The new school has, according to Malthus, three main principles. The first is, that what determines value is the quantity of labour that a thing costs to make,—the second, that supply and demand do not as a rule affect values,—and the third, that fertility of soil and not competition regulates the rate of profits. The new school thinks that profits enter so little into the price of an article that they may be neglected altogether in the computation of the causes of value. But (says Malthus) the value of a stone wall would be due, nearly all of it, to labour, and the value of a cask of old wine kept for twenty or thirty years would be largely due to profits. £50 worth of stone wall would have much more labour “worked up in it” than £50 worth of old wine. It is not sufficient to answer that profits are simply accumulated wages. As well say that five is another name for four. Ricardo himself introduced many qualifications into his own statement that value is due to labour. The principle (he confessed) was modified by the use of machinery and by the unequal durability of capital.[[634]]
Malthus admits the truth of Ricardo’s dogma that profits and wages can only increase at each other’s expense, and he even applies this principle of Ricardo’s in a new way to the facts of the commercial depression that had prevailed since the peace.[[635]] It was universally allowed there had been a less demand for labour and a great fall in wages, but, it was also allowed, a much greater fall in profits; so that wages while lower in gross amount bore a higher proportion to profits than before. The reason was that, while the competition of labourers was great, the competition of capitalists with capitalists was still greater. The result was a universal fall of prices; the wages, though relatively greater, were absolutely less in amount, and the demand for labour would have been greater if prices had risen and the capitalist had got greater returns to his capital. Malthus would not go farther than this, and the Ricardian doctrine needs to be otherwise applied to yield the doctrine of a wages fund. It was applied in some such way as follows:—Competition drives prices down to the cost of production; this means that at any given time the sum total of profits and wages cannot be more than they actually are, and both are kept down by competition to their minimum; the masters could not give higher wages without cutting down their profits, the men could not get less wages without either starving or being driven to seek other employments. Malthus does not so apply his doctrines. To him, what fixes the sum total of wages and profits is not the cost of production, but the demand for the thing produced; not the labour spent on a thing, but the labour that others are willing to give for it; and the cause of value is not cost, but demand acting with supply. Ricardo, who prefers to confine his theories to natural value, allows that the state of the demand and supply raises market value above or depresses it below cost price; and he does not see how seriously his own qualifications[[636]] impair the truth of his theory of value even when the value is “natural.”[[637]] It is true, on the other hand, that the supply at any given time is a supply that will not be kept up unless the cost price be paid back. The cost price would certainly be the minimum below which prices could not permanently pass. But to Ricardo the cost in labour is the formal as well as the material cause of a value; to Malthus it is only the material, and only part of that, a mere sine quâ non, while the efficient is the demand, and the final is the consumption of the article by its last buyer or user.
The third leading tenet of the new school, says Malthus, is that the rate of profits in a country depends on the fertility of the soil there, and not, as Adam Smith thought, on the competition of capital with capital for employment. Against them Malthus maintains that there is no necessary (though there is a frequent) connection between the productiveness of industry and the rate of profits, still less between the latter and the productiveness of any one single industry, such as agriculture. Profits depend on the proportion of the whole produce which “goes to replace the advances of the capitalist”; but this proportion may remain the same when the productiveness of industry is very various. In the previous eight or nine years, say from 1815 to 1824, there had certainly been no costliness in production. Corn had been cheap, and farmers’ losses had led to the discontinuance of high farming, and especially of the forced cultivation of the dear years. The production, therefore, was at the cost of much less labour. But profits, instead of higher, were much lower. Abundance of produce and competition of producers had caused a fall in the value of produce, so that it was possible for the labourer to receive a greater share of what he made, though his labour had not become more productive. Ricardo does not take sufficient account of the influence of prices, both on wages and on profits.
There had in fact been over-production and a general glut. James Mill’s Elements of Political Economy[[638]] contain a careful demonstration that general gluts are impossible. It was emphatically a controversial passage, and in the pages of John Mill it has the look of an anachronism. All depended on the meaning of “general.” If it meant universal, the case was impossible. It is incredible that all without exception should have something to sell and no wish to buy. To offer anything for sale must of itself imply a desire to buy something else with it, either directly or by means of money. Even a very near approach to universality is not easy to understand; and it would mean simply that a bad organization of the world’s markets had prevented buyers and sellers from reaching each other, and prevented goods from going where they are wanted, at the time when they are wanted; it would mean that not the malady but the scale and degree of it had passed belief.[[639]]
CHAPTER III.
GENERAL GLUTS.
French War and English Trade—English Currency—Bullion Committee—Restriction not the only Cause of High Prices—Ricardo on Currency—Tooke on Prices—Say on Gluts—English Trade from 1824—High and Low Wages—Some Fallacies of Malthus.
The discussion on General Gluts was simply a phase of the discussions on Value; and the prominence of such discussions in the political economy of sixty years ago was largely due to the peculiar effects on trade and prices of a twenty years’ war with France. The theories of economists were becoming most abstract precisely at the time when the justest generalizations were most severely tested by abnormal conditions. Even if the Industrial Revolution heralded by the Wealth of Nations had been allowed a free course, the new conditions of manufacture would have raised new economical questions; and they could not have failed to turn, to some extent, on the subject of value, which Adam Smith had by no means exhausted. But there was no free course. War was declared against England by France in 1793. In the same year Pitt was forced to offer English merchants a loan of public money, to cure a financial crisis. Then followed, under the long Tory supremacy, heavy taxes, repressive laws, and something more nearly approaching a war of classes than anything known in England before or since.
