Enforced Railroad Competition

THE main fabric of American railroad legislation rests on two principles, which are all but irreconcilable with each other: first, that carriers serving the same or adjacent territory must compete with one another; second, that rates for like and contemporaneous service under substantially similar circumstances and conditions must be the same to all comers, — that is to say, not competitive, — and that one city or territory must not be built up at the expense of another (long-and-short-haul clause); a process which is directly and naturally the result of competition. The Act to Regulate Commerce prohibits pooling, and the Sherman AntiTrust Law apparently makes every kind of trade agreement between persons engaged in the same kind of business an act of conspiracy, so that Congress has strongly affirmed the competitive principle; yet the 1906 revision of the commerce act makes it specifically impossible for a carrier to change its rates without giving thirty days’ prior notice to the Interstate Commerce Commission, unless the Commission exempts it by special action, an exemption which the commissioners have been very loath to give. This provision is, of course, along lines the reverse of competitive, since a thirty-day-notice cut-rate to move competitive traffic is about as effective a device as setting a tortoise to catch a squirrel. So the railroads are told with blunt plainness that they must compete, and are then immediately reminded that they must not.

The Sherman Anti-Trust Law of 1890 says definitely that every person who makes a contract or engages in any combination, in the form of a trust or otherwise, in restraint of trade or commerce, is guilty of a misdemeanor and subject to severe penalties, which have been made cumulative by subsequent court decisions; and eminent corporation counsel have expressed the opinion that it is technically impossible for two New York grocers in the same block to walk down the street together and agree on the price at which they will sell New Jersey eggs, without rendering themselves liable to fine and imprisonment, and to threefold damages payable to any other grocer whose business is injured by the reduction in price agreed upon. Thus the doctrine of individual competition is upheld with tremendous vigor, while trade agreement, or collective competition, is strongly repressed.

Are we, as a nation, correct in assuming that individual competition should be enforced by law,—and, whether it should be or not, can it be? These questions open up a very interesting field of economic discussion, which is of particular appropriateness in 1908, because we are apparently on the threshold of an era of sharp competition between railroads.

Broadly speaking, there has not been any severe railroad competition in the United States in a dozen years, while within that period, with overflowdng prosperity, and transportation facilities severely taxed by excess of traffic, has come the application of the Sherman Law to railroads, and the creation of the Elkins Law of 1903, and the Rate Law of 1906. The clear legislative tendency has been to incite the carriers to compete, but the carriers have been too busy, and have remained indifferent; now that traffic is slack and some of the conditions are present which foster competition, are we really sure that we desire it? And is it wise to leave on the statute books laws of such severity to enforce competition that no attempt is made to enforce the laws, except where some particular offense is singled out for chastisement ? Ever since the Northern Securities decision, and the ridiculous statement by the Attorney General that the government was not going to run amuck, the railroad systems and the great corporations have been living on sufferance; for all the limitation which can be found in the language of the law, there is scarcely one of them that does not possess the elements of trade restraint through combination.

It might be asked, with perfect justice, why we do not at once set about destroying our entire industrial fabric and reducing the manufacturing and transportation interests to primitive conditions, since our national attitude toward the principle of combination is so rigid; or, if we prefer efficiency in manufacturing and transportation to inefficiency, then why we do not so alter the laws as to admit the conditions that exist, and deal with them in a constructive, instead of in a destructive, manner. The question is a pertinent one; as Chancellor Day expresses it, “This new doctrine, that you can legislate unsuccessful men into success by legislating successful men out of success, is a piece of imbecility that does injustice to our twentieth century! ” Yet the whole fallacy of the Sherman Law originates in the national reverence for competition, and in the lack of clear thinking on the way competition works out, in its varying forms. As applied to the railroad situation in the United States, the discouraging fact about competition legislation is that it was given an exhaustive trial in England, fifty years ago, at which time certain truths were developed at great cost which, so far as we are concerned, need never have been developed at all, since we have not noted the relation of these truths to our own problems, but are proceeding independently, at still greater cost, to develop the same principles in this country.

