SOLUTION MANUAL FOR FUNDAMENTALS OF ECONOMICS 6TH

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CHAPTER 2
Markets and the Market Process

Field Code Changed

FUNDAMENTAL QUESTIONS
1. How are goods and services allocated? Field Code Changed

2. How does the market process work? Field Code Changed

3. What is demand? Field Code Changed

4. What is supply? Field Code Changed

5. How is price determined by demand and supply? Field Code Changed

6. What causes price to change? Field Code Changed

Field Code Changed

TEACHING OBJECTIVES
The purpose of this chapter is twofold. The first is to introduce the different allocation
mechanism systems, and the second is to develop the concepts of demand and supply and
explain how they combine to produce equilibrium prices and quantities.
The unique features of this chapter are the explanation of the functioning of the market process
and a discussion of market equilibrium in the real world.
The concepts that warrant special coverage are the construction of demand and supply curves,
how a movement along one curve compares to a shift in the entire curve, and how equilibrium
prices and quantities are obtained. Reasons for changes in equilibrium prices are also shown as
shifts in the demand and/or supply curves.

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a
publicly accessible website, in whole or in part.
12 Chapter 2: Markets and the Market Process
Field Code Changed
KEY TERMS
efficienc
y
demand
law of demand
demand schedule
demand curve
market demand
quantity
demanded
determinants of
demand substitute
goods complementary
goods supply
law of supply
determinants of
supply supply
schedule
supply Field Code Changed

curve
Field Code Changed
equilibrium
surplus
shortage

LECTURE OUTLINE AND TEACHING STRATEGIES

1. How are goods and services allocated?

The ways inputs can be utilized to serve the needs of consumers are called the allocation Field Code Changed
mechanisms. The market (price), government, random choice, and the first-come, first-served
mechanisms are the most commonly used allocation mechanisms.
Teaching Strategy: Using the exercise in Preview in the text, survey the class about their
response to the different situations. This is an excellent way of introducing the students to the Field Code Changed
notion of market mechanism and other means of allocating resources. You should expect a great
deal of debate about the different allocation mechanisms. Field Code Changed
1. Efficiency: If an allocation mechanism is efficient, it means that it best satisfies the needs
and wants of a society compared to the other allocation mechanisms. A system of markets
and prices is often the most efficient way of allocating scarce resources. As a result, it is
predominantly used in most industrial countries today.
2. Self-interest: When economists assume people are self-interested, they do not mean
people are mean-spirited or selfish, but are pursuing ends that best suit their needs and
wants.
3. Alternatives to market allocation: In some cases, the market system is not the best. One
reason for this is that for some goods and services, such as health care and defense, people do
not like the outcome of the market system. Another reason is that the market system is
inefficient under some
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a
publicly accessible website, in whole or in part.
 Chapter 2: Markets and the Market Process 13

circumstances. When the market is not the best system, the government is often called
on to allocate resources and goods.
Disagreement with the market outcome
Inefficiency
Teaching Strategy: Divide the class into groups and ask each group to make a list of situations
where they consider the market outcome is not efficient. Select one group to share their list with
the class and choose another group to react to the first group’s list. Then repeat the exercise with
other groups. At the end, point out that the market system is not the best available allocation
mechanism in some cases, although it is in most cases.
Field Code Changed
2. How does the market process work?
A market is defined as a place where buyers and sellers get together and set prices and quantities.
Teaching Strategy: Give real-world examples of markets that students can conceptualize, for
example, the market for X-Box, for illegal drugs, or for a local painter working on a cash-only
basis.
The market process guides producers to produce goods and services demanded by consumers at
the lowest possible price. As a result, those firms that cannot use resources most efficiently have
to leave the market. Thus, the market process brings about efficiency and increases consumer
welfare. Some have compared market efficiencies to economic Darwinism: survival of the Field Code Changed
fittest.

3. What is demand?
1.
The law of demand: The quantity of a well-defined good or service that people are willing and Field Code Changed
able to purchase during a particular period of time decreases as the price of that good rises,
ceteris
paribus. Be sure to define this term.
There are two points that economists advance to argue for a downward-sloping demand
the income and substitution effects. The income effect takes place when a change in the price
curve—
of a
good alters the consumers’ purchasing power. When the price of a good changes, and in turn
the
Teaching
demand forStrategy: When
a substitute goodbeer prices the
changes, fall substitution
during a Friday afternoon
effect happy hour, bar patrons
is at work.
substitute more beer for other goods they could consume (the substitution effect). In
increase
addition,in
thetheir purchasing power due to the less expensive beer allows them to buy more
pretzels and pizza (the income effect).
2. The demand schedule is a list of the quantities of a good that consumers demand at different Field Code Changed
prices, ceteris paribus.
Teaching Strategy: Pass out slips of paper and ask students what price they would pay for an
in
A the course. Generate a demand schedule with the results.
3. The demand curve is a graph constructed from the data in the demand schedule. Field Code Changed

Teaching Strategy: Derive a demand curve from the demand schedule created in the
teaching strategy above.
4. A market demand curve is the horizontal summation of all individual demand curves. Field Code Changed

5. Compare a movement along a demand curve, a change in quantity demanded, to a shift in the Field Code Changed
entire curve, a change in demand. The determinants of demand are income, tastes, the prices
of
related goods, expectations, and the number of buyers.

