. It may be urged that women, like men, should have the right to work as many hours as they please; but the general welfare of society is paramount to the rights of any class, whether of men or women. It is the duty of society to protect itself against anything that tends to break down its physical or moral well-being.
The old iniquities of child labor.
Child Labor.—In the early days of the factory system children of twelve, ten, or even seven years were put to work for long hours under frightful conditions. Underpaid and underfed, deprived of schooling, they grew up to be physically and intellectually unfit and developed into inferior citizens.[[187]] Child labor was thought to be cheap, and from the employer’s point of view it was; but in the long run society found it to be incalculably expensive. Unrestricted child labor increased the number of illiterates, promoted the spread of disease and crime, augmented poverty, and bred discontent. The child is the father of the man; and as our children are cared for so will the future manhood and womanhood of the nation be. No fewer than two million persons under fifteen years of age are engaged in some form of wage-earning occupation in the United States today. Since they are unable to protect themselves against overwork and underpayment, the state must see to it that they are treated by their employers with consideration and humanity.
Child labor laws of today.
The laws relating to child labor differ considerably in the various states; in some the provisions are much stricter than in others. In general the tendency is to prohibit the regular employment of children under fourteen years of age. Many of the states forbid the employment of persons under sixteen years of age in night work or in certain dangerous occupations, such as mining. The hours of labor for persons under sixteen are also limited in some states to not exceeding eight per day. Many other provisions restricting child labor are now in force, and year by year new limitations are being added.[[188]] In 1916 Congress undertook to place a general restriction on child labor throughout the entire country by passing a law which forbade the transportation and sale in interstate commerce of any goods made in whole or in part by children under a designated age-limit. The Supreme Court of the United States held this law to be unconstitutional, however, declaring that the authority to regulate commerce among the states does not empower Congress to control the conditions of industry within the state boundaries. Congress has since placed a ban upon child labor in another way, namely, by providing that the profits of these industries which employ children shall be taxed more heavily than the profits of those concerns which do not.[[189]]
The arguments for minimum wage laws.
Minimum Wage Laws.—Investigations into the subject made some years ago disclosed the fact that not only were women and children frequently overworked in industries but that they were often underpaid as well. One reason for this underpayment was that many of the women and children workers lived at home and did not need to be entirely self-supporting. They merely contributed to the general family earnings. They were thus in a position to work for smaller wages than if they were entirely self-dependent. But there were also many thousands of women and children who had to support themselves entirely from their own earnings and to these the low rate of wages meant hardship and suffering. It meant undernourishment, physical break-down, and premature old age. It led to pauperism and immorality. So the laws have once more intervened to protect the well-being of the race against the fruits of industrial injustice by providing that the wages of women and children in industry shall not fall below a certain minimum.
Nature of these laws.
Many of the states have put these minimum wage laws upon their statute books. Sometimes the minimum rate of wages is fixed in the law; more often it is determined in the case of each industry by a state board after an investigation. The minimum rate is set at such a point as will enable the wage-earner to be self-supporting. Here, again, the basic principle is that the actual cost of production, including the cost of protecting society against things detrimental to it, should be paid by the public which buys the goods. |Some practical difficulties.| One practical difficulty connected with the minimum wage plan is that it tends to throw the less efficient employees out of work altogether. The employer who is forced by law to pay a fixed minimum in wages, no matter how unskillful the worker may be, will promptly dismiss all those who do not give him, in work, the worth of their wages. If a minimum wage is established in all industries, where will the least skillful find employment?
Causes of unemployment.
The Problem of Unemployment.—The greatest of all economic wastes today is that which results from unemployment. The ideal condition would be to have everybody employed all the time. If that could be accomplished we could produce a great deal more each year at lower cost. Unemployment means that idle men must use what other workers are producing. But it is not possible to do away with unemployment altogether. Some trades are seasonal in character, that is to say, busy at one period of the year and slack during others. In northern regions the building trades, bricklaying, outdoor carpentry, and so on, are in this category. The larger part of the unemployment, however, is due to other than seasonal causes. It is due rather to trade depressions which from time to time cause the shutting down of industrial establishments and it is caused in some degree by the lack of careful planning on the part of the employer. The number of unemployed workers throughout the country varies greatly from time to time. It may be as low as five per cent or as high as forty per cent of the entire number.
Some suggested remedies.