Charles Francis Adams showed that it had always been the theory in England that the railroads ought to compete, until the commission of 1872 demonstrated that in the forty years since railroads began, English railroad legislation had never accomplished anything which it sought to bring about, nor prevented anything it sought to hinder. Thirtythree hundred useless enactments had cost the companies eighty million pounds, but the commission reported that competition between railroads existed only to a limited extent, and that it could not be maintained by legislation. The commission cited the case of the North Eastern Railway, formerly composed of thirty-seven independent, competing, and more-or-less bankrupt companies, but in 1872 (as to-day) prosperous and giving general satisfaction, and found that in view of such facts as this it was clear that amalgamation had “not brought with it the evils that were anticipated, but that in any event, long and varied experience had fully demonstrated the fact that, while Parliament might hinder and thwart, it could not prevent it, and it was equally powerless to lay down any general rules determining its limits or character.”

The attitude of British law toward the broad question of competition between the railroads of that country does not find particularly clear expression to-day, but the conservative work of the Railway and Canal Commission, which owes its existence to the parliamentary report just referred to, and the precedent of a long line of court decisions, make it quite apparent that the early lessons have had their effect. The working agreement recently proposed by the Great Northern and Great Central companies, which had competed extravagantly in almost identical territory in the eastern part of England, was not opposed on any broad lines of governmental policy. The arrangement amounted to a consolidation, to be brought about by the simple device of appointing the boards of directors of the two companies as a joint committee to manage both properties. This proposal was contested chiefly by certain other railroads because of its relation to their own special interests, and was refused by the Railway and Canal Commission (in which refusal the Commission was upheld by the Court of Appeal) for the purely technical reason that the original charter powers of the two companies did not provide for any such agreement. A working arrangement has been in force for three years between the London & North Western and the Lancashire & Yorkshire, and has been conspicuously successful, resulting in greater efficiency and economy of operation to the railroads and better service to the public. Curiously enough, though, when it comes to allowing a British railroad to control the tram-lines which compete sharply with it for suburban traffic, the law views the matter entirely differently. The thing is not even to be thought of.

In this country, control of street-railway lines by steam railroads has not yet appeared in politics outside the State of Massachusetts, and only to a limited extent there. The device by which the New England Investment and Security Company held the Massachusetts trolleylines which the New York, New Haven & Hartford bought, was sufficiently effective as a preventive of harmful competition, regardless of the somewhat technical question where actual control of these lines is vested.¹ But our national attitude toward consolidation of steam railroads which from their geographical location are presumed to be competitors, is perfectly uncompromising; so uncompromising that, practically speaking, it is unenforcible in its entire purview — like the Sunday liquor law in New York.

The disheartening thing about a law like this, whichever one of the examples we take, is the opportunity which it gives government to be unscrupulous. When the Duke of Alva was “ pacifying ” the Netherlands, in 1568, his Blood Council defined treason so broadly and in such loose terms that the expressly stipulated privileges of the Knights of the Golden Fleece, and the constitutional rights under the terms of the Joyous Entry, were not sufficient to save Count Egmont after Alva got his hands on him. Then, as if the intolerable edicts of the duke’s council were insufficient, a writ was actually issued from Rome, sentencing all the people of the Netherlands to death, on the heresy charge. The Duke of Alva did not really intend to execute all the people in the Netherlands, but it was very convenient for him to have authority to make such selections as he chose without undue formality.

This situation affords a pretty good historical parallel of the possibilities of governmental procedure against railroads and great industrial combinations under the Sherman Anti-Trust Law. There are few indeed of the railroad systems of the country that really know whether their skirts are clear of the entanglements of the law, as it has at present been construed; and it is hard to see how any large industrial company can avoid being a combination intrinsically in restraint of some other man’s trade, and hence illegal. To all intent, the government can exercise the widest choice in its selection of victims; a condition which gives opportunity for unlimited favoritism, and tends to inject a personal element into prosecutions.

