The Ethics of Trust Competition

WHOEVER has attentively followed the recent literature of the trust problem must be impressed with the tendency to extend the condemnation, which has been properly called forth by certain flagrantly dishonest practices, to methods of competition that till lately have never been questioned. In Professor John B. Clark’s books and recent articles on the trust question, in Miss Tarbell’s elaborate history of the Standard Oil Company,¹ and in the recent report of the Commissioner of Corporations in the Department of Commerce and Labor, — to cite only the more conspicuous examples, — methods which were considered blameless when practiced by businesses of equal size are denounced as criminal when practiced by trusts against smaller independent dealers. Professor Clark assimilates with illegal railway discrimination the trust practices of making factors’ agreements with dealers, and of selling at cut prices in the territory of rivals. Miss Tarbell’s most serious charge against the competitive methods of the Standard Oil Company, in its present phase, is its practice of underselling the independent dealers in competitive localities.

Against the arrangement of binding contracts with agents and the practice of underselling in competitive localities, these writers seek to array, not only the prohibition of statute, but also the moral sense of the community. In the days when trusts were not prominent it is generally admitted that these forms of competition were in fair repute. At just what point and for just what reason these practices became ethically unjustified has never been shown. Yet the remedies for trust evils which Professor Clark proposes are obviously confiscatory, unless they proceed on the assumption that these competitive methods are ethically wrong. Miss Tarbell has crowded two large volumes with accusations against the Standard Oil Company, and evidence offered in support of them. But the greater number of them, even though substantiated, must fail to fasten any moral guilt upon the Standard Oil Company, unless the hypothesis upon which she argues — but which she nowhere has sought to establish— be proven, — namely, that it is morally wicked for a trust to undersell a smaller rival. The only assumption on which competitive underselling and factors’ agreements are now condemned is that conditions have so changed as to require new moral standards in trade competition. Before assenting to the advanced ground taken by these serious writers, one may be pardoned for inquiring whether the change in economic conditions warrants so different a standard of business ethics.

Whenever a business is substantially controlled by an individual or combination — to state the premise of the new doctrine — there a new code of business competition must be established. Factors’ agreements, for instance, must be forbidden. The General Aristo Company, which controls the manufacture of photographic paper in the United States, is said to offer its goods to the trade with an added discount to dealers who agree not to sell the products of its rivals. The Pittsburg Plate Glass Company used to give a rebate of five per cent at the end of the year to those customers who observed its schedule of consumers’ prices. The American Tobacco Company and the Continental Tobacco Company formerly allowed an extra discount of three per cent to all dealers who handled their goods exclusively. In the sugar trade and in the marketing of soap and baking powders, it has been customary for the jobber to make affidavit at intervals of several months that he has sold only the goods of the trusts, and upon this statement he has been allowed a certain percentage in rebates. These practices, collectively called the factor system, are put under the ban of the new business ethics. The practice of cutting prices in one locality below those which prevail generally, for the purpose of overcoming local competition, has been even more warmly denounced. The prohibition of these discriminations in prices has been a common feature in the anti-trust bills proposed in Congress during the last three years. Such a statutory enactment has been urged by Professor Clark. The condemnation of this weapon of competition is the real gravamen of Miss Tarbell’s history of the Standard Oil Company. Facing the question thus earnestly presented, let it be granted, for purposes of argument, in order at once to reach the moral issue, that the prohibition of these forms of competition might prevent all possibility of evil in the trusts. Granting this point, is the distinction between small businesses and large businesses, between independent enterprise and combination, sufficient justification for denying to the latter the means of competition which the former have for generations used without rebuke ?

