A German economist recently visiting the United States was asked to
explain how Germany's policy toward industrial combinations differed
from ours. He said the difference that struck him most was that
Germany did not go about solving the problem through legislation in
the same light-hearted way that we seemed to. Perhaps, he added, this
is because the old fashioned view still prevails in Germany that laws
once enacted are to be rigidly and impartially enforced. He continued,
that beyond amending her corporation law to insure that actual assets
should bear a constant relation to nominal capital, to impose personal
liability upon promoters and directors for losses due to untrue or
misleading information which they might circulate, and to punish
severely all forms of unfair competition, Germany had refrained from
legislating on the subject. Nothing, he pointed out, like our
anti-trust act,--to say nothing of our New Jersey seven-sister laws or
our pending federal five-brother bills,--was to be found in German
legislation. On the contrary, he asserted, combination agreements
fixing prices and controlling outputs are enforced by German courts as
readily as any other contracts, and the dissolution of a combination
like the Westphalian coal cartell would be regarded not as a matter
for public rejoicing, but as a serious blow to national prosperity. He
did not maintain that Germany had solved the trust problem, but said
that her attitude was well described as one of "watchful waiting."
To American statesmen the policy of Germany must seem weak and
pusillanimous to a degree. They have become so habituated to the
thought that "the anti-trust act is the _magna charta_ of our business
liberties," that attorneys-general and members of Congress vie with
one another in the race to add fresh victims to the list of busted
trusts to the credit of the dominant political party. Presidents
"point with pride" to the number of prosecutions carried to a
successful conclusion during their administrations. If the zeal of the
department of justice seems to flag, Congress creates special
committees to investigate the steel trust or other suspected
combination, and thus a healthful rivalry is maintained which not only
keeps the names of the "busters" prominently before the public, but
supplies an unending stream of near facts for our newspapers, ever
fearless champions of truth and justice.
Exhilarating as is this national pastime of trust-busting, the latest
legislative proposals in Congress may well give pause even to the most
ardent. Four bills have been seriously put forward which if enacted
would make criminal many of the most common practices of American
business men. The climax is reached in a clause in one of these
measures that specifically makes it a crime for business men "to make
any agreement, enter into any arrangement, or arrive at any
understanding by which they, directly or indirectly, undertake to
prevent a free and unrestricted competition among themselves or among
any purchasers or consumers in the sale, production or transportation
of any product, article, or commodity." Under this clause California
orange growers who join together for the grading, packing and
marketing of their fruit would be parties to a criminal conspiracy.
Milk farmers who maintain coöperative creameries would be equally
culpable. Labor organizations restraining the competition of their
members in the sale of their labor are condemned. This bill, if
enacted and rigidly enforced would make of business a _bellum omnium
contra omnes_, and bring us back to the atomic stage of our industrial
development. That such ill-considered legislation will be enacted is
highly improbable, but its serious proposal invites a sober
reconsideration of our whole trust policy.
The first aspect of the present situation that must strike the
impartial observer is the inconsistency of the policy we are adopting
toward our railroads and other common carriers. Since 1887 these
businesses have been subject to regulation through the Interstate
Commerce Commission, justified on the ground that for them competition
is not an adequate means of control, and that unless their
monopolizing greed is subjected to rigid regulation, the interests of
the public must suffer. That these businesses are natural monopolies
of organization, that is, businesses that can be most efficiently and
economically administered as single or closely combined organizations
in each of the localities to which they minister, every economist
would agree. Competition in rates among railroads is undesirable
because it means costly and destructive rate wars that can only end in
rate agreements, tacit or open.
The policy of empowering the Interstate Commerce Commission to fix
rates, and thus secure reasonableness and stability, is thus sound
public policy. Amendments to the interstate commerce act, giving the
commission a similar power over express rates and telegraph and
telephone rates, where competition is also absent or self-destructive,
have been made or should be made.
But while we are committed to this policy of regulated combination of
common carriers, we still apply to them the Sherman act prohibiting
combinations! Without any attempt to decide or even discuss whether
the combinations into which the railroads have entered (the lease of
the Southern Pacific by the Union Pacific, for example) make for
economy and efficiency, the Attorney-General feels compelled by the
law which he is bound to administer, to search out such combinations
and force their dissolution. No well informed railroad man would
maintain that any benefit redounded either to the public or to the
railroads by forcing the Southern Pacific and the Union Pacific apart.