The futility of the enforced-competition legislation, when actually carried out, needs but a single instance — the Northern Securities case. James J. Hill controlled the Great Northern Railway and was influential in the Northern Pacific, but these lines had no proprietary access to Chicago, coining no nearer to it than St. Paul, and Ashland, Wisconsin. The joint purchase of the Chicago, Burlington & Quincy by the Great Northern and the Northern Pacific, in 1901, was really designed primarily to afford a perpetually friendly route into Chicago, the absence of which had handicapped the Hill lines in securing what they considered a full share of transcontinental traffic. To thwart this plan, Mr. Harriman and his associates, as everybody remembers, began buying Northern Pacific in the open market in March, 1901, and actually got control of that property by a narrow margin, — the price of stock going from fifty-eight dollars a share to one thousand dollars during the process. Both parties saw the futility of cut-throat competition, however, and compromised the matter by forming the Northern Securities Company, which ultimately held a very large proportion of the capital stocks of the Great Northern and Northern Pacific. The Northern Securities Company was bitterly opposed in the Minnesota courts, and was dissolved by the United States Supreme Court in 1904, on the ground that it was a combination in restraint of trade.

Well, let us see what happened then. The Northern Pacific was the original bone of contention. The device of the Securities Company kept the Northern Pacific (and one half of a half-control of the Burlington) equitably poised between Hill and Harriman; the distribution required by the dissolution of the Securities Company by the Supreme Court decision was pro rata, and resulted in leaving an absolute monopoly of three companies in Mr. Hill’s hands, — the Great Northern (which he started with), the Northern Pacific (with which Mr. Harriman went into the Securities Company), and the Burlington, which had been divided between the Great Northern and the Northern Pacific.

The Northern Securities decision was widely heralded as a positive governmental affirmation of the principle of enforced competition, — but does it appear that any important reduction in monopoly was effected thereby? Apart from the technical result of the decision, Mr. Hill got absolute control of eight thousand miles of parallel and competing lines of which he previously shared control with Mr. Harriman. His monopoly in the American Northwest was strengthened, not weakened.

The original purpose of the Sherman Anti-Trust Law was undoubtedly to restrain manufacturing, rather than transportation, combination. Let us see what it accomplishes here.

It is a very ancient saying that competition is the life of trade, and there are few of us who cannot recall some special instance where we have reason to believe that, as consumers, we have been benefited by competition or inefficiently served because of the lack of it. It is generally possible to get better horses and carriages in a town where there are two livery stables than in a town where there is only one. The telegraph service, to-day, is unquestionably better than it was before the younger of the two great companies entered the field; the efforts of a tremendous group of daily newspapers to make individual reputations by getting the first news from all parts of the world have enabled us to know more about current happenings in Sweden and Japan and South Africa, than Florence knew of the affairs of Milan four hundred years ago. In every branch of manufacturing, efficiency and economy have been carried to lengths undreamed of in early days, simply because they had to be, if the products were to be marketed in competition with similar products made somewhere else.

But this competitive efficiency was not law-made; the law had nothing whatever to do with it. The law did not require Eli Whitney to invent the cotton gin, nor was it instrumental in producing the sewing machine, or the power-loom, or the steamboat, or the telephone. In the great preliminary steps of economic development it was scarcely a spectator, but now that this development has been carried on and on, under conditions of constant betterment from within and of constant pressure from without, the law fears that the great natural force of competition which brought all this about is going to vanish from the earth, and that the collectivism which tries to put production on a basis of assured profit is going so far that the great industrial combination will have the power to make its own terms with its customers, concerned not with efficient service, but only with the exaction of the last farthing. It has a certain justification for this fear in the obvious fact that in modern industrial development the chance of the small individual producer is constantly tending to become less, and it reasons from this that the opportunity of the consumer to buy cheaply is also disappearing. Hence the great combination should be thwarted at every turn; it should be fined to death, or taxed to death, or broken in pieces, and its place taken by a host of lesser producers, competing among themselves, and therefore necessarily content with small profits, and keenly awake to the chance to improve their efficiency and skill.

This is perhaps an acceptable outline of the point of view which underlies enforced-competition legislation; it is based on the entirely correct belief that competition, in one form or another, is responsible for most of our economic development, and that we should be badly off without it. But from this impregnable position it proceeds to two lamentable fallacies: first, that competition can be killed by combination; and second, that it can be maintained by legislation!