Various plans for lessening the evils of unemployment have been suggested, but they all present some practical difficulties. Better vocational training would reduce the number of unskilled workers; and it is the unskilled who contribute most largely to the ranks of the unemployed. The establishment of public employment offices has done something to bring workers into touch with available jobs. It is proposed that we have a more careful planning of state and municipal improvements so that the heaviest demand for labor on public works would come at times when unemployment is most prevalent—this, it is urged, would help alleviate the trouble even though it might not go very far in solving the whole problem. Much would be accomplished by the better organization of industrial production and by some scheme of co-operation among employers which would enable workers to be transferred from one industry to another. Great practical obstacles are in the way of doing this on a large scale.
How progress toward a solution of the problem is being made.
Some large concerns have already adopted the plan of setting aside each week a certain percentage[percentage] of the total pay roll as an unemployment reserve. Then, whenever workers are temporarily out of employment through the slackening of business and not through any fault of their own, a certain weekly wage is paid to them from this reserve. Something will also be accomplished in the way of reducing unemployment by better vocational guidance, for young men and women often go into employments which afford no chance of promotion and which they subsequently find to be unsuited to their tastes. Many large industries now bestow great care upon the selection of new employees. All applicants are dealt with through a special official known as the employment manager, whose function it is to make reasonably sure that the applicant is fitted for the position. Foremen and bosses are not allowed to discharge employees at will. The complaints must first be referred for investigation to the employment manager’s office. This plan will also help alleviate unemployment if it becomes general.
Unemployment insurance.
Unemployment insurance has been tried in a few European countries and has been advocated in America. This plan contemplates that each employer shall contribute to a fund from which a stated wage scale shall be paid to those who remain out of work through no fault of their own, or that the government shall provide such a fund from the proceeds of taxes. It is easy to see that a scheme of this sort might be seriously abused, yet so long as the problem of unemployment remains serious we must strive to find some way of solving it.
Old-Age Pensions.—Most wage-earners do not save enough to provide for themselves in old age. The result is that after long years of toil they are dependent upon their children, or must eke out a precarious existence by doing odd jobs, or must be supported by the public poor-relief funds. |The experience of Great Britain and Germany.| This is not a desirable state of affairs and in some European countries, notably in Great Britain and in Germany, systems of old-age pensions for workers have been established. In Germany the worker pays a small amount each week into the fund; the employer pays an equal amount and the government pays the rest. In Great Britain the employers and the government pay it all. Every wage-earner, on reaching old age, receives a small weekly allowance for the rest of his days.[[190]] The cost of an old-age pension system is enormous, but in the long run it is likely to represent real economy. Sooner or later the system will probably be established in this country; the only question is whether, when it comes, the wage-earner should be required to pay a regular contribution during the years in which he is able to do full work.
The patriotism of American labor.
American Labor and the War.—Among the various factors which helped to win the World War the loyalty and enthusiasm of American labor should be accorded a high place. War always creates a great shortage of workers, partly because so many able-bodied men are taken into the army and partly because of the tremendous need for workers in munition plants and other war industries. During war, therefore, the labor organizations are always in a position to make demands which cannot well be refused. It is quite true that American labor took advantage of its opportunities during the World War; but so did the employers. The wages of labor rose everywhere, as did the profits of industry. Nevertheless it can fairly be said that labor co-operated with the government at all the essential points and produced the uninterrupted flow of materials which was needed to ensure victory. Certain it is that without this co-operation on the part of labor the United States could not have figured so prominently in deciding the ultimate issue of the great conflict.
General References
Isaac Lippincott, Economic Development of the United States, pp. 491-511;
R. T. Ely, The Labor Movement in America, pp. 34-91 (Growth and Present Conditions of Labor Organizations);
T. S. Adams and H. L. Sumner, Labor Problems, pp. 461-501 (Labor Laws);
F. T. Carlton, Organized Labor in American History, pp. 11-44 (Epochs in the History of Organized Labor); pp. 169-197 (Labor Parties); pp. 198-225 (Ideals of the Wage Earner);
R. F. Hoxie, Trade Unionism in the United States, pp. 254-275 (Collective Bargaining);
John R. Commons and J. B. Andrews, Principles of American Labor Legislation, pp. 35-90 (Individual Bargaining);
Samuel Gompers, American Labor and the War, passim.