In July, 1897, — to quote from Miss Tarbell’s History of the Standard Oil Com-pany, — the United States Pipe Line Company brought suit against the Standard Oil Company under the Sherman AntiTrust Law. A long list of wrongs was stated by the plaintiff. Most prominent were charges that the Standard Oil Company had chartered and purchased vessels carrying independent oil, solely for the purpose of interfering with the independent market; that the Standard Oil Company had intimidated merchants by threats of underselling, until they refused to buy oil from the plaintiff; and that the Standard Oil Company had “ criminally ” undersold, merely for the purpose of destroying the plaintiff’s market. The evidence collected by Roger Sherman, counsel for the United States Pipe Line Company, was elaborate and detailed. Less than two months after the summons was issued, however, Mr. Sherman died and the action was allowed to lapse. Had the suit proceeded to trial, the judicial discussion of the issues raised by these charges would have been of immense importance, both to shape our body of law, and to direct public opinion. Fifteen years ago, in the trial of similar issues before the highest courts of Great Britain, such a discussion was had by one of the greatest of recent English judges. Minor phases of the same issues have been discussed by our own United States Supreme Court, and by one of our most thoughtful American judges. In a subject where the courts have sought merely to express the business sense of the community, and to apply to trade competition the code which social ethics has elaborated, these judicial discussions, apart from their legal importance, possess an unusual value. They contain the most definite statements which we have of the moral and economic principles at issue. They convey the ethical sentiment of the time, through observers trained by their life-work to be responsive to the moral sense of the community. These conclusions are reached through the sober deliberation which is only possible in the decision of sharply disputed and immediately important issues. In the forum of ethics, therefore, whither Miss Tarbell has removed the charges against the Standard Oil Company, the words of these eminent judges are authority as considerable as in a court of law. In comparison with other current opinion, they deserve first importance.

The charges made in the English case were curiously similar to those in the United States Pipe Line Company’s suit. The defendants were shipowners, who had combined to drive out the plaintiff shipowner,and to control the tea carriage from certain Chinese ports. For this purpose, they offered to local shippers very low rates during the tea harvest of 1885, and a further rebate of five per cent to all shippers who would deal exclusively with the combination. The charges made by the plaintiff were that the defendants offered to the shippers a rebate, if they would not deal with the plaintiff; that special ships had been sent to Hankow by the combination, in order, by competition, to deprive the vessels of the plaintiff of profitable freight; that rates had been offered at Hankow at a level that would not repay a shipowner for his adventure, merely to smash freights and to frighten the plaintiff from the field; and that pressure had been put on the plaintiff’s customers to induce them to ship exclusively by the vessels of the combination. Lord Justice Bowen, after enumerating the various unfair modes of competition, such as the intentional driving away of customers by violence and the intentional procurement of a violation of individual rights, returned to the facts before him: “The defendants have been guilty of none of these things. They have done nothing more against the plaintiff than to pursue to the bitter end a war of competition waged in the interests of their own trade. To the argument that a competition so pursued ceases to have just cause or excuse, when there is ill will or a personal intention to harm, it is sufficient to reply (as I have already pointed out) that there was here no personal intention to do any other or greater harm to the plaintiff than such as was necessarily involved in the desire to attract to the defendants’ ships the entire tea trade of the ports, a portion of which would otherwise have fallen to the plaintiff’s share. I can find no authority for the doctrine that such a commercial motive deprives of ‘just cause or excuse’ acts done in the course of trade, which would, but for such a motive, be justifiable. So to hold would be to convert into an illegal motive the instinct of self-advancement and selfprotection, which is the very incentive to all trade. To say that a man is to trade freely, but that he is to stop short at any act which is calculated to harm other tradesmen and which is designed to attract business to his own shop, would be a strange and impossible counsel of perfection. But we are told that competition ceases to be the lawful exercise of trade, and so to be a lawful excuse for what will harm another, if carried to a length which is not fair or reasonable. The offering of reduced rates by the defendants in the present case is said to have been ‘unfair.’ This seems to assume that apart from fraud, intimidation, molestation, or obstruction of some other personal right in rem or in personam, there is some natural standard of ‘ fairness ’ or ‘ reasonableness ’ (to be determined by the internal consciousness of judges and juries), beyond which competition ought not in law to go. There seems to be no authority, and I think with submission that there is no sufficient reason, for such a proposition. It would impose a novel fetter upon trade. The defendants, we are told by the plaintiff’s counsel, might lawfully lower rates provided they did not lower them below a ‘fair freight,’ whatever that may mean. But where is it established that there is any such restriction upon commerce, and what is to be the definition of a ‘fair freight’ ? It is said that it ought to be a normal rate of freight, such as is reasonably remunerative to the shipowner. But over what period of time is the average of this reasonable remunerativeness to be calculated? All commercial men with capital are acquainted with the ordinary expedient of sowing one year a crop of apparently unfruitful prices, in order by driving competition away to reap a fuller harvest of profit in the future. And until the present argument at the bar, it may be doubted whether shipowners or merchants were ever deemed to be bound by law to conform to some imaginary ‘normal’ standard of freights or prices, or that law courts had a right to say to them, in respect to their competitive tariffs, ‘Thus far shalt thou go, and no farther.’ To attempt to limit English competition in this way would probably be as hopeless an endeavor as the experiment of King Canute. But on ordinary principles of law no such fetter on freedom of trade can in my opinion be warranted.” ²