Just as soon as combination gets two or three or more competing streams of industry diverted into the same channel and attempts to raise prices it invites fresh competitors into the same field, and also stimulates invention and resourcefulness to provide substitutes. Sometimes one of these effects is produced; sometimes the other; sometimes both together. It follows, therefore, that the successful combinations are those which use their organization to effect economies which keep the distribution price of their products just a little too low to tempt outsiders. The four corners of the world are tied so tightly together nowadays by steam and cable that competition has a long arm: American meat and meat-products compete in Europe, not only with European producers but with Australia, New Zealand, and South Africa; Denmark and Devonshire place their dairy products side by side in the London market, with a slight advantage in favor of Denmark; and oil from Kansas and Texas must be sold at an extremely low figure in Calcutta if it is to compete with oil from Baku.

We have heard much about the “ Beef Trust” in the last few years, and a considerable element of the daily press has actually maintained with bitterness that a group of Chicago packing-houses could make prices for meat as high as they chose, in utter disregard of the fact that cattle, sheep, hogs, and chickens can be raised in every state in the Union, and that thousands of local butchers would be delighted to undersell the " trust ” if current prices were high enough to make it profitable. As a matter of fact, this omnipresent local competition is felt especially strongly in the provision business, and there is perhaps no other large industry where the margin of profit is smaller in proportion to the capital tied up. The net profit which a great packinghouse derives from buying a steer, slaughtering it, and selling the meat and the by-products is around two dollars, or approximately four-fifths of the commission which a banker gets for the combined purchase and sale of a bond,² with the important difference that the banker gets spot cash or marketable collateral to cover his capital expenditure, while the packing-house pays spot cash for what it buys, but has to carry an open account unsecured for what it sells. Yet the government has been so afraid of combination in this industry, and has taken such vigorous steps to prevent it, that the Chicago packers no longer dare meet together to settle details of mutual helpfulness.

The very fact of the ease with which competition takes place in the provision business accounts for the concentration of capital in the gigantic packing plants at Chicago, Kansas City, and Omaha. As in nearly every other manufacturing industry, concentration brings efficiency with it; every one of the by-products can be developed to the highest commercial degree, and profits are made, not by raising prices but by eliminating waste. There is no doubt that the small, independent butcher finds it harder to make a living than he would if the great plants were not able, by their efficient organization, to sell meat a thousand miles from where it is dressed, at the smallest fraction above cost; but there is nothing in this situation to cause the consumer uneasiness. It is possible to demonstrate the truth of this in a striking manner by means of the industrial statistics collected by the Bureau of Labor, not only in the provision industry, but in others which may be selected as highly organized.

Thus, if we take the average price of cattle for the years 1890 to 1899 as a base, represented by the figure 100, and the average price of dressed beef for the same ten years at the same base figure, the Bureau shows us that the packers, as the largest purchasers, paid 114.2 for their cattle in 1906, but sold the beef for 101.2 per cent of the base price. This is a very striking demonstration of the effect which a highly concentrated and much-attacked industry has had in keeping down the price of the finished product as compared with the cost of the material from which this product was worked up. And the figures can be carried further; for example, the price of sheep went from 100, in the years 1890 to 1899, to 132.6 in 1906, while the price of mutton went from 100 to 120.7, in the same period; the price of hogs, from 100 to 142.2, while the price of hams went only to 125.5, of bacon to 139.9 and of lard to 135.6. The price of all farm products (non-concentration of capital) was 28.6 per cent higher in 1906 than in 1898; the price of beefsteak (concentration of capital) rose only 14.2 per cent in the same period.

Much has been said about the “ Sugar Trust,” as representing an oppressive economic system, and the activities of this trust, along with all the others, are supposed to have become much more baneful in the last decade than in former times. Note, then, that the average price of sugar was 4.7 per cent less in 1908 than it was in 1901, and 3.1 per cent less in 1906 than it was in 1898. As regards the effect on prices which the Standard Oil Company has brought about, it is interesting to see that the price of crude petroleum, which the company buys, was 175.8 in 1906, as compared with 100, average of the 1890 to 1899 decade, while the price of refined oil, which it sells, was 131.8 in 1906. In the steel business, the price of Bessemer pig rose from 100 to 141.8 during the same comparative period; the price of rails rose only to 107.4. The reader will understand that these figures do not represent dollars and cents, but the percentage-cost of the commodity when the prices from 1890 to 1899 are compared with those for 1906.

