The investigation of the preceding chapters, leading up to the final
conclusion that the proper and only wise remedy for the evils of
monopoly lies in direct action of the government to protect the rights
of the people, finishes the chain of our argument and really
accomplishes the work laid out in the opening chapter. The laws which we
have found to govern competition in modern industry are so far-reaching
in their effects, and their correct apprehension by the people at large
is so important to the general welfare, that economists ought to unite
in recognizing and teaching their truth, while all who desire to work
for the alleviation of present crying evils of society should understand
these laws and be guided by them.
In the practical application of these truths, however, so many
complicated details are involved that there is ample reason for the
widest differences of opinion. To decide intelligently upon these
practical methods demands special knowledge, in order that all necessary
details may be provided for, and rare practical judgment to adapt the
method to the means at hand.
The investigations which the author has pursued in the preparation of
the preceding chapters and for certain other purposes have suggested to
him certain principles in the practical execution of plans for the
control of various monopolies, which seem to him necessary to success in
the work. Well understanding the fallibility of any one man's judgment,
especially in these matters of detail, he has determined to outline in a
brief way what seem to him the most feasible plans for the control of
each class of monopolies. These suggestions, however, are to be regarded
in an entirely different light from the general laws propounded in the
preceding chapters; and they are presented with a full knowledge of the
fact that slight variations in circumstances may necessitate wide
changes in plans and processes.
Taking up the monopolies which by their use of natural agents or their
exercise of a franchise granted by the public, are already acknowledged
to be subject to the public control, let us consider first the railway
system. The two years in which the Interstate Commerce law has been in
force have seen a great progress toward the final solution of this
problem, even though railway affairs are at present in so unsatisfactory
a condition. The important features of our future policy which now seem
to be quite generally understood are: full State and national control
over both tariff rates and facilities; the abolition of competition,
either by consolidation or by legalized agreements to that end; and
strict prohibition of the construction of parallel lines not warranted
by the traffic.
That we are working very rapidly in this direction, no one will deny who
is familiar with the progress of legislation affecting railway interests
and with the opinions of railway men. Evidently, however, government
cannot justly take so prominent a part in railway management without
becoming in some degree responsible to railway stock- and bond-holders
for the protection of their interests; and it is a difficult question to
say in what manner this responsibility should be met. It has been the
intention of the author in devising the following plan for the control
of our railway system to make this responsibility a definite one, and
not leave it as now, a vague constitutional right. For according to the
law at present, State and national legislators may make laws to vary the
receipts and expenditures of the railway companies as much as they
please, and the only redress of the railway owner is an appeal to the
courts, the judges of which must decide whether the company's revenue is
so injured that its legal rights are infringed.
Space will not permit here a full statement of the many serious evils
and abuses with which our present system of railway management is
burdened. The study which the author has made of them has convinced him
of their importance and magnitude. The following plan is designed to
permit their remedy as well as to remedy the special evils of monopoly
with which our present investigation is concerned:
Let the government acquire the title to the franchise, permanent way,
and real estate of all the railway lines in the country. Let a few
corporations be organized under government auspices; and let each, by
the terms of its charter, receive a perpetual lease of all the railway
lines built or to be built within a given territory. Let the territory
of each of these corporations be so large and so planned with regard to
its neighbors that there shall be, so far as possible, no competition
between them. For instance, one corporation would operate all lines
south of the Ohio and east of the Mississippi rivers; another all lines
east of the Hudson and of Lake Champlain, etc. Let the terms of rental
of these lines be about 3¼ per cent. on the road's actual "present
cost" (the sum of money it would cost to rebuild it entirely at present
prices of material and labor) less a due allowance for depreciation. The
corporations would be obliged to keep the property in as good condition
as when received, and would own absolutely all their rolling stock,
machinery, etc.
It is not proposed, however, that the government shall own any interest
in the railways save the legal title. Bonds would be issued to the full
amount of the appraised valuation, running twenty-five years and bearing
interest at 3 per cent., principal and interest guaranteed by the
government, and these would be sold to the highest bidder. Thus the real
ownership of the roads would be vested in the bondholders. As is well
known, there is a great and fast increasing need for investments of
absolute safety, even though they bear very low rates of interest. This
is especially desirable for the continuance of our national banking
system, in order to insure us a safe, stable, and ample currency. Such
bonds would find a market at a premium as fast as offered.
It would not even be necessary that the money to pay the interest
coupons should pass through the government's hands. The operating
company would pay it directly to the bond-holder and at the same time
the ¼ of 1 per cent. would be paid into the government treasury.
The object in making the bonds run for no longer time than twenty-five
years, when it is intended that the whole value of the road shall be
perpetually held in the form of bonds, is that at proper intervals a
revaluation may be made of the improvements to the road and the
interest charges may be readjusted to correspond with the general
change in the income from capital. When the bonds fall due, a new block
would be issued and sold to the highest bidder. The interest rate should
be set at such a point that the bonds could be sold at a premium. These
premiums, with the ¼ of 1 per cent. on the bonds, paid by the operating
company to the government, (which we may regard as a legitimate fee to
the government for its guaranty) should form a government railway fund.
This should be used, first, to defray the expenses of the government
department of railways, and second, to pay the deficit when on any line
the net receipts after operating expenses are paid are insufficient to
pay the rental. The remainder should be expended in making improvements
and additions to the railway system, such as building new bridges and
stations, and improving the line, the cost of which, however, should be
represented by additional bonds at the end of the twenty-five-year term.
The amount of income should be so regulated, by varying the rate of
interest on new bonds, that the sum remaining for the last purpose may
be about sufficient for usual needs. The whole administration of the
receipt and expenditure of this fund should be vested in the government
department of railways. In this way the danger that the whole work of
this government department might be blocked through the neglect of
Congress to make necessary appropriations, would be avoided.
