Trusts and Public Policy

I.

ALTHOUGH twenty years have passed since the first monopolistic combinations made their appearance in our manufacturing industries, and notwithstanding that discussion of the trust problem has been rife during the greater part of this period, it cannot be said that much progress has been made in the development of an intelligent public opinion upon this subject, or in the formulation of successful measures of legal repression or control. It is true that the owners and managers of these colossal enterprises have not wearied in singing the praises of the trust, and that radical opponents of the movement have not withheld their sweeping condemnations ; while some of our courts and many of our legislatures have invoked the aid of the law against contracts and combinations in restraint of trade. But the work of industrial consolidation has steadily progressed, with a serene disregard of hostile opinion and legal restraints, and the average citizen has waited, helplessly or apathetically, for the question to settle itself, or, failing in this, to assume such a shape that the formation of a correct opinion would become a matter of comparative ease. Under such conditions, we have drifted to a point where the careful student must approach the trust problem with a full recognition of the following established facts.

He must understand, at the outset, that the policy of consolidation has gained at least a temporary control of the field of manufacturing industry, so that most staple products of the factory are now in the hands of the so - called trusts. Then it must be recognized that the important railways of the country have been brought under the control of five or six leading combinations, which are to be managed in complete harmony, and under the general direction of the same men who are the dominating spirits in the mining and manufacturing industries. It is evident, also, that such municipal industries as gas, electric lighting, and street railways are certain to be conducted as monopolistic undertakings, public or private ; and that, where private ownership is permitted, there is a marked tendency toward the consolidation of plants situated in different localities under the control of large syndicates, upon the directorates of which we find many of the same capitalists who figure in the manufacturing and railroad consolidations. Finally, in the world of banking the process of centralization has begun ; so that even now, in New York, Chicago, and perhaps Boston and other cities, there has been effected a union of financial interests sufficiently large to exert a material influence upon the bank statements, the supply of loanable capital, the rate of discount, and possibly the prices of stocks. It is almost needless to add that these financial consolidations have been brought about by the same capital that controls the manufacturing and transportation interests of the country. At the present moment, therefore, the student must reckon with the fact that industrial consolidation has reached a stage of development beyond the wildest dreams ever entertained a few years ago, and that a small group of capitalists wields a power such as has never fallen to the lot of captains of industry in any other age.

Turning now from the existing facts of industry to the present state of opinion among professional economists and others who have made a study of the question, the student finds that, so far as railroads and municipal monopolies are concerned, there is a general agreement that competition is both impossible and undesirable, and that monopoly is the order of the day. The only questions that may be considered open to debate are, whether the monopoly should be public or private, and whether, in case private ownership is permitted, the extent of the control exercised by public authority should be greater or less than at present. Combinations in the world of banking are of such recent growth that they have received but little attention up to the present time ; but concerning the trusts that control our manufacturing industries, a dozen years of debate have not produced anything that approaches substantial agreement of opinion. While this essay will be confined to a consideration of consolidation in the field of manufactures, the facts adduced in the previous paragraph will suffice to remind us that this particular question cannot be separated entirely from the problem of consolidation in other parts of the industrial world.

If differences of opinion exist upon other points, it is certain that disinterested students agree nearly unanimously that the trusts almost always attempt to secure a monopoly within their respective fields, and have actually secured monopolistic powers to a great degree. Prospectuses issued by promoters, and the admissions of a number of trust officials, show that the desire to secure control of the supply in order to regulate prices is one of the chief motives that have caused consolidation, while a study of price statistics proves that increased charges have certainly been exacted from the public. One still meets the reckless assertion that the trusts have not advanced prices ; but the simple fact is that, in almost every case investigated, combination has been followed by an advance in charges.¹ Economists are agreed also that, in order to secure a monopoly, it is not necessary to obtain control of the entire supply. For this purpose, control of a decided majority of the factories — enough, for instance, to bring from seventy to ninety per cent of the product into the hands of the combination — is as good as mastery of the entire output. Indeed, in many cases it may be better ; for the presence of a few smaller companies outside of the trust, which exist, perhaps, by mere tolerance and on condition that they shall not reduce prices, aids materially in throwing dust into the eyes of the public. We may therefore accept it as an established fact that the trust movement means, for the present, at any rate, the establishment of monopolistic power to control supply and fix prices at the point of highest net returns.

