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Modern Economic Problems by Frank Albert Fetter

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But in a number of cases, very early, groups of men came to have
certain interests in common and certain possessions. Gradually some
such groups gained more or less of legal recognition, with certain
political and economic rights as a body and not as individuals.
Thus evolved the conception of a "corporation" (body) having men as
"members," an artificial person, yet not the same as any one or as all
the individuals together, and legally distinct from the individuals.
A group of burghers obtaining a charter from the lord of the realm
became a municipal corporation; a group of teachers, a _collegium_,
became the corporation of the college or a university (a number of
persons united into one association); a group of craftsman became a
gild-corporation. Each corporation had certain rights, privileges, and
immunities, and used a corporate seal as a signature. All of the early
corporations had some economic features that were incidental to the
main purposes, which were political, ecclesiastical, educational,
and fraternal. Toward the end of the Middle Ages groups of traders
obtained charters to act as corporations permanently for business
purposes, such as foreign trade, colonization, and banking. These
increased in the sixteenth and seventeenth centuries, and in the
eighteenth century this form of organization was adopted also and
parliamentary charters obtained, by groups of men for building
turnpikes and canals and for carrying on other kinds of business.

Sec. 2. #The modern era of corporations#. The great era of the
corporations did not begin, however, until well on in the second
quarter of the nineteenth century. Then, both in Europe and in
America, the corporate form of organization was extended to a greater
number, and to other kinds, of enterprises. It proved itself to be
well adapted to enterprises for the construction and operation of
canals and railroads, requiring a larger amount of capital than
usually could or would be risked by one person. The investor in a
corporation bought shares, and his liability for debts and losses
was limited by charter to his share capital. It is an advantage that
permanent enterprises of that kind are owned by corporations
with charters perpetual or for long periods. It is possible for
corporations to make investments running for longer periods than would
be safe for individuals. The corporation with an unlimited charter
has legally an immortal life. Sale and change of management are not
necessary on the death or failure in health of any one owner. As the
factory system and large production developed, the corporate form of
organization was found to have these same advantages in manufacturing.
It appeared in textile, iron, mercantile, and other industries. After
1865 the corporate form of organization increased at a cumulative
rate, until now it is applied to many enterprises of small extent and
local in operation. There are 300,000 corporations making returns
to the United States Commissioner of Internal Revenue.[1] There were
70,000 manufacturing corporations, which were 26 per cent of the whole
number of manufacturing establishments, but which employed 76 per cent
of all wage earners and turned out 79 per cent of the whole product.

Sec. 3. #Beginning of corporation problems.# With the corporations
came "the corporation problem," a single name for a complex of
problems--legal, political, moral, and economic--which arise out of
the relations of corporations to their individual stockholders, to
their employees, to the state, to the general public, and to their
competitors in business. The problems differ also in corporations of
different sizes and in different businesses. We shall discuss in
this and succeeding chapters but a few of the larger aspects of the
corporation problem, the railroad, the industrial trust, and certain
other kinds of monopolistic industry.

Of the various forms of corporations, banks first presented problems
calling for economic legislation and regulation. This is explained by
the fact that it was the first kind of business corporation to become
important, and further by the fact that its work was in various ways
closely connected with the coinage and regulation of money, which had
already become a governmental function. The railroad was the form
of corporation next in point of time to become a great problem; this
because of the peculiarly vital and far-reaching effects that such
railroad transportation has upon all other kinds of business in the
community, as appears in what follows.

Sec. 4. #The era of canals.# Canals were used in the ancient empires
for irrigating, for the supplying of cities with water, and for
navigation. In the late eighteenth and the early nineteenth centuries
they were rapidly built in England and America. Six canals had been
built in the United States before 1807, but the "canal-era" in America
dated from the beginning of work on the Erie canal in 1817, and
continued until about 1840, when nearly all new work ceased; over 4000
miles of canals had been built at a cost of $200,000,000.

The great advantage of canals is cheapness of operation due to the
simplicity of the machinery needed and to the great loads that can be
moved with small power. A cent a ton-mile proved to be a paying rate
on a small canal. For heavy, slow-moving freight, a railroad can even
now barely rival a parallel canal at its best. As canals, however, can
be built only along pretty level routes and where the water supply is
at high level, their construction is limited to a small portion of the
country. The principle of diminishing returns applies strongly to
the construction of canals; the first canals in favored locations
are easily constructed and economically operated, but it is only
with greater cost and difficulty that the system can be successively
extended. In temperate climates the use of canals is limited by ice
to a part of the year, and by the summer's drought sometimes still
further. At its best, therefore, the small land-locked canal is fitted
only to be a supplementary agent in the system of transportation
wherever another transportation agency of higher speed and greater
regularity is possible. Far different is the case of the oceanic canal
in a tropical climate.

Canals do not appear to have developed any serious problems calling
for public regulation of rates. A first simple legislative act fixing
the rate of tolls for boats was sufficient. Charges were made by
distance as on a toll road and the boats were owned by different
private shippers or by common carriers among whom competition

Sec. 5. #Rapid building of American railroads#. The canal was just
reaching the peak of popular favor when the railroad in 1830, after a
half-century of slowly accumulating technical improvements, burst into
view as a demonstrated success as a means of transportation.[2] The
railroad excels in adaptability any other agent of transportation; it
can go over mountains or tunnel through them. It is markedly superior
in certainty; it may be blocked for a day or two by floods and snows,
but it suffers no seasonal stoppage of traffic. In speed, even the
early railroad so far excelled that the canal could survive only by
dividing the traffic, taking the lower grades of freight, and leaving
to the railroad the passenger traffic and fast freight. Even in
respect to cheapness, the unique virtue of waterways in favored
localities, the railroad made rapid gains. Improvements in roadbed,
rails, cars, engines, and other equipment soon reduced greatly the
cost of conducting traffic on the main lines of roads. Because of
these qualities railroads soon surpassed in importance every other
agency of internal transportation. The miles constructed and miles in
operation in the United States, by decades since 1830 were as follows
(route mileage, not counting double tracks and sidings):

Miles constructed Total route miles
in decade. in operation.

1830 ........................ 23 23
1840 ........................ 2,795 2,818
1850 ........................ 6,203 9,021
1800 ........................ 21,605 30,626
1870 ........................ 22,296 52,922
1880 ........................ 40,345 93,267
1890 ........................ 73,924 167,191
1900 ........................ 31,773 198,964
1910 ........................ 51,028 249,992
1915 (5 yrs.) ............... 13,555 263,547

The extension of railroads was so rapid that there was not time for
a gradual adjustment of industrial conditions. In many places the
resulting changes were revolutionary. The building of railroads in
the Mississippi valley in the seventies lowered the value of eastern
farms, ruined many English farmers, and depressed the condition of
the peasantry in all western Europe.[3] With the lower prices that
resulted when the fertile lands of the western prairies were opened
to the world's markets, the less fertile lands of the older districts
could not compete. Many other changes, of no less moment in
limited districts, resulted from the building of railroads. Local
trading-centers decreased in importance. Villages and towns, hoping
to be enriched by the railroads, saw their trade going to the cities.
Commerce became centralized. Enormous increases of value at a few
points were offset by losses in other localities.

Sec. 6. #Reasons for governmental aid#. The growth of railroads in
America was more rapid than in any other part of the world, but it
did not occur without much help to private capital from governmental
agencies. The railroad enterprise was uncertain, the possibilities of
its growth could not be foreseen, and private capital would not invest
without great inducements. In European countries the railways were
built through comparatively densely populated districts to connect
cities already of large size. Yet railroad extension was very slow
there, even tho the states in many ways aided the enterprises. America
was comparatively sparsely populated, and most of the railroads were
built in advance of and to attract population, business, and traffic.
In many cases railroad building in America was part of a gigantic
real-estate speculation undertaken collectively by the taxpayers of
the communities.

Sec. 7. #Kinds of governmental aid#. American states recklessly abandoned
the policy of non-interference, and vied with each other in giving
railroad enterprises lands, money, and privileges, in loaning bonds,
in subscribing for stock, and in releasing from taxation. These
fostering measures were expected to increase wealth and to diffuse a
greater welfare through the community. Many states were forced to
the point of bankruptcy by their reckless generosity, and some states
repudiated the debts thus incurred.

The national government then took up the same policy and granted lands
to the states to be used for this purpose. The first case of this kind
was the grant to the Illinois Central road, in 1850, of a great strip
of land through the state from north to south. Grants were made in
fourteen states, covering tens of millions of acres of land. Then the
national government, between 1863 and 1869, aided the building of the
Pacific railroads by granting outright twenty square miles of land for
every mile of track and by loaning the credit of the government to
the extent of fifty million dollars,--a debt which was settled by
compromise only after thirty years.

Counties, townships, cities, and villages then entered into keen
competition to secure the building of railroads, projected by
private enterprise. Bonds, bonuses, tax-exemptions, and many special
privileges were granted. To obtain this new Aladdin's lamp, this great
wealth-bringer, localities mortgaged their prosperity for years to
come. The promoters bargained skilfully for these grants, playing off
town against town, cultivating the speculative spirit, punishing the
obdurate. Not the civil engineer, but the railroad promoter determined
the devious lines of many a railroad on the level prairies of America.
The effects of these grants were in many cases disastrous, and after
1870 they were forbidden in a number of states by legislation and by
constitutional amendments. But before this era of generosity ended,
probably the railroads in America had received more public aid than
has ever been given to any other form of industry in private hands.

Sec. 8. #Emergence of the railroad problem#. In most charters and laws
authorizing the building of railroads, either nothing was specified
regarding rates, or maximum rates were fixed which proved to be so
high that they were of little, if any, practical effect. But very soon
began to appear some serious evils in the policy of railroads toward
the shipping and traveling public in matters of rates and of service.

As the ownership of the wagons, ships, and canal-boats of a country
is usually divided, ocean ports and points along the lines of
turnpikes and canals enjoy competition between carriers. In the early
days of the railroads it was believed that a company or the government
would own the rails and charge toll to the different carriers, who
would own cars and conduct the traffic as was done on the canals.
Experience soon showed the impracticability of this scheme and the
need of unified management. An operating railroad company, therefore,
has a monopoly at all points on its line not touched by other
carriers. This, like any other monopoly, is limited, for the railroad,
to secure traffic, is led to meet competition of whatever kind--that
of wagons, canals, rivers, or of other railroads--wherever it occurs.
The railroads in private hands early began to "charge what the traffic
would bear," high where they could, and low where they must, to get
the business. Thus developed the various forms of discrimination which
are now to be described.

Sec. 9. #Discrimination as to goods#. Discrimination as to goods is
charging more for transporting one kind of goods than for another
without a corresponding difference in the cost. When reasonably
understood, this proposition does not apply to a higher charge for
goods of greater bulk, as more per pound for feathers than for iron,
the "dead weight" of car being much greater in one case than in the
other. It does not apply where there is a difference in risk, as
between bricks and powder, or coal and crockery; nor where there is a
difference in trouble, as between live stock and wheat. Any difference
that can reasonably be explained as due to a difference in cost is
not discrimination; on the other hand a difference in cost without a
difference in rate is discrimination. Discrimination as to goods may
be by value, as low rates for heavy, cheap goods, and high rates for
lighter, valuable ones. Coal always goes at a low rate as compared
with dry goods, and sometimes more is charged for coal to be used for
gas than for coal to be used for heating purposes.

