THE FORMATION OF MONOPOLIES IN CAPITAL.
Sec. 1. _Productive Economies of the Large Business._
Sec. 2. _Competitive Economies of the Large Business._
Sec. 3. _Intenser Competition of the few Large Businesses._
Sec. 4. _Restraint of Competition and Limited Monopoly._
Sec. 5. _Facilities for maintaining Price-Lists in different
Industries._
Sec. 6. _Logical Outcome of Large-Scale Competition._
Sec. 7. _Different Species of "Combines."_
Sec. 8. _Legal and Economic Nature of the "Trust."_
Sec. 9. _Origin and "Modus Operandi" of the Standard Oil Trust._
Sec. 10. _The Economic Strength of other Trusts._
Sec. 11. _Industrial Conditions favourable to "Monopoly."_
Sec. 1. The forces which are operating to drive capital to group itself
in larger and larger masses, and the consequent growth of the
business-unit, require special study in relation to changes effected
in the character of competition in the market and the establishment of
monopolies. The economies which give to the large business an
advantage over the small business may be divided into two
classes--economies of productive power, and economies of competitive
power.
In the first class will be placed those economies which arise from
increased sub-division of labour and increased efficiency of
productive energy, and which represent a net saving in the output of
human energy in the production of a given quantity of commodities,
from the standpoint of the whole productive community. These include--
(_a_) The effort saved in the purchase and transport of raw materials
in large quantities as compared with small quantities, and a
corresponding saving in the sale and transport of the goods,
manufactured or other. Under this head would come the discovery and
opening up of new markets for purchase of raw materials and sale of
finished goods, and everything which increases the area of effective
competition and co-operation in industry.
(_b_) The adoption of the best modern machinery. Much expensive
machinery will only "save labour" when it is used to assist in
producing a large output which can find a tolerably steady market. The
number of known or discoverable inventions for saving labour which are
waiting either for an increase in the scale of production or for a
rise in the wages of the labour they might supersede, in order to
become economically available, may be considered infinite. With every
rise in the scale of production some of these pass from the "unpaying"
into the "paying" class, and represent a net productive gain in saved
labour of the community.
(_c_) The performance of minor or subsidiary processes upon the same
premisses or in close organic connection with the main process, the
establishment of a special workshop for repairs, various economies in
storage, which attend large-scale production.
(_d_) Economies consisting in saved labour and increased efficiency of
management, superintendence, clerical and other non-manual work, which
follow each increase of size in a normally constructed business. These
are often closely related to (_b_), as where clerical work is
economised by the introduction of type-writers or telephonic
communication, and to (_c_), as by the establishment of more numerous
and convenient centres of distribution.
(_e_) The utilisation of waste-products, one of the most important
practical economies in large-scale production.
(_f_) The capacity to make trial of new experiments in machinery and
in industrial organisation.
Sec. 2. To the class Economies in Competitive Power belong those
advantages which a large business enjoys in competing with smaller
businesses, which enable it either to take trade away from the latter,
or to obtain a higher rate of profits without in any way increasing
the net productiveness of the community. This includes--
(1) A large portion of the economy in advertising, travelling, local
agents, and the superiority of display and touting which a large
business is able to afford. In most cases by far the greater part of
this publicity and self-recommendation is no economy from the
standpoint of the trade or the community, but simply represents a gain
to one firm compensated by a loss to others. In not a few cases the
"trade" may be advantaged to the damage of other trades or of the
consumer, as when a class of useless or deleterious drugs is forced
into consumption by persistent methods of self-appraisal which deceive
the public.
(2) The power of a large business to secure and maintain the sole use
of some patent or trade secret in machinery or method of manufacture
which would otherwise have gone to another firm, or would have become
public property in the trade, represents no public economy, and
sometimes a public loss. Where such improvement is due solely to the
skill and enterprise of a business man, and would not have passed into
use unless the sole right were secured to his business, this economy
belongs to the productive class.
(3) The superior ability of a large business to depress wages by the
possession of a total or partial monopoly of local employment, the
corresponding power to obtain raw material at low prices, or to extort
higher prices from consumers than would obtain under the pressure of
free competition, represent individual business economies which may
enable a large business to obtain higher profits.
Sec. 3. Now all these forces operative in trades which are said to be
subject to the law of increasing returns tend to increase the size and
to diminish the number of businesses competing within a given area. In
some industries the expanding size of the market or area of
competition keeps pace with this movement, so that the total number of
the larger competitors within the market may be as great as before.
But in most of the markets the growing scale of the business is
attended by an absolute diminution in the number of effective
competitors, or at any rate by an increase which is very much smaller
than the increase in the amount of trade that is done.
So long as we have merely the substitution of a smaller number of
large competing businesses for a larger number of small ones, no
radical change is effected in the nature of industry. So long as
every purchaser is able to buy from two or more equally developed and
effectively competing firms he can make them bid against one another
until he obtains the full advantage of the economies of large-scale
production which are common to them. So long as there remains
effective competition, all the productive economies pass into the
hands of the consumer in reduction of price. Nay, more than this, a
competing firm cannot keep to itself the advantages of a private
individual economy if its competitor has another private economy of
equal importance. If A and B are two closely competing firms, A owning
a special machine capable of earning for him 2 per cent. above the
normal trade profit, and B owning a similar advantage by possession of
"cheaper labour," these private economies will be cancelled by
competition, and pass into the pocket of the consuming public.