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a
publicly accessible website, in whole or in part.
14 Chapter 2: Markets and the Market Process

Teaching Strategy: Consider using a mnemonic to help students appreciate the various
forces that can cause a change in demand: TYPEN.
T = tastes
Y = income
P = price of related goods
E = expectations
N = number of consumers
Teaching Strategy: Ask your students to reconsider their demand for an A after receiving
$1,000 in lottery winnings.
Field Code Changed
4. What is supply?
1. The law of supply: The quantity of a good producers will sell is positively related to price, Field Code Changed
ceteris paribus.
Teaching Strategy: Focus the law of supply around the profit motive of producers, that is,
self- interest.
2. The supply curve is composed of all the combinations of prices and quantities supplied Field Code Changed

that are listed in the supply schedule.

Field Code Changed
3. The market supply curve is the summation of all the individual supply curves. It is the
horizontal summation—the total amount provided by all producers at each price.
Field Code Changed
4. A change in supply occurs when the quantity supplied at every price changes, and a
change in quantity supplied occurs when only the product price changes while all other
factors hold constant.
Again, consider using a mnemonic to help students appreciate the various forces than can
cause a change in supply: PPETN.
P = price of resources
P = price of related goods
E = expectations
T = technology
N = number of producers
Teaching Strategy: Show a change in quantity supplied as a movement along a stationary
supply curve, as shown in Figure 4 in the text. A change in supply occurs when the quantity
supplied at every price changes due to a change in a factor other than product price, such as
resource prices, technology, producer expectations, number of producers, or prices of related
goods.
Teaching Strategy: Show how an increase in rent paid by the DVD store will cause the Field Code Changed
supply curve for DVDs to shift to the left. Refer to Figure 4 in the text.
Field Code Changed
5. How is price determined by demand and supply?
1. Equilibrium is the price where quantity demanded equals quantity supplied.
Teaching Strategy: Ask students which blade of a scissors cuts paper. Answer, à la Alfred
Marshall, both, just as supply and demand determine price.
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a
publicly accessible website, in whole or in part.
 Chapter 2: Markets and the Market Process 15

6. What causes price to change?

2. Demand shifts Field Code Changed

Teaching Strategy: Have students name fad items from their childhood or adolescence.
Today’s students may mention Tickle Me Elmo, X-box, or Beanie Babies. Older students
may mention Rubik’s cubes or Cabbage Patch dolls. Show how changes in demand for “hot”
items affected the equilibrium price. Have students use TYPEN to think of other factors that
would cause a demand shift.
Field Code Changed
3. Supply shifts
Teaching Strategy: Ask students how much they paid for their first personal computers
versus how much they paid for their most recent computer. Most students will have paid less
(if they paid for it and not their parents!) Show the results of changes in technology in the
market on the equilibrium price and quantity of personal computers. Have students use
PPETN to think of other factors that would cause a supply shift.
Field Code Changed

OPPORTUNITIES FOR DISCUSSION

Field Code Changed
1. Why does the demand curve slope down? Why does the supply curve slope up?
Field Code Changed
2. How do shortages and surpluses appear in a market? How are disequilibria eliminated?
Field Code Changed

ANSWERS TO EXERCISES Field Code Changed

1. Field Code Changed
a. Demand curve shifts Field Code Changed
Field Code Changed
in. b. Demand curve
shifts in.

c. Movement along the demand curve and movement along the supply curve.
Field Code Changed
d. Demand curve shifts in. Field Code Changed

e. Demand curve shifts in. Field Code Changed

2. Field Code Changed

a. F. An increase in demand is represented by a shift outward of the demand curve. Field Code Changed
Field Code Changed
b. F. An increase in quantity supplied is represented by a move up the supply curve.

Field Code Changed

c. T. The demand curve shifts out, leading to an increase in the Field Code Changed
price. d. F. The supply curve shifts out, leading to a decline in the Field Code Changed

price. Field Code Changed

3. Equilibrium price = $5; equilibrium quantity = 300. At a price of $10, the quantity supplied
is
975, and the quantity demanded is only 150. There is a surplus of 825. The surplus will
Field Code Changed
cause the supplier to lower the price. Price must decline to $5. At a price of $2, there is a
shortage of 280. The producer will raise the price until the shortage no longer exists. Price
must increase to $5.
4. California and Florida citrus are substitutes. Thus, as the quantity of California citrus Field Code Changed
declines, the supply curve shifts in and the price of California citrus rises. People shift their
purchases from California to Florida citrus. The demand for Florida citrus rises. As a result,
the price of Florida citrus rises.
5. People who buy the Polo line are also buying the prestige that comes with it. The prestige
rises as the price rises. Thus, in our demand and supply curves we would look at the Polo
brand and the
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a
publicly accessible website, in whole or in part.
16 Chapter 2: Markets and the Market Process

JCPenney brand as two different goods. The law of demand states that for the JCPenney
brand, the higher the price, the lower the quantity demanded, everything else the same.
higher the the
Similarly, price of the Polo brand, the lower the quantity demanded, everything else being the
same.
6. No. The price of trees rises because the demand curve shifts out; the demand for trees rises. Field Code Changed

7. The demand for U.S. oranges has increased due to a rise in foreign demand for the domestic Field Code Changed
product (U.S. oranges). This may result from an increase in Japanese consumers’ income or
the
depreciation of the U.S. dollar against the Japanese yen (or the appreciation of the yen against
the
dollar).
oranges.This creates a rightward shift in the demand curve, indicating a rise in demand for
8. The cost of supplying the packaged meat will rise as a result of the new labeling law. This Field Code Changed
that
meansthe supply curve will shift to the left (or up). As a result, the price of meat will rise.

