<h2>CHAPTER 14</h2>
<h3>THE MONEY ECONOMY AND THE CONCEPT OF CAPITAL</h3>
<h4>§ I. THE BARTER ECONOMY AND ITS DECLINE</h4>
<div class="sidenote">Various points of view of the students regarding money</div>
<p>1. <i>The use of money prevails in very different degrees in various parts
of the United States.</i> The members of this class, representing nearly
every state and territory in the Union, have lived amid very diverse
industrial conditions. Some know best the country where conditions are
similar to those of a hundred years ago; some, the villages where may be
seen the handicrafts and the small general store. Others know better the
cities with their varied industries; while doubtless still others,
through family relations, know of the methods of great wholesale
business, perhaps even of the larger commerce and foreign trade. Methods
differ in the different lines of business, and according as a man is a
farmer, a merchant, or a banker, he has different ideas as to the use of
money and of the part it plays in modern industry. You come to this
study with different experiences and preconceptions; as a result every
statement produces a somewhat different impression on each of you. This
is true in general of the statements made in political economy; but it
is most strikingly true in the discussions of money. A city boy rarely
sees a case of barter; whereas in many parts of the West and Southwest,
and in the mountainous districts of the East, a large part of the
business is carried on in this way. Town and city in New York state
differ in this respect, but hardly more than do the rural districts of
the different<span class="pagenum"><SPAN name="Page_109" id="Page_109">[Pg 109]</SPAN></span> sections of our country. Banks are very numerous in the
East, are few in the Northwest, and still fewer in the South. Men can
understand each other better in a discussion if they are conscious of
the fact that they do not instinctively take the same point of view.</p>
<div class="sidenote">Countries differ in their use of money</div>
<p>2. <i>The extent to which, on an average, money is used in different
countries of the world, differs widely.</i> Statements in political economy
must be guarded; few of them can be taken as universally true. As the
different parts of one country may be contrasted, so may the different
countries. The use of money in Siberia would be much less than that in
Moscow and St. Petersburg, and again the average use in Western Russia
is doubtless less than that in Austria. In Austria the money use is less
developed than in Germany. While there is now little difference between
Germany and France in this respect, France for a long time was the more
developed industrially and made greater use of money.</p>
<p>There is greater use of money in the cities of the outlying countries
than in the rural districts. In the cities of Mexico banks and credit
agencies are employed as in the American cities. The rural districts are
more backward and make far less use of money than is the case in the
United States. The great ports of China are provided with all the
facilities of modern banking. In the great cities of India one can get a
bank draft that will be paid in any part of the world. But go a very
little way out of the cities of China and India, and conditions greatly
change; money is far less used and principally as a storehouse of
saving.</p>
<div class="sidenote">Slight use of money in the Middle Ages</div>
<p>3. <i>In a historical view the European nations are seen to begin with a
barter economy and to pass through great changes as regards the use of
money.</i> Here the view shifts from a comparison of different nations at
the same moment to a comparison of the same nation through a period of
centuries. To understand, even in a measure, what is about them men must
know out of what it grows. In the early Middle Ages money was used
chiefly in cities, and there<span class="pagenum"><SPAN name="Page_110" id="Page_110">[Pg 110]</SPAN></span> only to a limited extent. Almost
universally a "barter economy" prevailed, or, as it has been called, a
"natural economy," a term taken from the German "Naturalien," which
means natural products, enjoyable things, as opposed to money. Natural
economy, therefore, means that condition of society in which things are
exchanged in kind. In the Middle Ages land was the great and dominant
form of wealth. The prince himself was dependent on land for his income.