There is every reason to believe that with a diminution in the number
of competitors and an increase of their size, competition grows keener
and keener. Under old business conditions custom held considerable
sway; the personal element played a larger part alike in determining
quality of goods and good faith; purchasers did not so closely compare
prices; they were not guided exclusively by figures, they did not
systematically beat down prices, nor did they devote so large a
proportion of their time, thought, and money to devices for taking
away one another's customers.[124] From the new business this personal
element and these customary scruples have almost entirely vanished,
and as the net advantages of large-scale production grow, more and
more attention is devoted to the direct work of competition. Hence we
find that it is precisely in those trades which are most highly
organised, provided with the most advanced machinery, and composed of
the largest units of capital, that the fiercest and most unscrupulous
competition has shown itself. The precise part which machinery, with
its incalculable tendency to over-production, has played in this
competition remains for later consideration. Here it is enough to
place in evidence the acknowledged fact that the growing scale of the
business has intensified and not diminished competition. In the great
machine industries trade fluctuations are most severely felt; the
smaller businesses are unable to stand before the tide of depression
and collapse, or are driven in self-defence to coalesce. The borrowing
of capital, the formation of joint-stock enterprise and every form of
co-operation in capital has proceeded most rapidly in the textile,
metal, transport, shipping, and machine-making industries, and in
those minor manufactures, such as brewing and chemicals, which require
large quantities of expensive plant. This joining together of small
capitals to make a single large capital, this swallowing up of small
by large businesses, means nothing else than the endeavour to escape
the risks and dangers attending small-scale production in the tide of
modern industrial changes. But since all are moving in the same
direction, no one gains upon the other. Certain common economies are
shared by the monster competitors, but more and more energy must be
given to the work of competition, and the productive economies are
partly squandered in the friction of fierce competition, and partly
pass over to the body of consumers in lowered prices. Thus the
endeavour to secure safety and high profits by the economies of
large-scale production is rendered futile by the growing severity of
the competitive process. Each big firm finds itself competent to
undertake more business than it already possesses, and underbids its
neighbour until the cutting of prices has sunk the weaker and driven
profits to a bare subsistence point for the stronger competitors.
So long as the increased size of business brings with it a net
economic advantage, the competition of ever larger competitors, whose
total power of production is far ahead of sales at remunerative
prices, and who are therefore constrained to devote an increased
proportion of energy to taking one another's trade, must intensify
this cut-throat warfare. The diminishing number of competitors in a
market does not ease matters in the least, for the intensity of the
strife reaches its maximum when two competing businesses are fighting
a life or death struggle. As the effective competitors grow fewer, not
only is the proportion of attention each devotes to the other more
continuous and more highly concentrated, but the results of success
are more intrinsically valuable, for the reward of victory over the
last competitor is the attainment of monopoly.
Sec. 4. To keen-eyed business men engaged in the thick of large-scale
competition it becomes increasingly clear that good profits can only
be obtained in one of two ways. A successful firm must either be in
possession of some trade secret, patent, special market, or such other
private economy as places it in a position of monopoly in certain
places or in certain lines of goods, or else it must make some
arrangement with competing firms whereby they shall consent to abate
the intensity or limit the scope of their competition. It will
commonly be found that both these conditions are present where a
modern firm of manufacturers or merchants succeeds in maintaining
during a long period of time a prosperous or paying business. The
firm, though in close competition over part of the field of industry,
will have a speciality of a certain class of wares, at any rate in
certain markets, and it will be fortified by a more or less firmly
fixed rate of prices extending over the whole class of commodities.
Both of these forces signify a restriction upon competition.
To the older economists, who regarded free competition as the only
safe guarantee of industrial security and progress, it appeared
natural that capitalists continually engaged in the maximum
competition would yet secure a living rate of profit, for if this were
not the case, they ingenuously urged, capital would cease to remain in
such a trade. With the fallacy involved in this theory we shall deal
in a later chapter. It is sufficient here to observe that where keen
competition is operative in modern machine industries the average rate
of profits obtained for capital is generally below that which would
suffice to induce new capital invested with full knowledge to come
into the trade.
In highly organised trades, where the natural effects of free
competition have been fully manifested, we find that the hope of a
profitable business is entirely based upon the possibility that a
trade agreement will so mitigate competition as to allow a rate of
selling prices to obtain which remains considerably higher than that
which free competition would allow.
As the field of competition is narrowed to a comparatively few large
competitors, there arises a double inducement to suspend or mitigate
hostilities; as the competition is fiercer more is gained by a truce;
as the number of combatants is smaller, a truce can be more easily
formed and maintained. In most machine-using countries each branch of
a staple industry endeavours to protect itself from free competition
by a combination of masters to fix a scale of prices. This is the
normal condition of trade in England to-day. These combinations to fix
and maintain prices are not equally successful in all trades, but they
are always operative to a more or less extent in modifying or
retarding the effects of competition. Where trade unions of operatives
are strong, well-informed, and resolute, or where outsiders have large
facilities for investing capital and dividing the trade, the
endeavours to maintain prices and to secure a higher than the
competitive rate of profits are unsuccessful. The joint operation of
both these conditions in the cotton-spinning trade explains why the
Lancashire spinners have been unable to check the effects of
cut-throat competition. But throughout all branches of textile, metal,
pottery, engineering, and machine-making trades strong and persistent
endeavours are made by co-operative action of capitalists to limit
competition by fixing a scale of prices which should not be underbid.
