David Ames Wells's Recent Economic Changes

David Ames Wells. Recent Economic Changes: And Their Effect on The Production and Distribution of Wealth and The Well-Being of Society. New York: Appleton and Company, 1891. (Original copyrighted in 1889). 493 pages. Out of print.

I was able to obtain a used copy of this book from Amazon.com for a reasonable price but it appears to have been one of the last available at this time. The copy I obtained had been donated to the Cotton Economic Research Library of the University of Texas at Austin in 1969 by Dr. AB Cox. Dr. Cox was a noted marketing professor and was involved in setting New Deal policy concerning cotton. Unfortunately, the copy is so old that several of the pages disintegrated while I was reading them, which is unfortunate.

David Ames Wells, a graduate of Williams College, was editor of the Annual of Scientific Discovery from 1850 to 1866. He was author of books concerning chemistry, geology and natural science. His 1863 Natural Philosophy went through 15 editions. In 1865 Abraham Lincoln appointed him chairman of revenue and in 1866 President Andrew Johnson appointed him special commissioner of the revenue. He started his economics work by supporting high tariffs, but then revised this view in favor of a general laissez-faire philosophy of low tariffs, low taxes, the gold standard and against inflation and free silver. Wells exemplifies the Mugwump movement of post-Civil War America, Republican advocates of efficiency as well as laissez-faire who opposed Republican James Blaine in the 1884 election in favor of Bourbon Democrat Grover Cleveland.

The book is very dull because it seems that readers of that day were not well acquainted with statistical tables. As a result, Wells verbally describes statistics rather than tabulating them. Large sections of the book are devoted to enumeration of various industry data. However, the key ideas are gems.

I suspect that because the book is dull few historians and economists have read it carefully in recent years. However, a careful reading would disabuse many of illusions about the late nineteenth century American economy. In particular, Wells shows that the word "depression" in use at that time referred primarily to profit declines as opposed to shifts in the physical volume of trade. As a result, the widespread claim that the late nineteenth century was characterized by high unemployment is wrong.

This conclusion should not be surprising to any who care to exercise a modicum of common sense because immigration exploded in the post 1873 period, at the very time that the country was supposedly wracked with "depression". Except for the Jews escaping murderous policies in Russia and Poland it is difficult to conjoin the vast immigration with the claims of many historians that the late nineteenth century was a period of poverty and unemployment. A careful reading of Wells shows that this claim is fallacious.

Wells's argument is germane to today as well as to the late nineteenth century. Wells argues that it is primarily anxiety and psychological factors that created labor unrest and a sense of deprivation in the late 19th century. The word "depression" that was used frequently in that period referred to depression of profit rather than of wages or unemployment.

Indeed, workers fared far better between 1860 and 1889 than they have between 1973 and 2008. Real wages were increasing robustly during the former period, but they have declined by nearly 20% since 1971.

Wells starts out by discussing "the unprecedented disturbance and depression of trade, commerce and industry" which began in 1873 and fluctuated through 1889. The fluctuations occurred throughout the civilized world. Wells points out (pp. 4-5) that antecedent to the 1873 depression in England and the US "were enumerated at the time to be 'a rise of prices, great prosperity, large profits, high wages and strikes for higher; large importations, a railway mania, expanded credit, over-trading, over-building and high living.'"

This sounds suspiciously like a monetary inflation brought on by the Civil War greenbacks. However, there were similar bubbles in England and Germany at that time as well. The 1873 depression ended in 1878 or 9 and recommenced in 1882-3. Wells notes that by 1882 (p. 11) there was

"a plethora of capital seeking investment and a low rate of interest; so that the economic disturbance since 1882 has been mainly in the nature of a depression of industry, with a renewed and remarkable decline of prices; with absolutely no decline but rather an increase in the volume of trade and certainly no falling off in production as compared with the figures of 1880 and 1881, which years in the United States and to some extent in other countries were regarded as prosperous."