The readjustment of existing stocks and bonds presents difficulties
which will be considered in very different ways by different classes of
persons. The "granger" element, for instance, would cut off the holder
of "watered stock" with a shilling. Fortunately, if we take time enough,
we can arrange this matter with no shadow of injustice. To illustrate:
The government can purchase the A. B. & C. road outright at its market
value, which, owing to inflated prices and watered securities, is
perhaps $3,000,000. It is desired to wipe out $1,000,000 of this to
place the road upon its proper basis. The government issues 3 per cent.
guaranteed ten-year bonds upon the road and leases it at an annual
rental of 6 per cent. on what it has paid. At the time the bonds are
due, the accumulation of rentals over interest is more than sufficient
to pay off $1,000,000 of the bonds, while the remainder are renewed on
the permanent basis.
The author is well aware that a very strong prejudice exists against the
lending by the government of its credit to private corporations. This
prejudice--which has perhaps already been sufficient to condemn the
plan, as thus far presented, in the mind of the reader--he believes to
be a very wise and well founded one. The assumption by the government of
any risk in connection with corporate enterprise is highly undesirable.
It is now to be noted that this objection is wholly overcome; for,
notwithstanding the fact that the government guarantees the bonds of the
railways, it is not proposed that it shall really assume any risk, as
will be seen from the further description of the powers and obligations
of the operating corporations.
These should be essentially private companies, but there should be two
or three representatives of the government on the Board of Directors.
They should be required to operate the roads in a safe, efficient, and
economical manner, and to keep accurate and simple records, open to the
inspection of the Government Commissioners, of the receipts and
expenditures on every separate line of road. The rates of fare and
freight should be, first of all, stable. When once fixed they should
neither be raised nor lowered except by the direction of the Government
Railway Commissioners. Next--and this is the cardinal feature of the
whole plan--it should be the endeavor to fix the rates of fare and
freight at such a point that the total receipts would be sufficient,
first, to pay the whole expense of operating and maintaining the road;
second, to pay the annual rental of 3¼ per cent. interest on the cost of
the road; and, third, an annual dividend to the stockholders of the
operating company of from 4 to 8 per cent. The capital stock of the
operating company should be fixed by law at about 1¼ times the actual
cost of rolling stock and machinery. The operating company should be
allowed to issue only one class of securities, and these should
represent at par the actual cash capital invested by the operating
company.
Under this plan it is evident that every community would pay its
equitable share of the cost of transportation, since the rates would be
based on the cost of service.[6] Instead of roads running along,
bankrupt for years, as now, we would have every community paying for
its transportation facilities just what it cost to furnish them. But if,
on any road, such a rule would raise the rates above a certain
prescribed maximum point, then the rate could be lowered, if necessary,
to a point where it was only great enough to pay the operating expenses;
and part or all the bond interest would be paid out of the government
railway fund.
[6] It should be explained that it is only proposed to base the
_rates as a whole_ upon the cost of service. As regards the relative
rates on different commodities, the author, in common with all who
have given careful study to the question, recognizes that the only
equitable principle for proportioning rates is the much maligned one
of "charging [in proportion to] what the traffic will bear." The
argument against this principle is so very plausible that, until he
had given the subject thorough study he held a diametrically
opposite opinion.
To make plain to the reader that this is really the only equitable
principle, the following illustration may serve: A coal-mine
operator and a sewing-machine manufacturer build together a railroad
to carry their respective products to a market. They will fix the
total rates of freight at such a point as to just pay the cost of
service; but it is required to find what relative rates each should
be equitably charged on the shipments from his works. Evidently, to
have the rates perfectly equitable, they must be in exact proportion
to the _benefit_ which each party derives from the use of the road.
But this benefit which each derives is _measured_ by the profits
which each makes from his business; and this profit, in turn, is the
measure of the amount each can afford to pay for the use of the
road,--that is to say, "what the traffic will bear." _Q. E. D._
"But," the objector says, "is it not true that when you limit the
profits of the companies and base rates on cost of service you take away
all incentive to economy and careful operation? The public, and not the
company, gain if the cost of service is reduced; so why should the
manager exert himself to economize? This very same principle has been
tried. Many States have chartered railway corporations, and provided
that fares and freight rates should be reduced when dividends exceeded a
certain per cent., or else that a percentage of the surplus earnings,
above the amount necessary to earn, say 10 per cent. dividends, should
be paid into the State treasury. Of course the railway corporations who
have been able to earn surplus dividends which they were not permitted
to pay, have been sharp enough to spend their surplus on their own
property instead of turning it over to the State treasury. How is it
possible, then, to base rates on cost of service and still leave the
incentive to economy, frugality, and efficiency which exists, when the
corporation is permitted to make all the profits it can?"
To discover a means of overcoming this difficulty, let us see how it is
overcome under competition. A man invents a new machine, for instance,
which effects a saving in the cost of some manufacturing process of 50
per cent. One manufacturer adopts it because it greatly increases his
profits, and one by one his competitors follow suit. The competition
between them cuts the prices lower and lower, till finally the consumers
of the goods get all the benefit from the saving effected by the new
machine, and the manufacturers' profits are no greater than they were
originally. But the important point to be noted is this, that the
benefit to the manufacturer continued long enough to repay him for
introducing the machine. So in our attempts to base railway rates upon
cost of service, we must permit the profit from the introduction of
economies, the use of improved appliances, etc., to be gathered by the
railway company long enough to induce it to work toward that end.
All we need to do to effect this end is to _somewhat delay_ the change
in rates to correspond to change in cost of service. As already stated,
it is most necessary that rates should be _stable_, and it is proposed
to make any change, either advance or reduction, only through the action
of a Government Commission. Now, suppose that some such clause as this
forms a part of our railway law: "upon the petition of any railway
corporation, or of not less than twenty-five patrons of any single
'railway district,' it shall be the duty of the Railway Commission to
investigate regarding a readjustment of rates to correspond more closely
to the cost of service. If it shall be found that in the given 'railway
district' the net receipts over the operating expenses and fixed
charges have been for one year not less than 9 per cent. on the capital
of the operating company invested in the given railway district; and
that for two successive years they have been not less than 8 per cent.;
or, if they have been for one year 8 per cent., and for two years 7 per
cent., and it shall be proven to the satisfaction of the Commission,
that any due and proper measure of economy, to which the attention of
the officers was called in writing has been wilfully neglected, or that
any uncalled for and manifestly extravagant expenditures have been
entered into during that time, then it shall be the duty of the
Commission to lower the rates. If it shall be found that for one year
the net earnings have been less than 3½ per cent., and for two years
less than 4½ per cent., unless it shall be proven that this deficit has
been fostered by neglect of due economy, or by extravagant expenditure
as aforesaid, the rates shall be raised. In all cases where rates are
readjusted, it shall be the endeavor of the Commission to set them at
such a point that the net earnings will equal 6 per cent. on the capital
stock."