More than this, whenever trusts have been formed, prospective monopoly profits have been capitalized at very high figures. The Industrial Commission tells us that the issue of securities up to two or three times the actual cash value of the assets has been considered a “fairly conservative ” basis of capitalization, and that this proportion has been exceeded in not a few instances. It would be a very considerable understatement of the truth to say that, in general, over one half of the capitalization of these combinations represents nothing more substantial than water. In most cases the preferred stock has equaled or exceeded the value of all tangible assets, and the common stock represents no actual investment of capital. Thus it is evident that the future has been heavily discounted ; the more so, in fact, since the valuations at which the constituent plants have been turned over to the combinations have, in recent years, been based upon earnings realized in times of unusual prosperity. This is something that investors are likely to appreciate more keenly when the trusts come to the lean years which are sure to follow the speculative activity of recent times.

Concerning the permanence of these overcapitalized companies that are now grasping for monopoly gains, opinions have differed most materially ; but one fact may be regarded as established. If the persistent growth of competitors or the approach of industrial depression ever results in financial embarrassments, it is not likely that the corporate existence of the trusts will terminate, and the constituent plants resume independent operations. Receiverships or eventual reorganizations are more likely to be the accepted forms of procedure, so that the enterprises now consolidated will probably remain under unified managements. Moreover, it must not be overlooked that the utter collapse of any considerable number of the combinations would shake the entire industrial structure to the utmost, producing a far-reaching series of disasters. In some form or other, in the shape of permanent monopolies or of organizations shorn of monopolistic power, the trusts are likely to remain with us, either as monuments of organizing talent, or as fatuous efforts to overreach the possible limits of capitalistic enterprise.

II.

Not a few of the advocates of industrial consolidation have told us that the trusts present a purely practical question, toward the solution of which the “theorist” and the “doctrinaire” can contribute nothing. But this distrust of theory has, obviously enough, been confined to reasonings based upon traditional economic principles, because these same writers have manifested little hesitation in advancing a number of new theories favorable to the principle of combination. We may proceed, therefore, to review some of these recent theories that are designed to allay popular discontent and gain a verdict favorable to the trusts.

In the first place, we are told that, under modern conditions, competition has become a “ wasteful,” “ irrational,” and “ self-destructive ” process. It is said that whenever an industry requires the investment of large amounts of fixed capital, it becomes impossible to decrease production if prices ever fall below a profitable level, since such a course would entail the sacrifice of enormously expensive plants. Under such conditions, it is argued, the only possible remedy is to combine the various establishments under a single management which can “ adjust production to consumption ” in a rational and scientific manner. Without doubt, some of the trusts have originated in periods of business depression caused by excessive investments in the industries in question ; and the whiskey, sugar, and tin-plate combinations are the stock illustrations employed to enforce this point. But when the facts are examined more closely, one finds that the depressed conditions out of which these trusts developed cannot be attributed fairly to the workings of ordinary competition. In each case the overinvestment of capital of which writers complain was due to governmental interference, and not to the ordinary vicissitudes of business. The whiskey trust was formed because the federal duties on distilled spirits had been so manipulated and administered that enormous amounts of capital had been called into this industry,² producing conditions for which mere competition was in no wise responsible. And the same thing is true of the sugar and tin-plate industries. Here our protective duties had given an undue stimulus to investments, so that Mr. Havemeyer was entirely correct in calling the tariff the mother of trusts, so far, at least, as his own industry was concerned. In our iron and steel industries, it is possible to trace with special clearness the influence of governmental interference in producing those periodic fluctuations of which the advocates of trusts complain. In times of rising prices and increasing demand, our tariff serves to throw upon domestic producers nearly the whole task of supplying the expanding market. This may be the precise condition which the protectionist desires, but it produces effects which are not contemplated in the philosophy of protectionism. Since new plants cannot be erected promptly, prices rise very high, and stimulate new investments to a degree which the permanent needs of the market could never warrant. Then, when normal conditions return, it is found that there has been an excessive investment of new capital, and, the supply remaining unduly large, prices fall to an unremunerative figure. All of this would be avoided if the government did not interfere to prevent foreign producers from furnishing a portion of the supply needed to meet conditions of expanding demand ; and we may insist that in such cases it is not competition, but the restriction which we place upon it, that is chiefly responsible for the depressed conditions that trusts are designed to remedy. Economists have long been aware that competition is not a perfect process, and have reckoned with the losses as well as the benefits that flow from its action. But until we give it a chance to demonstrate what its normal workings would be, it is premature to conclude that competition is either “ irrational ” or “ self - destructive,” and that monopoly is to be preferred to our traditional method of business rivalry.

