So, in the general market, every seller gains what he desires more than what he possesses, and every buyer has exactly the same experience. Two friends may exchange books if either would be benefited by the exchange.

In that case the one gaining the less valuable book gains the satisfaction of giving to his friend. Both are still profited, one by the larger value received, and the other by the pleasure of giving. In such an exchange no basis of value is reached, but in any ordinary bargain the final adjustment will be as nearly as possibly upon the test of value in the market. Between one buyer and one seller, the bargain is likely to turn to the advantage of the one who is quickest to discover the weakness of the other. If two persons are discussing the price of a house for which the seller wishes $1,000, but will sell for even $600, and for which the buyer hopes to give only $600, but will pay even $1,000, the seller will gradually lower his price, and the buyer gradually raise his offer until one or the other discovers the working of his neighbor's mind. These are the natural conditions for sharp bargaining.

In the larger market the interests of a mult.i.tude of buyers and a mult.i.tude of sellers have weight, and no shrewdness can prevent a settlement upon such a price as comes nearest to satisfying all parties.

The so-called law of supply and demand is a brief statement of the fact that sales cannot be made in open market above the mark where buyers and sellers agree, and that mark is essentially the price at which all who are willing to buy at the price current are met by those who are willing to sell at the same current price. With reference, then, to all articles sold in open market, it is safe to say that the only test of value is the price which the public is willing to pay. So universal is the acceptance of this principle in practical affairs that everybody estimates the value of his property by the price at which it will sell. Any appraiser or a.s.sessor who should adopt a different principle would be considered wholly untrustworthy.

_Freedom in markets._-In this higgling of the market it is absolutely necessary that buyers and sellers have essential freedom of choice and fairly equal information. There may be conditions of law preventing free compet.i.tion, as under the regulation of prices attempted in various countries prior to the present century. In England, during nearly four centuries, limits of prices for nearly every article of food and clothing were named by law. Yet in every instance the conditions of the market were stronger than the laws, and the restriction upon free compet.i.tion and free discussion of prices actually destroyed the open market. The conditions of a bankrupt sale at auction reduce the compet.i.tion to a struggle between buyers. In this case a very slight collusion between the buyers may destroy the market. This is frequently ill.u.s.trated in the sale of real estate after foreclosure of mortgages. The unnatural conditions of auction at any price are so evident as to make common the secret employment of sham bidders, shrewd enough to push actual buyers as far as they will go without preventing the sale. Somewhat similar conditions may exist in a great cattle market, in which immense quant.i.ties of cattle are delivered by owners, while the number of buyers is few. The great packing houses have the advantage of being almost the sole bidders for what must be sold at their price. These conditions, however, are not made by the packing houses, but by the large supply subject to immediate sale. Such conditions are much more noticeable in the market for ripe berries, when a slight excess of supply makes these perishable products of trifling value.

Conditions on the other extreme, from scarcity of supply and anxiety of buyers, may also interfere with a free market. Any scarcity in food products leads to an anxiety on the part of consumers to buy and an equal disposition on the part of owners to hold for higher prices. In this case, while the law of supply and demand is still active, the effects are quite out of the ordinary course. Thus, for a long time it has been estimated that a scarcity of one-tenth in the natural supply of wheat raises the price three-tenths, scarcity of two-tenths raises the price eight-tenths, scarcity of three-tenths raises the price one and six-tenths, scarcity of four-tenths raises the price two and eight-tenths, and scarcity of one-half makes the price of the half-crop four and a half times greater. A decrease in the supply of less essential foods evidently cannot have equal effect. Thus, a scarcity of sugar, causing increased price, will directly reduce consumption of sugar, so that the limit may be easily reached. The same conditions may exist with reference to meats, since a high price diminishes the demand from the disposition of people to eat less meat.

Indeed it has pa.s.sed into almost a proverb that dear bread makes cheap meat, for the reason that few will diminish the supply of daily bread, but the ma.s.s are willing to lessen the meat diet to save expense.