Where competing railways fix a tariff of rates for carriage, or
competing manufacturers fix a scale of prices for their goods, their
object is to secure to themselves in higher profits a portion or the
whole of the productive and competitive economies attending
large-scale production, instead of allowing them by unrestricted
competition to pass into the hands of their customers. Suppose that a
number of steel rail manufacturers freely competing would drive down
the selling price to L1 a ton, but that by a trade agreement they
maintain L1 10s. as the minimum price, 10s. per ton represents the
economies of production which they divert from their customers into
their own possession by a limitation of the competition. Part of the
10s. may represent the actual saving of the labour which would have
been spent in competition as prices fell from L1 10s. to L1. Part may
represent a taking in higher profits of some of the economies of new
machinery or improved methods of production common to the competing
firms, and which would inevitably have led to a fall of price if the
competitive process had been allowed free play.
The prices thus fixed are monopoly prices--that is to say, they are
determined by the action of a number of competing capitals which at a
certain point agree to suspend their conflict and act as a single
capital; when the bidding is above a certain figure they are many,
when it is below that figure they are one. The condition in such a
trade is one of limited monopoly. The prices fixed by such trade
agreements will generally be different from those of a single firm
with the absolute monopoly of a market, whose prices are arranged to
yield the maximum net profit on the capital engaged. For since the
economies of competition and some of the economies of production would
be far greater for a single producing firm with a monopoly, the
schedule of supply prices measuring the expenses of producing the
different quantities of goods will be different, and this difference
will be reflected in a different scale of non-competitive market
prices from that which would issue from a trade agreement. Moreover, a
loose voluntary compact between trade rivals yields a monopoly of a
far feebler order than does the unity of a single capital. If a scale
of prices were fixed which would yield a considerably higher profit
than the market rate, the temptation to secure a larger share of trade
by secret underbidding through commissions, drawbacks, or otherwise,
or even by an open cutting of rates, is very powerful. Moreover, the
ability of a number of firms with conflicting interests to secure this
monopoly by quick and vigorous repression of the attempts of outside
capital to come in either for the purpose of sharing the higher
profits, or of being bought out, is far less than in the case of a
single monopolist firm. So the scale of prices fixed by a number of
competing firms will generally be nearer to the competition prices
than would be the case with the prices of a single monopolist.
Sec. 5. The recognition of the advantages of limiting competition by
price tariffs, and the experience of the difficulty of maintaining
such tariffs, lead competing businesses to take further steps in the
curtailment of competition. Where a powerful trade opinion can be
focussed on an offender against the scale, where he can be boycotted
or otherwise subjected to punishment, and where outsiders can be
prevented from intruding into the trade, a common scale of profitable
prices can often be maintained with the verbal or even the tacit
consent of those concerned. This is the case in many manufactures
where the fixed and well-known character of the goods makes a close
price-list possible. Retail dealers in local markets are often able to
keep a close adherence to a rigid scale by the pure force of _esprit
de corps_. The price of bread, meat, milk, coals, and other articles
sold locally by well-known measures, is seldom, if ever, regulated by
free competition among the vendors. In articles where more depends
upon the individual quality of wares, and where a rigid tariff is less
easily fixed and less easily maintained, as in the case of vegetables,
fruit, fish, and groceries, trade agreements are less easy to
maintain. Still more difficult is it to maintain a tariff for articles
of dress or adornment of the person or the house, and in other
articles where the consumer is less confined to a narrow local market.
The general experience of manufacturing and mercantile businesses,
where each firm is closely confronted by other firms of similar
capacity and equipment at every point in the market, indicates an
increasing difficulty in maintaining prices at a profitable level.
Everywhere complaints are heard of a reckless use of the productive
power of machinery, of over-stocked markets, of a cutting of prices in
order to get business, and of a growing inability to make a living
rate of profit.
Sec. 6. The endeavour of a number of individual businesses in a trade to
fix and maintain a certain profitable scale of prices is constantly
frustrated. The introduction of new machinery enabling certain firms
to make a profit at prices below the tariff induces them to utilise
their full productivity, cut prices, and still sell at a profitable
price; others involved in the meshes of speculative production are
compelled to cut prices and effect sales even at a loss; the
difficulty of finding safe investments drives new capital into the
hands of company-promoters, who fling it with criminal negligence into
this or that branch of production, underbidding the tariff to win a
footing in the market. All these forces render loose agreements to
limit competition more and more inadequate to secure their purpose.
Frequent experience of the impotence of these partial forms of
co-operation drives trade competitors to seek ever closer forms of
combination. An issue of this necessity is the Syndicate and the
Trust. By raising the co-operative action so as to cover the whole,
and by thus reducing the competition to zero, it is hoped that a union
may be formed strong enough to maintain monopoly prices. Thus the
Trust is seen as the logical culmination of the operation of economic
forces which have been continually engaged in diminishing the number
of effective competitors, while increasing their size and the
proportion of their energy devoted to the competition.
At each stage in the process the smaller competitors are eliminated,
and the larger driven to increase their size so that the whole may be
illustrated by a pyramid, the base or first stage of which consists of
a larger number of small units, and each higher stage of a smaller
number of larger units, with a Trust or Monopoly Syndicate for its
apex.
Sec. 7. The motive which induces a number of businesses hitherto
separate, or associated merely for certain specific actions, such as
the fixing of prices or wages, to amalgamate so that they form a
single capital on which a single rate of interest is paid, is a
double-edged one. There is, on the one hand, the desire to protect
themselves against excessive competition and cutting of rates, and on
the other hand a desire to secure the advantages which arise from
monopoly. The way in which Syndicates and Trusts are regarded depends
very much from which of these two aspects they are regarded. Those who
consider these business "combines" as arbitrary and high-handed
interferences with freedom of commerce, undertaken in order to place
in the hands of a few persons a power to rob and oppress the consuming
public by legalised extortion, regard the motive of combination to be
monopoly. On the other hand, the combining firms represent themselves
as the victims of circumstances, bound in self-protection to combine.