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a
publicly accessible website, in whole or in part.
 Chapter 2: Markets and the Market Process 17

9. Field Code Changed

a. The freeze in Florida would shift the supply curve to the left, creating a decline in Field Code Changed
quantity demanded and an increase in price.
b. This would increase the supply of oranges and lower the orange juice prices as the Field Code Changed
supply curve shifts out to the right.
c. This ban would shift the supply curve for oranges to the left, creating a decline in Field Code Changed

the quantity demanded and an increase in the orange juice prices.

Field Code Changed
10. When the supply of a product rises, it means that the supply curve shifts to the right due to
nonprice factors, such as technological changes, whereas changes in the quantity supplied
are reflected in movements along the (same) supply curve because of the changes in the
price. Changes (shifts) in the demand curve for television sets could raise the price of
television sets if there is no change in the supply to offset the increase in the demand.
Field Code Changed

ACTIVE LEARNING EXERCISE

The purpose of this exercise is to allow students to observe how equilibrium prices and
quantities are set in goods markets. It also reinforces the point that market equilibrium is a
dynamic process and equilibrium quantities change with movements in prices. Finally, students
get another opportunity to practice the construction of supply and demand curves.
Field Code Changed

Materials Needed
Green and red tickets—green for buyer, red for seller
Five types of buyer sheets noting the following values for each buyer type:

Number of Goods Buyer 1 Buyer 2 Buyer 3 Buyer 4 Buyer 5

1 28 35 27 25 26
2 22 20 21 24 23
3 17 18 15 19 16
Five types of seller sheets noting the following costs for each seller type:
Number of Goods Seller 1 Seller 2 Seller 3 Seller 4 Seller 5
1 18 16 0 15 17
2 22 21 19 27 20
3 24 25 26 28 27
Each buyer values the first item purchased more than the second, and the second more than the third.
Each seller finds the cost of producing and selling the second item higher than the first, and the
third higher than the second.
Open the market. Buyers hold aloft green tickets, and sellers hold aloft red tickets. Then they call
out offered prices. Once a deal is set, it is recorded. Each buyer has two goods to buy, each seller
two goods to sell. Buyer profits are value less price paid; seller profits are price received less costs.
Carry out several trading sessions, and construct supply and demand curves plotting price
on the vertical axis and quantity on the horizontal axis.

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a
publicly accessible website, in whole or in part.
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would unquestionably be soon absorbed, while the ultimate result
might be the partition of all South America between the
various European Powers. …

"The people of the United States have learned in the school of

experience to what extent the relations of States to each
other depend not upon sentiment nor principle, but upon
selfish interest. They will not soon forget that, in their
hour of distress, all their anxieties and burdens were
aggravated by the possibility of demonstrations against their
national life on the part of Powers with whom they had long
maintained the most harmonious relations. They have yet in
mind that France seized upon the apparent opportunity of our
Civil War to set up a Monarchy in the adjoining State of
Mexico. They realize that, had France and Great Britain held
important South American possessions to work from and to
benefit, the temptation to destroy the predominance of the
Great Republic in this hemisphere by furthering its
dismemberment might have been irresistible. From that grave
peril they have been saved in the past, and may be saved again
in the future, through the operation of the sure but silent
force of the doctrine proclaimed by President Monroe. …

"There is, then, a doctrine of American public law, well

founded in principle and abundantly sanctioned by precedent,
which entitles and requires the United States to treat as an
injury to itself the forcible assumption by an European Power
of political control over an American State. The application
of the doctrine to the boundary dispute between Great Britain
and Venezuela remains to be made, and presents no real
difficulty. Though the dispute relates to a boundary-line,
yet, as it is between States, it necessarily imports political
control to be lost by one party and gained by the other. The
political control at stake, too, is of no mean importance, but
concerns a domain of great extent—the British claim, it will
be remembered, apparently expanding in two years some 33,000
square miles—and, if it also directly involves the command of
the mouth of the Orinoco, is of immense consequence in
connection with the whole river navigation of the interior of
South America. It has been intimated, indeed, that in respect
of these South American possessions, Great Britain is herself
an American State like any other, so that a controversy
between her and Venezuela is to be settled between themselves
as if it were between Venezuela and Brazil, or between
Venezuela and Colombia, and does not call for or justify
United States intervention. If this view be tenable at all,
the logical sequence is plain. Great Britain as a South
American State is to be entirely differentiated from Great
Britain generally; and if the boundary question cannot be
settled otherwise than by force, British Guiana with her own
independent resources, and not those of the British Empire,
should be left to settle the matter with Venezuela—an
arrangement which very possibly Venezuela might not object to.
But the proposition that an European Power with an American
dependency is for the purposes of the Monroe doctrine to be
classed not as an European but as an American State will not
admit of serious discussion. If it were to be adopted, the
Monroe doctrine would be too valueless to be worth asserting.
…