A second theory is that a monopoly, producing upon the largest possible scale, can supply the market more cheaply than a number of independent concerns. An adequate discussion of this argument is impossible within the limits of the present essay, and attention can be called to only a few of the most important considerations. Advocates of the trusts have had no difficulty in showing that a modern combination can produce goods more cheaply than the small enterprises that used to control the field of manufacturing industry. But the trusts have, for the most part, substituted a single consolidated company for separate business undertakings that were already conducting their enterprises upon a large scale ; and the question at issue is whether a combination can supply its product more cheaply than these large individual concerns could have continued to do. This is not an easy problem, and there is reason, doubtless, for considerable difference of opinion. In the matter of advertising and effecting sales, there is probably room for no little saving through the formation of a combination. But the opportunity for economy at this point does not always exist, and its extent is often exaggerated. Not all advertising is mere waste, because demand for commodities is aroused and stimulated by this means ; and some of the trusts that at the outset discharged many salesmen and reduced the outlay for advertising have been obliged to increase their expenditures for such purposes, because it was found that sales fell off under the other policy. Moreover, whenever new rivals appear to dispute the possession of the field by the monopoly, it is necessary for the trust to make extraordinary efforts to retain its trade. In the mere work of producing the commodity at the factory, there is much less reason to believe that a monopoly is superior to independent enterprises of a sufficiently large size. It is tolerably certain that there is not to-day a single trust that can make a satisfactory profit by selling at prices that are so low as to make competition hopeless; and until some of the combinations are able to defeat all rival concerns in this the only legitimate way, we may continue to believe that a company that controls a factory or a few factories of reasonable size, under the supervision of an able manager, is not an inferior agent of production. If the trusts ever reduce their cost of production to a point that makes it hopeless for independent concerns to enter the field, all students must then agree that the case in favor of combination has been fully established; but so long as it is necessary to employ questionable tactics in order to stifle competition, we may safely conclude that the business world has not accepted the theory of the advocates of consolidation.