Our analysis of the operations of commercial competition enables us to
see that these two forces are not really separate, but are only two
ways of looking at the same action. Every avoidance of so-called
"excessive" competition is _ipso facto_ an establishment of a
monopoly. The tariff of prices established a weak and partial
monopoly. The "combine," whether it takes the name of "ring,"
"syndicate," or "trust," succeeds, in so far as it establishes a
stronger and more absolute monopoly.
In their economic aspect these terms are somewhat vague, the vagueness
arising in some degree from the changing and secret shapes these
combinations often find it convenient to adopt in order to preserve
the appearance of competition, or to avoid public obloquy or legal
interference. "Combine" is probably the generic term which covers all
these operations. A syndicate of capitalists are said to form a
"combine" with the view of controlling prices so as to pay a
profitable interest. If they apply their capital not to the
acquisition of the plant and machinery of manufacture with the view of
regulating production, but directly and mainly to the planning of some
speculative stroke or series of strokes in the produce market,
obtaining temporary control of sufficient goods of a particular kind
to enable them to manipulate prices, they are said to form a "corner"
or "ring." Such forms of combined action are generally of short
duration. Technically they consist in an artificial diversion[125] of
a particular class of goods from the ordinary channel of a number of
competing owners into a single ownership, so that they may be held and
placed upon the supply market at such times and in such ways as to
enable the owner to obtain a famine price. The following description
of a wheat "corner" will serve to exemplify this method of
"combine":--
"The man who forms a corner in wheat, first purchases or secures the
control of the whole available supply of wheat, or as near the whole
supply as he can. In addition to this he purchases more than is really
within reach of the market by buying 'futures,' or making contracts
with others who agree to deliver him wheat at some future time. Of
course he aims to secure the greater part of his wheat quietly, at low
figures; but after he deems that the whole supply is nearly in his
control, he spreads the news that there is a 'corner' in the market,
and buys openly all the wheat he can, offering higher and higher
prices, until he raises the price sufficiently high to suit him. Now
the men who have contracted to deliver wheat to him at this date are
at his mercy. They must buy their wheat of him at whatever price he
chooses to ask, and deliver it as soon as purchased, in order to
fulfil their contracts. Meanwhile mills must be kept in operation, and
the millers have to pay an increased price for wheat; they charge the
bakers higher prices for flour, and the bakers raise the price of
bread. Thus is told by the hungry mouths in the poor man's home the
last act in the tragedy of the corner."[126]
These "corners," of which in various forms and degrees the speculative
business on the stock and produce markets largely consists, are
attempts to substitute for a time a high monopoly price for a
competitive price by "rigging the market." Since the calculations upon
which these "corners" are based are essentially hazardous, attempted
corners frequently break down. One of the most special examples of the
collapse of a powerful corner in recent years is that of "La Societe
Industrielle Commerciale des Metaux," commonly known as the "Copper
Syndicate." A body of French capitalists, for the most part not owners
of mines or metal merchandise, but speculators pure and simple, placed
a sum of money with the intention of cornering the supply of "tin."
Before completing this design they were induced to undertake a larger
speculation in the "copper market." In 1887 they entered into
contracts with the largest copper-producing companies in various
countries, agreeing to buy all the copper produced for the next three
years at a fixed price of 13 cents per pound, with an added bonus
equivalent to half the profit from their sale of the same. In 1888 the
Syndicate sought to extend its contracts with chief mining companies
to cover a period of twelve years, arranging with them also to limit
the output of copper. For some time they held the market in their
grip, and prices advanced considerably. But partly owing to a failure
to complete their contracts securing a restriction in production, and
partly from inability to meet their current liabilities, the "corner"
was broken down in 1889, and the artificially inflated prices fell.
Not only are the makers of "corners" liable to these miscalculations,
but they are liable to be overthrown by counter combinations of
capitalists or of operatives. The breakdown of a formidable attempt
to "corner" cotton in Lancashire in 1889 was due to the prompt action
of the Trades Unions, who undertook to unite with their employers in a
stoppage of work for such length of time as was requisite to force the
collapse of the "ring."
In the same year a formidable flour syndicate broke down before the
firm attitude of the co-operative flour mills.[127]
But though the speculative character of modern commerce, assisted by
the abundant use of credit, has lent special facilities to the
formation of "corners" and "rings," it is hardly necessary to say that
commerce has never been free from them. The celebrated "corner" in
grain which Joseph organised on behalf of the King of Egypt was one of
the largest and most successful. The commercial law of the Middle Ages
is full of provisions against engrossers, forestallers, and regrators,
all of whom were engaged in artificially raising prices to the
consumer by obtaining some sort of monopoly. Organised rings to secure
a monopoly of the food supply of some great city have been frequent
throughout history. Cicero informs us of the celebrated ring of
capitalists under Crassus to raise food prices at Rome. A
closely-formed combination of northern coalowners continued to
restrict output and impose monopoly prices upon London consumers for a
considerable time in the middle of the eighteenth century.[128]
In modern times these "corners" are essentially of brief duration so
far as they consist in narrowing the stream of commerce at a
particular point so as to check its free flow. Most of them are
confined to goods which are dealt with upon commercial exchanges, and
are amenable to the operations of skilled speculators. The "deal" must
be upon a scale large enough to enable a big net profit to be secured
in a short time. The stimulation which artificially inflated prices
apply to the early productive processes, the activity of other
speculators, and the check given to consumption by high prices,
generally preclude the possibility of a "corner" lasting long. The
strength of the copper "corner," had it succeeded, would have lain in
the hold it would have obtained over the early extractive stage,
preventing the operation of the natural stimulus of high prices to
increase production. If the Copper Syndicate had established its hold
upon the mining companies, it would have been able to hold the market
for an indefinite period, passing from the state of a "corner" into
the more durable and established position of the Trust.