The provision requiring two years of excess or deficiency before a
change, would be necessary to avoid the fluctuations which occur in
single seasons. Every piece of economy is so much gain to the
stockholders, and its benefit is received for at least two years. It
must be remembered that in any railway corporation, as at present
conducted, none but the highest of the managing officials have any
personal interest in the profit from operations. It may well be
believed, therefore, that the measure of economy and efficiency effected
would be at least as great as now. As this plan also contemplates
government representation on the Board of Directors, any action by the
higher officials to evade the law would be unlikely to occur.
The receipts of a company operating say 30,000 miles of railway and
carrying its traffic at fixed rates would vary but little from year to
year; and its stock would be so largely held by investors and would vary
so little in price that there would be very little speculation in it. To
bankrupt the company would be an impossibility, since its receipts would
always be regulated to preserve its revenue, although not so strictly
but that the company would still have every incentive to cultivate
traffic by offering good facilities, and to economize at the same time
by the introduction of improved methods.
No doubt it can be shown where every detail of the foregoing plan leaves
loop-holes for abuses to creep in. It will be much the same with any
plan whatever. The questions to be asked are, would abuses, waste and
stealing be any more likely to occur than under any other plan? Could
they be any more prevalent than they are now,--bearable only because we
are calloused to them? Of course, the foregoing is a mere outline of the
general principles of the plan. Details which readily suggest themselves
would, of course, be necessary to carry out the principle successfully.
That some attempt should be made in this connection to solve the
perplexing problem of strikes on railway lines is proven by the
memorable engineers' strike on the Chicago, Burlington, & Quincy system.
Perhaps a provision requiring every employé and officer to hold at least
a certain number of shares in the operating company in proportion to his
salary would help to solve the labor problem; and it might give the
higher officers a greater interest in their work than they always show.
The author has deemed it worth while to outline the foregoing plan for
the equitable control of railway monopolies with considerable fulness,
because, to a very great extent, the principles followed in the design
of this plan are applicable to a great number of other monopolies. These
important principles are: (1) Government protection to the owners of
fixed capital so that the public may obtain the use of it at the lowest
possible rate of interest. (2) The operation of monopolies by
corporations rather than by the government, thus securing the increased
efficiency of private over official management. (3) Securing to the
people at large the benefit of the monopoly by basing the prices for its
product on cost of service. (4) But leaving a suitable incentive for the
company's managers to maintain economy and efficiency in its operations.
(5) Government representation in the directorate controlling the
ordinary affairs of the company.
It is evident that the plan just outlined for railways would be
especially well adapted, with but slight changes, for the control of the
telegraph lines of the country.
* * * * *
We will next consider the monopolies discussed in Chapter III. It seems
too plain to need proof that our mines and quarries are certain to have
a steady increase in value as we use up the easily worked surface
deposits and have to dig deeper shafts and develop the poorer deposits
to supply the demand. In the case of any metals or minerals of which the
deposits are so abundant, easily worked, and widely scattered, that the
number of evenly matched competitors is great enough to ensure steady
competition, the public will get the benefit of the especial gift of
Nature, and its owner can receive little more than an ordinary return
for his labor and capital. But, as we have already amply shown, in the
production of a great number of minerals and metals competition has been
killed, or is heavily handicapped by the vast advantages of a few
bonanza mines, and the public is being taxed millions of dollars for
that which belongs to it by right.
How long is this condition to continue? Must all succeeding generations
pay for coal, copper, zinc, lead, nickel, marble, oil, gas, and various
other products of our mother-earth just what those who control the chief
deposits choose to ask? Because a pioneer stumbles upon a valuable mine,
shall the sole right to use the product of that mine be secured "to him,
his heirs and assigns" forever?
Suppose, now, that each of the several States were to acquire the title
to all the productive mines, quarries, and mineral wealth within its
borders, and enact laws providing that future discoverers of minerals on
land where they are not now known to exist should be liberally rewarded,
if the discovery proved valuable, but the minerals should belong to the
State and not to the owner of the land. The same principle which we
found to apply in the case of the railways would serve here in
readjusting values, viz.: the difference in the rates of interest on
safe investments and on risky ones. When acquired, the mines should be
leased to private parties for operation. In the case of coal-mines and
perhaps of iron, it would be well to copy largely from the scheme
proposed for railway operation, viz.: place all the business in the
hands of a single company, which should thus be enabled to carry on its
business on the largest possible scale; do away with wasteful
competition, and aim to regulate prices to provide a certain reasonable
steady income on its capital to the mining company.
For mines of copper, zinc, lead, and similar metals, it would be best to
pursue a different plan, and simply provide by statute that such mines
should be leased for short terms of years to the bidder who would offer
to sell his product at the lowest price per ton at the mines, all
lettings and relettings to be publicly advertised, and the successful
bidder to give bonds for the faithful performance of his contract. It is
difficult to see how, under these conditions, a combination to defeat
competition could be formed. Relettings of expired leases would be
frequent; and bidding by the _selling price_, a single competitor would
be sufficient to break any combination. Of course the lease should
specify a minimum product which the mine should furnish.
It would be advisable, too, that a manifest duty of the government,
which should be undertaken even under present conditions, should be
observed. It should be required to work the mine with due attention to
saving the greatest possible amount of ore or mineral contained in the
seam or vein.
The third class of monopolies, whose legal subjection to public control
is acknowledged, are those connected with our municipal public works.