Railroad discrimination so frequently has resulted in injustice to the
shipping public that the term has taken on an evil significance. But
it is well to observe that the word discrimination is not derived from
_crimen_ (crime), but from _discernere_ (to discern). There are
both reasonable and unreasonable forms of discrimination. In
general discrimination as to goods more often appears, under certain
conditions and made with due regard to the public interest, to
be reasonable; less often to be justified is the form of local
discrimination, next to be described; and least often of all to be
justified is the last named form of personal discrimination.

Sec. 10. #Local discrimination#. Discrimination between places (called
also local discrimination) is charging different rates to two
localities for substantially the same service. This occurs when local
rates are high and through rates are low; when rates at local points
are high and at competing points are low; when less is charged for
shipments consigned to foreign ports than for domestic shipments;
when, more is charged for goods going east than for goods going west.
The causes of local discrimination are: first, water-competition,
found at great trade centers such as New York and San Francisco;
second, differences in terminal facilities, making some places better
shipping-points than others; third, competition by other railroads,
which is concentrated at certain points, only one tenth of the
stations of the United States being junctions; fourth, the influence
of powerful individuals or large corporations and the personal
favoritism shown by railroad officials.

The effects of local discrimination are to develop some districts and
depress others; to stimulate cities and blight villages; to destroy
established industries; to foster monopolies at favored points; and to
sacrifice the future revenues of the road by forcing industry to move
in the competing points to get the low rates. The power of railroad
officials arbitrarily to cause rates to rise or fall is happily
limited in practice by the need of earning as large and as regular
an income as possible, but even as exercised it has been at times as
great as that possessed by many political rulers.

Sec. 11. #Personal discrimination#. Discrimination between shippers
(personal discrimination) is charging one person more than another for
substantially the same service. This most odious of railroad vices,
rarely practised openly, is done by false billing of weight, by
wrong descriptions or false classification to reduce the charge below
published rate-sheets, by carrying some goods free, by issuing passes
to some and not to all patrons under the same conditions, or by
donations or rebates after the regular rate has been paid. In some
cases a subordinate agent shares his commission with the shipper, and
the transaction does not appear on the books of the company. In other
cases favored shippers are given secret information that the rate is
to be changed, so that they are enabled to regulate their shipments to
secure the lower rate.

One group of reasons for personal discrimination is connected with the
interests of the road. It is to build up new business; it is to
make competition with rival roads more effective by favoring certain
agents, as was very commonly done in the Western grain business; it
is to exclude competition, as by refusing to make a rate from a
connecting line or to receive materials for a new railroad which is
to be a competitor; and it is to satisfy large shippers whose power,
skill, and persistence make the concession necessary. Another group of
reasons has to do with the interests of the corporate officials. It is
to enable them to grant special favors to friends; or it is to build
up a business in which they are interested; or it is to earn a bribe
that has been given them.

The evils of personal discrimination are great. It introduces
uncertainty, fear, and danger into all business; it causes business
men to waste, socially viewed, an enormous fund of energy to get good
rates and to guard against surprises; it grants unearned fortunes and
destroys those honestly made; it gives enormous power and presents
strong temptations to railroad officials to injure the interests of
the stockholders on the one hand and of the public on the other.

Sec. 12. #Economic power of railroad managers.# Other evils of
unregulated private management of railroads appeared. When the
railroad was a young industry, it was thought to be simply an
iron-track turnpike to which the old English law of common carriers
would apply. This and similar notions soon, however, proved illusory.
It was seen that the higher railroad officials had, in the granting
of transportation service and the fixing of rates, a great economic
power. They had complex and sometimes conflicting duties to
the stockholders and to the shipping public. They wore their
conscience-burdens lightly, before the days of effective regulation,
and frequently made little attempt to meet the one and no attempt
whatever to meet the other obligation. The opportunities for private
speculation brought to many railroad managers great private fortunes.
There were no precedents, no ripened public opinion, no established
code of ethics, to govern. It was a betrayal of the interests of
the stockholders when directors formed "construction companies" and
granted contracts to themselves at outrageously high prices. It was
an injury not only to shippers, but also to the stockholders, when
special rates were granted to friends and to industries in which the
directors were interested. In general, however, the interests and
rights of the stockholders were more readily recognized than
were those of the public. A railroad manager is engaged by the
stockholders, is responsible to them, and looks to them for his
promotion. Hence their interests are uppermost whenever the welfare
of the public is not in harmony with the earning of liberal dividends.
The managers long felt bound to defend the principle of "charging what
the traffic will bear" in the case of each individual, locality, and
kind of goods, even if this ruined some men and enriched others, and
if it destroyed the prosperity of cities to increase the earnings of
the road.

Sec. 13. #Political power of railroad managers.# Likewise in various ways
railroad managers may exercise great political influence and power.
Some writers maintain that the power to make rates on railroads is
a power of taxation. They point out that if rates are not subject to
fixed rules imposed by the state, the private managers of railroads
wield the power of the lawmaker. By changing the rates on foreign
exports or imports, the railroads frequently have made or nullified
tariff rates and have defeated the intention of the legislature.
High rates on state-owned roads in Europe have been used in lieu of
protective duties. These facts go to show that a change of railroad
rates between two places within the country is similar in effect to
the imposing or repeal of tariff duties between them.

The wealth and industrial importance of the railroads soon began to
give them widespread political power in other ways. It was commonly
charged in some states that the legislature and the courts were
"owned" by the railroads. The railroads, in part because they were
the victims at times of attempts at blackmail by dishonest public
officials, declared that they were compelled, in self-defense to
maintain a lobby. The railroad lobby, defensive and offensive, was, in
many states, the all-powerful "third house." Railroads even had their
agents in the primaries, entered political conventions, dictated
nominations from the lowest office up to that of governor, and elected
judges and legislators. The extent to which this was done differed
according as the railroads had large or small interests within the
state. These statements can with approximate truth now be made in
the past tense, as was not possible a few years ago. A better code
of business morality has developed, and the railroad management's
relationship of private trusteeship toward the shareholders and of
public trusteeship toward the patrons of the road is now much more
fully recognized. The change was not brought about without long and
strenuous agitation and effort, educational and legislative, as is in
part described below.

Sec. 14. #Consolidation of railroads#. Gradually the consolidation of the
railroad mileage into larger units put into fewer hands greater and
greater economic power. The early railroads, many of which were built
in sections of a few miles in length, have been slowly welded into
continuous trunk lines with many branches. The New York Central
between Albany and Buffalo was a consolidation, by Commodore
Vanderbilt, of sixteen short lines. The Pennsylvania system was formed
link by link from scores of small roads. In the decade of the nineties
the growth of consolidation went on more rapidly than ever before. In
1903 it could be said that 60 per cent of the mileage of the United
States was under the control of five interests; 75 per cent was
controlled by a group of men who could sit about one table. The
country was being divided territorially into great railroad domains,
within each of which one financial interest was dominant. Since that
time the policy of the leading roads has been still further unified
by great financial alliances and by the method known as "community of

Toward this result strong economic forces have been working.
Consolidation has many technical advantages: it saves time, reduces
the unit cost of administration and of handling goods, gives better
use of the rolling stock and of the terminal facilities of the
railroads, and insures continuous train service. It has the advantage
of other large production and the possible economies of the trusts.
Most important, however, from the point of view of the railroads, is
the prevention of competition and the making possible of higher
rates and larger dividends. The statement that competition is not an
effective regulator of railroads often is misunderstood to mean that
it in no way acts on rates. It is true that competition between roads
does not prevent discrimination and excessive charges between stations
on one line only; but competition usually has acted powerfully at
well-recognized "competing points." The larger the area controlled
by one management, the fewer are the competing points; the larger,
therefore, is the power over the rate and the more completely
the monopoly principle applies. It is a grim jest to say that
consolidation does not change the railroad situation as regards the
question of rates.

Sec. 15. #State railroad commissions.# When it became evident that public
and private interests in the railroads were so divergent, it still was
not easy to determine how the public was to be safeguarded. At first,
some general conditions such as maximum rates were inserted in the
laws and charters; but these were not adaptable to changing conditions
and, for lack of administrative agents, could not be enforced. Some
early efforts at state ownership were disastrous. The old law of
common carriers gave to individual shippers an uncertain redress in
the courts for unreasonable rates; but the remedy was costly because
the aggrieved shipper had to employ counsel, to gather evidence, and
to risk the penalty of failure; it was slow, for, while delay was
death to the shipper's business, cases hung for months or years in
the courts; it was ineffectual, for, even when the case was won, the
shipper was not repaid for all his losses, and the same discrimination
could be immediately repeated against him and other shippers.

In the older Eastern states, attempts to remedy these and other evils
by creating some kind of a state railroad commission date back to the
fifties of the last century. Massachusetts developed in the seventies
a commission of "the advisory type" which investigated and made public
the conditions, leaving to public opinion the correction of the evils.
A number of the Western states, notably Illinois and Iowa, developed
in the seventies commissions of "the strong type," with power to fix
rates and to enforce their rulings. The commission principle, strongly
opposed at first by the railroads, was upheld by the courts and became
established public policy. By 1915 every state and the District of
Columbia had a state commission. In Wisconsin and in New York, in
1907, in New Jersey, in 1911, and in many other states since, the
"railroad" commissions were replaced by "public utilities" or "public
service" commissions, having control not only over the railroads but
over street railway, gas, electric light, telephone, and some other
corporations. The state commissions have found their chief field
in the regulation of local utilities, and they fall far short of a
solution of the railroad problem. Altho they from the first did much
to make the accounts of the railroads intelligible, something to make
the local rates reasonable and subject to rule, and much to educate
public sentiment, on the whole their results have been disappointing.
It was difficult to get commissioners at once strong, able, and
honest; the public did not know its own mind well enough to
support the commissions properly; and the courts decided that state
commissions could regulate only the traffic originating and ending
within the state.

Sec. 16. #Passage of the Interstate Commerce Act.# Public hostility to
private railroad management was greatest in the regions where the
most rapid building of roads occurred from 1866 to 1873. One center of
grievances was in "the granger states' of Illinois, Wisconsin, Kansas,
Nebraska, Iowa, and Minnesota; another center was in the oil regions
of Ohio and Pennsylvania. The Eastern states were not without their
troubles, for the report of the Hepburn Committee of the New York
legislature in 1879 showed that discrimination between shippers
prevailed to an almost incredible degree in every portion of New York
state. When the courts, in 1886, decided that the greater portion of
the railroad rates could not be treated by state commissions, national
control was loudly demanded. Scores of bills were presented to
Congress between 1870 and 1886, and, despite much opposition, the
Interstate Commerce Act was passed in 1887.

The act laid down some general rules: that rates should be just and
reasonable; that railroads should not pool, or agree to divide,
their earnings to avoid competition; that they should, under similar
conditions, and, unless expressly excused, fix rates in accordance
with the long- and short-haul principle (to charge no more for a
shorter distance than for a longer one on the same line and in the
same direction, the shorter being included within the longer). The
act provided for a commission of five men, to be appointed by the
President, which might require uniform accounts from the railroads,
and which should enforce the provisions of the act.