Sec. 8. A Trust may be regarded from an economic aspect, or from a legal
aspect. Economically, the term Trust is applied to a class of
syndicates which have established a partial or total monopoly in
certain productive industries by securing the ownership of a
sufficient proportion of the instruments of production to enable them
to control prices. Legally, a Trust is a form of business
association--"a trust of corporate stocks by means of which a body of
men united in interest are enabled to carry on business through
separate corporate agencies."[129] It is a company of companies, under
which, while the formal structure of the original companies is
maintained, they are incorporated as single cells in the larger
organism which directs their activity. The constitution of the Trust
is best explained by a description of its origin in the industry of
the United States. The owners of a majority of the shares in a number
of corporations hitherto separate in their constitution (though they
may have been acting in agreement with one another, or have been
largely owned by the same persons) agree to place their shares of
stock in the full control of a body of persons called trustees. These
trustees may or may not be shareholders or directors of the several
corporations. They "act under an agreement that they will cast the
votes represented by the stock so held for the perpetuation of the
trust during the time agreed upon, and in furtherance of its purposes:
will elect the officers provided for by law in each of the
corporations, and in behalf of all of them manage the business of all,
except, it may be, in small matters of detail." "Each shareholder,
upon surrendering his corporate stock to the board of trustees,
receives a certificate entitling him to an interest in all the
property and earnings of all the corporations of the trust."[130]
These certificates are believed in many cases to certify a money value
far in excess of the real value of the stock surrendered at the time
when the Trust was formed. The Report of the New York Chamber of
Commerce for 1887-88 estimates the "certificates" given by the Sugar
Trust to the shareholders of its constituent corporations as bearing
"water" to the amount of 200 per cent., so that the nominal dividend
of 10-1/2 per cent. paid during the year represented a real net profit
of 31-1/2 per cent. Such statements cannot, however, be verified,
since it is the interest of the only persons who actually know to keep
secret such an arrangement.
It is asserted by many, and several State courts have sustained the
position, that a Trust is in America an illegal association, because
it implies on the part of its constituent corporations a violation of
the conditions under which they received the powers and privileges
conferred in their charters by the government of the several States.
Their illegality consists, it is held--
(1) In surrendering the power to manage and control their business to
some persons other than those legally authorised.
(2) In engaging, through the Trust, in kinds of business not
authorised by the charter.
Sec. 9. It is, however, the economic character and powers of the Trust,
and not its legal position, which concern us here.
The following short history of the origin and _modus operandi_ of the
Standard Oil Trust, the largest and in some respects the strongest of
these organisations, will serve to give distinctiveness to the idea of
the Trust:--
Petroleum began to be an article of extensive commerce about the year
1862. The wells from which the crude petroleum oil was drawn were in
Pennsylvania, and the work of boring the wells with machinery and
extracting the oil grew to be a considerable business. The crude oil
was sold to various refiners, who set up factories in Cleveland
(Ohio), in Pittsburg, and in several other cities. By 1865 these
factories had become pretty numerous, and in that year a private
refinery at Cleveland, owned by a few partners, obtained a charter
forming it into a corporation entitled the Standard Oil Company, with
a capital of $100,000. Until 1870 the progress of the company was
comparatively slow. In order to increase their hold upon the sources
of production in Pennsylvania, and to expand their trade, they began
to purchase stock in corporations already existing in that State, and
succeeded in establishing others, with which they worked in close
alliance. A Standard Oil Company was organised at Pittsburg, the stock
of which passed into the hands of the owners of the Cleveland Company.
They then proceeded to establish agencies in other States, primarily
for the sale of their goods, but when these businesses were firmly
planted they obtained for them from the several States charters
incorporating them as companies for refining oil. In 1872 the
shareholders of the Standard Oil Companies at Cleveland, Pittsburg,
and Philadelphia organised another corporation called the South
Improvement Company, obtaining a charter from the State of
Pennsylvania. This corporation, which was in fact though not in legal
form the "Standard Oil Companies," then entered into contracts with
the New York Central and Hudson River Railroad Company, the Erie
Railway Company, and several other lines which traversed the
oil-producing country, for the shipment of petroleum. The South
Improvement Company agreed to ship over these railways all the
petroleum products. In return the railway companies agreed to carry
their goods, not upon the terms open to other customers, but with a
system of rebates, paid not only upon the oil shipped by the company,
but upon that shipped by any other competing companies. "In one
locality the railroad companies were to charge oil shippers as freight
not exceeding $1.50 per barrel, and pay a rebate to the South
Improvement Company of $1.06 per barrel, whether it was the shipper of
the oil or not, so that under these contracts the Standard Oil Company
members would pay no more than 44 cents per barrel as freight to the
carrier, while their competitors would pay $1.50, and of this last sum
the railways were to pay back to the combination $1.06 per
barrel."[131]
Though this monstrous conspiracy was quickly unmasked, and the South
Improvement Company lost its charter, secret negotiations with the
railway companies enabled the Standard Oil Companies to strengthen
themselves by this system of rebates paid out of the pockets of their
business rivals. Chiefly by means of these and other discriminating
contracts they were enabled to enlarge their sphere of activity, and
making full use of their growing capital, succeeded in destroying or
absorbing their competitors, until, as early as 1875, they held a
practical monopoly of the refineries of the interior. No fewer than
seventy-four refineries are stated to have been bought up, leased, or
bankrupted by the Standard Oil Company in Pennsylvania alone in the
course of its career.
