Modern Economic Problems Part 34

Monopolies are lasting or temporary, according to the duration of control. By far the larger number are of the temporary sort, because high prices strongly stimulate efforts to develop other sources of supply. Yet the average profits of a monopoly may be large throughout a succession of periods of high and low prices.

Monopolies are general or local, according to the extent of territory where their power is felt. At its maximum where transportation and other costs most effectually shut out compet.i.tion, monopoly power shades off to zero on the border-line of compet.i.tive territory. The frequent use of the adjectives partial, limited, and virtual are implied but usually superfluous recognitions of the relative character of monopoly.

-- 2. #Political sources of monopoly.# Monopoly gets its power from various sources. A political monopoly derives its power of control from a special grant from the government, forbidding others to engage in that business. The typical political monopoly is that conferred by a crown patent bestowing the exclusive right to carry on a certain business. A second kind is that conferred by a patent for invention, or the copyright on books, the object of which is to stimulate invention, research, and writing by giving the full control and protection of the government to the inventor and the writer or their a.s.signees. In this case the privilege is socially earned by the monopolist; it is not gotten for nothing. Moreover, the patent, being limited in time, expires and becomes a social possession. A third kind is a governmental monopoly for purposes of revenue. In France and j.a.pan the governments control the tobacco trade, and the high price charged for tobacco makes this monopoly yield large revenues. A fourth kind is that derived from franchises for public service corporations, such as those supplying electricity, gas and water. These franchises are granted to private capitalists to induce them to invest capital in enterprises that are helpful to the community.

-- 3. #Natural agents as sources of monopoly.# "Economic" monopoly, so-called, arises when the ownership of scarce natural agents, as mines, land, water-power, comes under the control of one man or one group of men who agree on a price. Economic monopoly is a result of private property that is undesigned by the government or by society.

It is exceptional, considering the whole range of private property, but it is important. The oil-wells embracing the main sources of the world's supply have largely come under one control. One corporation may control so many of the richest iron mines of the country as to be able to fix a price different from that which would result under compet.i.tion. 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 inst.i.tution designed to further social welfare, and only rarely is property in any particular business a monopoly. Private control of great natural resources might have been prevented in many cases had it been foreseen.

-- 4. #Capitalistic monopoly; aspects of the problem.# Capitalistic monopoly, variously called contractual, organized, commercial or industrial monopoly, arises when men unite their wealth to control a market, to overpower or intimidate opposition, and to keep out or limit compet.i.tion by the mere magnitude of their wealth. These various kinds so merge into each other that they cannot always be distinguished in practice. A patent may help a capitalistic monopoly in getting control of a market; great wealth may enable a company to get control of rare natural resources.

In the discussion of industrial monopoly, the problem now before us, there is a good deal of vagueness and misunderstanding because of lack of definiteness in the use of words which have rapidly shifted in meaning. The word "trust" originally applied, and still in legal usage applies, to a particular form of organization, that of a board of trustees holding the stock, and thus unifying the control, of two or more formerly separate enterprises. The Standard Oil Company at one time had this form of organization, which was declared by the courts to be illegal _(ultra vires)_ for corporations. Now "trust" often is used in the sense of a corporation having monopoly power in some degree; either broadly, of any monopolistic corporation (including railways and local public utilities), or, oftener, limited to manufacturing and commercial monopolies, otherwise called "industrial trusts" in contrast with franchise trusts and railroads.[2] The word "combination" referred originally to a more or less thoro "merger,"

with a view to attaining monopolistic power, of a number of formerly separate organizations, as in the case of the United States Steel Corporation. But the word is often used as if it were a synonym for trust (in a narrower or wider sense) even as applied to a single enterprise that has grown to be monopolistic. A "trust" in the legal sense of a form of organization, and "combinations" as above defined, might have no monopoly power whatever; whereas a monopoly may be possessed by an individual owner (e.g., of a patent right, railroad, waterworks plant), or by a single corporation that has simply grown monopolistic without the trust form of organization or without combination.

Now it is evident that the real problem is that of monopoly, however attained. Monopoly may be defined as such a degree of control over the supply of goods in a given market that a net gain will result if a portion is withheld.[3] In accord with growing and now dominant usage it is well to observe the following meanings in our discussion.

