INDUSTRY AND _LAISSEZ FAIRE_
About the time the Sherman Anti-trust law was being passed, in 1890,
Henry D. Lloyd was writing his book _Wealth Against Commonwealth_, in
which occurred a memorable passage:
A small number of men are obtaining the power to forbid any but
themselves to supply the people with fire in nearly every form known
to modern life and industry, from matches to locomotives and
electricity. They control our hard coal and much of the soft, and
stoves, furnaces, and steam and hot-water heaters; the governors on
steam-boilers and the boilers; gas and gas-fixtures; natural gas and
gas-pipes; electric lighting, and all the appurtenances. You cannot
free yourself by changing from electricity to gas, or from the gas
of the city to the gas of the fields. If you fly from kerosene to
candles, you are still under the ban.
To understand the dangers of the monopolies which Lloyd feared and
denounced, it is necessary to know the principal features in the
development of American industry from the close of the Civil War to
1890.
It will be remembered that the consolidation of small railroad lines
into large systems was accompanied by such advantages to the companies
and to the travelling public, as to demonstrate that combination was the
inevitable order of the day. The similar integration of small industrial
and commercial enterprises took place more slowly between 1870 and 1890,
but the process was no less inevitable on that account. The census of
1890 indicated that the production of manufactured articles had greatly
increased since 1870; more capital was engaged; the product was more
valuable; and more workmen were employed. Nevertheless the number of
establishments which were in operation had shown a considerable decline
in many industries. An army of 100,000 employees represented the
expansion of the wage-earning force in the iron and steel works, for
example, and $270,000,000 the increase in the value of their products;
yet the number of establishments engaged showed a shrinkage of nearly
fourteen per cent. The workers in the textile mills grew from 275,000 to
512,000, and the capital outlay from $300,000,000 to $750,000,000, but
the number of factories declined from 4,790 to 4,114. A cartoon in
_Puck_ on January 26, 1881, remarked that "the telegraph companies have
been consolidated, which in simple language means that Mr. Jay Gould
controls every wire in the United States over which a telegram can be
sent."
Some of the reasons for the prevalent tendency toward combination were
not hard to discover. In the first place, although industrial
organizations fought one another with the utmost bitterness, it was in
the nature of things for them to combine if threatened by any common
foe. Moreover, production on a large scale made possible savings and
improvements that were outside the grasp of more modest enterprises;
buying and selling large quantities of goods commanded opportunities for
profit; waste products could be made use of and costly scientific
investigations conducted in order to discover improved methods, overcome
difficulties and open new avenues of activity; large salaries and
important positions could be offered to men of executive capacity; and
expensive equipment could be purchased and utilized.[1] An effective
force which tended to drive industries to combine was the cut-throat
competition which prevailed. Herbert Croly in his stimulating book _The
Promise of American Life_ vividly describes the bitter, warlike
character of industrial competition after 1865. Competition was battle
to the knife and tomahawk. The leaders were constantly seeking bigger
operations, to which the bigger risks only added zest. A company might
be making unbelievable profits one year and "skirting" bankruptcy the
next. Exciting as all this was, however, the desire for adventure was
not as powerful as the desire for profits, and cut-throat competition in
industry led as naturally to combination, as rate-wars on the railroads
led to pooling agreements.
An important factor in the development of large corporations was the
increasing use of the corporation form of industrial organization, as
contrasted with the co-partnership plan. If a few men enter a
copartnership, each of them must supply a considerable amount of
capital; but if a corporation is formed and stock is sold, the par value
of the shares may be placed at a low figure--$100 or less, for
example--and thus a large number of persons may be able to establish an
industry which is far beyond the financial resources of any individual
or small group among them. The corporation, moreover, is relatively
permanent, for the death of one stock-holder among many is unimportant
as compared with that of one member of a co-partnership. In case of
disaster to the enterprise the liability of the stock-holder in a
corporation is limited to the amount which he has invested, while any
member of a partnership may be legally held for all the debts of the
organization. With such advantages in its favor the corporation plan
largely dominated the organization of industry.