Group Problems
1. The origin, growth, and aims of labor organizations. The organization of industry before the Industrial Revolution. Rise of the factory system. Creation of a labor class. Early conditions of factory employment. Beginnings of labor organizations. Early attitude of the law and the courts. Growth of labor organizations during the past half century. Central organizations and national bodies. Present-day aims of labor organizations—economic, social, and political. Specific features of organized labor’s program. Labor as a factor in politics. The movements for industrial democracy. References: T.S. Adams and H.L. Sumner, Labor Problems, pp. 214-279; Sidney Webb, History of Trade Unionism, pp. 1-56; 431-541; Mary Beard, Short History of the American Labor Movement, pp. 47-79; F. T. Carlton, Organized Labor in American History, pp. 11-44; 198-225; R. F. Hoxie, History of Trade Unionism in the United States, pp. 211-252 (The Law in Relation to Labor); John R. Commons (editor), History of Labor in the United States, passim; R. T. Ely, The Labor Movement in America, pp. 34-91; P. F. Brissenden, History of the I. W. W., pp. 83-112 (The I. W. W. vs. the A. F. of L.).
2. The American Federation of Labor: its history, aims, and achievements. References: Samuel Gompers, American Labor and the War, pp. 186-196; John Mitchell, Organized Labor, pp. 397-406; F. T. Carlton, History and Problems of Organized Labor, pp. 75-82; Mary R. Beard, Short History of the American Labor Movement, pp. 86-149; G. G. Groat, Organized Labor in America, pp. 82-99; Helen Marot, American Labor Unions, pp. 11-28.
3. The arbitration of industrial disputes. References: T. S. Adams and Helen Sumner, Labor Problems, pp. 295-332; Sidney Webb, Industrial Democracy, pp. 222-246; N. P. Gilman, Methods of Industrial Peace, pp. 301-345; R. T. Ely, The Evolution of Industrial Society, pp. 374-397; John Mitchell, Organized Labor, pp. 337-346; F. W. Taussig, Principles of Economics, Vol. II, pp. 303-322.
4. The general principles of labor legislation. References: W. S. Jevons, The State in Relation to Labor, pp. 1-32; F. W. Taussig, Principles of Economics, Vol. II, pp. 285-302; John R. Commons and J. B. Andrews, Principles of Labor Legislation, pp. 1-34; H. S. Person, Labor Laws and Their Enforcement, passim.
Short Studies
1. The four epochs in the history of organized labor. F. T. Carlton, Organized Labor in American History, pp. 11-44.
2. Labor and politics. F. T. Carlton, History and Problems of Organized Labor, pp. 169-197.
3. The Knights of Labor: why they failed. Mary R. Beard, Short History of the American Labor Movement, pp. 116-126.
4. The right to strike. John Mitchell, Organized Labor, pp. 299-323.
5. Collective bargaining. Final Report of the U. S. Industrial Commission, pp. 843-847.
6. The use of injunctions in labor disputes. G. L. Bolen, Getting a Living, pp. 548-580; J. R. Commons, Trade Unionism and Labor Problems, pp. 156-163.
7. The Kansas plan. H. J. Allen, The Party of the Third Part, pp. 16-91.
8. Workmen’s compensation. John R. Commons and J. B. Andrews, Principles of American Labor Legislation, pp. 356-385. See also the publications on this subject issued by the National Industrial Conference Board.
9. Women and children in industry. T. S. Adams and H. L. Sumner, Labor Problems, pp. 19-67.
10. The problem of unemployment. E. T. Towne, Social Problems, pp. 140-159; W. H. Beveridge, Unemployment, 3d ed., pp. 1-15 (Great Britain).
11. Profit sharing as a solution of industrial problems. T. S. Adams and H. L. Sumner, Labor Problems, pp. 333-378.
12. Old age pensions. W. H. Dawson, Social Insurance, pp. 128-165; F. W. Lewis, State Insurance, pp. 148-170.
Questions
1. Explain why labor organizations came into existence during the nineteenth century. On the whole have they been a benefit to industry or not? Give your reasons.
2. Give some reasons for expecting trade unions to be stronger in certain employments than in others. In which of the following employments would you expect the unions to be strong, and in which would you expect them to be weak: (a) railroading; (b) domestic service; (c) school teaching; (d) farming; (e) mining; (f) steel-making? Give reasons for your expectations in each case.
3. With what points in the program of the American Federation of Labor do you agree and with what ones do you disagree?
4. The closed shop is sometimes criticised as being “un-American” and the open shop has been called the “American plan”. What does this mean?
5. Are there any employments, public or private, in which strikes should not be permitted?
6. Why should the consumer pay the costs of all industrial accidents? Explain how he does so where workmen’s compensation acts have been passed.