"_Combination"_ is a term referring particularly to one method by which monopolies are formed. "_Trust,"_ in the now popular sense, is best limited to an industrial, primarily manufacturing, enterprise or group of enterprises, with some degree of monopoly power due not to a "special franchise" giving the use of streets and highways and the right of eminent domain, nor to a single patent, but to a group of favoring technical, financial, and economic conditions. The trust may consist of a single establishment; or of a group of establishments separately operated but united in a "pool" to divide output, territory, or earnings; or of such a group held together by a holding company, or combined into one corporation. Public utility is the name of special franchise enterprises of the kind just mentioned, including, in the broad sense, railroads and local utilities such as street railways, gas, water, and electric light-plants.

-- 5. #Industrial monopoly and fostering conditions.# The problem of monopoly is probably as old as markets. From the first coming together of groups of men to trade there were doubtless efforts made by some individuals and groups of traders to manipulate conditions so as to get higher prices than they could get in a free and open market.[4]

There are traces of these practices in ancient times, and the history of the Middle Ages is full of evidences both of monopolistic practices and of the efforts to prevent or control them.

If this fact is borne in mind it may help us to distinguish in thought four features of enterprise that are readily and constantly confused, viz: large individual capital, large production, corporate organization, and monopoly.[5] Evidently any one of these features may appear without the other; e.g., a person of large aggregate capital may have his investments distributed among a large number of small enterprises, such as farms, without a trace of corporate organization or monopoly, and numerous examples could be given of large production, or of corporate organization, or of monopoly without one or more of the other features.

But the presence of any one of these features is a favoring condition for the development of the others. Hence they are frequently found together, and of late this occurs increasingly. It is difficult to say in every, indeed in any, case which feature has been cause and which effect in this development, but, on the whole, large production seems to have been primary. Itself made possible by inventions, by better transportation, and by the widening of markets, it in turn helped to build up large individual fortunes, and then to create a need for the corporate form of organization. And monopoly power no doubt is more easily gained by large aggregations of capital in a corporation having the advantages of large production.

-- 6. #Growth of large industry in the nineteenth century.# The great recent growth of the monopoly problem is in part to be explained as the result of the growth of large industry, not as the sole cause, but as a favoring condition. Before the middle of the last century a tool-using household industry, on farms and in homes where the greater part of the things used were produced in the family, was still the typical organization in the United States.[6] A family produced somewhat more than it needed of food and cloth and exchanged with its neighbors; so with shoes, candles, soap, and cured meats. The early factories growing out of the household industry were small. Since that time two counter forces have been at work to affect the ratio of manufacturing establishments to population. The number of small establishments has been increased by the many industries producing the things once made on farms, and by increasing demands for comforts and luxuries. Many establishments producing the staple products that can be transported have been consolidated or have been enlarged, so that the unit of production now averages much larger. The number of cotton-weaving factories was about the same in 1900 as it had been seventy years earlier, while population has grown six fold. Iron- and steel-mills were fewer in 1900 than in 1880. In industries having local markets or local sources of materials, such as grist mills and saw mills, the change in numbers was less, for many small establishments were started in outlying districts at the same time that the mills became larger in the great population centers. But the average number of employees and the average capital per establishment increased in every period between census enumerations.

-- 7. #Methods of forming combinations.# Combinations of previously independent enterprises may be more or less complete and are made by different methods. Four major methods are:

(1) The pool, by which the enterprises continue to be separately operated, but divide the traffic (or output), or the earnings, or the territory, in prearranged proportions.

(2) The trust, in a legal sense (as defined above in section 5).

(3) The holding company, a corporation with the sole purpose of holding the shares of stock, or a controlling number of them, in various corporations otherwise nominally independent.

(4) Consolidation into one company.

At least five minor methods may be distinguished; these are here numbered continuously with the preceding four.

(5) Lease by one company of the plants of one or more other companies.

(6) Ownership of stock by one corporation in another corporation, sufficient to give substantial influence over its policy, if not absolute control.

(7) Ownership of stock in two or more competing companies, by the same individual or group of individuals, to such an extent as appreciably to unify the policies of the competing companies.

(8) Interlocking directorates, that is, boards of competing companies containing one or more of the same persons as directors.

(9) Gentlemen's agreements, mere friendly informal conferences and understandings as to common policies.