The most famous example of combination before 1890 was the Standard Oil
Company, which was the cause of more litigation, more study and more
complaint than any other industrial organization that has ever existed
in America. In 1865 Rockefeller & Andrews started an oil-refining
business in Cleveland, Ohio. Samuel Andrews was a mechanical genius and
he attended to the technical end of the industry; John D. Rockefeller
had bargaining capacity, and to him fell the task of buying the crude
oil, providing barrels and other materials and selling the product. The
firm prospered. H.M. Flagler was taken into the company and a branch was
established in New York. In 1870 these three with a few others organized
the Standard Oil Company of Ohio, with a capitalization of a million
dollars. It controlled not over ten percent. of the business of
oil-refining in the United States at that time. But the oil business was
so profitable that capital flowed into it and competition became keen.
Rockefeller and some associates, therefore, devised the South
Improvement Company of Pennsylvania, a combination of refiners, headed
and controlled by the Standard, the purpose of which was to make
advantageous arrangements With the railroads for transportation
facilities. Early in 1872, a most remarkable contract was signed between
the company and the important railroads of the oil country--the
Pennsylvania, the New York Central and the Erie. By it the roads agreed
to establish certain freight rates from the crude-oil producing region
of western Pennsylvania to such refining and shipping centers as New
York, Philadelphia, Baltimore, Pittsburg and Cleveland. From these rates
the South Improvement Company was to receive substantial rebates,
amounting to forty or fifty per cent. on crude oil and twenty-five to
forty-five per cent. on refined. On their side the railroads were
promised the entire freight business of the Company, each to have an
assured proportion of the traffic, with freedom from rate-cutting
competition. All this was the common railroad practice of the times.
But another portion of the contract was not so common. It provided that
the roads should give the South Improvement Company rebates on all oil
shipped by its competitors and furnish it with full way-bills of all
such shipments each day. In other words, the Company was to know exactly
the amount of the business of its competitors and with whom it was being
done. The contract allowed the roads to make similar rebates with
anybody offering an equal amount of traffic, but the likelihood of such
an outcome was slender in the extreme. Armed with this powerful weapon,
Rockefeller entered upon a campaign to eliminate competition by offering
to buy out independent refiners either with cash or with Standard Oil
stock, at his estimate of the value of their property. Those who
objected to selling were shown that the alliance between the South
Improvement Company and the railroads was so strong that they faced the
alternative of giving way or being crushed. Of the twenty-six refineries
in Cleveland, at least twenty-one yielded. The capacity of the Standard
leaped from 1,500 to 10,000 barrels a day and it controlled a fifth of
the refining business of the country. When these facts came to be known
in the oil country, the bitter Oil War of 1872 began. Independent
producers joined to fight for existence, and at length the railroads
gave way and agreed to abandon the contract with the South Improvement
Company, and the legislature of Pennsylvania annulled its charter,
although in one way or another rebates continued and the absorption of
rivals went on. In 1882 the entire combination--thirty-nine refiners,
controlling ninety to ninety-five per cent. of the product--was
organized as the Standard Oil Trust. All stock-holders in the combining
companies surrendered their certificates and received in return receipts
or "trust-certificates," which showed the amount of the owner's interest
in the trust. In order to secure unity of purpose and management, the
affairs of the combination were put into the hands of nine trustees,
with Rockefeller at the head.
The wonderful success of the Standard Oil Company, however, was not due
solely to the alliance with the railroads, although this advantage came
at a strategic time when it was fighting for supremacy. Its marketing
department gave it an unenviable reputation, but achieved amazing
success. The department was organized to cover the country, find out
everything possible about competitors, and then kill them off by
price-cutting or other means. The great resources of the Company enabled
it to undersell rivals, going below cost if necessary, and thus wearing
out opposition. Continuity of control, also, contributed to Standard
success; the narrow limits of the area in which the crude oil was
produced before 1890 rendered the problem of securing a monopoly
somewhat easier; the organization was extremely efficient and the
constituent companies were stimulated to a high degree of productivity
by encouraging the spirit of emulation; men of ability were called to
its high positions; the policy of gaining the mastery over the trade in
petroleum and its products was kept definitely and persistently to the
front; and then there was John D. Rockefeller.
Rockefeller was what used to be called a "self-made" man. He began his
business life in Cleveland as a clerk at an extremely modest salary.