"The declaration of the Monroe Message—that existing Colonies

or dependencies of an European Power would not be interfered
with by the United States—means Colonies or dependencies then
existing with their limits as then existing. So it has been
invariably construed, and so it must continue to be construed,
unless it is to be deprived of all vital force. Great Britain
cannot be deemed a South American State within the purview of
the Monroe doctrine, nor, if she is appropriating Venezuelan
territory, is it material that she does so by advancing the
frontier of an old Colony instead of by the planting of a new
Colony. The difference is matter of form, and not of
substance, and the doctrine if pertinent in the one case must
be in the other also. It is not admitted, however, and
therefore cannot be assumed, that Great Britain is in fact
usurping dominion over Venezuelan territory. While Venezuela
charges such usurpation Great Britain denies it, and the
United States, until the merits are authoritatively
ascertained, can take sides with neither. But while this is
so—while the United States may not, under existing
circumstances at least, take upon itself to say which of the
two parties is right and which wrong—it is certainly within
its right to demand that the truth shall be ascertained. …

"It being clear, therefore, that the United States may

legitimately insist upon the merits of the boundary question
being determined, it is equally clear that there is but one
feasible mode of determining them, viz., peaceful arbitration.
The impracticability of any conventional adjustment has been
often and thoroughly demonstrated. Even more impossible of
consideration is an appeal to arms—a mode of settling national
pretensions unhappily not yet wholly obsolete. If, however, it
were not condemnable as a relic of barbarism and a crime in
itself, so one-sided a contest could not be invited nor even
accepted by Great Britain without distinct disparagement to
her character as a civilized State. Great Britain, however,
assumes no such attitude. On the contrary, she both admits
that there is a controversy, and that arbitration should be
resorted to for its adjustment. But, while up to that point
her attitude leaves nothing to be desired, its practical
effect is completely nullified by her insistence that the
submission shall cover but a part of the controversy—that, as
a condition of arbitrating her right to a part of the disputed
territory, the remainder shall be turned over to her. If it
were possible to point to a boundary which both parties had
ever agreed or assumed to be such either expressly or tacitly,
the demand that territory conceded by such line to British Guiana
should be held not to be in dispute might rest upon a
reasonable basis. But there is no such line. The territory
which Great Britain insists shall be ceded to her as a
condition of arbitrating her claim to other territory has
never been admitted to belong to her.
{687}
It has always and consistently been claimed by Venezuela. Upon
what principle—except her feebleness as a nation—is she to be
denied the right of having the claim heard and passed upon by
an impartial Tribunal? No reason or shadow of reason appears
in all the voluminous literature of the subject. …

"In these circumstances, the duty of the President appears to

him unmistakable and imperative. Great Britain's assertion of
title to the disputed territory, combined with her refusal to
have that title investigated, being a substantial
appropriation of the territory to her own use, not to protest
and give warning that the transaction will be regarded as
injurious to the interests of the people of the United States,
as well as oppressive in itself, would be to ignore an
established policy with which the honour and welfare of this
country are closely identified. While the measures necessary
or proper for the vindication of that policy are to be
determined by another branch of the Government, it is clearly
for the Executive to leave nothing undone which may tend to
render such determination unnecessary. You are instructed,
therefore, to present the foregoing views to Lord Salisbury by
reading to him this communication (leaving with him a copy
should he so desire), and to reinforce them by such pertinent
considerations as will doubtless occur to you. They call for a
definite decision upon the point whether Great Britain will
consent or will decline to submit the Venezuelan boundary
question in its entirety to impartial arbitration. It is the
earnest hope of the President that the conclusion will be on
the side of arbitration, and that Great Britain will add one
more to the conspicuous precedents she has already furnished
in favour of that wise and just mode of adjusting
international disputes. If he is to be disappointed in that
hope, however—a result not to be anticipated, and in his
judgment calculated to greatly embarrass the future relations
between this country and Great Britain—it is his wish to be
made acquainted with the fact at such early date as will
 enable him to lay the whole subject before Congress in his
next Annual Message."

Great Britain, Parliamentary Publications

(Papers by Command:
United States Number 1, 1896, pages 13-21).

VENEZUELA: A. D. 1895 (November).

The British Guiana boundary question.
Replies of Lord Salisbury to Secretary Olney.

The reply of Lord Salisbury was not written until the 26th of
November. It was then given in two despatches, bearing the
same date,—one devoted entirely to a discussion of "the Monroe
doctrine" and of the argument founded on it by Mr. Olney; the
other to a rehearsal of the Venezuela controversy from the
standpoint of the British government. In the communication
first mentioned he wrote:

"The contentions set forth by Mr. Olney in this part of his

despatch are represented by him as being an application of the
political maxims which are well known in American discussion
under the name of the Monroe doctrine. As far as I am aware,
this doctrine has never been before advanced on behalf of the
United States in any written communication addressed to the
Government of another nation; but it has been generally
adopted and assumed as true by many eminent writers and
politicians in the United States. It is said to have largely
influenced the Government of that country in the conduct of
its foreign affairs; though Mr. Clayton, who was Secretary of
State under President Taylor, expressly stated that that
Administration had in no way adopted it. But during the period
that has elapsed since the Message of President Monroe was
delivered in 1823, the doctrine has undergone a very notable
development, and the aspect which it now presents in the hands
of Mr. Olney differs widely from its character when it first
issued from the pen of its author. The two propositions which
in effect President Monroe laid down were, first, that America
was no longer to be looked upon as a field for European
colonization; and, secondly, that Europe must not attempt to
extend its political system to America, or to control the
political condition of any of the American communities who had
recently declared their independence. The dangers against
which President Monroe thought it right to guard were not as
imaginary as they would seem at the present day. … The system
of which he speaks, and of which he so resolutely deprecates
the application to the American Continent, was the system then
adopted by certain powerful States upon the Continent of
Europe of combining to prevent by force of arms the adoption
in other countries of political institutions which they
disliked, and to uphold by external pressure those which they
approved. … The dangers which were apprehended by President
Monroe have no relation to the state of things in which we
live at the present day. … It is intelligible that Mr. Olney
should invoke, in defence of the views on which he is now
insisting, an authority which enjoys so high a popularity with
his own fellow-countrymen. But the circumstances with which
President Monroe was dealing, and those to which the present
American Government is addressing itself, have very few
features in common. Great Britain is imposing no 'system' upon
Venezuela, and is not concerning herself in any way with the
nature of the political institutions under which the
Venezuelans may prefer to live. But the British Empire and the
Republic of Venezuela are neighbours, and they have differed
for some time past, and continue to differ, as to the line by
which their dominions are separated. It is a controversy with
which the United States have no apparent practical concern. It
is difficult, indeed, to see how it can materially affect any
State or community outside those primarily interested, except
perhaps other parts of Her Majesty's dominions, such as
Trinidad. The disputed frontier of Venezuela has nothing to do
with any of the questions dealt with by President Monroe. It is
not a question of the colonization by a European Power of any
portion of America. It is not a question of the imposition
 upon the communities of South America of any system of
government devised in Europe. It is simply the determination
of the frontier of a British possession which belonged to the
Throne of England long before the Republic of Venezuela came
into existence.

{688}

"But even if the interests of Venezuela were so far linked to

those of the United States as to give to the latter a 'locus
standi' in this controversy, their Government apparently have
not formed, and certainly do not express, any opinion upon the
actual merits of the dispute. The Government of the United States
do not say that Great Britain, or that Venezuela, is in the
right in the matters that are in issue. But they lay down that
the doctrine of President Monroe, when he opposed the
imposition of European systems, or the renewal of European
colonization, confers upon them the right of demanding that
when a European Power has a frontier difference with a South
American community, the European Power shall consent to refer
that controversy to arbitration; and Mr. Olney states that
unless Her Majesty's Government accede to this demand, it will
'greatly embarrass the future relations between Great Britain
and the United States.' Whatever may be the authority of the
doctrine laid down by President Monroe, there is nothing in
his language to show that he ever thought of claiming this
novel prerogative for the United States. … I will not now
enter into a discussion of the merits of this method of
terminating international differences. It has proved itself
valuable in many cases; but it is not free from defects, which
often operate as a serious drawback on its value. It is not
always easy to find an Arbitrator who is competent, and who,
at the same time, is wholly free from bias; and the task of
insuring compliance with the Award when it is made is not
exempt from difficulty. …

"In the remarks which I have made, I have argued on the theory
that the Monroe doctrine in itself is sound. I must not,
however, be understood as expressing any acceptance of it on
the part of Her Majesty's Government. It must always be
mentioned with respect, on account of the distinguished
statesman to whom it is due, and the great nation who have
generally adopted it. But international law is founded on the
general consent of nations; and no statesman, however eminent,
and no nation, however powerful, are competent to insert into
the code of international law a novel principle which was
never recognized before, and which has not since been accepted
by the Government of any other country. … Though the language
of President Monroe is directed to the attainment of objects
which most Englishmen would agree to be salutary, it is
impossible to admit that they have been inscribed by any
adequate authority in the code of international law; and the
danger which such admission would involve is sufficiently
exhibited both by the strange development which the doctrine
has received at Mr. Olney's hands, and the arguments by which
it is supported, in the despatch under reply. In defence of it
he says: 'That distance and 3,000 miles of intervening ocean
make any permanent political union between a European and an
American State unnatural and inexpedient will hardly be
denied. But physical and geographical considerations are the
least of the objections to such a union. Europe has a set of
primary interests which are peculiar to herself; America is
not interested in them, and ought not to be vexed or
complicated with them.' … The necessary meaning of these words
is that the union between Great Britain and Canada; between
Great Britain and Jamaica and Trinidad; between Great Britain
and British Honduras or British Guiana are 'inexpedient and
unnatural.' President Monroe disclaims any such inference from
his doctrine; but in this, as in other respects, Mr. Olney
develops it. He lays down that the inexpedient and unnatural
character of the union between a European and American State
is so obvious that it 'will hardly be denied.' Her Majesty's
Government are prepared emphatically to deny it on behalf of
both the British and American people who are subject to her
Crown."

In his second despatch, Lord Salisbury drew the conclusions of

his government from the facts as seen on the English side, and
announced its decision, in the following terms: "It will be
seen … that the Government of Great Britain have from the
first held the same view as to the extent of territory which
they are entitled to claim as a matter of right. It comprised
the coast-line up to the River Amacura, and the whole basin of
the Essequibo River and its tributaries. A portion of that
claim, however, they have always been willing to waive
altogether; in regard to another portion, they have been and
continue to be perfectly ready to submit the question of their
title to arbitration. As regards the rest, that which lies
within the so-called Schomburgk line, they do not consider
that the rights of Great Britain are open to question. Even
within that line they have, on various occasions, offered to
Venezuela considerable concessions as a matter of friendship
and conciliation, and for the purpose of securing an amicable
settlement of the dispute. If as time has gone on the
concessions thus offered diminished in extent, and have now
been withdrawn, this has been the necessary consequence of the
gradual spread over the country of British settlements, which
Her Majesty's Government cannot in justice to the inhabitants
offer to surrender to foreign rule, and the justice of such
withdrawal is amply borne out by the researches in the
national archives of Holland and Spain, which have furnished
further and more convincing evidence in support of the British
claims.