This raises another question in my mind. If unemployment were high and production low in that period, why were the "robber barons" so eager for combination? Much of the late nineteenth and early twentieth century political debate concerned trusts and business combinations. The Sherman Anti-trust Act was passed in 1884. If business were slow, demand weak and unemployment high, why were firms eager to restrict production? It would seem that production was high but profits low. In that case, can it be possible that unemployment was high, given that production was excessive? How could it be both ways, over-production coupled with high unemployment? It seems to me that much of the discussion about the late nineteenth century economy has been confused by ideology.

Wells traces the transition of iron prices from 1873 to 1880. He notes of 1877 that although there was a decrease in production of pig-iron from 1873 to 1877 of about 1/3 and prices for iron reached an all time low in 1879, by the end of 1879:

"excitement and speculation took the place of the gloom and discouragement with which the American iron-trade had been so familiar scarce one year before, and the business of buying and selling iron became close neighbor to that of gambling in stocks." (p. 13)

But by 1882 there was another reversal due to expanded capacity. In 1885 there was " a meeting of the Bessemer steel rail manufacturers in August 1885, at which meeting a restriction of production for one year to avoid the evils of over-production and ruinous prices was agreed upon. This action was almost immediately followed by beneficial results to the iron-trade...An incident of our industrial history for 1886 was the large number of strikes among workingmen."

All through the 1870s (from 1873 to 1878 or so) there were public discussions about "depression". In 1886 unemployment may have been around one million (p. 18). There was an 1880 population of about 62 million, but Wells doesn't say the size of the work force and I cannot find it on the web. About half the workforce was in agriculture in 1880, and it is likely that many of the unemployed returned to family farms. According to Charles Hirschman and Liz Mogford:

"In 1880 almost half the gainfully employed workers in the United States were engaged in agriculture, and the American industrial economy was on the periphery of the national and world economy. Employing only about one in seven workers, the manufacturing sector in 1880, with few exceptions, consisted of small enterprises."

Hirschman and Mogford point out that in 1880 immigrants were about one third of all workers, and this proportion increased to 40 percent by 1920. The claim that living standards were declining between 1860 and 1913 would seem to require two fantastic assumptions. First, massive numbers of people were coming to America in order to be impoverished. Second, because real hourly wages were increasing, such people would have had to be coming here in order to be paupers.

Wells reports a study of British conditions on p. 19:

"a. That the trade and industry of the country are in a condition which may fairly be described as depressed
b. That by this depression is meant a diminution and in some cases, an absence of profit, with a corresponding diminution of employment for the laboring classes
c. That neither the volume of trade nor the amount of capital invested therein has fallen off, although the latter has in many cases depreciated in value. That the depression above referred to dates from about the year 1875.

Wells argues that a number of potential causes of the "depression" had been noted, to include over-production, excessive competition and many others (p. 20). Despite all the discussion of unemployment and depression, argues Wells (p. 25):

"statistics not only fail to reveal the existence of any great degree of scarcity anywhere, but, on the contrary, prove that those countries in which depression has been and is most severely felt are the very ones in which he desirable commodities of every description--railroads, ships, houses, live-stock, food, clothing, fuel and luxuries, have year by year been accumulating with the greatest rapidity and offered for use or consumption at rates unprecedented for cheapness."

Wells opens the second chapter with a discussion of how the Suez Canal disrupted prior trade patterns and (p. 34):

"revolutionized one of the greatest departments of the world's commerce and business; absolutely destroying an immense amount of what had previously been wealth, and displacing or changing the employment of millions of capital and thousands of men; or, as the London 'Economist' has expressed it 'so altered and so twisted many of the existing modes and channels of business as to create mischief and confusion to an extent sufficient to constitute one great general cause for a universal commercial and industrial depression and disturbance.'"

In other words, technology causes old modes to become obsolete, and this throws people out of work. It would seem that this is partially true. For the twentieth century excelled in a different kind of depression, one where there was no innovation but rather monetary expansion which, when contracted, caused people to be thrown out of work. This may have been at play in the 1873 depression as well.

Wells gives numerous examples of how technology threw maritime and seal fishery workers out of work (pp. 38-9). Likewise, the railroads threw horse carriers out of work (p. 41). Improved transportation compelled "a uniformity of prices" (p. 46) which ended local shortages. 82.2% more pig-iron was produced in 1883 than in 1870 (p. 49), resulting in "an extreme depression of the business". But the cost of railroads was reduced by the depression in steel. In other words, a wealth of production creates a depression.