Capacity for details and for shrewd bargaining, patience, frugality,
seriousness, secretiveness, caution, an instinctive sense for business
openings, self-control--all these were characteristic both of the
Cleveland clerk and the later oil-refiner. In the bigger field he
developed a daring caution, a quick understanding of the value of new
inventions, a capacity for organization, quick grasp of essentials and a
resourcefulness that dominated the entire Standard combination. He built
his own barrels, owned the pipe-lines, tank-cars, tank-wagons and
warehouses. Consolidation, magnitude and financial returns were his
aims, and in achieving these he and his associates were so successful as
to make the Standard a leader in all branches of business, except the
ethics of industry. Litigation has been the constant accompaniment of
Standard progress.
Following the Standard Oil Company, other combinations found the trust
form of organization a convenient one. The cotton trust, the whiskey
trust, and the sugar, cotton bagging, copper and salt trusts made the
public familiar with the term. Moreover, popular suspicion and hostility
became aroused, and the word "trust" began to acquire something of the
unpleasant connotation which it later possessed.
Although it was upon the Standard Oil Company that people turned when
they denounced the trusts and feared or condemned their practices, the
principles to which the Standard adhered when under the strain of
competition were the practices which were followed by their
contemporaries, both big and little. When the Diamond Match Company, for
example, was before the Courts of Michigan in 1889, it appeared that the
organization was built up for the purpose of controlling the manufacture
and trade in matches in the United States and Canada. Its policy was to
buy up and "remove" competition, so that it might monopolize the
manufacture and sale of matches. It could then fix the price of its
commodity at such a point that it could recoup itself for the expense of
eliminating competitors and also make larger profits than were possible
when its rivals were active.
Still more dangerous was the combination of the hard coal operators. By
1873, six corporations owned both the hard coal deposits of Pennsylvania
and the railroads which made it possible to haul the coal out to the
markets. In the same year and later these companies made agreements
which determined the amounts of coal that they would mine, the price
which they would charge, and the proportion of the whole output that
each company would be allowed to handle. Independent operators--that is,
operators not in the combination--found their existence precarious in
the extreme, for their means of transportation was in the hands of the
six coal-carrying railroads, who could raise rates almost at will and
find reasons even for refusing service. The states were powerless to
remedy the situation because their authority did not extend to
interstate commerce, yet it was intolerable for a small group of
interested parties to have power to fix the output of so necessary a
commodity as coal, on no other basis than that provided by their own
desires.
Other abuses appeared which showed that industrial combinations were
open to many of the complaints which, in connection with the railroads,
had led to the Interstate Commerce Act. Industrial pools resembled
railroad pools and were objected to for similar reasons. Bankers and
others who organized combinations were given returns that seemed as
extravagant as the prices paid to railroad construction companies; the
issues of the stock of corporations were bought and sold by their own
officers for speculative purposes; and stock-watering was as common as
in railroading. The industrial combinations also had somewhat the same
effect on politics that the railroads had. Lloyd declared that the
Standard Oil Company had done everything with the Pennsylvania
legislature except refine it.
One of the most noted cases of corporation influence in politics was
that of the election of Senator Henry B. Payne of Ohio. In 1886 the
legislature of the state requested the United States Senate to
investigate the election of Payne because of charges of Standard Oil
influence. The debate over the case showed clearly the belief on the
part of many that the Standard, which controlled "business, railroads,
men and things" was also choosing United States senators. Senator Hoar
raised the question whether the Standard was represented in the Senate
and even in the Cabinet. In denying any connection with the Oil Company,
Payne himself declared that no institution or association had been "to
so large an expense in money" to accomplish his defeat when he was a
candidate for election to the lower house. Popular suspicion seemed
confirmed, therefore, that the Company was taking an active share in
government. Whether the trust was for or against Payne made little
difference.