Similar conditions, affecting every market for any commodity, may easily be discovered. Yet in spite of all these extreme fluctuations, no better test of value has been suggested than the market price in open, unrestrained compet.i.tion of buyers and sellers.

_The market price._-In the discussion of value so far, the term market price has been used because perfectly familiar to everyone. It is necessary, however, to call attention to the fact that price always indicates an estimate of value in units of current money. If that money itself has a fluctuating value, the same article may have at different times different prices with the same value, or the same price with different values. Thus market prices in our country during and after the civil war, in which a paper currency gave the unit of prices, cannot safely be compared with each other, and can far less be compared with prices upon a specie basis.

Even the reduction to a so-called gold basis may give misleading ideas in regard to the market, since a new element of speculation in gold enters into the calculation. In all the accompanying ill.u.s.trations of fluctuating prices, this particular abnormal condition has been carefully excluded.

Any fluctuations in the value of money metals, necessarily affecting the relation of market price to market value, will be treated under standards of price in Chapter X.

_Prices of farm products; the crop year._-The actual fluctuations of market prices under the law of supply and demand can be most clearly seen by a careful study in the same definite market during a period of years.

For ill.u.s.tration here the staple products of the farm have been chosen, and the markets of Chicago and New York, as most truly representative, have furnished the facts for study. These facts are presented to the eye directly by a series of charts, each of which has been most carefully prepared from official records, and gives within narrow limits a large range of investigation. In every case involving annual crops, it seemed necessary to rearrange statistics so as to cover the actual year affected by the crop in question. September 1 was chosen as the beginning of each year, because that date is nearest the time when the new crop of the season appears in market and directly affects the price of such products in store. All calculations upon live stock have been brought to the same basis, for the reason that the supply of marketable stock is largely dependent upon the supply of feed for stock. It seems very desirable that all statistics in regard to markets and productive industry should be brought to a uniform year. The year given in these charts seemed best to suit the subjects treated. It is possible, however, that for all data convenience would settle upon July 1, the beginning of the fiscal year in the United States, as the best for beginning the universal statistical year. Each chart in the series, of course, requires its particular explanation.

The fluctuations of supply and prices for series of years are exhibited in the Charts 4, 5, 6, 8, 9 and 12, and these are explained in detail at the close of the chapter.

_Fluctuations with season._-Every product of the farm is known to have conditions favorable or unfavorable from the mere changes of season affecting the prospective supply. Conditions equally dependent upon the seasons have something to do with demand. The result of both combined is worthy of study by farmers and dealers in farm produce, that all may get the full benefit of such knowledge as the study affords. For this purpose, charts showing the annual fluctuations of staple products in the leading markets have been carefully prepared. These may have a greater usefulness than simply to ill.u.s.trate the law of supply and demand, since it is within the possibility of actual practice to in some degree modify by provident foresight the extremes of fluctuation. It is hoped that the suggestiveness of these charts may help the most enterprising farmers to adjust their practice to conditions of market.

Charts Nos. 7, 10, 11 and 13 ill.u.s.trate the fluctuations as related to seasons.

_Law of diminishing returns._-In considering the value of farm products, it is necessary to notice a natural tendency in all products of the earth toward greater cost of effort in production. This is called the law of diminishing returns, and is ill.u.s.trated in every industry where the acc.u.mulations of nature are depended upon for making labor effective.

Hunting, fishing and mining afford familiar ill.u.s.trations of more work of the same kind for equal product.

Agriculture, however, gives the most extensive available ill.u.s.tration of the facts grouped under this law. In the first place, the farmer is subject to it by mere location. The product of a field near his house and barn costs less exertion than the product of a more distant field. In the second place, he is likely to have chosen for his first efforts in crop raising the land most readily yielding its fertility in crops. If he extends his operations to less productive soil, he must work more for the same product. In the third place, if a certain amount of work upon a certain field will give him twenty bushels of wheat, he must give a good deal more than twice as much work in the way of tillage and manufactured fertilizer to make a crop of forty bushels. The proof of this is clear in the disposition of farmers to buy more land instead of to increase labor upon a limited s.p.a.ce possessed.