Until about 1878 the chief source of power of the company seems to
have been the alliance with the railroads and the local monopolies
obtained by buying up or crushing rival businesses. But the president,
Mr. Rockefeller, and his associates were men of keen business ability,
who understood how to make use of the inventive genius of the abler
employees who passed into their service, and of the improvements in
method of production and distribution of oil which were suggested. In
the next few years the company were enabled to effect enormous
economies in the storage and conveyance of oil. Pipe lines were laid
down connecting New York, Philadelphia, Baltimore, Buffalo, Pittsburg,
Cleveland, and Chicago, and a network of feeding lines joining the
sources of supply. Thousands of huge tanks were erected for holding
surplus stores; a large number of agencies were established along the
sea-shore with storage attached. Further considerable economies were
effected by the undertaking of the manufacture of barrels and cans and
other subsidiary articles required in the trade. At the close of 1881
the owners of the entire capital of fifteen corporations and parts of
the stock of a number of others, the latter chiefly trading companies,
established the Trust. The number of shareholders thus associated was
forty, and they placed their stocks in the hands of nine of their
number as trustees, who continued to administer the whole business,
paying interest upon the certificates which represented the stock of
the several shareholders until March 1892, when the Trust was legally
dissolved. The legal dissolution of the Trust has not, however,
materially impaired its economic unity and power; on the contrary, it
has extended in the United States its monopolic control of the
market, and has already established a strong control over several
European markets for the sale of oil, and over the chief natural
sources of supply. Although a practical monopoly in many parts of the
interior had been acquired at a tolerably early date, there continued
to be active competition in all branches of the petroleum business
until 1884, when the war of rates, which had been waged for some time
with a formidable Canadian competitor, the Tidewater Company, ceased,
an alliance being formed between the rivals. From that time the
Standard Oil Trust has held a practical monopoly over the greater part
of the country. It has introduced new economies in the machinery of
refining, has found profitable uses for naphtha and other waste
products, and has vastly increased its output and the machinery of
distribution. Not content with controlling the market for crude oil,
it has during the last few years obtained the possession of larger and
larger portions of the oil-producing country, forming companies to
acquire mining rights, sink wells, and oust the private producers from
whom it had previously been content to purchase the raw material at
their own prices.
Bearing in mind the fact that the actual unification of businesses
took place a good many years before the formation of the Trust, there
is nothing in the account given above inherently inconsistent with the
following explanation afforded by the Standard Oil Trust of their
proceedings:--
"The Standard Oil Trust offers to prove by various witnesses that the
disastrous condition of the refining business, and the numerous
failures of refiners prior to 1875, arose from imperfect methods of
refining, want of co-operation among refiners, the prevalence of
speculative methods in the purchase and sale of both crude and refined
petroleum, sudden and great reductions in price of crude, and
excessive rates of freight; that these disasters led to co-operation
and association among the refiners, and that such association and
co-operation, resulting eventually in the Standard Oil Trust, has
enabled the refiners so co-operating to reduce the price of petroleum
products, and thus benefit the public to a very marked degree."[132]
So far as this furnishes an explanation of the motives leading to the
earlier growth of the Company, the consolidation of rival companies,
no doubt it contains a considerable element of truth. The Standard Oil
Trust, however, differs from most others in that it was not directly
formed by the union of a number of leading rival businesses, but was
merely a reorganisation upon a firmer basis of a single complex
business. The motive of self-protection, though it might be operative
in the early history of the Company, cannot be adduced as the true
motive of the formation of the Trust.
Since the claim of the Standard Oil Trust to be a public benefit rests
upon the fall of price to the customer, resulting from the various
economies and improvements adopted by the Trust, it may be well to
append a diagram showing the actual fall of prices during the twenty
years 1870 to 1890.
In this diagram we note that from 1870 to 1875 there was a rapid
reduction of price in consequence of the fact that these were years of
keen competition with other Pennsylvanian businesses. 1875, which
marks the establishment of a monopoly of the interior trade in the
hands of the Standard Oil Trust, also marks a sharp rise of prices.
The expansion of their business brought them into contact with new and
more distant competitors, and a fall of price continued until 1879,
while prices continued to oscillate until 1881, the year of the
formation of the Trust. From the time of the formation of the Trust
the fall of price has been only half a cent. The moral is obvious. So
long as there is competition, in spite of the expense of conducting
the strife, prices fall; when the competition is suspended, and there
is a saving of friction, the public gains no further reduction.
The reason why, even after the complete monopoly had been attained,
the price of oil was not put up again will be apparent when we come to
examine the economic limits of the power of a Trust.
[Illustration: FLUCTUATIONS OF PRICES OF STANDARD OIL, 1870 TO
1890.]