Sec. 17. #Working of the Act.# The commission in its earlier years
gave promise of effectiveness, but its powers, as interpreted by the
courts, proved inadequate to its assigned task. The railroads in many
cases refused to obey its orders, and court decisions paralyzed its
activity. Competent authorities declared in 1901, after fourteen years
of the commission's operation, that discrimination never had been
worse, and a series of exposures of abuses strengthened the popular
demand for stricter legislation. The result was first the Elkins' Act
of 1903, aimed at discrimination and rebates, and then the Hepburn
Act Of 1906, which marked a new era in railroad regulation in this
country. The commission was increased to seven members, its authority
was extended to include express, sleeping car, and other agencies of
transportation, and it was given the power to fix maximum rates,
not to be suspended by the courts without a hearing. It became thus
unquestionably a commission of "the strong type." It began to exercise
its new powers with vigor, and the carriers reluctantly accepted its
authority. Responsive to a calmer but insistent popular demand
further amendments were made by the Mann-Elkins Act of 1910,
which strengthened the long-and-short-haul clause, and gave to the
commission, among other new powers, that of suspending new rates
proposed by carriers. A special Commerce Court of five judges was
created with exclusive jurisdiction in certain classes of railroad
cases, but this was abolished after a short trial.

It cannot be said that a final satisfactory solution of the railroad
problem has been attained; indeed, in most human affairs such a thing
is unattainable. But it can be said that there is no considerable
sentiment anywhere in favor of reversing the railroad policy that has
been developed, as here briefly outlined. Certainly the public has no
such sentiment, and the railroads, which for many years opposed the
progress of strong federal control, are now foremost in advocacy of
a policy of exclusive national regulation, to remedy the evil of
"forty-nine masters."

Sec. 18. #Public nature of the railroad franchise.# A pretty definite
public opinion regarding the nature of the problem has emerged from
the nearly half-century of experience and discussion, since the
first vigorous agitation of the subject in the seventies of the last
century. Railroads in our country are owned by private corporations
and are managed by private citizens, not, as in some countries, by
public officials. They have been built by private enterprise, in
the interest of the investors, not as a charity or as a public
benefaction. Railroad-building appears thus at first glance to be
a case of free competition where public interests are served in the
following of private interests. But, looked at more closely, it may
be seen to be in many ways different from the ordinary competitive
business. Competition would make the building of railroads a matter of
bargain with proprietors along the line, and an obdurate farmer could
compel a long detour or could block the whole undertaking. But the
public says: a public enterprise is of more importance than the
interests of a single farmer. By charter or by franchise the railroad
is granted the power of eminent domain, whereby the property of
private citizens may be taken from them at an appraised valuation.
The manufacturer, enjoying no such privilege, can only by ordinary
purchase obtain a site urgently needed for his business. Why may the
railway exercise the sovereign power of government as against the
private property rights of others? Because the railway is peculiarly
"affected with a public interest." The primary object is not to
favor the railroads, but to benefit the community. These charters and
franchises are granted sparingly in most European countries. In this
country they have been granted recklessly, often in general laws, by
states keen in their rivalry for railroad extension. When thus
great public privileges had been granted without reserve to private
corporations, it was realized, too late in many cases, that a mistake
had been made and that an impossible situation had been created.

Sec. 19. #Other peculiar privileges of railroads.# Further, do the
various grants of lands and money to the railroads make them other
than mere private enterprises? One answer, that of those financially
interested in the railroads, was No. They said that the bargain was
a fair one, and was then closed. The public gave because it expected
benefit; the corporation fulfilled its agreement by building the road.
The terms of the charter, as granted, determined the rights of the
public; but no new terms could later be read into it, even tho the
public came to see the question in a new light. Similar grants, tho
not so large, have been made to other industries. Sugar-factories were
given bounties; iron-forges and woolen-mills were favored by tariffs;
factories have been given, by competing cities, land and exemption
from taxation; yet these enterprises have not on that account, been
treated, thereafter, in any exceptional way. So, it was said, the
railroad was still merely a private business.

But the social answer is stronger than this. The privileges of
railroads are greater in amount and more important in character than
those granted to any ordinary private enterprise. The legislatures
recognize constantly the peculiar public functions of the railroads.
In other private enterprises, investors take all the risk;
legislatures and courts recognize the duty of guarding, where
possible, the investment of capital in railroads. Laws have
been passed in several states to protect the railroads against
ticket-scalping. Whenever the question comes before them, the courts
maintain the right of the railroads to earn a fair dividend. Private
enterprise has been invited to undertake a public work, yet public
interests are paramount.

Sec. 20. #Private and public interests to be harmonized.# If an extremely
abstract view is taken there is danger of losing sight of the real
problem, which is that of harmonizing these two interests in thought
and in public policy. Yet the extreme advocates of the private
control of railroads for a long time resented indignantly any public
interference with railroad rates and with railroad management as
an infringement of individual liberty. Before the passage of the
Interstate Commerce Act, in 1887, this position was inconsistently
taken by those in whose interests free competition had been violently
set aside at the very outset of railroad construction, and for whom
governmental interference had made possible great fortunes. It has
become generally recognized that the railroads ought not to be allowed
to change from a public to a private character just as it suits
their convenience. True, they are private enterprises as regards the
character of the investment, but they are public enterprises as to
their privileges, functions, and obligations.

Finally, it might be said that if there were none of these special
reasons for the public control of railways, there is an all-sufficient
general reason in the fact that a railroad is always, in some respects
and to some degree, a monopoly. Therefore, the railroad problem may be
viewed as but one aspect of the general problem of monopoly. To other
aspects of this problem we are now to turn our attention.

[Footnote 1: Returns for 1915. The following figures are from the
census taken in 1909.]

[Footnote 2: See A.T. Hadley, "Railroad Transportation," pp. 10, 32.]

[Footnote 3: See Vol. I, pp. 437, 438, 443.]



Sec. 1. Kinds of monopoly. Sec. 2. Political sources of monopoly. Sec. 3.
Natural agents as sources of monopoly. Sec. 4. Capitalistic monopoly;
aspects of the problem. Sec. 5. Industrial monopoly and fostering
conditions. Sec. 6. Growth of large industry in the nineteenth century. Sec. 7.
Methods of forming combinations. Sec. 8. Growth of combinations after
1880. Sec. 9. The great period of trust formation. Sec. 10. Height of the
movement toward combinations. Sec. 11. Motive to avoid competition.
Sec. 12. Motive to effect economies. Sec. 13. Profits from monopoly and
gains of promoters. Sec. 14. Monopoly's power to raise prices.

Sec. 1. #Kinds of monopoly.# Monopolies may, for special purposes, be
classified as selling or buying, producing or trading, lasting or
temporary, general or local, monopolies. The terms selling or buying
monopoly explain themselves, tho the latter conflicts with the
etymology.[1] Under conditions of barter the selling and the buying
monopoly would be the same thing in two aspects. A selling monopoly
is by far the more common, but a buying monopoly may be connected with
it. A large oil-refining corporation that sells most of the product
may by various methods succeed in driving out the competitors who
would buy the crude oil. It thus becomes practically the only outlet
for the oil product, and the owners of the land thus must share
their ownership with the buying monopoly by accepting, within certain
limits, the price it fixes. The Hudson Bay Company, dealing in furs,
had practically this sort of power in North America. Many instances
can be found, yet, relatively to the selling monopolies, those of the
buying kind are rare.

A producing monopoly is one controlling the manufacture or the source
of supply of an article; a trading monopoly is one controlling the
avenues of commerce between the source and the consumers.

Monopolies are lasting or temporary, according to the duration of
control. By far the larger number are of the temporary sort, because
high prices strongly stimulate efforts to develop other sources of
supply. Yet the average profits of a monopoly may be large throughout
a succession of periods of high and low prices.

Monopolies are general or local, according to the extent of territory
where their power is felt. At its maximum where transportation and
other costs most effectually shut out competition, monopoly power
shades off to zero on the border-line of competitive territory. The
frequent use of the adjectives partial, limited, and virtual are
implied but usually superfluous recognitions of the relative character
of monopoly.

Sec. 2. #Political sources of monopoly.# Monopoly gets its power from
various sources. A political monopoly derives its power of control
from a special grant from the government, forbidding others to engage
in that business. The typical political monopoly is that conferred
by a crown patent bestowing the exclusive right to carry on a certain
business. A second kind is that conferred by a patent for invention,
or the copyright on books, the object of which is to stimulate
invention, research, and writing by giving the full control and
protection of the government to the inventor and the writer or their
assignees. In this case the privilege is socially earned by the
monopolist; it is not gotten for nothing. Moreover, the patent, being
limited in time, expires and becomes a social possession. A third
kind is a governmental monopoly for purposes of revenue. In France and
Japan the governments control the tobacco trade, and the high price
charged for tobacco makes this monopoly yield large revenues. A fourth
kind is that derived from franchises for public service corporations,
such as those supplying electricity, gas and water. These franchises
are granted to private capitalists to induce them to invest capital in
enterprises that are helpful to the community.

Sec. 3. #Natural agents as sources of monopoly.# "Economic" monopoly,
so-called, arises when the ownership of scarce natural agents, as
mines, land, water-power, comes under the control of one man or one
group of men who agree on a price. Economic monopoly is a result of
private property that is undesigned by the government or by society.
It is exceptional, considering the whole range of private property,
but it is important. The oil-wells embracing the main sources of the
world's supply have largely come under one control. One corporation
may control so many of the richest iron mines of the country as to
be able to fix a price different from that which would result under
competition. Coal mines, especially those of some peculiar and
limited kind, such as anthracite, appear to become easily an object
of monopolization. Economic monopoly merges into political monopolies,
such as patents and franchises. Private property is a political
institution designed to further social welfare, and only rarely is
property in any particular business a monopoly. Private control of
great natural resources might have been prevented in many cases had it
been foreseen.

Sec. 4. #Capitalistic monopoly; aspects of the problem.# Capitalistic
monopoly, variously called contractual, organized, commercial or
industrial monopoly, arises when men unite their wealth to control
a market, to overpower or intimidate opposition, and to keep out or
limit competition by the mere magnitude of their wealth. These
various kinds so merge into each other that they cannot always be
distinguished in practice. A patent may help a capitalistic monopoly
in getting control of a market; great wealth may enable a company to
get control of rare natural resources.