A specific statement of the law of diminishing returns is that _in the cultivation of land an increased amount of effort under usual conditions fails to give a correspondingly increased amount of produce_.

_Exceptions to law of diminishing returns._-Exceptions to this law are easy to find, as where the first selection of land in a new country has had reference rather to safety from wild beasts and savages or malarial diseases than actual store of fertility. Another exception is found in any new country, where imperfect adjustment of labor to conditions of soil and climate are liable at the outset to prevent the full use of natural powers of the soil. So evident are these two exceptions in imperfectly developed agriculture that some have disputed the general fact, yet all must admit the certainty of diminished returns from multiplication of the same kind of efforts upon the same s.p.a.ce, and general proof is abundant in all long settled communities.

_Effect of improved farming._-Counteracting this tendency to diminishing returns, and in many instances more than overcoming the difficulty, is a tendency toward improved methods in farming by more perfect application of labor to the soil, better developed crops, better adaptation of live stock to culture, improved machinery of every sort, and more extended range of operations in farming, reducing the restraints of s.p.a.ce by improved transportation and more economical use of natural fertilizers; in short, by any improvement through which labor is made more directly effective in either quant.i.ty or quality of agricultural products. The whole story of the development of agriculture in all these ways furnishes abundant ill.u.s.tration of this counteracting tendency. In some regions it has more than counter-balanced the tendency to diminishing returns. Various staple products, like wheat, show in their diminishing value the advance in methods of culture and adjustment of labor to production.

_Diminishing values._-The above is only a particular ill.u.s.tration of the general tendency of all values to diminish with every improvement in tools, machinery, economy of materials and saving of time, as the world gains wisdom in applying labor to the meeting of material wants. With every discovery of more perfect power or better use of natural forces, like electricity, or easier ways of handling raw materials, as in developing aluminum from crude clay, the value of the product quickly diminishes.

A familiar ill.u.s.tration is found in the manufacture of steel. The so-called Bessemer process, introduced some thirty years ago, reduced the actual labor of making steel from iron by more than one-half. Improved furnaces and greatly enlarged operations have reduced still further the labor involved, until now steel often takes the place of iron, and the value of all such products is greatly diminished. This is easily ill.u.s.trated by comparison of prices during a series of years, as shown in chart No. 14. That this reduction in price is not the result of poorly paid labor, but of better returns for labor expended, is evident to any one investigating the tendency of wages or of living among wage-earners, or of the general improvement in welfare of communities where these labor-saving methods are applied. Any hardship connected with these diminished values falls chiefly upon the laborers who fail to adjust their work to the improved method. But even they gain for the diminished value of their product a larger return on the whole through exchanges than the higher values had brought them before.

[Chart.]

Chart IV. Comparison of the numbers of live stock with increases in population and mileage of railroad, 1860-1898.

CHART NO. 4

_Numbers of live stock compared with increase of population and mileage of railroad, 1860 to 1898, in the United States_

_Explanation._-This chart exhibits to the eyes a comparative increase of (1) population, (2) sheep, (3) hogs, (4) railroad mileage, (5) beef cattle, (6) cows, (7) horses, (8) mules. The figures followed in making this chart are taken from the best estimates available, chiefly from the reports of the United States Department of Agriculture. It shows that railroad mileage has increased faster than the population, with some slight exceptions, and its fluctuations mark quite distinctly the periods of financial speculation and distress. The great fluctuations in the line of sheep raising may be seen to have some correspondence with special tariff legislation. The striking opposition of hog raising to sheep raising is in accord with the universal experience that farmers easily turn from one to the other. The rapid development immediately following the civil war represents the restocking of farms and the great expansion in farm industry so noticeable during that period. The falling off in numbers of live stock during the last five years is evidently a reaction from a very apparent over-production in many directions during the previous ten years. The miles of railroad are shown in thousands, the population and live stock in millions.

[Chart.]