"Her Majesty's Government are sincerely desirous of being in

friendly relations with Venezuela, and certainly have no
design to seize territory that properly belongs to her, or
forcibly to extend sovereignty over any portion of her
population. They have, on the contrary, repeatedly expressed
their readiness to submit to arbitration the conflicting
claims of Great Britain and Venezuela to large tracts of
territory which from their auriferous nature are known to be
of almost untold value. But they cannot consent to entertain,
or to submit to the arbitration of another Power or of foreign
jurists, however eminent, claims based on the extravagant
pretensions of Spanish officials in the last century, and
involving the transfer of large numbers of British subjects,
who have for many years enjoyed the settled rule of a British
Colony, to a nation of different race and language, whose
political system is subject to frequent disturbance, and whose
institutions as yet too often afford very inadequate
protection to life and property. No issue of this description
has ever been involved in the questions which Great Britain
and the United States have consented to submit to arbitration,
and Her Majesty's Government are convinced that in similar
circumstances the Government of the United States would be
equally firm in declining to entertain proposals of such a
nature."
Great Britain, Papers by Command:
United States Number 1, 1896, pages 23-31.

{689}

VENEZUELA: A. D. 1895 (December).

Message of President Cleveland to the United States Congress
on the Guiana boundary dispute.

As the replies given by Lord Salisbury showed no disposition

on the part of the British government to submit its dispute
with Venezuela to arbitration, President Cleveland took the
subject in hand, and addressed to Congress, on the 17th of
December, 1895, a special Message which startled the world by
the peremptoriness of its tone.

"In my annual message addressed to the Congress on the 3d

instant," he said, "I called attention to the pending boundary
controversy between Great Britain and the Republic of
Venezuela and recited the substance of a representation made
by this Government to Her Britannic Majesty's Government
suggesting reasons why such dispute should be submitted to
arbitration for settlement and inquiring whether it would be
so submitted. The answer of the British Government, which was
then awaited, has since been received, and, together with the
dispatch to which it is a reply, is hereto appended. Such
reply is embodied in two communications addressed by the
British prime minister to Sir Julian Pauncefote, the British
ambassador at this capital. It will be seen that one of these
communications is devoted exclusively to observations upon the
Monroe doctrine, and claims that in the present instance a new
and strange extension and development of this doctrine is
insisted on by the United States; that the reasons justifying
an appeal to the doctrine enunciated by President Monroe are
generally inapplicable 'to the state of things in which we
live at the present day,' and especially inapplicable to a
controversy involving the boundary line between Great Britain
and Venezuela.

"Without attempting extended argument in reply to these

positions, it may not be amiss to suggest that the doctrine
upon which we stand is strong and sound, because its
enforcement is important to our peace and safety as a nation
and is essential to the integrity of our free institutions and
the tranquil maintenance of our distinctive form of
government. It was intended to apply to every stage of our
national life and can not become obsolete while our Republic
endures. If the balance of power is justly a cause for jealous
anxiety among the Governments of the Old World and a subject
for our absolute non-interference, none the less is an
observance of the Monroe doctrine of vital concern to our
people and their Government. Assuming, therefore, that we may
properly insist upon this doctrine without regard to 'the
state of things in which we live' or any changed conditions
here or elsewhere, it is not apparent why its application may
not be invoked in the present controversy. If a European power
by an extension of its boundaries takes possession of the
territory of one of our neighboring Republics against its will
and in derogation of its rights, it is difficult to see why to
that extent such European power does not thereby attempt to
extend its system of government to that portion of this
continent which is thus taken. This is the precise action
which President Monroe declared to be 'dangerous to our peace
and safety,' and it can make no difference whether the
European system is extended by an advance of frontier or
otherwise.

"It is also suggested in the British reply that we should not

seek to apply the Monroe doctrine to the pending dispute
because it does not embody any principle of international law
which 'is founded on the general consent of nations,' and that
'no statesman, however eminent, and no nation, however
powerful, are competent to insert into the code of
international law a novel principle which was never recognized
before and which has not since been accepted by the government
of any other country.' Practically the principle for which we
contend has peculiar, if not exclusive, relation to the United
States. It may not have been admitted in so many words to the
code of international law, but since in international councils
every nation is entitled to the rights belonging to it, if the
enforcement of the Monroe doctrine is something we may justly
claim, it has its place in the code of international law as
certainly and as securely as if it were specifically
mentioned; and when the United States is a suitor before the
high tribunal that administers international law the question
to be determined is whether or not we present claims which the
justice of that code of law can find to be right and valid.

"The Monroe doctrine finds its recognition in those principles

of international law which are based upon the theory that
every nation shall have its rights protected and its just
claims enforced. Of course this government is entirely
confident that under the sanction of this doctrine we have
clear rights and undoubted claims. Nor is this ignored in the
British reply. The prime minister, while not admitting that
the Monroe doctrine is applicable to present conditions,
states: 'In declaring that the United States would resist any
such enterprise if it was contemplated, President Monroe
adopted a policy which received the entire sympathy of the
English Government of that date.'

"He further declares: 'Though the language of President Monroe

is directed to the attainment of objects which most Englishmen
would agree to be salutary, it is impossible to admit that
they have been inscribed by any adequate authority in the code
of international law.'