7. In your opinion would the legislature be justified in limiting to eight hours per day the labor of (a) women in candy factories; (b) men who work on farms; (c) men who work in coal mines; (d) physicians; (e) waitresses in hotels; (f) female servants; (g) members of the fire-protection service in cities; (h) motormen on street cars? Give your reasons in each case.
8. Give your views as to the minimum age at which any person should be permitted to engage in regular employment for wages. At what age should employment in night work be permitted? Should persons under fourteen years of age be allowed to work for wages after school hours, on Saturdays, and during vacations?
9. A girl of sixteen has graduated from grammar school and could obtain a position as clerk in a millinery store at eight dollars a week. She is living at home and does not have to support herself. But the minimum wage for clerks in stores happens to be ten dollars per week and the owner will not pay so much. Is there any injustice here?
10. How can the evil of unemployment be reduced? What abuses might arise in connection with unemployment insurance? Who pays the cost of unemployment now? Argue whether we should or should not place industrial unemployment on the same basis as industrial accidents.
Topics for Debate
1. The demand for collective bargaining is (or is not) justified.
2. A plan of old-age pensions, like that now maintained in Great Britain, should be established in the United States.
CHAPTER XXII
CURRENCY, BANKING, AND CREDIT
The purpose of this chapter is to explain what money is, what purposes it serves, how banks conduct their business, and how credit facilitates trade.
Money supplants barter.
The Origin of Money.—The use of money is one of the marks of civilization. In primitive communities money was unknown. Buying and selling was by barter, the exchange of one commodity for another. The man with too much corn exchanged corn for cattle or for a boat or for skins with which to clothe himself. But exchange by barter is a slow and clumsy method because it means that two persons must be found each of whom wants exactly what the other has to sell, a thing which does not easily happen. With the growth of trade, accordingly, it became necessary to find a medium of exchange, in other words some single commodity which is so readily exchangeable for all other commodities that it can be used to facilitate buying and selling. Some of the Indians of North America used the ends of shells, or wampum, for this purpose. The early colonists in Virginia chose tobacco as a temporary medium of exchange, it being in universal demand. People accepted tobacco in exchange for things which they wished to sell, and gave tobacco for things which they desired to buy. This was not because they wanted tobacco for their own use but because of all commodities in the colony tobacco was the most easy to exchange for other things at a moment’s notice. No ordinary form of merchandise, however, makes an entirely satisfactory medium of exchange and all of them in time gave way to the precious metals, gold and silver, which are now everywhere used for this purpose.[[191]]
Money as a standard of value and a measure of deferred payments.
The Functions which Money Serves.—Money, however, serves not only as a medium of exchange but as a standard of value and a measure for future payments. Money is the common denominator by means of which we express the value of different commodities. If money were not in existence, how could we state the value of anything? It would be of little avail to say that a suit of clothes is worth ten hats, for this would merely beg the question: How much is a hat worth? Money performs the function of providing a uniform scale into which all values can be translated. When we say, therefore, that a suit of clothes is worth forty dollars and that hats are worth four dollars apiece we are measuring both commodities according to the same standard of value. Money also facilitates the use of credit by providing a measure for deferred payments. People cannot well agree to indefinite future obligations; they must know exactly what a debt amounts to. The use of money enables men to borrow today with the understanding that they will repay the same amount at some future date.