Yet the Attorney-General congratulates himself on the achievement, and
public opinion approves because it is clear that the process was both
costly and painful to the railroads themselves. That what is bad for
the railroads must be good for the rest of us seems to be the popular
logic of the matter.
The most recent triumph of the department of justice, in this field,
is the forcing apart of the telephone and telegraph monopolies. That
these businesses can best be operated in combination, is obvious to
anyone who has given any thought to the character of the services they
render. Receiving and delivering telegrams by telephone add greatly to
the efficiency of the system, not only because of the saving of time,
but because of the multiplication of offices from which either
telephone calls or telegrams may be despatched. In many localities the
same poles may be used for stringing both kinds of wires. Finally, on
the administrative side, the opportunity for saving through
concentration of management is considerable. At the same time that the
Attorney-General was effecting this divorce, the Postmaster General
was urging the advantages not only of having these two businesses
combined, but of having both managed by the government in connection
with the postal service. As has been well said, if the Postmaster
General is right in advocating the operation of both the telegraph and
long-distance telephone businesses by the post-office, the
Attorney-General cannot be right in thinking the dismemberment of the
telegraph-telephone combination was in the line of wise public policy.
It has long been clear to thoughtful citizens that as the policy of
regulating natural monopolies is perfected, the policy of prohibiting
combination in this field of enterprise should be abandoned. No such
amendment of the anti-trust act is, however, included among the trust
bills now before Congress! They continue to ignore the distinction
between natural monopolies and ordinary businesses, and to force upon
both the _form_ of competition; although, as regards the former, the
reality has long been notoriously absent. Under the law as applied by
the Supreme Court, it is still criminal for the railroads to enter
into rate agreements. That they do enter into such agreements,
however, is tacitly recognized even by the Interstate Commerce
Commission, in entertaining from them a collective demand for a five
per cent increase in rates. No wonder a German visitor is led to
remark upon the contrast his country presents, where the old fashioned
view still prevails that laws should be enforced!
As combination in the railroad, telegraph and telephone businesses is
a perfectly normal economic development, conducing to the public
interest rather than opposed to it, so it is far from proven that
combinations among manufacturers, such as are freely permitted in
Germany, are not often advantageous. The steel industry may be used to
illustrate the argument. Here is a branch of business in which
concentration and large scale production make for economy, until a
scale of operations is attained calling for millions of dollars of
capital and thousands of employees. The Carnegie Steel Company, the
Jones-Laughlin Steel Company, the Illinois Steel Company, all grew up
under highly competitive conditions, and each attained a gigantic size
without passing the point where enlarging the scale of operations
continued to make for economy in production. But when an industry is
of such a character that success necessitates the investment of
millions of dollars in each competing aggregation of producing units,
a situation is presented where the losses due to unrestrained
competition are correspondingly enormous. In times of prosperity, each
producing organization expands to realize more fully the economies of
large scale production. Iron and coke properties are secured to insure
uninterrupted supply of raw materials; transportation facilities are
acquired, since the business is so large as to require for its
exclusive use fleets of vessels and special railroad carriers; blast
furnaces and rolling mills are built in convenient proximity, to
permit the conversion of raw materials into finished products with
least expenditure of time and effort. This development is in obedience
to the laws of expanding trade. If the industry is to be economically
conducted, it must occur, and the public interest demands that it
shall occur.
A period of depression now ensues. If each of the competing units
pursues its own interest blindly, disregardful of the general good of
the trade, each will compete desperately to secure the largest share
of the diminished trade. Prices will be recklessly cut. It is better
to operate mines and mills at low profits, at no profits, or even at a
loss, than to have mines and mills shut down, the properties
deteriorate, and the skilled labor force that has been slowly drawn
together dispersed far and wide over the country. There is thus no
limit short of actual bankruptcy to which the competitors will not
find it to their interest to go so long as they remain competitors.
But why should they carry their competition to such reckless lengths?