There is already a widespread movement toward taking the control and
operation of these out of the hands of private corporations, and placing
it directly with the city government, and progress in this direction is
very rapid. The author believes, however, that the general law already
stated is applicable here. If the public works of States and of the
nation are more economically and efficiently managed when in the hands
of private parties, it is surely unwise, as a general rule, to entrust
the operation of municipal works to the average city official. While it
is in the highest degree desirable that water-works, gas, and
electric-lighting plants, street railways, and the other municipal
enterprises, discussed in Chapter V., should be _owned_ by the
municipality, their operation, in cases where the employment of
considerable labor and the carrying on of intricate business and
mechanical operations is involved, should in general be entrusted to
private companies. In every case where the financial condition of the
municipality obliges it to rely at first upon private corporations for
the construction and ownership of its public works, the franchise should
expire at the end of a short term of years, and the city should then
have the privilege of purchasing the works at their actual cost.
As regards works for water supply, there can be little doubt that almost
invariably the municipality should operate as well as own the works, for
the administration of the works requires but a small amount of labor,
and that of such a class that the city can safely carry it on. But gas
or electric-light plants, both for street and resident lighting, should
be operated by private companies.
These industries are making such rapid progress in the way of new
processes, effecting both economy and improvement, that it is somewhat
difficult to say what steps should be taken. Many are of the opinion
that gas is destined to be entirely replaced by the electric light; but
while this may eventually prove true, it will probably be a very long
time before the existing gas-works cease to supply consumers. Thus the
true solution of the problem seems to be that when a growing town
nowadays wishes to establish a new lighting plant of its own, it should
adopt electricity. But in the case of a town having gas-works already
established, the municipality is safe in assuming their ownership.
As regards the operation of lighting plants in small towns, it would
doubtless be best to lease the plant for short terms of years to the
highest bidder, making sure that the call for proposals is widely
circulated. Great cities, however, would find this policy
unsatisfactory. If a ten-year lease of the Philadelphia gas-works, for
instance, were advertised for sale to the highest bidder, there would be
but few really close bidders upon it, and the danger of "a combination
to defeat competition" would be great. It is at least worth considering
whether such a plan as we proposed for railways could not be made
feasible here. Let a corporation be chartered to operate the lighting
plant of the city, and let the charter of the corporation provide that
its rates shall be such as to pay an annual dividend upon its capital
stock (fixed by law and not changeable) equal to the legal rate of
interest in the State. Provided, that in no case should the rates be
lowered unless the net profits in one year were more than 2 per cent. in
excess of this rate, and that the excess for two consecutive years was
more than 1½ per cent. in excess of this rate. Provided also, that in no
case should the rates be raised unless the deficit exceeded 1½ per cent.
in any year, and 1 per cent. for two consecutive years, and that it
should be proven by the company that it had exercised all reasonable
diligence, care, and economy in the management and operation of its
business.
A certain proportion of the stock--less than a majority--should be held
by the city; and the mayor should appoint directors to represent the
city, at least one of whom should be personally conversant with the
industry carried on by the company.
Although not often so considered, the matter of passenger transportation
is a much more important matter in our greatest cities than either
lighting or water supply. The laboring man, who has to pay perhaps
twelve cents for the necessary ride back and forth to his work every
day, feels this tax most severely. Suppose that under such an
arrangement for street railways as we have outlined for gas and electric
lighting companies the fare would be reduced to three cents. His savings
from this source would amount to at least $18 per year. Counting the
extra rides and those which his wife and children have to take, the
annual saving would probably reach $25, a sum which to the average
laboring man with a family dependent upon him means a great deal.
Our municipal monopolies are now taxing us that they may pay swollen
dividends on millions of dollars of fictitious capital. It is quite time
that the public recovered possession of the valuable franchises which
are its rightful property, and managed them for its own benefit. The
legal difficulties in regaining the title to these franchises are
certainly not insuperable, and the readjustment of capitalization can be
made on the principle outlined in the case of steam railways. To
illustrate: The city of "Polis" purchases the works which supply it with
water from the private company owning them, paying the average market
value of the stock and bonds during five years past, which amounts,
perhaps, to one and one half times the cost of the works. The revenue
from the works has been sufficient, probably, to pay 8 per cent. on
these securities. The city issues 3 per cent. ten-year bonds to raise
funds for the purchase, and it then operates the works so as to gain a
yearly revenue of 6 per cent., or 2 per cent. less than that gained by
the private company. At the end of ten years the surplus income from the
works is enough to pay more than one third the bonded indebtedness; and,
if desired, the rest may be reissued as new bonds to run for a long
period.
The three classes of monopolies just discussed--railways, mineral
wealth, and municipal works--include practically all the monopolies
which are generally acknowledged to be subject to the public control by
virtue of their use of natural agents or the exercise of franchises
granted by the public.
We will next consider the monopolies in trade, in manufacturing, and
in the purchase and sale of labor, to see what steps should be taken
to protect them from encroaching on the rights of the people. In
exercising the right of the people at large to take control of these
purely private industries from the hands of their owners, we are
assuming a power which, like a strong medicine, may be as potent for
evil as for good. Only extreme necessity should sanction its use, and
its abuse must be carefully guarded against. It is not saying too much
to assert that the abuse of this power has already become an evil. We
have become so used to legislation for the benefit of special
industries, that legislation for their injury does not seem to be
regarded as the exercise of a dangerous prerogative. Thus we are
threatened with a flood of laws to fix the prices in various industries
now subject to monopoly, or to crush them out altogether by enacting
some restrictive measure,--legislation which, by its directness, is apt
to strike the average lawmaker very favorably, but which, it needs
little wisdom to see, is the sure forerunner of abuses. The author
trusts that nothing in this book may be construed as advocating or
defending some of the crude and ill-considered attempts at anti-monopoly
legislation already made, or that may be made in the future.
We have proven in the preceding chapters that, from the character of
modern concentrated industry, a very large number of our manufactures
must either exist as monopolies or else must engage in intense and
wasteful competition. If the monopoly can be so managed that it shall
carry on the industry economically, adopt improvements, keep up the
character of its product, and keep the prices therefor so low as to make
no more than ordinary profits, it would be for the public advantage that
monopolies rather than competition should exist. Can we regulate
monopolies to secure such results? If so, our problem will be solved.