In the discussion of industrial monopoly, the problem now before us,
there is a good deal of vagueness and misunderstanding because of
lack of definiteness in the use of words which have rapidly shifted in
meaning. The word "trust" originally applied, and still in legal usage
applies, to a particular form of organization, that of a board of
trustees holding the stock, and thus unifying the control, of two or
more formerly separate enterprises. The Standard Oil Company at one
time had this form of organization, which was declared by the courts
to be illegal _(ultra vires)_ for corporations. Now "trust" often
is used in the sense of a corporation having monopoly power in some
degree; either broadly, of any monopolistic corporation (including
railways and local public utilities), or, oftener, limited to
manufacturing and commercial monopolies, otherwise called "industrial
trusts" in contrast with franchise trusts and railroads.[2] The word
"combination" referred originally to a more or less thoro "merger,"
with a view to attaining monopolistic power, of a number of formerly
separate organizations, as in the case of the United States Steel
Corporation. But the word is often used as if it were a synonym for
trust (in a narrower or wider sense) even as applied to a single
enterprise that has grown to be monopolistic. A "trust" in the legal
sense of a form of organization, and "combinations" as above defined,
might have no monopoly power whatever; whereas a monopoly may be
possessed by an individual owner (e.g., of a patent right, railroad,
waterworks plant), or by a single corporation that has simply grown
monopolistic without the trust form of organization or without

Now it is evident that the real problem is that of monopoly, however
attained. Monopoly may be defined as such a degree of control over
the supply of goods in a given market that a net gain will result if a
portion is withheld.[3] In accord with growing and now dominant
usage it is well to observe the following meanings in our discussion.
"_Combination"_ is a term referring particularly to one method by
which monopolies are formed. "_Trust,"_ in the now popular sense, is
best limited to an industrial, primarily manufacturing, enterprise or
group of enterprises, with some degree of monopoly power due not to
a "special franchise" giving the use of streets and highways and the
right of eminent domain, nor to a single patent, but to a group of
favoring technical, financial, and economic conditions. The trust may
consist of a single establishment; or of a group of establishments
separately operated but united in a "pool" to divide output,
territory, or earnings; or of such a group held together by a holding
company, or combined into one corporation. Public utility is the
name of special franchise enterprises of the kind just mentioned,
including, in the broad sense, railroads and local utilities such as
street railways, gas, water, and electric light-plants.

Sec. 5. #Industrial monopoly and fostering conditions.# The problem of
monopoly is probably as old as markets. From the first coming together
of groups of men to trade there were doubtless efforts made by some
individuals and groups of traders to manipulate conditions so as to
get higher prices than they could get in a free and open market.[4]
There are traces of these practices in ancient times, and the history
of the Middle Ages is full of evidences both of monopolistic practices
and of the efforts to prevent or control them.

If this fact is borne in mind it may help us to distinguish in thought
four features of enterprise that are readily and constantly
confused, viz: large individual capital, large production, corporate
organization, and monopoly.[5] Evidently any one of these features may
appear without the other; e.g., a person of large aggregate capital
may have his investments distributed among a large number of small
enterprises, such as farms, without a trace of corporate organization
or monopoly, and numerous examples could be given of large production,
or of corporate organization, or of monopoly without one or more of
the other features.

But the presence of any one of these features is a favoring condition
for the development of the others. Hence they are frequently found
together, and of late this occurs increasingly. It is difficult to say
in every, indeed in any, case which feature has been cause and which
effect in this development, but, on the whole, large production seems
to have been primary. Itself made possible by inventions, by better
transportation, and by the widening of markets, it in turn helped to
build up large individual fortunes, and then to create a need for the
corporate form of organization. And monopoly power no doubt is more
easily gained by large aggregations of capital in a corporation having
the advantages of large production.

Sec. 6. #Growth of large industry in the nineteenth century.# The great
recent growth of the monopoly problem is in part to be explained as
the result of the growth of large industry, not as the sole cause,
but as a favoring condition. Before the middle of the last century a
tool-using household industry, on farms and in homes where the greater
part of the things used were produced in the family, was still the
typical organization in the United States.[6] A family produced
somewhat more than it needed of food and cloth and exchanged with its
neighbors; so with shoes, candles, soap, and cured meats. The early
factories growing out of the household industry were small. Since
that time two counter forces have been at work to affect the ratio
of manufacturing establishments to population. The number of small
establishments has been increased by the many industries producing the
things once made on farms, and by increasing demands for comforts and
luxuries. Many establishments producing the staple products that can
be transported have been consolidated or have been enlarged, so
that the unit of production now averages much larger. The number of
cotton-weaving factories was about the same in 1900 as it had been
seventy years earlier, while population has grown six fold. Iron-
and steel-mills were fewer in 1900 than in 1880. In industries having
local markets or local sources of materials, such as grist mills
and saw mills, the change in numbers was less, for many small
establishments were started in outlying districts at the same time
that the mills became larger in the great population centers. But the
average number of employees and the average capital per establishment
increased in every period between census enumerations.

Sec. 7. #Methods of forming combinations.# Combinations of previously
independent enterprises may be more or less complete and are made by
different methods. Four major methods are:

(1) The pool, by which the enterprises continue to be separately
operated, but divide the traffic (or output), or the earnings, or the
territory, in prearranged proportions.

(2) The trust, in a legal sense (as defined above in section 5).

(3) The holding company, a corporation with the sole purpose of
holding the shares of stock, or a controlling number of them, in
various corporations otherwise nominally independent.

(4) Consolidation into one company.

At least five minor methods may be distinguished; these are here
numbered continuously with the preceding four.

(5) Lease by one company of the plants of one or more other companies.

(6) Ownership of stock by one corporation in another corporation,
sufficient to give substantial influence over its policy, if not
absolute control.

(7) Ownership of stock in two or more competing companies, by the same
individual or group of individuals, to such an extent as appreciably
to unify the policies of the competing companies.

(8) Interlocking directorates, that is, boards of competing companies
containing one or more of the same persons as directors.

(9) Gentlemen's agreements, mere friendly informal conferences and
understandings as to common policies.

Sec. 8. #Growth of combinations after 1880.# Undoubtedly industry before
1860 had some elements of monopoly. Monopoly constituted part of the
banking problem; it began to be evident in the railroads almost at
once, and it rapidly increased as street railways and other public
utilities were constructed. But after 1880 occurred the formation in
larger numbers of industrial enterprises which appeared to exercise
some monopoly power. In the years between 1890 and 1900 this movement
was still more rapid. Consolidation took place on a great scale in
railroads and in manufactures. Much of this has been of such a kind
that it does not appear at all in the figures showing the number of
establishments and of employees. In the data regarding this movement
given by different authorities, many discrepancies appear, as there is
no generally accepted rule by which to determine the selection of the
companies to be included in the lists. One financial authority
gave the following figures[7] regarding the industrial companies
reorganized into larger units in the United States between 1860
and 1899, not including combinations in such businesses as banking,
shipping, and railroad transportation. Some of the enterprises here
included have much and others probably have little or no monopolistic

_Decade Number Organized Total Nominal Capital_

1860-60 ............... 2 $ 13,000,000
1870-79 ............... 4 135,000,000
1880-89 ............... 18 288,000,000
1890-99 ............... 157 3,150,000,000
--------------- ------ ---------------
Total, 40 years ........ 181 $3,586,000,000

Sec. 9. #The great period of trust formation.# The number of trusts
organized and the capital represented by this movement in the last
of these decades were seven times as great as in the thirty years
preceding. The figures by years for the decade 1890-1899 are as

Decade Number Organized Total Nominal Capital

1890 ................... 6 $82,000,000
1891 ................... 13 168,000,000
1892 ................... 13 140,000,000
1893 ................... 5 226,000,000
1894 ................... 2 35,000,000
1895 ................... 7 104,000,000
1896 ................... 3 40,000,000
1897 ................... 6 93,000,000
1898 ................... 22 574,000,000
1899 ................... 80 1,688,000,000
---------------- ---- --------------
Total, 10 years ......... 157 $3,150,000,000

The influence of great prosperity shows in the large number of
combinations; but in 1893, the number was less, altho the total
nominal capital (stocks and bonds) was still the greatest it had ever
been in any year. Then came the period of depression, 1894-97, when
both the numbers and the capital were comparatively small. Then from
1898 to 1901 followed the period of the greatest formation of trusts
the world has ever seen.

The list of these four years contains the names of the most widely
known American combinations, a few of which are here given with the
years of their formation: 1898, American Thread, National Biscuit;
1899, Amalgamated Copper, American Woolen, Royal Baking Powder,
Standard Oil of N.J., American Hide and Leather, United Shoe
Machinery, American Window Glass; 1900, Crucible Steel, American
Bridge; 1901, United States Steel Corporation, Consolidated Tobacco,
Eastman Kodak, American Locomotive.

Sec. 10. #Height of the movement toward combinations.# In a list by
another authority[8] it appears that the data for all industrial
trusts are in round numbers as follows:

Number of
Plants Acquired Total
Date Number or Controlled Nominal Capital

Jan. 1, 1904 318 5288 $7,246,000,000

These figures compared with those given above would indicate that the
industrial trusts had about doubled in the years 1900-1903 inclusive.
Probably most of this growth was in the years 1900 and 1901; then the
movement became very slow, because, as is generally believed, of
the aroused public opinion, of more vigorous prosecution by the
government, and of additional legislation against trusts. The
authority last cited gives in a more comprehensive list, in six
groups, all the monopolistic combinations in the United States, at
the date of January 1, 1904, as follows (the figures just given above
being the totals of the first three groups):

No. of Plants Total Nominal
Groups Number Acquired or Controlled Capital

1. Greater industrial
trusts 7 1528 $2,260,000,000
2. Lesser industrial
trusts 298 3426 4,055,000,000
3. Other industrial
trusts in process
of reorganization
or readjustment 13 334 528,000,000
4. Franchise trusts 111 1336 3,735,000,000
5. Great steam
railroad groups 6 790 9,017,000,000
6. Allied independent 10 250 380,000,000
--- ----- --------------
Total, 445 8664 $20,000,000,000

Sec. 11. #Motive to avoid competition.# This remarkable movement toward
the formation of united corporations from formerly independent
enterprises called forth a variety of explanations. The organizers of
trusts gave as the first explanation of their action that it was the
necessary result of excessive competition. It is not to be denied
that a hard fight and lower prices often preceded the formation of
the trusts. But as this excessive competition usually is begun for the
very purpose of forcing others into a combination, this explanation
is a begging of the question. It is fallacious also in that it ignores
the marginal principle in the problem of profits. Profits are never
the same in all factories, and to those manufacturers that are on the
margin competition may appear excessive. It generally has been the
largest and strongest factories, in the more favored situations,
that, in order to get rid of troublesome competitors, have forced the
smaller, weaker, industries to come into the trust. In other cases the
smaller enterprises have been eager to be taken in at a good price,
altho they might have continued to operate independently with moderate
profits. When, therefore, it is said that competition is destructive,
it may be a partial truth, but more likely it is a pleasantry
reflecting the happy humor of the prosperous promoters of the

Sec. 12. #Motive to effect economies.# Another advantage of the
combination of competing plants that was strongly emphasized was the
economy of large production.[9] The economies that are possible within
a single factory may be still greater in a number of combined or
federated industries. The cost of management, amount of stock carried,
advertising, cost of selling the product, may all be smaller per unit
of product. Each independent factory must send its drummers into every
part of the country to seek business. In combination they can divide
the territory, visit every merchant and get larger orders at smaller
cost. A large aggregation can control credit better and escape
losses from bad debts. By regulating and equalizing the output in
the different localities, it can run more nearly full time. Being
acquainted with the entire situation, it can reduce the friction. A
combination has advantages in shipment. It can have a clearing-house
for orders and ship from the nearest source of supply. The least
efficient factories can be first closed when demand falls off.
Factories can be specialized to produce that for which each is best
fitted. The magnitude of the industry and its presence in different
localities often, in the period of trust formation, served to
strengthen its influence with the railroads, and to increase its
political as well as its economic power.