The effects of the first ten years of the French war (1793 to 1802) were to all appearance rather good than bad. Britain itself, unlike the other belligerent countries, was always intact, and the labours of British manufacturers could go on as if nothing unusual was happening on the Continent. Our command of the sea, to say nothing of the conquest of new countries, gave us trade which others lost, and made amends for the annulment of the French treaty of commerce, and the loss of the Dutch trade. In 1806 the situation became less pleasant. The Berlin and Milan decrees excluding us from almost every country in Europe, the retaliatory Orders in Council and consequent alienation of America did real damage to English commerce. The very expectations they caused of a probable scarcity of particular goods sent up prices; and, with the real scarcity, contributed to an acute disturbance of trade, which lasted about five years for the Continent and three years more for America (1807–12, 1807–15). New markets were opened to us in South America; and the pent-up commercial enterprise of our countrymen vented itself in that direction, with wild disregard of the needs of consumers in that quarter.[[640]] The same happened, with more reason, in 1814 and 1815. When peace was restored, it was thought that the whole Continent must be eager to have our goods, after being so long without them; and we sent them lavishly everywhere without waiting for orders. Unhappily the rest of Europe was exhausted by the war, which had lessened their production; and such products as they could offer us in exchange for our manufactures we seldom took without taxing. The very food that we most wanted from them we were careful to keep out till the last moment.[[641]] Anything more unlike the “simple system of natural liberty” could not be conceived; and the result certainly seemed to be an over-production on our part;—it was at any rate a reign of low prices and deep commercial depression. This was not all. Since 1797 we had had a paper currency of uncertain value. In that year the Bank of England, whose department of issue was not then separated from its department of banking, gave advances to Government, in return for which it was relieved of immediate obligation to pay gold to the holders of its notes. As long as the issues were moderate, the notes kept their value; but this was a time when economical substitutes for the currency, cheques and bills and County notes, were lessening the proportion of the Bank’s notes to the total transactions of trade; and the Bank’s power of calculating the public need without the natural safety-valve of convertibility became more and more fallible; the circulation soon contained superfluous paper, which dragged down the whole currency. In these circumstances, discussions on currency gained an interest they could never have had in the abstract; and they led to measures of the most practical and permanent usefulness. Ricardo’s tract The High Price of Gold Bullion a Proof of the Depreciation of Bank-Notes (1809) prepared the way for the Bullion Committee of the House of Commons (1810), and through them for our own Bank Charter Act (1844). Malthus played a more quiet part. His chief writings on the subject of the currency were two magazine articles, one in the Edinburgh Review of February 1811,[[642]] and another in the Quarterly Review of April 1823.
The first treats of The Depreciation of Paper Currency, and is a review of pamphlets by the leading advocates and assailants of the principles of the Bullion Committee’s Report. The Committee had inquired into three subjects: the high price of gold bullion, the state of the currency, and the state of the foreign Exchanges. As to the first, they found that, while an ounce of standard gold was converted at the Mint into £3 17s. 10½d. (which sum was therefore the Mint price of gold bullion), the said ounce could not in the years 1806–8 be bought by the Mint for less than £4 in bank-notes, or in 1809 for less than £4 10s. The market price had risen to that extent above the Mint price, of gold bullion. As to the second, they found that guineas had gone out of circulation, and were practically replaced by small notes between £1 and £5. Finally, as to the third, they found that from the end of 1808 the Exchanges had become more and more unfavourable to England, till in 1809–10 they were with Hamburg nine, with Amsterdam seven, with Paris more than fourteen per cent. below par. After examination of witnesses and consideration of their evidence, the Committee resolved “that there is at present an excess in the paper circulation of this country, of which the most unequivocal symptom is the very high price of bullion, and next to that the low state of the Continental Exchanges; that this excess is to be ascribed to the want of a sufficient check and control in the issues of paper from the Bank of England, and originally to the suspension of cash payments, which removed the natural and true control.” The effects had been very serious, especially on the wages of common country labour (Report, p. 73); and the Committee recommend a speedy return to the principle of cash payments, whether the nation be at peace or war, though caution demands that this take place gradually, in the space of two years. It took place, not in two years, but in more than ten, namely on 1st May 1821,[[643]] Parliament not agreeing to the change till 1819.[[644]] Cobbett’s venture (to be broiled on a gridiron when the Bank paid in gold) seemed a perfectly safe one.
Both Malthus and Ricardo agreed with the Report of the Bullion Committee. Ricardo indeed is in a sense the father of it. Malthus (in the Edin. Review) speaks strongly of the bad policy and injustice of continuing the suspension, and he does not spare the Bank of England and its mischievous monopoly,[[645]] or the “practical men” and their narrow views.[[646]] Yet he finds fault with Ricardo here as elsewhere for making his statements too absolute. Malthus’ fault is in the contrary direction; he qualifies too much.[[647]] He thinks that Ricardo has gone too far in attributing all the movements of the Exchanges to excessive or defective currency; a purely commercial excess of imports over exports might, he thinks, cause the same effects, and even in the high price of bullion it was the commercial difficulty that began what the depreciation of currency continued. Ricardo, who replies in a long appendix,[[648]] answers, in substance, that in any and every case money goes from where it is cheaper to where it is dearer, and therefore from where the currency has lost value to where it has gained it. But this hardly meets the contention of Malthus, that the efficient cause, though it affects the currency, is not in all cases the currency itself, and in the case of an unequal balance of trade, however temporary, the cause of the exportation of the money is rather the superfluity of the goods in the foreign country than the deficiency of the money there;—it would be otherwise when the first cause was in the currency itself. The rest of the article contains little that is new to readers of the Political Economy, and the reference to a possible over-production is chiefly valuable as a sign of the authorship, and as showing that the views of the author were becoming fixed. The personal acquaintance of Malthus with Ricardo dates probably from the appearance of this article;[[649]] and they continued to discuss and correspond, in perfect friendship, till the death of Ricardo in Sept. 1823.[[650]]