Sec. 10. A large number of these Trusts, similar in their constitution to
the Standard Oil Trust, and with the same object of maintaining a
scale of prices based upon monopoly, have been founded in the United
States. Some have undoubtedly owed their establishment to the
prevalence of low profits in a trade where close competition has led
to a constant cutting of prices, and their foundation has been
leniently regarded as an act of self-defence. To this order belong the
Whisky Trust, the Cotton Oil Trust, the Cotton Bagging Trust, and
others. Indeed, one well-informed writer upon the subject holds that
this is the normal origin of the Trust. "With the exception of the
Standard Oil Trust, and perhaps one or two others that rose somewhat
earlier, it may be fairly said, I think, that not merely competition,
but competition that was proving ruinous to many establishments, was
the cause of the combinations."[133]
This condition of ruinous competition must be recognised as the normal
condition of all highly-organised businesses where modern machinery is
applied, and which are not sheltered by some private economy in the
shape of special facilities in producing or in disposing of their
goods. Even the Standard Oil Company, as we saw, claimed that a policy
of consolidation was forced upon it by the conditions of the market.
But this claim is not a refutation, but an admission of the statement
that the object of a Trust is to obtain monopoly prices; for these
ruinously low prices and profits are the result of free competition,
and the only alternative to this free competition is monopoly. Hence
it is a legitimate conclusion that the economic object of a Trust is
to substitute monopoly for competitive prices, and to do this more
effectively than can be done by the mere acceptance of a common
price-list by the separate firms engaged in a branch of production. In
order to attain this object it is not necessary that the Trust shall
comprise all the capital engaged in an industry. Even when the
Standard Oil Trust was firmly established, and was, according to its
own admission, paying 12-1/2 or 13 per cent. on its highly-watered
stock, there appears to have existed no fewer than 111 smaller
independent companies competing with it directly or indirectly at some
point within the area of its market.[134] But the Standard Oil Trust
was able to control prices, as the producer of some 75 per cent. of
the total product, and the practical monopolist over the main area of
its market. Similarly the Sugar Refineries Trust in 1888 had a firm
grip over prices by its possession of 80 per cent. of the sugar
refining capacity of the Atlantic Coast, or 65 per cent. of the sugar
consumed in the United States.[135] There are other cases where a
formally constructed Trust is for a time engaged in close effective
competition, either with another Trust, as was the position of the
Standard Oil Trust over a portion of its markets in the period 1881 to
1884, or with powerful companies not organised as Trusts. This is what
Mr. Gunton appears to consider the normal condition of a Trust, one in
which competition takes place between a few large bodies of capital
instead of between many smaller bodies.[136] Certain Trusts have
certainly been compelled to struggle for the retention of their
monopoly power over the market. A notorious example is that of the
Sugar Trust, which, after a most successful start in 1888, found
itself in 1890 face to face with a new and formidable competitor in
the shape of the Claus Spreckles refineries of Philadelphia and San
Francisco, and was compelled to forego the high profits it had been
making and fight for its existence under terms of keenest competition.
But in so far as a Trust stands in this position it has failed to
achieve its industrial end of checking "ruinous competition" and the
"cutting of prices." It is not in the possession of the chief
economies of a Trust so long as it remains at warfare, for it is
compelled to expend all that it gains from the enlarged scale of
business and from the cessation of competition among its constituent
companies upon the strife with its single antagonist. A Trust in this
inchoate condition has no special economic character distinguishing it
from other large aggregates of competing capital. It is with
fully-formed trusts which are able to control prices and regulate to
some degree production and profits that we are concerned. An economic
Trust has its _raison d'etre_ in monopoly. It may not have eliminated
all actual competitors, and is generally limited in its power by the
possibility of outside opposition, but so far as its power extends it
must be able to regulate prices upon non-competitive lines.
Sec. 11. A large number of different articles have at some stage in
their production fallen under the monopoly of a Trust.[137]
As is the case with "corners" and "rings" in the produce market,
certain classes of commodities lend themselves more readily than
others to the monopoly of Trusts.
There are three classes of industry which more easily than others
permit the formation of effective trusts.
(1) Industries connected with, or closely dependent on, the nature and
properties of land. When the whole or a large proportion of the raw
material required for producing any class of goods is confined within
a restricted area, the possession of that land by a single body of
owners will give a strong monopoly. It was not essential to the
Standard Oil Trust in its earlier years to own the sources of the oil
provided they could possess themselves of the stream after it had left
the source. But they have strengthened this monopoly lately by
securing the ownership of the oil lands in Pennsylvania. The most
striking example, however, is the monopoly of the anthracite coal
region in Pennsylvania by the shareholders of the Pennsylvania and
Reading Railway. The tendency of a Trust to strengthen its industrial
position and at the same time to find a profitable investment for its
surplus profits by fastening upon an earlier process of production or
a contiguous industry, and drawing it under the control of its
monopoly, is one of the most important evidences of the rapid growth
of the system in America. The rapidity with which the whole railway
system is passing into the hands of the two great monopolist
syndicates with the necessary result of stifling competition is in
some respects the most momentous economic movement in the United
States at the present time. The magnificent distances which separate
the great mass of the producers of agricultural and other raw products
from their market makes the railway their only high-road, and the fact
that except between a few large centres of population there is no
competition of rival railways, places the producer entirely at the
mercy of a single carrier, who regulates his rates so as to secure his
maximum profit. Indeed, so fast is the amalgamation of railway capital
proceeding that even between large cities there is little genuine
competition. The same is true of the telegraph and the supply of such
things as water and gas, which, by reason of their relation to land,
and the power thus conferred upon the owner of the first and most
convenient means of supply, are "natural" monopolies. Where such
industries are left, as in most cities of America, to private
enterprise, they form the objects of a monopoly which is commonly so
strong as to crush with ease attempts at competition where such are
legally permissible. Jay Gould's Western Union Telegraph Company is an
example of an absolute monopoly maintained for many years without the
possibility of effective competition. The purchase of Western lands in
order to hold them for monopoly prices has been a favoured form of
syndicate investment during the last forty years.