Wells gives one example after the next of how technology and innovation replaced human labor, resulting in temporary unemployment. But the new high levels of production resulted in new demands for workers as society became wealthier. There were marked increases in production of textiles, coal, copper, agricultural implements, boots, shoes, flour, metals, bottles, jewelry, bank notes, retail, paper sacks, pharmaceuticals, dyes, oils, natural gas, oil, electricity, electric motors and even the Census Bureau:

"On another grade of goods, the facts collected by the agents of the bureau show that one man can now do the work which twenty years ago required ten men."

However, the rapid change in the economy was coupled with strikes and industrial revolts, which led to ever greater substitution of capital for labor:

"And one significant illustration of the quickness with which employers carry out this suggestion is afforded by the well-authenticated fact that the strike among the boot and shoe factories of one county in the State of Massachusetts in the year 1885 resulted in increasing the capacity for production by the same factories during the succeeding year of a fully equal product, with a reduction of at least fifteen hundred operatives..."

Wells argues (p. 68-9):

"All investigators substantially agree that the depression of industry in recent years has been experienced with the greatest severity in those countries where machinery has been most extensively adopted, and least in those countries and in those occupations where hand-labor and hand-products have not been materially interfered with or supplanted...There have, moreover been no displacements of labor, or reduction in the cost of labor or of product, in all those industries in civilised countries where machinery has not been introduced or increased."

In chapter three Wells discusses over-production as a cause of "depression" (p. 74):

"Industrial over-production--manifesting itself in excessive competition to effect sales and a reduction of prices below the cost of production...and there appears to be no other means of avoiding such results than that the great producers should come to some understanding among themselves as to the prices they will ask...Society has practically abandoned--and from the very necessity of the case has got to abandon unless it proposes to war against progress and civilization--the prohibition of industrial concentrations and combinations. The world demands abundance of commodities, and demands them cheaply; and experience shows that it can have them only by the employment of great capital upon the most extensive scale...To the producer, the question of importance is, How can competition be restricted to an extent sufficient to prevent its injurious excesses? To the consumer, How can combination be restricted so as to secure its advantages and at the same time curb its abuses."

Wells notes that many businesses over expanded in good years, resulting in overproduction that caused reduced profit. He quotes a miller (p. 79):

"...our ambition has overreached our discretion and judgment. We have all participated in the general steeple-chase for pre-eminence...As our glory increased our profits became smaller..."

"Overproduction led to increased competition" (p. 80).

But (p. 82):

"One universally recognized and, to some persons, perplexing peculiarity of the recent long-continued depression in trade is the circumstance, that while profits have been so largely reduced that, as the common expression goes, it has not paid to do business," the volume of trade throughout the world has not contracted but, measured by quantities rather than by values, has in many departments notably increased."

The result of the enhanced competition was (p. 84):

"an increase (but not necessarily proportional or even universal) in consumption...There is, therefore, nothing inconsistent or mysterious in the maintenance or increase in the volume of the world's business contemporaneously with a depression of trade--in the sens of a reduction of profits--occasioned by an intense competition to dispose of commodities, which have been produced under comparatively new conditions in excess of a satisfactory remunerative demand in the world's markets. And, apart from this, it is now well understood that the aggregate movement and exchange of goods is little if any less in times of the so-called 'depression of grade' than in times of admitted prosperity. Again, if depression of business does not signify less business, it can only signify less profits...If there is a progressive fall of prices without a corresponding fall of wages, profits must fall progressively, and interest also...Now this is exactly what has happened in recent years. Profits and prices of commodities have fallen, but wages have not fallen, except in a few special departments. Consequently, the purchasing power of wages has risen, and this has given to the wage-earning class a greater command over the necessaries and comforts of life, and the purchases of all this great class have supplemented any forced economizing of the employing and well-to-do classes. 'The latter are the ones who make the most noise in the newspapers, and whose frequent bankruptcies fill the public eye. But they are not those whose consumption of commodities most swells the tonnage of the railways and steamships. They occupy the first-class cabin, and their names are the only ones printed in the passenger lists, but the steerage carries more consumers of wheat, sugar, and pork than all the cabins together."

