of production. In the case of a cart-horse and similar instruments, there are no repairs, but the depreciation in its value is met by an annual item added to the cost of production. A farmer who employs twelve horses, each of which is expected to last twelve years, must be repaid the cost of a horse each year as replacement of capital used up. As to the remaining portion-which is the only fixed capital—it is wealth converted into a lasting instrument of production. It was made to take that form for the sake of the profit resulting from its employment. But the use of it is subject to necessary conditions. That use must, first, pay for repairs; secondly, it must, out of its products, furnish the fitting rate of interest on the capital which it cost to make that machine, be it building, engine, tool, or horse; thirdly, in many cases it will be expected to do more. Its construction has destroyed wealth; in most businesses the careful capitalist will seek to lay by from its profits something in repayment of its original cost. But there are instances of such machines which are treated differently. A railway incurs an immense cost in its construction; but its shareholders are satisfied with leaving their wealth permanently invested in it, providing only for the maintenance of its efficiency, and then dividing all the surplus as dividend. But the railway does more than this duty. It satisfies the shareholders and keeps their property undiminished; but over and above this service it confers an enormous benefit on the nation far exceeding its cost. Its indirect effects, in cheapening transport, placing commodities at the doors of consumers at trifling expense, economising time, opening new markets for districts more or less isolated, dispensing with large accumulations of stock in shops all over the land, giving access to manures, and in a hundred other ways, are so enormous that, many years ago, the great engineer Robert Stephenson declared that the railways had paid off the National Debt. And so they had; the assertion was perfectly correct. They had established for England, by their existence, a clear additional income, out of the same capital, of some 28 millions a year— and the annual charge of 28 millions is, and alone is, the National Debt. There remains one most important moral to be drawn from this analysis. If the creation of fixed capital leads to the great enrichment of a country, it not seldom lands it in great impoverishment. There is no cause so common of financial crises and commercial depressions as an excessive construction of fixed capital. Large quantities of wealth are consumed and disappear altogether in the opening of great mines, the formation of railways with their tunnels and embankments, or the creation of great iron works. The food, clothing, and materials have been eaten and drunk up and worn out; they are cleared away, and nothing left except the works which have been made. So far, the consumption is a creator of poverty; for tunnels and shafts by themselves alone do not restore the food and clothing which have perished. The deficiency is not filled up even if these mines and railways go to work, and produce profits, and yield good dividends. The capital, the wealth consumed in their construction, is still unrestored, and is not replaced until out of the profits, and before dividends are distributed, the original cost of making these works is repaid. The nation is poorer in things to use. The inevitable consequence is that there is less trade, for there is less to buy with, less to exchange, diminished traffics, fewer and reduced profits-precisely because there are fewer things, fewer goods in the country. This excess of creation of fixed capital-of capital, be it remembered, which is destroyed, and is not, for a long time, practically restored by wealth available for usecommonly follows a season of exceptional prosperity. Men are then hopeful, profits are good and abound, extension of business fascinates, trade is active, and demand for goods ever on the rise. At such times, as happened a few years ago, in the iron and coal trades, new works are commenced in profusion. All this while the consumption of the national wealth proceeds rapidly in maintaining many labourers and in the development of luxurious consumption in the fine weather of large profits; and it is followed by the consequences just described. Amongst these offenders none are so mischievous as railways; promoters, desirers of premium, stock-brokers, and many others, eagerly excite one another. The railway works are begun, and often the revulsion overtakes them before they are completed: the nation is stricken with poverty by their construction. All these events react on the money market. The depositors of banks are unable to meet their calls; many fail, the others press for loans to save them from ruin. Deposits diminish; on many mercantile accounts, or bad bills, the banks incur heavy losses. Suspicion spreads in every quarter, as to what house is sound, on what bank a run may take place. Failures multiply— change, and even economists, would be at the pains to gather it. 1. We learn, in the first place, what income is. It is most important to understand this clearly. Income is generally supposed to consist of money. It is always expressed in money. Profits, wages, salaries of all kinds are reckoned in money. All purchases are supposed to be made with money. Every one lays down that he has so much money to spend. Thus money hides the real facts which occur. Now income is not money. It is a pure delusion to suppose that income is money. Even where income is received in money, or wages, the true income is what the wages buy in the shops; the real wages, in contradistinction to what economists call nominal wages, that is, money. A labourer gets much or little exactly in proportion to what he can procure with his wages in the shops. In the same way, the great landowner's income is not money, for he may very probably not receive a pound of it in cash, but his share of the cattle, corn, and hay grown on his farms. The tenants sell these things for him, and pay their rents with cheques. He reaches what his income brings him when he completes the exchange by purchasing with these cheques what he desires. It is the same with profits. A merchant makes a profit of £1000 on a cargo of cotton. He lives upon these pounds. Is not the money specifically his income? No, for very probably he has never touched a shilling from these pounds in money. He received them in cheques or bills, and cheques and bills are not money, but only promises to pay money. These promises, written on paper, perform for him exactly what coin does for the labourers. They are his nominal profits. His real profits are obtained when he exchanges these promises for the articles which he buys. These articles are his income. Money and paper are mere cartage. The things moved by the cart are what the owner finally receives as income. 2. We learn what savings are, surplus of things made over things consumed. When the owners of this surplus -each man for himself-decides that this surplus shall be applied to increased means of production, it becomes capital. Where An interesting question, little thought of, now presents itself, Where are these savings? Lord Overstone estimated the annual savings of England at 150 millions of pounds—an exaggerated sum probably— but undoubtedly they are excessively large. are they? in what form do they exist? Not in consols, certainly, or old railway shares, or shares in old companies; nor in fine houses and gardens freshly made-for these last are not capital. Most savers, no doubt, purchase investments-shares in companies and railways, or consols, or other stocks, but this does not tell us where the savings of the nation are. These investments were in existence before the saving was made. They remain unchanged. The man who buys such an investment does not determine where the saving he has made shall be. He transfers his money to a seller, and it is what the seller does with this money which determines not only where the saving shall be, but whether there shall be any saving at all. If he sells his railway shares to the saver, and with the money he receives pays for fox-hounds or race-horses, he destroys the saving H |