Another phase of corporate growth is the "integration of industry,"
that is, the grouping under one control of a whole series of
industries. One company may carry the iron ore through all the
processes from the mine to the finished product. A railroad line
across the continent owns its own steamers for shipping goods to Asia
or Europe. Large wholesale houses own or control the output of entire

Sec. 13. #Profits from monopoly and gains of promoters.# There are,
however, well-recognized limitations to the economy of large
production in the single establishment,[10] and of late there has been
ever-increasing skepticism as to the net economy actually attributable
to combinations. Undoubtedly the merging of a number of old plants has
sometimes effected an immediate improvement in the weaker ones. A new
broom sweeps clean. This movement chanced to be contemporaneous with
the development of "efficiency engineering," and of "scientific
cost-accounting," and these better methods, already developed and
applied in comparatively small plants, could be more quickly extended
to the other plants brought into the combination. Moreover, the
personal organizations in the separate enterprises had been brought to
a high state of efficiency by the stimulus of competition, and there
is reason to fear that, after some years of centralized bureaucratic
organization, much of this efficiency may be lost.

There seems no doubt that the strong motive for forming combinations
is the profit to the organizers.[11] Whatever was the more generous
motive or more fundamental economic reason assigned by the promoters,
the investing public confidently expected that higher prices would be
the chief result. There are indirect as well as direct gains to the
promoters of a combination. There is the gain from the production and
sale of goods to consumers, and there is the gain from the financial
management, from the rise and fall in the value of stock. The
promoters of a combination often expect to make from sales to the
investing public far more than from sales to the consumer of the
product. A season of prosperity and confidence, when trusts and their
enormous profits are constantly discussed, has an effect on the
public mind like that of the gold discoveries in California and in the
Klondike. Then is the time for the promoter to offer shares without
limit to investors.

Sec. 14. #Monopoly's power to raise prices#. There is no doubt that the
formation of a combination from competing plants can and does give a
control over prices, a monopoly power, not possessed by the separate
competing establishments. The same kind of power might be attained by
the growth of one establishment outstripping all its competitors,
or by a new enterprise coming into the field backed by powerful
capitalists. But this would work slower and less extensive results
than does the formation of a combination.

Of course, the fundamental principles of price cannot be changed by a
trust; a selling monopoly can affect price only as it affects supply
or demand.[12] The strongest trust yet seen has not been omnipotent.
Many careless expressions on the subject are heard even from
ordinarily careful writers and speakers: "The trust can fix its own
prices," "has unlimited control," "can determine what it will pay
and for what it will sell." This implies that trusts are benevolent,
seeing that the prices they charge are usually not far in excess of
competitive prices in the past. Such a view overlooks the forces that
limit the price a monopoly can charge. If the supply remains the same,
no trust can make the price go higher. The monopoly usually directs
its efforts to affecting the supply, leaving the price to adjust
itself. It can affect the supply either by lessening its own output or
by intimidating and forcing out its competitors. It is true that this
logical order is not always the order of events. The trust may not
first limit the supply, and then wait for prices to adjust themselves;
it may first raise its prices, but unless it is prepared to limit the
supply in accordance with the new resulting conditions of demand,
such action would be vain. The control of the sources of supply is the
logical explanation of the higher price, even tho the limitation
of supply is effected later by successive acts found necessary to
maintain the higher price.

The report of the Federal Industrial Commission, which, from 1898
to 1901, investigated the trusts, showed that immediately upon their
formation, the industrial combinations had raised their prices.[13]
Prices might be lowered again but only when and where competition
became troublesome, thus causing either "price-wars" or

[Footnote 1: See Vol. I, p. 76.]

[Footnote 2: As in the list in sec. 8, below.]

[Footnote 3: See Vol. I, chs. 8 and 31.]

[Footnote 4: See Vol. I, ch. 8, on competition and monopoly, and ch.
31, on monopoly prices and large production. An understanding of the
definitions and of the general principles distinguishing competition
and monopoly is a necessary prerequisite to a profitable discussion of
the practical problem of monopoly.]

[Footnote 5: See Vol. I, p. 267, on capital; pp. 388-393, on large
production. See also references in preceding note on monopoly; and ch.
27, secs. 1 and 2, on corporate organization.]

[Footnote 6: See above, ch. 26, sec. 3; and ch. 25, secs. 6 and 7.]

[Footnote 7: Compiled from data given by "The Journal of Commerce and
Commercial Bulletin," reprinted in "The Commercial Year Book," Vol. V,
1900, pp. 564-569.]

[Footnote 8: John Moody, "The Truth About the Trusts," 1904]

[Footnote 9: See Vol. I, pp. 388-393.]

[Footnote 10: See Vol. I, pp. 391-392.]

[Footnote 11: See Vol. I, p. 334, on the function of the promoter.]

[Footnote 12: See Vol. I, pp. 80-85, 382-387, 394-396.]

[Footnote 13: A summary of this evidence is given in the author's
"Principles of Economics" (1904), pp. 327-330. A fuller outline of
the results of the Commission's conclusions may be found in "The Trust
Problem," by J.W. Jenks, who acted as expert in the investigation.]



Sec. 1. Moral judgments of competition and monopoly. Sec. 2. Public character
of private trade. Sec. 3. Evil economic effects of monopolistic price.
Sec. 4. Common law on restraint of trade. Sec. 5. Growing disapproval of
combination. Sec. 6. Competition sometimes favored regardless of results.
Sec. 7. Increasing regard for results of competition. Sec. 8. Common law remedy
for monopoly ineffective. Sec. 9. First federal legislation against
monopoly. Sec. 10. Policy of the Sherman anti-trust law. Sec. 11. Policy of
monopoly-accepted-and-regulated. Sec. 12. Field of its application. Sec. 13.
Industrial trusts,--a natural evolution? Sec. 14. Artificial versus natural
growth. Sec. 15. Kinds of unfair practices. Sec. 16. Growing conception of
fair competition. Sec. 17. The trust issues in 1912. Sec. 18. Anti-trust
legislation in 1914.

Sec. 1. #Moral judgments of competition and monopoly.# What should be the
attitude of society toward monopoly? Is it good or bad as compared
with competition? Some very strong ethical judgments bearing on
practical problems are found in the popular mind connected with the
ideas of competition and monopoly. Competition usually is pronounced
bad when viewed from the standpoint of the competitors who are losing
by it, and as good when viewed from the standpoint of the traders on
the other side of the market who gain by that competition. Competition
among buyers thus appears to sellers to be a good thing; that among
sellers appears to themselves to be a bad thing (and _vice versa_).
Many persons are moved by sympathy to pronounce competition among
low-paid and underfed workers to be bad, and each worker is convinced
that it is so in his own trade. Yet nearly all men are of one mind
that competition is a good thing in most industries, those that are
thought of as supplying "the general public." Monopoly is believed by
the public to be wrong in such cases, and competition to be the normal
and right condition of trade. Yet there are some men interested in
"large business" who look upon competition as bad, and upon monopoly
as having essentially the nature of friendly cooeperation. The roots
of these opinions, or prejudices, are easily discoverable in the
theoretical study of the nature of monopoly.[1] Yet often different
men or groups of men feel so strongly on this matter, viewing it from
their own standpoints, that they are quite unable to understand
how any one else can feel otherwise. There is thus a great deal of
controversy to no purpose.

Sec. 2. #Public character of private trade.# Any such general judgment as
that of the public, tho it may be mistaken in some details, is likely
to be a resultant of broad experience. There is in competitive trade a
public, a social character, which monopoly destroys. Even in a simple
auction, when the bidding is really competitive, price depends far
less on shrewd bargaining, on bluff, or on stubbornness, than is the
case in isolated trade. Each bidder is compelled by self-interest to
outbid his less eager competitors, and thus the limits within which
the price must fall are narrowly fixed. The auction-sale is less a
purely personal matter, takes on a more public aspect, has a more
socialized character than isolated trade, depends more on forces
outside the control of any one man, and results in a price fixed with
greater definiteness. The price in a more developed market results
from the play of impersonal forces, or at least from the play of
personal forces which have come under the rules of the market.[2] This
price men are ready to accept as fair. It has a democratic character,
whereas the gains of monopoly price arouse resentment as being the
work of personal, and felt to be despotic, power. Monopoly price is a
bad price to the one who pays it, not only because it is a high price
but because it bears the character of personal extortion.

The medieval notion of _justum pretium_, the just price, may have
been often misapplied, and it was often criticized and ridiculed by
economists in the period of idealized competition (from Adam Smith
to John Stuart Mill). But at the heart of the notion was the judgment
that general uniform prices fixed in the open market are the proper
norms for prices when one of the traders is caught at an exceptional
disadvantage. The modern world has been compelled to reexamine the
conception of the just price.

Sec. 3. #Evil economic effects of monopolistic price.# Theoretical
analysis confirms this view. Any exercise of monopolistic power over
price keeps some, the weaker bidders, from getting any of the desired
goods, or limits them to their most urgently desired units. What
may be called "the theoretically correct price"[3] with two-sided
competition is the one that permits the maximum number of trades
with a margin of gain to each trader. In narrowing the possibility of
substitution of goods by trade, the sum of values of goods for most
men is diminished. All citizens thus that are the victims of an
artificially created scarcity look upon monopoly as "bad," just
as they do upon the evils of nature--drought, locusts, fires, and
pestilence. A monopoly has an indirect and more distant effect upon
the spirit of all those trading with it. If they are producers selling
at prices depressed by monopoly, their money incomes are reduced; if
they are consumers buying at monopoly prices, their real-incomes are
reduced; in either case their psychic incomes, the motives of all
industry, are diminished, and their industrial energies are relaxed.

Sec. 4. #Common law on restraint of trade.# The first recorded case in
English law, wherein the courts sought to prevent the limiting of
competition by agreement, runs back to the year 1415, in the reign
of Henry V. This was a very simple case of a contract in restraint of
trade, whereby a dyer agreed not to practise his craft within the town
for half a year. The court declared the contract illegal (and hence
unenforceable in a court) and administered a severe reproof to the
craftsman who made it. Thus was set forth the doctrine of the moral
and legal obligation of each economic agent to compete fully, freely,
and without restraint upon his action, even restraint imposed upon
himself by a contract voluntarily entered into for his own advantage.

Not until the eighteenth century was this rigid doctrine somewhat
relaxed so as to permit the sale of the "good will" of a business
under limited conditions, and some "reasonable" contracts in restraint
of trade. Later the emphasis was somewhat further shifted, by judicial
interpretations, from the notion of free competition to that of "fair"
competition, so as to permit contracts involving moderate restraint of
trade, if the essential element of competition was retained. Thus
it was said that a piano manufacturer might by contract grant an
exclusive agency to a dealer in a certain territory, there being many
other competing makes of pianos, and such a contract "does not operate
to suppress competition nor to regulate the production or sale of any
commodity."[4] But with such moderate limitations the courts in cases
under the common law have steadily disapproved contracts in restraint
of trade that would appear to be to the disadvantage of third parties,
whether producers or consumers.