The conquering chief or invader took possession of the land and parceled
it out to his followers, and they in turn to their vassals. The income
of the rulers was in the form of "Naturalien" (wheat, chickens, eggs),
the kind and amount of which was fixed by contract or by immemorial
usage. The landlord had land as his wealth and income-getter; the tenant
received the use of the land in payment for his labor.</p>
<div class="sidenote">Land, the main form of wealth, was rented without the use of
money</div>
<p>The condition of the serf appears to have been, under these
circumstances, inevitably connected with the "barter economy" as applied
to the renting of land. A farm cannot be moved, and in medieval
conditions its products mainly had to be used on the spot. If the serf
was to use and enjoy the land, he had to stay upon it. Having no money
he had to pay in labor or in products, for its usufruct. In those times
the powerful man, politically, was also a wealthy man whose wealth
consisted of landed estates. Between the landlord and the serf existed a
lasting relation, inherited rather than voluntary, but similar in its
conditions to the renting contract. The villein had the use of the
stock, pastures, fields, woodlands, provided he kept them undiminished
and undestroyed to transmit to his children. Under such conditions there
was great fixity of economic relations. While in some respects this was
a happy condition, it had its disadvantages. The renting contract, in
connection with a fixed rotation of crops and some communal modes of
cultivation, hindered improvements. The more intelligent cultivator
could not change his methods for the better. It may be seen not only<span class="pagenum"><SPAN name="Page_111" id="Page_111">[Pg 111]</SPAN></span>
that the use of money on a medieval manor was slight, but that the
conditions for the growth of the money habit were most unfavorable. The
terms of agricultural contracts, the modes of speech, the habits and
thought of the mass of the people, were therefore determined by the
conditions of the barter economy. A change in these respects was slowly
worked by forces originating outside, in a very different industrial
environment.</p>
<div class="sidenote">Contrast between city wealth and feudal estates in the Middle
Ages</div>
<p>4. <i>With the growth of cities developed a new class of wealthy men and a
new view of wealth.</i> The student of history knows of the conflict that
grew up during the Middle Ages between the cities and the landed
aristocracy. It found its cause in economic conditions. There were
obvious differences between the wealth of the feudal landlords, and the
wealth that grew up in cities. One must be used mostly on the spot, the
other can be moved. The fruits of one are perishable for the most part;
the fruits of the other can be kept for a longer period. The methods of
agriculture are exceptionally stable; production by handicraftsmen is
dependent on the peculiar skill of the workman, giving greater room for
invention and a premium on skill. The one industry may be carried on by
servile labor; the other can be efficiently followed only by free
workers having the ambition to excel.</p>
<div class="sidenote">Money thus more used in city trade</div>
<p>The use of money grew up in the city. The density of population made it
easy, the growth of wealth made it possible, and the nature of the
exchanges made it necessary. Whereas the relation of landlord and serf
under the renting contract continues from year to year, the relation of
the buyer and seller of shoes, hats, etc., in the city, is temporary,
these things forming only a part of man's economic needs. Barter with a
particular individual is much more inconvenient if exchange is only
occasional than where the contract is a continuing one, and there is an
annual balancing and settlement of accounts. So, as city industry and
commerce grew the use of money increased, both in small<span class="pagenum"><SPAN name="Page_112" id="Page_112">[Pg 112]</SPAN></span> neighborhood
trade and in the larger transactions with distant countries; and thus
the business methods of the cities grew into sharper contrast with those
of the rural districts.</p>
<div class="sidenote">Money loaned and borrowed in cities</div>
<p>5. <i>The loan and hire of wealth in medieval cities came to be expressed
as a money loan.</i> The loan of money and of other wealth expressed in
terms of money, began in the cities. The use of money and the expression
of the value of things in terms of money was common there throughout the
Middle Ages. Moreover, as the movable forms of wealth multiplied, the
agreement to return borrowed wealth in kind became impossible in cities;
the loan in terms of money became the only practicable thing. A merchant
embarking on a trading expedition must have such a number and variety of
goods, that he finds it both very difficult to rent them and wasteful in
time to enumerate them and return them in like kind. It therefore became
usual to make a loan either of the things expressed in terms of money,
or of money with which to buy the things, thereby reducing to a single,
simple, easily interpreted contract, the indebtedness which the
borrowing of a thousand different things occasioned.</p>
<div class="sidenote">The medieval opposition to loans at interest</div>
<p>Such a contract differed not in economic purpose, but only in form and
terms of obligation, from the renting of wealth. The church writers,
however, got much confused in regard to the nature of money loans. They
did not see that it was <i>things</i> which the merchant wished to borrow.