The author has proposed for the first class of monopolies--those
obtaining the benefit of natural agents and public franchises--government
ownership of fixed capital and regulation of prices, with private
operation and general management. But he is far from believing that such
a plan would now be wise for regulating trusts. It may indeed be that,
at some time in the future, many of the great staple manufactures will
be formally established by the government as monopolies, and controlled
in a similar way to that which we have outlined for the railway system;
but it is so far in the future that we need not consider it in detail
now. Under our present political organization it would be practically
impossible for the government to undertake to regulate justly and
equitably such an industry, for instance, as the steel-rail manufacture.
We have set our State, national, and municipal governments a hard enough
task in the preceding pages of this chapter, in bringing under public
control our monopolies of transportation and communication and our
productive mines; and although it is a work possible of accomplishment,
it will need good statesmanship to carry it out. By the time that task
is accomplished, a similar plan, improved as experience will then
suggest, may perhaps be found available for the regulation of the
important manufacturing industries.
We decide, then, that it is for the public advantage at present that
both the ownership and operation of manufacturing industries and of
trade must remain in private hands. The next question is, will the
greatest advantage to the public be secured by starting a crusade to
re-establish competition and break up all existing monopolies in
manufacturing and trade; or by taking the opposite course, legalizing
monopolies and so regulating them by law that they shall be prevented
from making undue profits by laying an exorbitant tax upon the public?
Practically all the efforts made or proposed thus far for remedying the
evils of monopolies in manufacturing and trade have had for their
purpose the re-establishment of competition. The investigation to which
the first part of this book was devoted shows the wide extent of the
movement to restrict competition. Is it possible to wholly counteract
this? All our study of the laws of competition seems to show that the
tendency of modern competition is to destroy itself by its own
intensity. Certainly all the strenuous efforts to keep it alive by the
force of legal enactment and public opinion have thus far proved
unavailing. There are now, probably, at least a million persons in the
United States who are directly or indirectly interested in unlawful
contracts in restraint of competition; and among them are included many
of the best financiers and most enterprising business men of the
country. Certainly those who propose to drive these men into a renewal
of competitive strife contrary to their will have set themselves a very
difficult task.
Let us consider the opposite alternative. It cannot be a good thing to
have such a great proportion of the active business men of the country,
who bear the highest personal character, engaged in illegal contracts.
Let us therefore take them within the pale of the law. They seem to be
determined to make contracts with each other in restraint of
competition; and believe, indeed, that they are forced to do it by
modern conditions of trade. Suppose we were to legalize these contracts
and permit the establishment of monopolies. What can we then do to
protect the public from extortion in prices and adulteration in its
products on the part of the monopoly?
In the first place, now that we have legalized monopolies there is no
more excuse for secrecy. To work in darkness and privacy befits
law-breakers, but is needless for legitimate enterprises. Let the law
provide that every contract for the restriction of competition shall be
in writing, and that a copy shall be filed, as a deed for real estate is
filed now, with the proper city or town officer where the property
affected is situate, and also with the Secretary of State where the
contract is made. Certainly no honest man will object to this provision.
The contention has been made that contracts to restrict competition were
necessarily kept secret because they were "without the pale of the law."
Very well; we have legalized them. There can be no further defense of
secrecy. If any now refuse to make public their contracts to restrict
competition, the refusal is evidence that the contract is for the injury
of the public or some competitor and therefore properly punishable. We
shall now know just what monopolies exist; just what is their strength,
and for just how long a time their members are bound. Let us next see
what measures we can adopt to prevent these legalized monopolies from
practising extortion upon the public and abusing the power they have
gained by the combination.
The first important means to secure this which the author would
suggest is simply an extension of the common-law principle of
non-discrimination. A man in conducting certain sorts of business is
permitted to do as he chooses. He may sell to one person and refuse to
sell to another; he may give to one and withhold from another. But if he
enters business as the keeper of an inn or as a common carrier of
passengers or freight, he can no longer exercise partiality. He has
_elected to become a necessary servant of the public_, and as such he is
bound to serve impartially all who apply. In the same way a manufacturer
while he engages in business under the usual laws of competition, may
sell to whom he pleases and exercise such preference as he chooses. But
when he combines with all other manufacturers of the same sort in a
combination to restrict competition, he and his allies voluntarily
change their relation to the public. Is it not true that they do
actually _elect to become necessary servants of the public_--far more
necessary, indeed, than the inn-keeper or the stage-coach driver,--and
ought they not therefore to be placed under similar legal restrictions?
In every case where combination or consolidation restricts competition
in an industry, one effect produced is an increase in the power over
the public which the industry possesses. But this increased power over
the public, thus voluntarily assumed, must inevitably carry with it
increased responsibility to the public. It is the duty of the government
to see that this responsibility is legally enforced.
This first principle, then, should be embodied in a law providing, in
substance, that every person or firm entering into a contract to
restrict competition should, so long as that contract was in force, be
debarred from showing any preference in his or its purchases and sales,
by giving more or less favorable prices to any person or firm than those
quoted to any other person or firm. To enforce this requirement and
prevent its evasion it is necessary to provide also that prices shall be
public and that they shall not be altered without due notice. The
requirement of publicity might be best effected by providing that the
contract restricting competition should contain a schedule of prices,
which would usually be the case in any event.
While this may seem like quite an assumption of authority on the part of
the State, it is exactly what trusts and trade associations are striving
to effect, though with the important qualification that when occasion,
in the shape of an obnoxious competitor, requires, they wish to be at
liberty to put prices up or down at short notice and exercise their
preferences as they choose.
Let us now see what we would effect by the enforcement of this principle
of non-discrimination. We have explained in the chapter on combinations
in trade how one monopoly gains strength by alliance with another; as
when the firms belonging to the car-spring combination made a contract
with the steel combination by which that monopoly agreed to sell to
them at a reduced price and to make an extra rate to their competitors.
Under this law it would be impossible to found one monopoly upon the
favors of another in this manner.
The obnoxious trade boycott, too, which is now becoming so common, would
be effectually checked. And the scheme for crushing out a rival by
giving all his customers specially favorable rates would no longer be
practicable. The fact is that if we can stop the discriminations which
the monopolies have practised, we shall cure a large share of the evils
they have caused. It may be said that the courts will already punish
many conspiracies of this sort; but a monopoly which is already breaking
the law by its contracts of combination, finds in its methods of doing
business plenty of chances to evade the laws against conspiracy.
