land, or real property, the least readily convertible, mainly in consequence of the difficulty in its transfer.

Thus securities for money never represent any specific money, but are always a claim on the person. Convertible securities are never a claim on a person, and certain kinds of them are always a title to certain specific goods. Sometimes a security for money may be changed into a convertible security. This is done in what is technically called funding the unfunded debt. The Government often raises money on its bills like an individual, and is of course bound to pay them at maturity. These Exchequer Bills, therefore, as they are called, are like any other bills of exchange, securities for money. Sometimes when these bills amount to a large sum, it is very inconvenient for the Exchequer to pay them in full, and it gets its creditors to agree not to demand repayment of the whole debt, but to receive only the interest on it in perpetuity. When this is done the creditor loses the right to demand the principal sum from the Government, but he may sell the right to receive the annuity to any one else in the open market. It then becomes a convertible security, and is called the Public Funds, or Stock. This operation is termed funding the unfunded debt. In a similar manner Railway companies have been allowed to borrow money on their bonds, termed Debentures; but finding it inconvenient to be obliged to repay these large sums have formed them into Debenture Stock, upon which they are only bound to pay the interest, like the Public Funds.

On the Definition of CAPITAL.

27. The word Capital is one of the great fundamental conceptions of Economics, and we must frame a definition of it in accordance with the canons we have already laid down.

Any Economic Quantity whatever may be employed in two different ways. The proprietor may either use it himself for his own personal enjoyment, or he may use it to produce a profit. When an Economic Quantity is thus used productively, i.e. so as to produce a profit, it is termed CAPITAL. Senior says very justly-" Economists are agreed that whatever gives a profit is 1 Political Economy, p. 67.

properly termed CAPITAL." And Stephens in his Thesaurus defines the word thus:

"Kepáλaιov. Caput unde fructus et reditus manat. Capital, the source whence any profit or rent flows."

It is clearly to be understood that there is no such thing as absolute Capital. Whether any Economic Quantity is to be termed Capital or not depends not upon the nature of the thing itself, but exclusively on the Method in which it is employed. We have already seen that Economic Quantities are of three distinct orders, and as any of these may be used so as to produce a profit, it follows that Capital may be of three distinct kinds. Thus if I have a sum of money which I spend in purchasing things for my own use and enjoyment, it is not Capital; but if I use it so as to produce a profit in any way, it then becomes Capital. Thus if I lend it out at interest; or buy goods with it to sell again with a profit; or invest it in a commercial enterprise of any sort; or in the funds: or if I spend it in acquiring the knowledge necessary to exercise a profession such money is capital. And the things or commodities purchased for the purpose of producing the profit, are termed Capital as well: because though the money was originally employed in acquiring them, they are again employed in purchasing money, and there is no profit unless they sell for a greater sum than was spent in purchasing them.

So any material thing may be capital. The land belonging to a landlord is Capital to him if it produces him a profit. Several great noblemen possess immense tracts upon which great part of London is built, which yield them an enormous revenue: that land is Capital to them.

So many natural advantages may be Capital. If a person has a natural waterfall in his grounds and he makes no use of it, but considers it as a mere ornament, it is not Capital; but if he uses it to turn a mill then it becomes Capital. So if he has a spring of mineral water which acquires a reputation for curing diseases, and so causes visitors to flock to the place, and live there for the benefit of the waters, thereby giving great value to the land and producing him a good revenue, it is Capital to him.

It is sometimes said that air, sunshine, etc., are not wealth, because they cannot be appropriated; but in many cases the climate is bona fide Capital to a country. The climate, it is

true, cannot be exchanged away, but it may attract strangers to come and settle there for the benefit of their health, who would not have done so otherwise, and so brings wealth to the place. The climate is real Capital to Madeira, the Riviera, and many other places.

So if I have musical or histrionic talents, and use them merely for the amusement of myself and my friends, these talents so used are not Capital; but if I adopt the stage as a profession, or earn an income by giving lessons in music, or drawing, then these talents become Capital. So with all the professions, clerical, legal, medical, military and naval, engineering, civil service, etc. So if I dig in my garden for my own amusement, my labour is not Capital, but if I dig, or plough, or do any other work for hire, then my labour becomes Capital; and indeed to the great majority of the labouring classes, their labour is their only Capital.

So trade secrets, so long as they can be kept secret, and persons can use them for the purpose of profit, are a very valuable kind of Capital.

