Online Library of Liberty: Economics, vol. 2: Modern Economic Problems

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CHAPTER 30

THE PROBLEM OF INDUSTRIAL MONOPOLY

§1. Kinds of monopoly. § 2. Political sources of monopoly. § 3. Natural and capitalistic monopolies. § 4. Monopoly and corporate organization. § 5. Rise of the corporation concept. § 6. Advantages of corporate organization. § 7. Growth of large industry in the nineteenth century. § 8. Trusts and combinations. § 9. Methods of forming combinations. § 10. Growth of combinations after 1880. § 11. The great period of trust formation. § 12. Height of the movement toward combinations. § 13. Motive to avoid competition. § 14. Motive to effect economies. § 15. Profits from monopoly and gains of promoters. § 16. Monopoly’s power to raise prices.

§1. Kinds of monopoly. 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.1 There are traces of the 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. 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.

Monopolies may, for special purposes, be classified as selling or buying, producing or trading, lasting or temporary, general or local, monopolies.2 The term monopoly applied by its etymology3 only to selling, but by usage also to buying. Under conditions of barter the selling and the buying monopolies would be the same things 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’s Bay Company, dealing in furs, had virtually 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.

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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 borderline 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 a 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 obtained 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 and capitalistic monopolies. Monopoly has been called economic or natural when it rests on the ownership of scarce natural agents, as mines, land, waterpower, 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 increase social welfare, and only rarely is property in any particular business a monopoly. Private control of any great natural resources might have been prevented in many cases had it been foreseen.

Monopoly is called capitalistic, or contractual, or organized, or commercial, or industrial, when it arises from the power under one control to dominate the market, to intimidate opposition, and to keep out or limit competition by the mere magnitude of wealth. These various kinds so merge into one another 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.

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§ 4. Monopoly and corporate organization. It is necessary to distinguish from monopoly three other features appearing in some enterprises, that are readily and constantly confused with monopoly, viz.: large individual capital, large production, and corporate organization.4 Evidently any one of these four 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.

In the frequent concurrence of these four features in a modern industry, probably the dominant rôle is taken by corporate organization. It has been, often in a special sense, causal in that it has made possible and advantageous great aggregations of capital and large units of production, and thus has bestowed monopolistic power.

§ 5. Rise of the corporation concept. In the legal systems of primitive people and long afterwards, only natural persons had legal rights, could make contracts, have property, and carry on a business. But in a number of cases, very early, groups of men came to have certain interests in common and certain possessions. Gradually some such groups gained more or less of legal recognition, with certain political and economic rights as a body and not as individuals. Thus evolved the conception of a “corporation” (body) having men as “members,” an artificial person, yet not the same as any one or as all the individuals together, and legally distinct from the individuals. A group of burghers obtaining a charter from the lord of the realm became a municipal corporation; a group of teachers, a collegium, became the corporation of a college or a university (a number of persons united into one association); a group of craftsmen became a gild corporation. Each corporation had certain rights, privileges, and immunities, and used a corporate seal as a signature. All of the early corporations had some economic features that were incidental to the main purposes, which were political, ecclesiastical, educational and fraternal. Toward the end of the Middle Ages groups of traders obtained charters to act as corporations permanently for business purposes, such as foreign trade, colonization, and banking. These increased in the sixteenth and seventeenth centuries, and in the eighteenth century this form of organization was adopted also, and parliamentary charters obtained, by groups of men for building turnpikes and canals and for carrying on other kinds of business. The great era of the corporations did not begin, however, until well on in the second quarter of the nineteenth century. Then, both in Europe and in America, the corporate

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form of organization was extended to a greater number and to other kinds of enterprises.

§ 6. Advantages of corporate organization. The corporate form proved itself to be well adapted to enterprises for the construction and operation of canals and railroads, requiring a larger amount of capital than usually could or would be risked by one person. The investor in a corporation bought shares, and his liability for debts and losses was limited by charter to his share capital. It is an advantage that permanent enterprises of that kind are owned by corporations with charters perpetual or for long periods. It is possible for corporations to make investments running for longer periods than would be safe for individuals. The corporation with an unlimited charter has legally an immortal life. Sale and change of management are not necessary on the death or failure in health of any one owner. As the factory system, and large production developed, the corporate form of organization was found to have these same advantages in manufacturing. It appeared in textile, iron, mercantile, and other industries. After 1865 the corporate form of organization increased at a cumulative rate, until now it is applied to many enterprises of small extent and local in operation. Of the 300,000 corporations making returns to the United States Commissioner of Internal Revenue in 1915, 70,000 were manufacturing corporations, which were 26 per cent of the whole number of manufacturing establishments, but which employed 76 per cent of all wage-earners and turned out 79 per cent of the whole product.

With the corporations came the “corporation problem,” a single name for a complex of problems—legal, political, moral, and economic—which arise out of the relations of corporations to their individual stockholders, to their employees, to the state, to the general public, and to their competitors in business. The problems differ also in corporations of different sizes and in different businesses. Of the various forms of corporations, banks first presented problems calling for economic legislation and regulation. This is explained by the fact that it was the first kind of business corporation to become important, and further by the fact that its work was in various ways closely connected with coinage and regulation of money, which had already become a governmental function. The railroad was the form of corporation next, in point of time, to become a great problem—this because of the peculiarly vital and farreaching effects that such railroad transportation has upon all other kinds of business in the community. Finally, industrial monopoly loomed before the American people threatening the very existence of our democratic society.

§ 7. 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 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.5 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

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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 had grown sixfold. Ironand 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.

§ 8. Trusts and combinations. In the discussion of monopoly, misunderstanding has resulted from lack of definiteness in the use of words, which have rapidly shifted in meaning. The word trust was 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.6 The word combination referred originally to a more or less thorough “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, or water-works plant) or by a single corporation that has simply grown monopolistic without the trust form of organization or without combination.

The chief problem is monopoly, however attained. 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 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 an enterprise having a “special franchise” giving the use of streets and highways and the right of eminent domain, and includes, in the broad sense, railroads and local utilities, such as street railways, gas, water, and electriclight plants.

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§ 9. 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 in § 8).

(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, by the same individual or group of individuals, in two or more competing companies, 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.

§ 10. 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 figures7 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.

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Decade	Number Organized Total Nominal Capital
1860-69	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 years181		$3,586,000,000

§ 11. 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 years157		$3,150,000,000

The influence of great prosperity shows in the large number of combinations; but in 1893 the number was less, although 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 New Jersey, 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.

§ 12. Height of the movement toward combinations. In a list by another authority8 it appears that the data for all industrial trusts are in round numbers as follows:

Date	Number Number of Plants Acquired or Controlled Total Nominal Capital
Jan. 1, 1904318		5288	$7,246,000,000

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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):

Groups

1.Greater industrial trusts

2.Lesser industrial trusts

3.Other industrial trusts in process of reorganization or readjustment

4.Franchise trusts

5.Great steam railroad groups

6.Allied independent railroad groups

Total,

a In round numbers.

No. of Plants Number Acquired or

Controlled

7 1528

298 3426

13 334

111 1336

6 790

10 250

445 a7664

Total Nominal

Capital

$2,260,000,000 4,055,000,000

528,000,000

3,735,000,000

9,017,000,000

380,000,000 a$20,000,000,000

§13. 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 a trust. In other cases the smaller enterprises have been eager to be taken in at a good price, although 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.

§14. 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

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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.

§ 15. Profits from monopoly and gains of promoters. There are, however, wellrecognized 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 developing 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.

§ 16. 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

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