"Again he says: 'They [Her Majesty's Government] fully concur

with the view which President Monroe apparently entertained,
that any disturbance of the existing territorial distribution
 in that hemisphere by any fresh acquisitions on the part of
any European State would be a highly inexpedient change.'

"In the belief that the doctrine for which we contend was
clear and definite, that it was founded upon substantial
considerations, and involved our safety and welfare, that it
was fully applicable to our present conditions and to the
state of the world's progress, and that it was directly
related to the pending controversy, and without any conviction
as to the final merits of the dispute, 'but anxious to learn
in a satisfactory and conclusive manner whether Great Britain
sought under a claim of boundary to extend her possessions on
this continent without right, or whether she merely sought
possession of territory fairly included within her lines of
ownership, this Government proposed to the Government of Great
Britain a resort to arbitration as the proper means of
settling the question, to the end that a vexatious boundary
dispute between the two contestants might be determined and
our exact standing and relation in respect to the controversy
might be made clear.
{690}
It will be seen from the correspondence herewith submitted
that this proposition has been declined by the British
Government upon grounds which in the circumstances seem to me
to be far from satisfactory. It is deeply disappointing that
such an appeal, actuated by the most friendly feelings toward
both nations directly concerned, addressed to the sense of
justice and to the magnanimity of one of the great powers of
the world, and touching its relations to one comparatively
weak and small, should have produced no better results.

"The course to be pursued by this Government in view of the

present condition does not appear to admit of serious doubt.
Having labored faithfully for many years to induce Great
Britain to submit this dispute to impartial arbitration, and
having been now finally apprised of her refusal to do so,
nothing remains but to accept the situation, to recognize its
plain requirements, and deal with it accordingly. Great
Britain's present proposition has never thus far been regarded
as admissible by Venezuela, though any adjustment of the
boundary which that country may deem for her advantage and may
enter into of her own free will can not of course be objected
to by the United States. Assuming, however, that the attitude
of Venezuela will remain unchanged, the dispute has reached
such a stage as to make it now incumbent upon the United
States to take measures to determine with sufficient certainty
for its justification what is the true divisional line between
the Republic of Venezuela and British Guiana. The inquiry to
that end should of course be conducted carefully and
judicially, and due weight should be given to all available
evidence, records, and facts in support of the claims of both
parties. In order that such an examination should be
prosecuted in a thorough and satisfactory manner, I suggest
that the Congress make an adequate appropriation for the
expenses of a commission, to be appointed by the Executive,
who shall make the necessary investigation and report upon the
matter with the least possible delay. When such report is made
and accepted it will, in my opinion, be the duty of the United
States to resist by every means in its power, as a willful
aggression upon its rights and interests, the appropriation by
Great Britain of any lands or the exercise of governmental
jurisdiction over any territory which after investigation we
have determined of right belongs to Venezuela.

"In making these recommendations I am fully alive to the

responsibility incurred and keenly realize all the
consequences that May follow. I am, nevertheless, firm in my
conviction that while it is a grievous thing to contemplate
the two great English-speaking peoples of the world as being
otherwise than friendly competitors in the onward march of
civilization and strenuous and worthy rivals in all the arts
of peace, there is no calamity which a great nation can invite
which equals that which follows a supine submission to wrong and
injustice and the consequent loss of national self-respect and
 honor, beneath which are shielded and defended a people's
safety and greatness."

United States, Message and Documents

(Abridgment, 1895-1896).

The recommendations of the President were acted upon with

remarkable unanimity and promptitude in Congress, a bill
authorizing the appointment of the proposed commission, and
appropriating $100,000 for the necessary expenditure, being
passed by the House on the day following the Message (December
17), and by the Senate on the 20th.

See (in this volume)

UNITED STATES OF AMERICA: A. D. 1895 (DECEMBER).

VENEZUELA: A. D. 1895-1896 (December-January).

Feeling in England and the United States
over the boundary dispute.

See (in this volume)

UNITED STATES OF AMERICA:
A. D. 1895-1896 (DECEMBER-JANUARY).

VENEZUELA: A. D. 1896-1899.
Appointment of the United States Commission to investigate
the boundary question.
Reopening of negotiations between the United States
and Great Britain.
The solution of the main difficulty found.
Arbitration and its result.

The Commission authorized by the Congress of the United States

to investigate and report on the true divisional line between
British Guiana and Venezuela was named by the President of the
United States, on the 1st of January, as follows:
David J. Brewer, Associate Justice of the Supreme Court
of the United States;
Richard H. Alvey, Chief Justice of the Court of Appeals in
the District of Columbia;
Andrew D. White, ex-President of Cornell University,
and ex-Minister to Germany and Russia;
Daniel C. Gilman, President of Johns Hopkins University;
Frederick H. Coudert, of New York.

The Commission was organized on the 4th by the election of

Justice Brewer to be its President. Mr. S. Mallet Prevost was
subsequently appointed Secretary. One of the first proceedings
of the Commission was to address a letter to the Secretary of
State, suggesting a friendly intimation to the governments of
Great Britain and Venezuela that their assistance to it, in
procuring unpublished archives and the like evidence, would be
highly acceptable, and that "if either should deem it
appropriate to designate an agent or attorney, whose duty it
would be to see that no such proofs were omitted or
overlooked, the Commission would be grateful for such evidence
of good will." This overture was well received in England, and
had an excellent effect. It was responded to by Lord
Salisbury, with an assurance that Her Majesty's government
would readily place at the disposal of the President of the
United States any information at their command, and would
communicate advance copies of documents soon to be published
on the subject of the boundary line. Before the close of
January the Commission had organized its work, with several
experts engaged to assist on special lines. Professor Justin
Winsor, Librarian of Harvard University, had undertaken to
report on the early maps of the Guiana-Venezuela country.
Professor George L. Burr, of Cornell University, was making
ready to examine the Dutch archives in Holland, and Professor
J. Franklin Jameson, of Brown University, was enlisted for
other investigations.