A complaint that brought the trust problem to the attention of many who
were not interested in its other aspects was the treatment accorded
independent producers. The rough-shod methods employed by the Standard
Oil Company, the Diamond Match Company and the coal operators were
concretely illustrated in many a city and town by such incidents as that
of a Pennsylvania butcher mentioned by Lloyd. An agent of the great meat
slaughtering firms ordered the butcher to cease slaughtering cattle, and
when he refused the agent informed him that his business would be
destroyed. He then found himself unable to buy any meat whatever from
Chicago, the meat-packing center, and discovered that the railroad would
not furnish cars to transport his supplies. Faced by such overwhelming
force, the independent producer was generally compelled to give way to
the demands of the big concerns or be driven to the wall. The
helplessness of the individual under such conditions was strikingly
expressed by Mr. Justice Harlan of the Supreme Court in a decision in a
suit against the Standard Oil Company:
All who recall the condition of the country in 1890 will remember
that there was everywhere, among the people generally, a deep
feeling of unrest. The Nation had been rid of human slavery ...
but the conviction was universal that the country was in real danger
from another kind of slavery sought to be fastened on the American
people, namely, the slavery that would result from aggregations of
capital in the hands of a few ... controlling, for their own ...
advantage exclusively, the entire business of the country, including
the production and sale of the necessaries of life.
Observers noted that fortunes which outstripped the possessions of
princes were being amassed for the few by combinations which sometimes,
if not frequently, resorted to illegal and unfair practices, and they
compared these conditions with the labor unrest, the discontent and the
poverty which was the lot of the many.
In the meanwhile there had arisen a growing demand for action which
would give relief from the conditions just described. As early as 1879
the Hepburn committee appointed by the New York Assembly had
investigated the railroads and had made public a mass of information
concerning the relation of the transportation system to the industrial
combinations. In 1880 Henry George had published _Progress and Poverty_
in which he had contended that the entire burden of taxation should be
laid upon land values, in order to overcome the advantage which the
ownership of land gave to monopoly. In 1881 Henry D. Lloyd had fired
his first volley, "The Story of a Great Monopoly," an attack on the
Standard Oil Company which was published in the _Atlantic Monthly_ and
which caused that number of the periodical to go through seven
editions.[2] In 1888 Edward Bellamy's _Looking Backward_ had pictured
a socialized Utopian state in which the luxuries as well as the
necessities of life were produced for the common benefit of all the
people. Societies had been formed for the propagation of Bellamy's
ideas, and the parlor study of socialism had become popular.
The platforms of the political parties had given evidence of a
continuing unrest without presenting any definite proposals for relief.
As far back as 1872 the Labor Reformers had condemned the "capitalists"
for importing Chinese laborers; in the same year the Republicans and
Democrats had opposed further grants of public land to corporations and
monopolies--referring in the main to the railroads; in 1880 the
Greenbackers and in 1884 the Anti-Monopolists, the Prohibitionists and
the Democrats had denounced the corporations and called for government
action to prevent or control them; and in 1888 the Union Labor party,
the Prohibitionists and the Republicans had urged legislation for doing
away with or regulating trusts and monopolies. By 1890 eight states had
already passed anti-trust laws. Among unorganized forces, possibly the
independent producers were as effective as any. Although usually
overcome by the superior strength of their big opponents, they
frequently conducted vigorous contests and sometimes carried the issue
to the courts where damaging evidence was made public.
The solution of the problem of trust control was not easy to discover.
The amount of property involved was so great that forceful legislation
would be fought to the last ditch; while legislation that was obviously
weak, on the other hand, would not satisfy public opinion. Public
officials were hopelessly divergent in their views. Cleveland had
called attention to the evils of the trusts in his tariff message of
1887, but had laid his emphasis on the need of reduced taxation rather
than upon control of the great combinations. Blaine was opposed to
federal action. Thomas B. Reed had characteristically ridiculed the
idea that monopolies existed:
And yet, outside the Patent Office there are no monopolies in this
country, and there never can be. Ah, but what is that I see on the
far horizon's edge, with tongue of lambent flame and eye of forked
fire, serpent-headed and griffin-clawed?
Surely it must be the great new chimera "Trust." Quick, cries every
masked member of the Ways and Means. Quick, let us lower the tariff.
Let us call in the British. Let them save our devastated homes.
More serious was the almost universal lack of knowledge of the elements
involved in the situation. Industrial leaders were unenlightened and
wrapped up in the attempt to outdo rivals who were equally
unenlightened and absorbed; the nation needed instruction and
leadership, and neither was to be found. Instead, the poorer classes
became more and more hostile to big business interests; the capitalist
class set itself stolidly to the preservation of its interests. The one
saw only the abuses, the other only the benefits of combinations.
