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