Before these labors had gone far, however, the two

 governments, of Great Britain and the United States, were
induced to reopen a discussion of the possibility of an
arbitration of the dispute. On the 27th of February, Mr.
Bayard, the Ambassador of the United States at London,
conveyed to Lord Salisbury a proposal from his government
"that Her Majesty's Ambassador at Washington should be
empowered to discuss the question at that capital with the
Secretary of State," and that "a clear definition of the
'settlements' by individuals in the territory in dispute,
which it is understood Her Majesty's Government desire should
be excluded from the proposed submission to arbitration,
should be propounded."
{691}
Lord Salisbury assented so far as to telegraph, on the same
day, to Sir Julian Pauncefote: "I have agreed with the United
States' Ambassador that, in principle, the matter may be
discussed between the United States Government (acting as the
friend of Venezuela) and your Excellency." But, a few days
later (March 5), the British Premier and Foreign Secretary
gave a broader range to the discussion, by recalling a
correspondence that had taken place in the spring of 1895
between the then American Secretary of State, Mr. Gresham, and
the British Ambassador, in contemplation of a general system
of international arbitration for the adjustment of disputes
between the two governments. Reviving that project, Lord
Salisbury submitted the heads of a general arbitration treaty
between the United States and Great Britain, which became a
subject of discussion for some weeks, without offering much
promise of providing for the settlement of the Venezuela
dispute. In May, the correspondence returned to the latter
subject more definitely, Lord Salisbury writing (May 22):

"From the first our objection has been to subject to the

decision of an Arbiter, who, in the last resort, must, of
necessity, be a foreigner, the rights of British colonists who
have settled in territory which they had every ground for
believing to be British, and whose careers would be broken,
and their fortunes possibly ruined, by a decision that the
territory on which they have settled was subject to the
Venezuelan Republic. At the same time, we are very conscious
that the dispute between ourselves and the Republic of
Venezuela affects a large portion of land which is not under
settlement, and which could be disposed of without any
injustice to any portion of the colonial population. We are
very willing that the territory which is comprised within this
definition should be subjected to the results of an
arbitration, even though some portion of it should be found to
fall within the Schomburgk line." He proposed, accordingly,
the creation of a commission of four persons, for the
determination of the questions of fact involved, on whose
report the two governments of Great Britain and Venezuela
should endeavor to agree on a boundary line; failing which
agreement, a tribunal of arbitration should fix the line, on
the basis of facts reported by the Commission. "Provided
always that in fixing such line the Tribunal shall not have
power to include as the territory of Venezuela any territory
which was bona fide occupied by subjects of Great Britain on
the 1st January, 1887, or as the territory of Great Britain
any territory bona fide occupied by Venezuelans at the same
date."

Objections to this proposal, especially to its final

stipulation, were raised by the government of the United
States, and the negotiation looked unpromising again for a
time; but at length, on the 13th of July, Mr. Olney made a
suggestion which happily solved the one difficulty that had
been, from the beginning, a bar to agreement between the two
governments. "Can it be assumed," he asked, in a letter of
that date, "that Her Majesty's Government would submit to
unrestricted arbitration the whole of the territory in
dispute, provided it be a rule of the arbitration, embodied in
the arbitral agreement, that territory which has been in the
exclusive, notorious, and actual use and occupation of either
party for even two generations, or say for sixty years, shall
be held by the arbitrators to be the territory of such party?
In other words, will Her Majesty's Government assent to
unrestricted arbitration of all the territory in controversy,
with the period for the acquisition of title by prescription
fixed by agreement of the parties in advance at sixty years?"
Lord Salisbury assented to the principle thus suggested, but
proposed a shorter term of occupation than sixty years.
Finally the term of fifty years was accepted on both sides,
and from that point the arrangement of a Treaty of Arbitration
between Great Britain and Venezuela went smoothly on. The good
news that England and America were practically at the end of
their dispute was proclaimed by Lord Salisbury, on the 9th of
November, in a speech at the Lord Mayor's banquet, in London,
when he said: "You are aware that in the discussion had with
the United States on behalf of their friends in Venezuela, our
question has not been whether there should be arbitration, but
whether arbitration should have unrestricted application; and
we have always claimed that those who, apart from historic
right, had the right which attaches to established
settlements, should be excluded from arbitration. Our
difficulty for months has been to define the settled
districts; and the solution has, I think, come from the
suggestion of the government of the United States, that we
should treat our colonial empire as we treat individuals; that
the same lapse of time which protects the latter in civic life
from having their title questioned, should similarly protect
an English colony; but, beyond that, when a lapse could not be
claimed, there should be an examination of title, and all the
equity demanded in regard thereto should be granted. I do not
believe I am using unduly sanguine words when I declare my
belief that this has brought the controversy to an end."

On the 10th of November, the Secretary of the United States

Commission appointed to investigate the disputed boundary
published the following: "The statements of Lord Salisbury, as
reported in the morning papers, make it probable that the
boundary dispute now pending between Great Britain and Venezuela