Thoughtful men felt that industrialism was afflicted with a malady
which would kill the nation unless a remedy were found.
The legal and constitutional position of the trusts was almost
impregnable. Ever since the decision of the Supreme Court in the
Dartmouth College case, handed down in 1819, franchises and charters
granted by states to corporations had been regarded as contracts which
could not be altered by subsequent legislation. Moreover, the Court had
so interpreted the Fourteenth Amendment, as has been seen, that the
states had found great difficulty in framing regulatory legislation
that would pass muster before the judiciary.[3] It was doubtful
whether federal attempts at regulation would be more fortunate. More
fundamental still, for public opinion underlies even constitutional
interpretation, American industrial and commercial expansion had run
ahead of our conception of the possible and proper functions of
government. Government as the protector of property was an ancient
concept and commonly held in the United States; government as the
guardian of the individual against the powerful holder of a great deal
of property was a new idea and not generally looked upon with favor.
It has already been seen that the prevailing economic theory, _laissez
faire_, was diametrically opposed to government regulation of the
economic activities of the individual. According to this view,
unrestricted industrial liberty would result in adjustment by business
itself on honorable lines. Men whose integrity was such that they were
in control of great enterprises, asserted an attorney for the Standard
Oil Company, would be the first to realize that a fair policy toward
competitors and the public was the most successful policy. Combination
was declared to be inevitable in modern life and reductions in the
price of many commodities were pointed to as a justification for
leaving the trusts unhampered.
Public opinion, however, was reaching the point where it was prepared
to brush aside theoretical difficulties. President Harrison, Senator
Sherman and others urged action. Large numbers of anti-monopoly bills
were presented in Congress. The indifference of some members and the
opposition of others was somewhat neutralized by the fiery zeal of such
men as Senator Jones of Arkansas, who declared that the fortunes made
by the Standard Oil Company did not represent a single dollar of honest
toil or one trace of benefit to mankind. "The sugar trust," declared
the senator, "has its 'long, felonious fingers' at this moment in every
man's pocket in the United States, deftly extracting with the same
audacity the pennies from the pockets of the poor and the dollars from
the pockets of the rich."
After much study of the mass of suggested legislation, Congress relied
upon its constitutional power to regulate commerce among the several
states and passed the Sherman Anti-trust Act, which received President
Harrison's signature on July 2, 1890. Its most significant portions are
the following:
Sec. 1. 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, is ... illegal.
Sec. 2. Every person who shall monopolize, or attempt to monopolize,
or combine or conspire with any other such person ... to monopolize
any part of the trade or commerce among the several States, or with
foreign nations, shall be deemed guilty of misdemeanor.
The purpose of the framers of the Act seems clearly to have been to
draw up a general measure whose terms should be those usual in the
English common law and then rest on the assurance that the courts would
interpret its meaning in the light of former practice. For some
centuries restraint of trade had been considered illegal in England,
but no contract was held to be contrary to law if it provided only a
_reasonable_ restraint--that is, if the restraint was merely minor and
subsidiary. The Sherman act was a Senate measure, was presented from
the Judiciary Committee and was passed precisely as drawn up by it. In
speaking from the Committee, both Edmunds and Hoar took the attitude
which the latter expressed as follows: "The great thing that this bill
does ... is to extend the common-law principles, which protected fair
competition ... in England, to international and interstate commerce in
the United States." Just how far the members of Congress who were not
on the Judiciary Committee of the Senate shared in this view or really
understood the bill can not be said. Indeed, many members of both
chambers absented themselves when the bill came to a vote.[4]
For a long time the Sherman Act like the Interstate Commerce Act was
singularly ineffective and futile. Trusts were nominally dissolved, but
the separate parts were conducted under a common and uniform policy by
the same board of managers. The Standard Oil Company changed its form
by selecting the Standard Oil Company of New Jersey as a "holding
corporation." Stock of the members of the combination was exchanged for
stock in the New Jersey organization, leaving control in the same hands
as before. The "same business was carried on in the same way but 'under
a new sign.'" The wide variety of conditions tolerated under the
corporation laws of the several states made confusion worse confounded.