It would be possible to cite many more examples illustrating the tendency of raw materials and manufactured articles representing no concentration of capital to increase in price faster than those articles produced by concentration of capital and the supposed elimination of competition. To take a few illustrations at random: candles (concentration, noncompetitive) were 2 per cent cheaper in 1906 than in 1890-99; axes (non-concentration, competitive) were 43.1 per cent dearer; hides (raw material, competitive) rose in price 64.7 per cent; leather (concentration of capital, reduced competition) increased 20.4 per cent.

The government, in its arraignment of the Standard Oil Company, admitted freely that the combination has not made prices burdensome, but argued that it might have made them cheaper. It seems only necessary to ask why it should have made them cheaper, with the cost of labor and of raw materials tending almost uniformly upwards. The opinion may at least be hazarded that the Standard Oil Company would long ago have been defeated in a battle against the impossible if it had attempted to force its current prices so high as really to tempt competition, — which is another way of saying that the price of oil, if produced under conditions of small individual manufacture, would not be any less than it now is. As regards the special advantages which are charged against great corporations, — rebates, and the power to shut out local competition by temporarily underselling, — it is not necessary at present to discuss the rather technical question whether these advantages are fair or unfair, in comparison with the ordinary trade methods of free competition. The point is that you cannot, as alleged, achieve greatness with these methods; you must start with greatness in order to achieve the methods! When railroads and steamboats and oil companies used to drive one another out of business by underselling, it was not necessarily the wickedest company which came out ahead; it was the best organized company.

Now observe where the Sherman Law has led us, while we have been digressing! Does the wickedness of the great combinations lie in their efficiency in obtaining rebates (that is, wholesale rates) for transportation ? Perhaps it did so lie, prior to the Elkins Law, — it depends largely upon one’s definition of wickedness, — but rebates are essentially a competitive device, and the enforcedcompetition doctrine can have no quarrel with them. In what, then, do the great combinations so offend as to bring upon themselves the Sherman Anti-Trust Law, the law of enforced competition ? Besides their former ability to obtain privileged transportation, they have only two other advantages over the small producer: one is efficiency — the ability to buy more advantageously, to manufacture at a less cost per unit, to sell in a wider market; the other is the power to undersell local territory and spread the cost over world-wide territory, or else charge it to profit and loss.

Theoretically, the power to undersell small competition and drive it out of business, is accompanied by the subsequent power to make prices far higher than the small competitor would have made them; practically, it does not work that way, because the effect of the high prices would be to attract to the field a host of competitors, big and little, who would continue to charge the citadel of the monopoly over the fallen bodies of the vanquished until the monopolistic ammunition gave out. The Bureau of Labor unit-costs, quoted above, afford concrete illustrations of the attitude of the largest industrial organizations in the country; these organizations tend to keep prices stable, but to lower, rather than raise them, in comparison with the cost of the raw materials they purchase.

If the great corporations offend because they are efficient, we must logically commend small enterprise because it is inefficient; if they offend because they undersell, we must praise the local manufacturer who is unable to undersell. Manufactured articles we must have; therefore we must buy them from the concern which is inefficient and weak, since the law forbids combination for purposes of strength and of efficiency. Does anybody suppose that this is going to benefit the consumer?

Probably nobody believes so, — and yet everybody feels the force of the liverystable argument, mentioned above, or recalls some similar instance where he has seen competition work wonders, and he fears that the great corporation is going to remove competition from the earth. After all, the difficulty between the citizen who fears the “ trusts,” and the citizen who believes in them, is largely a matter of definitions. Fundamentally, it is impossible so to define the word trust as to make it akin to our purpose at all; but if we spell it with a capital and give it the duty which the newspapers assign to it, we should suppose that the timorous citizen, and his representative, the Sherman Law, would define it somewhat as follows : —

Trust: a combination of corporations which is in restraint of trade, eliminates competition, and oppresses the consumer by charging him higher prices than would otherwise prevail.