The enhancement of production through technology required (pp. 92-3) "great corporations or stock companies, which are only forms of associated capital organized for effective use...it must also be admitted that the whole tendency of recent economic development is in the direction of limiting the area within which the influence of competition is effective."

Wells notes the familiar importance of scale that was widely noticed in the 19th century:

"Thus, the now well-ascertained and accepted fact, based on long experience, that power is most economically applied when applied on the largest possible scale, is rapidly and inevitably leading to the concentration of manufacturing in the largest establishments, and the gradual extinction of those that are small...and another quarter of a century will not unlikely see all of the numerous companies that at present make up the vast railroad system of the United States consolidate, for sound economic reasons, under a comparatively few organizations or companies."

Wells emphasizes the importance of economies of scale (pp. 99-109). Thus, heavy investment in technology led, in the 19th century, to the need for greater scale. Wells also believed that machinery would replace low wage work in poorer countries (p. 105). Wells did not believe in the possibility of accurate price indexes (his arguments are not surmounted by the price indexes in use today). He goes through a number of commodities, some of which he is certain have falling prices due to improved technology and some of which offer less clear evidence (p. 126). Of these, I found his discussion of oil most interesting, in part because that was the product of Standard Oil, and Ames says (p. 131) that it is the most interesting commodity. He writes (p. 131):

"...the annual product of crude petroleum in the United States--the chief source of supply--increased from 9,893,786 barrels in 1873 to 28,249,597 in 187. The price of crude oil during this period declined from 9.42 cents to 1.59 cents per gallon and of refined oil from 23.59 cents to 6 3/4 cents per gallon. Thus, from our vantage point, Standard Oil had performed a tremendous service to the American public, for which Mr. Rockefeller was reviled and the firm attacked legally.

Wells adds (p. 132): "It is claimed, and without doubt correctly, to be largely due to the fact that the whole business of refining petroleum in the United States and the distribution of its resulting products has gradually passed, since 1873, into the ownership and control of a combination or 'trust'--the Standard Oil Company--which commanding millions of capital has used it most skillfully in promoting consumption , and in devising and adopting a great number of ingenious methods whereby the cost of production has been reduced to an extent that, at the outset, would not have seemed possible..."

Standard Oil's use of capital , penetration of foreign markets, use of capital, construction of pipelines, creation of knowledge, improvement of inputs.

To take a more modest example (Wells goes through about fifty pages of discussion about various products whose cost was reduced sharply between 1820 and 1889), Wells discusses paper and rags on p. 155. He writes that the substitution of pulp from wood, straw and various gasses for pulp from fibers of cotton and rags (which had been used until the 1860s) that the prices of "fair qualities of book-paper have declined since the year of 1872 to the extent of fully fifty per cent, while in the case of ordinary 'news' the decline has been even greater." Between 1880 and 1888 the capital invested in the paper industry had increased by almost 75%, wages had increased from $1.13 to $1.50 per day and "the average value of a pound of paper declined from 6.09 cents in 1880 to 3.95 cents in 1888. With declining prices and increasing wages and capital investment, small wonder that investors complained about "depression". Note as well that the rising wages in the paper industry were coupled with deflation in prices, so workers were double off twice, once because of increasing wages and once because of decreasing prices. No wonder the economists who work for Wall Street interests, like Ben Bernanke and Alan Greenspan, worry endlessly about "deflation". Imagine what the stock market would look like in the 19th century's democratic economy.

Unlike the large range of products whose prices were reduced due to technology (p. 191), all the products that were the result of handicrafts did not decline in price. Morevoer, the "scarcity of gold" did not seem to affect prices. Thus, Wells did not believe that "free silver" was a solution to deflation. This contrasts with the subsequent Keynesian view that money is the source of productivity and wealth. It would seem that Wells's ideas were more successful in the 19th century than Keynes's were in the 20th.