They did not see that the money loan was simply a more convenient mode
of transferring the use of wealth from one person to another. The
moralists and lawmakers of that day said: Money is unfruitful, therefore
taking interest for it is robbery. We cannot follow here the controversy
as to the justice of interest on money which involved other ideas than
those mentioned, but even to the present time traces of the old fallacy
may be seen more or less plainly in the economic theory as well of
conservative writers as of the socialistic opponents of interest. The
principal sum expressed in the loan contract was called the capital sum,
from <i>caput</i>, head, and the amount<span class="pagenum"><SPAN name="Page_113" id="Page_113">[Pg 113]</SPAN></span> paid for its use was first called
usury, money for the use. How the word interest came to take its place,
and the word usury came to mean <i>excessive</i> interest is one of the most
interesting chapters in economic history. The term capital then came to
be connected with city wealth, with movable forms of wealth, with things
supposed to be peculiarly "the product of labor"; and interest was
assumed to be connected only with this capital. The term rent on the
other hand was connected especially with the use of land. The connection
was a historical accident, but it has had an important influence on
economic theory.</p>
<div class="sidenote">Rivalry of the commercial and landholding classes in Europe</div>
<p>6. <i>The owners of city wealth and of country landed estates often were
opposed as well in social and political as in economic affairs.</i> The
practical economic questions of the Middle Ages and the practical
political questions largely turned on these two groups of interests. The
men of wealth in the cities, the merchants and manufacturers, often were
found opposed to the landed aristocracy. This social division between
the commercial and agricultural classes doubtless helped to strengthen
the prejudgment as to the nature of the two kinds of wealth. Indeed, in
view of the situation, it may have been in a measure justifiable and
expedient to contrast the thought of city wealth, which has come to be
called capital, with that of landed wealth. But even if it were, it is
now misleading and erroneous to continue the use of such concepts in a
new country and in our modern conditions.</p>
<div class="sidenote">Land continues to be rented while city wealth is borrowed in
money form</div>
<p>Indeed, for centuries the sharper features of the contrast have been
steadily softened. The money economy of the city gradually spread to the
rural districts, but never entirely displaced barter, which lingers
everywhere. Important steps toward a money economy were the commuting of
forced or customary labor of the serfs into a money payment to the lord,
and at the same time the substitution of money payments for payments in
kind (use of lands, specified goods, etc.) to the peasants. Thus arose a
free peasant<span class="pagenum"><SPAN name="Page_114" id="Page_114">[Pg 114]</SPAN></span> class receiving wages. But land continued to be rented and
landed estates to be hereditary throughout Europe. As they did not pass
from hand to hand as a commercial or marketable form of wealth, their
value was rarely, if ever, expressed in terms of money and as a ratio to
the rent they bore. The result was the fixing of the erroneous idea that
agricultural wealth is essentially different in the character of its
service and yield from wealth used in manufactures. One phase of the
error was the idea held by the physiocratic writers and by Adam Smith
that in agriculture "nature labors along with man," while in manufacture
"nature does nothing, man does all." This view was corrected by later
critics (Buchanan, Ricardo, and others), but the main portion of the
fallacy persisted in the supposed contrast between the characters of the
services performed by natural resources and by artificially produced
wealth.</p>
<h4>§ II. THE CONCEPT OF CAPITAL IN MODERN BUSINESS</h4>
<div class="sidenote">Extension of the use of the money loan and of the capital
concept</div>
<p>1. <i>The development of the use of money and credit has led to the
expression of the value of all indirect agents, without distinction, in
terms of money.</i> This is a capitalistic age. The development of a class
of money-lenders has led to a transfer of all sorts of wealth from
owners to users by means of money. As in medieval Europe city wealth was
bought and sold, and measured and expressed, so in twentieth century
America are the farm, the waterfall, and the mine. Every purchase with
money owned or borrowed is to-day called an investment of capital. To
invest means to clothe, and an investment of capital is clothing money
in any kind of wealth, whether it be a ship, a factory, or a farm.</p>
<p>Interest on money is the contractual form in which more and more the use
of wealth is paid for. The borrower does not ask the wealthy man to buy
for him a factory and to rent it to him. It is not impossible for the
transaction to take that form; but in practice it is inconvenient. The
capital<span class="pagenum"><SPAN name="Page_115" id="Page_115">[Pg 115]</SPAN></span> concept, the expression of wealth in the form of money, spreads
over almost the whole face of the economic world. In promissory notes,
mortgages, capital stock, bonds, and many other forms, are expressed the
obligations of borrowers bound to pay regularly a sum called interest
for the use of the multifarious wealth they have chosen to employ.</p>
<div class="sidenote">Definition of capital</div>
<p>2. <i>Capital to-day may be defined as economic wealth expressed in terms