Will it not be better for each and for all to produce moderately at
low profits until the depression has passed, and conserve all the
producing machinery for the time when business will revive, as it
surely will revive, and all will again be needed? Is such combination
to restrain competition opposed to the interest of the whole
community? What useful purpose, after all, is served by forcing large
numbers of steel plants into bankruptcy in every period of depression,
with the result that the machinery for production becomes quite
inadequate to meet the demand when prosperity returns, and prices are
forced to levels as unreasonably high as they were unreasonably low
during the depression? Instead of having steel either prince or
pauper, is it not better to have steel a contented and moderately
prosperous citizen at all times? It is contended that this life and
death competition makes for more rapid improvement in productive
methods, but does it? Under a regime of regulated combination, each
producing unit is still under strong pressure to cut down its expenses
of production, and to make its profits by that much larger. Is there
any real evidence that improvements in methods have not been
introduced as rapidly since the steel trust was organized in 1901, as
they were before? In that period the open hearth process has been
substituted on a vast scale for the Bessemer process. The Steel
Corporation has spent millions of dollars in developing its plants at
Gary to the highest efficiency yet known in the industry. Its smaller
rivals have been equally active. Although in many lines prices have
been steadied, and run-away markets in either direction prevented,
there have been as eager efforts to improve on existing methods, and
to concentrate production at the points best fitted for it, as there
ever were before.
There are, of course, considerations to be urged on the other side. If
allowed to combine to prevent disastrously low prices, steel
manufacturers will be under temptation to take advantage of the
situation by imposing unreasonably high prices. "When producers reach
for one another's hands, let consumers guard their throats!" If such
combination is to be tolerated, it must be under the restraining
influence of a strong federal commission that will enforce publicity,
will prevent unfair and oppressive methods toward non-members of the
combination, and will be prepared as a last resort to ask Congress for
authority to prescribe reasonable prices in exceptional cases, just as
the Interstate Commerce Commission has been given authority to
regulate in the public interest the charges of common carriers.
The objection most strongly urged against such a policy in high
quarters is that it means "regulated monopoly" and that monopoly is
intolerable. There are three possible policies which government may
apply to business: that of enforced competition, that of regulated
competition, and that of regulated monopoly. The bill that we have
criticized would enforce competition by penalizing every slightest
departure from it in the direction of coöperation. This is so
obviously not in harmony with the coöperative spirit of the day, that
the latest _pronunciamento_ from Washington declares in favor not of
"enforced" competition but of "regulated" competition. Regulated
competition is a policy on which all may seemingly unite, but there is
wide difference of opinion as to what it will ultimately lead to.
Those who consider regulated monopoly intolerable believe that in all
lines of business, provided that small business men are protected from
unfair and oppressive methods of competition on the part of their
larger rivals, that a reasonable amount of publicity is required, and
that artificial methods of bringing about monopoly are prevented,
competition will remain a dominant force. They make light of the
alleged economies of combination and view the whole trust movement as
the offspring of monopolistic greed and the profit-hunger of the
promoter and high financier. Those who believe that in other lines of
business than the recognized natural monopolies, all embracing
combinations would be able to produce more efficiently and therefore
sell more cheaply than smaller producing units, think that regulated
competition, at least for these lines, must develop in the long run
into regulated monopoly. Instead of regarding regulated monopoly as
intolerable they view it as natural and inevitable. While they admit
that the superiority of large combinations cannot be proved from
American experience, since regulated competition is only just
beginning to have a fair trial here, they point confidently, in
support of their theory, to what is going on in Germany. In view of
this diversity of expert opinion, it would seem to be the part of
prudence to give regulated competition a fuller trial before going in
either for enforced competition, on the one hand, or regulated
monopoly, on the other.
As a step toward a wiser solution of the combination problem, than the
blind condemnation and prohibition of all combinations, which has thus
far dominated American legislation, the proposal to create an
Interstate Trade Commission now before Congress merits the support of
all classes. Such a commission could aid materially in the enforcement
of the anti-trust act, and should therefore be favored by the
trust-busters. It could pass on the plans of business men before they
enter upon them, and thus give at least negative aid in avoiding
arrangements that might be held unlawful. Finally, it could collect
the information necessary to a wise decision between our present
policy of prohibiting combinations and the German policy of permitting
them, subject to a policy of "watchful waiting" on the part of the
government.
It is indicative of the present state of mind of our public men that
the very committees of Congress which are considering the creation of
such a commission, are considering at the same time measures that
would largely prevent it from accomplishing the good that is to be
expected from it. It is earnestly to be hoped that Congress may be
induced to content itself at this time with creating a competent trade
commission. If it is not prepared expressly to exempt from the
operation of the anti-trust act the common carriers subject to
regulation by the Interstate Commerce Commission, may it at least
refrain from making that act odious as well as ridiculous, and leave
to the Supreme Court the task, on which it is so well advanced, of
giving it an interpretation that is at once clear and reasonable!