On the other hand, the courageous citizen, who has done some thinking on his own account, and is not afraid of trusts at all, succeeds in locating the difference between the Standard Oil Company and the un-competed-with livery stable by creating for himself a definition something like this: —

Trust: a combination of corporations to increase efficiency, which, by means of this efficiency, reduces competition by sellingmore cheaply than any but the most efficient of its competitors can sell.

But it may be presumed that the Sherman Law, in lending its support to the former rather than the latter of these definitions, seeks to establish not a weak and futile competition but a strong one, and that it takes the point of view that a group of efficient concerns seeking the same market will make the consumer’s prices lower than will a single immense combination, governed rather by potential than by actual competition. The theory is an attractive one, but it is hard to find much concrete support for it. George Stephenson said two generations ago, when corporate development was in its infancy, that where combination was possible, competition was impossible, and the principle thus laid down has been receiving new application and expression every year. It is easy to find instances of severe sporadic competition which has served, for a brief time, to bring selling cost down to a point below the cost of production; but such a condition never lasts long before the weaker competitor is absorbed or driven to the wall, and the prices which the consumer derives from this process are so unstable that the retailer hesitates to carry goods in stock, while the recouping period which follows a struggle is apt to have its effect on qualities as well as prices.

These remarks apply to industries which are of such nature that they are naturally and readily subject to competition. But when the Sherman Law includes railroads in its purview, it is attempting to deal with an industry which is naturally monopolistic. It is more or less generally recognized that the effects of competition fall short of any usefulness in certain public-service enterprises. Nobody saves telephone bills by living in a city which is served by two or three competing telephone companies. Even if the toll-rate is low, two or three cheap services cost more than one dear one, and a business man must have them all. This is a case where monopoly is convenient to the consumer; a street railway in a crowded district usually furnishes a case of monopoly which is inevitable. The clearest thinkers in all countries now concede that regulation furnishes a better solution in safeguarding the public welfare than competition does, throughout a fairly longlist of what are generally termed publicservice enterprises. The most conservative of these thinkers believe, probably without so much as raising the question in their own minds, that police forces and sewer systems are branches of the public service which can best be provided for by the municipality itself. It is also quite universally conceded that the control and supply of a city’s drinking water ought to be a regulated monopoly rather than a competitive industry. There is difference of opinion whether better service is obtained from waterworks owned by private capital or from waterworks owned by the municipality, but this point is alien to our discussion.

Further down on the list come lighting and heating plants, telephones, and street railways. We do not want warfare between the companies supplying us with gas or electricity, involving fluctuating rates and large liability of interruptions to service because of wars and receiverships; we want regular, undisturbed service. The reason why competitive telephones are undesirable has already been stated. As regards street railways, competition under any circumstances must be of very limited extent, because the company first on the ground will always have secured the best routes, at least for a term of years, and it is not generally either feasible or desirable for two companies to operate on the same street. Where competition in one form or another does exist between street railways in the same town, it may be taken for granted that transfer privileges will not be liberal, that traffic will be interrupted, and that the disadvantages attendant upon the operation of a bankrupt or financially embarrassed company will tend to crop up with considerable frequency Cleveland has been giving an illustration, for some five years, of the practical disadvantages arising from street-railway competition in a busy city, these disadvantages including tracks torn up in midnight warfare, abolition of transfer privileges between competing lines, failure to run through services to important points, such as railroad stations, and the like.

It must be said in all frankness that in former days, when street railways were given franchises freely, and very little was required of them, the results to the public were extremely good, and there is reason for expressing doubt that the present tendency to scrutinize franchise privileges with extreme care and to reduce streetrailway fares by franchise contracts is going to work as well. The average citizen would rather go over the whole city for five cents than be able to go over only half of it, even if he can get over that half for three cents; and capital has little inducement to build extensions to meet the city’s growth in such places as Cleveland, Detroit, or the Canadian cities and towns where much is being asked of the street railways and little is being allowed them in the way of opportunities to earn. But even in the cities where the street railways have been most harassed, competition has not been advanced in good faith as a permanent way of bringing about better service, and in cities where street railways have been able to keep out of local politics, nobody advocates it at all.