A third theory should be considered in connection with the two lines of argument already discussed. Whenever the critic urges that a monopoly possesses dangerous power of oppressing consumers with higher charges, the advocates of combination reply that all such objections will settle themselves, because the trusts will be restrained by the force of potential competition. Now the economist who believes that competition is not, under normal conditions, “ irrational ” and “ self-destructive,” and holds that a trust cannot produce goods more cheaply than independent concerns of a large size, can very properly argue that the present effort of combinations to exact monopoly prices will ultimately be defeated by competition, both potential and actual. But the advocate of trusts cannot, without manifest absurdity, endeavor to allay discontent by an appeal to competition. He has already demonstrated to his own satisfaction that competition is irrational, wasteful, and self - destructive; and we must insist that he shall not point to such an agency as this when pressed for remedies for the evils of monopoly. In the railroad industry and the field of municipal monopolies, we have come to recognize that competition is indeed an undesirable and illusory regulator of monopolistic power, and are now proceeding to develop methods of public control. This is precisely what must be done with the trusts if competition has now become a thing of the past. The advocates of trusts have further argued that a combination can produce its goods more cheaply than separate concerns. If this be true, the conclusion follows that it is useless to expect that competition in any form can oblige the trust to divide its savings with the public. If the price at which rival concerns can supply the product is one dollar, and the trust can produce for less, say eighty cents, — and this is precisely what these arguments go to prove, — then the combination will run no risk of competition if it places the price at ninety-nine and nine tenths cents. Thus the whole of the alleged economies of consolidation will accrue to the benefit of the trust. Manifestly, if competition is selfdestructive, the evils of monopoly cannot be held in check by a force that annihilates itself; and if rival concerns cannot hope to produce at as low a cost as the trust, capitalists will soon learn not to meddle with enterprises that are foredoomed to failure. There can be no potential competition when actual competition is hopeless ; and the last vestiges of the competitive régime must disappear from the industries controlled by trusts, if the advocates of combination can establish the truth of their theories. If the critic of trusts is to be told that his theories can contribute nothing to the solution of the question, which is a problem of a purely practical character, he may at least suggest that if the advocates of combination undertake to theorize, they should devote some attention to the logical connection of the theories which they advance.

A fourth theory which is supposed to add materially to the sum total of human contentment is found in the law of substitution. If the monopolist raises the price of his commodity unduly, the consumer may seek for substitutes, and may be able oftentimes to find them. It is certainly true that the exactions of the “ coal barons ” who control the output of the anthracite regions have increased the use of bituminous coal, or of such substitutes as oil, crushed coke, and fuel gas. It is well known that high duties upon wool have increased the use of cotton fabrics, that cottonseed oil competes with linseed, and that the high charges fixed by the trust that controls writing paper have led to experiments with the pulp of the palmetto tree and the hull of the cotton seed. This is not a new principle, but is found in almost all of the discussions of the law of monopoly price. But what is it worth as a sedative for popular unrest or scientific skepticism ? Comparatively little, we fear. First of all, even if the quest for substitutes were always easy and certain of success, it would not alter the fact that the monopolist may deprive the consumer of the opportunity of securing the precise article desired, at a reasonable price. This may be a short-sighted act on his part, but it is irritating, nevertheless. Then, as a matter of fact, it is not always easy to find an acceptable substitute, and monopoly charges must often be borne for a considerable time before relief can be secured. Moreover, since the range of monopolized industries is now so wide, and the tendency to exact monopoly prices so general, the law of substitution becomes little more than an invitation to consumers to devote an enormous amount of energy to the search for commodities which would be needless but for the presence of the trust. And, finally, would not the monopolist watch this process with serene confidence that, after a substitute should be discovered, he could find the capital and the persuasive arguments and the precise means needed to demonstrate that the march of industrial progress makes it desirable and more economical for him to take the newly established industry into his own hands ? If combination is superior to competition, and therefore inevitable, is it not apparent that both substitutes and original products must be brought under the same control ?

Another comforting theory is that the injurious results of monopoly may be avoided by bringing all people into the scheme of industrial combination. Let farmers and laborers and professional people adopt the same methods now introduced into manufactures, so that the power of the present trusts may be limited by the “ universalization of the tendency to monopoly.” All producers may thus be placed in a position to control the supply of their respective products, fix prices at the point of highest net returns, and enjoy the resulting monopoly profits. Then consumers may invest in the securities of all combinations, and receive back in the form of dividends what is taken from them in the shape of higher prices. In criticism of this theory three suggestions may be made. First, the power of all these combinations would not be the same. A monopoly based upon the ownership of mines or a few large factories would possess greater stability than a union of laborers or agricultural producers, so that monopolistic earnings would not be distributed with even proximate equality. Moreover, a trust that controlled an article of necessary use would make greater profits than one that monopolized the supply of a luxury. In the second place, the prospective monopoly earnings of our existing trusts have already been capitalized at very high figures, so that the lion’s share of the advantage has been secured by the promoters and original owners, while subsequent purchasers can hope to receive only average returns. Finally, the whole scheme, if not entirely chimerical, is based upon the doctrine of universal scarcity. Monopoly means limitation of supply, as a necessary condition of obtaining higher prices and larger profits. By such devices a few trusts in selected industries can enrich their owners and managers ; but this is done at the expense of society, which receives a smaller supply of commodities than would be produced under other conditions. If such a method could become universal, it would mean a lessened production in all branches of industry, and a general régime of scarcity, by which all members of society would lose. Scarcity is the necessary implication of monopoly ; universal monopoly would, of necessity, connote universalized scarcity. In comparison with such a programme, Socialism would offer an attractive alternative. The competitive régime possesses the merit of making it advantageous for producers to furnish the largest possible supply of commodities that can be sold at prices sufficient to cover the costs of production. Socialism, also, would make an abundant production of commodities the ideal of social effort, even though it should weaken the industrial motive in the individual members of society. But universalized monopoly, — only a Bastiat could do justice to such an economic ideal.