of the general unit of value.</i> In economic discussion new conditions
must be recognized and an attempt made to adapt definitions to the
language and needs of practical life. By this definition, capital, at
any given moment of time, includes all economic goods in existence, when
they are thought of in terms of their value. But things have different
durations, some are parts of the capital of the world only for an
instant, others for a week, a month, or years. Most capital is composed
of things durable in a large degree.</p>
<p>It has been seen above that there is no reason for keeping things unless
they will increase in value, that is, unless a rental is logically
attributable to them. Everything kept for a day, a month, a year, is
kept because thus it will continually give off uses or by accumulating
them it will become more useful. Hence, when interest is defined as the
payment for the use of capital, it is connected with all wealth that is
expressed in the capital form. In practical business and in theoretical
discussion this is the idea of capital that alone can be consistently
followed. Capital is the value equivalent of a sum of money "invested,"
"clothed" in forms of wealth purchased and exchanged. Wealth has become
fluid in modern times; it was crystallized in medieval times. Under the
new conditions, wealth, expressed in the mobile form of capital, flows
into the most distant corners of the industrial world.</p>
<div class="sidenote">Distinction between money and capital</div>
<p>3. <i>Capital must not be identified with money although it is expressed
in terms of money.</i> While money and capital are not identical, neither
are they opposite or mutually contradictory.<span class="pagenum"><SPAN name="Page_116" id="Page_116">[Pg 116]</SPAN></span> Money is but one species
of the genus capital. It is a particularly durable form when industry as
a whole is considered, a particularly fleeting form in the individual's
possession, and a particularly important, though not necessarily the
most important, form in its social significance. The things composing
capital are concrete things, scarce forms of wealth, some of which are
yielding gratification at the present moment, or are destined to do so
at some future moment; others of which are not themselves giving direct
gratification, but are indirect agents for the gratifying of wants. To
this latter group belongs money.</p>
<p>The caution contained in this proposition may appear to some to be
superfluous, but it is most needed. The mind is so prone to identify
things that are expressed currently by the same words. The ease with
which money and capital are thus confused has led to various popular
fallacies on practical economic questions.</p>
<div class="sidenote">Contractual interest and rent involve a difference of
business procedure</div>
<p>4. <i>Renting wealth and borrowing capital have the same economic purpose,
but the capital contract presents certain peculiar features.</i> In the
interest contract for the loan of capital the interest always is and
must be expressed in money; the capital sum must be expressed as value;
and the interest rate expresses the relation between these two values.
In each of these features the interest contract is in contrast with the
renting contract. While the rent itself may or may not be expressed in
terms of money, the value of the rented wealth is not so expressed, and
there is no rent-rate expressing the relation between the two values.</p>
<div class="sidenote">The wealth concept and the capital concept contrasted</div>
<p>As here presented, the essence of the capital concept is in the mode or
form of expression of wealth, not in the physical nature, the origin of
its value, or any peculiarity in the kind of wealth; the content of the
concept is limited only by man's thought of wealth, every good becoming
capital when it is capitalized, that is, when the totality of its uses
is expressed as a present sum of values. The difference between the
wealth concept and the capital concept is therefore subjective,<span class="pagenum"><SPAN name="Page_117" id="Page_117">[Pg 117]</SPAN></span> not
objective; it is a difference in the mode of man's thought regarding
wealth. The rent contract and the interest contract are modes of
borrowing and lending which reflect this difference of conception. In
their effort to express more exactly to themselves and to others the
relative felt importance of their environment, men take in turn
different points of view, and use different modes of expression. The
most developed and exact of these devices for the social expression of
valuations, which became possible only with a money economy and widened
markets, is the capital concept, whose nature has been analyzed here.</p>
<div class="sidenote">The capital concept now prevalent</div>
<p>Summarizing the thought of this chapter, it may be said that the capital
concept has gradually developed with industry, and is now the most
widely prevailing mode of expressing the quantity of wealth. It is used
in the discussion of all the most important problems of modern industry.
The questions of income from wealth, of trusts and corporations, nearly
all that is most notable in the development of modern industry, require
the use of the capital concept. Yet (returning to the thought with which
this chapter started) in many of the outlying districts other modes of
looking upon wealth are employed. References to modern industry must be
understood usually as applying to the most developed capitalistic
conditions.</p>
<hr class="chap" />
<p><span class="pagenum"><SPAN name="Page_118" id="Page_118">[Pg 118]</SPAN></span></p>
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