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 prevailed.
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 interests.”
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.]
CHAPTER 28
THE PROBLEM OF INDUSTRIAL MONOPOLY
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 combination.
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 power.
_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 follows:
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 combination.
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 factories.
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 discrimination.
[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.]
CHAPTER 29
PUBLIC POLICY IN RESPECT TO MONOPOLY
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 trade.
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 welfare.
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 defects.
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 business.
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 competition.
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. 598).]
[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 prohibited.]
[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 (1877).]
[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.]
CHAPTER 30
PUBLIC OWNERSHIP
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 ownership.
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 fifties.
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 essential.
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