A final theory must receive its share of attention. It is argued that the trusts will prove a remedy for the depressions which have constantly beset the path of modern industry. This theory is based upon the belief that a combination, controlling practically the entire supply, can adjust production to consumption, and avoid the mistakes which in former times caused periods of temporary overproduction and consequent business depression. This is a claim which probably cannot be definitely settled until we have had further experience both with trusts and with the inevitable reaction from the recent “ flush times.” If trusts can repress competition, and do not, by their high prices, call too much capital into their respective fields, it is conceivable that something may be done in the way of decreasing the severity of the next period of depression. Yet it must be remembered that a trust can decrease production only by methods that lessen industrial activity and react upon other trades, while it is not certain that outside capital will cease permanently from interfering with the fields now controlled by the combinations. In Germany, where industry is regulated to a considerable degree by various syndicates and agreements among producers, a somewhat prolonged period of gradual depression has not been avoided, and the end is not yet in sight. One other point should not be overlooked. If the consolidation of banking interests has proceeded, or shall yet proceed, far enough to establish a considerable degree of concerted action in our leading financial centres, it is conceivable that something may be done to avoid that acute monetary stringency which has played such an important part in previous periods of depression. Our system of independent banks has lacked that stability which a central, unifying agency might be able to supply in times of panic; and the issue of clearing-house certificates has served to mitigate disastrous effects rather than guard against approaching dangers. In this direction, we shall have, before the expiration of many years, an opportunity to test the workings of financial consolidation.

III.

If, now, a critic professes inability to accept many of the theories that are current among the advocates of trusts, it is natural to inquire what suggestions he can offer in place of the views that he is compelled to reject. And it must be confessed that, with this problem, criticism is far easier than the formulation of positive opinions. But it can be suggested, also, that a critical attitude is much better than the uncritical acceptance of views that seem to require material qualification or radical modification in many particulars. Perhaps, too, such criticism may be a necessary condition for the development of more adequate and consistent theories.

As a preliminary consideration of great importance, it can be urged that grave dangers may attend the present attitude of many economists who counsel a policy of delay, and would postpone serious action until we have had time to gain fuller knowledge and greater experience. Existing trusts possess sufficient power to make the danger of ultraradical action decidedly small, while there is always a possibility that our final remedies may be postponed until they come too late. And even if one is optimistic concerning the ultimate outcome, there remains what Mr. Dooley has called “ the annoyance of the meantime,” and this is sufficient to make one dissatisfied with the policy of delay. It must not be forgotten that one important factor in recent consolidations has been the concentration of enormous wealth and power in the hands of a few men ; and while the discussion of remedies continues, monopoly profits are flowing into the coffers of these same persons. When the Standard Oil Company can earn annual dividends that exceed thirty per cent, it is evident that a few years of further debate are almost as much as the monopolist could desire. It seems dangerous, therefore, to adopt an opportunist or a temporizing attitude.