Wells goes on to argue against the theory that "depression" and "deflation" were due to an insufficient amount of gold. This directly contradicts the concerns of today's economists, who believe that deflation is harmful because it reduces business activity. Under the theory of "everyone is stupid except the economists who work for banks and the Fed", today's economists argue that business stops if there is insufficient liquidity, and then a dose of state compulsion is needed. In contrast to today's crackpot theories, Wells watched a healthy economy characterized by an unparalleled degree of innovation. Wells argues (p. 208) that:

"profts have fallen..due, in almost every case, to the severe competition engendered by the desire to effect sales in face of a continued supply of commodities in excess of any current market demand; whle in contravention of the assumption that the supply of gold in recent years has been inadequate to meet the increased deamnds of the world for coinage, etc., the following facts are in the highest degree pertinent, if not wholly conclusive: No one doubts that the amount of gold in the civilized countries of the world has largely increased in recent years...and at the end of 1885 was nearly four times what it was in 1850"

Wells argues (p. 254) that a trimetallic system based on copper, silver and gold is the best coinage for world trade based on the volumes of trade in each country (the more developed the country, the greater the need for an expensive currency).

Wells goes on to describe the extensive amount of protectionism that existed in the nineteenth century. For example, with respect to Russia (p. 290):

"Russia having sought to close her doors against the produce of other countries, they in turn have curtailed their purchases of Russian products; and the shrinkage in the foreign trade of Russia in recent years, and during a period of peace, has accordingly been almost withou precedent in commercial history."

Neither tariffs nor bounties on production for export turn out to be beneficial, according to Wells (p. 291). Wells comments on the reactionary nature of protectionism (p. 316):

"...a review of all the circumstances connected with the multiplication of restrictions on international commerce, which the majority of civilized nations have united in creating in recent years, fully justifies the British Commission and other European authorities in regarding it as a most influential agency in occasioning almost universal economic disturbance. It has been progress backward--progress in the direction of that sentiment of the middle ages, which held that, as commerce benefited one country only as it injured some other, it was the duty of every country to impose the most harassing restrictions on its commercial intercourse. The evidence, furthermore, is overwhelming that, as civilization grows more complex, and the use and perfection of machinery increases, all obstacles placed in the way of the freest interchange of commodities have an increasingly disastrous effect in deranging and destroying industry everywhere. Or, in other words, increased knowledge respecting the forces of Nature, and a wonderful subordination and use of the same having greatly increased and cheapened the abundance of all useful and desirable things, the majority of the world's legislators and statesmen have seemed to have considered it incumbent upon them to neutralize and defeat the beneficent results of such abundance."

Wells notes that the improvement in technology had made expanding population possible, refuting Malthus. Thus (p. 334):

"All the resources of the population of the United States, as they exiisted in 1840, would have been wholly inadequate to sow or harvest the present average annual corn or wheat crops of the country; and even if these two results had been accomplished, the greater proportion of such a cereal product would have been of no value to the cultivator, and must have rotted on the ground for lack of any means of adequate distribution...(p. 338, my favorite) The consumption of beer has increased from 6.68 gallons per capita in 1878 to 8.26 gallons in 1880, 10.18 gallons in 1883 and 12.48 in 1888..."

Moreover (p. 342):

"The facts in regard to the general increase in the deposits of savings-banks and the decrease in pauperism, are also entitled to the highest consideration in this discussion. In the United States the aggregate deposits in such banks were probably about ($1.5 billion) in 1888 as compared with ($759 million) in 1873--'74; an increase of nearly one hundred per cent in fourteen years..."

Despite massive increases in real wages and standards of living during the late nineteenth century labor was filled with discontent in the late nineteenth century because the displacement of labor through machinery was psychologically jarring and because "changes in the character or nature of employments consequent upon the introduction of new methods--machinery or processes--which in turn have tended to lower the grade of labor and impair the independence and restrict the mental development of the laborer" and also "the increase in intelligence or general information on teh part of the masses" (p. 364-5).

