labour, that is to say, income. As much as he saves at once becomes capital, which, however, never can be used as capital, without in whole or in part generating income. But in a state of society like England, it is more convenient and equally true, to make capital the starting point, and trace its course, as it flows off into income.

Capital applied to Production or Distribution.

Capital, then, may be applied to the production of material commodities or to their distribution. The classification is rough, but accords with real relations. Each great class is made up of subordinate classes, which ramify out and intermix; but the great trunks or stems can always be distinguished. The utility of the distinction depends first on this-that capital applied to production, as in agriculture, manufactures, railway-making, ship-building, must generally, though not always, be applied for a much longer period before obtaining a return, than in commerce, in which it may be used one week and withdrawn the next, according as the progress of sales disengages it;-but secondly, and chiefly, because capital applied to immediately productive operations passes more rapidly and largely into income than that which is applied immediately to commerce. The latter may take several steps before it gets much into income, and often only quickens the action of production at one period to retard it at another.

Distributive limited by Productive Capital.

Further, the capital that can be applied to commerce or distribution is limited by the capital that is applied to production, and, as the means of communication are progressively improved, tends to diminish rather than increase, in proportion to the amount of capital applied to production. For example, the aggregate of capital held by traders at this moment, in the

form of goods, is probably, in proportion to the aggregate of what is employed by the manufacturers, less than it was twenty years ago, because railway facilities enable a dealer to supply himself more quickly with what he wants, and therefore to effect the same number of sales with a smaller capital. There are also fewer goods on the road, as Mr. Wilson has shown in one of his excellent papers on the influence of railways. Mercantile capital, therefore, is clearly subordinate, and dependent upon productive capital.

The application of capital to productive operations will be more distinctly conceived by again breaking up the whole aggregate into parts, and considering the application of money capital—

1. To the creation of fixed capital.

2. To agriculture and mines, including all the forms of extracting raw produce from the earth.

3. To manufactures, which, however, for the purpose immediately in hand, may be joined with agriculture.

Incomes arising from Creation of fixed Capital.

To the first class belong such operations as land drainage (which, of course, must be broadly separated from the raising of crops or rearing of cattle), the making of railways, docks, and canals, ship-building, and the erection of factories, buildings, and the greater machines. This class deserves to be considered first, because in it capital sweeps out into incomes with the most ample stream, and remains longest in those channels. The great peculiarity of this application of capital is, that those who lay it out expect, by way of return, not a greater sum in the same form, but some great instrument of production or transport from the use of which an annual revenue is expected. According to the common and correct acceptation, money capital in these cases is destroyed, or sunk for the parties investing it, because what it produces does not replace their outlay in the same form; but, in fact, it almost

immediately enters into one or more of the circles of commercial revolution which carry it back as the return to capital already invested in other branches of industry. It thus quickens the return, and tends to increase the profits of such capital. The stock of capital disposable, or waiting for employment, before the outlay on the dock or the railway, is by so much diminished, and the money capital operating in commerce by so much increased. It will be seen presently, that the generation of new money capital in the disposable form instantly recommences upon the destruction effected by the drainage or railway outlay; but it is still true, that in no other way does so sudden and large an alteration take place in the proportions between the amount of money used as income and that which is held as capital. If, therefore, the equilibrium of money capital and money income was previously disturbed, by a preponderance on the side of capital, the conversion of such capital, as it is called, into fixed capital, is the most potent means of producing a contrary oscillation.

Capital applied to land drainage dissolves at once in a shower of incomes, in wages and salaries, and goes very soon as demand against all kinds of goods, and thus takes off the surplus stocks, which were previously blocking up the channels of commerce. In docks and canals, and notably in railways, a considerable portion does not go off in income, but is paid for the purchase of land, and therefore still remains in the form of capital, disposable for new employment, unless where the seller is a spendthrift. But there are no other forms of industrial outlay in which a rapid conversion of capital into income is more certainly effected.

New Money Capital saved out of Incomes.

Before proceeding to the second and third classes of investments, it is necessary to trace the steps of that nice process, by which income from its excess again makes good the gap left in the fund of disposable capital. We may take the case of a railway,

and remark, first, that great part of the outlay at once takes its place in the industrial circle as active money capital. For example, of that portion which goes to purchase rails, only the profit of the iron-master becomes income, the rest remaining with him still as capital. But confining the view to what is paid in wages and salaries, let us see what becomes of it. As disposable capital it is destroyed, the return being merely the bodily and mental work of the receivers, and finally the railway when completed. But out of the new addition made to income, there will be some saving, which is straightway disposable capital again. The remainder goes, to a greater or less extent, as new demand, against the pre-existing stocks; not only becoming for the most part money capital in the hands of the dealers in return for their stocks, but leaving them increased profits through increased prices; whereupon the new income again gives out new jets of saving into the general stream of disposable capital. The productive operation thus resolves itself into the destruction of the articles consumed by railway makers and the creation of a railway; whilst, during the continuance of the process, or immediately after, the money capital which was transformed for a time into income reappears as capital.

Incomes from new Capital in Manufactures.

In the second and third classes of investments, the proportion of capital which goes out directly as income varies considerably; but to whatever extent this takes place, there is a demand for consumption created, which quickens the revolution of the industrial circle. The difference between the application of new capital to the first kind of investment and to either of the other two, is this-that, in the former case, the return power is increased, for the capital is already active in commerce; but, in the latter case, although the return power is increased, yet as the capital requiring return is also increased, there cannot be the same effect produced upon prices, profits,

or incomes. An addition is made to the money active in commerce, but no such stimulus given to industry, and no such series of additions made to incomes, increasing the aggregate of income, as would result from an equal expenditure on drainage or railways.

Incomes derived from Profits.

The incomes immediately created by these modes of employing capital all agree in deriving their origin directly from capital. They consist, in fact, of the divided fragments of the capital or paying power that has been broken up. In yet minuter fragments they go in exchange against the commodities which the receivers consume, and thus yield a profit to the dealers. The incomes of the latter are thus a secondary formation, being composed of fragments of income. This is the prevailing character of the incomes of traders or distributors. Commercial clerks and other servants, who receive salaries or wages, indeed, derive them from capital, although they are distributors; and as small dealers come to be superseded by great establishments, the salaried class increases; but it is nevertheless the general characteristic of mercantile incomes to be composed of profit, and therefore gathered out of incomes. Such incomes, it is evident, must be immediately effected by fluctuations of prices, tending to vary sometimes directly, sometimes inversely with those variations, but always in the highest possible degree sensitive to changes in the amount of consumptive demand. Traders, of course, deal with traders, and, therefore, their own varying incomes operate upon each other; but the main current of causation, so to speak, flows from the primary incomes, or those derived from capital, to those incomes which are gathered out of incomes, and may, therefore, without impropriety, be called secondary.

Revolution of Capital and Income.

If this be true, amidst the infinitely varying and complex phenomena of society, a kind of general law of the revolution