Certainly with a properly drawn law with reference to the publicity and
stability of prices, it should be possible to practically wipe out the
evil of discrimination by monopolies. It is also to be noted that the
requirement of non-discrimination and of public and stable prices would
bring profit in doing away with the waste of competition.
We have now to inquire what means it is possible to take to ensure that
the prices charged by the monopoly shall not only be the same to all,
but that they shall not in themselves be so exorbitant that the monopoly
will reap large profits at the public expense. How can we keep the
prices charged by the monopoly from rising far above the point where
they would stand if free competition were in force? Two methods are open
to us. We may keep down the monopoly's rates by what we will call
_potential_ competition, or we may reduce them directly by legislative
enactment.
The right of the public to take this latter course may be defended on
the ground that the monopoly has voluntarily made itself a necessary
public servant, and in that capacity offers to the public its goods.
While it is true that the people permit the monopoly to become a
necessary public servant and protect it in the contracts by which it
restricts competition, it is also true that the monopoly cannot justly
make merchandise of the necessities of the people. The public may allow
a combination to obtain control of all the sugar refineries, for
instance, and protect the combination in its formation. But suppose the
owners of the combination then say: "The people are obliged to have
sugar and we control the supply. We will set a high price on sugar,
therefore, because we know that they will pay it rather than go
without." They are then making the necessity of the public a source of
gain, and it cannot be believed that this will be permanently suffered.
The serious difficulty in fixing by direct government action the prices
which a monopoly of this sort shall charge, is that we cannot stop at
that point. When once the government steps in to do so radical a thing
as to fix the price which a monopoly shall charge, it becomes in equity
responsible to the owners of that monopoly for the maintenance of their
incomes from their capital invested. If their profits have been so
reduced by this action as to seriously injure the value of their
property, they have a legal right to claim compensation from the state
for the injury it has done them. And in almost every case they would set
up the claim that their property had been thus injured. To determine the
point at which reasonable prices and reasonable profits become
extortionate prices and unjust profits is a task requiring expert
knowledge and the most comprehensive judgment, aided by the most
accurate statistics. To impose this task on our already overburdened
courts would permanently block the wheels of justice, and would give to
the judicial department of government a work which its machinery is
wholly unsuited to carry on.
It seems evident, therefore, that when it becomes necessary for the
state to directly fix prices to be charged by monopolies, a more radical
step should be taken. The monopoly should be established on a permanent
basis, and the state should have some part in its direct control.
Discarding, therefore, direct action by the state to fix prices as
inexpedient, for the present, at least, let us see what we can effect by
means of "potential" competition, which term we will use to signify that
competition which may be established in any monopolized industry if the
inducements offered are sufficiently great. It must be remembered that
nowadays men of capital and enterprise are always on the look-out for
every opportunity to invest money and expend their industry where it
will bring the greatest returns. If any monopoly seems to be making
large returns, people are generally ready to believe that it is making
twice as great profits as it really is; and some one is quite likely to
start in as a competitor, if there is a prospect of large profits. Now
we wish to do two things. We wish to make it so easy for new competitors
to enter the field against a monopoly that its managers will keep their
profits down in order not to call in any new competitors. We also wish
to so modify the intensity of competition between the monopoly and the
new competitor that the latter may have a chance at least of being
repaid for its expenditure in entering the field. The simplest and best
of the legal provisions which we may enforce to this end is the one
already stated of non-discrimination. The monopoly can no longer reduce
its price to apply to only the limited field in which the new competitor
works, but must reduce its prices everywhere to meet those made by the
rival. In the case of monopolies in trade and all monopolies in
manufacturing in which the fixed capital required is but small, this is
all that would be needed to encourage the establishment of new
competitors and discourage the monopoly from grasping after undue
profits from the public.
In the case of those manufacturing monopolies in which a large fixed
capital must be invested at the start by any new competitor, we have a
much more difficult problem. It is true that in this case the monopoly
itself has more at stake; and this may induce the starting up of new
competitors simply to be bought out by the trust,--a sort of
blackmailing operation which is certainly repugnant in its character. It
might be possible to provide that rates charged by the monopoly must be
so stable that a competitor would have a chance to establish itself
before the monopoly could bring its own rates down. It might be possible
to force the monopoly to keep all its factories in operation, and thus
oblige it to keep down its price in order to dispose of its products;
but there are evident practical difficulties in the way of enforcing
such laws. It seems a great pity that just now, when to find some
employment of prison convicts in some manner that will not "compete with
free labor," and thus displease the labor interests, seems an
impossibility, we cannot set the convicts at work to compete with the
trusts and bring down their profits to a reasonable point. Surely the
labor party would find no fault with this use of convict competition.
There is one step, however, which we can take, and whose effect would
certainly be very great; in its desirability, apart from questions of
monopoly, all honest men are practically united. We can reform our laws
regarding corporate management. It is a mild arraignment compared to
what is deserved, to say that our present laws regarding the formation
and management of corporations, taking the country as a whole, are a
shame to the people and a disgrace to the men who made them. They seem
designed to place a premium on fraud and knavery, and to assist the
professional projector and stock manipulator in reaping gains from
innocent--generally very innocent--stockholders. Now a real reform in
our corporation laws would greatly simplify our work in controlling
monopolies. Let us have no more stock-watering of any sort at any time
in a corporation's life. Let us have no more "income bonds" which yield
no income, and "preferred stock" in which another is preferred after
all. Two classes of securities are enough for an honest corporation, and
the public interest requires the charter of no other class of companies.
Let us have done, too, with the iniquitous custom of one corporation
holding another's stock or bonds. With a few such simple reforms as
these effected, the holders of stock in our corporations would have some
idea where they stand and what their securities represent, and would
take some interest in the control of their property.