-- 8. #Growth of combinations after 1880.# Undoubtedly industry before 1860 had some elements of monopoly. Monopoly const.i.tuted part of the banking problem; it began to be evident in the railroads almost at once, and it rapidly increased as street railways and other public utilities were constructed. But after 1880 occurred the formation in larger numbers of industrial enterprises which appeared to exercise some monopoly power. In the years between 1890 and 1900 this movement was still more rapid. Consolidation took place on a great scale in railroads and in manufactures. Much of this has been of such a kind that it does not appear at all in the figures showing the number of establishments and of employees. In the data regarding this movement given by different authorities, many discrepancies appear, as there is no generally accepted rule by which to determine the selection of the companies to be included in the lists. One financial authority gave the following figures[7] regarding the industrial companies reorganized into larger units in the United States between 1860 and 1899, not including combinations in such businesses as banking, shipping, and railroad transportation. Some of the enterprises here included have much and others probably have little or no monopolistic power.

_Decade Number Organized Total Nominal Capital_

1860-60 ............... 2 $ 13,000,000 1870-79 ............... 4 135,000,000 1880-89 ............... 18 288,000,000 1890-99 ............... 157 3,150,000,000 --------------- ------ --------------- Total, 40 years ........ 181 $3,586,000,000

-- 9. #The great period of trust formation.# The number of trusts organized and the capital represented by this movement in the last of these decades were seven times as great as in the thirty years preceding. The figures by years for the decade 1890-1899 are as follows:

Decade Number Organized Total Nominal Capital

1890 ................... 6 $82,000,000 1891 ................... 13 168,000,000 1892 ................... 13 140,000,000 1893 ................... 5 226,000,000 1894 ................... 2 35,000,000 1895 ................... 7 104,000,000 1896 ................... 3 40,000,000 1897 ................... 6 93,000,000 1898 ................... 22 574,000,000 1899 ................... 80 1,688,000,000 ---------------- ---- -------------- Total, 10 years ......... 157 $3,150,000,000

The influence of great prosperity shows in the large number of combinations; but in 1893, the number was less, altho the total nominal capital (stocks and bonds) was still the greatest it had ever been in any year. Then came the period of depression, 1894-97, when both the numbers and the capital were comparatively small. Then from 1898 to 1901 followed the period of the greatest formation of trusts the world has ever seen.

The list of these four years contains the names of the most widely known American combinations, a few of which are here given with the years of their formation: 1898, American Thread, National Biscuit; 1899, Amalgamated Copper, American Woolen, Royal Baking Powder, Standard Oil of N.J., American Hide and Leather, United Shoe Machinery, American Window Gla.s.s; 1900, Crucible Steel, American Bridge; 1901, United States Steel Corporation, Consolidated Tobacco, Eastman Kodak, American Locomotive.

-- 10. #Height of the movement toward combinations.# In a list by another authority[8] it appears that the data for all industrial trusts are in round numbers as follows:

Number of Plants Acquired Total Date Number or Controlled Nominal Capital

Jan. 1, 1904 318 5288 $7,246,000,000

These figures compared with those given above would indicate that the industrial trusts had about doubled in the years 1900-1903 inclusive.

Probably most of this growth was in the years 1900 and 1901; then the movement became very slow, because, as is generally believed, of the aroused public opinion, of more vigorous prosecution by the government, and of additional legislation against trusts. The authority last cited gives in a more comprehensive list, in six groups, all the monopolistic combinations in the United States, at the date of January 1, 1904, as follows (the figures just given above being the totals of the first three groups):

No. of Plants Total Nominal Groups Number Acquired or Controlled Capital

1. Greater industrial trusts 7 1528 $2,260,000,000 2. Lesser industrial trusts 298 3426 4,055,000,000 3. Other industrial trusts in process of reorganization or readjustment 13 334 528,000,000 4. Franchise trusts 111 1336 3,735,000,000 5. Great steam railroad groups 6 790 9,017,000,000 6. Allied independent 10 250 380,000,000 --- ----- -------------- Total, 445 8664 $20,000,000,000

-- 11. #Motive to avoid compet.i.tion.# 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 compet.i.tion. It is not to be denied that a hard fight and lower prices often preceded the formation of the trusts. But as this excessive compet.i.tion 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 compet.i.tion 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 compet.i.tors, have forced the smaller, weaker, industries to come into the trust. In other cases the smaller enterprises have been eager to be taken in at a good price, altho they might have continued to operate independently with moderate profits. When, therefore, it is said that compet.i.tion is destructive, it may be a partial truth, but more likely it is a pleasantry reflecting the happy humor of the prosperous promoters of the combination.