Equally emphatic has been the endorsement which competition by underselling has received from the United States Supreme Court. The “long and short haul” clause of the Interstate Commerce Act fixed in the law the principle — long recognized as ethically and economically sound, but against which many railroads had trespassed — that under similar circumstances no greater freight charge should be made for a short haul than for a long one. The qualifying clause, “under similar circumstances,” was enacted in recognition of the fact that fair competition extending over wide areas must meet different communities with different charges for service. The only question was: what shall constitute unlike conditions under which charges, in effect necessarily discriminating, shall be justified ? It had already been recognized in the interpretation of the English Railway Act that the presence of a competing road at one station was sufficient justification for discriminating in favor of that locality, and against one where there was no competition, — although in other respects both localities were exactly similar in conditions.³ The same doctrine was stated by our own Supreme Court.⁴

Probably the most suggestive discussion of business competition which opens up the ethical and social issues of the subject has been by Mr. Justice Holmes, while upon the Supreme Bench of Massachusetts, before his elevation to the Supreme Court of the United States. “It has been the law for centuries,” says Mr. Justice Holmes, “that a man may set up his business in a country town too small to support more than one, although he expects and intends thereby to ruin some one already there, and succeeds in his intent. ... I have chosen this illustration partly with reference to what I have to say next. It shows without the need of further authority that the policy of allowing free competition justifies the intentional inflicting of temporal damage, including the damage of interference with a man’s business, by some means, when the damage is done not for its own sake, but as an instrumentality in reaching the end of victory in the battle of trade. In such a case it cannot matter whether the plaintiff is the only rival of the defendant, and so is aimed at specifically, or is one of a class, all of whom are hit. The only debatable ground is the nature of the means by which such damage may be inflicted. We all agree that it cannot be done by force or threats of force. We all agree, I presume, that it may be done by persuasion to leave a rival’s shop and come to the defendant’s. It may be done by the refusal or withdrawal of various pecuniary advantages which, apart from this consequence, are within the defendant’s lawful control.”⁵

All forms of competition in business which do not involve fraud, disparagement, or coercion are lawful. In applying this rule, the courts make no distinction in cases of large competitors or trusts. The reason for this rule lies in the firm conviction of the mass of men that such competition is ethically sound, and socially advantageous to the community. In a matter where, as Mr. Justice Holmes remarks, “it is vain to suppose that solutions can be sustained merely by logic and the general propositions of law which nobody disputes,” the greatest importance must be attached to the unquestioned sanction which centuries have placed on competitive underselling and agreements with factors.

Underselling in competitive localities, and factors’ agreements, apart from the size of the business of the trader who practices them, are innocent means of competition. A small flour - mill — to borrow an example from Professor Jeremiah W. Jenks — sells flour in its home town, Oswego, and also in Elmira, New York, Wilkesbarre and Scranton, Pennsylvania, and Phillipsburg and Dover, New Jersey. Outside its home town, in all these places it meets competition with the Minneapolis mills. Freight rates from Minneapolis to all these points are about the same, but freight rates from the small mill to these points differ widely. The problem set before the small miller is that which faces every business man who seeks to market his goods in several localities, some of which are competitive and some non-competitive. He must meet his competitors’ prices, freight included. If he is a sensible miller, he does not sell to all his customers at the same rate, adding to each the freight. Instead he sells at a different rate to each, fixing the rate at such a figure that with freight added the price of the flour delivered may be as low as his competitors’. This is underselling, — “ criminal underselling,” if you will, because the small miller sells his flour in competitive markets at a less profit than in the non-competitive home market. Yet, unless one advocates giving to the small miller the flour business of his home town and allowing the Minneapolis millers a monopoly in Elmira, Wilkesbarre, Scranton, Phillipsburg, and Dover, the thought of abolishing such underselling would be dismissed as absurd. So, too, the small miller might agree with his agents in these towns to allow them a commission for handling his flour exclusively. Unless one were ready to deny the right of a business man to contract for entire fidelity in his agents, the suggestion that this custom be forbidden would never occur. Such statutory prohibitions, indeed, have been included in the hasty drafts of several prominent anti-trust bills before Congress. It may be charitably assumed, however, that the prohibition of underselling and factors’ agreements, though they are but vaguely defined by those most conspicuous in advocating such prohibition, refers only to the practice of such methods by large consolidated businesses called trusts.