With these reforms, in the case of every corporation making a contract
to restrict competition, it would be required that the company make
public annually a full statement of its receipts, expenditures, and
profits. Every monopoly would stand before the public then in its true
position, and every one would know if it were making 50 per cent. per
annum on the actual capital invested, or only 5 per cent. With these
facts made public, if any monopoly ventured to raise its price till it
reaped unusual profits, some of the heaviest consumers of the
monopolized product would be very apt to start a factory of their own in
opposition. It is to be remembered that under the law of
_non-discrimination_ the monopolies would be prevented from currying
favor with the large consumers by giving them specially favorable
prices. It is now common to do this, as it removes the danger of
combination among these important customers to compete with the
monopoly.
To sum up, the chief features of the plan proposed for the control of
monopolies in manufacture and trade are as follows: Make contracts to
restrict competition, legal and binding, instead of illegal and void as
now. _But_; provide that every such contract shall be filed for public
inspection; that prices charged by the combination shall be public,
stable, and absolutely unvarying to all; that the affairs of the
combination shall be managed according to a consistent and stringent
corporation law; and that an annual report of the operations of the
combination be made to a public commission.
Contrast this with the existing law upon this important subject. In
Judge Barrett's decision in the Sugar Trust case he said:
"The development of judicial thought, in regard to contracts in
restraint of trade, has been especially marked. The ancient
doctrine upon that head has been weakened and modified to such a
degree that but little if any of it is left. Indeed, excessive
competition may sometimes result in actual injury to the public;
and anti-competitive contracts, to avert personal ruin, may be
perfectly reasonable. It is only when such contracts are publicly
oppressive that they become unreasonable, and are condemned as
against public policy."
This is probably the best statement of the present status of the common
law upon this subject now extant. But what a path to endless litigation
does it open! Who shall draw the line where a contract to restrain
competition ceases to be beneficial and lawful, and becomes an injury to
the public welfare? Must this be left to judge and jury? If so, the
responsibilities of our already overburdened Courts are vastly
increased.
In contrast with such a policy as this, the plan before presented
certainly promises definiteness in the place of uncertainty; and treats
all contracts in restraint of competition with impartiality. It is
believed that the effect of its enforcement would be a great reduction
in the tax now levied on us by monopolies.
There is yet one way, however, in which all these monopolies that we
have found it so difficult to devise a plan to deal with--the
manufacturers' trusts--may be quickly and certainly reduced. Our heavy
tariff on imported goods, by protecting manufacturers from foreign
competition, and thus reducing the number of possible competitors, has
undeniably been a chief reason why trusts have appeared and grown
wealthy in this country before any other. The author has purposely
refrained, as far as possible, from reference to the relation of the
tariff to monopolies; for the question has been so hotly fought over,
and the real facts concerning it have been so garbled and distorted,
that people are not yet ready to consider it in an unprejudiced way.
This much, however, no one can gainsay. We hold in our hands the means
to at any time reduce the prices and profits of practically all our
monopolies in manufacturing to a reasonable basis, by simply cutting
down the duty on the products of foreign manufactories. Now, if after
our plan just described is in force, the managers of any monopoly choose
to be so reckless as to raise its prices to a point where its published
reports will show it to be making enormous profits, thus tempting new
competitors to enter the field and breeding public hostility, all honest
protectionists and free-traders will be quite apt to unite in a demand
that the "protection" under which this monopoly is permitted to tax the
public be taken away.
If only we could find in any possible plan so excellent a solution of
the problem of labor monopolies as a reduction of the tariff offers us
in the case of trusts! The question is so complex a one that it is
hardly possible to consider it here, except very briefly. Certainly, if
we legalize combinations to restrict competition among capitalists, we
should among laborers as well. Indeed, the decay of the old common-law
principle, that such contracts were against public policy, and that such
combinations were punishable, has been more marked in the case of trade
unions than anywhere else. Besides this, as long as employers have the
right to kill competition in the purchase of labor, workmen should
certainly have the right to avoid competition in its sale. But to
prevent by force other competitors from taking the field, if they
choose, against any labor combination, is an infringement of the
personal liberty guaranteed to every man by the Constitution, and can by
no means be lawfully permitted.
If workingmen only understood how much the apparent gain when they win
in a strike is overbalanced by their loss in the higher prices which
they have to pay for the necessaries of life, and in the reduced demand
for labor, they would be as anxious to protect capital as they now
are--some of them--to injure it. The strikes make timid the men who have
capital to invest. They will not loan their money to business men,
builders, manufacturers, or any one who wishes to use it to employ
workmen, except at a higher rate of interest, to pay for the increased
risk. _Hence_, the cost of the capital used in production is greater,
and the price the public has to pay for the product must be greater.
Again, when men have to pay higher rates of interest for the money they
borrow they are slower to engage in new enterprises. Mr. A. a builder,
intended to put up a block of a dozen houses this season, which would
have tended to reduce rents; but the fear of strikes, with their
attendant damage and loss, has prevented him from borrowing money at
less than 8 per cent. interest. He concludes that, on the whole, this
will eat up so much of his profits that he will not build. Is it not too
plain to need proof that the _moral influence_ alone of the strikes has
robbed the workmen at every point? And this is one of a thousand cases
in a hundred different industries.
The plans we have discussed for the treatment of monopolies have for
their object a benefit to the people at large, by enabling them to
purchase the products of industry and of natural wealth free from the
tax now levied upon them by monopolies. If we can effect this, we shall
not have a millennium; there will still be injustice and suffering
enough in the world; but we shall have reduced the pressure upon the men
who work with their hands for their daily bread, enough so that we shall
no longer see the strange spectacle of over-production and hunger and
nakedness existing side by side. Men's desires were made by an All-wise
Creator to be always in advance of their ability to gratify them. And
the commercial supply of that ability--the supply of men willing to
work--ought always to be behind the demand for men.
It seems beyond dispute, then, that whatever will remove these
obstructions to the wheels of production will increase the demand for
labor, as well as increase the wages of labor by lowering the prices of
the necessaries of life. This the plan we have discussed promises to do,
and it also promises to benefit the whole people by lowering the cost of
monopolized articles.
The men and women who work with their hands, and those dependent on
them, form 97 per cent. of the population of the country. Instead of
combining to stop production in this shop or that factory, why not join
hands to work for reforms in the interest of the whole people? Be sure
that in so doing, organized labor will have the hearty co-operation, and
leadership if need be, of the best men in every class of society.