Chart V. Showing the acreage and yield of Indian corn, wheat, and oats in the United States, 1862-1897. Pages 84-87.

CHART NO 5.

_Acreage and yield of corn, wheat and oats, 1862 to 1897, in the United States_

_Description._-This chart is intended to show the fluctuations from year to year in acres devoted to the three staple crops, together with fluctuations in the corresponding years in yield of each. Figures on the right show the number of millions of acres. Figures on the left give millions of bushels. Continuous lines show the acreage. Dotted lines show the yield. For convenience of comparison, the line of increasing population is added. The broken lines indicate what might have been the consumption of each of these staples within our own country, if the people had used throughout all the years as much of each as during the five years of plenty from 1888 to 1892. Lines marked 1 tell the story for corn; those marked 2 for wheat; and those marked 3 for oats. In comparing the number of acres as given on the right with the number of bushels as given on the left, it will be seen that an average yield of corn is a.s.sumed to be 25 bushels per acre; an average yield of wheat, 12 bushels; and an average yield of oats, 28 bushels. The variations of the dotted lines above or below the continuous line show whether the yield was greater or less than these averages. The average a.s.sumed is evidently too high for the oats.

_Explanation._-Several important facts are shown. First, there has evidently been a very great increase in the amount of these staple crops in proportion to the population, with a recent tendency toward reduction.

Second, all three have exceeded the needs for domestic consumption, and at the same time; while it is evident that the rate of consumption in the early years could not have been equal to that of recent years. This appears very striking with reference to corn. An explanation of the increased consumption of corn may be found in its larger use for fattening pork and beef for export as well as for domestic consumption. It has also entered quite largely, through improved manufacture of meals, starches and syrups, into table use. The consumption of oats is known to have greatly increased in its use for breakfast food. The per capita consumption of wheat, while slightly increased in some quarters through the cheapening of flour, has been diminished by the larger use of corn and oats, and a far greater variety of table food. Quite probably, however, the data as to corn raising in the first few years of this period are not complete. The years of the war made such statistics difficult to obtain. The difficulty with reference to wheat raising was by no means as great, since the wheat raising regions were more directly accessible. Third, the seasons of abundance and those of poor crops can easily be seen. It is evident that while the three crops are not always poor together, they are too frequently so to balance each other in meeting the risks of farmers.

Fourth, it appears that the fluctuations in yield are much greater in late years. This is accounted for by the greatly increased proportion of lands cultivated upon the plains of the western states and subject to greater fluctuations of climate. It will be noticed that the acreage frequently falls off in the years showing inferior yield. This shows that sowing and planting have frequently been affected by unpropitious weather. In fact, wheat fields have frequently been plowed up in the spring and not counted in return of acreage. Reductions in the acreage of wheat, however, appear frequently succeeding an immense crop. This indicates the effect of low prices. Fifth, the bearing of the total product upon the prices of these staples, while suggested by the greatly increased amount, will be more clearly seen by reference to Chart No. 6.

[Chart.]

Chart VI. Fluctuations in prices of wheat, Indian corn and oats in New York, 1878-1898. Pages 87-91.

CHART NO. 6

_Fluctuation of prices of wheat, corn and oats in New York, 1878 to 1896._

_Explanation._-This chart exhibits the average price of each of these three staples in September, December and May of each year. These months are chosen as giving without too great complication the widest range with reference to a particular season. September gives usually the price of the first of the new crop; December shows usually the fullest marketing of crops; May marks the month of largest speculation with reference to the incoming crop. Corn is less distinctly affected by these peculiarities, being subject to different conditions of the weather as well as of marketing. But the correspondence in price to a certain extent is easily perceived at a glance. The reason for this correspondence is partly in the uniform effect of seasons, as shown in Chart No. 5, and partly in the fact that either of the crops may supplement, in certain respects, a deficiency in either of the others.