The truism that the law is no respecter of persons, which instantly occurs at this suggestion, is, for purposes of argument, laid aside. It would be beyond the present purpose to discuss the well-nigh insuperable difficulties, raised in the Federal Constitution, of prohibiting to a corporation, merely because of its size and prominence, the liberty to carry on business by competitive methods which the law has for generations most favored. Placing the subject outside its purely legal bearings, and considering it solely in its ethical relations: are these methods of competition, as they are practiced by businesses which are not trusts, morally warranted ? Are these methods of competition, as they are practiced by trusts against independent businesses, ethically justified ?

The ethics of business competition is an unexpressed code, evolved and made authoritative through centuries of business dealing. Philosophically stated, its bases are the essential facts that individuals must exist and tolerate one another’s existence, and the moral principles to which individuals feel themselves obliged to give effect. The first basis, with its defined cleavage between individual and social rights, has been shaped by the conditions of modern civilized life, and laid by experience. The second basis, consisting of irreducible moral obligations, has been laid by conscience. The code of trade competition is a structure that has been centuries building. The process by which it has been elaborated from these two fundamentals can be best understood by tracing the growth of any usage that boasts of a gentleman’s code. At the risk of introducing a new example into metaphysics, consider the game of baseball. A few of the official rules, and a large part of the playing usage, express the desire to score and to keep the other side from scoring. Bunts and sacrifice hits, drops, curves, and sacrifice steals to second while a runner is on third, are all authorized by the code as legitimate devices to win. “Spiking” a baseman, however, and surreptitiously changing the batting order and obstructing a runner on the base line are forbidden by the official rules, and condemned by the code. Timid casuists might conceivably deplore the spirit of deceit that inspires the pitcher’s curves and the runner’s steals to second. But the rugged common sense of the majority can distinguish the deceptions of base-running from the deception of surreptitious changes in the batting order. It is a sickly logic that would confuse the two, by ignoring the great fact that the wholesome desire to win must needs be indulged, if the game is to be continued a sport. Whoever plays baseball consents to innumerable deceptions, upon which he relies to his damage. Whoever plays football consents to personal violence which, though ultimately harmless enough, is temporarily sheer discomfort. Whoever boxes consents to be put in fear of imminent blows. Baseball is a conspiracy to deceive; football is organized battery; boxing is willful assault. Considered in themselves, all these acts are torts, — the plainest forms of deceit, assault, and battery. Indeed, in the vexation of defeat, unlucky players frequently suffer more than those who en dure legal injuries and recover therefor round damages. Nevertheless, within the limits fixed by the rules of the game and the code of gentlemen, these prima facie torts are justified by the legitimate desire to win. The code that excuses this degree of deception, assault, and battery, has never been questioned by the ethical sentiment of the community. Society has similarly learned, through centuries of experience, that business competition is necessary to the economic development of the individual and the economic welfare of the community. The mode of competition which most benefits the community, needless to say, is that which lowers the price to the consumer. The practice of underselling in competitive markets, since it directly accomplishes this end, is the most innocent mode of competition conceivable. The making of factors’ agreements, since it is merely a mode of extending a business, is as innocent as growth can be in any enterprise. These practices are sanctioned by the self-aggrandizing principle in the code of business ethics. They are also well within the limits fixed by the principle of moral obligation. The social conscience, like the spirit of sportsmanship, has placed limits on individual aggrandizement. Fraud and lying disparagement in trade, like secret changes of the batting order, are discountenanced. Physical coercion, like excessive violence in football, is forbidden. Other limits than these have not been fixed, for the same ethical reason that stealing bases and mystifying curves are not forbidden in baseball,— and for the infinitely more important reason that a considerable degree of individual freedom must be allowed, in order that the work of the world may go on.