But while the reforms proposed promise great and important benefits to
the workers on whom the tax laid by monopoly falls most cruelly, the
question, "What shall fix the rate of wages, if competition cannot?" is
still left undecided. The best answer the author can make to this is as
follows: The monopoly formed by the trade unions in the sale of labor is
unnatural, because the number of competing units is great instead of
small. As new competitors must continually arise, the monopoly can never
be successful without the use of unlawful means. If it raises the price
of labor above what free competition would determine, it as truly lays a
tax on the whole people as did the copper monopoly. On the other hand,
we must recognize the fact that competition is now often absent in the
_purchase_ of labor, and this is a chief and sufficient cause for the
existing attempts to kill competition in its sale. But this is largely
due to the fact that the supply of labor is now in excess of the demand.
When instead of signs everywhere, "No one need apply for employment
here," we see placards, "Men wanted; high prices to good workmen," then
competition will assert itself in the purchase of labor.
In regard to the first class of industries, those utilizing natural
agents, which we proposed to place under the care of the state, it is
evident that we can permit no strikes there. Our transportation lines,
our mines, our gas-works, our water supplies, are to be operated for the
benefit of the whole people, and no labor monopoly can be permitted to
stop them. The plan that might be adopted to prevent interruptions in
these industries has been already referred to. The author would suggest
a similar plan for the benefit of labor in general. Suppose that in the
charter of a manufacturing corporation, a certain portion of the stock
in small-sized shares was set aside for the employés required to operate
the mill. Let each employé be _required_ to hold a certain number of
shares in proportion to his wages; to purchase them when he begins to
work, and to return them when he leaves the service of the corporation;
the price in all cases to be par. In case he leaves without giving a
certain notice, he should forfeit a certain proportion of his stock. If,
on the other hand, he is discharged without an equal notice, he should
receive the full amount of his stock, and a sum in addition equal to the
penalty which he would have incurred had he broken the contract. Who
will deny that such a move would be vastly to the interest of both
parties, the employer and employed. Is not a protection needed by the
workman against the power of the employer to turn him adrift at any time
without a penny?
Finally it must be said that the labor question, more than any other
connected with monopoly, needs solution through the influence of the
principles of Christian fraternity. In the last analysis, every man
sells to his brother men his service and receives his food, clothing,
and shelter in return. We may execute justice never so well, and
regulate never so nicely the wages of men by the law of supply and
demand, there will still be special cases demanding and deserving to be
treated by the rules of brotherly charity. The strong were given their
power that they might aid the feeble; and they who fall behind in the
struggle for position are not to be blotted out by the brute law of the
survival of the fittest, but cared for as the noblest instincts of
humanity prompt.
* * * * *
I am well aware that the indictment which conservative critics will be
apt to bring against the plans for the equitable control of monopolies
presented in this chapter is that they are too novel, and that they
require too much of an upheaval of existing institutions for their
accomplishment. The conservative man is invariably in favor of getting
along with things as they are. The answer to be made to this is, that no
candid man who will make a thorough study of the present status of
monopoly and of the attempts to control it can be conservative. The
present status of monopolies is just neither to their owners nor to the
public. They are plundering the public as much or as little as they
choose; and the sovereign people are submitting to it and taking their
revenge by passing retaliatory laws intended to ruin the monopolies if
possible. These legislative "strikes" are thus especially well
calculated to foster extortion on the part of the owners of monopolies,
who naturally wish to make what profits they can before some piece of
legislation is put through to destroy the industry they have built up.
In contrast to this are the plans proposed in this chapter. They offer
to establish a definite relation between the public and the monopolies,
and a permanent and stable foundation for each industry they affect in
place of the present fickle and ever changing one.
There is another class of critics who may complain that the plan
proposed leaves too much power still in the hands of the monopolists,
and gives the government too small a part in their management. The
answer to this is very evident. We have found the cardinal value of the
system of individual competition to be that it tends by a process of
natural selection to bring the men of greatest ability into the control
and management of our industries; while the vital weakness in the
management of industry by government is the fact that the sovereign
people does not choose the wisest and most honest men to control its
affairs. Men may well say that if they are to be robbed it had better be
by a corporation, where innocent stockholders will receive part of the
benefit, than by dishonest officials of government.
The ultimate remedy for the evils of monopoly, therefore, lies with the
people. When they will choose to control their affairs the men of
greatest wisdom and honor; when each man will exercise the same care in
choosing men to care for the public business that he does in caring for
his own private interests, then we can safely trust far greater
responsibilities to our government than is now prudent.
There is no more important lesson to impress on the minds of the toiling
millions who are growing restless under the burdens of monopoly than
this: The only remedy for monopoly is control; the only power that can
control is government; and to have a government fit to assume these
momentous duties, all good men and true must join hands to put only men
of wisdom and honor in places of public trust.
There is a virtue which shone in all brightness when this nation was
born, not alone in the hearts of the commander-in-chief and his brother
heroes, but in the hearts of the men and women who gave themselves to
their country's service. It glowed with all fervor when, a quarter of a
century ago, the North fought to sustain what the fathers had created,
and the rank and file of the South gave their lives and all they had for
what they deemed a righteous and noble cause. Though the robust spirit
of partisanship may seem for a time to have crowded out from men's
hearts the love of their country, surely that love still remains; and in
the days of new import which dawn upon us, in the virtue of PATRIOTISM
will be found a sufficient antidote for the vice of _monopoly_.
+--------------------------------------------------------------+
| Transcriber's Note and Errata |
| |
| Some tables have been reformatted for clarity. |
| |
| One instance of an oe ligature has been expanded to 'oe'. |
| |
| The following typographical errors have been corrected: |
| |
| |particularly |particular | |
| |1888, |1888. | |
| |succcessful |successful | |
| |ascendency |ascendancy | |
| |quenced |quenched | |
| |accomodate |accommodate | |
| |owership |ownership | |
| |
| The following words were hyphenated in varying fashion in |
| the text: |
| |
| |bond-holders (1) |bondholders (1) | |
| |midle-men (1) |middlemen (2) | |
| |over-estimate (1) |overestimate (1) | |
| |over-production (16) |overproduction (1) | |
+--------------------------------------------------------------+