(2) Articles which for economy of transport and distribution require
to be massed together in large quantities are specially amenable to
monopoly. Grains produced over a wide area have often to be collected
in large quantities to be re-assorted according to quality, and to be
warehoused before being placed in the market. So the produce of
thousands of competing farmers passes into the hands of a syndicate of
owners of grain elevators at Chicago or elsewhere. The same is true of
meat, fish, fruit, vegetables, dairy produce. All these things, raised
under circumstances which render effective co-operation for purposes
of sale well-nigh impossible, flow from innumerable diverse places
into a common centre, where they fall into the hands of a small group
of middlemen, merchants, and exporters. Even the retail merchants, as
we have seen, are able to make effective combinations to maintain
prices in the case of more perishable goods.
In England the combination of retail merchants commonly takes the form
of a trade regulation of prices restricting competition. But in the
United States regular Trusts have been in some cases established in
retail trade. The Legislative Committee of New York State, in its
investigations, discovered a milk trust which had control of the
retail distribution in New York City, fixing a price of three cents
per quart to be paid to the farmer, and a selling price of seven or
eight cents for the consuming public.
Hence it arises that the prices paid by the consumer for farm produce
are picked pretty clean by various groups of monopolists or restricted
competitors before any of them get back to the farmers or first
producers.
The farmer, from his position in the industrial machine, is more at
the mercy of Trusts and other combinations than any other body of
producers. In the United States he is helpless under the double sway
of the railway and the syndicate of grain elevators and of
slaughterers in Chicago, Kansas City, and elsewhere. In England, in
France, and in all countries where the farmer is at a long distance
from his market, farm produce is subject to this natural process of
concentration, and we hear the same complaints of the oppressive rates
of the railway and the monopoly of the groups of middlemen who form
close combinations where the stream of produce narrows to a neck on
its flow to the consumer. The position of the American farmer, crushed
between the upper and the nether mill-stone of monopoly, is one of
pathetic impotence.
(3) In those industries to which the most elaborate and expensive
machinery is applied, and where, in consequence, the proportion of
fixed capital to labour is largest, the economies of large-scale
production are greatest. Here, as we have seen, the growing strain of
the fiercer competition of ever larger and ever fewer capitals drives
towards the culminating concentration of the Trust. Where, owing
either to natural advantages, as in the case of oil and coal, or to
other social and industrial reasons, a manufacture is confined within
a certain district, and is in the hands of a limited number of firms
in fairly close commercial touch with one another, we have conditions
favouring the formation of a Trust. In most of the successful
manufacturing Trusts some natural economy of easy access to the best
raw material, special facilities of transport, the possession of some
state or municipal monopoly of market, are added to the normal
advantages of large-scale production. The artificial barriers in the
shape of tariff, by which foreign competition has been eliminated from
many leading manufactures in the United States, have greatly
facilitated the successful operation of Trusts. Where the political,
natural, and industrial forces are strongly combined, we have the most
favourable soil for the Trust. Where a manufacture can be carried on
in any part of the country, and in any country with equal facility, it
is difficult to maintain a Trust, even though machinery is largely
used and the individual units of capital are big.
Each kind of commodity, as it passes through the many processes from
the earth to the consumer, may be looked upon as a stream whose
channel is broader at some points and narrower at others. Different
streams of commodities narrow at different places. Some are narrowest
and in fewest hands at the transport stage, when the raw material is
being concentrated for production, others in one of the processes of
manufacture, others in the hands of export merchants. Just as a number
of German barons planted their castles along the banks of the Rhine,
in order to tax the commerce between East and West which was obliged
to make use of this highway, so it is with these economic "narrows."
Wherever they are found, monopolies plant themselves in the shape of
"rings," "corners," "pools," "syndicates," or "trusts."
FOOTNOTES:
[124] There still survive in certain old-fashioned trades firms which
do business without formal written contracts, and which would be
ashamed to take a lower price than they had at first asked, or to seek
to beat down another's price.
[125] There need, of course, be no actual diversion of goods into the
possession of the Ring: the essence of the monopoly consists in the
control, not in the possession of goods.
[126] Baker, _Monopolies and the People_, p. 81.
[127] Cf. Miss Potter, _The Co-operative Movement_, p. 199.
[128] Porter, _Progress of the Nation_, pp. 283-285.
[129] C.S.T. Dodd, "Ten Years of the Standard Oil Trust," _Forum_, May
1892.
[130] "The Standard Oil Trust," Roger Sherman, _Forum_, July 1892.
[131] Roger Sherman, "The Standard Oil Trust," _The Forum_, July 1892.
[132] Argument of Standard Oil Trust before the House Committee on
Manufactures, 1888 (quoted Baker, _Monopolies and the People_, p. 21).
[133] J.W. Jenks, _Economic Journal_, vol. ii. p. 73.
[134] _Report to the Commission of the Senate of New York State_, p.
440.
[135] _Economic Journal_, vol. ii. p. 83.
[136] "The Economic and Social Aspect of Trusts," _Political Science
Quarterly_, Sept. 1888.
[137] Baker, writing 1890, names fifty-nine articles which have at
various times formed the material of Trusts, ranging in importance
from sugar and iron rails to castor-oil, school slates, coffins, and
lead pencils.