Sec. 5. #Growing disapproval of combination.# The attitude of the courts
became in one respect stricter. Some earlier cases involved the
doctrine that what is lawful for an individual to do alone is lawful
if done in combination with others. Indeed, a comparatively recent
case[5] declared regarding a group of dealers, agreeing not to deal
with another, that "desire to free themselves from competition was a
sufficient excuse" for such action. But the general trend has been
to the doctrine that a combination of men "has hurtful powers
and influences not possessed by the individual." Hence threats of
associations of traders (retailers or wholesalers) not to deal with
another if he continued to deal with some third party have been
declared acts in restraint of trade.[6] Yet in the case cited the
court seemed to have been more concerned with protecting "the
individual against encroachment upon his rights by a greater power,"
"one of the most sacred duties of the courts," than with rights and
interests of the general public, endangered by such restraint of

Sec. 6. #Competition sometimes favored regardless of results.# In another
respect the courts have wavered in their attitude toward competition,
the general doctrine being that competition, particularly the cutting
of prices, is absolutely justifiable, regardless of circumstances. In
the leading English case[7] the facts were that the larger steamship
companies sent to Hankow additional ships, now called, figuratively,
"fighting ships," to "smash" freights in order to ruin tramp steamship
owners and drive them out of the field. The court held that this
constituted no legal wrong to the tramp steamship owners, and scouted
the idea of the court's looking at the motives in price cutting,
or taking into consideration in any way what the court called "some
imaginary normal standard of freights and prices." And of this case
the lawyer is forced to say: "Undoubtedly the excellent opinion just
quoted represents the law everywhere," even tho there are other cases
difficult to harmonize with it.[8]

To the economist, not bound in like manner by legal precedent, such
a verdict was from the first impossible. The court appears to have
considered that only the rights of the private litigants, the tramp
steamship owners, were involved, not the rights and interests of the
shipping public; it considered the immediate and not the ultimate
effects of the "smashing" of rates; it allowed itself to be deceived
by the appearance of acts that in outer form were competition,
but that had as their purpose the strengthening and maintenance of
monopoly. These acts are forms of the "unfair" practices that will be
mentioned later.[9]

Sec. 7. #Increasing regard for results of competition.# Despite the
binding precedents, the courts in some later decisions have refused
to look upon competition as good regardless of its motives and of its
consequences. In a federal case[10] the judge, in a brief and acute
dictum, recognized the evil of a rate war that would result from
threats of definite cuts. They impair "the usefulness of the railroads
themselves, and cause great public and private loss." The court's
opinion was no doubt largely influenced by the fact that railroad
rates were already subject to regulation: "Every precaution has been
taken by state legislatures and by the congress to keep them just and
reasonable,--just and reasonable for the public and for the carriers."

In a state case[11] the facts were that a man of wealth started a
barber shop and employed a barber to injure the plaintiff and drive
him out of business. The court recognized that while, as a general
proposition, "competition in trade and business is desirable," it
may in certain cases result in "grievous and manifold wrongs to
individuals"; and in this case the "malevolent" man of wealth was
declared to be "guilty of a wanton wrong and an actionable tort."
The economists can but pronounce this judgment admirable so far as it
goes, but it is remarkably confined to a consideration of the private
legal rights of the injured competitor, and gives hardly a hint of
a higher criterion for judging competitive acts, that of the general

Sec. 8. #Common law remedy for monopoly ineffective.# The common law
contained prohibitions enough, both broad and specific, against
contracts and acts in restraint of trade. The common law contained
likewise a closely related body of doctrine by which the railroads,
as common carriers, ought to have given equitable and undiscriminating
rates to all shippers. There was a strong body of influential opinion
that long maintained that the case was sufficiently covered, that the
only thing needed was to enforce the common law. Even now, after all
that has elapsed, there are some in railroad and business circles
who still appear to hold that opinion. But the evils of railroad
discrimination and of other monopolistic practices continued, and for
some cause the common law was not enforced, excepting occasionally,
disconnectedly, and without important results.

Why? The answer may be ventured that in the common law the whole
question of restraint of trade was treated primarily as one of private
rights and only incidentally as one involving general public policy.
Cases came before the courts only on complaint of some individual
that felt injured. Now the injury of higher prices due to contracts in
restraint of trade is usually diffused among many customers, and
the loss of any one is less than the expense of bringing suit.
Consequently, it rarely happened that cases were brought before the
courts except by one of the two equally guilty parties to a contract
in restraint of trade, when the other party had failed in some way to
do his part. When such an illegal contract in restraint of trade was
proved before a court by a defendant in a civil suit the contract was
declared unenforceable, and the only penalty in practice was that the
plaintiff could not collect his debt or secure performance from the
defendant.[12] A very similar situation existed in the case of the
individual's grievances against railroad charges and services.

Sec. 9. #Federal legislation against monopoly.# The passage of the
Interstate Commerce Act in 1887[13] prohibiting discrimination and
railway pooling, and that of the Act of 1890 "to protect trade and
commerce against unlawful restraints and monopolies," popularly known
as the "Sherman Anti-trust Law," were part of one public movement to
remedy monopoly. From one point of view it seems true, as has often
been said, that in essence these statutes were simply enactments
of long established principles of the common law. Section 1 of the
Sherman law declared illegal "every contract, combination in the
form of trust or otherwise, or conspiracy, in restraint of trade or
commerce among the several states, or with foreign nations." Section 2
made it a misdemeanor "to monopolize, or attempt to monopolize."

But from another point of view, these new laws showed a marked change
both in the conception of the interests involved and in the means of
preventing the evils. The evil was at last conceived of as a general
public evil; the laws are not merely to protect individuals,[14]
but "to regulate commerce," "to protect trade and commerce."
More important still, it was made the duty of public officers
(district-attorneys of the United States) to institute proceedings in
equity "to prevent and restrain" violation of the Sherman Act, and a
special Commission was instituted to deal with railroad cases. It was
this undertaking of the initiative by the government, the treatment of
the problem as one of the general welfare, that marked a new epoch
in this field. The methods and agencies provided might be at first
inadequate and ineffective, but time and experience could remedy those

Sec. 10. #Policy of the Sherman anti-trust law.# But in important
respects opinion and policies were not yet clear and consistent. They
wavered from one to another conception of the method for dealing with
the problem. It was clear only that _laissez-faire_ had been laid
aside. There are three other possible policies reflecting as
many different conceptions of the problem of monopoly: (1)
monopoly-prosecuted, (2) monopoly-accepted-and-regulated,
(3) competition-maintained-and-regulated. The policy of
monopoly-prosecuted is merely negative. This is the policy of
the Sherman law. It opposed no positive action to the making of
monopolistic contracts and to the formation of combinations, but
declared them to be illegal and provided for their prosecution and
punishment after the mischief had been done. The great epoch of the
formation of combinations[15] followed the enactment of this law.
True, lack of experience by the department of justice, and lack of
vigorous effort to enforce the law, and the slow action of the courts
were largely to blame for this result. The law has proved to be more
effective to prevent new combinations since it has been successfully
enforced in a few notable cases. But once large combinations have
been formed and complex individual financial interests have become
involved, the courts have proved to be incapable of undoing the deeds.
In practice the most sweeping remedy attempted under the law has been
the dissolution of enormous combinations formed years after the law
went into effect. This has been called the job of unscrambling the
eggs. The most notable cases were those of the Standard Oil Company
and of the Tobacco Company, decided in 1911, the results being
absurdly futile.

Sec. 11. #Policy of monopoly-accepted-and-regulated.# A second policy may
be called that of monopoly-accepted-and-regulated. This is represented
by the Interstate Commerce Act (at first weakly, and more vigorously
after its amendment), and by the great mass of state legislation
putting the local and interurban public utilities under the control
of regulative commissions. For some decades after these industries
developed, the public faith was in competition as the effective
regulator. If monopolistic prices were too high, another company was
chartered to build a parallel railroad or another horse-car line on
the next street, or to lay down another set of gas pipes in the same
block. Almost from the first some students of the subject saw the
wastefulness and futility of this kind of competition, and nearly a
half century later the public reluctantly came to this view. Still,
sad to relate, the same history had to be repeated in regard to the
telegraph and telephone industry, and in some quarters the ultimate
outcome is not yet recognized. The Interstate Commerce Act itself,
with odd inconsistency, contains an anti-pooling provision (section
5) the purpose of which seems to have been to compel competition as to
rates which is now practically impossible under the other provisions
of the law. The policy of "monopoly-accepted" was seen to involve as
a necessary feature, public regulation of rates, to the point, if
necessary, of absolutely fixing them. The principle has come to be
accepted that wherever competition ends there public regulation of
prices and service begins. Monopolistic enterprises are _ipso facto_
quasi-public institutions.

Sec. 12. #Field of its application#. This policy, gradually extending
in practice, came to be applied to the class of industries which,
for lack of a better name, are called local utilities. The one
characteristic that they all have in common is that the service,
or product, which is sold requires for its delivery an expensive,
permanent, physical plant, and some special use of public highways.
Thus gas pipes, water pipes, poles and wires for telegraph, telephones
and electric light, street railways, regular steam railroads and some
other minor industries all answer to this test.[16]

Beginning about the year 1900 one state after another enlarged the
powers of its state railroad commission or created a new corporation
commission to regulate these "local" or "public utilities."[17] They
have accomplished much, but the development of this kind of regulation
has not proceeded in many cases beyond the adjustment of relative
rates and the abolition of discrimination among the different
individuals and classes of customers. Experience has shown the great
difficulty of determining what is a fair absolute level of charges.
A new science of accounting has been developing to assist in the
solution of a problem, the complexity of which transcends the agencies
at hand to deal with it. With this policy applied to the local utility
(and railroad) phase of monopoly, there remains still the problem of
the industrial trusts in the manufacturing enterprises.

Sec. 13. #The industrial trust,--a natural evolution?# The policy that
one is inclined to favor regarding industrial trusts depends very
much on one's answer to the question: Are or are not industrial trusts
natural growths? In this bare form the question is somewhat vague, but
the thought of those who answer it in the affirmative is positive if
not always entirely clear. They (at least the extreme representatives
of this view) declare that trusts have been, are, and will continue
to be, the results of a "natural evolution" of business conditions, as
inevitable as the great changes in the physical world. If this is so
man and society must recognize the facts, must waste no efforts vainly
in fighting against fate, but should accept the trusts and realize
their possibilities for good. And these are declared to be great, for
it is assumed that without the trusts all of the economies of large
production must be sacrificed. Irresistible economic forces, it is
said, are creating larger and larger units of business; friendly
cooeperation and unified action must take the place of competition in

The outcome must be monopoly in every important line of manufacturing
industry and perhaps of commerce. In view of public opinion toward
monopoly, its acceptance necessitates its regulation. This argument
is supported by appeal to the experience in the field of railroads
and other local utilities, where public opinion has, after long
hesitation, recognized competition to be impracticable and the
acceptance of monopoly as inevitable. As extremes often meet, the view
of the industrial trust as a natural evolution is most favored on the
one hand by men of "big business," already interested financially
in trusts, and on the other hand by the most radical communists (or
socialists) whose ideal is the complete monopolization of industry
under the government.