-- 12. #Motive to effect economies.# Another advantage of the combination of competing plants that was strongly emphasized was the economy of large production.[9] The economies that are possible within a single factory may be still greater in a number of combined or federated industries. The cost of management, amount of stock carried, advertising, cost of selling the product, may all be smaller per unit of product. Each independent factory must send its drummers into every part of the country to seek business. In combination they can divide the territory, visit every merchant and get larger orders at smaller cost. A large aggregation can control credit better and escape losses from bad debts. By regulating and equalizing the output in the different localities, it can run more nearly full time. Being acquainted with the entire situation, it can reduce the friction. A combination has advantages in shipment. It can have a clearing-house for orders and ship from the nearest source of supply. The least efficient factories can be first closed when demand falls off.

Factories can be specialized to produce that for which each is best fitted. The magnitude of the industry and its presence in different localities often, in the period of trust formation, served to strengthen its influence with the railroads, and to increase its political as well as its economic power.

Another phase of corporate growth is the "integration of industry,"

that is, the grouping under one control of a whole series of industries. One company may carry the iron ore through all the processes from the mine to the finished product. A railroad line across the continent owns its own steamers for shipping goods to Asia or Europe. Large wholesale houses own or control the output of entire factories.

-- 13. #Profits from monopoly and gains of promoters.# There are, however, well-recognized limitations to the economy of large production in the single establishment,[10] and of late there has been ever-increasing skepticism as to the net economy actually attributable to combinations. Undoubtedly the merging of a number of old plants has sometimes effected an immediate improvement in the weaker ones. A new broom sweeps clean. This movement chanced to be contemporaneous with the development of "efficiency engineering," and of "scientific cost-accounting," and these better methods, already developed and applied in comparatively small plants, could be more quickly extended to the other plants brought into the combination. Moreover, the personal organizations in the separate enterprises had been brought to a high state of efficiency by the stimulus of compet.i.tion, 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 a.s.signed by the promoters, the investing public confidently expected that higher prices would be the chief result. There are indirect as well as direct gains to the promoters of a combination. There is the gain from the production and sale of goods to consumers, and there is the gain from the financial management, from the rise and fall in the value of stock. The promoters of a combination often expect to make from sales to the investing public far more than from sales to the consumer of the product. A season of prosperity and confidence, when trusts and their enormous profits are constantly discussed, has an effect on the public mind like that of the gold discoveries in California and in the Klondike. Then is the time for the promoter to offer shares without limit to investors.

-- 14. #Monopoly's power to raise prices#. There is no doubt that the formation of a combination from competing plants can and does give a control over prices, a monopoly power, not possessed by the separate competing establishments. The same kind of power might be attained by the growth of one establishment outstripping all its compet.i.tors, or by a new enterprise coming into the field backed by powerful capitalists. But this would work slower and less extensive results than does the formation of a combination.

Of course, the fundamental principles of price cannot be changed by a trust; a selling monopoly can affect price only as it affects supply or demand.[12] The strongest trust yet seen has not been omnipotent.

Many careless expressions on the subject are heard even from ordinarily careful writers and speakers: "The trust can fix its own prices," "has unlimited control," "can determine what it will pay and for what it will sell." This implies that trusts are benevolent, seeing that the prices they charge are usually not far in excess of compet.i.tive prices in the past. Such a view overlooks the forces that limit the price a monopoly can charge. If the supply remains the same, no trust can make the price go higher. The monopoly usually directs its efforts to affecting the supply, leaving the price to adjust itself. It can affect the supply either by lessening its own output or by intimidating and forcing out its compet.i.tors. It is true that this logical order is not always the order of events. The trust may not first limit the supply, and then wait for prices to adjust themselves; it may first raise its prices, but unless it is prepared to limit the supply in accordance with the new resulting conditions of demand, such action would be vain. The control of the sources of supply is the logical explanation of the higher price, even tho the limitation of supply is effected later by successive acts found necessary to maintain the higher price.

The report of the Federal Industrial Commission, which, from 1898 to 1901, investigated the trusts, showed that immediately upon their formation, the industrial combinations had raised their prices.[13]

Prices might be lowered again but only when and where compet.i.tion became troublesome, thus causing either "price-wars" or discrimination.

[Footnote 1: See Vol. I, p. 76.]