The steam railroads have given ample demonstration that nobody gets any permanent profit from cut-throat competition between them. In the ten years when the general competition in this country was most severe, say from 1870 to 1880, the shipper might get an exceedingly low rate on a competitive transaction, but was quite sure to get an exceedingly high one to compensate for it on a transaction in noncompetitive territory. At all events, he never knew six months, or even one month, ahead, what his rate was going to be, and the uncertainty attendant upon this state of affairs worked a great deal of harm and resulted in a thousand forms of discrimination, intentional and unintentional, on the part of the railroad. Moreover, the lines which felt the competition most were in wretched physical condition, and were unable to better themselves. This was particularly true in the South. Albert Fink pointed out that, in the rate wars prior to the formation of the Southern Railway and Steamship Association, gross earnings of the southern railroads were reduced about 42 per cent below what regular rates would have allowed; an amount in many cases equal to the whole net earnings which could have been derived from the competitive business at the regular rates, so that the business was really unprofitable, and the roads were, in consequence, practically worthless to their owners. In 1876 a committee of the stockholders of the Central Railroad & Banking Company of Georgia reported; “It is conceded that the property of your stockholders is on the brink of being sunk forever, and the bankruptcy of a number of your roads is imminent, if not even now a fact.” Of course, roads in this condition could not afford to make their facilities better or to give their country a better service in any way. They had no surplus net earnings for betterment work, and nobody wanted to buy their securities. It was not until the great consolidations like the Southern Railway, the Atlantic Coast Line, and the Seaboard Air Line got the situation well in hand that the South began to have a decent railroad service. Prior to that time, the best and strongest companies always had to compete with the bankrupts; a process which does no good to a well company or a sick company, or to the territory which either of them serves.

S. W. Dunning, with his long experience as a close observer and critic of railroad affairs, used to say that the people who built the West Shore Railroad did more harm and caused greater destruction of property than they would have done if they had gone around burning barns all along the route; and this simile portrays pretty well the workings of unrestricted competition. The shipper gets a high rate one day, a low one the next, and confronts a constant tendency on the part of the hard-beset railroad company to “scamp ” its work; the railroad company works at cost in one locality and on a basis of exorbitant profit in another, and engages in a long struggle with bankruptcy, while the investor realizes that he has made a mistake, and resolves to keep out of such enterprises in the future, or else to require an extremely high potential return on his investment.

This, in brief, was the effect upon railroads and upon the interests they served, in the period of maximum free competition. The particular harmfulness of this kind of competition to railroads arises from the fact that the capital invested in them must perform its work just where it is, no matter how great the disadvantages, so that the bankrupt that has given up trying to pay fixed charges has powers of harmfulness almost unlimited. It is surely to our discredit as an intelligent people that we should try to maintain this kind of free competition by law!

The odd fact about the present activity in enforcing the Sherman Law is that it comes at a time when everybody has been enabled to observe that, in practice, great corporations and great railroad combinations do not operate to force rates up. People ought not to be afraid of bigness in concerns any longer, and they ought not to cherish the illusion that they really want to be served by small concerns doing business at a loss. The cheaper a given service can be performed, the less people are going to have to pay for it, in the long run, and it has been shown over and over again that consolidation means efficiency, and that sharp competition means waste; also, that the cost of killing the loser and buying his useless plant must be borne by the winner’s customers. Competition means duplication of facilities for doing the same work, and the theoretic economic loss of this duplication is habitually converted into a practical loss either in dollars or in efficiency, with a rapidity which far outstrips many of the economic processes that rejoice in our full belief and confidence.

There has been no more curious result of our enforced-competition legislation — a result surely not looked for by the lawmakers — than the unsympathetic attitude of the law towards small dealers organized to prevent big concerns from underselling them. Here we have a temporary industrial combination fighting a permanent industrial combination, and the law sides with the permanent one, and finds the little fellows guilty of conspiracy! This has been exemplified in the opposition to the mail-order houses in the West; in the case of the National Druggists’ Association, etc. In the drug trade, the owners and manufacturers of certain proprietary medicines sold their goods to jobbers under an agreement that certain “ aggressive cutters,” principally large department stores, should not be allowed to receive these goods from the wholesalers at any price. These “ aggressive cutters ” had been accustomed to act as wholesalers, in buying very large consignments at best prices, and then selling at retail at cost or below, charging off loss to the advertising account. The sale of some well-known “ household remedy ” for seven cents or thirteen cents below the prevailing price was, of course, a strong drawing card, but the process devastated the business and the reputations of the small retailers, who were the manufacturers’ best steady customers. It was to protect these people that the manufacturers and jobbers agreed, in substance, to blacklist retail firms that would not maintain prices as per schedule. Of course this was readily proved to constitute a combination in restraint of trade, within the meaning of the Sherman Law, and the manufacturers were prosecuted by the government and enjoined from carrying out their agreement.³