As practiced by businesses which are not trusts, competitive underselling and factors’ agreements are seen to be ethically justified. Are they also justifiable when practiced by trusts against independent businesses ? Further than the difference in the size of the competitors, nothing can be suggested which would require the application of a new rule of competition. The divergence in the size of competing businesses effected by the rise of trusts during the last dozen years, great as it has been, has been immeasurably less than the divergence which occurred three generations and more ago, upon the rise of the factory system and the beginning of railroad construction. The master weaver, with his dozen or score of journeymen, competing with rivals of equally small establishments, was suddenly met by the competition of Lancashire mills, operated by power and employing several hundred operatives. The stagecoach line, with its half-dozen coaches, was confronted by the competition of the steam railroad, with its larger and more numerous coaches, its quicker service, and greater facilities. The unfortunate fate that overcame the master weaver and the stagecoach proprietor, in their unequal competition with larger rivals, very rightly aroused keen sympathy. The code of business competition, however, was not altered. Quickened though it was by sympathy, the moral sentiment of the community never confounded philanthropy with business ethics. In the midst of an economic change greater than any which had occurred for three hundred years, the ethics of trade competition endured no change. Indeed, until the comparatively small economic change of the past dozen years, these rules of business competition were never questioned. Laying aside the incongruity of urging at so unlikely an occasion a radical amendment of long settled business standards; and disregarding again the probable legal futility of enacting a new rule of competition that shall apply to large businesses but not to small concerns, the question becomes: does the code of business competition, permitting competitive underselling, demand revision when applied to the competition of large businesses against small businesses ?

Because of competitive underselling by the trusts, it has been urged, the independent dealer cannot sell his goods at a profit, and is accordingly forced out of business. By reason of sacrifice hits— to return to the baseball analogy— runs are scored, and the opposing team is beaten. Nevertheless, a suggestion that the stronger team be forbidden these tricks would be laughed out of mind. No team has the inherent right not to be defeated. No man has the special privilege, at law or in ethics, to be protected from competition, whether it come from a smaller or a larger rival. Conceivably, baseball could be played with the suggested change of rules; but it would cease to be a sport. Conceivably, business could be carried on after the suggested change in the rules of competition. Goods would then be sold by the trust at prices varying strictly according to their cost of production and transportation. The result would be, however, to create monopolies more uncontrollable than any modern trust. If the trust could make and transport its goods to its rival’s home territory cheaper than the independent concern, the small rival would be crushed. If the trust were unable to make and transport its goods to its rival’s home territory at a cost less than its rival’s cost of production, but could nevertheless make and transport goods to neutral competitive markets cheaper than the independent dealer, the small rival would enjoy the monopoly of his home market; and as a means of enabling himself to compete with the trust in neutral markets, he could raise the price at home as high as he dared. The only reason why a change in the code of business competition has been suggested is the alleged unfairness to the small dealer, and the apprehended oppression upon the community of monopoly, resulting from competitive underselling. The effects of this change would be either to wipe out the small concerns and to make the monopoly of the trust complete; or else to give the independent dealer the monopoly of his home market,the power to exclude the trust from neutral markets, and the opportunity to become himself a trust whose monopoly would be more oppressive upon the community than the old one. Common sense cries out against such an absurdly futile regulation. The assumption that competitive underselling and factors’ agreements are unfair, whenever practiced by the trusts against independent dealers, springs from prejudice or from thoughtless and short-sighted sympathy. Ethically it has no ground; practically it fails of its purpose.

At a time when the popular impulse is to impute dishonor to every operation of trust management, it is not extraordinary that even serious writers should be drawn unconsciously into the general denunciatory mood. No good can be accomplished, however, and much harm may be done, by judging the situation according to distorted and unwarranted standards. Whoever advocates the regulation of trust competition by prohibiting factors’ agreements and underselling in competitive markets, will seek in vain for any justification of his remedy in any accepted code of business competition. An affecting narrative may be made by heaping together instances in which trusts have undersold independent dealers and driven them from the market, — such as Miss Tarbell has collected in her history of the Standard Oil Company. But whoever seeks to infer from defeat, whether in athletics or in business, that his opponent was necessarily unfair, presumes too far on the credulity of his audience. Nor can the explanation that defeat was accomplished by selling goods in the territory of the independent dealer at a price below that which prevailed elsewhere bring home to the trust absolute proof of moral guilt. Only by appealing to distorted standards of business morality can this mode of trade competition be given the appearance of evil.

The admitted ills of trust promotion and internal management are considerable enough to require the undivided attention of students of the trust problem. The growth of trusts has not altered the economic principles and ethical code of business competition. So long as fraud, disparagement, or coercion is not practiced, free competition by underselling, by factors’ agreements, and by the other usual trade methods, is sanctioned by the law of the land and by ethics. To proclaim that trust competition makes necessary an amendment of the code of business ethics is to add an imaginary ill to the considerable list of real trust evils, and to darken counsel in a matter that greatly needs light.