So Economic Quantities of the third order may be Capital also. If an author writes a successful work, the copyright of it is Capital to him; or if he sells it to a publisher, it is Capital to the publisher. If a man buys into the Funds, they become Capital to him. There is a class of traders whose business it is to buy and sell the Funds, or Shares in Commercial Companies. They are called Stock jobbers, and they keep a stock of this property on hand, just as other traders keep a stock of material goods. The business of a banker is to buy commercial debts. He buys them from his customers before they are due for a lower price than their amount, and sells them when they are due to the debtors at their amount. These debts are to a banker, exactly the same as a stock of goods to a shopkeeper. They are Capital to him; and as he invariably purchases them with his own credit, his credit is Capital to him.

One of the most important branches of this species of Capital is when traders use their Moral Capital as purchasing power. They buy goods with their promise to pay instead of actual money; and these promises to pay, or Rights to demand payment, circulate in commerce and perform the functions of money, and are themselves the objects of a gigantic commerce.

28. Now, there are two fundamentally distinct ways in which Capital may increase :

1. By a direct and actual increase of quantity; Thus flocks, and herds, cattle, corn, and all fruits of the earth increase by adding to their numbers or quantity.

2. By Exchange: that is by exchanging something that has a low value in a place, for something which has a higher value. Now it is clear that money produces a profit, and, therefore, becomes capital, by the second of these methods. We do not sow sovereigns in the ground like corn, nor do they produce a crop of half-sovereigns. But money becomes capital by exchanging it for some goods, and which may be sold or exchanged again for a greater sum than they cost. And it is also clear that any Economic Quantity whatever which is used as a substitute for money to purchase goods and for the purpose of profit is capital as well as money, by the force of the very definition which Senior says all Economists are agreed upon.

Smith says "A capital may be employed in four different ways: either, first, in procuring the rude produce annually required for the use and consumption of the society; or, secondly, in manufacturing and preparing that rude produce for immediate use and consumption; or, thirdly, in transporting either the rude or manufactured produce from the places where they abound to those where they are wanted; or, lastly, in dividing particular portions of either into such small parcels as suit the occasional demands of those who want them." Now it is clear that the last two ways are identical in principle, and include the business of the foreign merchant, the wholesale and the retail dealer that is the whole operations of commerce or exchange. Hence we may say that Smith enumerates three distinct methods of employing a capital productively-agriculture, manufactures, and commerce, to which we must add, as Smith himself admits afterwards, money spent in acquiring the knowledge and skill necessary to exercise a profession. Now, without inquiring yet what the technical Economic definition of Production is, which is done a little further on, we see at once that Smith enumerates exchange, or purchase, as one species of production. Now Mr. Mill says" anything which is susceptible of being ex1 Wealth of Nations, B. II., c. 5. Principles of Political Economy, B. I., c. 4, § 4.

changed for other things, is capable of contributing to production in the same degree" as money, and also "bank notes, bills of exchange and cheques circulate as money, and perform all the functions of it."

Now money becomes productive capital by being employed to purchase things to be sold again at a profit. And if a man can purchase things by means of his credit, that is, if he can purchase them by giving his promise to pay at a future time, and by so doing sells the goods at a higher price, and so has a profit after paying and discharging his debt, it is quite clear that his credit has been capital to him in exactly the same way that money would have been.

Let us take a very simple example. Suppose a tailor wants to make clothes for a customer. He pays, say £10 in cash to the cloth merchant, and after making up the cloth he sells them perhaps for £15. Then he has used his money as capital. He has £10 at the beginning of the operation, and £15 at the end of it; or he has made a profit of £5.

Suppose the tailor has no money to buy the cloth with, then if he cannot buy it on credit, he cannot make the clothes, and he cannot have any profit.

Suppose, however, the cloth merchant, believing in his honesty and capacity to pay, sells him the cloth in exchange for his promise to pay money three months after the time. As the payment is deferred, and as of course there is some risk of loss, he will, by way of insurance, charge the tailor a somewhat higher price than the cash price. Suppose he sells his cloth in exchange for the tailor's promise, to pay £11 three months after the time. Now this is as much a sale as if the price had been paid in money. The property in the cloth is gone to the tailor, and what the cloth merchant has received in exchange for it is, the Right, or Property, to demand £11 three months after date. And this Property is called a Credit or a Debt.

The tailor having purchased the cloth by creating a debt against himself of £11, payable in three months' time, makes up the clothes as before, and is paid £15 by his customer. At the end of the three months he pays £11 out of this to the cloth merchant, and has, of course, remaining for himself a profit of £4.

1 Principles of Political Economy, B. III., c. 12, § 1.