The qualities which money must have:
Characteristics of Money.—Gold and silver are best adapted to facilitate exchange because they possess, in high degree, certain qualities which money must have in order to fulfil its functions properly. What are these qualities? |1. Value.| To serve acceptably as money a substance must have, in the first place, some value in itself; it must therefore have utility as a basis of value. A worthless substance, which nobody wants, would not do. |2. Stability.| Second, it must not only have value but stability of value. To serve efficiently as money a metal must not be subject to wide and frequent fluctuations in what it is worth. A substance which might be worth much today and little tomorrow would not be satisfactory. Gold and silver, being produced in limited quantities, are more nearly stable in value than any other metals, gold being particularly so. |3. Convenience.| Third, the metal used as money must possess relatively high value in proportion to its bulk so that it can be easily passed from hand to hand. There was a tradition in ancient Greece that Lycurgus compelled the Lacedaemonians to use iron money in order that its weight might deter them from overmuch trading. If iron were used as currency today a dime would weigh more than a pound.[[192]] In a word the metal used as money must be portable, easy to carry around. |4. Durability.| Fourth, it must be relatively indestructible, not subject to rapid decay or rusting. Gold and silver satisfy this requirement, for time does not destroy their value nor do they suffer much wear and tear through handling. It is believed that some of the gold which is in the coinage of European countries today served as money in the time of the Romans. |5. Uniformity.| Fifth, it must be homogeneous, that is, it must not vary in quality, otherwise equal amounts of it would not have the same value. In order that we may reckon things in terms of money the units must be equal and similar so that twice one will always make two. If we were to use diamonds as money, it would not always happen that two stones would be worth exactly twice as much as one. |6. Divisibility.| Sixth, it must be easily divisible without loss of value, for we need small units of money as well as large ones. One great difficulty which primitive people found in using the skins of animals as money was that they could not be cut into portions without destroying their value altogether. Nobody would take, for example, a quarter of a skin in payment for a basketful of corn. But gold and silver can be divided at will and yet retain an exactly proportionate value. |7. Cognizability.| Finally, it must be a metal or other substance the genuineness of which can be easily determined. If every person who receives money had to scrutinize, weigh, and test it, the processes of trade would be intolerably delayed.[[193]] Gold and silver may not themselves be readily cognizable by the uninitiated, but they are easy to stamp into coins with a stamp or design and this impression cannot be easily counterfeited. The various countries of the world adopted gold and silver as their chief media of exchange because these metals fulfil in the largest degree the foregoing requirements. For small units of currency nickel and bronze are utilized because subsidiary coins of gold and silver would be too small.
Gold is the American standard of values.
The Coinage of the United States.—In the United States gold is the standard of values. This does not mean that gold is circulated from hand to hand in every transaction, but merely that all economic values are expressed in terms of gold coin. The actual payments may be made in paper notes, or in silver, nickel, or copper coins. The monetary system of the United States is based upon the decimal system, which was adopted in 1784 at the suggestion of Thomas Jefferson. This means that we reckon in fractions and multiples of ten—ten cents one dime, ten dimes one dollar, and ten dollars one eagle. For convenience there are also additional coins, such as nickels, quarter dollars, half dollars, and half-eagles. No gold dollars are now coined, as they were found to be too small for convenience.[[194]] The mint has also ceased coining quarter eagles but continues to make five, ten, and twenty dollar gold pieces although these coins remain for the most part in the banks where they are held as reserves. Very little gold coin is in circulation anywhere in the world today. The coining of money is wholly within the jurisdiction of the national government; no state is allowed to make or issue coins. |The United States mints.| The making of coins takes place at four mints, which are located at Philadelphia, New Orleans, Denver, and San Francisco.[[195]] If you look at the reverse side of a recently minted coin, you will find, near the base, a small letter indicating the mint at which the coin was struck; if there is no such letter, the coin was minted at Philadelphia.
The ratio between gold and silver.
The Controversy over Bimetallism.—In 1792, when the first American mint was established, Congress provided by law that there should be two monetary units, the gold dollar and the silver dollar—the ratio between the two, in terms of weight, being fixed at fifteen to one. Any person bringing gold or silver bullion to the mint was entitled to have it made into coins at this ratio, which corresponded to the relative market value of the two |In 1792.|metals in 1792. Silver eventually cheapened in relation to gold, however, and in time only silver bullion came to be coined. |In 1834.| So Congress in 1834 reduced the weight of the gold dollar and made the ratio sixteen to one. This, in turn, proved to be an under-valuation of silver, and no silver now came to the mint to be coined.[[196]] |In 1873.| In 1873, after silver dollars had practically dropped out of circulation Congress abolished the free coinage of silver altogether.[[197]] Presently, however, there was a popular demand for a resumption of silver coinage and the minting of silver dollars was recommenced,[[198]] |In 1893.|but only on a limited scale; and in 1893 it was once more abandoned.[[199]]
This action on the part of Congress raised a great hue and cry in certain sections of the country, especially in the South and West. Free coinage of silver was desired not only by owners of mines who had silver to sell but by large numbers of farmers who believed that gold was becoming too scarce to serve as the sole standard of value. Scarcity of gold meant scarcity of money, and scarcity of money meant low prices for wheat. If money were plentiful, prices would go higher, and the way to get more money was to coin into dollars all the silver that would come to the mint. That was the farmers’ argument.