In so far as our present trusts depend upon public or private privileges and favors, there can certainly be no excuse for delay. If the largest of all trusts is exacting monopoly charges from domestic consumers, and selling its products in foreign markets at lower rates, — and who can doubt that this is the case ? — we have only ourselves to blame if we fail to apply the simple remedy of placing iron and steel upon the free list. And this trust is only one of many, the powers of which could be curbed by this course of action. If railroad rates are so manipulated that they sometimes favor the localities in which the plants owned by trusts are situated, — and what disinterested student can deny this ? — why should we hesitate, in season and out of season, to agitate the question of the control of the national highways ? If patent laws are another reliance of the trusts, why should we hesitate to throw open to general use, in return for a reasonable compensation, every patent that is employed hereafter for monopolistic ends ? These remedies would at least moderate the exactions of many of the trusts, and no further experience or greater knowledge ought to be needed to demonstrate the wisdom of employing all such means that stand so near at hand.

Then it is evident that our corporation laws are in need of serious attention. Without the grant of a limited liability and unlimited control, by the directors, of the property of all the stockholders, the consolidations of recent years would have been an impossibility. Without the privilege of issuing watered stock, promoters and financiers might have found no profit in the work of consolidation, and the trust movement would not have assumed its present gigantic proportions. It is not to be expected that the states that now find it profitable to encourage the incorporation of these companies will change their policy in any future that we have a right to contemplate ; nor can we hope that rational and uniform corporation laws can be secured soon in all of our various commonwealths. A national law, applicable to all companies doing business outside the state in which they are chartered, is almost certainly our only hope of securing an effectual control of corporate enterprise. Such a measure, to be sure, would be a step in the direction of political centralization ; but the only alternative is irresponsible industrial centralization, and there should be no doubt as to which policy is preferable. For a dozen years or more we have been sowing the wind, and we have now reaped what might have been expected. We have thrown many of our manufacturing interests into a mad vortex of speculation, and have danced attendance upon a game in which entire industries have been the counters, and the rights of consumers or small investors the last consideration. Why should we longer delay concerted efforts to secure a national corporation law ?

The simple fact is that existing laws relating to tariff duties, railroads, patents, and business corporations have offered every conceivable inducement to consolidation, and have complicated the existing situation to such an extent that we are often unable to distinguish the results of permanent economic principles or forces from the effects of our own unwise legislation. Until we remove the abuses caused by laws of our own making, we shall probably secure no general agreement upon the economic principles involved ; but our doubts upon many of the economic aspects of the question should not serve as an excuse for delay in removing the evils caused by forces that are in our own control. These evils present practical issues that may well serve as a basis for immediate action ; the decision of the complicated economic principles involved in the trust problem may then be reserved more safely for a time when we shall have greater experience and a clearer vision.

And the friend of private property and individual enterprise should not forget that awaiting the outcome of our dealings with the trust stands — Socialism. The “ Billion Dollar Trust ” seems to furnish a practical demonstration of the possibility of organizing the largest industries upon a national scale, and the Socialist applauds the efforts of Mr. Morgan and his associates. The concentration of all the railroads into a few groups, controlled by a single set of interests, is a brilliant triumph for the policy of centralization ; and for this, too, Mr. Morgan has the gratitude of every Socialist. The popular discontent caused by the monopolization of one necessary of life after another prepares the soil in a manner ideally perfect for the sowing of socialistic seed ; and it is a significant fact that American Socialism has first become an appreciable force in this era of trusts and combinations. When the people once gained an appreciation of the fact that monopoly is inevitable in the field of municipal service industries, the question immediately arose, Shall this monopoly be public or private ? And the last ten years have witnessed a remarkable growth, among conservative people, of an opinion favorable to public ownership. The same question will certainly arise if thinking men ever become convinced that in manufacturing and other industries competition is impossible, and monopoly inevitable. Only two possible alternatives will then present themselves, — public or private monopoly ; and those who are now occupied with the formation or justification of trusts will be the persons chiefly responsible in case the balance finally swings in the direction of Socialism.

Charles J. Bullock.