Sec. 14. #Artificial versus natural growth.# Opposed to this view is a
deep and widespread popular opinion or prejudice, against the trust
and in favor of competition. General opinion in this case (as not
always) finds much support in special economic studies of the methods
by which the existing industrial trusts came into being. First the
question properly is raised; just what is meant by "natural"? In a
sense everything has been the natural outcome of evolution,--the steam
engine, the submarine, the boycott, militarism. In an equally good,
if not better sense, every mechanical invention and every method of
industrial organization is artificial, has been the result of man's
choice and effort. In any case men may choose as good or reject as
unsuitable or bad, any particular mechanical device, and society
may decide to adopt any particular policy toward a certain form of
business organization and certain business practices (unless, indeed,
our philosophy be that of automatism, crude determination or fatalism,
regarding all human affairs).

Now when one examines the methods which the notable trusts actually
did employ, and apparently had to employ, even when they were already
powerful single enterprises, in order to destroy their competitors and
to attain their monopolistic power, the word "natural" seems hardly to
describe the process. The evidence is not a matter of hearsay but is
embodied in a long line of judicial decisions, and in numerous special
inquiries by governmental commissions and officials.[18]

Sec. 15. #Kinds of unfair practices#. This evidence is a startling
array of "unfair practices" and "unfair" forms of competition, which,
however novel in appearance, are essentially of the kind that has been
illegal under the common law for the past five hundred years. Many of
these practices were baldly dishonest, many of them were contemptibly
mean. The manifold varieties of unfair competition may be roughly
grouped under three headings according as they are connected with (1)
Illegal favors received from public or quasi-public officials; (2)
Discrimination against, or control of, customers; (3) Foul tactics
against competitors.

(1) Among the practices in the first group are discriminatory rates
and rebates from railroads, favoritism in matters of taxation, undue
influence in legislatures, special manipulation of tariff rates
through powerful lobbies, or paid agents, undue influence in the
courts through the employment of lawyers of the highest talent, who
often later became judges.

(2) Among the unfair practices toward customers are discriminations
among them by the various forms of price cutting, grants of credit,
and kinds of service. The liberty of retail dealers is limited in
a variety of ways, such as fixing resale prices, requirement of
exclusive dealing, and full-line forcing.

(3) All the methods just mentioned as employed in dealings with
customers are likewise unfair toward competitors. Many other methods
are used to the same end, such as: enticing away their employees,
or corrupting and bribing them to act as spies, paying secret
commissions, false advertising, misrepresenting competitors, imitating
their patterns in goods of defective workmanship, shutting off their
credit or their supplies of materials, acquiring stock in competing
companies, malicious suits, infringement of patents, intimidation by
threats of business injury or of scandalous exposures, operation of
bogus independent companies.

Sec. 16. #Growing conception of fair competition.# Any industrial trust
that was able to gain domination and monopoly power only by the use of
such practices, or any part of them, can hardly be deemed the result
of a "natural evolution." If "artificial" means the use of artifices
surely this development deserves the adjective. Yet even if not
natural, this development may be thought to be "inevitable," human
nature being as it is. But the bald fact is that while the great trust
movement was in progress no effort worthy of the name was being made
to enforce even the then existing laws and to oppose this artificial
development. The same allegation of inevitableness was once commonly
made of discriminatory railroad rates and rebates, evils which have
been in large part remedied only since the period 1903-1906, when at
last intelligent action was taken.

To those that came to see the problem in this light, acceptance
of industrial monopoly with its complex task of fixing by public
commission the prices on innumerable kinds and qualities of goods
seemed at least premature. Rather, the first step toward a solution
seemed to be the vigorous prevention of unfair practices, and the
next step a positive regularizing of "fair competition."[19] The
fundamental idea in this is the enforcement of a common market price
(plus freights) at any one time to all the customers of an enterprise.
By this plan potential competition would become actual, and small
enterprises that were efficient might compete successfully within
their own fields with large enterprises that maintained prices above
a true competitive level. Even general lowering of prices by a large
enterprise with evident purpose of killing off smaller competitors is
unfair competition under this conception. It was for years recognized
that the realization of this policy required legislation regarding
uniform prices and the creation of a commission for the administration
of the law.

Sec. 17. #The trust issues in 1912#. The campaign of 1912 presented in an
interesting manner the three policies above outlined. The
Republican party led by President Taft stood for the policy of
monopoly-prosecuted; its program was the vigorous enforcement of the
Sherman law. The Progressive party, led by Mr. Roosevelt, stood in the
main for the policy of "monopoly-accepted-and-regulated"; its program
called for minimizing prosecution and for developing a system of
regulation of trust-prices. The Democratic party, led by Mr. Wilson,
stood for the policy of competition-maintained-and-regulated, and the
problem was to find means to strengthen and regularize the forces of

In practice these programs doubtless would be less divergent than they
appear. All alike proposed the retention of the Sherman law. The
two proposals to go further were presented as mutually exclusive
alternatives, whereas they necessarily must supplement each other in
some degree. The Progressives did not expect all industries to become
monopolies, and the Democrats tacitly conceded to monopoly-accepted
the large field of transportation and local utilities it already had
occupied. But there was a real difference in the angle of approach and
a real difference in emphasis. The Democratic program (the somewhat
unclearly) showed greater distrust of monopoly and greater faith in
the possibilities of creating fair conditions of competition (which
never had fully prevailed) in which efficiency would be able to prove
its merits and monopoly would work its own undoing. It was the more
logical for the country to give this policy at least a trial before
adopting irrevocably the policy of general industrial monopoly.
In either case competition actual or potential is the fundamental
principle by which prices have to be regulated. Where competition is
enforced it is by applying some general rules that create a general
market price instead of discriminatory prices, but the fixing of the
price is left to the competitors. Where monopoly is accepted prices
must be fixed with reference to an estimated competitive standard,
that which under hypothetically free conditions would just suffice to
attract and retain private enterprise and capital.

Sec. 18. #Anti-trust legislation of 1914#. The anti-trust legislation
of 1914, passed by the Democratic party to carry out its program, is
embodied in two acts: the Clayton Act, laying down new rules; and
the Federal Trade Commission Act, mainly to provide an agency with
administrative and quasi-judicial functions to deal with unfair
practices. This displaced the Bureau of Corporations, established in
1903. The Clayton Act forbids discrimination where the effect may be
to lessen competition, or tend to create a monopoly. Due allowance may
be made for difference in the cost of selling or transportation, but
a difference is not required in such cases. It forbids contracts
to prevent dealers from handling other brands. It forbids corporate
ownership of stock in a competing corporation, forbids interlocking
directorates in large banks and in other competing corporations,
with capital, surplus and undivided profits aggregating more than
$1,000,000. The Trade Commission Act in addition to its administrative
provisions for investigation, reports, and readjustment of the
business of companies upon request of the courts, declares that
"unfair methods of competition in commerce" are unlawful, and both
empowers and directs the Commission to prevent their use (banks and
common carriers subject to other acts being excepted).

These acts are too new to have been given a fair test. They have,
however, given evidence of exercising at once an influence upon
the situation. They are imperfect in some details that will require
amendment; but they mark the beginning of a new policy toward
industrial monopoly, the results of which will be watched with the
deepest interest.

[Footnote 1: See Vol. I, especially pp. 74 and 75.]

[Footnote 2: See Vol. I, pp 59, 68, 70-71]

[Footnote 3: See Vol. I, pp. 66, 67.]

[Footnote 4: 77 Miss., 476. Cited by Bruce Wyman, "Control of the
Market," p. 137.]

[Footnote 5: 19 R.I., 255.]

[Footnote 6: 115 Ga., 429.]

[Footnote 7: Mogul Steamship Company v. McGregor (L.R. 23 Q.B.D.

[Footnote 8: Bruce Wyman, "Control of the Market," p. 22. In 1914 (216
Fed. 971), a federal court granted an injunction restraining the use
of fighting ships by a combination, and in 1915 (220 Fed 235),
the court indicated a willingness to grant a similar injunction if
necessary. Similarly "fighting brands" of goods have been recently

[Footnote 9: See below, sec. 15.]

[Footnote 10: Averrill v. Southern Railway (75 Fed. Rep. 736).]

[Footnote 11: 107 Minn. 145.]

[Footnote 12: Arnott v. Pittston and Elmira Coal Co., 68 N.Y. 558

[Footnote 13: See ch. 27, sec. 16.]

[Footnote 14: At the same time the rights of injured individuals
are better safeguarded by sec. 7 of the Sherman law, permitting the
recovery of threefold damages and attorney's fees.]

[Footnote 15: See ch. 28, sec. 9.]

[Footnote 16: See further, ch. 30, secs. 5-9.]

[Footnote 17: See ch. 27, sec. 15, on state commissions.]

[Footnote 18: A few among the most important sources are the Report
of the Industrial Commission, 1898-1901, 19 volumes; reports of the
Bureau of Corporations on the petroleum and tobacco industries; U.S.
Supreme Court decisions, e.g., the Addystone Pipe case (175 U.S. 211),
given in Ripley, Trusts, Pools, and Corporations, p. 86; the Standard
Oil case (221 U.S. 1), and the Tobacco Trust case (221 U.S. 106); and
the very comprehensive volume on "Trust Laws and Unfair Competition,"
by Joseph E. Davies, Commissioner of Corporations, Washington, 1916.]

[Footnote 19: John B. Clark, the distinguished professor of economics
in Columbia University, has been the foremost and clearest exponent of
this idea, in his "The Control of Trusts," 1901, 2d ed., 1912, and in
other works.]



Sec. 1. Waves of opinion as to public ownership. Sec. 2. Primary functions
of government favoring public ownership. Sec. 3. Economic influences
favoring public ownership. Sec. 4. Forms of municipal ownership. Sec. 5.
Localized production favoring monopoly. Sec. 6. Economies of large
production favoring monopoly, Sec. 7. Uniformity of products favoring
monopoly. Sec. 8. Franchises favoring monopoly. Sec. 9. Various policies
toward local public service industries. Sec. 10. State ownership of various
kinds. Sec. 11. National ownership. Sec. 12. Economic basis of public

Sec. 1. #Waves of opinion as to public ownership.# Opinion and practice
in the matter of the public ownership of wealth and the direct
management of enterprises has moved in waves. In feudal times, when
government was practically identical with the personal ruler, and
the private "domains" of the lord or king were the sole source of
his public revenues,[1] holdings of this kind were very large. Their
public nature came to be more fully recognized, but they did not yield
large revenues, and gradually were in large part sold or given away to
private owners. This was particularly true in England, and in a less
degree on the continent of Europe. The conviction grew that the state,
or government, was an inefficient enterpriser, and that the sound
public policy was to foster private industry and obtain public
revenues by taxation. The ideal was embodied in the _laissez-faire_
philosophy that government should confine itself exclusively to the
most essential political functions, leaving the economic functions
absolutely alone. It should keep the peace, prevent men from beating
and robbing each other, and preserve the personal liberty of the
citizen.[2] Thus, it was believed, all of the economic needs would be
provided for by competition, in the best way humanly possible, in the
quantities and at the rate needed. This policy attained its maximum
influence in the first half of the nineteenth century in England, and
in America probably just before the Civil War, in the decade of the

Sec. 2. #Primary functions of government favoring public ownership#. Some
public ownership, however, is necessary for the exercise even of
the primary political functions of the state. Civilized government
requires the use of numerous material agents. Buildings for
legislative and executive offices, custom-houses, post-offices,
lighthouses, can be rented of private citizens, as post-offices
usually are in small places; but it is obviously economical and
convenient in large cities for the government to own the public
buildings. Government can reduce to a minimum its direct employment
of officials by "farming out" the taxes, as all countries once did
to some extent, and as France continued to do up to the French
Revolution. It is now the general policy for government to own or
control its essential agencies, but this does not involve in every
case the employment of day-labor direct as in cleaning the streets or
collecting garbage. The more simple political functions shade off into
the economic. To coinage usually are added the issue of legal-tender
notes and certain banking functions: the post carries packages,
transmits money, and in most countries now performs the function of
a savings-bank for small amounts. The social and industrial functions
undertaken by public agencies have steadily increased since the
middle of the nineteenth century, and the sphere of the state has been
enlarging.[3] The question ever open is as to the proper limits to
this development.