Wells points out (p. 366):

"That such phases of human suffering are now, always have been and undoubtedly always will be the inevitable concomitants of the progress of civilization or the transitions of the life of society to a higher and better stage...That it is not within the power of statute enactment to arrest such transitions, even when a large and immediate amount of human suffering can certainly be predicated as tehir consequent except so far as it initiates and favors a return of society toward barbarism...the utlimate result is always an almost immeasurable degree of increased good...Society proffers its highest honors and rewards to its inventors and discoverers; but, as a matter of fact, what each inventor or discovereris unconsciously trying to do is to destroy property, and his measure of success and reward is always proportioned to the degree to which he effects such destruction..."

Returns to capital fall with innovation but returns to labor increase with innovation (p. 370) "law" attributed to Bastiat.

This is an interesting claim, because in the last 35 years or so returns to capital have risen while returns to labor have been reduced. Presumably, this is attendant upon a reduction in innovation as firms have found it more convenient to relocate and seek lower labor costs than to innovate.

In the nineteenth century, despite complaints of depression in 1873, 1882 and in the 1890s, notes Wells, depression DID NOT mean unemployment. That is a common error that many historians and economists make. DEPRESSION DID NOT MEAN UNEMPLOYMENT IN THE LATE NINETEENTH CENTURY. IT MEANT DEPRESSION OF PROFITS.

Thus, Wells writes (pp. 373-4):

the number of persons who ahve been displaced during recent years by new and more effective methods of production and distribution and have thereby been deprived of occupation and have suffered, does not appear to have been so great as is popularly supposed; a conclusion that finds support in the fact that, notwithstanding trade generally throughout the world has been notably depressed since 1873, through a continued decline in prices, reduction of profits and depreciation of property, the volume of trade--or the number of things produced, moved, sold and consumed--on which the majority of those who are the recipients of wages and salaries depend for occupation, has all this time continually increased, and in the aggregate has probably been little if any less than it would have been if the times ahd been considered prosperous. In the United States there is little evidence thus far that labor has been disturbed or depressed to any great extent from this cause. But there is undoubtedly a feeling of apprehension among the masses that the opportunities for employment through various causes--continued large immigration, absorption of the public lands, as well as machinery improvements--are less favorable than formerly, and tend to be still further restricted; and this apprehension finds expression in opposition to Chinese immigration, to the importation of foreign labor on contract, to the increase in the number of apprentices, and in the endeavor to restrict the participation of various employments to membership of certain societies...The annual investigation by the managers of 'Bradstreet's Journal' into the condition of the industries of the country for 1887, indicated that in March of that year 400,000 more industrial employes were at work than in 1885..."

and (p. 379):

"Wages, speaking generally, have not fallen but have increased; and, except in Germany, there is little indication of a tendency to increase the hours of labor or encroach upon the reservation of Sunday...The extent and rapidity of the increase in consumption of all useful and desirable commodities and services which follows every increase in the ability of the masses to consume, is one of the most wonderful of modern economic phenonmena; and the one thing which, more than any other, augments their ability to consume, is the reduction in the price of commodities, or rather the reduction in the amount of human effort or toil requisite to obtain them, which the recent improvements in the work of production and distribution have effected. Better living, contingent on a reduction of effort necessary to insure a comfortable subsistence, induces familiarity with better things; constitutes the surest foundation for he elevation of the standard of popular intelligence and culture, and creates an increasing desire for services. "

Wells notes the tendency of labor to transmute from manufacturing to services or what he calls "incorporeal functions--that is, as artists, teachers and others who minister to taste and comfort in a way that can hardly be called material--to increase disporportionately to those engaged in the production of the great staples; and that, therefore, the production of these latter is not likely to increase as rapidly as heretofore."

Wells concludeds his chapter on labor by noting (p. 394):

"All this evidence, therfore, seems to lead to the conclusion that there is little foundation for the belief largely entertained by the amsses and which has been inculcateed by many sincere and humane persons, who have undertaken to counsel and direct them, that the amount of remunerative work to be done in the world is a fixed quantity and that the fewer there are to do it the more each one will get; when the real truth is that work as it were breeds work; that the amount to be done is not limited; that tthe more there is done the more there will be to do; and that the continued increasing material abundance which follows all new methods for effecting greater production and distribution is the true and permanent foundation for increasing general prosperity."