In its early attempts to convict corporations of violation of the law,
the government was uniformly defeated.
In 1893 came the climax of futility. The American Sugar Refining
Company had purchased refineries in Philadelphia which enabled it to
control, with its other plants, ninety-eight per cent. of the refining
business in the country. The government asked the courts to cancel the
purchase on the ground that it was contrary to the Sherman law, and to
order the return of the properties to their former owners. The Supreme
Court declared that the mere purchase of sugar refineries was not an
act of interstate commerce and that it could not be said to restrain
such trade, and it refused to grant the request of the government.
Unhappily the prosecuting officers of the Attorney-General's office had
drawn up their case badly, making their complaint the purchase, not the
resulting restraint. No direct evidence was presented to show that
interstate commerce in sugar and the control of the sugar business and
of prices were the chief objects of the combination. To the public it
seemed that the corporations were impregnable, for even the United
States government could not control them.
BIBLIOGRAPHICAL NOTE
The early history of anti-trust agitation centers about Henry D. Lloyd.
His earliest article, "The Story of a Great Monopoly," is in _The
Atlantic Monthly_ (Mar., 1881); his classic account of trust abuses is
_Wealth against Commonwealth_ (1894); consult also C.A. Lloyd, _Henry
D. Lloyd_ (2 vols., 1912). Early and valuable articles in periodicals
are in _Political Science Quarterly_, 1888, pp. 78-98; 1889, pp.
296-319; W.Z. Ripley, _Trusts, Pools, and Corporations_ (rev. ed.,
1916), is useful; B.J. Hendrick, _Age of Big Business_ (1919), is
interesting and contains a bibliography. Ida M. Tarbell, _History of
the Standard Oil Company_ (2 vols., 1904), is carefully done and a
pioneer work. Other valuable accounts are: S.C.T. Dodd, _Trusts_
(1900), by a former Standard Oil attorney; Eliot Jones, _The Anthracite
Coal Combination in the United States_ (1914); J.W. Jenks, _Trust
Problem_ (1900), contains a summary of the economies of large scale
production; J.W. Jenks and W.E. Clark, _The Trust Problem_ (4th ed.,
1917), is scholarly and complete; J.D. Rockefeller, _Random
Reminiscences of Men and Events_ (1916), is a brief defence of the
Standard Oil Company; W.H. Taft, _Anti-Trust Act and the Supreme Court_
(1914), summarizes a few important decisions on the Sherman law. Edward
Bellamy, _Looking Backward_ (1888), describes an economic Utopia. Early
proposed anti-trust laws, together with the Congressional debates on
the subject are in _Senate Documents_, 57th Congress, 2nd session, vol.
14, No. 147 (Serial Number 4428). No complete historical study has yet
been made of the effects of industrial development, immediately after
the Civil War, on politics and the structure of American society.
* * * * *
[1] Charles M. Schwab mentions an unusual example. Under the direction
of Andrew Carnegie, the wealthy steel magnate, he had a new mill
erected, which seemed likely to meet all the demands which would be
placed upon it. But in the process of building it Schwab had seen a
single way in which it could be improved. Carnegie at once gave orders
to have the mill taken down before being used at all, and rebuilt on
the improved plan.
[2] It was not until 1894 that Lloyd published _Wealth Against
Commonwealth_, but his pen had been busy constantly between 1881 and
1894.
[3] Cf. above, pp. 89-93, on Fourteenth Amendment.
[4] The authorship of the Sherman law has often been a source of
controversy. Senator John Sherman, as well as other members, introduced
anti-trust bills in the Senate in 1888. Senator Sherman's proposal was
later referred to the Judiciary Committee, of which he was not a
member. The Committee thoroughly revised it. Senator Hoar, who was on
the Committee, thought he remembered having written it word for word as
it was adopted. Recent investigation seems to prove that the senator's
recollection was faulty and that Edmunds wrote most of it, while Hoar,
Ingalls and George wrote a section each and Evarts part of a sentence.
If this is the fact, it seems most nearly accurate to say that Sherman
started the enterprise and that almost every member of the Judiciary
committee, especially Edmunds, shared in its completion.