Sec. 3. #Economic influences favoring public ownership#. In some cases
private ownership is difficult because of the excessive cost of
collecting for the service. The cost of maintaining toll houses on a
turnpike sometimes exceeds the amount collected. Collection in
other cases, as for the service of lighthouses to passing ships, is
impossible. Public industry may secure, through the economy of large
production, a cheaper and more efficient service, the benefits and
costs being diffused throughout the community. The benefits of the
work of experiment-stations for agriculture are felt immediately by
the farmers, but are diffused to all citizens. A manufacturer able to
keep his method secret, or to retain his advantages for a time, can
afford to undertake experiments in his factory, but the farmer seldom
can. The public ownership of parks for the use of all gives a maximum
of economy in the production of the most essential goods,--fresh air,
sunshine, natural beauty, and playgrounds in the midst of crowded
populations. Municipal ownership of waterworks is an extension of the
same idea. Not only because large amounts of water are used by the
public, but because cheap, pure, abundant water is an essential
condition to good citizenship, speculation should in every possible
way be eliminated from this industry.

The assumption is made in the _laissez-faire_ doctrine that the
interest of the public harmonizes with that of the individual. But
this proves often not to be the case. For example, the forest has an
immediate value to its owners and to the consumers of lumber, and it
has also a diffused utility in its influence on industry, on climate,
on navigation, on water-power and on floods. Yet, as the private
owner, unless a great land monopolist, does not control enough of the
forest to appreciably affect any of these things, and could rarely
sell them even if he could affect them, he will cut down the
tree whenever he can gain by doing so. In this situation either
governmental control or governmental ownership of forests is

Each kind of political unit, or subdivision of government, develops
characteristic kinds of public ownership and industry. Federal states
consist of three main groups of political units: national, provincial,
and local. Provincial units are the largest subdivisions, as the
American "states," or commonwealths, the German states, and the
provinces in other countries. The term local political unit is more
complex and may mean county, township, village, city, or school or
sanitary district; but most of what is to be said of local ownership
refers to cities or to incorporated villages.

Sec. 4. #Forms of municipal ownership#. Local political units acquire
ownership only in local industries and in wealth used locally by the
citizens. Nearly all parks and recreation grounds are owned by cities.
As population has become more dense, private yards of any extent
have become impossible, in cities, for all but the wealthy. Public
ownership of parks insures a "breathing place" and recreation grounds
to the common man in the most economical way. Of late the movement for
large and small public parks and playgrounds has gone on rapidly in
American cities. Related to parks are public baths, public libraries,
art collections, museums, zoological gardens, etc. Some have seen
danger in this policy, but the public sees no such danger so long
as the things supplied gratify the higher tastes--as art, music,
literature, and social recreation. These give no encouragement to
the increase of improvident families and to the breaking down of
independent character. The means of local communication--streets,
roads, bridges--were once owned largely by private citizens. Here and
there still are found toll roads and toll bridges built under charters
granted a century ago, but tolls on public thoroughfares are for the
most part abolished. A public market, where the producer from the
farm and the city consumer can meet, is an old institution. About two
thirds of the cities of 30,000 population or more have public markets
or scales, and fully one third have public markets of importance. New
York City has six large retail and wholesale markets, for selling meat
and farm produce, in which rents or fees are charged, and several open
markets. There has recently been a large movement in this direction.

The providing of apparatus for extinguishing fires is always a public
duty; the conveyance of waste water is increasingly a public function.
The supply of pure water for domestic and business uses, for fire
protection and for street cleaning, while often a private enterprise
in villages, and sometimes in large cities, is increasingly undertaken
by public agencies. Most of the largest cities now own their own water
supply systems. Public ownership of gas and electric lighting is less
common, as the utility supplied is not so essential and the industry
is somewhat less subject to monopoly; but the difference is one of
degree only. Street railroads are often under public ownership in
Europe; but there have thus far been few cases of the kind in the
United States and Canada.[4]

Sec. 5. #Localized production favoring monopoly#. A number of these
enterprises have characteristics in common which appear to make
inevitable their drift into monopolistic control. Waterworks, gas,
electric lighting, street railways, telephone systems, are among
these. However fierce may be the competition for a time, sooner or
later either one company drives out the other or buys it up, or both
come to an agreement by which the public is made to pay higher prices.

A feature favoring the growth of monopoly when such industries are
left to private enterprise is the need to produce and supply the
commodity or service at a given locality. While two street railways
can compete on neighboring streets, it is physically impossible for
two or more to compete on the same street. Two systems of water-mains
or gas-mains can be put down, as sometimes is done, but this is not
only a great economic waste, but the tearing up of the streets is an
intolerable public nuisance. This difficulty is less marked in the
case of telephones and electric lighting, and some persons still cling
to faith in competition to regulate the rates in those industries; but
faith in competition between water companies and between gas companies
has been given up by nearly all persons now, as it was long since by
students of the subject.

Sec. 6. #Economies of large production favoring monopoly#. A second
feature favoring monopoly in such industries is the marked advantage
of large production in them. These industries are usually spoken of as
"industries of increasing returns." This advantage is enjoyed in
some degree by every enterprise, but it is gradually neutralized and
limited. The need to extend an expensive physical plant to every point
where customers are to be served, and the very much smaller cost
per unit of delivering large amounts of water, gas, electricity, and
transportation, on the same street, offers a greater inducement
for one competitor to crowd out or buy out the other at a more than
liberal price. Even then, larger net dividends and correspondingly
larger capitalization are secured than were before possible to both
companies combined.

Sec. 7. #Uniformity of products favoring monopoly#. A third feature
favoring monopoly is uniformity in the quality of the furnished. It is
a general truth that competition is most persistent where there is the
greatest range of choice open to the customer, and consequently the
most individual treatment required of the enterpriser. An artist,
even a storekeeper, attracts about him a body of patrons who like his
product (for the merchant's manner and method of dealing are a part
of the quality of his goods), and who cannot be tempted away by slight
differences in price. Rival companies in the stage of competition are
seen to claim superiority for their particular goods and to improve
their service in every way possible. A new telephone company, entering
where a monopoly has held the field, works at once a wonderful
betterment in rates, courtesy, and service. But as the product of all
competitors attains the highest technical standard possible at the
time, the rivalry is reduced to one of price, and it is usually a
"fight to the finish."

Sec. 8. #Franchises favoring monopoly#. A fourth feature favoring
monopoly in these enterprises is the necessity of making permanent and
exceptional use of the public streets and alleys. If this right were
granted by a general law to every citizen, this feature would be
sufficiently implied in the foregoing discussion. As it would be
intolerable to allow private interests to use public property in
whatever way they wished, the legislative body makes special grants in
such cases in view of the circumstances. Not only is the legislature
(or council, or county board of commissioners, etc.) led by the
economic difficulties to withhold a charter from a second company, but
it may be corruptly influenced by the company already established. The
knowledge of the opposition to be encountered in getting a franchise
must keep competitors out, even tho monopoly prices are maintained.

In view of these several features, which are so closely related that
they form a common character, more or less fully shared by various
industries, and especially in view of the necessity for the formal
granting to them of peculiar privileges in the form of a public
franchise, the public, in order to protect the general interest, is
forced to undertake an exceptional control of these industries.

Sec. 9. #Various policies toward local public service industries#.
Several courses are open to the public, acting in its political
capacity, to retain those monopolistic advantages for the general
welfare. (a) It may do nothing, trusting vainly to competition to
regulate the rate, or consciously leaving the result to be worked out
by the monopoly principle; this is what in most cases has been done in
the past in America. (b) It may attempt, in granting the franchise,
to fix near cost the charge for the service or product, so that the
franchise will be worth little as private property. (c) It may leave
the rate to be fixed by the monopoly principle, but charge for the
franchise so much that the value of the monopoly is appropriated into
the public treasury. (d) It may have public officials carry on the
business, either selling the product at cost or making monopoly
profits that go into the public treasury. Various combinations of
these plans are followed in practice, the most common plan being the
fixing of maximum rates which, with improved methods, generally become
ineffective. It is difficult to fix a uniform rate that is equitable,
because conditions change, and, further, because a uniform rate must
be applied to all parts of the town, altho the cost of service varies
greatly. It is difficult because of the limited number of competent
bidders, to sell the franchise for what it is worth. There remains the
policy of public ownership to secure the profits of monopoly to the
public, either directly or in a diffused manner. There is no doubt
that the general trend of municipal policy everywhere is toward public
ownership of this type of local public service industries.

Sec. 10. #State ownership of various kinds#. The movement toward public
ownership by the American states has been much less marked than that
by the municipalities. The commonwealths have retired from some fields
where once they were engaged in industry. Students of American history
know that between the years 1830 and 1840 some states engaged largely,
even wildly, in canal building, railroad construction, banking and in
other enterprises. The undertaking of these industries was determined
often by political and by selfish local interests, and their operation
often was wasteful. A few enterprises succeeded, the most notable of
these being the Erie Canal in New York. The unsuccessful ones remained
worthless property in the hands of the state or were sold to private
companies, as in the case of the Pennsylvania Railroad. This reckless
state enterprise was a bitter lesson in public ownership, and
continued for three quarters of a century to have such an effect on
public opinion, that few proposals for public ownership could have a
fair hearing in America, But railroads and canals are publicly owned,
and more or less successfully operated, by many foreign states, as in
Prussia and other German states, in Switzerland, and in the new states
of Australia, and this policy is rapidly extending to other countries
and to varied industries.

There has been recently a greatly increased interest in forestry
shown by the American states. This is especially likely to be a state
enterprise wherever the forest tracts are entirely within the limits
of the state, as is the case in New York and Pennsylvania which
have been foremost in this work. At present at least 32 states have
forestry departments. Most of the forests in Germany are either
communal or state-owned. The schools, a great industry for turning
out a product of public utility, are largely conducted by the American
states and by local units rather than by the nation or by private
enterprise. The state encourages researches in the arts and sciences,
and gives technical training. A variety of minor enterprises have been
undertaken by states to supply salt, phosphate, banking facilities,
even some manufactures. One after another the states are adopting the
"state use" system of labor in the prisons and public institutions,
engaging in agriculture and manufacturing on a large scale, and
using the products, amounting to millions of dollars annually, almost
entirely for public purposes.

Sec. 11. #National ownership#. The national governments everywhere appear
to be enlarging the field of their ownership. This policy has its
roots far in the past. Some industries grow out of the political needs
of government. Established as a means of communication with military
outposts, the post became a convenient means of communication
for merchants and other citizens and grew into a great economic

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