Wells notes (p.396) that "subordination to routine and method is an essential element in all systematized occupations" and that much of worker discontent flowed from restriction of independence attendant upon industrialization. He argues that most occupations are not so routinized as the manufacture of boots and shoes (p. 397-8). He also argues that greater scale leads to greater corporate social responsibility (p. 399):

"Experience also shows that the larger the scale on which he capitalistic production and distribution is carried on, 'the less it can countenance the petty devices for swindling and pilfering,' and the neglect and disregard of the health, safety and comfort of operatives, which so generally characterize industrial enterprises on a small scale; or, in other words, the maintenance of a high standard of industrial and commercial morality is coming to be recognized by the managers of all great enterprises as a means of saving time and avoiding trouble, and therefore as an undoubted and important element of profit. And it is to these facts--the natural and necessary growth of what has been termed the 'capitalistic system'--that a recent English writer on the condition of the working classes largely attributes the suppresssion of the truck (store) system, the enactment of laws limiting the hours of labor, the acquiescence in the existence and power of trade-unions, and the incerasing attention to sanitary regulations; reforms that have reformed away the worst features of the condition of labor as it existed thirty or forty years ago in Great Britain. The larger the concern, the greater usually the steadiness of employment and the more influential the public opinion of the employed."

Wells argues (p. 404):

"There is, therefore, unquestionably in these facts an explanation in no small part of what to many has seemed one of the greatest puzzles of the time--namely, that with undoubtedly greater and increasing abundance and chepanes of most desirable things, popular discontent with the existing economic condition of affairs does not seem to diminish, but rather to greatly increase. And out of such discontent, which is not based on anything akin to actual and unavoidable poverty, has originated a feeling that the new conditions of abundance should be further equalized by some other methods than intelligent individual effort, self-denial and a natural, progressive material and social development (the actuality of which is proved by all experience); and that the state could, if it would, make all men prosperous; and therefore should, in some way not yet clearly defined by anybody, arbitrarily intervene and effect it. And this feeling so far as it assumes definitenss of idea and purpose, consitutes what is called socialism."

From 1860 to 1885 purchasing power increased 26.44% per dollar (i.e., there was 26.44% deflation). In discussing the deflation of the late nineteenth century, Wells observes:

"Why is it that wages of manual labor have been constantly rising in recent yers, while all other prices have been concurrently falling? or, to put it differently, why is it that over-production, while cheapening the product, should not also cheapen the work that produces it? The answer is, that the price of the products of labor is not governed by the price of labor, or wages, but that wages, or earnings, are results of production, and not conditions precedent. Wages, as a rule, are paid out of product. If production is small, no employer can afford to pay high wages; but if, on the contrary it is large, and measured in terms of labor is of low cost--which conditions are eminently characteristic of the modern methods of production--the employer is not only enable to pay high wages but will, in fact be obliged to do so in order to obtain what is really the cheapest (in the sense of the most efficient) labor. The world has not yet come to recognize it, but it is nevertheless an economic axiom that the invariable concomitant of high wages and the skilled use of machinery is a low cost of production and a large consumption."

But (p. 418):

"while the remuneration of labor has enormously increased during recent years, the return to capital has not been in any way proportionate, and is apparently growing smaller and smaller. For this economic phenomenon there can be but one general explanation; and that is, that regarding labor and capital as commodities, or better, as instrumentalities employed in the work of production and distribution, capital has become relatively more abundant than labor, and has accumulated faster than it can be profitably invested...

(p. 420)"Again, as capital increases and competition between its owners for its profitable investment becomes more intense, and as modern methods can bring all the unemployed capital of the world within a few hours of the world's great centers for financial supply, the rate of profit, or interest to be obtained by the investor or lender, from this cause, also necessarily tends to shrink toward a minimum. Such a minimum will be reached when the returns for the use of capital become insufficient to induce individuals to save it"

Thus, through a process of creative destruction, capital continually reduces its own returns.

This process was aborted through institution of the Federal Reserve Bank in 1913.