_Wheat prices._-With reference to wheat, No. 1 in the chart, further particulars as to prices are shown. The horizontal line in each year gives the average price of the year; the diagonal line gives the extremes of prices, highest and lowest, within the twelve months from September to September again. The dot within the circle gives the estimated average of farm prices on the first of December, as given by the Department of Agriculture. The relation of this, somewhat constant, to the New York price for December, as given in the line directly above it, may be of interest as showing the average actual expense of bringing wheat from all over the United States to the New York market. Where the difference of the two prices is more than an average, a speculative turn in the market during December is indicated, the farm price being fixed on the first day of December. The same fact of speculation is also shown in years where the diagonal line is longer than usual.

_Special variations._-At the top of the chart is shown the world's visible supply of wheat for each year, each horizontal line indicating 500,000,000 bushels. The shaded portion gives the amount exported by the United States and the part above the shaded portion indicates the amount consumed or stored within the country. Thus, in the year 1894-5 the total wheat crop of the world was 2,672,000,000 bushels, of which the United States furnished 460,000,000, 144,000,000 of this amount being exported. This year marked the lowest price of wheat in the record, together with the largest crop in the world, though not in the United States. A proportionally small amount exported explains the falling out of the bottom of the wheat market. By reference to Chart No. 5, it will be seen that while the wheat crop of that year was considerably above the average, the corn crop and oat crop were far below the average. This explains the fact appearing in Chart No. 6, that the price of wheat was lower than the price of corn at the beginning of that year. It is probable that the use of wheat as a subst.i.tute for corn in feeding stock actually saved the wheat from a still lower price. The crop of 1891, the largest on record in the United States, was accompanied by a moderate crop in the rest of the world following two other moderate crops, indeed two short crops, for the entire world. The large amount of wheat exported explains the reason why the fall of prices was not greater in this country. That the price did not fall faster was due to the fact, remembered by many, that farmers, as well as speculators, held to the crop with the expectation of larger demand from abroad. When the crop of 1892 was felt to be still larger throughout the world, the price fell rapidly, in spite of a smaller crop in the United States. But when the prospect of an inferior crop in this country for 1893 was felt in the spring, the price rose a trifle. Yet as soon as the harvests of the world showed an enormous crop outside the United States, the price dropped again. The crop of 1889 was a short one in the world, and apparently should have affected the price of wheat in this country more than appears; but when the total amount exported is seen to leave more than an average crop in store, it is easy to see why the price in this country did not rise. The explanation of this small exportation is in the fact that the greater part of the shortage in yield was in countries like Russia, from which no demand was felt, because the people simply went without. The starvation of people in such countries affected the demand for wheat in this country only so far as our benevolence enlarged the market. The peculiar shape of the line of wheat prices in 1889 without any correspondence in prices of corn and oats is due to a speculative movement for December wheat in Chicago. The attempted corner in wheat failed suddenly, or it might have produced a line similar to that of 1897-8, due to the famous long-continued Leiter corner.

_Sources of information._-The object of this chart, taken altogether, is to show the general law of market prices as governed by supply and demand from the actual facts in the market for wheat. The facts are taken from the best records available. The prices are from the daily record of the Produce Exchange of New York. The average price for the year and the fluctuations within the year are given for the period from September 1, when the new crop appears, to the August following, this being the period actually corresponding in market with a year represented by the crop figures. The estimate of the world's crop since 1885 is taken from carefully prepared statistics in the United States Department of Agriculture. The estimates prior to that date do not include the entire world, because no statistics can be reached, but they do include the most careful estimates of all countries whose product entered into the world's market. No effort has been made, for fear of complicating the chart, to show a similar correspondence between supply and price in reference to corn and oats. The tables following, however, give data for such comparison with reference to this country alone. The export of corn and oats has been too limited to play any great part in modifying prices.

[Table.]

Table of production-wheat, corn, oats, 1878 to 1897. (Figures give millions of bushels)

CHART NO. 7

[Chart.]

Chart VII. Annual fluctuations in the price of wheat in New York, 1878-1897. Page 91.

_Annual fluctuations in the price of wheat. Highest year, lowest year, and average of twenty years in New York, 1878 to 1897_