The “Cross of Gold” Campaign.—The leaders of the Democratic party took advantage of this widespread agricultural grievance. At the national convention of that party, held at Chicago in the summer of 1896, Mr. W. J. Bryan swept the delegates off their feet with his denunciation of the “few financial magnates who corner the money of the world” and his plea for the poor man’s dollar. “You shall not press upon the brow of labor this crown of thorns”, he declaimed. “You shall not crucify mankind upon a cross of gold.” The delegates, amid tumultuous cheering and enthusiasm, thereupon nominated the young orator from Nebraska as their candidate for President and made the free coinage of silver at a ratio of “sixteen to one” a fundamental part of the Democratic platform in the election campaign. But Bryan was overwhelmingly defeated and the clamor for free silver soon subsided. |Final settlement of the question in 1900.| In 1900 Congress passed the Currency Act, which declared gold to be the sole standard and directed the secretary of the treasury to maintain all other forms of currency at a parity with gold. This means that every silver dollar, whether the silver which it contains be worth a dollar or not, is guaranteed by the national government to be worth a gold dollar.
Our early experience with paper currency.
Paper Money.—Our experience with paper money goes back to colonial days when bills of credit were issued by Massachusetts to pay the costs of the expedition against Quebec in 1690. But no great amounts were issued until the Revolutionary War; then the various state governments as well as the Continental Congress printed and issued notes to the par value of nearly half a billion dollars. In the earlier years of the war this paper currency circulated at its face value although there was no gold or silver reserve behind it; but as the struggle dragged on and notes by the million kept being issued they began to depreciate until eventually this continental paper currency was worth only a fraction of a cent per dollar. Hence the origin of the slang expression “not worth a continental”. The notes for the most part were never redeemed; they merely became worthless and passed out of circulation.
What the constitution provides as regards paper money.
Naturally this experience made the people averse to paper money and when the constitution of the United States was framed it contained a provision that “no state shall emit bills of credit (or) make anything but gold and silver coin a tender in payment of debts”. It was strongly urged that the national government should also be prohibited from issuing paper money, but in the end it was decided not to make any express prohibition, so the constitution is silent as regards the authority of the national government to emit bills of credit. It neither gives this power nor denies it. In due course, however, Congress authorized the issue of legal-tender notes or greenbacks, and the Supreme Court upheld its right to do this on the ground that the constitution expressly gives Congress the power to borrow money and that the issue of paper money is a reasonable method of borrowing. But although the national government has itself the legal right to issue paper money, either with or without a reserve behind it, most of the paper money now in circulation is issued by the federal reserve board or by the federal reserve banks under authority granted by Congress.
The seven kinds of paper money in use.
Paper Notes now in Circulation.—There are several kinds of paper notes now in circulation.[[200]] These include silver certificates, gold certificates, treasury notes, and greenbacks issued directly by the national government, national bank notes, federal reserve notes, and federal reserve bank notes. The provisions for the redemption of these different types of paper money vary greatly, and each is protected by a different reserve, but in actual fact the holder of any unit of paper money can obtain gold for it if he so desires. This is true even of the silver certificates which, strictly speaking, are redeemable only in silver dollars. The arrangements under which the national banks, the federal reserve banks, and the federal reserve board are permitted to issue paper money will be discussed presently.
Paper money has some advantages in convenience and cheapness.
Why do we have paper money? Chiefly because it is, in many respects, more convenient for use than metallic money. In large amounts it is not so bulky as silver or gold would be. There is also the advantage that when paper money wears out it can be cheaply replaced. If gold coins were continually in circulation from hand to hand, they would gradually wear down and the monetary loss would be considerable. Hence it is better to keep the gold in the bank vaults and circulate the paper, which represents gold, in its stead. But a sound system of paper money should always provide for the redemption of the notes, which means that the notes should have an adequate reserve behind them. This reserve should be in gold or in the equivalent of gold. |Inconvertible paper money.| Unredeemable paper money, issued without an adequate reserve behind it, leads practically always to depreciation and thereby to heavy losses on the part of the people who have taken the money in good faith. That was what happened in the case of the assignats of the French Revolution, the continental currency in the American Revolution, and the paper money of several European countries during the World War.[[201]] It is folly to try to finance a war or any other national enterprise by issuing fiat currency, as it is called, which is paper currency with only the word of the government and no substantial reserve behind it. Better tax the people outright than make them take money as legal tender which is not worth what it purports to be.[[202]]
Why not abolish money?
Radicals sometimes say: “Let us do away with money altogether”. Instead of money, they say, we might use “labor checks”, each check representing a given amount of labor. One hour of labor, let us say, would then be the standard of value instead of 23.2 grains of gold. This arrangement, however, would not abolish money, but only change the nature of the basis upon which the value of money is calculated. The labor checks would be money in every sense of the word. There is only one way to abolish money and that is to go back to barter.