Now, a big department store is not.

technically, a combination, because it does not illustrate amalgamation of a group of industries which might in the eyes of the law be regarded as natural competitors. But it is, in point of fact, a very effective grouping of capital, and its organization is such that it possesses nearly all the working characteristics of a “trust,” in action. The law was perfectly consistent in finding that a group of small individual producers were banded together in restraint of trade; but the application of the law, without regard to its theory, was to protect the large, permanent aggregation of capital against the temporary attack of small concerns joined together in what is sometimes called antagonistic coöperation, for protection against a common foe. Competition was continually present, in one form or another, between the units of capital making up the wholesale druggists’ combination; it was conspicuously lacking between the units of capital making up the department-store organization; yet the technical position of the department store was impregnable.

If we agree that the outworking of this case was not precisely in line with what the framers of the law intended, we are probably safe in concluding that the intense criminality of the two grocers who confer on the selling price of eggs, and the technical uncertainty as to the legality of nearly every manufacturing concern in the country, formed by a process of consolidation, would also surprise the lawmakers of 1890. If it is really true that all common control of parallel railroad lines is in restraint of trade, which of our great systems is exempt from disintegration ? And suppose that this disintegration really can be effected, — who is the gainer thereby ? In the days when the coastwise steamers could beat the railroad trains down the coast, because of the handicaps of bad connections, different gauge, and lack of friendly coöperation, due to rivalry, we had an advance illustration of the perfect fulfillment of the laws of enforced competition.

Many conservative people will concede, without argument, the contention that excessive competition, with its bankruptcies, its discouragement of new enterprises, and its constant incentive to discrimination, is undesirable; but they feel, nevertheless, that a condition where competition is entirely absent would be worse. Granting that it would be, does not the weakness of the Sherman Law lie in the fact that it overlooks the constant working of potential competition? Apart from its direct effects, giving the strongest inducement to industrial combinations to keep prices at a figure where they will not serve as a constant temptation to new comers, potential competition finds constant exemplification in the principle of “ charging what the traffic will bear.” It has often been pointed out that the common interpretation of this principle is wrong. In the language of W. M. Acworth, charging what the traffic will bear is not the same thing as charging what the traffic will not bear! A certain New England railroad has made a rate on pulp-wood which, in itself, would barely pay for coal and train-crew’s wages. It does this in order to open up a new territory, so remote from the market that the pulp-wood which it produces cannot be sold at all unless the railroad rate is carefully adjusted with this in view. This road does not get its profit from the pulpwood traffic; it gets it from opening the territory to mills, farms, and minor manufactures, with coal and materials to be hauled in, and some little general traffic to be hauled out, besides the staple. It has accomplished this by charging only what the traffic will bear.

This is a single instance of countless cases where railroads and industrial combinations alike have to determine the rate at which they can make the most profit; and it has again and again been proved that it is better in all industries to do a tremendous business at a very small margin of profit than to do a very small business at a large margin of profit! In parallel efforts to reduce prices for the consumer, the Sherman Law has always to compete with the forces of enlightened selfishness, and enlightened selfishness is continually successful, while the Sherman Law has never succeeded at alt!

It should not be inferred from this argument that the writer believes that railroads and industrial combinations should be free of regulation in the public interest. Certain police powers are just as necessary to the national government as they are to a municipal government; certain kinds of corporate conduct, such as the practice of giving rebates to favored shippers, may certainly be determined to be contrary to public policy without violation of economic laws. But the attempt to confer a public benefit by requiring universal competition in place of consolidation is just as absurd in theory as it is unattainable in practice.